LEGAL ANALYSIS: [2008] J.LB.L.R.
Koo Golden East Mongolia v Bank
of Nova Scotia
JONATHAN LAWRENCE
Partner, K&L Gates, London
(J^'" Banker-customer relationship; Central banks;
Gold; Norwich Pharmacal orders; Reserves; State
immunity
The Court of Appeal (Civil Division) of England and
Wales delivered its judgment in Koo Golden East
Mongolia v Bank of Nova Scotia^ on December 19,
2007.
The role and powers of central banks have come
under scrutiny given recent economic turbulence.
The case threw a spotlight on the relationship
between central banks and their own bankers,
especially in the London market. The case also
examined the extent to which a central bank can
rely on state immunity when it transacts in England
and Wales.
The facts
Koo Golden East Mongolia is a gold mining company
based in Mongolia. Under Mongolian banking law,
the right to hold deposits of gold is limited to
Mongolia's central bank, Mongolbank. In practice,
gold mining companies place their mined gold with
Mongolbank for safekeeping, usually releasing it for
sale at a later date. In July 2006, Koo entered into a
safe custody/sale and purchase of precious metal
agreement with Mongolbank. Between July 2006
and January 2007, Koo delivered approximately 3.3
million grams of gold bars to Mongolbank. In August
2007, Mongolbank issued a press statement in terms
that the state bank, implementing Mongolian law
and with the purpose of increasing the country's
currency reserves, had refined and placed abroad the
gold deposited by Koo. Koo argued it had not given
permission for its gold to be handled in this way. Koo
was subsequently told that the gold had been refined
and placed with the Bank of Nova Scotia (BNS) in
London.
Proceedings
Koo made an initial application on notice to BNS
(but not to Mongolbank) for an order that BNS and
Mongolbank be restrained from moving or otherwise
dealing with the gold.
1. Koo Golden East Mongolia v Bank of Nova Scotia [2007]
EWCA Civ 1443; [2007] All ER (D) 306.
271
The judge held that the effect of s.l4(4) of the State
Immunity Act 1978^ ("the 1978 Act") was that no
injunctive relief can be granted against a central bank
Koo issued a further claim based on the alleged
possession of the gold by BNS and requested an order
for delivery of the gold, an account and damages
and/or return of profits. BNS issued a statement that
in the relevant period, Mongolbank had not deposited
with BNS any gold ingot and that Mongolbank only
held an unallocated account. On an unallocated
account, the investor simply holds a claim over
an amount of physical metal held in a pool by the
bank. Specific metal is not allocated to a particular
customer of the bank. An unallocated metal account
holder is effectively an unsecured creditor of the
bank.
BNS believed the likely chain of events to be
that Mongolbank probably placed Koo's gold with
a European refinery to be refined. The European
refinery placed the refined gold with a European
bank. The European bank then arranged for a credit
of the equivalent number of ounces in gold to
Mongolbank's unallocated account with BNS.
Koo subsequently abandoned its claim for injunctive relief against BNS. Instead, it sought wideranging "Norwich Pharmacal"^ relief. This is a disclosure order available to the English courts, requiring
a third party mixed up in a wrongdoing to disclose
certain documents or information so a claim can be
made against the wrongdoer. Koo was trying to discover who the refiner was, what had happened to the
gold and what had happened to the proceeds of sale
through the international banking system.
The judge made the order that Koo sought.
The appeal
BNS resisted the claim for "Norwich Pharmacal"
relief on three grounds.
The conditions for "Nonwich Pharmacal"
relief were not satisfied
The facts asserted were that the gold had refined by
a gold refiner outside Mongolia, probably in Europe.
It was not clear where the refined gold has been
physically held after refining and by whom. Nor
was it clear whether the unrefined gold was still
identifiable or whether it had been mixed with other
gold.
2. "Property of a State's central bank or other monetary
authority shall not be regarded for the purposes of subsection
(4) of section 13 above as in use or intended for commercial
purposes; and where any such bank or authority is a separate
entity subsections (1) to (3) of that section shall apply as if
references to a State were references to the bank or authority."
3. The "Norwich Pharmacal" jurisdiction was established
in the House of Lords' decision in Norwich Pharmacal Co v
Customs 8-Excise Commissioners [1974] A.C. 133.
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The evidence was that Mongolbank only had an
unallocated account with BNS. The Court of Appeal
thought it likely that BNS did have information that
would lead to the name of a gold clearing bank which
may lead to the gold or the reiiner.
The Court of Appeal held that "Norwich Pharmacal" relief should, in principle, be available in these
circumstances and the conditions were satisfied.
However, Lord Cross made it clear at 199F to
G of Norwich Pharmacal Co v Customs and Excise
Commissioners that "Norwich Pharmacal" relief is a
discretionary remedy of the court.
The Court cannot grant relief because of
the state immunity of Mongolbank
Mongolbank is the central bank of Mongolia and is a
state entity within the meaning of the 1978 Act. The
Court of Appeal confirmed that Mongolbank entered
into its contract with BNS in the exercise of sovereign
authority and its contract was of a commercial,
financial or similar character. The purpose of the
transactions (including the refining of the gold
and the placing of refined gold on the unallocated
account at BNS) was to increase Mongolia's currency
reserves—an exercise of sovereign authority within
the meaning of the 1978 Act. Koo's counsel submitted
that its claim was not now against Mongolbank itself
but against BNS, a commercial entity. BNS's counsel
submitted that the application was for an order for
the disclosure of information that was confidential
between BNS and Mongolbank. The information was
held on behalf of Mongolbank and to require BNS to
disclose it would be for Koo to obtain relief against the
agent of the central bank where Koo could not obtain
relief against the central bank itself, BNS relied upon
the judgment of James L.J. in Twycross v Dreyfus-^
"You cannot sue the Peruvian Government, and it
would be a monstrous usurpation of jurisdiction, in
my opinion, to endeavour to sue a foreign government
indirectly by making its agents in this country
Defendants, and then saying, 'You have got the money
of the government, and you ought to apply that.' It
really would be indirectly endeavouring to make the
foreign government responsible to the jurisdiction of
this Court."
The Court of Appeal conceded that BNS was neither
the servant nor the agent of Mongolbank in a narrow
sense, but BNS was a servant or agent in the wider
sense that James L.J. had in mind.
BNS's counsel also relied upon Art.6(2)(b) of the
2004 United Nations Convention on Jurisdictional
Immunities of States and their Property, which
provides:
"A proceeding before a court of a state shall be
considered to have been instituted against another
4.
Twycross v Dreyfus (1877) L.R. 5 Ch. D. 605 at 618-9.
state if that other state
is not named as a party
to the proceeding but the proceeding in effect seeks to
affect the property, rights, interests or activities of that
other state."
The Convention is not part of English municipal law,
but BNS's counsel submitted that it was valuable
guidance on the extent of state immunity.
The Court of Appeal held that BNS was an agent
of Mongolbank for the purpose of the principle
in Twycross v Dreyfus. The Court declined to
uphold the order sought on the ground that
"Norwich Pharmacal" relief in these circumstances
was contrary to state immunity.
Relief should be refused in the exercise of
the court's discretion
The Court declined in its discretion (as per Lord
Cross) to make the order sought by Koo for, amongst
others, the following reasons:
(a) A court should be very reluctant to make a
"Norwich Pharmacal" order which involves a
breach of confidence as between a bank and its
customer; particularly so when the customer is a
central bank.
(b) The principle dispute is between Koo and
Mongolbank. There is nothing to stop the dispute
being resolved in the courts of Mongolia or by
agreement.
(c) There is no suggestion that if Koo succeeds
against Mongolbank that Mongolbank will not
pay Koo.
Analysis
The two main issues on which the judgment turned,
were state immunity and the availability of "Norwich
Pharmacal" orders.
State immunity
»
State immunity relates to the protection given to
a state from being sued in the courts of other states.
Historically, the principle derived from the sovereign
equality of states. How has this principle developed
at a time when states are also involved in acts of a
commercial nature?
The 1978 Act provides a basic principle:
"1(1) A State is immune from the jurisdiction of the
courts of the United Kingdom except as provided in
the following provisions of this Part of this Act."
One of the exceptions is dealt with in s.3:
"3(1) A State is not immune as respects proceedings
relating to:
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LEGAL ANALYSIS; [2008] J.LB.L.R.
(a) a commercial transaction entered into by the State;
or
(b) an obligation of the State which by virtue of a
contract (whether a commercial transaction or not)
falls to be performed wholly or partly in the United
Kingdom. ..."
Section 3 of the 1978 Act defines
transaction" as:
"commercial
"(a) any contract for the supply of goods or services;
(b) any loan or other transaction for the provision of
finance and any guarantee or indemnity in respect
of any such transaction or of any other financial
obligation; and
(c) any other transaction or activity (whether of a
commercial, industrial, financial, professional or other
similar character] into which a StSte enters or in which
it engages otherwise than in the exercise of sovereign
authority; but neither paragraph of subsection (1) above
applies to a contract of employment between a State
and an individual."
However, there are limits (set out in s.l3) to the
relief that can be obtained under the heading of
"commercial transaction":
"(2) Subject to subsections (3) and (4) below:
(a) relief shall not be given against a State by way of
injunction or order for specific performance or for the
recovery of land or other property; and
(b) the property of a State shall not be subject to any
process for the enforcement of a judgment or arbitration
award or, in an action in rem, for its arrest, detention
or sale."
In respect of the factual matrix in the Koo case,
subsections of s.l4 were relevant:
"(2) A separate entity is immune from the jurisdiction
of the courts of the IJnited Kingdom if, and only if:
(a) the proceedings relate to anything done by it in the
exercise of sovereign authority. . ..
(4) Property of a State's central bank or other monetary
authority shall not be regarded for the purposes of
subsection (4) of section 13 above as in use or intended
for use for commercial purposes; and where any such
bank or authority is a separate entity subsections (1) to
(3) of that section shall apply to it as if references to a
State were references to the bank or authority."
Mongolbank is the central bank of Mongolia and is
a state entity within the meaning of the 1978 Act.
In proceedings against it, Mongolbank would have
state immunity if they were proceedings relating to
a transaction or activity of a commercial, financial
or similar character. The judgment concludes that
Mongolbank entered into the contract in the exercise
of sovereign authority. This conclusion was reached,
inter alia, from a press statement by Mongolbank
which claimed:
"Mongolbank, implementing the Law on Central Bank
(Mongolbank) and the Law on Precious Metal and
Stones Fund and with the purpose of increasing
the country's currency reserves piuchases from gold
273
producing business entities and individuals unrefined
gold at the market price, published as of a certain
date."
The evidence also showed that the purpose of the
transactions, including the refining of the gold and
the placing of a quantity of refined gold on the
unallocated account at the bank, was for the purposes
of increasing Mongolia's currency reserves. This was
an exercise of sovereign authority within the meaning
o f t h e l 9 7 8 Act.
Although 30 years old, the 1978 Act has shown
itself to be relevant for a world in which the line
between state and commercial activities has become
increasingly blurred.
"Norwich Pharmacal" orders
In the English courts, a "Norwich Pharmacal" order
requires a person to disclose certain documents or
information to the person making the application.
The subject of the order must be a party who is
involved or mixed up in a wrongdoing, whether
innocently or not, and is unlikely to be a party to
the potential proceedings. The principle behind the
order is that justice requires a person to cooperate in
righting a wrong if the person, whether wittingly or
unwittingly, facilitated its perpetration.
There are several types of circumstances where a
claimant may seek such an order:
• identifying wrongdoers;
• identifying the full nature of the wrongdoing;
• tracing assets and making proprietary claims;
• obtaining the source of information contained
in a publication; and
• enabling a claimant to plead its case.
Koo's objective seems to have been the identification
of wrongdoers.
In the Norwich PharmacaP case itself, Customs &
Excise had published information which revealed
that a number of consignments of a chemical
compound (patented by Norwich Pharmacal) had
been imported to the United Kingdom without a
licence iiom the company, thereby in breach of its
patent rights. Norwich Pharmacal had no cause of
action against Customs & Excise but sought disclosure
of the names of the wrongdoing importers. The House
of Lords held that Customs & Excise were under a
duty to disclose the information sought.
However, in its judgment^ the House of Lords
made clear that the court should exercise its own
discretion on whether to grant such an order, given
all the circumstances:
5. Norwich Pharmacal Co v Custom &• Excise Commissioners
[1974] A.C, 133.
6. Norwich Pharmacal Co v Custom 8- Excise Commissioners
[1974] A.C. 133 as per Lord Cross at 199F to G.
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274 LEGAL ANALYSIS: [2008] J.LB.L.R.
"In so deciding it would no doubt consider such
matters as the strength of the applicant's case
against the unknown alleged wrongdoer, the relation
subsisting between the alleged wrongdoer and the
respondent, whether the information could be obtained
from another source, and whether the giving of the
information would put the respondent to trouble which
could not be compensated by the payment of all
expenses by the applicant."
In the Koo judgment, the Court of Appeal concluded
that, in principle, Koo would be entitled to the
"Norwich Pharmacal" order against BNS. However,
the Court's discretion should be used to refuse the
order where, amongst other considerations, the order
would involve a breach of confidence as between
bank and its customer, particularly so when the
customer is a central bank.
Conclusion
This decision gives comfort to state banks, in that
their dealings with their own bankers in the United
Kingdom cannot be investigated by third parties to
circumvent the state immunity they enjoy under UK
law.
The Court of Appeal recognised that the facts
entitled Koo to a "Norwich Pharmacal" order.
However, Mongolbank's state immunity and the
Court's discretion overrode that entitlement.
1. Section 340(3) of POCA.
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