Harbour Fund III, LP v Kazakhstan Kagazy Plc & Ors

A rehabilitation manager’s authority under Kazakh law is assessed when the transaction is made. A transaction may later be voidable without that consequence establishing authority. Where the Bankruptcy Law requires creditors’ consent for transactions outside ordinary commercial operations or the rehabilitation plan, the manager lacks authority to enter them without that consent.

Ostensible authority requires a representation by the principal and reliance. Reliance fails where the third party lacks an honest belief in authority, has actual knowledge of the lack of authority, or recklessly turns a blind eye to actual suspicions.

Contractual provisions concerning funding, preservation of rights and enforcement costs must be construed in the context of the agreement as a whole. Unjust enrichment requires more than receipt of payments where the recipient did not freely accept them.

This was a Phase 1 trial concerning litigation funding provided by Harbour Fund III, L.P. to Kazakhstan Kagazy Plc, Kazakhstan Kagazy JSC and related companies under an Investment Agreement.

The court considered whether amendments signed by Tomas Werner, the CEO and rehabilitation manager of Kazakhstan Kagazy JSC, were valid and binding. It also considered whether additional payments made by Harbour Fund III were recoverable as contractual costs, damages, or sums due to unjust enrichment.

The central issues were whether Mr Werner had actual or ostensible authority under Kazakh law, whether the Investment Agreement covered the various categories of expenditure, and whether the defendants were unjustly enriched.

1. Actual authority. The relevant authority was governed by Kazakh law. Applying Article 6 of the Civil Code, the language of Article 71(1)(4) of the Bankruptcy Law was clear. Transactions outside ordinary commercial operations and the rehabilitation plan required creditors’ consent. Mr Werner therefore lacked authority to enter the disputed variation letters without that consent. The fact that a transaction might be voidable did not establish authority. Authority and the consequences of an unauthorised transaction were distinct questions assessed at different stages.
2. The disputed variations were outside KK JSC’s ordinary commercial operations. KK JSC was a holding company. The scale and value of the litigation did not make funding it an ordinary commercial operation. Article 71(2), concerning protection and control of the debtor’s property, did not confer a free-standing power to vary the rehabilitation plan without creditors’ consent. The Rehabilitation Plan itself required consent for material changes and did not authorise the variations without that consent.
3. Ostensible authority. The court applied the principles in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, as qualified by Kelly v Fraser [2013] 1 AC 450 (PC). The relevant test, following Quinn v CC Automotive Group Limited t/a Carcraft [2011] 2 All ER (Comm) 584, required consideration of actual knowledge, dishonesty, recklessness and turning a blind eye to actual suspicions, rather than mere unreasonableness or being put on enquiry. HF3 did not have an honest belief in Mr Werner’s authority in 2017 and, alternatively, turned a blind eye. Reliance was not established for the May 2016 variation.
4. Contractual costs and damages. The Investment Agreement did not impose a freestanding obligation on the funded parties to provide unlimited additional funding or to negotiate variations in good faith. The “preservation of rights” wording in the definition of Claimants’ Legal Costs was construed narrowly and did not cover the additional funding. The Enforcement Costs were governed specifically by clause 10.3 and were recoverable through the clause 10.1(c) waterfall, but were not Claimants’ Legal Costs or part of the HF3 Investment and did not attract a return. Clause 10.3 did not give HF3 a separate damages claim for those expenses.
5. No implied term required the funded parties to discharge expenditure above the agreed budget. The proposed term was neither necessary nor so obvious that it went without saying, applying Marks & Spencer plc v BNP Paribas Securities Services Trust Company [2016] AC 742 at [23].
6. Unjust enrichment. The court assumed enrichment and enrichment at HF3’s expense, but found no unjust factor. KK JSC had not freely accepted the variation or later proceedings payments, and the payments were not made at its request. HF3 had not shown the relevant mistake or total failure of consideration. The claims therefore failed.