Enron (Thrace) v Clapp and others
 EWCA Civ 1511 Court of Appeal;  EWHC 401 (Comm) Aikens J;  EWHC 1612 (Comm)
Court: High Court
John Machell QC
Thrace Basin Natural Gas (Turkiye) Corporation (“TBNG”) owned gas concessions in Turkey, but needed to investment to exploit them. It entered into negotiations with the Enron group. Enron carried on the negotiations using various employees employed by different group companies, particularly a Mr Friend. As is commonplace, it was not until fairly late in the negotiations that Enron identified the vehicle through which it intended to contract and (ultimately) it incorporated a shell SPV, ETEP, for the purpose. ETEP had a third party corporate director that did not participate actively in the transaction. ETEP and TBNG entered into a JVA under which ETEP agreed to provide funds and expertise in exchange for a 55% interest in the concessions. ETEP provided funds (sourced from higher up the corporate tree) but the deal was never “closed” and the funds became repayable. TBNG’s shareholders had entered into a guarantee of TBNG’s liability to ETEP and it was a claim under the guarantee that was the subject of the proceedings.
One of the defences run by the shareholders was that TBNG had entered into the JVA, and they had entered into the guarantee, as a result of misrepresentations (inter alia) as to the financial condition of the Enron group (which was, by the time of the JVA, in truth, insolvent). ETEP applied to strike out the defence on the basis that there was no arguable misrepresentation defence. The key issues were whether the representations were made on behalf of ETEP and (because rescission for innocent misrepresentation was not available) whether ETEP was fixed with the fraud of the employees of Enron Corp. (It was common ground that the negotiators themselves were innocent of the fraud.) In short, the shareholders argued as follows. For the purpose of negotiating the deal with TBNG, and prior to the selection of ETEP to undertake the transaction, Mr Friend acted, de facto, as agent for the Enron Group as a whole or (as the ultimate owner of all the group companies) Enron Corp. Once Enron selected ETEP as its vehicle for the JV with TBNG, negotiations continued up to execution, with Enron (through the same individuals as negotiators) acting (as agent) on behalf of ETEP (as principal). The earlier representations were of a continuing nature down to execution of each of JVA and Charge (Briess v Woolley  AC 333) and were, therefore, made by ETEP. Enron’s continuing knowledge of the untruth of the representations means that ETEP could not assert its innocence in face of the fraud of its agent, namely, Enron. Aikens J ( EWHC 401) rejected the shareholder’s argument and his decision was affirmed by the Court of Appeal. Some may regard rejection of the shareholders’ argument “as an unattractively technical response to the problems faced by people dealing with group companies” (Buxton LJ para 27). (Cf Mance LJ in MCI WorldCom v Primus International  EWCA Civ 957 para 25.) In this type of case, should a subsidiary be entitled to take the benefit of the contract free of the fraud of its parent? It might be thought a legal system that responds to this problem in the affirmative (that is, by allowing the subsidiary to take free of the fraud) is not merely “unattractively technical”, but unjust given that, in a group situation (at least where the subsidiary is wholly owned, directly or indirectly), the effect is to permit an insolvent and fraudulent parent to take the benefit of the contract without bearing the burden.