(delivered the unanimous opinion of the Board)
Franz Wilhelm Kohlrautz is a German national. He is now semi-retired but has had a successful career as an off-shore investment adviser, dealing with clients’ funds through trust and corporate entities. In 1981, when he was living in Luxembourg, he married Tracey O’Reilly and a few years later they moved to Freeport in The Bahamas. Their relationship deteriorated and in 1992 Mrs O’Reilly-Kohlrautz (“the wife”) went to Texas to pursue a business venture. In 1997 she brought proceedings for divorce in Texas. She obtained a decree in default of appearance and the appointment of a receiver charged with obtaining possession of the matrimonial property. This was alleged by the wife to include substantial assets held by companies in various parts of the world. Mr Kohlrautz, on the other hand, said that he had no beneficial interest in most of these assets and that they belonged to clients or third parties.
The Texas lawyers acting for the wife and the receiver co-ordinated proceedings against Mr Kohlrautz in the United States, Switzerland, Germany, Liechtenstein, England, Jersey, The Bahamas and possibly other places as well. They engaged the services of private investigators and pelted him with Mareva injunctions, Anton Piller orders and the like, including criminal proceedings in Switzerland which resulted in Mr Kohlrautz and a business associate being arrested.
It was during this unhappy period that Mr Kohlrautz was befriended by Dr Diedrichs-Shurland, another German national living in The Bahamas. They had met briefly in 1997 but the friendship began in April 1998 when they met again. Mr Kohlrautz found her a willing listener to the story of his misfortunes. She was a business woman and about to be married to Mr Kemuel Shurland, a criminal lawyer. They both offered to help Mr Kohlrautz; he by providing legal services and she by holding his or his client’s assets in her name and by taking possession of his confidential papers to keep them out of the reach of Anton Piller orders.
There is no dispute that under this arrangement the Talanga Stiftung, a Liechtenstein entity controlled by Mr Kohlrautz, made three transfers of a total of US$3.22 million to accounts in the names of Dr Diedrichs-Shurland and Excalibur Investments and Holdings Ltd, a company through which she traded. Apart from a fairly substantial sum representing his own advance commission, Mr Kohlrautz said that these funds were held by him in a fiduciary capacity. He also moved his files into the Shurland home and for some months he and the Shurlands lived on terms of intimate friendship. They saw each other several times a week and Dr Diedrichs-Shurland accompanied Mr Kohlrautz to court for the hearings of the proceedings brought by the wife. From time to time Mr Kohlrautz asked Dr Diedrichs-Shurland to make payments out of the funds to lawyers and others and she duly wrote cheques drawn on her bank account.
The friendship began to deteriorate in the summer of 1999, when Mr Kohlrautz tried to obtain an account from Dr Diedrichs-Shurland of what she had in the bank and what she had paid out. He had himself been keeping an account of the expenditure which he had authorized or requested but he wanted to know whether it coincided with the bank statements. On 12 July 1999 he wrote her a letter saying that “since 12 April 1999 we have been asking for an accounting from you to verify amounts transferred”. He set out in some detail the sums which had been transferred, the payments to third parties which he had requested to be made and the interest which should have been earned. His conclusion was that approximately US$2.2m ought to be held on his behalf. The letter ended:
Please let us know if your actual data from the banks reflect different figures. Also you have not charged us for administering these trust funds so far. Please let us know.
There was no reply to this letter. In July 1999 matters reached crisis point. The funds had been entrusted to Mr Kohlrautz for investment in a foreign exchange transaction which he had foreseen might be very profitable at some date within the following year. When it appeared to him that a suitable moment had arrived, he asked Dr Diedrichs-Shurland to transfer the funds in accordance with his directions. She failed to do so, thereby causing Mr Kohlrautz some considerable embarrassment with his clients. On 17 August 1999 he wrote again in stronger terms, saying that he was making “a final effort to obtain from you a statement of accounts”. After explaining the problems he had been caused, he said:
As you are aware, if you have a financial problem, I am willing to help you. You will recall that I offered several times to pay you for your services for acting as trustee on my behalf. As a matter of fact in my letter to you from 12 July 1999 I had asked for your billing concerning your services provided to me in this matter.
This offer is still open. However, I cannot sit and permit you to violate our agreement and understanding. This is a very serious matter since I am responsible for these funds too.
Dr Diedrichs-Shurland made no substantive reply to this letter before Mr Kohlrautz issued proceedings on 26 August 1999 out of the Supreme Court Registry in Nassau. On the same day he obtained from Hartman Langley J, sitting in Nassau, a Mareva injunction to restrain the dissipation of the funds remaining in Dr Diedrichs-Shurland’s accounts. On 2 September Mr Shurland wrote on his wife’s behalf, saying that he had been instructed to send Mr Kohlrautz a bill for her services in a sum representing 35% of the value of the funds she had received. She included in this amount not only the US$3.22m but US$5.5m, said to be the funds held by a shelf company (“Free Christian Church Inc”) which Mr Kohlrautz had acquired and in which Dr Diedrichs-Shurland held the shares subject to a deed of trust.
Mr Kohlrautz rejected this demand. His solicitor wrote expressing his “dismay and astonishment that your wife would attempt to extort in excess of $2.5 million under the guise of having provided the services identified.” The reply by Mr Shurland on behalf of his wife on 27 September 1999 was a scarcely veiled threat to make use, to the prejudice of Mr Kohlrautz, of the private papers which Dr Diedrichs-Shurland had obtained in her capacity as his confidante. Mr Shurland wrote:
I need not remind you of the aged old equitable doctrine that ‘he who comes to equity must come with clean hands.’
I have noticed that your client’s action is on the equitable side and I am assured that he will not be coming to equity with clean hands.
It is my considered opinion that the court, having knowledge of the full facts, will not assist your client in any way with regard to the recovery of the funds being held in the names of Annaliese Dietrich and Excalibur Investments and Holdings Ltd.
At the same time, Dr Diedrichs-Shurland decided to make common cause with Mr Kohlrautz’s wife and her lawyers and private investigators. She disclosed to them Mr Kohlrautz’s confidential papers in the expectation that they would help them to prove that he was lying when he denied being beneficial owner of various assets which his wife was claiming. Thereafter, Dr Diedrichs-Shurland went to Europe in order to meet the private investigators and assist them. As will appear, this turned out to be less successful than she might have expected. In particular, the criminal proceedings in Switzerland were dismissed on the ground that there was no evidence of any impropriety by Mr Kohlrautz.
In October 1999 Dr Diedrichs-Shurland applied to have these proceedings transferred from Nassau to Freeport. Despite objection by counsel for the plaintiffs, the order was made. As the parties lived in Freeport, it was a more convenient venue for them (if not for the plaintiffs’ lawyers) than Nassau. But there was only one judge sitting in Freeport, Stanley Moore J, who (as Dr Diedrichs-Shurland knew) was to continue hearing the applications in the Kohlrautz divorce proceedings. At the time, no one seemed to think that this was likely to cause any difficulty.
Mr Kohlrautz had launched his own proceedings for divorce in Freeport, together with applications, by way of ancillary relief, for a half share in the matrimonial home in The Bahamas and a declaration that he had no beneficial interest in various entities which his wife claimed that he owned. The divorce petition came before Moore J on 5 January 2001, when Mr Kohlrautz was cross-examined by the wife’s counsel but she gave no evidence. The judge granted the decree, remarking that Mr Kohlrautz was an “impressive and credible witness”. Curiously, this encomium was included as a recital in the order subsequently drawn up by counsel.
When the trial in these proceedings began before the same judge on 5 March 2001, the issues were fairly narrow. Dr Diedrichs-Shurland did not dispute that she had received $3.22m from Talanga and that she held the money in trust. The question was whether Mr Kohlrautz had authorized the disbursement of more than the amount shown in his own accounts (just under $360,000) and whether (and if so how much) he had agreed to pay Dr Diedrichs-Shurland for her services.
Mr Kohlrautz’s case was that she had agreed to act as his trustee out of friendship and fellow-feeling for a compatriot in difficulties. There had been no intention to create a legal obligation to pay a fee and (as was accepted) no figures had been discussed. On the other hand, Mr Kohlrautz recognized a moral obligation to reward her for her help and had given effect to this obligation by making an offer in his letter of 12 July and repeating it in his letter of 17 August. Dr Diedrichs-Shurland had however rejected these offers, preferring to stand upon which she claimed to be her legal rights. But, he submitted, she had no such rights.
The counterclaim for remuneration went through various amendments and by the time an amended defence and counterclaim was filed on 17 April 2000 the claim for 35% was confined to the US$3.2m which Dr Diedrichs-Shurland had received in cash. She claimed only 2% of the $5.5m alleged to belong to Free Christian Church Inc but she also enlarged her claim to include 2% of the assets of a Cook Island Trust (“GRC Family Trust”), in which she said Mr Kohlrautz had a beneficial interest. This was said to have assets of $20,067,853. In addition, she claimed B$900 a week damages from August 1999 for loss caused by Mr Kohlrautz’s failure to pay her earlier and the effect of the Mareva injunction. Finally, there was a claim for general damages for injury to her reputation caused by Mr Kohlrautz having obtained an order for her committal to prison for breach of an interlocutory order. These claims underwent further modification at the trial.
The judge heard evidence over 8 days in March 2001, 2 days in April and 3 days in July. Dr Diedrichs-Shurland was in the witness box for 6 of those days. After two further days of closing submissions in October 2001, he reserved judgment.
Meanwhile, the Shurlands had fallen out and each petitioned for divorce on the grounds of the other’s cruelty. Moore J heard applications in these proceedings on 23 May and 19 November 2001.
Early in 2002, the judge began the trial of the proceedings for ancillary relief in the Kohlrautz divorce. This occupied ten days of hearing, ending in April 2002, after which he also reserved judgment.
He announced the results in both actions on 31 December 2002 and gave written reasons later. The outcome was a comprehensive victory for Mr Kohlrautz in both proceedings. In the action against Dr Diedrichs-Shurland, the judge held that there was never any intention to make a legally binding agreement for the payment of remuneration. He took a very unfavourable view of Dr Diedrichs-Shurland, who had “fraudulently siphoned off” trust money for her own purpose and, when called to account, had set about inventing claims on the funds. His finding was that she was not in law entitled to any remuneration and that she had not been authorized to make any payments out of the funds in excess of those admitted by Mr Kohlrautz. She was accountable for the balance.
In the matrimonial proceedings, the judge refused to make any order on the wife’s claim for financial support until she made proper disclosure of her assets. He granted Mr Kohlrautz’s claims to a share in the matrimonial home and made declarations that he had no interest in the various entities over which the parties had been in dispute.
Dr Diedrichs-Shurland appealed to the Court of Appeal. The 32 paragraphs of the notice of appeal all alleged that the judge had misdirected himself as to various aspects of the evidence. Not surprisingly, the Court of Appeal gave these submissions very short shrift. Ganpatsingh JA said that the case turned entirely on credibility and that there were no grounds for interfering with the judge’s assessment of which party was telling the truth. Their Lordships would add, having read the transcript of Dr Diedrichs-Shurland’s evidence, that there was ample material upon which the judge could have reached this conclusion. She was plainly a very unsatisfactory witness, giving evidence which was shifting, contradictory and often inconsistent with the contemporary documents.
The appeal to Her Majesty in Council, however, is concerned not with the merits of the decision but with the fairness of the trial. First, it is said that the judge must have been prejudiced by having heard the Kohlrautz and Shurland divorce proceedings before he gave judgment in the present case. The fact that he had announced in January 2001 that he found Mr Kohlrautz an “impressive and credible witness” meant that he must have been at least unconsciously biased in his favour when he heard his evidence in this case.
Their Lordships think that there is nothing in this point. In the leading English case of Locabail (UK) Ltd v Bayfield Properties Ltd  QB 451, 480 the Court of Appeal gave, as examples of cases in which “a real danger of bias might well be thought to arise”, cases in which —
Where the credibility of any individual were an issue to be decided by the judge, he had in a previous case rejected the evidence of that person in such outspoken terms as to throw doubt on his ability to approach such person’s evidence with an open mind on any later occasion.
An example of such a case is London Borough of Ealing v Jan  EWCA Civ 329 (“I do not trust Mr Jan further than I could throw him”). But this is far from such a case. The fact that Moore J found Mr Kohlrautz an impressive and credible witness on an issue on which his evidence stood uncontradicted casts no doubt on his ability to approach his evidence in a proper judicial manner in later proceedings. Their Lordships would observe that the transcript of the evidence shows that the judge conducted what could not have been an easy trial (both Mr Kohlrautz and Dr Diedrichs-Shurland were strong-willed characters) in a manner which combined fairness with robust common sense. In any case, Dr Diedrichs-Shurland applied for a transfer to Freeport in the knowledge that Moore J would be dealing with the Kohlrautz divorce and would be bound to form a view of Mr Kohlrautz in that context. If she was concerned about the consequences, she could have left the action in Nassau.
The next matter upon which the appellants rely is the long delay between the end of submissions and the judgment. It is accepted that delay is not in itself a reason why the proceedings should be regarded as unfair. It is unfair only if there is a real likelihood that it has resulted in a flawed decision: see Cobham v Frett  1 WLR 1775. The appellants submitted that such a likelihood was shown by mistakes which the judge had made in his reasons for judgment. These showed that he must have forgotten some parts of the evidence.
Their Lordships have examined these alleged mistakes with care and can find nothing to support a conclusion that the judge had forgotten any significant aspect of the evidence. The terms of his judgment suggest that by the end of the hearing he must have reached the conclusion that Dr Diedrichs-Shurland was not to be believed and only required time to put his reasons in writing. Mr Goldberg QC, who appeared for the appellants, said that the judge’s omission to mention Mr Kohlrautz’s letters of 12 July and 17 August 1999, both of which contained offers to pay remuneration, show that he must have forgotten their significance. But their Lordships think that these letters are quite inconsistent with a previous binding agreement to pay remuneration and that they were rightly relied upon by Mr Kohlrautz’s counsel in support of his case. The fact that they were not mentioned is therefore no indication that the judge overlooked evidence favourable to the appellants.
Next, Mr Goldberg says that the judge, in adopting some of the written submissions of Mr Kohlrautz’s counsel at the trial, incorporated an “obvious mistake” which shows that he did not apply an independent mind to the formulation of his reasons. The alleged mistake is to have said that paragraph 7 of the Amended Defence and Counterclaim alleges that Dr Diedrichs-Shurland was a secretary in her husband’s law firm. In fact, says Mr Goldberg, the pleading says that she was not. But Mrs Talbot-Rice, who appeared for Mr Kohlrautz, produced a copy of the pleading from the court file at Freeport which supports the judge’s reading. Perhaps this was an error which was subsequently corrected; there appears to have been another copy of the pleading in circulation which said the opposite, but the judge cannot be blamed for quoting from the version he had been given.
Thirdly, it is submitted that the judge forgot to deal with the claim that even if no figure for remuneration had been agreed, Dr Diedrichs-Shurland was entitled to a quantum meruit fixed by the court. But a claim to a quantum meruit depends upon the existence of some express or implied agreement to pay remuneration which the court can then quantify by fixing a reasonable figure. The judge’s finding, however, was that no such agreement could be implied from the nature of the transaction (since trusteeship is prima facie gratuitous) and that Mr Kohlrautz had not entered into any agreement, even in general terms, to pay remuneration. That is inconsistent with a quantum meruit.
The last ground on which it is said that the trial was unfair is that after judgment was reserved, Mr Kohlrautz and his counsel each wrote letters to the judge which were not communicated to the appellants. Their Lordships can deal briefly with the letter written by counsel. It was a closing submission in the divorce proceedings and was copied to Mr Collie in his capacity as counsel for the wife. It appears to have gone astray because Mr Collie says he did not receive it. The appellants complain that it also contained some allegations prejudicial to Dr Diedrichs-Shurland but their Lordships do not think that this made it material which had to be disclosed to her any more than the other evidence and documents in the divorce proceedings. As it happens, Mr Collie was also counsel for Dr Diedrichs-Shurland and, if the letter had not gone astray, would have received the submission. This was an unfortunate accident but did not make the trial unfair.
The other letter is a different matter. On 18 December 2001, two months after judgment had been reserved, Mr Kohlrautz wrote the judge’s clerk a letter headed “Without Prejudice”. What he meant by this their Lordships cannot even begin to imagine. The letter proceeded:
When his Lordship in January 2001 heard my divorce in Nassau he called me a very credible witness.
Since it is my desire to maintain his Lordship’s opinion about me I now, due to developments happened, deem it necessary to address some facts without prejudice because what I am addressing is either already on record or documented otherwise.
During the divorce hearing in January attorney Bridgewater tried to challenge my statement about my health.
In her affidavit of 2 August 2001 my former wife swears that I only use the story of my health as a shield.
Only 5 weeks later in her affidavit dated 7 September 2001 my former wife tells this same court that she saved me 3 times from my death.
As we shall see later my former wife and her cohorts will make any statement under oath. They make a mockery out of the court, they smear the court as documented here following.
He then gave some clinical details about his state of health and went on:
My former confidant Diedrichs-Shurland knew about my fragile health situation. That’s why she stated after I had sued her: ‘by the time I’m finished with Franz Kohlrautz he will have had at least a heart attack or hit the bucket!’
Although I had a witness for this, unfortunately it did not come out at trial.
On 26 February 2001 at 12:35 pm Diedrichs-Shurland and my former wife sent 3 men to my residence to threaten and harm me not to go into the trial Talanga/Diedrichs-Shurland. Only because I went for my gun (which is licensed) these men left my property in haste and under loud threats.
Immediately after I had Inspector Clyde Nixon and Sgt Gibson from the Royal Bahamian Police Force take a report at my home since my maid overheard the threats against me.
This occurrence shows how desperate Diedrichs-Shurland in collusion with my former wife were in trying everything (also criminal) to prevent me from going into the trial against Diedrichs-Shurland. As is known from the record Diedrichs-Shurland and Tracy O’Reilly-Kohlrautz had a secret agreement which is also documented by the fee notes of the Texas receiver. Unfortunately this threat on my life also did not come out during trial. It would have been very damaging to Diedrichs-Shurland.
Mr Kohlrautz then went on to say more about his health and repeated that he wanted to maintain the judge’s opinion of his credibility and have a fair hearing in what were then the imminent divorce proceedings.
This was a grossly improper letter. No copy was sent to the appellants and the appellants say that they discovered the existence of the letter only when their counsel went through the court files in the course of preparing their case for the Court of Appeal. (Mr Kohlrautz says that the appellants had somehow found out about it earlier, before judgment was delivered. Their Lordships will deal with this issue later). On its face, the letter was an attempt to influence the judge in favour of Mr Kohlrautz by making very serious allegations against Dr Diedrichs-Shurland. These allegations, if they were going to be raised at all, should have been put to her in cross-examination at the trial, when she would have had an opportunity to answer them. It was contrary to basic principles of fairness to communicate them to the judge behind her back after the trial had ended.
Mr Kohlrautz says in an affidavit that he was driven to write the letter by his frustration at the legal proceedings in which he had been involved. But he had access at the time to very competent legal advice and furthermore he knew perfectly well that he should not write private letters to the judge. In November 2000 he had written to Lyons J (who had been presiding over the divorce proceedings before Moore J took them over) and received a reply from his clerk:
His Lordship has directed me to advise the following:
Mr Kohlrautz says by way of excuse for his letter that “there was a history of parties in my divorce proceedings corresponding with the judge.” It does appear that as counsel for some of the parties interested in the divorce proceedings lived abroad, Lyons J was willing to accept applications and submissions by letter copied to all the other parties rather than insist on personal appearance in court. This was a sensible practice but it cannot possibly justify the kind of letter sent by Mr Kohlrautz without a copy to anyone.
The problem is the question of this letter was raised in the Court of Appeal at the last minute and without proper notice. Perhaps for this reason, the Court did not take it very seriously, remarking only that Mr Kohlrautz should be told that he might be able to write such letters in Germany but that they were improper in The Bahamas. However, the letter has been in the forefront of the argument before the Board and their Lordships do not see how it can be ignored. But the difficulty which faces their Lordships is that there has been no investigation into whether Moore J saw the letter or what, if anything, he did about it. One would expect the clerk to have shown it to him but equally, one would then have expected him to send copies to the other parties and say that, subject to any contrary submissions, he proposed to ignore it. Perhaps he did. Mr Kohlrautz has sworn an affidavit saying that his wife and Mr Collie told him in April 2002 that she knew of the letter and was going to complain to the court. If that is true, it could only have been because Moore J sent it. As Mr Collie was also acting for Mrs Diedrichs-Shurland, it would be likely to have come to her attention as well. Neither she nor the wife raised the matter. If Mrs Diedrichs-Shurland knew about it, she would not be entitled to complain now. On the other hand, Mrs Diedrichs-Shurland altogether denies any knowledge of the letter until it appeared from the court file before the hearing in the Court of Appeal and Mr Collie supports her.
Mr Goldberg submitted that if the judge had read the letter, there would have been a real risk that he would thereby have been biased against Dr Diedrichs-Shurland. Their Lordships were referred to the well-known authorities on bias. But their Lordships think that this is the wrong approach. To say that the judge might have been biased is an artificial and unnecessarily convoluted way of putting the matter. Dr Diedrichs-Shurland’s real complaint would be that she did not get a fair trial because she was given no opportunity to defend herself against damaging allegations going to her credit. The distinction between impartiality and fairness is explained by great clarity by Lord Denning in Kanda v Government of Malaya  AC 322 at 336-338, a case to which their Lordships were not referred. The appellant was a policeman who had been dismissed after a disciplinary hearing. It later appeared that the adjudicating officer had received the report of a board of inquiry which contained very damaging statements about the appellant but which had not been disclosed to him. In the lower courts, the issue was treated as being whether there was a real risk that the adjudicating officer would have been biased. Lord Denning said:
In the opinion of their Lordships, however, the proper approach is somewhat different. The rule against bias is one thing. The right to be heard is another. Those two rules are the essential characteristics of what is often called natural justice. They are the twin pillars supporting it. The Romans put them in the two maxims: Nemo judex in causa sua: and Audi alteram partem. They have recently been put in the two words, Impartiality and Fairness. But they are separate concepts and are governed by separate considerations. In the present case inspector Kanda complained of a breach of the second. He said that his constitutional right had been infringed. He had been dismissed without being given a reasonable opportunity of being heard.
If the right to be heard is to be a real right which is worth anything, it must carry with it a right in the accused man to know the case which is made against him. He must know what evidence has been given and what statements have been made affecting him: and then he must be given a fair opportunity to correct or contradict them .... It follows, of course, that the judge or whoever has to adjudicate must not hear evidence or receive representations from one side behind the back of the other. The court will not inquire whether the evidence or representations did work to his prejudice, Sufficient that they might do so. The court will not go into the likelihood of prejudice. The risk of it is enough. No one who has lost a case will believe he has been fairly treated if the other side has had access to the judge without his knowing.
Their Lordships therefore consider that if the judge read the letter but did not send it to Mrs Diedrichs-Shurland and it did not come to her attention in any other way before judgment was delivered, she is entitled to an order for a new trial. They would arrive at this decision with considerable regret, because, as they have said, the judge conducted the trial with conspicuous fairness and ability and there were ample grounds for his rejection of her evidence. Even if he read the letter, it is unlikely that it had the slightest effect on his judgment. It would however be contrary to the principle stated by Lord Denning in Kanda’s case to speculate on such matters. Mr Kohlrautz would have only himself to blame for snatching defeat from the jaws of victory.
Their Lordships consider that it would not be fair to either side to order or refuse a new trial without inquiring into the question of whether the judge read the letter and, if so, whether it came to the attention of Mrs Diedrichs-Shurland. The appropriate course is to remit the appeal to the Court of Appeal of the Bahamas to decide upon a procedure for determining these questions. Whether the Court of Appeal hears evidence itself or directs that the issues be tried by a judge at first instance is entirely a matter for them. The costs of the proceedings, including the costs before the Board, should also be reserved to the Court of Appeal. Their Lordships will humbly advise Her Majesty accordingly.
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