VTB Capital Plc v Nutritek International Corp & Ors [2013] UKSC 5

An English bank sued Russian-connected defendants for fraud inducing a US$225m loan. The Supreme Court, by 3:2, upheld the setting aside of service out of the jurisdiction because Russia, not England, was clearly the appropriate forum, and unanimously refused permission to amend to pierce RAP's corporate veil.

Facts

VTB Capital plc (“VTB”) is a bank incorporated, registered, authorised and regulated in England. It is majority-owned by JSC VTB Bank (“VTB Moscow”), a Russian state-owned bank. By a Facility Agreement dated 23 November 2007, VTB advanced some US$225,050,000 to a Russian company, Russagroprom LLC (“RAP”), principally to fund RAP’s purchase from Nutritek International Corp (“Nutritek”) of six Russian dairy companies and three associated companies. An accompanying interest rate swap agreement (“ISA”) was also entered into, and VTB Moscow assumed the entire credit risk under a 100% funded participation agreement. RAP made three interest payments and no capital repayments before defaulting in November 2008. VTB assessed the security as worth only some US$32m-US$40m.

VTB’s case was that it had been induced in London to enter into the Facility Agreement and ISA by fraudulent misrepresentations made by Nutritek, for which the other respondents were jointly and severally liable: first, that RAP and Nutritek were not under common control; secondly, that the dairy companies were worth far more than their true value (an Ernst & Young valuation of US$366m, prepared by E&Y’s Moscow office on information supplied by Nutritek’s Russian management). The respondents were Nutritek and Marshall Capital Holdings Ltd (“Marcap BVI”), both BVI companies, Marshall Capital LLC (“Marcap Moscow”, never served) and Mr Konstantin Malofeev, a Russian businessman resident in Moscow alleged to be the ultimate owner and controller of all of them.

The Facility Agreement was governed by English law and, by clause 35.1, conferred non-exclusive jurisdiction on the English courts, recorded that the English courts were the most appropriate and convenient forum and that no party would argue otherwise, and was expressed to be for VTB’s benefit only; clause 35.3 gave VTB an option to arbitrate in London.

Procedural history

VTB obtained ex parte permission from Master Winegarten to serve its tort claims (deceit and unlawful means conspiracy) out of the jurisdiction. The served respondents applied to set service aside; VTB cross-applied to amend to add a contractual claim, alleging that RAP’s corporate veil could be pierced so as to make the respondents liable under the Facility Agreement and ISA. Arnold J set service aside and refused the amendment ([2011] EWHC 3107 (Ch)); the Court of Appeal dismissed VTB’s appeal ([2012] EWCA Civ 808), though on partly different reasoning. A worldwide freezing order against Mr Malofeev, granted in August 2011, had been continued pending the appeals.

It was common ground before the Supreme Court that VTB had a serious issue to be tried in tort against each respondent and a good arguable case that the claims fell within CPR Part 6, PD 6B, para 3.1(9)(a) (damage sustained within the jurisdiction). The Supreme Court refused permission to re-argue the respondents’ “no loss” point.

Issues

Two main questions arose:

• Whether the ex parte permission to serve out should be set aside, i.e. whether VTB had shown that England was “clearly or distinctly the appropriate forum” and the “proper place in which to bring the claim” under CPR 6.37(3). This raised subsidiary questions as to (a) the law governing the alleged torts under sections 11 and 12 of the Private International Law (Miscellaneous Provisions) Act 1995; (b) the weight to be given to the place of commission of the tort under the line of authority represented by Cordoba Shipping Co Ltd v National State Bank, Elizabeth, New Jersey (The Albaforth) [1984] 2 Lloyd’s Rep 91; (c) the weight of the English jurisdiction clause in a contract to which the defendants were not parties; and (d) the proper scope of appellate intervention.
• Whether VTB had an arguable case for piercing RAP’s corporate veil so as to hold Mr Malofeev and Marcap liable as if they were co-contracting parties under the two agreements.

A third question concerned the fate of the freezing orders.

Arguments

For VTB, Mr Mark Howard QC contended that where a tort is committed in England there is a presumption, and a strong one, that the defendant should answer for it here; that English law governed the torts; and that the fact that the defendants had, by fraud, procured VTB’s entry into a contract containing clause 35 was “a powerful pointer to England being the proper place to bring [a] claim”. On the veil, he argued that Mr Malofeev had abused the corporate structure by using RAP to disguise his control and obtain the loans, relying by analogy on the undisclosed principal doctrine and on Antonio Gramsci Shipping Corporation v Stepanovs [2011] EWHC 333 (Comm).

For the respondents, Mr Mark Hapgood QC (for Mr Malofeev) submitted that the connections of the parties, the events, the witnesses and the documents were overwhelmingly Russian; that appellate courts should discourage re-argument of evaluative interlocutory balancing exercises; and that clause 35 could assist VTB at most in proceedings that included a claim under the agreements against a contracting party. Mr Michael Lazarus (for Marcap BVI) mounted a wider attack, contending that English law recognises no principle permitting the corporate veil to be pierced at all, the decided cases being explicable by agency, statutory construction or receipt principles, and that in any event VTB’s case was an unprincipled extension.

Judgment

The Supreme Court dismissed the appeal on both main issues. On forum, the majority comprised Lord Mance, Lord Neuberger and Lord Wilson; Lord Clarke and Lord Reed dissented. On the corporate veil the Court was unanimous, Lord Neuberger giving the leading reasoning.

Governing law of the torts

All five Justices held that the courts below had erred in treating Russian law as governing the alleged deceit. Lord Mance proceeded on the basis that England was the place where the events constituting the tort occurred within section 11(1) of the 1995 Act, and that the respondents had not shown under section 12 that it was substantially more appropriate for Russian law to apply. As to conspiracy he was “content to proceed on the basis that the conspiracy was, like the deceit, governed by English law, since ultimately in my view it makes no difference to the result”. Lord Clarke’s dissent contains the fullest analysis of sections 11 and 12, concluding that the most significant elements of deceit—reliance and loss—occurred in London, and that the general rule was not displaced, since section 12 focuses on the particular tort and “substantially” is the key word.

Crucially for the majority, however, that error was not decisive. Lord Mance accepted that:

The governing law, which is here English, is in general terms a positive factor in favour of trial in England, because it is generally preferable, other things being equal, that a case should be tried in the country whose law applies.

But he held that this factor has “particular force if issues of law are likely to be important and if there is evidence of relevant differences in the legal principles or rules applicable”, and neither consideration applied: the key issues would be factual, Russian courts can receive evidence of English law, and there was no evidence that Russian law would treat deceit or conspiracy differently. Arnold J had expressly considered the position on the alternative hypothesis that English law applied (para 194 of his judgment), and the Court of Appeal had said it would have reached the same conclusion.

The Albaforth principle and Spiliada

Lord Mance reaffirmed Spiliada Maritime Corpn v Cansulex Ltd [1987] AC 460 as the “locus classicus”, with the claimant in a service-out case bearing the burden of showing that England is clearly the appropriate forum. He rejected the “strong presumption” formulation advanced for VTB, observing of the Albaforth line (approved in Berezovsky v Michaels [2000] 1 WLR 1004):

The Albaforth line of authority is no doubt a useful rule of thumb or a prima facie starting point, which may in many cases also prove to give a final answer on the question whether jurisdiction should appropriately be exercised. But the variety of circumstances is infinite, and the Albaforth principle cannot obviate the need to have regard to all of them in any particular case.

He added that “References to a presumption are in my view unhelpful”, and that the significance of the place of commission “may be dwarfed by other countervailing factors”, particularly in an international transaction.

Application to the facts

Lord Mance emphasised that the tortious liability of all respondents depended on a common design which, on VTB’s own pleadings, was formed in Russia; that both representations emanated from Russia; that the transaction was introduced, negotiated, pursued and approved predominantly in Moscow, with VTB “effectively following suit on decisions taken there”; that the facts said to render the representations untrue (the dairy companies’ businesses and Mr Malofeev’s control of RAP) lay in Russia; and that the evidence, oral and documentary, expert and factual, would be “overwhelmingly Russian”. There was no suggestion that a fair trial could not be had in Moscow. As to clause 35, he agreed with Arnold J that it was “a pointer to England, but not a strong one given that the claim is a tort claim not a contract claim”, warning that to treat the point as decisive “begs the question where the issue whether any such deceit occurred and induced the loan should most appropriately be determined”. His conclusion was that “the Russian connection is of such strength and importance in this case that, despite the existence of some factors favouring England, the appellant is quite unable to discharge the onus on it”.

Appellate restraint and the conduct of jurisdiction hearings

Lord Neuberger made three general points of practical importance. First, “hearings concerning the issue of appropriate forum should not involve masses of documents, long witness statements, detailed analysis of the issues, and long argument”, since it is “self-defeating” and disproportionate for the jurisdiction hearing to approach the putative trial in effort, time and cost; judges should use case management powers to keep such hearings within proportionate bounds. Secondly, on the extent to which a challenging defendant must reveal his case, he held: “As a matter of principle, a defendant is entitled to keep his powder dry: he can simply put the claimant to proof of its case”, though if he says nothing the court may proceed on the basis that there is no more to the proceedings than the claimant making out its case. Lord Mance agreed that a positive case need not be advanced, while noting that in the absence of one the convenience of adducing defence evidence on such points can be left out of account. Lord Clarke, dissenting, took a firmer view that a defendant “must indicate, at least in general terms what positive case he wishes to advance”, there being no risk of submission to the jurisdiction in serving a draft defence expressly without prejudice.

Thirdly, Lord Neuberger endorsed Lord Bingham’s warning in Lubbe v Cape plc [2000] 1 WLR 1545 against litigating forum at successive levels in the hope of a different balance being struck, and stressed (with Lord Wilson) that the exercise below was not the exercise of a discretion but an evaluative or balancing exercise with which an appellate court should be slow to interfere. He concluded that Arnold J and the Court of Appeal each reached a conclusion they were entitled to reach, which was “not vitiated by any error, because, to the extent that there was any error, it did not invalidate the conclusion”. Lord Wilson agreed that “considerations of practicality militate strongly in favour of a Russian forum”, contrasting VTB’s points, which “primarily go to theory, to policy and, yes, perhaps to a limited extent to justice”, with the defendants’ points, which “primarily go to practicality”. He doubted whether permission to appeal on forum should have been granted.

Piercing the corporate veil

Lord Neuberger addressed Mr Lazarus’s submission that no such principle exists, reviewing Salomon v A Salomon & Co Ltd [1897] AC 22, Lord Keith’s “mere façade concealing the true facts” formulation in Woolfson v Strathclyde Regional Council 1978 SLT 159, Gilford Motor Co Ltd v Horne [1933] Ch 935, Jones v Lipman [1962] 1 WLR 832, Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177, Gencor ACP Ltd v Dalby [2000] 2 BCLC 734, Adams v Cape Industries plc [1990] Ch 433 and Ben Hashem v Al Shayif [2008] EWHC 2380 (Fam). He warned that metaphors such as “façade”, “sham”, “cloak” and “puppet” “are often dangerous, as they risk assisting moral indignation to triumph over legal principle”. He nevertheless declined to decide the existence question: “it is unnecessary and inappropriate to resolve the issue”, it being unnecessary to the result and inappropriate on an interlocutory appeal to determine an issue of such general importance.

Assuming the jurisdiction exists, VTB’s case failed. It sought an extension, to hold the controller liable as if he had been a co-contracting party, supported by no authority save Gramsci. Lord Neuberger held that “far from there being a strong case for the proposed extension, there is an overwhelming case against it”. His reasons were: (i) joint and several liability alongside RAP is inconsistent with the reasoning in Salomon; (ii) “where B and C are the contracting parties and A is not, there is simply no justification for holding A responsible for B’s contractual liabilities to C simply because A controls B and has made misrepresentations about B to induce C to enter into the contract”, C having its remedy in misrepresentation; (iii) it would contradict the objective principle of contract formation (Smith v Hughes (1871) LR 6 QB 597), since no party intended to contract with Mr Malofeev and he never conducted himself as if liable; (iv) the undisclosed principal analogy told against VTB, being an anomaly which should not be extended; and (v) the alleged facts did not involve RAP being used as a façade concealing the true facts, because “the true facts” must mean that in reality it is the person behind the company who is the relevant actor or recipient. “Abuse of the corporate structure” added nothing. He also doubted Gramsci, and was “not at all attracted by the notion that the principle should be invoked simply to enable VTB to justify the proceedings being heard in this jurisdiction”—that would be “precious close to its application being permitted to pull itself up by its own bootstraps”. He noted, without deciding, that a choice of law question may arise where a foreign-incorporated company’s veil is in issue, English law being common ground here. Lord Clarke agreed on the facts but expressly reserved the true scope of the principle and whether Gramsci was correctly decided.

The freezing orders

With the appeal dismissed, the discharged worldwide freezing order remained discharged and the temporary order was discharged. Lord Wilson described the continuation of the order for some 14 months beyond the point at which it was proper as “a highly unsatisfactory state of affairs”, observing that Mr Malofeev is “at first sight” entitled to complain of an oppressive restraint on his economic activities, with his cross-undertaking claim stayed but issued. Lord Mance associated himself with these concerns.

The dissents

Lord Clarke would have allowed the appeal on forum, holding that both courts below erred in principle: on applicable law; in under-weighting the Albaforth factor (a “weighty factor” where deliberate representations were made, intended to be relied on, relied on and caused loss within the jurisdiction); and in failing to give proper weight to the English jurisdiction clause, agreeing with Professor Briggs that where a person fraudulently engineers a contract subject to English law and an English jurisdiction clause, England is the proper place to assert substantive liability against him. Lord Reed agreed with Lord Clarke on forum, considering the errors material and cumulative, while agreeing with Lord Neuberger on the veil.

Implications

The decision confirms, at the highest level, that the Spiliada question—whether the claimant has shown England to be clearly or distinctly the proper place to bring the claim—remains the single over-arching test in service-out cases, and that the Albaforth line does not create a legal presumption. The place of commission remains a relevant starting point creating a prima facie basis, but it can be outweighed, and in international fraud cases where the design, the actors, the witnesses and the documents are located abroad, it may be. Practitioners should note that the Court did not doubt Albaforth or Berezovsky; it declined to elevate them beyond a rule of thumb.

Equally significant is the guidance on process. The Court’s insistence that forum disputes be kept proportionate, and that the determination is an evaluative judgment rather than a discretion with which appellate courts should be slow to interfere, will make appellate challenges to forum rulings harder where the real complaint is that the balance should have been struck differently. The clarification that a defendant challenging jurisdiction may “keep his powder dry”, but risks the court assuming there is nothing more to the case than the claimant’s own case, is a practical point of tactical importance—though the Justices differed in emphasis, Lord Clarke favouring greater candour.

On company law, the case is important for what it did not decide: the existence of a general power to pierce the corporate veil was expressly left open, Lord Neuberger regarding an interlocutory appeal as an inappropriate vehicle. What was decided is narrower but clear: the veil cannot be pierced so as to make a controller liable as if he were a co-contracting party under a contract entered into by the company, where no party intended him to be a party. That holding is grounded in Salomon and in objective principles of contract formation, and reflects the point that the victim of fraud already has a remedy in deceit. The corresponding doubt cast on Gramsci, and Lord Neuberger’s reservations about Kensington International, signal caution about expansive veil-piercing; but Lord Clarke’s express reservation means the wider question remained open for later decision.

The judgment also leaves unresolved the choice of law rule governing veil-piercing of foreign-incorporated companies, the point having been conceded, and it does not decide whether the alleged conspiracy was governed by English law. Finally, Lord Wilson’s and Lord Mance’s criticism of the prolonged continuation of a worldwide freezing order pending appeals, where jurisdiction had twice been declined below, is a caution to claimants and to courts about the cost to defendants of interim relief that survives on appeal alone.

Verdict: The appeal was dismissed on both main issues. On forum, by a majority of 3:2 (Lord Mance, Lord Neuberger and Lord Wilson; Lord Clarke and Lord Reed dissenting), the setting aside of permission to serve the proceedings out of the jurisdiction was upheld, VTB having failed to show that England was clearly or distinctly the appropriate forum. Unanimously, permission to amend the particulars of claim to plead a contractual claim based on piercing RAP’s corporate veil was refused. The Supreme Court unanimously held that English law governed the alleged tort of deceit, correcting the courts below, but this did not alter the outcome. The previously discharged worldwide freezing order remained discharged and the temporary freezing order was also discharged.

Source: VTB Capital Plc v Nutritek International Corp & Ors [2013] UKSC 5