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Yesterday, Lord Neuberger, Lord Mance, Lord Clarke, Lord Wilson and Lord Reed began a three day hearing of the case of VTB Capital plc v Nutritek International Corp & Ors [2012] EWCA Civ 808, which involves the principle of “piercing the corporate veil”, and the increasingly common issue of the breadth of the jurisdiction of the English courts.

Background

Nutritek International Corp is a British Virgin Island incorporated company, with its ownership and operations in Russia. In November 2007, Russian company Russagroprom LLC (“RAP”) acquired six Russian dairy plants (the “Dairy Companies”) from Nutritek under a $225 million loan agreement (the “Facility Agreement”) from London-based bank VTB.  RAP defaulted on the Facility Agreement and was unable to pay the balance of the loan. Against this background VTB brought proceedings against (i) Nutritek, (ii) Marshall Capital Holdings Limited (a BVI company and indirect owner of a substantial interest in Nutritek) and (iii) Mr Konstantin Malofeev (a Russian resident and the alleged principal beneficial owner of both Nutritek and Marshall).

The original proceedings were issued on the basis that VTB had been induced to enter into the Facility Agreement by fraudulent misrepresentations made by Nutritek, and as direct or indirect beneficial owners, the other defendants should be held jointly liable in tort.

Court of Appeal decision

Before the Court of Appeal were three main issues:

(i) VTB had applied to amend its original particulars of claim in order to bring a claim for breach of contract, in the alternative to the claim in tort already pleaded. This was effectively motivated by jurisdiction, as the Facility Agreement was governed by English law with the non-exclusive jurisdiction of the English courts.

However, to allow these defendants to be added to the contract claim would pierce RAP’s corporate veil, since RAP alone was the contractual borrower. VTB sought to rely on the decision of Mr Justice Burton in Antonio Gramsci Shipping Corporation and Others v. Stepanovs, to the effect that the controlling parties of a puppet company may be sued in contract when that puppet company has been used as a vehicle to defraud.

The Court of Appeal held, overruling Gramsci, that there was no good arguable case and in fact, no true authority to cut through the basic principle of privity of contract and pierce through to those persons behind the veil. To do so, Lord Lloyd held at [95], would “amount to the adoption by the courts of a jurisdiction to subject parties to contractual obligations under a contract to which neither they, nor the only undisputed parties to the contract, had ever agreed or intended that they should be subject“.

(ii) The second issue was whether the English courts should exercise jurisdiction to hear the tort claims for deceit and “unlawful means” conspiracy originally pleaded against the defendants. The alleged fraudulent misrepresentations made primarily by Nutritek but endorsed by the other defendants included representations (a) that Nutritek and RAP were companies under separate control and that the transaction was at arms’ length, and (b) that the Dairy Companies were in various respects  more valuable than they were.

Arnold J had previously set aside the original order which had granted permission to serve proceedings out of the jurisdiction, concluding that VTB had failed to discharge the burden of establishing that England was “clearly or distinctly the appropriate forum” to determine the disputes for the ends of justice and in the interests of all the parties. VTB contended that, in reaching this view, Arnold J had failed to acknowledge that there was a presumption that the place where a tort is committed is the natural or appropriate forum. Despite identifying a technical error in the Judge’s formulation of the Spiliada test, the Court of Appeal confirmed Arnold J’s findings and held that the applicable law of the torts was Russian law and that the centre of gravity lay in Russia, such that England could not be said to be clearly and distinctly the most appropriate forum. In reaching this view the Court of Appeal rejected the submission that there was a “presumption” that the place where a tort was committed was the natural or appropriate forum [144].

(iii) The final appeal concerned the worldwide freezing order (“WFO”) against Mr Malofeev, but as the Court of Appeal had confirmed Arnold J was correct in setting aside VTB’s permission to serve out of the jurisdiction, the question of continuing the WFO did not arise for decision.

Comment

VTB’s appeal will ask the Supreme Court to (i) overturn the Court of Appeal, (ii) allow RAP’s corporate veil to be pierced, and (iii) allow the defendants to be sued in contract and/or tort before the English courts.  If that fails, VTB will have to pursue the Defendants in tort inRussia.

The Justices of the UKSC will face a balancing act between the rights of an individual claimant who has a good arguable case that they have suffered loss, and the weight of legal principle which held sway in the lower Courts.  The judgment may potentially have wide-ranging implications for certainty of contract, the existence of presumptive territorial connections in private international law, and the extent to which due diligence is carried out on companies and the indirect shareholders / beneficiaries that control them.

The case also pits some titans of the Commercial Bar against one another: VTB is represented by Michael Howard QC, Paul McGrath QC and Iain Pester; Mr Malofeev is represented by Mark Hapgood QC, Stephen Rubin QC and James McClelland, and Marshall is represented by Michael Lazarus and Christopher Burdin.