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oliver_gayner_phVTB Capital Plc v Nutritek International Corp & Ors is one of the highest profile commercial cases of the year. The appeal concerned two issues of significance to commercial law: first, the circumstances in which fraud claims involving foreign parties but relating to frauds allegedly perpetrated in England should be heard by the English courts; and second whether a claimant who has entered into a contract with a company as a result of a fraud practised by the company’s owners can “pierce the corporate veil” so as to sue the owners of the company under that contract.  Remarkably, this the first time the corporate veil doctrine has ever been considered by the Supreme Court or the House of Lords; and it is also the first time in over 10 years that the proper forum of tort disputes has reached a final appeal.

On 6 February 2013, the Supreme Court dismissed the appeal by the claimant bank VTB Capital Plc (“VTB”) on both points.  On the corporate veil issue, the Court (Lords Neuberger, Mance, Clarke, Wilson and Reed) was unanimous: there were no grounds on which the bank could “look behind” the borrower company to sue its owners in contract, and the precedent established by the High Court in the Antonio Gramsci case was expressly overruled.  By contrast, the jurisdiction issue was a close run thing: whilst the Court unanimously approved the Spiliada test for determining whether England was the appropriate forum, it split 3:2 (Lords Clarke and Reed dissenting) on the application of that test to the facts, with the majority holding that Russia, not England, was the appropriate forum to hear the claim. 

As a consequence the Court ordered that the claim should not proceed in England and discharged a $200 million worldwide freezing order (“WFO“).  VTB therefore leaves its battle before the English courts with a large legal bill and an as yet undetermined exposure under the cross undertaking in damages granted under the WFO.

Facts

For an explanation of the key facts of the case, see our Case Preview here; and for more detail, see paragraphs 7 to 42 of the judgment. 

By way of very brief summary, VTB contended that it had been induced into entering a $225m loan agreement (English law jurisdiction clause, non-exclusive, negotiated through VTB’s parent in Moscow) on the basis of fraudulent misrepresentations by a Russian businessman, Mr Konstantin Malofeev, who was alleged to be the ultimate owner of both the borrower / purchaser (RAP LLC, a Russian company) and the vendor (Nutritek) on an asset sale transaction. 

When the borrower defaulted and became insolvent, VTB sought permission to sue Mr Malofeev, Nurtritek and other alleged group companies in England for deceit and conspiracy; and, to bolster its case on English jurisdiction, sought permission to pierce the corporate veil and include a claim against the Defendants for damages for breach of contract, claiming that RAP was a puppet company being used by Malofeev to orchestrate the fraud.  VTB failed on both points at first instance (Arnold J) and in the Court of Appeal, and appealed to the Supreme Court.

Analysis

Jurisdiction

In support of its argument in favour of English jurisdiction, VTB argued that there was a strong presumption in favour of English jurisdiction if the substance of a tort occurred in England (relying on the Court of Appeal’s decision in The Albaforth [1984] 2 Lloyds Rep 91, and the House of Lords decision in Berezovsky v Michaels [2000] 1 WLR 1004).  The Supreme Court held that this was putting the bar too high: it was unhelpful to approach the matter in terms of a “presumption”; instead a Court should consider all the factors in the round, in accordance with the classic common law test for jurisdiction in The Spiliada [1987] AC 460.  As Lord Mance put it, giving the leading judgment of the Court on the jurisdiction issue –

“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.  The ultimate over-arching principle is that stated in the Spiliada, and, if a court is not satisfied at the end of the day that England is clearly the appropriate forum, then permission to serve out must be refused or set aside.” (18)

This is an important restatement of the law and brings greater clarity to the relationship between the Spiliada and The Albaforth, which Berezovsky v Michaels had previously left open to doubt.

In effect, the Spiliada test requires the Court to determine which of two or more competing forums is more appropriate by conducting a balancing act, weighing up factors such where the factual events occurred and the location of the key witnesses and documents, as well as considering where the tortious act occurred and the governing law of any contract.  Whilst Lord Mance disagreed with Arnold J’s conclusion that the torts were commissioned in Russia, it would be “over-simplistic” – particularly in the context of an international commercial transaction – to presume jurisdiction based on place of commission alone.  His Lordship agreed with Arnold J that other factors in the case weighed more heavily in favour of Russia being the appropriate forum, in particular:

(i)        “the major part of the factual subject matter involves Russia” (57 – 61), and the “key issues in this litigation will be factual not legal” (49);

(ii)       “the oral and documentary evidence, on both factual and expert matters, is likewise likely to be overwhelmingly Russian” (62);

(iii)     VTB was entitled to plead a tort under English law before the Russian courts (47), and there was no reason to suggest that VTB would not receive a fair trial if it did so (67).

Jurisdiction is a notoriously uncertain area of law, and the Court’s decision serves as a reminder of the difficulties the courts face in mapping legal principles onto complex cross-border transactions.  VTB contracted for English law, and ultimately was found to have a claim in tort governed by English law.  These two factors were enough to persuade Lords Clarke and Wilson to find that Russia was the forum conveniens.  However, the majority were clearly swayed by the practical reasons summarised at (i) to (iii) above, which essentially concern the efficient administration of the trial process.  It also appears that the majority took wider considerations of judicial policy into account (discussed further under “Practical Implications” below).

Corporate Veil

There are numerous cases in which the English courts have allowed the shareholders of a company to be liable for its actions, notwithstanding the principle of separate corporate identity established in Salomon v Salomon [1897] AC 22.  The common theme in these cases is where the corporate structure was being used as a “sham” or a “façade” to conceal wrongdoing.  Recently the principle was controversially extended in Antonio Gramsci Shipping Corp v Stepanovs [2011] EWHC 333 (Comm), in which Burton J held that the veil could be pierced to allow the controllers of a company to be sued under the company’s contracts as if they were themselves a contracting party. Gramsci, which involved a fraudulent shipping charterparty scheme, has caused considerable uncertainty in commercial law and has been widely regarded as an over-extension of legal principle to provide justice on a fairly extreme set of facts. 

Lord Neuberger, giving a concise judgment on the corporate veil issue, expressly overruled Gramsci and concluded that there was an “overwhelming” case (137) against extending the principle in this way.  If the Defendants were treated as co-contracting parties, it would lead to the unusual and undesirable conclusion that Mr Malofeev & co had unwittingly become parties to a contract, when none of the actual parties, at the time of contract, intended them to be so (140).  Further, such an extension was unnecessary since remedies already existed in tort: if VTB could prove its case on fraudulent misrepresentation, it would prima facie be entitled to redress against Mr Malofeev & co (146).

Whilst VTB is the first time the issue of piercing the corporate veil has fallen for consideration by the Supreme Court or House of Lords, the Court elected not to engage with the wider question of whether such a power should exist under English law, holding that to do so would be unnecessary given its determination on the facts of this appeal (130), as described above.  Practitioners may feel this is something of a missed opportunity, but the net result is that other than closing down the Gramsci principle, the law in this area remains unchanged.

Some Practical Implications

The case raises some interesting practical implications both for legal practitioners and commercial parties.

In terms of legal practice, it appears that the Supreme Court has laid down a marker that, because they are essentially evaluative, decisions on forum will only rarely be re-opened on appeal.  Lord Neuberger, having had some strong words to say about parties seeking to stage mini-trials on preliminary issues such as jurisdiction (82 to 89 – see for example “it is simply disproportionate for parties to incur costs, often running to hundreds of thousands of pounds each, to spend many days in court on such a hearing“), concluded that the appellate Courts should be “vigilant in discouraging appellants from arguing the merits of evaluative interlocutory decision reached by a judge” (93), and should only reopen such a decision if “satisfied that the judge made a significant error of principle” (69).Lord Wilson’s comments on this issue were even more trenchant: “I am doubtful whether the committee would have granted permission to appeal on the forum issue if it had realised that VTB’s case would develop into little more than an invitation to re-evaluate all the relevant factors for and against the English forum.” (157).

In terms of commercial interests, it is now clear that the Court will not permit claimants to reach through corporate structures in order to enforce jurisdiction agreements. That being so, it is particularly important for commercial parties to (1) carry out due diligence on overseas contractual counterparties, including their ultimate ownership structure; (2) take adequate and enforceable security as a condition of high risk financing agreements; and (3) carefully consider, in conjunction with their legal advisors, what rights of resort to dispute resolution they would wish to have – and against whom – in the event that a deal turns sour.