Breach of contract – Conspiracy – Russia – Shipbrokers

Fiona Trust & Holding Corp & 75 Ors (claimants) v Yuri Privalov & 28 Ors (defendants); Yuri Nikitin & Anor (part 20 claimants) v H Clarkson & Co Ltd (part 20 defendants); Intrigue Shipping Inc & 50 Ors (claimants) v H Clarkson & Co Ltd & 8 Ors (defendants); Yuri Nikitin & Anor (part 20 claimants) v H Clarkson & Co Ltd (part 20 defendants); Fiona Trust & Holding Corporation & 9 Ors (claimants) v Dmitri Skarga & 3 Ors (defendants) : Southbank Navigation Ltd & 6 Ors (claimants) v H Clarkson & Co Ltd (defendants): QBD (comm) (Mr Justice Andrew Smith): 10 December 2010

The claimant Russian shipowning groups (F and J) made claims against their former senior officers (S and T respectively), alleging that they had dishonestly entered into certain shipping transactions which were against the interests of the groups and designed to benefit the defendant Russian businessman (N) and companies associated with him.

The transactions of which complaint was made included the payment of commission on the sale and purchase of ships, the payment of commission in respect of new buildings, the arrangements for the sale and leaseback of certain vessels, and the terms of time charterparties and options in respect of certain vessels.

F alleged that S, while director-general of the parent company, had acted in breach of his contract of employment, which was governed by Russian law, and in breach of fiduciary duties that he owed to companies in the group. The claimants included one-ship companies incorporated in Liberia, Malta and Cyprus. J made similar allegations against T who had been president of J. F had brought proceedings, which had been compromised, against the managing director (P) of an English company in the group engaged in the purchase, sale, financing and chartering of vessels. It was not disputed that P had been dishonest in carrying out his duties. The claims against N and his companies included claims for knowing receipt and for dishonestly procuring or assisting in breaches of trust or fiduciary duty. The claimants also made claims for damages for conspiracy to defraud them by unlawful means and on the basis that bribes were paid by N or companies associated with him to S and T among others. The claimants pursued an alternative case that, even if S and T were not dishonest in relation to the commissions claims transactions, N and his companies were liable because they dishonestly colluded with P or the brokers (C and G) involved in the transactions or dishonestly assisted them to act in breach of their duties. The defendants denied that they had engaged in any dishonest or improper dealings. S and T said that the impugned transactions were entered into in the proper course of business and in the interests of the respective groups. N and his companies accepted that they had received payments from F’s and J’s brokers, but said that they were legitimate and proper payments. In the proceedings by F and J, N and one of his companies brought part 20 proceedings against C, and companies controlled by N also brought proceedings against C, alleging that C were liable to them for certain address commissions received from shipyards. The claimants’ claims against C and G had been settled.

Held: (1) The claims against S and T by F and J based upon breach of their contracts of employment were governed by Russian law because of the express terms of the contracts. The claims against them for breach of their fiduciary duties as directors of the parent companies were also governed by Russian law because that was the place of incorporation of the companies. Furthermore, the contracts provided that Russian law was to govern any disputes arising between the parties to the contracts. Their duties as directors of the other claimant companies were governed by the law of the place of incorporation of the companies, even though that meant that different laws governed issues about whether the same or closely related acts gave rise to liabilities to different claimants, Base Metal Trading Ltd v Shamurin [2004] EWCA Civ 1316, (2005) 1 WLR 1157 followed. The principle that the law of incorporation of a company determined whether a person had acted in breach of duties owed as a de jure or shadow director was not displaced where he owed his directorships to his position with another company, and it applied even though the consequence was that different laws determined whether the same acts gave rise to a claim for breach of similar duties owed to different claimants. The conspiracy claims were governed by Russian law whether by operation of sections 11 and 12 of the Private International Law (Miscellaneous Provisions) Act 1995. The 1995 act and therefore Russian law also applied to the claims for damages and an account on the basis of the tort of bribery and on the basis of dishonest procurement of or assistance in breaches of fiduciary duty, which ‘related to tort’ for the purposes of the act. Insofar as the knowing receipt claims were brought on the basis that the payments were made in circumstances involving dishonesty and breach of duty on the part of S and T, their closest and most real connection was with Russian law, and issues relating to those claims were governed by Russian law. Insofar as commissions claims were pursued on the alternative basis that there was no relevant breach of duty on the part of S or T, the issues between the parties were to be determined in accordance with English law (see paragraphs 140-181 of judgment).

(2) The claims against S and T were pursued only on the basis that they had acted dishonestly. On the evidence, the claimants failed to show that S dishonestly acted in breach of his duties by acting in the interests of N or his companies or by acting contrary to the interests of F and other companies in the group, or that he conspired with N to defraud F or companies in the group. Similarly, the claimants’ case that T acted dishonestly and in breach of his duties in relation to J had not been established. Therefore, the claims against S and T were dismissed. They would in any event have faced insuperable difficulties. F and J failed to show that they had suffered loss as a result of some breach of duty on the part of S and T as required by Russian law. Claims by other group companies under the law of the place of incorporation faced similar difficulties in establishing the necessary causal connection. There was no evidence that S or T had received any profits from breach of duty or from any of the schemes and thus no basis on which an account of profits could be ordered against them. No account of profits was available against them in respect of profits received by N or his companies, Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 HL considered. Issues about S and T accepting a bribe would be governed by Russian law, which would require the claimants to prove influence and causation, and they had not done so (paragraphs 1454, 1484-1487, 1563).

(3) Claims against N and other defendants which were pursued only on the basis that S or T had acted dishonestly and in breach of duty therefore had to be dismissed as well (paragraphs 1488, 1489).

(4) The claimants succeeded on their alternative claims against N and his companies, which were governed by English law. C and G acted dishonestly and in breach of their fiduciary duties as brokers. They were in breach of their fiduciary duty to their principals in the F and J groups by making payments for N without disclosing them. A broker was not always obliged to disclose it to his principal when he paid an introductory commission provided that he did not know or have reasonable grounds to suspect that the principal would or might object to the payment. However, the payments to N could not properly be described as introductory commission and C and G knew that their principals would or might object to them. N acted dishonestly and knew that the recipient companies were receiving payments as a result of the brokers and P acting in breach of their fiduciary duties. On that basis, N and his companies were liable in relation to the commissions claims. N was liable for damages in respect of the claim in conspiracy and also liable to pay equitable compensation for dishonestly procuring or assisting breaches of fiduciary duty by the brokers and P. The companies were liable for damages for conspiracy in relation to the transactions in respect of which they received payments. They were also either liable to account for their receipts or to pay equitable compensation because they were liable for assisting breaches of fiduciary duties and for knowing receipt of the monies. The claimants who were entitled to recover damages or equitable compensation were the companies that bought or sold the relevant vessels. The same companies would be entitled to an account. N was liable to account for monies paid by the brokers to the recipient companies but the court would consider further submissions about N’s liability to account. N and the companies were entitled to credit against their liability the sum of $15m paid under the settlement agreement between F and C (paragraphs 343, 1490-1508, 1519-1527, 1540-42, 1545-1555).

(5) The Part 20 claim against C failed because the arrangements to make payments did not have contractual effect. The action against C failed because the court would not assist N’s companies to recover benefits from wrongdoing which was attributable to them through their association with N who was to be treated as party to the brokers' dishonesty (paragraphs 550-572, 1556-1562).

Judgment for claimants in part.

Fiona Trust and Intrigue Shipping: Andrew Popplewell QC, Dominic Dowley QC, Justin Higgo, Simon Birt, Fionn Pilbrow (instructed by Fiona Trust and Intrigue Shipping: Ince & Co) for the claimants; Graham Dunning QC, Susannah Jones (instructed by Stephenson Harwood) for the defendant Skarga; Steven Berry QC, Nathan Pillow, David Davies (instructed by Lax & Co) for the claimants Nikitin, Standard Maritime Defendants and Southbank Navigation; Simon Bryan QC, Jern-Fei Ng (instructed by Stephenson Harwood) for Izmaylov; John Odgers, Ian Wilson (instructed by CMS Cameron McKenna) for the defendants H Clarkson & Co.