B e f o r e :
MR. JUSTICE ANDREW SMITH
|| Claim no: 2005 Folio 534
Fiona Trust & Holding Corporation and 75 ors.
||- and -
||Yuri Privalov and 28 ors.
||And in the part 20 proceedings between:
||Yuri Nikitin and anr.
||Pt. 20 Claimants
||H. Clarkson & Company Ltd
||Pt. 20 Defendants
||Claim no: 2007 Folio 482
Intrigue Shipping Inc. and 50 ors
||H. Clarkson & Company Ltd. and 8 ors.
||And in the part 20 proceedings between:
||Yuri Nikitin and Anor.
||Pt. 20 Claimants
||H. Clarkson and Company Ltd.
||Pt. 20 Defendants
||Claim no: 2009 Folio 91
Fiona Trust & Holding Corp. and 9 Ors.
||Dmitri Skarga and 3 Ors.
||Claim no: 2009 Folio 281
Southbank Navigation Ltd. and 6 Ors.
||H. Clarkson and Company Ltd.
Andrew Popplewell QC
Dominic Dowley QC
Instructed by Ince & Co. for the Claimants in actions: 2005 Folio 534, 2007 Folio 482 and 2009 Folio 91.
Graham Dunning QC and Susannah Jones
Instructed by Stephenson Harwood for Mr. Dmitri Skarga
Steven Berry QC
Instructed by Lax & Co. for Mr. Yuri Nikitin and the Standard Maritime Defendants in actions: 2005 Folio 534, 2007 Folio 482 and 2009 Folio 91 and the Claimants in 2009 Folio 281 and the Part 20 claimants in 2005 Folio 534 and 2007 Folio 482.
Simon Bryan QC and Jern-Fei Ng
(instructed by Stephenson Harwood) for Mr. Tagir Izmaylov
John Odgers and Ian Wilson
(instructed by CMS Cameron McKenna LLP) for H. Clarkson & Company Ltd.
1, 2, 5, 6, 7, 8, 9, 12, 13, 14, 15, 16, 19, 20, 21, 22, 23, 26, 27, 28, 29 October 2009,
2, 3, 4, 5, 6, 9, 10, 11, 12, 13, 16, 17, 18, 19, 20, 23, 24, 25, 26, 27, 30 November 2009,
1, 2, 3, 4, 7, 8, 9, 11, 14, 15, 16, 17 December 2009,
1, 2, 3, 5, 8, 9, 15, 17, 18, 22, 23, 24, 25, February 2010,
22, 23, 24, 25, 26, 29, 30, 31 March 2010, And 9 July 2010.
HTML VERSION OF JUDGMENT
Crown Copyright ©
|English domestic law
|Russian domestic law
|Private international law
|The hull no 1231 commission scheme
|The schemes involving collusion with brokers for sales and purchases
|The Sovcomflot Clarkson commissions scheme
|The part 20 claim in the Fiona action
|The Norstar commissions scheme
|The NSC Clarkson and the Galbraith's commissions schemes
|The Sawyer commissions scheme
|The RCB scheme
|The SLB arrangements scheme
|The termination of the SLB arrangements scheme
|The newbuildings scheme
|The "Romea Champion" commission scheme
|The Sovcomflot time charters scheme
|The NSC time charters scheme
|The allegations that Mr. Skarga was dishonest
|The allegations that Mr. Izmaylov was dishonest
|Conclusions on the claims against Mr. Skarga and Mr. Izmaylov
|The case against Mr. Nikitin and the Standard Maritime defendants
|Relief against Mr. Nikitin and the Standard Maritime defendants
|The claims against unrepresented defendants
|The Southbank action
MR. JUSTICE ANDREW SMITH:
- This is the trial of four actions to which I shall refer as the Fiona action (claim 2005 folio 534), the Intrigue action (claim 2007 folio 482), the second Fiona action (claim 2009 folio 191) and the Southbank action (claim 2009 folio 281).
- The Fiona action and the second Fiona action are brought by OAO Sovcomflot ("Sovcomflot"), a Russian ship-owning and ship-operating company, and subsidiaries of Sovcomflot. They allege that Mr. Dmitri Skarga, a former Director-General of Sovcomflot, and Mr. Yuri Nikitin embarked on a course of dishonest conduct between about the end of 2000 and 2004, whereby companies in the Sovcomflot group entered into transactions which benefited Mr. Nikitin and companies associated with him and were against the interests of the Sovcomflot group. They say that among those who were engaged with Mr. Nikitin and Mr. Skarga in this conduct were Mr. Yuri Privalov, the Managing Director of Fiona Maritime Agencies Ltd. ("FML"), an English company which is the second claimant in the Fiona action and is now called Sovcomflot (UK) Ltd., and from some time in 2002 Mr. Igor Borisenko, then the Executive Vice-President and Chief Financial Officer of Sovcomflot. (In this judgment I often use the term "Sovcomflot" to refer to the group of companies and not only to OAO Sovcomflot, without distinguishing the individual companies unless it matters.)
- The Intrigue action is brought by JSC Novorossiysk Shipping Company ("NSC"), another Russian ship-owning and ship-operating company, and by subsidiaries of NSC. The claimants' allegations are similar to those in the Fiona actions in that it is said that between about 2002 and 2004 Mr. Tagir Izmaylov, a former President of NSC, and Mr. Nikitin, sometimes with Mr. Privalov's assistance, dishonestly entered into transactions which were against the interests of the NSC group and profitable to Mr. Nikitin and companies associated with him. (Again, I often use the term "NSC" to refer to the group and not only to the parent company.)
- In the Fiona action Mr. Nikitin and one of his companies, Milmont Finance Ltd. ("Milmont"), a company incorporated in the British Virgin Islands ("BVI"), have brought proceedings under part 20 of the Civil Procedure Rules ("CPR") against H. Clarkson & Sons Ltd. ("Clarkson") in which they claim that Clarkson are liable to them for sums in respect of business that they handled for companies in the Sovcomflot group. There is a similar part 20 claim against Clarkson in the Intrigue action in respect of business handled for companies in the NSC group. In the Southbank action, companies controlled by Mr. Nikitin (the "Southbank claimants") bring claims against Clarkson on the basis that, if (as the claimants in the Fiona action allege) Clarkson, when acting as brokers upon certain ship purchase agreements, received from the shipyards sums by way of address commissions, then they are liable to account to the Southbank claimants for those sums attributable to the purchases which they made. (When I refer in this judgment to "the claimants", I do not include the Southbank claimants.)
- As Mr. Andrew Popplewell QC, who represented the claimants, made clear when he opened the case, the claims are pursued against the defendants upon the basis that they were dishonest. In the two Fiona actions, their only case against Mr. Skarga is that he acted dishonestly in breach of his duties in relation to the various transactions into which the Sovcomflot group entered with Mr. Nikitin and companies associated with him, and their only case in the Intrigue action against Mr. Izmaylov is that he acted dishonestly in breach of his duties in relation to the various transactions entered into by the NSC group with Mr. Nikitin and his companies. No claim is pursued on the basis that Mr. Skarga or Mr. Izmaylov acted honestly in relation to the relevant transactions but in breach of contractual, fiduciary or other duties. As far as concerns the claims against Mr. Nikitin and corporate defendants with whom he is associated and to whom I shall refer as the "Standard Maritime defendants" (an expression that I shall define more specifically below), the claimants' case generally depends upon them showing both (i) that Mr. Skarga or, as the case might be, Mr. Izmaylov acted dishonestly in relation to the transaction in question, and (ii) that Mr. Nikitin acted dishonestly in relation to the transaction and through him the relevant corporate defendants acted dishonestly. The only exceptions to this are to the "commissions claims", an expression that I shall explain below. In the case of the commissions claims, the claimants' case depends upon them establishing that Mr. Nikitin acted dishonestly, but not necessarily upon showing dishonesty on the part of Mr. Skarga or Mr. Izmaylov. The claimants pursue an alternative case that, even if Mr. Skarga and Mr. Izmaylov were not dishonest in relation to the commissions claims transactions, Mr. Nikitin and the relevant Standard Maritime defendants are liable because they dishonestly colluded with Mr. Privalov or the brokers involved in the transactions or dishonestly assisted them to act in breach of their duties.
- The defendants deny that they engaged in any dishonest or improper dealings. Mr. Nikitin and the Standard Maritime defendants accept that, when Mr. Skarga and Mr. Izmaylov were in office as the Director-General of Sovcomflot and the President of NSC respectively, they entered into transactions with the Sovcomflot and NSC groups that proved to be very profitable, but they say that this was because Mr. Nikitin invested heavily in shipping when others did not do so, and he profited from his shrewd business acumen and the sustained strength of the shipping market, which many had not foreseen. They also accept that they received payments from Sovcomflot's and NSC's brokers, namely Clarkson, Galbraith's, Norstar and Mr. John Sawyer, but say that they were legitimate and proper payments. Mr. Skarga and Mr. Izmaylov say that the impugned transactions were entered into in the proper course of business, and in the case of Sovcomflot, in particular, in accordance with the planned development of the group, and that they and other senior executives together decided to enter into them in the belief that they were in the interests of their companies' group.
- Sovcomflot and NSC were at the relevant time among the largest Russian operators of tankers and other commercial ships. As at 31 March 2001, the three largest Russian tanker businesses were the Sovcomflot group, who had 34 tankers with a total tonnage of 2,534,308 dwt, the NSC group, who had 66 tankers of 3,293,312 dwt in total, and Primorsk Shipping Company, who had 36 tankers of 786,922 dwt in total. The Russian Federation owned and owns the shares in Sovcomflot. NSC were owned by the Russian Federation until 5 December 2007, when the shares were transferred to Sovcomflot.
- Sovcomflot, the 28th claimant in the Fiona action and the 3rd claimant in the second Fiona action, own a company called Glenas Shipping Co Inc. ("Glenas"). Glenas in turn own (i) the first claimant in both the Fiona action and the second Fiona action, Fiona Trust & Holding Corporation ("Fiona"), a Liberian corporation, and (ii) Megaslot Shipping Corporation Ltd. ("Megaslot"), a company incorporated in Bermuda. (It appears that Megaslot Shipping Corporation Ltd. was sometimes referred to as Megaslot Ship Holding Corporation Ltd. If that is not so, the difference between the two companies with these names is not important and I refer to them both, without distinction, as Megaslot.) Fiona are Sovcomflot's principal operating subsidiary, they conduct their business through wholly owned subsidiaries and joint venture companies and they operate (or at least at the material time operated) from Sovcomflot's offices in Moscow. As at 31 December 2001 the Sovcomflot group comprised 84 subsidiary companies, of which 71 were single ship-owning companies. The others included:
i) FML, which was incorporated to act as the London commercial agent of Sovcomflot's shipping business and was engaged in the purchase, sale and financing of vessels on behalf of the group and in particular in chartering the bulk carrier fleet.
ii) Sovchart SA ("Sovchart"), a Swiss company, which is the 29th claimant in the Fiona action and the 4th claimant in the second Fiona action. They operated from offices in Geneva until their activities were transferred to FML in London in August 2007 (after the transactions which are the subject of these proceedings), and they acted as the group's chartering agent for the tanker fleet. In August 2000 Mr. Jan van Boetzelaer became the managing director of Sovchart in succession to Mr. Alex Prezanti, and he held that position until August 2007.
iii) Unicom Management Services (Cyprus) Ltd. ("Unicom"), which was incorporated in and operated from Cyprus, and dealt (and still deals) primarily with the technical management of Sovcomflot's fleet. Some of the accounting and financial functions and treasury services of the group were also conducted from the Cyprus offices through various subsidiaries.
- The other claimants in the Fiona action and the second Fiona action were wholly-owned subsidiaries of Fiona, many of them owning a single vessel, and are incorporated in Liberia, Cyprus, Panama and Malta.
- NSC are the 30th claimant in the Intrigue action. The principal operating company in the group is and was at the relevant time Intrigue Shipping Inc. ("Intrigue"), a Liberian company, which is the first claimant in the Intrigue action. Novoship (UK) Ltd. ("NOUK"), a subsidiary of the NSC group, operated from London, and were responsible for managing the vessels and also for hiring out on charter the NSC vessels which were not registered in Russia. The general manager of NOUK between October 2002 and March 2006 was Mr. Vladimir Mikhaylyuk, who is not a defendant in the proceedings before me but is being sued by NOUK and others in other proceedings in this court. The other claimants in the Intrigue action, apart from Novoship SA, are single purpose companies incorporated in Liberia and Malta and owned by Intrigue. Novoship SA, the 51st claimant and a Liberian company, are a party to the Intrigue action for procedural purposes so that the action is properly constituted to pursue certain causes of action which had been vested in ship-owning companies owned by Intrigue and which are said to have been transferred to them and Intrigue.
- Mr. Yuri Privalov, the first defendant in the Fiona action and 6th defendant in the Intrigue action, is a Russian citizen. He was first employed by the Sovcomflot companies in 1983. In 1992 he joined FML, and was their Financial Manager from 1 December 1992 to 1 October 1997. During this time he reported principally to Mr. Borisenko, the Deputy Chairman and then the Deputy Director-General of Sovcomflot. He was appointed to the Board of Directors of FML on 1 April 1997, and on 1 October 1997 he became their Managing Director. He resigned in February 2005, in circumstances that I shall describe later.
- Mr. Privalov had personal bank accounts with the Royal Bank of Scotland ("RBS") in the Isle of Man and Banque Cantonale Vaudoise ("BCV") of Switzerland. He also used, and was interested in, a number of companies, which he described as vehicles for holding bank accounts, including the following:
i) Continental Shipping Ltd. ("Continental"), which was incorporated in Liberia on 25 April 1997 and registered as a foreign company in the Isle of Man on 19 January 1998. Continental was de-registered in September 2000. According to Mr. Privalov, Mr. Vladimir Lyashenko, whom he had known since about 1995 and who had been the managing director of Far Eastern Shipping Company (UK) Ltd. ("FESCO UK"), the London commercial agents of OAO Far Eastern Shipping Company ("FESCO"), a major Russian shipping company, had a beneficial interest in Continental, and he was a director and had authority to transfer money from Continental's accounts. Continental had bank accounts with the Isle of Man branch of RBS, with the London Shipping Centre branch of RBS and with EFG Private Bank SA, Switzerland.
ii) Montrose Maritime Ltd. ("Montrose"), which was incorporated in the Isle of Man in August 1996. Its name was changed to Paribas Shipping Ltd. in April 1997 and to Fesco Management Ltd. in October 1999, although it had no association with the bank or the Russian transportation group that those names might suggest. Mr. Privalov has said that Mr. Lyashenko had a beneficial interest in Montrose, as he did in Continental, but I do not need to decide and do not decide whether he did so.
iii) Getwire Corporation ("Getwire"), which was established in Panama on 24 May 2001 and which opened an account with Credit Suisse in Switzerland in 2001 in circumstances which I shall explain later. Mr. Privalov was the sole beneficial owner of Getwire.
iv) Sisterhood Participation Corporation ("Sisterhood"), a BVI company, the 18th defendant in the Fiona action, which was incorporated in September 2002 and apparently used by Mr. Privalov from November 2002.
v) Shipping Associates Inc. ("Shipping Associates"), a Panamanian company, which is the 27th defendant in the Fiona action and the 7th defendant in the Intrigue action. Mr. Privalov used Shipping Associates to receive payments from Clarkson, Norstar and Galbraith's made in connection with business that they handled for Sovcomflot and NSC.
- On 29 June 2005 Fiona, FML and the 3rd to 12th claimants in the Fiona action (the other claimants being added as parties later) brought proceedings against Mr. Privalov and on the same date obtained against him a Freezing Order and a Search Order to have documents and information preserved. Interlocutory orders were also obtained against Mr. Privalov in the Isle of Man. The allegations were both about transactions conducted between about the end of 2000 and 2004 involving, or said to involve, Mr. Nikitin and Mr. Skarga, and that earlier in 1999 and 2000 Mr. Privalov had dishonestly misappropriated commissions payable to Fiona and their subsidiaries, unlawfully diverted business from FML and made secret profits. It is not said that Mr. Nikitin or Mr. Skarga was involved in those earlier transactions.
- The Fiona claimants' claims against Mr. Privalov were compromised in October 2005 in what I shall refer to as the "Privalov settlement agreement", on terms that the proceedings should be stayed against him on conditions (i) that he should serve an affidavit within 28 days providing a full and frank explanation of each transaction with Mr. Nikitin and supply relevant documents, and (ii) that he should co-operate with the claimants in the prosecution of the Fiona proceedings. However, the Russian authorities brought criminal proceedings against him, and he was arrested in Switzerland and extradited to Russia in 2008. He was released from custody subject to restrictions which prevent him from leaving Moscow. On 13 April 2009 Mr. Privalov entered into an agreement with Sovcomflot to provide consultancy services in relation to the prosecution of these proceedings. His duties include that he will "assist and cooperate with [Sovcomflot] in connection with the preparation and hearing of [Sovcomflot's] case(s) in the High Court of England". That obligation was to continue until January 2010.
- The claimants called Mr. Privalov as a witness, but he was not permitted by the Russian authorities to come to England. He gave his evidence over a video-link from Moscow over 7 days. Although the Fiona proceedings against him had been settled in October 2005, the Intrigue action had not been, and before he gave evidence I stayed the Intrigue action against him because I considered that it would otherwise be unfair that he should be cross-examined without having legal advice or representation. I ordered this stay on my own motion, but the parties did not oppose it.
- Mr. Yuri Nikitin, the 3rd defendant in the Fiona action, the 4th defendant in the Intrigue action and the 1st defendant in the second Fiona action is a Russian citizen. He has been a successful businessman and is apparently very wealthy. He left Russia in December 2004 and came to England via Switzerland. Since then he has returned to Russia for only half a day in February 2005 in order to obtain a visa, and he now lives in England. An application was made by the Russian authorities to extradite him on criminal charges, but on 8 December 2008 Senior District Judge Workman refused the application. There has been no appeal against that refusal.
- Before 2003 Mr. Nikitin worked from the offices in St Petersburg of Premium Nafta Products Ltd. ("PNP"), the 20th defendant in the Fiona action and 4th defendant in the second Fiona action, which was owned by Mr. Nikitin and business associates of his, including Mr. Andrei Katkov, Mr. Evgeny Malov and Mr. Gennady Timchenko. In 2003, PNP's shipping business was transferred to Henriot Finance Ltd. ("Henriot"), the 22nd defendant in the Fiona action. PNP's offices were closed in December 2003, and they re-opened in January 2004 as the representative offices of Henriot. Mr. Nikitin's associates gave up (or had given up) their interests in the business, and thereafter Mr. Nikitin managed it for his own profit. Mr. Nikitin also used Remmy Commercial Corp. ("Remmy"), the 21st defendant in the Fiona action, for his shipping business. PNP, Henriot and Remmy are all incorporated in the BVI.
- Mr. Nikitin operated through a large number of companies, many if not all of which were incorporated in the BVI and had bearer shares. In 2003 he decided to organise at least many of the companies under the umbrella of the Standard Maritime Holding Corporation ("Standard Maritime"), the 4th defendant in the Fiona action, which was incorporated in the BVI on 17 March 2003 and of which Mr. Nikitin is the sole beneficial owner.
- Milmont, the 5th defendant in the Fiona and the Intrigue actions, was incorporated in the BVI in August 1999, and was always wholly owned and controlled by Mr. Nikitin. At one time, the claimants suggested that Mr. Skarga might also have, or have had, some interest in Milmont, but, if that suggestion be pursued, in my judgment there is no proper evidence to support it and I reject it.
- Amon International Inc. ("Amon"), a BVI company and the 8th defendant in the Intrigue action, was established in May 2002 and was at all times wholly owned and controlled by Mr. Nikitin. He used it for his dealings with Galbraith's, to which I shall refer, and I accept his evidence that he established Amon for this purpose.
- Mr. Nikitin had interests in and, as I have said, operated through many other companies, and his evidence about their purposes was vague and unsatisfactory. His business associates also had interests in some of them, including Pollak Management Inc. ("Pollak"), the 25th defendant in the Fiona action, which was incorporated in the BVI in March 2001, and was partly owned, at least until 2003, by Mr. Katkov and Mr. Malov, as well as Mr. Nikitin.
- Since 4 August 2003 Mr. Nikitin has owned Meino Group Ltd. ("Meino"), another BVI company and 19th defendant in the Fiona action. It is not clear who owned Meino previously. It apparently had bearer shares. The claimants' pleaded case is that in 2002 the company was owned by Mr. Katkov, Mr. Malov and Mr. Nikitin, and was controlled by Mr. Nikitin. Mr. Nikitin and the Standard Maritime defendants plead that it was then owned by Mr. Katkov. By an agreement dated 31 July 2003 Mr. Katkov and Mr. Malov agreed to transfer their shares in Meino to Mr. Nikitin, but Mr. Nikitin's evidence was that he bought them only from Mr. Katkov. I conclude that before August 2003 Meino was owned jointly by Mr. Nikitin, Mr. Katkov and Mr. Malov. Mr. Nikitin signed a form for BCV dated 21 May 2002 in which he, Mr. Katkov and Mr. Malov were named as beneficial owners of Meino, and Mr. Nikitin, Mr. Katkov and Mr. Malov all signed a record dated 21 November 2002 of resolutions of Meino (and another BVI company, Kosta Continental SA, to which I refer as "Kosta") on the basis, as I interpret the document, that they were all shareholders of Meino. As with Milmont, the claimants at one time alleged, or at least suggested, that Mr. Skarga had some interest in Meino, but I reject that suggestion, if it be pursued.
- I have used the expression Standard Maritime defendants to refer to companies with which Mr. Nikitin is associated. More specifically, I use this expression to refer to these corporate defendants: Standard Maritime, Milmont, Meino, PNP, Henriot, Remmy and also the 6th to 17th defendants in the Fiona action, namely, Blanter Shipping Co. Ltd. ("Blanter"), Socoseas Marine Co. Ltd. ("Socoseas"), Repmar Shipping Co. Ltd. ("Repmar"), Plutorex Marine Co. Ltd. ("Plutorex"), Martex Navigation Co. Ltd. ("Martex Navigation"), Class Properties Ltd. ("Class Properties"), Akola Maritime Corp. ("Akola Maritime"), Savory Trading Inc. ("Savory Trading"), Titanium Transport Corp. ("Titanium"), Pendulum Navigation Ltd. ("Pendulum"), Accent Tanker Inc. ("Accent"), and Severn Navigation Ltd. ("Severn"). These companies and Mr. Nikitin were represented at the trial by Mr. Steven Berry QC.
- Mr. Dmitry Skarga, the second defendant in the Fiona action, is a Russian citizen, and is married with three children. He now lives in England, but his wife and family still live in Russia. In May 2000 Mr. Skarga was appointed Director-General of Sovcomflot in succession to Mr. Vadim Kornilov, who had held the position from May 1991 to November 1999, and Mr. Borisenko, who had been acting Director-General for a few months. At about the same time, he was appointed to be a director of Fiona, a director and the Chairman of FML and a director of Sovchart. Mr. Skarga left Sovcomflot in October 2004 in circumstances which I shall describe later. He was appointed a Senator in the Upper House of the Russian Parliament, but he resigned in September 2006. He came to England in 2006 and has not returned to Russia. The Russian Government applied to have him extradited to Russia on criminal charges, but on 8 December 2008 Senior District Judge Workman rejected the application, and there has been no appeal against that decision.
- Since coming to this country, Mr. Skarga has been living in Mr. Nikitin's house, and, according to his evidence, which I accept for present purposes, he has been largely or wholly dependent upon Mr. Nikitin to provide him with living expenses and other funds. In particular, Mr. Nikitin has funded legal expenses which Mr. Skarga has incurred in these proceedings, in the extradition proceedings and for other purposes. He was represented at the trial by Mr. Graham Dunning QC.
- After graduating from Marine College in 1968, Mr. Izmaylov, the 9th defendant in the Intrigue action, worked as a navigator on Soviet vessels and then joined the Legal Department for Foreign Relations of the Russian Ministry of Merchant Marine. In 1991 he became the Head of Sovcomflot's Legal Department, in March 1997 he was appointed to be their Deputy Director-General responsible for operations and in 1999 he was appointed their Deputy Director-General responsible for administrative matters. From the time that he joined Sovcomflot in November 1991 until he left in November 2001 he was a member of the Executive Board.
- From November 2001 he acted as President of NSC, being formally appointed to the position by a contract of employment dated 25 January 2002. The claimants do not pursue any allegation that he acted improperly when he was with Sovcomflot or that his appointment as President of NSC was procured by him improperly or for improper purposes.
- Mr. Izmaylov ceased to be the President of NSC in circumstances that I shall describe. He left Russia in October 2005 and, after a short stay in Germany, he came to London. In 2006 criminal proceedings were brought against him in Russia, and also against Mr. Mikhaylyuk. The Russian authorities applied that both be extradited to Russia, but the applications were refused by Senior District Judge Workman on 22 December 2008. Again, there have been no appeals against that decision.
- Mr. Nikitin has provided Mr. Izmaylov with some financial support while he has been in England, including funding his legal costs in respect of the extradition proceedings and these proceedings. He was represented at the trial by Mr. Simon Bryan QC.
- Mr. Nikitin, Mr. Skarga and Mr. Izmaylov all gave evidence in English. (Mr. Skarga had an interpreter available, but he seldom required her assistance.) I assess their evidence with this in mind. Occasionally they did not immediately understand a question, or gave an answer that might on a literal reading of the transcript appear evasive or inconsistent with their account, but I consider that any misunderstandings were clarified. Sometimes the phraseology of their answers was awkward and lacked fluency, but they were entirely able to convey their intended meaning. Similarly, some of the Russian witnesses called by the claimants who gave evidence in English (including Mr. Borisenko, but not Mr. Privalov) struggled from time to time with the language, but I do not consider that this significantly detracted from their evidence or prevented them from making themselves understood.
- Clarkson, the 28th defendant in the Fiona action and the first defendant in the Intrigue action, is a company incorporated in England and Wales, which carries on business in London as shipbrokers. It is a subsidiary of Clarkson PLC. At all relevant times until April 2004 Mr. Richard Fulford-Smith was Head of their Sale and Purchase Division, and thereafter until 30 April 2008 he was their Chief Executive Officer. The claimants' claims against Clarkson both in the Fiona action and in the Intrigue action were settled by agreements dated 26 June 2008, but on 13 June 2008 Mr. Nikitin and Milmont had brought the part 20 proceedings against them in both actions.
- Until about March 2006 Mr. Richard Gale, another director of Clarkson and the 29th defendant in the Fiona action and 2nd defendant in the Intrigue action, was a broker in Clarkson's Sale and Purchase Department, but he has now retired from Clarkson. The claims against him were settled together with those against Clarkson, and under the settlement agreements he and Clarkson agreed that they would co-operate with the claimants for the purposes of the litigation. However, Mr. Gale was not called by any party to give evidence at the trial and no statement from him has been put in evidence. According to Mr. Nikitin's evidence, Mr. Gale told him in August 2006 and again in October 2006 that Clarkson had put him under pressure to give false evidence about his dealings with Mr. Nikitin, but Clarkson deny that they put him under such pressure and, whatever Mr. Gale might have said to Mr. Nikitin, I accept that they did not do so. I also accept Clarkson's submission that, in view of Mr. Gale's involvement in the transactions that gave rise to the claims against Clarkson, the explanations of them that he has given and the nature of his own defence in the proceedings, no inference can be drawn against Clarkson or any other party from the fact that they did not call him as a witness of truth.
- Galbraith's Ltd. ("Galbraith's"), an English company, are shipbrokers in London who acted for companies in the NSC group in sale transactions (and also a re-financing arrangement and a purchase transaction) in and after 2002. They are the 3rd defendants in the Intrigue action, but the claims against them were settled by an agreement dated 9 April 2009. Before the settlement was reached, Galbraith's had served witness statements of the evidence that they intended to adduce in the Intrigue action, but those witnesses did not give evidence before me and their statements were not put in evidence. However, Mr. Popplewell put to Mr. Nikitin and Mr. Izmaylov during cross-examination some passages from a witness statement served by Galbraith's and made by Mr. Neil Rokison, who had been a broker with Galbraith's since 1988, was appointed to Galbraith's board on 1 June 1998 and became the Head of the Sale and Purchase Department on 21 November 2003.
- Other defendants, as well as Mr. Privalov and Galbraith's, were not represented at the trial. They were Sisterhood, RTB Overseas Ltd. ("RTB"), Horber Financial SA ("Horber"), Pollak, Glanos Enterprises Ltd. and Shipping Associates (the 18th and the 22nd to 27th defendants in the Fiona action, and the 7th defendant in the Intrigue action). RTB, the 23rd defendant in the Fiona action, a company incorporated in the BVI, was associated with an Italian broker called Mr. Claudio Cepollina, with whom Mr. Nikitin had dealings from time to time. Horber, which was incorporated in Panama, was dissolved on 22 November 2006 and has not been served with any relevant proceedings. Otherwise, these defendants did not acknowledge service. The only claims that the claimants pursue against them are (i) against RTB for $5,500,000 which was paid to them in relation to what I shall call the Athenian transaction, (ii) against Shipping Associates in the Intrigue action and (as I understand the position adopted by the claimants in their final submissions) (iii) against Pollak.
- The trial was heard over 76 days. The oral evidence of fact was heard over some 51 days and the oral evidence of experts was heard over 10 days. There were wide-ranging and hotly contested disputes of fact between the parties, even upon questions that were of peripheral importance to the claims. The evidence of the witnesses of fact was unsatisfactory and it has been particularly difficult to resolve the factual issues. I confine myself here to three general observations. First, most of the central witnesses of fact were willing to give dishonest and untruthful evidence. Mr. Izmaylov was, in my judgment, an exception: although he was an argumentative witness, I considered that his account was generally reliable, provided that some individual answers were not given an entirely literal interpretation that was not in my judgment intended. In the case of those of the claimants' witnesses who live in Russia, and particularly those who are employed by the Sovcomflot group or NSC group, I recognise the force of the defendants' submission that they are likely to have felt great pressure to support the claimants' case, and I am driven to conclude that sometimes untruthful allegations were made or supported by generally honest witnesses called by the claimants, including Mr. Andrei Sharikov, who was Sovcomflot's Head of the Fleet Operations Department from 1 January 2002, and Mr. Andrey Khlunyev, who was their Chief Accountant. Others, including Mr. Andrey Novikov, who was the Deputy Manager of Sovcomflot's Fleet Operations Department, gave untruthful evidence more readily. I shall explain later why I conclude that the evidence of Mr. Privalov and Mr. Borisenko was thoroughly dishonest, why I also regard as untruthful Mr. Vladimir Oskirko, who gave evidence for the claimants relevant to the claims in the Intrigue action, and why I conclude that Mr. Skarga and Mr. Nikitin gave dishonest evidence.
- Secondly, the claimants' witness statements were shown in cross-examination to be distinctly unreliable. Even in the case of a witness such as Mr. Nikolay Lipka, the Head of Sovcomflot's Legal Department, who gave honest answers in cross-examination, his oral evidence departed so far from his statement that I cannot accept that the statement had ever represented his real account of events or that he understood it in proper detail when he verified it. One implication of this is that I am driven to treat with considerable scepticism other witness statements, such as those of Mr. van Boetzelaer, which the claimants put in evidence without calling oral evidence from the witness.
- Thirdly, in seeking to resolve disputes of fact about which I considered none of the relevant witnesses truthful, I have had to be cautious about relying upon apparent corroboration for an account found in the documents. Sometimes witnesses manufactured an account of events, or supported a manufactured account of events, that was designed to build a fiction consistent with the documents, and the documents, as I conclude, inspired a false account rather than corroborate a true one.
- In these circumstances, it is perhaps not surprising that I have found it impossible properly to understand some curious aspects of the transactions that are the subject of these proceedings. There are some matters which are not satisfactorily explained by the defendants, but which, on examination, do not seem to me to advance the allegations which the claimants make. I have sought to restrain myself from impermissible and unnecessary speculation about possible explanations, and to focus upon considering whether the claimants have made out the case that they allege and the defendants have to meet.
- In order to manage the trial within reasonable limits, I restricted the time allowed for cross-examination. For the factual witnesses, a limit was placed upon the time allowed in total for cross-examination of the claimants' witnesses, of the defendants' witnesses and of the witnesses called by Clarkson. In the case of the expert witnesses, a time limit was placed upon the cross-examination of each individual witness. I made it clear to counsel that I recognised that they could not, in these circumstances, be expected to challenge everything in the witness statements with which their clients took issue. One consequence of the time limits was that some witnesses were not cross-examined at all, and their evidence was presented by way of a statement (or statements) under the Civil Evidence Act 1995, not because the party adducing the evidence could not call the witness to give it orally or was unwilling to do so, but because no other party allocated their allotted time for the cross-examination of that witness, although his evidence was, to a greater or lesser degree, disputed. Although in closing submissions counsel made some observations about evidence that had not been challenged, I do not generally consider these telling in view of how the trial was managed.
- There was a vast amount of documentation in agreed trial bundles. I was asked to read, and I read, a great deal by way of evidence and other documents that was not referred to during the oral hearing. In order to control the volume of material to be considered by the court (and upon any appeal), I directed that only those documents which were referred to in a witness statement (of a witness that had been called or that was otherwise put in evidence), in oral evidence or in oral or written submissions should stand as evidence for the purposes of the trial. Those documents are evidence of the truth of their contents, unless a party identified in their statements of case or in their written or oral submissions that they do not accept that a document bears its true date or is otherwise not authentic.
- Disclosure was an enormous exercise for the claimants, and they disclosed many new documents during the course of the trial. After the parties had completed their final submissions, the claimants disclosed yet further documents which should undoubtedly have been disclosed much earlier and which required me to hear further oral submissions. Some, but by no means all, of this late disclosure was because during the trial there emerged issues which had not previously been appreciated. Some significant documents were disclosed by the claimants after the cross-examination of a relevant witness. To give just one example, after Mr. Borisenko had been cross-examined, there were disclosed documents relevant to the bonuses paid to him by Sovcomflot and to issues about when he and others were travelling abroard and whether they could have been at disputed meetings.
- This extensive late disclosure made heavy demands upon the defendants and those acting for them. In particular, the claimants disclosed many documents shortly before Mr. Nikitin, Mr. Skarga and Mr. Izmaylov each gave evidence. Mr. Dunning submitted that this reflected a deliberate strategy on the part of the claimants designed to produce "bombshells" at strategically significant times in the trial. I was particularly concerned that a few days before Mr. Nikitin gave evidence the claimants produced documents relating to the purchase by Mr. Skarga's wife, Mrs. Natalya Skarga, of a property at Donino near Moscow. As I shall explain, by an amendment to their pleadings that I permitted after this disclosure, the claimants alleged that Mr. Nikitin made a payment in relation to the purchase by way of a bribe to Mr. Skarga. The relevant documents were made available to the claimants by the Russian prosecuting authorities only shortly before they were disclosed to the defendants. The position was the more unsatisfactory because initially the authorities did not make available all the relevant documents, and it is still not clear that they have done so. However, whatever the extent of co-operation between the claimants and the prosecuting authorities, the claimants did not control the decisions of the prosecuting authorities about what documents they made available, and there is no sufficient evidence to lead me to conclude that the claimants were party to a plan deliberately to withhold these documents. I do not consider that in the event the defendants were significantly prejudiced by their late production, and this complaint does not assist me to decide the issues about the payment and whether it related to Mrs Skarga's purchase.
- The defendants also complained that the claimants have still failed to make proper disclosure of documents which they must have. I agree that, on some of the issues, it is remarkable that more documents have not been produced. I here mention only two examples, and shall refer to others in the course of my judgment. Few documents have been disclosed about a proposal that Sovcomflot should raise funds by an Initial Public Offer ("IPO") on the New York stock exchange, and there are important gaps in the documentation about when and how executives in Sovcomflot learned that in 2004 Primal Tankers had expressed interest in acquiring the Arbat vessels and were involved in making arrangements in relation to the sale. The apparent deficiencies in the claimants' disclosure have further been aggravated because in April 2007 Sovcomflot destroyed documents, including some "current Fleet analysis" reports and correspondence with Sovchart which would probably have shown (inter alia) who within Sovcomflot decided upon and authorised some of the impugned chartering agreements with Standard Maritime defendants. In particular, there are few documents about who authorised the so-called stand-alone options in August 2003 and in September 2004. I am not, however, persuaded that the claimants have deliberately withheld or destroyed relevant documentation. Specifically, despite the confusion that surrounded this part of the claimants' disclosure, I reject the allegation made on behalf of Mr. Skarga that the claimants have suppressed electronic documents from the laptop computer that he used when he was at Sovcomflot. I must decide the issues upon the material that is available. The burden of proving their allegations is upon the claimants, and sometimes the want of documentation might well have told against their case.
- The claimants submitted that Mr. Skarga, Mr. Nikitin and Mr. Izmaylov have disclosed documents which should not properly have been in their possession: for example, that Mr. Skarga has disclosed minutes of meetings of Sovcomflot's General Board and Executive Board that took place after he left the company; Mr. Nikitin has disclosed e-mail correspondence which was internal to the Sovcomflot group; and Mr. Izmaylov is said to have had board papers from NSC. Mr. Skarga explained that some papers were provided to him from persons within the Sovcomflot organisation who were "loyal to [him]" (and whose identity he declined to reveal). Mr. Izmaylov explained that, when he left NSC, he was concerned that he might need to defend himself against false accusations. It is not necessary to investigate these allegations. It suffices to say that, even assuming the defendants obtained documents which should not have been in their possession, this does not assist me to decide the claims against them. I reject the claimants' suggestion (as I understand it) that the defendants are in a position to produce whatever documents held by Sovcomflot or NSC might assist their case, and that this answers any concern that the defendants are prejudiced by deficiencies in the claimants' disclosure. Even if the defendants have managed to obtain some documents from within the Sovcomflot and NSC groups, I cannot accept that they have had general access to the claimants' documents.
- There were also complaints about the inadequacies of the defendants' disclosure. I refer to Mr. Skarga's disclosure in relation to bank accounts later. Mr. Nikitin and the Standard Maritime defendants have disclosed few documents, for example about what interests Mr. Nikitin has or had in different companies, but I need not explore the adequacy or otherwise of their disclosure. It does not affect my conclusions.
- The parties produced reports of expert evidence about the laws of Russia, Liberia, Switzerland and Malta. I heard evidence about Russian law and shall explain my conclusions about the issues between the parties relating to it. I did not hear at the trial evidence about the laws of Liberia, Switzerland or Malta, but ruled that there should be a separate hearing to determine any issues about those laws that it proved necessary to resolve. On the basis of the other findings that I have made, there are none.
- I shall next briefly indicate the nature of transactions with which these actions are concerned. The schemes between defendants that are said to be corrupt in the Fiona and the second Fiona actions are these:
i) The "Sovcomflot Clarkson commissions" scheme, by which between 2001 and 2004 it was arranged that Clarkson should act as brokers for the Sovcomflot group to buy and sell ships and should pay "commission" upon the purchases and sales to Mr. Nikitin or at his direction. It is said that as a result the Standard Maritime defendants and other companies, namely Pollak and Horber, have been paid over $30 million, and Mr. Nikitin and Milmont are claiming that they are entitled to further sums of some $8.5 million in the part 20 claim in the Fiona action against Clarkson.
ii) The "Tam commissions" scheme, whereby, when in 2001 the Sovcomflot group were buying in the so-called "Athenian transaction" (which was itself one of the purchases comprised in the Sovcomflot Clarkson commissions scheme) six ships which were being built by Hyundai Heavy Industries ("HHI"), address commissions paid by HHI amounting to $1.2 million were diverted to Milmont.
iii) The "hull no 1231 commission" scheme, whereby, in the context of arrangements made to finance the purchase of hull no 1231, a vessel under construction by Tsuneishi Shipbuilding Co Ltd. ("Tsuneishi"), $105,000 paid by way of an address commission was diverted to Milmont.
iv) The "Norstar commissions" scheme, which was similar to, but on a smaller scale than, the Sovcomflot Clarkson commissions scheme, and whereby it was arranged that Mr. Christopher Bonehill, a broker who carried on business as Norstar Shipping ("Norstar") in Monaco, should act as Sovcomflot's broker for ship sales in 2002 and 2003 and pay "commission", which in the event amounted to some $238,000 in total, to Mr. Nikitin or at his direction.
v) The "RCB" scheme, whereby, as the claimants allege, in 2001 Mr. Nikitin arranged for Meino to acquire a debt owed (or said to be owed) by the Sovcomflot group to the Russian Commercial Bank Ltd. ("RCB"), and Mr. Skarga was party to arranging for the debt to be discharged on terms that improperly benefited Mr. Nikitin. The claim in respect of this scheme is about $3 million.
vi) The "SLB arrangements" scheme, whereby in 2002 the Sovcomflot group sold eight vessels, the Arbat vessels, to Standard Maritime defendants upon terms that they were to be leased back to the sellers on bareboat charters and re-purchased at the end of the charter periods. It is alleged that these arrangements (the sale and leaseback or "SLB" arrangements) were uncommercial and designed to benefit Mr. Nikitin and the Standard Maritime defendants at the expense of the Sovcomflot group. The compensatory damages claimed in respect of this scheme are some $17 million, and there is also a claim for an account of profits.
vii) The "termination of the SLB arrangements" scheme, whereby in 2004 the Standard Maritime defendants sold the eight Arbat vessels which were the subject of the SLB arrangements, and Sovcomflot were paid $20 million for their rights in respect of them. It is alleged that this was inadequate compensation for the rights that Sovcomflot relinquished. The claimants' primary compensatory claim is for some $159 million, and there is also a claim for an account of profits.
viii) The "newbuildings" scheme, whereby in 2003 and 2004 Sovcomflot entered into agreements with HHI and Daewoo Shipbuilding Marine Engineering Company Ltd. ("Daewoo"), and contracted to buy ships by way of newbuildings and acquired options to buy other vessels. It is alleged that they allowed some of the Standard Maritime defendants to acquire the benefit of options for no proper consideration, and also to acquire the benefit of contracts with HHI (by acquiring the vehicle companies who had entered into newbuilding contracts) at an undervalue. This gives rise to claims of some $212 million.
ix) The "Sovcomflot time charters" scheme, which relates to agreements that were made between 2001 and 2004 whereby certain of the claimants hired eight vessels to Standard Maritime defendants on time charterparties and also granted options to extend the period of hire of some of them. The charterparties and options are said to have been designed, at least in some cases, to benefit the Standard Maritime defendants and correspondingly to have been to the disadvantage of the claimants. The claimants claim some $219 million in respect of these allegations.
x) The "Romea Champion" commission scheme, whereby Milmont are said to have been paid improper commission in respect of a charter of the "Romea Champion". This claim is for only $16,599.50.
- The claims about the hull no 1231 commission scheme, the Norstar commissions scheme and the "Romea Champion" commission scheme are brought in the second Fiona action, and the claims arising from the other schemes are brought in the Fiona action. As I have indicated, it was also alleged in the Fiona action against Mr. Privalov that:
i) He dishonestly misappropriated commissions payable to Fiona or their subsidiaries in a series of refinancing transactions referred to as the Société Générale loan, the BCV loan and Hamburgische Landesbank and Credit Agricole Indosuez ("CAI") loans; and
ii) He unlawfully diverted business from FML and received secret profits for himself and his companies, Montrose and Continental.
It is not said that Mr. Skarga, Mr. Nikitin or the Standard Maritime defendants were party to these deceptions on the part of Mr. Privalov.
- The claims in the Intrigue action relate to dealings under four schemes which are said to have been corrupt and to which Mr. Izmaylov and Mr. Nikitin and Standard Maritime defendants are said to have been parties:
i) The "NSC Clarkson commissions" scheme, where the claimants in the Intrigue action make allegations similar to those made in the Fiona action about the Sovcomflot Clarkson commissions scheme, except that Clarkson acted as NSC's brokers only upon purchases. It is said that Milmont received over $10.5 million under the NSC Clarkson commission scheme, and Milmont and Mr. Nikitin also claim some $6.7 million in the part 20 claim in the Intrigue action.
ii) The "Galbraith's commissions" scheme, which is similar to the Clarkson commissions schemes, except that the brokers were Galbraith's rather than Clarkson and it mainly, but not exclusively, concerns sales by NSC. It is said that Amon received some $7,329,052.44 under the Galbraith's commissions scheme.
iii) The "NSC time charters" scheme, which is similar to the Sovcomflot time charters scheme in the Fiona action and concerns agreements made in 2003 and 2004 for the hire of seven vessels to Henriot. It is said that, at least in some cases, the terms were designed to benefit the Standard Maritime defendants and were to the disadvantage of the claimants. The companies who owned two of the vessels at the relevant time are no longer in the NSC group, and no claim is brought in respect of the charters of them, but the claims relating to the other five vessels are for some $128 million.
iv) The "Sawyer commissions" scheme, whereby Mr. Sawyer, after appointment as NSC's financial adviser, made payments to Amon of some $1.5 million which are said to have been unjustified and improper.
- For convenience I shall use the expressions the "Sovcomflot schemes" and the "Sovcomflot transactions" to refer to all the schemes and the transactions under them which are the subject of the Fiona and the second Fiona action. I shall use the expressions the "NSC schemes" and the "NSC transactions" to refer to the schemes and the transactions under them which are the subject of the Intrigue action. I have used the expression "commissions claims", and by that I mean the claims relating to the Sovcomflot Clarkson commissions scheme, the Tam commissions scheme, the hull no 1231 commission scheme, the Norstar commissions scheme, the "Romea Champion" commission scheme, NSC Clarkson commissions scheme, the Galbraith's commissions scheme and the Sawyer commissions scheme. The expression "Sovcomflot brokers commissions" claim means a claim relating to the Sovcomflot Clarkson commissions scheme, the Tam commissions scheme or the Norstar commissions scheme, and the expression "Intrigue brokers commissions" claim means one relating to the NSC Clarkson commissions scheme, the Galbraith's commissions scheme or the Sawyer commissions scheme
English domestic law
- The claimants' primary case is that English law governs their claims other than those against Mr. Skarga and Mr. Izmaylov for breach of their contractual duties and of their fiduciary duties owed to overseas companies. The defendants say that the claims against them are governed by Russian law. Before coming to the issues of fact, it is convenient first to say something about the relevant legal principals under both these systems of law and to consider some of the issues between about them; and then to consider which system or systems of law govern the issues between the parties.
- The claimants in the two Fiona actions allege against Mr. Skarga that he acted in breach of his contract of employment with Sovcomflot and in breach of fiduciary duties that he owed to companies in the Sovcomflot group. Mr. Skarga's first employment contract with Sovcomflot was dated 15 May 2000 and was for a term of three years. After this contract had expired, Mr. Skarga and Sovcomflot entered into another contract of employment dated 30 June 2003, which was for a term of five years and had terms materially similar to that of 15 May 2000. The contracts were governed by Russian law.
- Clause 5 set out Mr. Skarga's rights and duties. His rights included the right to "issue orders, instructions and other documents pertaining to the operation of [Sovcomflot]". His duties included a duty "to act in the interests of [Sovcomflot] in good faith, reasonably and honestly".
- I should set out clause 6 of the contract in full because Mr. Skarga pleads that clauses 6.2 and 6.3 of his contracts of employment protect him from liability to Sovcomflot in that:
i) the transactions which give rise to the claim were all "normal business transactions" within the meaning of clause 6.2, and
ii) clause 6.3 confines any liability to Sovcomflot to "direct actual loss", and so excludes any claim for loss of profits.
Clause 6 provided as follows:
"6.1 Where a breach of this Contract takes place, the Employee shall be subject to disciplinary, administrative and financial liability in accordance with the procedure stipulated by the law of the Russian Federation.
6.2 The Employee shall not be subject to material liability for damage arising from normal business activities, commercial or manufacturing and business risk, nor if he/she voted against (or did not participate in the vote on) the Management Committee's decision which lead to losses to the Company, nor if losses arose through the Employee's execution of decisions made by the Company's management (Chief Executive Officer, Management Committee, Board of Directors, Meeting of Shareholders), which compelled the employee to carry out the actions, which caused damage.
6.3 Where the company suffers material damage as a consequence of the Employee's culpable conduct (actions or failure to act), he/she shall be subject to material liability to the Company in the amount of the direct actual damage confirmed by a court ruling that comes into force."
(In the agreed translation of clause 6.2 the expression "Management Committee" is used. This body was generally referred to as the Executive Board during the trial, and this is the expression that I shall use.)
- As I shall explain when I deal with the evidence about Russian law, clause 6.3 is to be understood in light of the Russian Labour Code, and I accept that the expression "direct actual loss" does not include loss of profits. This does not avail Mr. Skarga. English law would not interpret clause 6.2 or clause 6.3 as excluding or limiting his liability for damages for intentional wrongdoing or dishonesty directed against the interests of Sovcomflot. The contract of employment is to be interpreted in accordance with Russian law, but it is not pleaded or alleged that Russian law adopts different principles of contractual construction from those of English law, and I reject the argument that clause 6 protects Mr. Skarga against the claims which are pursued against him.
- Mr. Skarga was a director of Sovcomflot, of Fiona, of Sovchart and of FML (of which he was also the Chairman), and under English law he would therefore have owed fiduciary duties to those companies, that is to say he would have owed them single-minded loyalty. He would be obliged to act in good faith and not to place himself in a position in which his duty and his interest might conflict and was not to act for his own benefit or that of a third party without the informed consent of the companies. It is not necessary to examine the limits of Mr. Skarga's fiduciary duties in any detail because the claimants pursue their claims only on the basis that he acted in dishonest breach of them. In so far as it is said that on occasions the Executive Board of Sovcomflot or the directors of Fiona endorsed or approved or ratified a transaction which had already been concluded, or it is otherwise said that Mr. Skarga is not liable because the companies consented to transactions which give rise to a claim, a fiduciary who has placed himself in a position which might bring about a conflict between duty and interest can escape liability only if he shows that his principal has given full and informed consent to it. It is not sufficient that he made sufficient disclosure to put the principal on inquiry. The evidence about the endorsement of transactions by the Executive Board, the Board of Fiona or other executives is relevant in assessing whether Mr. Skarga acted honestly, but I see no proper basis for an argument that they gave full and informed consent to any transaction if Mr. Skarga had dishonestly entered into it, dishonestly introduced it to the company or dishonestly promoted it.
- The claimants say that Mr. Skarga also owed fiduciary duties to other claimants who are one-ship companies in the Sovcomflot group (that is to say, to all the claimants in the Fiona action and the second Fiona action other than Sovcomflot, Fiona, Sovchart, FML and Sovcomflot Bulk Shipping Inc.) because he was a shadow director of them, that is to say a person in accordance with whose directions or instructions their directors were accustomed to act: see section 741(2) of the Companies Act 1985. Mr. Skarga disputes this, and I do not need to decide this issue. It is not (as I shall explain) governed by English law, and I did not receive submissions about the role that Mr. Skarga personally had in giving directions or instructions to the individual subsidiary companies. Had this been a crucial issue, I would have invited further argument upon it in light of evidence of the relevant law or laws.
- In the Intrigue action, the claimants make similar allegations against Mr. Izmaylov to those in the Fiona action against Mr. Skarga. He had a contract of employment with NSC dated 25 January 2002 and, as far as is relevant, it was in similar terms to Mr. Skarga's contracts with Sovcomflot. The claimants also allege that he owed fiduciary duties to NSC and Intrigue as a director of those companies and to the ship-owning subsidiaries of the NSC group, including all the other claimants in the Intrigue action, because he was a shadow director of those companies.
- The claimants pleaded claims against Mr. Skarga and Mr. Izmaylov for dishonestly assisting others to act in breach of their fiduciary duties to them. For example, they pleaded that Mr. Skarga dishonestly assisted Mr. Privalov to act in breach of his fiduciary duties in relation to the hull no 1231 commission scheme and that Mr. Izmaylov dishonestly assisted the brokers in acting in breach of their fiduciary duties in relation to the NSC Clarkson commissions scheme and the Galbraith's commissions scheme. These claims were abandoned in the course of the claimants' closing submissions. They added nothing to the claimants' case.
- The claims against Mr. Nikitin and Standard Maritime defendants include (i) claims for knowing receipt and (ii) claims for dishonestly procuring or assisting in breaches of trust or fiduciary duty. A defendant is liable for knowing receipt if he receives beneficially (and not merely in a ministerial capacity on behalf of another) assets which are to his knowledge beneficially owned by the claimant, and he is then liable to restore them and to account for any profit that he has made from them. To bring such a claim, the claimant must have a beneficial interest in the assets when they are received by the defendant, and therefore a claim cannot be brought against a defendant who receives the assets as a bona fide purchaser for value. Liability does not depend upon dishonesty, but, if the recipient is a purchaser for value, he is liable only if he knew of the claimant's interest in the assets and knew that the assets are received as a result of a breach of fiduciary duty, so that it would be unconscionable for the defendant to retain them or any benefit from them: BCCI v Akindele,  Ch 437 esp at pp.448H,450D-F, 455E.
- A defendant is liable for procuring or assisting in a breach of trust or fiduciary duty if a person acted in breach of a fiduciary duty owed to the claimant, and the defendant dishonestly persuaded that person to do so or assisted him to do so. I shall refer to the principles that determine whether a defendant was dishonest later. It is not necessary that the breach of duty should involve property held on trust or its misapplication or misappropriation: "A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists a breach of trust or fiduciary obligation", per Lord Nicholls in Royal Brunei Airlines v Tan,  2 AC 378 p.392G. Mr. Berry disputed this, citing the decision of the Court of Appeal in Satnam Investments Ltd. v Dunlop Heywood & Co Ltd.,  1 BCLC 385, 404, and the decision of David Steel J in Petrotrade Inv v Smith,  1 Lloyd's Rep 486 at pp. 491-2. In particular, in the Satnam case Nourse LJ referred to cases of liability for knowing receipt of trust property and for knowing assistance and said that, "before a case can fall into either category there must be trust property or traceable proceeds of trust property". The observation of Nourse LJ was considered by the Court of Appeal in Goose v Wilson Sandford & Co.,  Lloyd's Rep PN 189 at p.210, and said not to be of binding authority. I agree with the view expressed by Peter Smith J in J D Weatherspoon v Van de Berg,  EWHC 639 (Ch) that liability for dishonest assistance does not require dealing with trust property and adopt his reasons for so concluding.
- The remedies for knowing receipt include an account of profits. Mr. Nikitin and the Standard Maritime defendants argued, however, that, while a trustee or other fiduciary is normally liable to disgorge any profit that he made as a result of his breach of trust or fiduciary duty, a person who dishonestly induces or assists a breach of trust or fiduciary duty is not. In Fyffes v Templeman,  2 Lloyd's Rep 643, Toulson J decided that a person who bribed an agent to act in breach of fiduciary duty is liable to account for any profits that he made, although he acknowledged that no English authority directly decided the question and that "the textbooks tend to imply that there is no such remedy" (at p.668). The position under English law was not then firmly established: in Crown Dilman v Sutton,  BCLC 468 at para 11, Peter Smith J recognised that there was "limited English authority providing guidance about the rules applicable in a case where profit is obtained by a third party who is not in a fiduciary relationship with the beneficiary". Mr. Berry argued that I should not follow the decision of Toulson J, submitting that the authorities upon which it was based do not, upon analysis, support it.
- However, since that decision and Peter Smith J's observation about the paucity of English authority, further decisions have supported the claimants' contention that the remedy of an account is available against a defendant in these circumstances. In Ultraframe (UK) Ltd. v Fielding,  EWHC 1638 (Ch), Lewison J considered (at paras 1589-1601) that a dishonest assistant is liable to account for any profits that he himself made as a result of the assistance, but not for any profits made by the fiduciary who was in breach of duty. In Tajik Aluminium Plant v Ermatov (No 3),  EWHC 7 (Ch), Blackburne J said (at para 23) that:
"It is well recognised in cases such as Fyffes … and in Ultraframe … that there is an obligation to account for any profits made from a transaction induced by dishonest participation in the breach of trust. Together with an alternative remedy in damages that is the usual remedy of the principal against the other party to a transaction induced by the payment by that other party of a bribe or secret commission to the principal's agent".
- In OJSC Oil Company Yugraneft v Abramovich and ors,  EWHC 2613 (Comm) Christopher Clarke J said (at para 392) this:
"In my judgment the defendants are right to say that the "orchestration" of the sale to Gazprom and of the reinvestment of the proceeds do not amount to dishonest assistance. But that does not render them irrelevant to the dishonest assistance claim. There is authority that a claim may be made against a dishonest assistant either for compensation for loss which the claimant has suffered as a result of the misapplication of trust property or other breach of trust; or for an account (as a personal not a proprietary remedy) of any profit that the dishonest assistant may make from his dishonest assistance or from the underlying breach of trust: Fyffes Group v Templeman,  2 Lloyd's Rep 643; Ultraframe (UK) Ltd. v Fielding,  EWHC 1638 (Ch). It seems to me at least arguable that any profit made by Mr. Abramovich by reason of the inclusion of the participation interests in Sibneft when it was sold to Gazprom, was attributable to and resulted from the original dishonest assistance in relation to the ECMs (if there was any), even though the sale itself was not a further act of dishonest assistance, and that Mr. Abramovich would be accountable (on a personal basis) therefore. If, as the defendants assert, no value was attributed to the 49% interests by either of the parties to the sale, and Mr. Abramovich has, in effect, given them away, he is, nevertheless, accountable for whatever their true value was when he did so."
- Further the Court of Appeal in Murad v Al-Saraj,  EWCA Civ 959 appears to me to have proceeded on the basis that, as an account of profits is available against a fiduciary, so too it is available against an assistant or secondary participant in a breach of fiduciary duty: see per Arden LJ at para 69 and per Jonathan Parker LJ at paras 118-120.
- In view of these authorities, I consider it now established that an account of profits is available under English law against one who dishonestly procures or assists a breach of fiduciary duty. There are strong reasons for recognising the remedy, which were explained by Gibbs J in Consul Development v DPC, (1975) 132 CLR 373 at p. 397: "If the maintenance of a very high standard of conduct on the part of fiduciaries is the purpose of the rule it would seem equally necessary to deter other persons from knowingly assisting those in a fiduciary position to violate their duties. If, on the other hand, the rule is to be explained simply because it would be contrary to equitable principles to allow a person to retain a benefit that he gained from a breach of his fiduciary duty, it would appear equally inequitable that one who knowingly took part in the breach should retain a benefit that resulted therefrom". Therefore, although a person who assists a breach of trust or fiduciary duty is not himself a trustee, he is liable to account in equity as if he were: see Dubai Aluminium v Salaam,  2 AC 366 at para 141 per Lord Millett.
- There is a further issue about the limits of the remedies available to the claimants if Mr. Nikitin or the Standard Maritime defendants are liable for procuring or assisting the breach of a fiduciary duty. Mr. Berry argued that, if an account of profits is available, they are liable to account only for the profits that result from the act of dishonest assistance. Thus, in Fyffes v Templeman, (loc cit) at p. 672, Toulson J referred to the wrongdoer accounting for the "benefits obtained from the corruption of the agent". Accordingly, as it is argued, a dishonest assistant is not liable to account for profits that could and would have been made regardless of his dishonest participation in the fiduciary's breach; and he is liable to account only for profits which directly resulted from the transaction concluded through dishonest inducement or assistance and not profits which can truly be said to be the result of another subsequent event, such as the movement of the market. I do not accept this submission. The law does not enter into investigations of what would have happened if the fiduciary had performed his duty when taking an account of profits: see Murad v Al-Saraj, (cit sup) at para 76 per Arden LJ. However, the defendants' argument is, as I understand it, directed particularly to the accounts which the claimants would seek in respect of the newbuildings scheme, and I reject this claim against Mr. Nikitin and the Standard Maritime defendants.
- The claimants also make claims for damages for conspiracy to defraud them by unlawful means. The claimants in the Fiona action bring these claims against Mr. Skarga, Mr. Nikitin and the Standard Maritime defendants, alleging a conspiracy from around the beginning of 2001 between Mr. Privalov, Mr. Skarga, Mr. Borisenko, Mr. Nikitin and the Standard Maritime defendants. The claimants in the second Fiona action allege a conspiracy (or more precisely, I think, conspiracies) against Mr. Skarga, Mr. Nikitin, Milmont and PNP. The claimants in the Intrigue action allege various conspiracies in relation to the different schemes: in relation to the NSC Clarkson commissions scheme, a conspiracy "from in or about 2001" between Clarkson, Mr. Gale, Mr. Nikitin, Mr. Izmaylov, Milmont, Mr. Privalov and Shipping Associates; in relation to the Galbraith's commissions scheme, a conspiracy "from in or about 2001" between Galbraith's, Mr. Nikitin, Mr. Izmaylov, Amon, Mr. Privalov and Shipping Associates; in relation to the NSC time charters scheme, a conspiracy "from about 2002" between Mr. Izmaylov, Mr. Nikitin and Henriot; and in relation to the Sawyer commissions scheme, a conspiracy "in about early 2002" between Mr. Izmaylov and Mr. Nikitin.
- Under English law, a claim may be brought for "unlawful means" conspiracy if two or more persons combine (whether or not under an express agreement and whether or not all the persons involved participated at the same time) to use unlawful means with the intention (but not necessarily the predominant purpose) of injuring the claimant. The law does not require that the unlawful means should themselves be actionable at the suit of the claimant: the means might be a criminal action, a breach of contract, a director's fiduciary duty to a company or fraud. The unlawful means alleged in the Fiona action are (i) the various schemes pleaded in that action (the Sovcomflot Clarkson commissions claim, the Tam commissions claim, the RCB scheme, the SLB arrangements scheme, the termination of the SLB arrangements scheme, the newbuildings scheme and the Sovcomflot time charters scheme), (ii) bribery of Mr. Skarga, Mr. Privalov and Mr. Borisenko by Mr. Nikitin and some of the Standard Maritime defendants to bring about the transactions which were the subject of some of the schemes, and (iii) creating "false and fictitious documentation" to conceal the transactions under the schemes. I accept that all these matters might constitute unlawful means so as to give rise to the tort of conspiracy, provided that the "false and fictitious documentation" was created in order to enable the schemes to be put into effect. I cannot accept that deceptive documents that were not contemplated at the time of a transaction and were drawn up subsequently in order to conceal what had been done would constitute unlawful means whereby a combination to bring about the transaction would be tortious. The unlawful means alleged in the second Fiona action are (i) breaches of fiduciary duty on the part of Mr. Skarga and Mr. Privalov, and (ii) bribery of Mr. Skarga and Mr. Privalov by Mr. Nikitin and Standard Maritime defendants. The unlawful means alleged in the Intrigue action are the wrongs of breach of fiduciary duty, dishonest assistance and knowing receipt done in the course of the various schemes, and also, as is specifically alleged in relation to the conspiracy involving the NSC time charters scheme, bribery of Mr. Izmaylov.
- The claimants finally assert claims on the basis that bribes were paid by Mr. Nikitin or companies associated with him to Mr. Privalov, Mr. Borisenko, Mr. Skarga and Mr. Izmaylov. English law take a broad view of what constitutes a bribe for the purposes of civil claims. It considers that a bribe (or "secret commission" or "surreptitious payment") has been paid where "(i) … the person making the payment makes it to the agent of another person with whom he is dealing; (ii) … he makes it to that person knowing that that person is acting as the agent of the other person with whom he is dealing; and (iii) … he fails to disclose to the other person with whom he is dealing that he has made that payment to the person whom he knows to be the other person's agent": Industries & General Mortgage Co Ltd. v Lewis,  2 AER 573 at p. 575G. Thus, a bribe is "a commission or other inducement which is given by a third party to an agent as such, and which is secret from his principal": Anangel Atlas Compania Naviera SA v Ishikawajima-Harima Heavy Industries Company Limited,  1 Lloyd's LR 166 at p. 169.
- "When an agent receives or arranges to receive by way of a bribe or secret commission in the course of his agency from a person who deals or seeks to deal with his principal, the agent is liable to his principal jointly and severally with that person (1) in restitution for the amount of the bribe or secret commission; or (2) in tort for any loss suffered by the principal from entering into the transaction in respect of which the bribe or secret commission was given or promised, and the bribe, if it was paid, is held on trust for the principal", and the person who pays or promises the bribe is also liable in restitution and damages to the principal: Bowstead & Reynolds on Agency (2010) 19th Ed at 6-084. The principal may also require either the agent or the briber to give an account of profits.
- It is not necessary in order to establish a claim for a claimant to show that the bribe was either paid or received dishonestly: where a bribe is paid, it is irrelevant whether either the briber or the agent realised that they were doing wrong. In English law corruption and fraud are presumed, and so a claim can be brought on the basis of the payment of an "innocent" bribe: Re a debtor,  2 Ch 367 at p. 376 per Scrutton LJ. It is also presumed that the person paying a bribe intended that the agent would be influenced by it and that the agent was in fact induced to act in favour of the briber in relation to transactions between the briber and the recipient's principal: Hovenden & Sons v Millhoff, (1900) 83 LT 41; Industries & General Mortgage Co Ltd. v Lewis, (cit sup). If a bribe is paid to an agent, it does not assist the briber or the agent to show that in fact the agent acted in his principal's best interests.
- The reason that the law so protects a principal if his agent receives a bribe is that he is entitled to be confident that the agent will act wholly in his interests, and the test for whether a payment or other benefit or promise amounts to a bribe depends upon whether it puts the agent in a position in which his duties to his principal and his interest might conflict. Accordingly:
i) It is not necessary that the bribe be given in connection with a particular transaction or series of transactions. The possibility of a conflict between duty and interest might be created by a bribe paid to an agent in order to influence him in favour of the person paying it generally and not directed to any particular matter or intended to influence him in relation to a particular transaction. In the Fiona action the claimants have sought to link payments made to Mr. Privalov and Mr. Borisenko and arranged by Mr. Nikitin to particular schemes about which they complain, but, as I shall explain, I conclude that they have not established connections of this kind. This does not mean that they are not entitled to rely upon the payments as bribes. If a secret payment is made to an agent, it taints future dealings between the principal and the person making it in which the agent acts for the principal or in which he is in a position to influence the principal's decisions, so long as the potential conflict of interest remains a real possibility: see Daraydan Holdings v Solland,  Ch 115 at para 132.
ii) The law recognises that some gifts or benefits are too small to create even a real possibility of a conflict of interest and so too small to be treated as a bribe. The defendants say that some benefits that Mr. Nikitin is said to have provided to Mr. Skarga and Mr. Izmaylov were of insufficient value to be bribes, and were only what Gorell Barnes J called in The "Parkdale",  P 53, 58-9 "a little present". It is a question of fact depending on the circumstances of each case where the line is to be drawn between "a little present" and a bribe, and so unsurprisingly there is little guidance about this in the authorities, but the test, as I understand it, is whether it is sufficient to create a "real possibility" of a conflict between interest and duty: Imageview Management v Jack,  1 Lloyd's Rep 436 para 6 per Jacob LJ. It is not whether such a conflict is actually created.
iii) If a payment is made to an agent that creates a real possibility of this kind, it does not make "any difference whether the surreptitious profit was gained as a pure gift or for services rendered or for any other reason": Keogh v Dalgety & Co Ltd., (1916) 22 CLR 402, 418. An agent might have a conflict between his interest and his duty as a result of being rewarded for "moonlighting" for a person engaged in transactions with his principal.
- In this case the claimants do not pursue any claim against Mr. Skarga or Mr. Izmaylov on the basis that they received bribes without any dishonest intention. The allegations that they accepted bribes are relied upon by the claimants principally to support their contention that Mr. Skarga and Mr. Izmaylov were acting dishonestly, but the alleged bribery is neither necessary nor sufficient to establish that contention. Equally, no claim is made against Mr. Nikitin or any of the Standard Maritime defendants on the basis that they innocently made payments or conferred benefits amounting to bribes without any dishonest or improper purpose, although they would be presumed to be corrupt under English law. The claimants' case is that he, and through him the Standard Maritime defendants, acted dishonestly. Mr. Popplewell accepted that all that the claims in bribery add to the other claims pursued by the claimants is that, if they do establish that Mr. Skarga or Mr. Izmaylov acted dishonestly in relation to a transaction and that they dishonestly had received a bribe, it will, as a matter of English law, be presumed that the bribe influenced them to act as they did. This qualification is not important in view of my other conclusions. To my mind, because of the findings that I make the claims in bribery add nothing significant to the other claims that are pursued against the defendants.
- The remedies sought in respect of each of the schemes include compensatory damages, equitable compensation and for an account of profits. Often claims for compensation in respect of essentially the same loss are made by several claimants, and more than one claimant seeks an account of profits. Prima facie the question which claimant is entitled to compensatory damages depends upon which, if any, of the claimants suffered the loss asserted. As Mr. Popplewell rightly observed, that claimant might not necessarily be the counter-party to the transaction that gave rise to the loss. However, it is necessary to recognise the precise nature of the loss in respect of which damages are claimed, and the distinct corporate identities of the different claimants in the Sovcomflot and NSC groups. I shall here illustrate the point by referring only to the claim in respect of the SLB arrangements scheme. In their closing submissions, the claimants argued that "in reality the losers" were Fiona and Sovcomflot, rather than the eight ship-owning subsidiaries that sold and then chartered back the eight vessels. Their pleaded case, however, is that the transactions "were on uncommercial terms which caused substantial loss to the relevant Fiona subsidiaries" and were correspondingly beneficial to "Mr. Nikitin's companies": see para 103 of the particulars of claim. The starting point for assessing the quantum of loss that they plead is to take the total of the hire paid by the charterers under the charterparties and to deduct from it the cost of raising money by refinancing the fleet by borrowing funds on the basis of interest at the rate of 1.25% over LIBOR (rather than by the SLB arrangements). Nevertheless, the claimants submitted that Fiona or Sovcomflot are the real losers because the SLB arrangements were financing transactions entered into for the group and the funding "passed through to the group for use for group purposes". I do not doubt that the purpose of the SLB arrangements was to improve the cash flow of the Sovcomflot Group generally, but the assertion about the "real losers" being Sovcomflot and Fiona, which is neither pleaded nor supported by evidence, is too vague to justify a claim by Fiona or Sovcomflot for compensatory damages. It is telling that the claimants do not identify which of these two companies is to be said to have suffered loss. As I see it, the only claimants that might be entitled to compensatory damages in respect of the SLB arrangements scheme (if liability be established) are the eight ship owning companies. It is irrelevant that, as the claimants present the claim, had the SLB arrangements not been made, the group would have sought to improve their cashflow in other ways. In reaching this conclusion I do not overlook that the claimants' further argument that Fiona guaranteed the obligations of the eight companies. The guarantees did not lead to Fiona suffering any loss, nor is any such loss pleaded. The "counter-factual" does not mean that another company in the group suffered loss from the eight companies contracting "uncommercial" terms, but provides the measure of how "uncommercial" they are alleged to have been.
- Mr. Popplewell also submitted that Sovcomflot and Fiona or NSC and Intrigue might have a claim for reflective loss in respect of the value of their shareholdings in subsidiary companies who were defrauded if the subsidiary companies, such as the one-ship companies, suffered financial loss but had no relevant cause of action against a defendant. Even assuming that loss was suffered by a subsidiary that had no relevant cause of action, in order to establish any such claim in accordance with the principles explained in Johnson v Gore Wood,  2 AC 1 at p. 35 per Lord Bingham and p. 61 per Lord Millett, it would be necessary not only that a claimant in fact held the shares in the relevant subsidiary but also that it suffered a diminution of the value of the shareholding or other losses as shareholder, such as a reduction in dividends. No such loss has been pleaded or proved.
- The claimants rightly observed that Mr. Skarga or Mr. Izmaylov might have acted on behalf of more than one company to which they owed fiduciary duties in respect of the same transaction, and, if they acted in breach of duty to both, they would be liable to render an account and to disgorge profits to each. Equally Mr. Nikitin and the Standard Maritime defendants might be so liable to more than one claimant if they dishonestly procured or assisted breaches of fiduciary duties so owed. At this point, I only observe that I do not accept that Mr. Skarga has been shown to have been in breach of any duty to FML because he has not been shown to have been acting in any relevant way as a director of that company and that I also do not accept that he acted in any relevant way as director of Sovchart or was in breach of any duty to them. In so far as he gave instructions to Mr. Van Boetzelaer in relation to the time charters, I conclude that he was acting in his capacity as Director-General of Sovcomflot, because Sovcomflot was authorising Sovchart to enter into the charter or for some other reason.
Russian domestic law
- The defendants argued, as I have said, that any issues concerning their liability to the claimants are governed by Russian law. As I shall explain, Russian law would in various ways be less favourable to the claimants than English law. In particular, the defendants are able to argue that under Russian law:
i) Mr. Skarga could be liable only to Sovcomflot as his employer and only in contract and under the Russian Labour Code. He could not be liable in tort and could not be liable in the circumstances of this case to any other claimant.
ii) Similarly, Mr. Izmaylov could be liable only to NSC as his employer and could only be liable in contract and under the Russian Labour Code. He too could not be liable in tort and could not in the circumstances of this case be liable to any other claimant.
iii) None of the defendants could be liable to give an account or in unjust enrichment.
iv) In order for Mr. Nikitin or any of the Standard Maritime defendants to be liable in tort, harm would have to be directly caused by the defendant's unlawful fault.
v) There is no presumption that, if a bribe was paid, it influenced the recipient, and the claimants cannot succeed in a claim either against a person paying a bribe or a recipient without proving that the bribe influenced the recipient or otherwise caused loss.
vi) The defendants would be protected by different limitation periods, which appear generally to be more favourable to them than those available under English law.
- The defendants also argued that under Russian law Mr. Skarga and Mr. Izmaylov could rely on the terms of their contracts of employment to confine any liability to direct actual damage and to exclude liability for loss of profits, but, as I shall explain, I reject that argument.
- I heard expert evidence about Russian law from Professor Alexander Sergeev, who was the claimants' witness, and Professor Peter Maggs, who was called jointly by Mr. Skarga, by Mr. Nikitin and the Standard Maritime defendants and Mr. Izmaylov. I shall explain the nature of the claims that the claimants might have under Russian law, and, although on the basis of the conclusions that I have reached about the applicable law and my findings of fact, I do not determine any claim by reference to Russian law, since I heard evidence and submissions about how it applies, I shall state my conclusions about the main issues of Russian law.
- Professor Sergeev is Professor of Law and Head of the Civil Law Department at the School of Law at St Petersburg State University of Economics and Finance. Professor Maggs is Professor of Law and holder of the Clifford M and Bette A Carney Chair at the University of Illinois College of Law, and specialises in Russian Law, the laws of the other former Soviet Republics and Soviet Union. Both have had very distinguished careers, have published widely and were undoubtedly well qualified to give their expert evidence. Both were seeking honestly and carefully to assist the court with their knowledge of and opinions about the relevant provisions of Russian law. Professor Sergeev gave his evidence in Russian and sometimes this made it difficult to follow his answers in cross-examination, but I consider that, while some of his individual answers, as translated, should not be accepted in a precisely literal sense, he clearly explained his views upon the points put to him. The differences between the experts reflect genuine uncertainties about how Russian law would treat some of the questions arising in this case, but I seek to apply the relevant principles of Russian law that were explained to me and examine how far the material presented by the witnesses appears to support their views.
- Under the Criminal Code of the Russian Federation, a victim of a crime can recover compensation for losses either in the criminal proceedings or through a civil claim, and if he brings a civil claim, a court sentence in the criminal proceedings is binding upon the civil court in any dispute about whether the defendant did the criminal act. The claimants do not advance claims on the basis that they would be entitled to compensation in criminal proceedings but on the basis of civil liability. No party has pleaded that Russian criminal law differs from English law, and, if and in so far as it is relevant whether any criminal offence was committed, Russian law is taken to be the same as English law. Although in his first report Professor Sergeev gave some consideration to whether the defendants are guilty of criminal acts under Russian law, the expert evidence was really directed to their civil liability.
- Russian civil law is codified, and usually key principles governing different branches of the law are set out in the relevant codes. While Russian law has no doctrine of stare decisis, it is proper to look to Russian court decisions, as well as legal academic writings, for guidance to the interpretation of the codes and their application. The claimants say that under Russian law they have claims (i) against Mr. Skarga, Mr. Izmaylov, Mr. Nikitin and the Standard Maritime defendants under article 1064 of the Russian Civil Code, which has been described loosely as the general tort provision of the Code; (ii) against Mr. Nikitin and the Standard Maritime defendants under article 1102 of the Civil Code, which is concerned with unjust enrichment; and (iii) against Mr. Skarga and Mr. Izmaylov under various provisions of the Civil Code, the Labour Code of the Russian Federation and the Federal Law on Joint Stock Companies.
- The Civil Code includes provisions about "obligations arising from transactions", that is to say obligations arising from the actions of natural or legal persons directed at the establishment, change or termination of civil law rights: see article 153 of the Civil Code. These include the law of contracts, and they are found in chapter 9 of the First Part of the Civil Code. The provisions of the Civil Code which are more directly relevant to the claims are (i) those governing "obligations arising as a result of causing harm", which broadly cover questions of tort or delict and are in chapter 59 of the Second Part of the Civil Code; and (ii) those about "obligations arising as a result of unjust enrichment", which are in chapter 60 of the Second Part of the Civil Code. Russian law does not have principles equivalent to those of the English law about beneficial ownership, constructive trust or equitable remedies, and it has no concept of shadow (or de facto) directors.
- The relationship between the parties is key to deciding which provisions of the codes are relevant to determining a dispute. Thus, as between parties to a contract, generally disputes are to be resolved in accordance with the law concerning contracts and the contract itself, and the contracting parties cannot bring claims on any other basis. Professor Maggs explained that this reflects a prohibition under Russian law against "competition between claims" and is an application of a broader principle that a special rule prevails over a general legal rule. As he puts it:
"Where a claim concerns or arises from contractual relations (which would include the claims in the present case, being (i) claims arising from contracts said to have been uncommercial; and (ii) claims resulting from the alleged diversion of moneys by third parties in breach of contractual duties owed by them to the claimants), the provisions of the Civil Code … do not allow a party to the contract to avoid the structure of Russian law and to bring any non-contractual claim arising out of the same facts against the other party".
- Professor Maggs considered that, because of the principle of Russian law prohibiting competition against claims, Sovcomflot cannot bring claims against Mr. Skarga otherwise than on the basis of their employment contracts and under the Labour Code, and similarly NSC cannot bring claims against Mr. Izmaylov on any other basis. Professor Sergeev disagreed: he cited in his report of 8 May 2009 eleven Russian cases as examples of cases in which a corporate director-general had been held to be liable otherwise than under the Labour Code, and considered that Mr. Skarga and Mr. Izmaylov might be liable under Russian law under the Civil Code for non-contractual liability. I do not consider that on examination these cases provide support for Professor Sergeev's opinion. Seven of the cases are shareholder suits, and another two are claims brought by a joint-stock company against another company and not against a director-general. In none of the cases was any reference made to an employment contract between the director-general and the company, and Professor Sergeev accepted that sometimes a director-general is not an employee, although it is relatively unusual for him not to be employed. The cases cited by Professor Sergeev were all decided in the Arbitrazh Courts, which deal with commercial disputes and not disputes concerning individuals, such as employment law disputes. Moreover, Professor Maggs' views seem to me to be supported by a decision of the Federal Arbitrazh Court dated 24 June 2004 in the case of Hotel Sportivnaya. As I understand the report of this decision, the Court considered that an employer can bring against an employee only a claim of a contractual nature. Professor Sergeev accepted that he could cite no precedent for an employer making a claim under article 1064 of the Civil Code. I conclude that such a claim would offend against the principle that Professor Maggs identified and would not be permitted.
- When determining the nature of the relationship between the parties and therefore which provisions of the Civil Code apply to issues between them, it is important to recognise that, as Professor Maggs explained and I accept, Russian law maintains a clear distinction between the different corporate entities in a group or otherwise associated with each other, and also between natural persons and corporate entities with which they are associated. An entity is not liable for the obligations of another unless a specific provision of the Code so provides. Therefore, for example, Russian law would not recognise any claim in contract made by Sovcomflot or NSC in respect of the impugned contracts said to have been entered under the various schemes because Sovcomflot and NSC were not a party to any of them; no contractual claim would lie against Mr. Nikitin under the impugned contracts because he did not enter into any of them in a personal capacity; and no contractual claims between a claimant and a defendant could be brought in respect of the various commissions schemes since there is no relevant impugned contract between a claimant and a defendant. On the other hand, the principle of competition against claims would not protect Mr. Skarga or Mr. Izmaylov from claims by subsidiary companies of Sovcomflot or NSC because they had no employment (or other) contract with them. As I shall explain, they would have a different answer to such claims.
- Before dealing further with the claims that might be brought under Russian law, I should mention another argument raised by Mr. Nikitin and the Standard Maritime defendants about the Civil Code provisions concerning contracts, and in particular article 179, which provides as follows:
"1. A transaction made under the influence of fraud, duress, threat, a bad-faith agreement of the representative of one party with another party, and also a transaction that a person was compelled to make as the result of the confluence of harsh circumstances on conditions extremely unfavourable for himself that the other party used (an oppressive transaction) may be declared invalid by a court on suit of the victim.
2. If a transaction is declared invalid by a court on one of the bases indicated in Paragraph 1 of the present Article, then the other party shall return to the victim everything it received under the transaction and, if it is impossible to return it in kind, its value in money shall be compensated. Property received under the transaction by the victim from the other party and also due to it in compensation for that transferred to the other party shall be transferred to the income of the Russian Federation. If it is impossible to transfer the property to the income of the state in kind, its value in money shall be taken. In addition the victim shall be compensated by the other party for the actual damage caused to him."
- This article can apply when a person enters into a contract under the influence of deceit, or when an agent has been bribed and as a result the principal enters into a contract with the briber. In these circumstances, the contracting party can obtain (i) an order that the contract is invalid and that there should be returned anything received under it or its value should be repaid, and (ii) damages for "actual damage caused to him". Mr. Nikitin and the Standard Maritime defendants submitted that the right to recover "actual damage caused to" the contracting party does not allow lost profits to be recovered or a remedy that the other contracting party should disgorge profits. Moreover, a claim would be subject to the Russian limitation period of one year from the time that the relevant claimant knew or should have known of the circumstances upon the basis of which it is alleged that the transaction should be declared to be invalid.
- These provisions that a contract may be invalidated are not of direct relevance for present purposes. All contracts which might be invalidated are governed by English law by the express choice of the parties. In the case of the time charters, disputes about their validity are covered by arbitration agreements and are to be determined in a reference: Fiona Trust v Privalov,  1 Lloyd's Rep 254. Mr. Berry argued that nevertheless any issues about consequential financial liability after a contract is invalidated are to be determined by Russian law, and so the compensation that may be recovered is defined and limited by article 179. His argument was that, where a contract has been invalidated, or in the terminology of English law rescinded, whatever law governed the contract and determined its validity, the Private International Law (Miscellaneous Provisions) Act 1995 (the "1995 Act") determines which law applies to any issues about the consequential liabilities between the parties.
- I do not accept that these are "issues relating to tort" even in the broad and internationalist sense in which the expression is used in section 9(1) of the 1995 Act (to which I refer later). The 1995 Act does not apply to them. They would be characterised for English private international law purposes as contractual issues, and (whether they are covered by the Rome Convention as adopted into English law by the Contracts (Applicable Law) Act, 1990 or whether, as Mr. Berry argued, the 1990 Act does not apply, and that they are governed by common law principles) they are governed by English law as the law chosen by the parties expressly or by implication. Moreover, even if 1995 Act did apply, in these circumstances it would be "substantially more appropriate" for English law to determine these matters and therefore English law governs them under section 12. I therefore need not consider any issue about what damages or compensation could be recovered in Russian law under article 179, and I decline to do so.
Obligations arising as a result of causing harm
- The claimants say that under Russian law they would have claims under article 1064 in chapter 59 of the Second Part of the Civil Code against Mr. Skarga and Mr. Izmaylov and also Mr. Nikitin and the Standard Maritime defendants because they entered into and carried out a dishonest conspiracy to cause the claimants loss; and that, if they were parties to fraud or other wrongdoing that caused damage to the subsidiaries of Sovcomflot and to Sovcomflot as a shareholder, or to the subsidiaries of NSC and to NSC as a shareholder, then both the parent companies and the subsidiaries would have claims under the article.
- Article 1064 provides as follows:
"1. Harm caused to the person or property of a citizen and also harm caused to the property of a legal person shall be subject to compensation in full by the person who has caused the harm.
A statute may place a duty for compensation for harm on a person who is not the person that caused the harm
A statute or contract may establish a duty for the person who has caused the harm to pay the victim compensation in addition to compensation for the harm.
2. The person who has caused the harm is freed from compensation for the harm if he proves that the harm was caused not by his fault. A statute may provide for compensation for the harm even in the absence of fault of the person who caused the harm.
3. Harm caused by lawful actions shall be subject to compensation in the cases provided by a statute. Compensation for harm may be refused if the harm was caused at the request, or with the consent, of the victim, and the actions of the person who caused the harm do not violate the moral principles of society."
- Thus liability under article 1064 requires (i) harm, (ii) causation, (iii) fault and (iv) unlawfulness. As a matter of Russian law, the burden is upon a claimant to prove harm and causation of harm, and, if he does so, the defendant has to show lack of fault or that he acted lawfully in order to avoid liability. Generally, as a matter of English private international law, the burden of proof is probably a procedural matter determined by the lex fori (The "Roberta", (1937) 58 Ll L R 159, 177 per Langton J, In the estate of Fuld (No 3),  P 675, 696G-7A, per Scarman J, but see Dicey, Morris and Collins, The Conflict of Laws (2006) 14th Ed para 7-027), and therefore I am inclined to think that it would be for the claimant to establish in the trial before the English court that the defendant did not act lawfully, as well as that he suffered harm and that it was caused by the defendant. I cannot, however, accept that, in determining whether harm was caused by the defendant's "fault", the English court would not give effect to the express provision in paragraph 2 of article 1064 that the burden of proof about this is upon the defendant. In any case, however, the burden of proof about fault and unlawfulness for the purpose of article 1064 would not affect anything that I had to decide, even if I had concluded on the basis of my findings of fact that the claimants have a claim which is governed by the article.
- There is no significant issue about what constitutes fault or unlawfulness for the purposes of article 1064. The defendants pointed out, and I accept, that, while intentional actions that cause harm are unlawful (unless permitted by a legal provision), payments made in legitimate business transactions are not unlawful, and a person cannot be said to be at fault on that account. However, it is not disputed that the requirements of fault and unlawfulness would be satisfied if the claimants succeeded in establishing dishonesty, the sole basis upon which they pursue the claims. The significant issues about article 1064, if Russian law applies, concern the requirements of harm and causation.
- There is no dispute that "harm" within the meaning of Article 1064 includes both damage to property and financial losses such as lost profits. It is a question of fact whether a claimant suffers "harm", and in particular whether, if a claimant entered into an "uncommercial" contract, such as a charterparty at an excessively low rate of hire, he suffers "harm" for the purposes of bringing a claim against a third party under article 1064. At one point in his evidence, Professor Maggs expressed the opinion that such a claimant would not have suffered harm, but it became clear that he was supposing circumstances in which the contract might be cancelled before it was performed. He accepted that there might be harm if the contract was performed; if, for example, a shipowner delivered a vessel on charter at an uncommercial rate. He was not, as I understood his evidence, suggesting any restriction upon what sort of loss could in principle constitute harm for the purpose of article 1064. He was simply indicating his view as to what findings of fact would be made in the circumstances that he supposed. As he explained, a contracting party might fail to show that he has suffered harm of this kind because he did not avoid a contract or did not seek to recoup loss from the contractual counterparty; and, although Professor Maggs at one point treated this as a question of mitigation, the thrust of his evidence was that upon a factual analysis it might be held that there was no harm.
- The claimants observed that Mr. Nikitin and the Standard Maritime defendants plead that the claimants who entered into contracts with the defendants suffered no harm within the meaning of Article 1064 because "the impugned contracts were not uncommercial and/or otherwise than on market terms", and they submitted that therefore Mr. Nikitin and the Standard Maritime defendants are precluded by their pleading from arguing that, even if the contracts were "uncommercial" and not on "market terms", nevertheless the claimants have failed to show harm and so are unable to sustain a claim under article 1064. I do not accept that argument: the pleading does not, to my mind, relieve the claimants of the burden of showing that they in fact suffered harm because the impugned contracts were on uncommercial terms. However, the point is, as it seems to me, of no consequence on the facts of this case. All of the impugned contracts were performed, and there would be no basis for concluding that, if the terms were sufficiently uncommercial, the claimant who was party to the contract did not suffer harm for the purposes of a claim under article 1064.
- The remaining element of liability under article 1064 is that the harm was caused by an action of the defendant. This too is largely question of fact. English law presumes that the payment of a bribe or secret commission in relation to a contract causes loss. The claimants rightly did not argue that they could rely upon the presumption made by English law in support of a claim based upon article 1064. The so-called presumption of English law, being irrebuttable, is not a matter of procedure for the lex fori, but a matter of substantive law for lex causae: see Dicey, Morris & Collins, loc cit, para 7-029, 030.
- Under Russian law, bribery can be a criminal offence. Article 204 of the Criminal Code defines "commercial bribery" as follows: "The unlawful transfer to a person fulfilling management functions in a commercial or other organisation of money, securities, commercial paper or other property, and also unlawful rendering of services to him of a property nature for the commission of actions (or inactions) in the interests of the person giving in connection with the office held by this person". Russian law does not provide a civil remedy in such circumstances and has no presumption or other legal principle comparable to the presumption in relation to bribes made under English law. The payment of a bribe does not relieve the claimant of the burden of proving harm and causation in order to establish liability under article 1064.
- Although a necessary ingredient of a claim under article 1064 is that the act of the defendant has caused harm, this does not mean that a fraudster can escape liability by acting through a corporate structure. As Professor Sergeev observed, "Otherwise impunity would result for criminals committing white-collar crimes through corporate structures, and it would deprive the aggrieved party of the opportunity to effectively restore their violated rights at the expense of the individuals who directly enriched themselves through the commission of the offences". Professor Maggs accepted that in these circumstances (assuming the company was not an innocent tool of the fraudster) both the fraudster and the company that he used would be regarded as doing the act that caused harm.
- Under article 1064 the defendant's action must be a direct or immediate cause of the harm. Professor Maggs illustrated this by referring to the procedure available under the Criminal Procedure Code which allows a claimant to make a civil claim in the context of criminal proceedings. Commentators on the relevant provision, article 44 of the Code, explain that a civil claim is properly presented "only when a direct causal link between harm and an event of crime is present", and I accept Professor Maggs' evidence that the position is similar when a claim is made under article 1064. This means in the context of this case that:
i) If a claimant company had entered into a contract that resulted in loss, Russian law would not attribute that loss to the act of a defendant for the purposes of article 1064 unless the claimant showed that the defendant directly caused the company to enter into the contract. Thus, if an officer of the claimant accepted a bribe, the claimant would not have a claim against the briber in relation to a transaction unless it was established that the bribe directly brought about the decision to enter into it. This could not normally be done if, for example, those who so decided on behalf of the company (whether their board of directors or their management) took the decision to do so with knowledge of the relevant information about whether the company should enter into the contract. The bribery would only be a sufficient cause of the contract and so any loss or harm resulting therefrom if, because of the bribe, the recipient therefore caused the company to decide to contract, for example by misleading those taking the decision to do so.
ii) Similarly, if brokers such as Clarkson acted in breach of their duties so as to cause loss to their claimant principal, prima facie the brokers' breach of duty would be the direct cause of the loss. Professor Maggs did not consider that, if a defendant had entered into an agreement with brokers that they should do something which amounted to a breach of duty to their principal, Russian law would therefore regard the defendant's action as a direct cause of the principal's loss. The brokers' behaviour intervenes, and prevents the link in the chain of causation being sufficiently direct. I accept his evidence that, in order to succeed in a claim under article 1064, the claimant would have to show a more specific and direct link between the defendant's action and the loss, such as that the defendant and the brokers made an agreement that they should conceal the position from, and deceive, the principal, and that as a result the principal did not enforce his rights against the brokers.
iii) Russian law would not consider that a company has been caused harm simply because the value of its shares in a subsidiary was reduced by harm caused to the subsidiary. The harm suffered by the shareholder would not be sufficiently closely linked to the action of the defendant. In reaching this conclusion, I do not overlook that at one point in his cross-examination Professor Sergeev appeared to contemplate that, where a subsidiary company was caused harm, a parent company might also be treated as having been caused harm, but his answers about this were unclear. There is no dispute on the pleadings that direct causation is required and, if there be a difference between the experts, I prefer the opinion of Professor Maggs about this. Thus, I conclude that Sovcomflot and NSC would not have claims under article 1064 on the basis that they suffered harm because the value of their interest in their subsidiaries was reduced by the acts of the defendants.
- Mr. Skarga and Mr. Izmaylov submitted that they are not liable under article 1064 because (i) no claim by Sovcomflot or NSC would be permitted because it would offend the principle against competition of claims, and (ii) no other company has a claim because they were at the relevant times acting as employees of Sovcomflot and NSC and therefore any liability under the article falls upon their employer and not upon them. I have upheld the first part of that submission, and now come to consider the second. Generally it must be shown that the defendant himself caused harm if he is to be held liable under article 1064, and no other natural or legal person is liable for harm unless a specific provision of the Code so provides. However, employers may be liable for the action of employees under article 1068 of the Civil Code, which provides as follows: "A legal person or a citizen shall compensate for harm caused by its employee in the performance of labour (or employment, or official) duties ...".
- The claimants' pleaded case is that article 1068 imposes liability to third parties upon the employer for an employee's wrongful act, and that it does not relieve the employee of liability. Despite the express wording of the article, however, Professor Sergeev and Professor Maggs agreed that the article can also provide protection for an employee from liability to a third party. As Professor Maggs explained, the purpose of the article is two-fold: (i) to protect the employee from claims by those who have suffered harm as a result of what an employee has done, or omitted to do, in the course of his employment; and (ii) to give victims a more substantial remedy against the employer than they would typically have against the employee. Where the article applies, Russian law requires that any claim should be against the employer and not against the employee, and the employee is not directly liable to the injured person, although the protection afforded to the employee is limited in that an employer who is held liable for his employee's action is entitled to be indemnified by his employee: see article 1081 of the Civil Code, which provides that:
"One who has compensated for harm caused by another person (by an employee in his performance of employment, official, or other labour duties, by a person driving a means of transport, etc.) shall have the right of a claim back (subrogation) against this person in the amount of compensation paid, unless another amount is established by a statute…".
- Professor Sergeev considered that, "when Mr. Skarga and Mr. Izmaylov took bribes for concluding certain contracts and influenced by those bribes, made the Board of directors take unprofitable or wrongful decisions as far as Sovcomflot was concerned, they were acting against the Civil Code, against the Labour code and against their own employment contract. They went outside the scope of their employment". He considered that therefore article 1068 did not protect them against liability under article 1064 to a third party, such as a subsidiary of their employers. In his opinion, in some circumstances article 1068 would not protect the employee even though it applies so as to make the employer liable to the third party. Both employer and employee would then be liable.
- I reject Professor Sergeev's evidence that article 1068 can apply for the purpose of imposing employer's liability without also protecting the employee. It had not been stated in Professor Sergeev's reports that in some circumstances where article 1068 applies both employer and employee might be liable, and he expressed this view only in cross-examination. The only case which he identified as supporting this proposition was a decision of the Fifteenth Arbitrazh Appeals Court on 13 October 2008 in ruling no 15-AP-5643/2003. In that case ZAO Flora had brought a claim against Alkema Limited Liability Company on the grounds that Mr. N V Alkema, their Chief Executive Officer, had stolen industrial equipment. The court stated that the fact that an employee causes damage in the course of acting in the interests of his employer company is not sufficient in itself to prove that he acted with the knowledge or on the instructions of the employer and does not per se lead to the employer being liable under article 1068. I do not understand how the case illustrates that article 1068 can impose liability on the employer without affording protection to the employee. To my mind it simply shows that, in a case involving the theft of physical property, the court would not conclude on the facts that the crime had been done in the performance of employment duties.
- I prefer the evidence of Professor Maggs that, if article 1068 applies at all, it not only imposes liability on the employer, but also prevents the employee from being liable. This view is supported by the ruling of the Military Panel of Supreme Court of the Russian Federation dated 23 May 2003 in the case of claims by Sharokhova and others against Timkiv and another. The defendants were soldiers who had gone on a rampage in which they shot, injured and killed others in their troop: one of the defendants had used the gun with which he had been issued in connection with his military service, and the other had been on duty at the dugout where the shooting took place. It was held that their crimes were committed in the course of their duties as employees of their troop, and so the troop was held to be civilly liable for their crimes; and consequently it was held that the defendant soldiers were not civilly liable to the victims. Professor Sergeev described this as a "strange decision", which he suggested was driven by social considerations, and I accept that the court took a strikingly wide view of what constitutes performance of employment duties. He described it as a "ruling", rather than a full decision of the court. Nevertheless, as I read the judgment, the three judges of the Supreme Court of Russia considered that, because the employer was liable, therefore the individual defendants were not.
- Article 1068 applies when the employee was acting in the performance of his labour (or his employment) duties. This concept is broadly comparable to the common law's notion of an employee acting within the scope or course of his employment, but Professor Maggs emphasised that the Russian law concept of an employee acting in the performance of his labour duties is a very broad one. There is no single test as to whether an employee is performing his duties for the purpose of article 1068. The employee can be doing so although he commits a criminal act: Professor Sergeev accepted that unlawful and criminal acts can be done "in the performance of labour duties" within article 1068, and the ruling of the Military Panel of 23 May 2003 illustrates this. Equally, the fact that the victim even of a criminal act is a subsidiary company of the employer does not in itself mean that the act was not done by the employee in the performance of his duties. On the other hand, the ruling in the case of ZAO Flora v Alkema LLC, to which I have referred, illustrates that, if an employee does a criminal act, the fact that he caused damage in the course of acting in the interest of his employer does not mean that he was acting in the performance of his duties. As Professor Maggs explained, the Russian courts have consistently rejected arguments that thefts of physical property by employees were by way of the performance of labour duties, but he distinguished such cases from the position where an employee defrauds a subsidiary company by giving it dishonest instructions which are of a kind which he might properly give in the course of performing his duties. Thus, for example, he considered that, if Mr. Skarga gave instruction for a subsidiary of Sovcomflot to enter into a charterparty with a Standard Maritime defendant, the instruction would still be of a kind that Mr. Skarga was expected to give in the performance of his duties as an employee of Sovcomflot. This would be so even if the rate of hire or the terms of the charter were uncommercial and the instruction was given in order to benefit the charterer. I found his evidence about the application of article 1068 convincing.
- It is a question of fact whether any particular act is done in the performance of employment duties. Professor Maggs did not suggest that, whenever an employee in the position of Mr. Skarga or Mr. Izmaylov gives directions to, or makes arrangements for, a subsidiary company, he is necessarily performing his duties. It would depend upon what the subsidiary was instructed to do and how far it reflected the sort of instruction that he would properly give in his capacity as an employee. However, I accept Professor Maggs' evidence that the fact that arrangements or directions for the subsidiary were made for fraudulent purposes would not in itself prevent the employee from being protected by article 1068. He said that he had not seen any allegation in the present litigation that harm was caused to any subsidiary of Sovcomflot by Mr. Skarga giving instructions to subsidiaries or making contractual arrangements for subsidiaries which were outside what Russian law would regard as the scope of his duties, because "Mr. Skarga's duties included day-to-day management of Sovcomflot, which would cover relevant instructions to Sovcomflot subsidiaries". He gave similar evidence in relation to what Mr. Izmaylov did.
- It might be said that here Professor Maggs was expressing his own views about the facts of the case, which is not strictly the role of an expert witness of foreign law, but I agree with his assessment. The question depends upon the nature of the contracts made by the subsidiary companies of Sovcomflot and NSC that are said to have been made as a result of Mr. Skarga and Mr. Izmaylov dishonestly participating in the schemes, and upon what they did to bring about the contracts. I have seen no evidence that any of the contracts was of a kind that the subsidiaries could not properly have made if its terms had been commercial and the circumstances had justified it. Nor have I seen any evidence that Mr. Skarga or Mr. Izmaylov did anything to bring about the contracts, by way of giving instructions to subsidiary companies or participating in decisions of Sovcomflot or NSC or their subsidiary companies, which was different in kind from what they would have been expected to do in the course of their duties in relation to such a contract. The claimants have not identified any transaction to which these conclusions do not apply. I conclude that article 1068 would protect Mr. Skarga and Mr. Izmaylov from liability under article 1064 in respect of the complaints by the subsidiaries of Sovcomflot and NSC.
- I should refer to a further issue about what liability might arise under article 1064. The article defines the circumstances in which Russian law will hold a defendant liable for harm, but article 15 of the Civil Code states what compensation is to be awarded for any harm if there is liability. Professor Sergeev and Professor Maggs disagreed about the meaning and effect of article 15 and how compensation under it is to be measured. Article 15, which applies to the measure of compensation in cases of contractual liability as well as liability under article 1064, provides as follows:
"1. A person whose right has been violated may demand full compensation for the losses caused to him unless a statute or a contract provides for compensation for losses in a lesser amount.
2. Losses means the expenses that the person whose right was violated made or must make to reinstate the right that was violated, the loss of or injury to his property (actual damage), and also income not received that this person would have received under the usual conditions of civil commerce if his right had had not been violated (forgone benefit).
If the person who has violated a right has received income thereby, the person whose right has been violated has the right to demand – along with other losses - compensation for forgone benefit in a measure not less than such income."
- Thus, in some circumstances article 15 allows the recovery of "compensation for forgone benefit" in a minimum sum measured by the income of the person who has violated the right in question. It is to be observed that this provision operates by reference only to the income of that person, and not the income of any company or other person with whom the violator is associated.
- Professor Maggs considered that this provision allows recovery only of the amount of any immediate profits from the wrongdoing. He emphasised that the right arises if the defendant has received income "thereby", that is to say by violation of a right. He explained that the provision is typically deployed in cases where there has been violation of a trademark or other intellectual property and such violation occurs (or recurs) whenever a sale is made of the protected goods. The sale proceeds are income received by violation of the rights of the claimants because the sale itself is wrongful. As far as he was aware, the Russian courts have not applied the provision in other circumstances, and he considered therefore that if, for example, a ship were sold or chartered as a result of an uncommercial contract or one procured by bribery, payments that the purchaser or charterer received from an on-sale or a sub-charter would not generally be recoverable under this provision, because those receipts would not be caused sufficiently directly by the wrongdoing so as to have been received "thereby" for the purpose of this article.
- Professor Sergeev considered that article 15 is more generous to the claimant in that it allows his minimum recovery to be measured by the violator's income. In his opinion the provision is directed to any "incomes which, at the end of the day, are derived by the perpetrator", and that were "connected with" the breach. In effect, as the claimants submitted and I accept, his evidence was that it sufficed that the wrongful act allowed the wrongdoer to receive the income.
- The provision in article 15 was introduced into Russian law in 1995 and, as Professor Sergeev told me, no authority has considered how close a causative link between the income and the wrongdoing is required by the article. Professor Maggs acknowledged that the Russian courts did not, in the intellectual property cases upon which he relied, expressly state that the article requires a direct causation link of this kind that he described. Interpreting the provision as best I can by considering its wording and its purpose, I cannot accept that it is to be given as narrow an application as Professor Maggs described. Undoubtedly some causative link is required between the wrongdoing and the income by reference to which the claimant is entitled to measure his minimum compensation. The express purpose of the provision is not to make the wrongdoer disgorge his profit but to provide a minimum measure of compensation for "forgone benefit", and it seems to me that, if the article is given Professor Maggs' restrictive interpretation, the wrongdoer's income would be unlikely to reflect the claimant's minimum loss. This was, I think, why Professor Sergeev explained the position as follows when he was asked in cross-examination about whether, if a wrongdoer hired a vessel on charter at unduly favourable rates and profited from a favourable sub-charter in the second year of hire, the claimant could recover the amount of the charterers' income from the sub-charter: "Had it not been for the breach, then the victim in the second year could have jolly well sublet or leased out the cargo [sic] himself and would have derived an income by himself and in the current scenario it's the perpetrator who is deriving the second year income. So there is economic justification for that". The question, as I understand article 15, is whether, but for the violation of his rights, the claimant would under the usual conditions of civil commerce have received income corresponding in kind to that which the wrongdoer received, and I conclude that, if he would have done, he is entitled to recover by way of lost income no less than the corresponding income that the defendant in fact received. This, as I understood his evidence, was the view of Professor Sergeev, and I accept his evidence.
- Article 1102 of the Civil Code concerns what under English law would be termed unjust enrichment, and it provides as follows:
"1. A person who, without bases established by a statute, other legal acts, or a transaction, has acquired or economized property (the recipient) at the expense of another person (the victim) shall have the duty to return to the latter the unjustly acquired or economized property (unjust enrichment), with the exception of the cases, provided by Article 1109 of the present Code.
2. The rules provided by the present Chapter shall be applied regardless of whether the unjust enrichment was the result of the conduct of the acquirer of the property, the victim himself, third persons, or occurred against their will."
I should also set out articles 1103, 1105 and 1107.
"To the extent not otherwise established by the present Code, other statutes or other legal acts, nor otherwise follows from the nature of the respective relations, the rules provided by the present Chapter shall also be applied to claims:
1) for return of performance under an invalid transaction;
2) for the recovery of property by an owner from another's illegal possessions;
3) of one party in an obligation to another for return of performance in connection with this obligation;
4) for compensation for harm including that caused by the bad-faith conduct of the enriched person."
"1. In case of the impossibility of the return of the unjustly received or economized property in kind, the acquirer must compensate the victim for the actual value of this property at the time it was acquired and also for the losses caused by later change in the value of the property if the recipient has not compensated for its value promptly after he learned of the unjust enrichment.
2. A person who has unjustifiably made temporary use of another's property without the intent to acquire it or of another's services must compensate the victim for what the person economized as the result of such use at the price existing at the time when the use ended in the place where it occurred."
"1. A person who has unjustly received or economized property shall have the duty to return to or compensate the victim for all incomes that he extracted or should have extracted from the property from the time when he learned or should have learned of the unjust enrichment.
2. Interest for the use of another's assets (Article 395) shall be calculated on the sum of unjust monetary enrichment from the time when the acquirer learned or should have learned of the unjust receipt or saving of monetary assets."
- The effect of these provisions is that, where article 1102 applies, the defendant is liable to return the property and income received from it from the time that he knew or should have known of the unjust enrichment; and, if he is unable to return the property, he is liable to pay compensation.
- Professor Maggs considered that these remedies are available only against a person who has himself acquired property or has "economised" property, that is to say has been saved an expense by another person. He explained the notion of an expense being "economised" by a textbook example of A paying B's telephone bill by mistake with the result that B is not liable to pay it, or has "economised" - or saved - the amount of the bill. Thus, in Professor Maggs' view, if a corporate Standard Maritime defendant received property, no claim would lie against Mr. Nikitin on the basis that he was thereby enriched, although he accepted that, if Mr. Nikitin himself received the property belonging to a claimant through a company that he controlled (or indeed indirectly through an independent third party), the claimant might have a claim against him under article 1102.
- Professor Sergeev suggested that the article might be applied where a party has received a benefit through a company. He expressed his view as follows in his first report dated 8 May 2009:
"Furthermore, Mr. Nikitin can possibly be viewed as a person who unjustly enriched himself from the uncommercial contracts concluded by the companies under his control which provides grounds for presenting a claim directly against him under Article 1102 of the [Civil Code].
Even though it was companies under Mr. Nikitin's control which benefited from the uncommercial contracts, in my view this would not be an obstacle for presenting an unjust enrichment claim against Mr. Nikitin as the ultimate beneficiary. Taking into account the underdeveloped state of the Russian corporate law and its application in practice, this method of protection of civil law rights of the persons aggrieved by the uncommercial contracts might face certain difficulties in Russia. However, these difficulties would lie in the practical sphere of providing the links of unjust enrichment rather than in existence of any formal obstacles in Russian law to the application of this method of protection of civil law rights."
- As this passage from Professor Sergeev's report indicates, Russian law has not yet been developed so as to allow a claimant to deploy article 1102 in these circumstances, but Professor Sergeev considers that there is scope for the law to develop to allow property to be recovered from a fraudster who holds it in the name of the company. Professor Sergeev advanced this suggestion only tentatively. Indeed, he accepted that, as Russian law presently stands, a claim under article 1102 is available only against the actual recipient of a claimant's property. I conclude that this is indeed a requirement of article 1102: it seems to me required by the natural meaning of the article. After all, a claim can be made under the article where the defendant is not guilty of fraud or of any wrongdoing at all, and it was not suggested that, if its application was expanded as Professor Sergeev contemplated, its wider application should, or on any principled basis could, be only for cases of fraud.
- The defendants also submitted that the application of article 1102 is subject to further restrictions, which they said reflect the principle of Russian law that there should not be competition between claims. In particular, they said that no claim under article 1102 can be made in relation to property that has been transferred or saved as a result of a contractual relationship because that would introduce competition with the regime governing obligations arising from transactions, and no claim can be made where article 1064 applies because it would compete with the regime governing obligations arising as a result of causing harm. I accept this submission, and the evidence of Professor Maggs to that effect.
Mr. Skarga's liability to Sovcomflot and Mr. Izmaylov's liability to NSC
- Under article 53 of the Civil Code, which the claimants say applies to the members of the management bodies of all legal entities, it is provided that:
"A person who by virtue of a law or constitutive document of a juridical person acts in its name must operate in the interests of the juridical person represented by him in good faith and reasonably. He shall be obliged at the demand of the founders (or participants) of the juridical person, unless provided otherwise by a law or contract, to compensate for losses caused by him to the juridical person".
Article 71 of the Law of Joint Stock Companies provides as follows in relation to those concerned in the management of a Joint Stock Company such as Sovcomflot or NSC:
"1. The members of the board of directors (or supervisory board), one-person executive body (director, general director), an interim sole executive body, members of the collegial executive body (management board, directorate), and likewise the management organization or manager must, when exercising their rights and performing duties, operate in the interests of the company and exercise their rights and perform duties with respect to the company reasonably and in good faith.
2. Members of the board of directors (or supervisory board), one-person executive body (director, general director), an interim sole executive body, members of the collegial executive body (management board, directorate), and likewise the management organization or manager shall bear responsibility to the company for losses caused to the company due to their actions (or failure to act), unless other grounds and extent of responsibility have been established by federal laws.
In the board of directors (or supervisory board) and the collegial executive body (management board, directorate) the members who have voted against decision which entailed the causing of losses to the company or who did not take part in the voting shall not bear responsibility. …".
- Mr. Skarga argued that his liability to Sovcomflot is limited by the Russian Labour Code and by clause 6 of his contract of employment, which I have set out above. Mr. Izmaylov, whose contract of employment included a materially similar provision, advanced similar arguments about his liability to NSC.
- The essential issue of Russian law is whether Mr. Skarga might be liable to Sovcomflot for loss of profits despite the terms of his employment contract. In my judgment, in fact no such claim arises on the facts on this case because Sovcomflot (as opposed to its subsidiary companies) do not have such claim against Mr. Skarga. Nor, as I see it does NSC have such a claim against Mr. Izmaylov. Nevertheless, since I heard expert evidence and received full submissions about the issues of Russian law, I shall express my conclusions about them as briefly as I can.
- When Mr. Skarga was first employed by Sovcomflot and entered into his first contract of employment of 15 May 2000, and when Mr. Izmaylov entered into his contract of employment with NSC, the Code of Laws of Labour of 1971 was in force. Article 118 of that Code provided that, in the case of all employees, "Only direct actual damage is taken into account when determining the amount of damage: lost earnings are not taken into account". The wording of clause 6.3 of Mr. Skarga's contract of employment and the corresponding provision of Mr. Izmaylov's contract reflect article 118.
- A new Russian Labour Code (the "new Labour Code") came into force on 1 February 2002. The general rule for employees is that they are not liable to their employers for loss of profits, and this is stated in article 238: "An employee must compensate an employer for direct actual damage which he has caused. Revenues not received (loss of profit) are not recoverable from the employee."
- Further, unless certain exceptions apply, an employee's liability is restricted to one month's salary in respect of direct actual damage. Article 241 provides that, "An employee shall be materially liable for damage caused within the limit of his average monthly earnings, …". Article 243 provides that the employee shall be "materially liable in full measure for the damage caused" in some cases, including where damage is caused "as a result of criminal actions of an employee established by a court verdict"; and it also stated that "Material liability in full measure for damage caused to an employer may be established by a contract of employment concluded with the manager of an organisation…".
- Article 242 of the new Labour Code provided before 30 June 2006 that, "Full material liability of an employee consists in his liability to compensate for damage caused in full measure". This provision was amended with effect from 30 June 2006 so as to provide that, "Full material liability of an employee comprises his duty to compensate in full measure for direct actual damage caused to an employer". Professor Sergeev's opinion was that before the amendment article 242 provided for liability for loss of profit, and liability was confined to direct actual damage only by the amendment. Professor Maggs considered that the amendment simply clarified what was always the meaning and effect of article 242. I prefer the opinion of Professor Maggs: article 242, both before and after the amendment, is, to my mind, naturally understood to be directed to whether liability is limited to a month's earnings. It does not seem to me natural to interpret article 242 as providing that the employer can be compensated for loss of profits despite the limitation in article 238. This view seems to me to be confirmed by the explanation in Mironov, Labor Law of Russia, 2004 edition, which Professor Maggs described as a "standard labour textbook": see chapter 15 para 8.
- However, the claimants were also able to rely upon article 277 of the Labour Code, which came into force on 1 February 2002. It provides in the case of the manager of an organisation (and there is no dispute that Mr. Skarga and Mr. Izmaylov were covered by the provision) as follows: "The manager of an organisation shall bear full material liability for direct actual damage caused to the organisation. In cases specified by federal laws, the manager of an organisation shall compensate the organisation for losses caused by his culpable actions. In addition, the calculation of losses shall be carried out in accordance with the norms specified by civil legislation." The claimants submitted that, whereas if the case were governed by the first sentence of article 277 the liability of the manager would be in respect of material responsibility for direct actual damage (as other workers are liable for such damage under article 238), the position is different if the case falls under the second sentence because then it is covered by Federal Law. In such cases, the claimants argued, the manager is liable for "losses" caused by his wrongdoing, the liability is not confined to direct actual damage, and there is no proper basis for excluding compensation for financial loss or loss of profit. The "case provided by Federal law" upon which the claimants relied is in article 71 of the Law on Joint Stock Companies, which was in force before as well as after 1 February 2002 and which I have already set out. There is no dispute that the losses to which article 71 refers and for which the employee is liable include lost profits. Professor Maggs agreed that the Russian wording of the article makes that clear.
- I should add that Russian lawyers differ about whether Sovcomflot would be entitled to bring a claim against Mr. Skarga without relying upon article 277 of the Labour Code and directly under article 71 of the Civil Code. The potential relevance of this issue is that there are different limitation periods under Russian law for claims brought under the Civil Law (as a claim directly under article 71 would be) and a claim under the Labour Code (as a claim under article 277 of the Labour Code would be, even if the effect of article 277 is to engage article 71). This does not affect whether Mr. Skarga and Mr. Izmaylov might be liable to their employers for loss of profit. On any view, that depends upon the effect of article 71, either because the claim itself is brought under that article or because it is under article 277 of the Labour Code, which is to be taken to refer to article 71.
- The measure of compensation for liability under article 71 is stated in article 15 of the Civil Code, which I have already set out. The argument of Mr. Skarga and Mr. Izmaylov is that they are entitled to rely upon their contracts of employment to limit liability because article 15 specifically permits this, and that their contracts of employment should be interpreted as excluding liability for loss of profits because the wording of clause 6 of Mr. Skarga's contract and the comparable provision of Mr. Izmaylov's contract reflect that of article 188 of the 1971 Labour Code and of article 238 of the new Labour Code.
- I am unable to accept this argument. First, as I have said, Mr. Skarga and Mr. Izmaylov rely upon it to restrict their liability for intentional wrongdoing or dishonesty directed against Sovcomflot or NSC, and the relevant provisions of their employment contracts are not to be interpreted as applying in these circumstances. Secondly, article 15 does not, in its general application, allow a contractual provision to exclude liability for intentional breach of contract because article 401(4) of the Civil Code provides that "An agreement concluded in advance for eliminating or limiting liability for the intentional violation of an obligation is void". Although Professor Maggs considered that this applies only to contracts governed by the Civil Code and not to the employment contracts, which are governed by the Labour Codes, this does not mean that article 15 is to be understood to allow contractual exclusions or limitations of liability where there is intentional wrongdoing. Thirdly, I accept the evidence of Professor Sergeev that under article 71 of the Civil Code liability can be excluded only by reference to another law and not by reference to a contractual provision. Since article 71 is a more specific provision and specific norms take precedence over the general ones, liability under article 277 cannot be excluded contractually. Accordingly, while the measure of compensation under article 71 generally is determined by reference to article 15 and article 15 generally allows contractual exclusions of liability, this is displaced by article 71's more specific and narrower regime.
- I therefore reject the defendants' argument that their contracts of employment would protect them from a claim for lost profits by their employers.
- If, as the defendants submitted, the claims against them are governed by Russian law, they are entitled to rely upon Russian law limitation defences. The Foreign Limitation Periods Act, 1984 (the "1984 Act") provides, in place of the common law rule that limitation periods that barred a remedy are procedural and determined by English law as the lex fori, that generally, and subject to an exception based upon public policy, the limitation rules of the lex causae govern proceedings before the English courts. The Contracts (Applicable Law) Act 1990 is to broadly similar effect in that a law applicable to a contract by virtue of articles 3-6 and 12 of the Rome Convention (to which the 1990 Act gives effect) govern prescription and limitation of actions, subject to a public policy exception in different terms from those of the 1984 Act. Where another law confers a discretion relating to limitation, the English court must so far as practicable exercise the discretion "in the manner in which it is exercised in comparable cases by the courts of that other country": section 1(4) of the 1984 Act.
- The Russian limitation period governing claims under the Civil Code, including in particular claims under articles 1064 and 1102, are generally stated in articles 196 and 200 of the Code. Article 196 provides that the "general limitation period is established as three years", and article 200 provides that "The running of the period of limitations shall commence from the day when the person knew or should have known about the violation of his right". However, a different period governs claims under article 179 of the Code: article 181 provides for a period of one year from the date when the aggrieved party discovered the circumstances that provides grounds for declaring the transactions invalid. In the case of claims by Mr. Skarga and Mr. Izmaylov in relation to their contracts of employment the relevant limitation period is stated in article 392 of the Labour Code, which provides that: "an employer has the right to take court action in respect of disputes regarding compensation for damage inflicted to the employer, but such action must be taken no later than a year from the date the damage inflicted is discovered". The court may extend the period in exceptional cases, but nothing has been identified in this case that would constitute such exceptional circumstances.
- The question whether the claims against the claimants were brought within the stipulated periods is primarily a question of fact. It would be for the claimants to prove that they have brought their claims within three years of when they knew or should have known that their rights had been violated or, as the case might be, within a year of discovering the grounds for challenging a contract or the damage inflicted. The burden of proof is upon the claimants because, where, as in this case, a time bar has been pleaded, English law requires the claimants to show that the claim was brought within the stipulated period (Cartledge v E Jopling & Sons Limited,  AC 758, 784), and, even if the burden of proof is to be regarded as a matter of substantive law governed by the lex causae (see above), it has not been pleaded or proved that Russian law differs in this regard from English law and it is presumed not to do so.
- There are two questions of Russian law to which I should refer. It appeared in the reports of the expert witnesses and their memorandum of points of agreement and differences that they took different views about whether, as a matter of law, the limitation period might run from the date of a sentence of the defendant by a criminal court. Professor Maggs said that a criminal ruling does not, as a matter of Russian law, affect the limitation period for a civil claim. It initially appeared that Professor Sergeev disagreed and considered that, if a person's actions constituted fraud or another criminal offence, then the limitation period against him began when "a court sentence or a ruling of another authorized agency confirming the fact that the actions … constitute a crime became effective" (although the claimant was entitled to bring a civil claim earlier). He referred to cases in which the approach of the Russian courts was that the victim of a crime had or should have had the requisite knowledge for the limitation period to begin to run only upon a criminal being sentenced.
- It is not open to the claimants on the pleadings to rely upon such an argument, but in any case, as the evidence developed, it became apparent that Professor Sergeev was not describing a rule of substantive Russian law. I accept Professor Sergeev's evidence in so far as he was describing how in practice Russian courts have decided whether the claimant had or should have had the requisite knowledge. They often conclude, in cases where a defendant's liability arises from a criminal act and he has been convicted and sentenced for a criminal offence, that the period of limitation runs from the date upon which the defendant was sentenced. In his expert report in another case before this court, Professor Sergeev put it as follows:
"…the need for a relevant criminal finding for the purposes of establishing a civil claim is not a requirement of substantive law. Such a requirement is not identified in any substantive or even procedural law. It derives solely from court practice. A civil cause of action cannot be established in the court practice. It can only arise by virtue of law or regulatory legal acts. Court practice is not a source of law in Russia."
- Professor Sergeev told me that this remains his view. I do not accept that, as a matter of substantive Russian law, any limitation period for a civil claim runs from the date of a criminal sentence or other decision in criminal proceedings. The practice of the Russian courts is irrelevant for present purposes. It is a matter for the lex fori, in this case English law, to determine how the relevant facts are proved and the standard of proof.
- Secondly, I have already said that the claimants contend that they could bring claims against Mr. Skarga and Mr. Izmaylov under article 71 of the Civil Code, rather than under article 277 of the Labour Code and so have a longer limitation period for their claims. In view of my other conclusions, nothing turns upon this, but I accept Professor Maggs' evidence that Russian law would not allow the regime of the Labour Code to be circumvented in this way.
Private international law
- I come to the principles of private international law that determine the issues between the claimants and the defendants about which law is applicable. No question of private international law arises in the part 20 proceedings against Clarkson because no party in those proceedings pleads that any issue is governed by any law other than English law.
- The claims against Mr. Skarga and Mr. Izmaylov by Sovcomflot and NSC based upon breach of their contracts of employment are governed by Russian law because of the express terms of the contracts that they should be. The claims against them for breach of their fiduciary duties as directors of Sovcomflot and NSC are also governed by Russian law because that is the place of incorporation of the companies. Further clause 10.2 of Mr. Skarga's contracts of employment provided that "Any disputes that may arise between the parties to this contract are to be resolved by direct negotiations. If the parties fail to reach an agreement by negotiation (amicably), disputes are to be resolved via the courts in accordance with Russian Federation legislation in force". Similarly clause 10.2 of Mr. Izmaylov's contract of employment provided that Russian law governs "Any dispute that may arise between the parties to this contract", and therefore Russian law would govern NSC's pleaded claims against him for dishonestly assisting the brokers to act in breach of their fiduciary duties.
- Their duties as directors of the other claimant companies are governed by the law of the place of incorporation of the companies, even though this means that different laws govern issues about whether the same or closely related acts give rise to liabilities to different claimants: see Base Metal Trading Ltd. v Shamurin,  1 WLR 1157. Thus, as far as liability for breach of fiduciary duty is concerned, the claims by Fiona against Mr. Skarga and by Intrigue against Mr. Izmaylov are governed by Liberian law; the liability of Mr. Skarga to FML is governed by English law; the liability of Mr. Skarga to Sovchart is governed by Swiss law; and the liability of Mr. Skarga and Mr. Izmaylov to the other claimants is variously governed by the laws of Liberia, Cyprus and Malta.
- Mr. Skarga and Mr. Izmaylov dispute that the claimants have any claim against them that is not governed by Russian law. Their arguments are based upon (i) the claimants' pleading, and (ii) the nature of their directorships of subsidiary companies of Sovcomflot and NSC and of the claims against them.
- The claimants' pleading in the Fiona action (at paragraph 120.1 and elsewhere in the particulars of claim in relation to the SLB transactions and repeated in relation to all transactions for which Fiona gave approval) is that "all commercial decisions in relation to the business of Fiona were taken by Mr. Skarga in his capacity as Director-General of Sovcomflot", and Mr. Dunning argued that therefore it is not open to the claimants to allege that what Mr. Skarga did involved a breach of any duty owed to Fiona or to any company other than Sovcomflot. I do not so understand the claimants' pleading, and the case against Mr. Skarga was not conducted on this confined basis. An allegation that Mr. Skarga was acting in the capacity as Director-General of Sovcomflot does not mean that he was necessarily acting in no other capacity, and, for example, when he was signing the minutes of Fiona's board meetings, he was clearly acting as a director of Fiona. Had I otherwise reached conclusions in the claimants' favour against Mr. Skarga, I would not have upheld this argument based upon the claimants' pleading.
- However, I do accept Mr. Dunning's submission that, because of the vagueness of the allegations about what rights owed to the various claimants are said to have been breached so as to give rise to harm suffered by them or to profits on the part of the defendants, he has not been able properly to develop the arguments that Mr. Skarga would advance in relation to limitations periods under Russian law. Had my decision depended upon whether Mr. Skarga has a Russian law time-bar defence, I would have required the claimants to explain their case in more detail, and invited further submissions about the defence in light of that explanation.
- Mr. Bryan advanced a similar argument based upon the claimants' pleading in the Intrigue action. Having alleged duties owed to NSC under his contract of employment and as its President, the claimants pleaded that Mr. Izmaylov was "in breach of his fiduciary and other duties owed to NSC and the relevant ship-purchasing, ship-owning and ship-chartering companies in that" he was involved in the various schemes. It is said that this is naturally understood as referring only to the duties owed to NSC which have previously been set out in the pleading. Again, I do not consider that the pleading should be given this limited interpretation.
- Undoubtedly, Mr. Skarga was appointed to be a director of Fiona, FML and Sovchart because of his appointment to the office of Director-General of Sovcomflot. Equally, Mr. Izmaylov was appointed as a director of Intrigue because he was the President of NSC. In so far as they acted for these or other subsidiaries of Sovcomflot and NSC respectively, or took or participated in decisions of the subsidiaries, they did so, as it was put by Mr. Bryan, by dint of their positions as Director-General and President. The claimants often relied upon the same allegations of fact in support of their claims of breaches both of duties owed to the parent companies and of duties owed to one or more of the subsidiaries. The defendants argued that in these circumstances the claims cannot be governed by different laws, that the true basis of the claims is that they are for breach of duties owed to the parent companies in respect of what Mr. Skarga and Mr. Izmaylov did as Director-General of Sovcomflot and President of NSC respectively, and that therefore the claims made by all the claimants are governed by Russian law as the law governing whether they acted in accordance with their duties to Sovcomflot and NSC.
- I am unable to accept that argument. I do not consider that it is open to me to do so because of the decision of the Court of Appeal in the Base Metal Trading case (cit sup). The principle that the law of incorporation of a company determines whether a person has acted in breach of duties owed as a (de jure or shadow) director is not displaced where he owes his directorships to his position with another company, and it applies even though the consequence is that different laws determine whether the same acts give rise to a claim for breach of similar duties owed to different claimants. The question whether Mr. Skarga or Mr. Izmaylov owed any relevant duty to a subsidiary of Sovcomflot or NSC in respect of any act or decision relating to a transaction depends upon the specific facts. I reject the argument that, because of their relationships with the parent companies, all issues about their liability to subsidiary companies are governed by Russian law.
- I come to consider which law governs issues concerning the other claims against Mr. Skarga and Mr. Izmaylov and the claims against Mr. Nikitin and the Standard Maritime defendants.
- Staughton LJ observed in Macmillan Inc. v Bishopsgate Trust (No 3),  1 WLR 387 at p.391H and p.393G that, in cases that involve a foreign element and in which the court must decide what system of law is to be applied to the case as a whole or to a particular issue or particular issues, it is necessary to consider three questions: (i) how should the issue or issues between the parties be characterised; (ii) what connecting factor (or factors) between the issue(s) and a system of law determines which law is applied to determine the issue; and (iii) what system of law does the connecting factor (or do those connecting factors) require be applied. Within a week of the decision of the Court of Appeal in that case, the 1995 Act was enacted, which stipulates rules for deciding which law is to be applied for "determining issues relating to tort": see section 9(1). Where the statute applies, it answers the first question of Staughton LJ, and provides a statutory test to answer his second question. Section 11 states the "general rule" as follows:
"(1) The general rule is that the applicable law is the law of the country in which the events constituting the tort or delict in question occur.
(2) Where elements of those events occur in different countries, the applicable law under the general rule is to be taken as being –
(a) for a cause of action in respect of personal injury caused to an individual or death resulting from personal injury, the law of the country where the individual was when he sustained the injury;
(b) for a cause of action in respect of damage to property, the law of the country where the property was when it was damaged; and
(c) in any other case, the law of the country in which the most significant element or elements of those events occurred."
- Section 12 states a secondary rule that may displace the general rule:
"If it appears, in all the circumstances, from a comparison of –
(a) the significance of the factors which connect a tort or delict with the country whose law would be the applicable law under the general rule; and
(b) the significance of any factors connecting the tort or delict with another country,
that it is substantially more appropriate for the applicable law for determining the issues arising in the case, or any of those issues, to be the law of the other country, the general rule is displaced and the applicable law for determining those issues or that issue (as the case may be) is the law of that other country.
(2) The factors that may be taken into account as connecting a tort or delict with a country for the purposes of this section include, in particular, factors relating to the parties, to any of the events which constitute the tort or delict in question or to any of the circumstances or consequences of those events."
- The 1995 Act does not define the expressions "tort" and "relating to tort". Section 9(2) of the 1995 Act provides that: "The characterisation for the purposes of private international law of issues arising in a claim as issues relating to tort or delict is a matter for the courts of the forum". Therefore, the relevant question is whether an issue, not a claim or a cause of action, is one "relating to tort", and the characterisation is "for the purposes of international law". It is not a question of how the claim is formulated in the proceedings or how cause of action is classified in English law. This reflects the established approach of the common law to how the court determines which "connecting factors" between the issues and a system of law are relevant. In Macmillan Inc. v Bishopsgate Trust (No 3), (loc cit) at p.407B Auld LJ said this:
"Subject to what I shall say in a moment, characterisation or classification is governed by the lex fori. But characterisation or classification of what? It follows from what I have said that the proper approach is to look beyond the formulation of the claim and to identify according to the lex fori the true issue or issues thrown up by the claim and defence. This requires a parallel exercise in classification of the relevant rule of law. However, classification of an issue and rule of law for this purpose, the underlying principle of which is to strive for comity between competing legal systems, should not be constrained by particular notions or distinctions of the domestic law of the lex fori, or that of the competing system of law, which may have no counterpart in the other's system. Nor should the issue be defined too narrowly so that it attracts a particular domestic rule under the lex fori which may not be applicable under the other system:…".
- What has been called a "broad 'internationalist' view of legal concepts" (per Aikens J in Trafigura Beheer BV v Kookmin Bank Co,  2 Lloyd's Rep 455 at para 68) is required if the court is to fulfil the "overall aim … to identify the most appropriate law to govern a particular issue": Raiffeisen Zentrale Ostereich AG v Five Star General Trading LLC,  QB 825 at para 25 per Mance LJ. It does not matter that the issues arise in the context of equitable rather than legal claims: see Dicey, Morris & Collins (cit sup) at para 2-035; AG of England & Wales v R,  NZLR 91, 103 per Tipping J. Further, different laws might govern different claims arising from the same facts (see Base Metal Trading Ltd. v Shamurin, (cit sup) at para 57 per Tuckey LJ), and specifically the law governing the liability of the secondary party to breach of fiduciary duty (whether the claim is for dishonest assistance or for knowing receipt) is not necessarily that which governs the relationship between the fiduciary and his principal.
- There are found in the authorities different formulations of the rule for determining which law governs a claim for dishonestly procuring or assisting a breach of fiduciary duty: see for example: Arab Monetary Fund v Hashim, (29 July 1994); Dubai Aluminium v Salaam,  1 Ll.L.R. 415; Kuwait Oil Tanker Co v Al Bader,  2 AER (Comm.) 271; and Grupo Torras v Al Sabah (No 5),  Lloyd's PN 117. They were reviewed by Christopher Clarke J in OJSC Oil Co Yugraneft v Abramovich and ors,  EWHC 2613 (Comm) who expressed the view at para 223 that, "Dishonest assistance, a form of equitable wrongdoing, is so closely analogous to a claim in tort (as characterised for purely domestic purposes) that it should, I would have thought, be so characterised for private international law purposes". I agree with the view of Christopher Clarke J (which was not strictly necessary to his decision), and, as I understand the parties' submissions, there is no dispute that claims for dishonest assistance or procurement "relate to tort" and the 1995 Act stipulates the principles for determining which law governs the issues to which they give rise. It also stipulates the criteria for determining the law governing the issues that arise with regard to the claims in conspiracy and, so far as is relevant for present purposes, the claims based upon allegations of bribery. (I do not have to determine any claim that any contract is to be rescinded because it was influenced by bribery. That question might well be determined by a different law from that which governs the issues relating to the claims before me, being determined by the law governing the contract. I am considering the liability of persons said to have paid or received bribes.)
- The claimants argued, however, that, even if the defendants' liability is governed, as the defendants submitted, by Russian law or by another law other than English, nevertheless English law as the law of the forum governs what remedies are available if liability is established, and therefore, in particular, it determines whether the claimants are entitled to an account of profits if the defendants are liable for what English law would regard as liability for dishonest assistance or bribery. In support of this contention they relied upon the general principle stated in Dicey, Morris & Collins (loc cit) at para 7-006: "The nature of the remedy is to be determined by the lex fori. Thus if the claimant is by the lex causae entitled only to damages but is by English law entitled to specific relief, the latter type of remedy is available in England". The principle was considered by the House of Lords in Harding v Wealands,  2 AC 1, in which case damages were claimed for personal injuries by a claimant who had been injured in the road accident in New South Wales, Australia, and a preliminary question arose as to whether the assessment of damages was governed by the law of England as lex fori or by the law of New South Wales as lex causae. Lord Hoffmann said (at para 24) that, while the question of whether there was actionable damage so as to determine whether there was an actionable injury is for the lex causae, "whether the claimant is awarded money damages (and if so how much) or, for example, restitution in kind, is a question of remedy".
- I reject the claimants' submission for two reasons. First, the basis of the principles stated in Dicey, Morris & Collins is the distinction between questions of substantive law which are governed by the lex causae, and questions of procedure, which are governed by the lex fori. This is not affected by the 1995 Act: section 14 provides that section 10 does not affect "any rules of law", and specifically that it did not affect "any rules of evidence, pleading or practice or authorise questions of procedure in any proceedings to be determined otherwise than in accordance with the law of the forum". The well-established rule of English law is that questions about what heads of damage are recoverable are questions of substantive law. This was clearly stated in Boys v Chaplin,  AC 356, at p. 379 per Lord Hodson, p. 393 per Lord Wilberforce and pp. 394-5 per Lord Pearson.
- Harding v Wealands was concerned with the effect of a New South Wales statute, which imposed restrictions on the amount of compensatory damages that could be recovered for injury in a road traffic accident, and held that the effect of the statute upon the quantum of recoverable damages was governed as a procedural issue by the lex fori. I cannot accept that the House of Lords intended to qualify the established distinction between questions about whether a type or head of damages is recoverable, which are categorised as questions of substantive law, and questions of the quantification of damages in respect of a recoverable type of damage. It was recognised by Lord Hoffmann (at  2 AC para 24) that:
"… it makes no sense simply to say that someone is liable in tort. He must be liable for something and the rules which determine what he is liable for are inseparable from the rules which determine the conduct which gives rise to liability".
- Secondly, if English law as the lex fori does determine whether a remedy of an account or other remedy is available for a wrong established under a foreign law as the lex causae, this does not mean that, having established liability against a defendant, the court will then determine what remedies would be available on the particular facts under English law. The questions would be what is the nature of the liability under the foreign law, and what remedy or remedies would English law provide for English law liability similar or analogous to the kind of liability established under the foreign law. On the facts of this case, this would require in particular consideration of the nature of liability under article 1064 of the Russian Civil Code, which, as I have said, provides that, "Harm caused to the person or property of a citizen and also harm caused to the property of a legal person shall be subject to compensation in full by the person who has caused the harm …". The nature of this liability is similar to or analogous to English tortious liability giving rise to a claim for compensatory damages. It is nothing to the point that, on the particular facts that gave rise to a liability under article 1064, English law would recognise a cause of action which affords the remedy of an account. Nor is it relevant that the English court came to apply Russian law and so to recognise a liability under article 1064 because questions about that cause of action relate to tort within the meaning of the 1995 Act. The question is what remedy English law provides for liability of the kind that article 1064 defines, and the answer is that in those circumstances English law provides a remedy of compensatory damages and not an account. The remedy of an account reflects the nature of a fiduciary's obligation, and is characteristic of liability associated with breach of fiduciary duty, which is not a feature of liability under article 1064.
- I come to the question of the law governing liability for knowing receipt. The nature of this cause of action is different from that of dishonest assistance. As it was put in Grupo Torras SA v Al Sabah, (cit sup) at para 122, "One is a receipt-based liability which may on examination prove to be either a vindication of persistent property rights or personal restitutionary claim based on unjust enrichment by subtraction; the other is a fault-based liability as an accessory to a breach of fiduciary duty". Knowing receipt is not a tort or analogous thereto. I do not accept the submission of the Standard Maritime defendants that, because the claims are said to result from conspiracies between Mr. Nikitin and Mr. Skarga and others in the case of the Fiona action and the second Fiona action and between Mr. Nikitin and Mr. Izmaylov and others in the case of the Intrigue action, therefore the issues arising in respect of the knowing receipt claims "relate to tort" and the 1995 Act therefore determines the question which law governs the claims, or rather which law governs the issues to which the claims give rise. All that this shows is that the alleged background to the knowing receipt claims might give rise to claims in tort. It does not mean that the issues arising in the knowing receipt claims relate to tort.
- It is said in Dicey, Morris & Collins, The Conflict of Laws, cit sup, at para 34-041 that the conclusion to be drawn from the authorities was that "an equitable claim which is found in an allegation of unlawful or knowing receipt, or any other equitable claim to disgorge an unjust enrichment, will fall within [the Rule governing restitutionary claims]. But a claim which is founded on an allegation of wrongdoing for which compensation is sought will not do so, even if English domestic law would regard the liability as equitable". However, the law governing the obligation to restore a benefit is stated tentatively at para 34R-001:
"(1) The obligation to restore the benefit of an enrichment obtained at another person's expense is governed by the proper law of the obligation.
(2) The proper law of the obligation is (semble) determined as follows:
(a) If the obligation arises in connection with a contract, its proper law is the law applicable to the contract;
(b) If it arises in connection with a transaction concerning an immovable (land), its proper law is the law of the country where the immovable is situated (lex situs)
(c) If it arises in any other circumstances, its proper law is the law of the country where the enrichment occurs."
- If the Rule is intended to be applied rigidly, it is not supported by authority, and a more flexible approach has been preferred in the Scottish case of Baring Bros & Co Ltd. v Cunninghame DC,  CLC 108 and by Christopher Clarke J in Yugraneft v Abramovich, (loc cit) at para 247, who stated the position thus:
"If there is a contractual or similar relationship between the claimant and the defendant, the law of that relationship is likely to govern. If the parties are complete strangers and the defendant is a recipient from a wrongdoer, the place of receipt is likely to be relevant, although that may well not be so if, for instance, the place of receipt is a transitory home. If the defendant is the primary wrongdoer or the instigator of, or someone vicariously responsible for, the wrongdoing, it is likely to be relevant to examine where the wrongdoing and its effects took place."
- Citing these authorities, the Standard Maritime defendants against whom the claims of knowing receipt are pursued submitted that the law governing knowing receipt claims is that law of the place with which they have the closest and most real connection. The claimants did not submit that the governing law is determined by applying inflexibly the rule stated by Dicey, Morris & Collins. They submitted that the restitutionary claims for knowing receipt are governed by the law which has the closest connection with the obligation to restore the unjust enrichment, which in cases in which the obligation arises in connection with a contract is likely to be the law applicable to the contract and otherwise (except where the claim is in respect of real property) the law of the place where the enrichment occurs. Thus, the difference between the parties' formulations of the rule to determine the governing law appears to be that, whereas the Standard Maritime defendants referred to the law with the closest (or closest and most real) connection with the claims, the claimants referred to the closest connection with the obligation to restore the receipt. This distinction does not, as I see it, give rise to a difference of any significance, at least for present purposes, but, if it matter, I would adopt the rather broader formulation of the Standard Maritime defendants. The question which considerations have a particular significance for identifying that connection depends upon the facts of the case.
- In applying these principles, I shall first consider the claims in the Fiona actions and start with the claims in conspiracy. The defendants first submitted that the thrust of the allegation against them is that the transactions in the various schemes were all undertaken pursuant to a single overarching conspiracy by which bribes were paid or promised by or on behalf of Mr. Nikitin in order to bring about uncommercial transactions which would benefit him and his companies at the expense of the Sovcomflot group. The claims in conspiracy, and the other claims, should all be regarded as manifestations of this single scheme, and they are governed by the law of Russia, where the events most significant to the scheme occurred. It was a conspiracy which originated in Russia, which was targeted at a group controlled by a Russian company, which was for the benefit of a Russian businessman and which depended on and was characterised by the corruption of the Director-General of Sovcomflot, who worked from the group's headquarters in Moscow.
- In support of this submission, the defendants referred to the approach adopted by Moore-Bick J in Kuwait Oil Tanker Co v Al Bada, unrept, 15 December 1998, who considered a claim of conspiracy to embezzle money from Kuwaiti claimants through various schemes, some of which were carried out in London and through charterparties concluded in London. The position was described by the Court of Appeal,  EWCA Civ 160 at para 173:
"Briefly stated, the claimants contended that the design underlying the defendants' fraudulent activities was to generate funds outside Kuwait, the primary location chosen to effect such design being London. The moneys were largely obtained through Clarksons in London, Mr. McCoy playing a central role in the events which gave rise to the proceedings; of the 27 charterparties used by the defendants as part of their fraudulent conspiracy, only six were signed in Kuwait and the rest were signed in London; the overt acts of the conspirators in effecting their frauds were substantially committed in London, schemes I, II and III all involving the procurement of Clarksons to remove money from accounts held by them on the claimants' behalf in London, largely in cash or traveller's cheques delivered in London; and the bulk of the known enrichment took place in London rather than Kuwait."
- Moore-Bick J decided that in substance the tort was committed in Kuwait. He described one of the schemes carried out through London as "another manifestation of the original conspiracy" and did not consider connections with London to be sufficient for the tort to be regarded as committed in England. To my mind, the defendants derive little assistance from the Kuwait Oil Tanker Co case. On any view the enquiry of Moore-Bick J was fact-sensitive and he was applying established principles to the case before him. I do not understand him to have decided that, where defendants collude to carry out a number of wrongful schemes, all the wrongdoing is necessarily governed by the same law. In any case the 1995 Act did not apply in the Kuwait Oil Tanker Co case, and in Morin v Bonhams & Brooks,  1 Lloyd's Rep 708 Mance L.J. warned against turning too readily to earlier cases when considering the application of the 1995 Act. I accept the claimants' submission that issues arising from the various claims in conspiracy in respect of wrongful acts done pursuant to it might, upon a proper application of the statute, be governed by different laws, and that the proper approach is to consider the claims in respect of each of the schemes separately. Indeed, it might in principle be right to consider separately the application of the 1995 Act to each transaction which is impugned, but in my view that is an unnecessary step on the facts of this case.
- The first question under the 1995 Act is what law applies if the general rule stated in section 11 is not displaced: that is to say, where did the events constituting the tort occur, and if they occurred in different countries where did the most significant element or elements of the events occur? This requires an analysis of the elements of the tort of conspiracy as a matter of law and, if the elements occurred in different countries, a judgment about the "significance" of the different elements in order to determine in which country there occurred the elements which, in cumulative significance, outweigh the elements that occurred in any other country. In English law the elements of the tort of conspiracy include not only an agreement but "concerted action taken pursuant to agreement": Lonrho Ltd. v Shell Petroleum Co Ltd. (No 2),  AC 173, at p.188F per Lord Diplock. Damage is an element of the tort, and damage comes about not from any agreement of itself but from acts done pursuant to it.
- As I have said, in my view it is right to consider separately the elements of the tort of conspiracy in relation to each scheme. However, the defendants are able to identify elements relating to the agreement or collusion which are common to all the parts of the claimants' conspiracy claims in so far as they allege that Mr. Skarga was party to the collusion against Sovcomflot. (I leave aside for the time being their secondary case in relation to the commission claims that there was a conspiracy or conspiracies involving Mr. Nikitin in which Mr. Skarga did not participate.) The central thrust of the claimants' allegations in relation to each scheme is that Mr. Nikitin was dishonestly working with Sovcomflot's Director-General, Mr. Skarga, and their Chief Financial Officer, Mr. Borisenko, to secure the group's agreement to transactions and arrangements which favoured him. I conclude that generally Mr. Nikitin would have had any discussions with Mr. Skarga and Mr. Borisenko in Russia, although I accept that on occasions there will have been some discussions outside Russia, such as when Mr. Nikitin and Mr. Skarga were on holiday together in September 2004. Further, in so far as Mr. Skarga or indeed Mr. Borisenko implemented an agreed scheme by ensuring that Sovcomflot or one of the companies in the group entered into the transactions, they generally did so when they were in Russia. For example, all the meetings of the Sovcomflot Executive Board which decided upon, approved or ratified transactions took place in Russia, and minutes of meetings of the Fiona board were signed in Russia by Mr. Skarga, Mr. Borisenko and others. Mr. Privalov, as the claimants allege, was party to the schemes (other than the Sovcomflot time charters scheme), and, working from London, provided important assistance to implement them, but the defendants pointed out that, according to Mr. Privalov's own evidence, his discussions with Mr. Nikitin, Mr. Skarga and Mr. Borisenko took place sometimes in Russia and on other occasions in London or elsewhere. In any event, it seems to me that, if, as the claimants allege, Mr. Skarga was party to the schemes, Mr. Nikitin's collusion with him as Sovcomflot's most senior executive is of greater significance than Mr. Privalov's relatively junior participation in them, and Mr. Skarga's role in implementing them by way of ensuring that Sovcomflot agreed to transactions designed to benefit Mr. Nikitin and his companies at Sovcomflot's expense was, in terms of identifying the wrongful acts that caused Sovcomflot damage, of greater significance than the arrangements that Mr. Privalov made in the London market in order to implement the transactions. In substance the impact of the financial damage was suffered by Sovcomflot in Russia.
- Against this background, I should refer to the particular considerations upon which the claimants relied in relation to the schemes in support of their contention that the most significant elements of the wrongdoing occurred in England, or at least outside Russia. These will be explained further when I later deal with the various schemes.
i) In the case of the Sovcomflot Clarkson commissions scheme, the claimants said that (a) Mr. Nikitin made his arrangement with Clarkson in England, and (b) Mr. Privalov and Mr. Gale carried out the transactions under the scheme in London.
ii) In the case of the Tam commissions scheme, the claimants said that the scheme was carried out in England by Mr. Privalov and Mr. Andrew Wettern, an English solicitor and then a partner in the firm of Watson, Farley and Williams ("WFW") in London.
iii) In the case of the hull no 1231 commission scheme, the claimants relied upon the facts that Mr. Privalov conducted negotiations with BCV in England, as well as in Switzerland, and that the agreements by which the scheme was implemented were prepared by Mr. Wettern in England (although the loan agreement was executed in Russia).
iv) The claimants' case is that the arrangement between Mr. Skarga, Mr. Privalov and Mr. Bonehill for the Norstar commissions scheme was made or confirmed at a meeting in Switzerland. They relied, however, upon the fact that Mr. Privalov arranged in England for payments to be made under it and otherwise to carry it out.
v) The claimants recognised with regard to the RCB scheme that some of the relevant events, including discussions between Mr. Cepollina and RCB, meetings with RCB, arrangements with BCV and the formal closing of the agreement to acquire the debt, occurred in Switzerland, and that the Sovcomflot Executive Board meeting of 9 August 2001 took place in Russia. However, they said that the most significant elements of the wrongdoing took place in England because Lawrence Graham discussed the matter with Mr. Privalov and drew up documentation in England.
vi) In the case of the SLB arrangements scheme, the claimants relied upon the facts that Mr. Privalov negotiated the transactions in London, that Mr. Wettern prepared the documentation in London and that the documentation for the SLB arrangements concluded in November 2002 (to which I shall refer as the "November SLB arrangements") was executed in England. However, the documentation for the "Fili" transactions, and the SLB arrangements concluded in July 2002 (the "July SLB arrangements") was signed in Russia.
vii) In the case of the termination of the SLB arrangements scheme, the claimants observed (a) that Mr. Gale was in England when he reduced the value of the Arbat vessels, and (b) that the documentation was drawn up by Mr. Wettern in England and executed in England by Mr. Wettern and Mr. Privalov.
viii) In the case of the newbuildings scheme, the agreements whereby the Standard Maritime defendants acquired the benefit of the options and shareholdings were drawn up in England and executed in England. The claimants also relied upon the fact that the Supplemental Agreement to which I shall refer was drawn up by Mr. Wettern in England
- The claimants did not argue that, as far as the evidence goes, any element of the events constituting the wrongs in relation to the Sovcomflot time charters scheme or the "Romea Champion" commission scheme occurred in England. The time charters record that they were made in Switzerland, except in the case of the charters of the "Fili" and the "Azov Sea" which were stated to be made in Finland. The claimants argued that, if the law governing issues about the Sovcomflot time charters scheme were to be determined by the general rule, the law of the country where the most significant elements of the events constituting the tort occurred would be Swiss or Finnish, but that those laws are displaced by English law because of the secondary rule. They said that the most significant elements of the events constituting the "Romea Champion" commission scheme occurred in Switzerland because the scheme was carried out when Sovchart acted in Switzerland on Mr. Skarga's instructions, when Fiona paid money from their Swiss bank account to Sovchart's Swiss bank account, and when the money was then transferred to PNP's Swiss bank account and on to Milmont's Swiss bank account.
- I consider that some of the matters upon which the claimants relied are not elements of the events that constitute a conspiracy relating to the scheme in question or to a transaction under it, and the conspiracies are the focus of the claimants' allegations. Although lawyers' documentation was required in order to carry out the schemes, I do not regard the drafting work of Lawrence Graham and Mr. Wettern as an event constituting the tort of conspiracy. In the case of the newbuildings scheme, the Supplemental Agreement was drawn up after any tort had been completed. In any event, I would not consider these matters to be significant events for the purpose of deciding where the tort is to be regarded as having occurred. I have explained why I consider the part played in London by Mr. Privalov in carrying out the schemes to be less significant than the events in Russia. The same applies to the part played in Switzerland by Sovchart in carrying out the Sovcomflot time charters scheme and the "Romea Champion" commission scheme.
- The claimants' arguments are strongest, as it seems to me, in relation to the other commissions schemes, because of the role played by the brokers in London and because Clarkson were engaged to act for Sovcomflot and the Clarkson arrangements with Mr. Gale were made in London. But here too, on balance, I accept the defendants' submission that, if Mr. Skarga was a participant in the schemes, the most significant elements of the conspiracy in relation to them occurred in Russia. It was there that the crucial arrangements in relation to the schemes would have been made between Mr. Nikitin and the senior conspirator in the Sovcomflot organisation, the originating steps to carry them out were taken in Russia, and the events in London flowed from what occurred in Russia. In my judgment, therefore, if the general rule under the 1995 Act is applied to the claims of conspiracy in relation to the various Sovcomflot schemes, the applicable law is Russian.
- The claimants submitted that, nevertheless, the issues relating to the conspiracy claims are to be determined by English law because the general rule is displaced by the secondary rule in section 12 of the 1995 Act; that is to say, that it is apparent that it is substantially more appropriate for the issues to be determined by English law if the significance of the factors that connect the tort with Russia are compared with the significance of the factors that connect the tort with England. The factors that may be considered in applying the secondary rule are not limited to where events constituting the tort occurred. The claimants relied not only upon the considerations that they invoked in relation to the general rule but also upon the fact that the contracts and arrangements with yards, purchasers of vessels, charterers and other third parties whereby the various schemes were implemented were governed by English law through the parties' express choice and in many cases had English jurisdiction or English or London arbitration provisions.
- The law indicated by the general rule is not displaced simply because on balance, when all factors relating to a tort are considered, those that connect the tort with a different country prevail. That would emasculate the general rule. The secondary rule is applied only if it indicates that another law is substantially more appropriate. In my judgment, the considerations identified by the claimants, including the terms of the contracts implementing the schemes, are not sufficient to displace the general rule so as to have any issues relating to the conspiracy claims in the Fiona actions determined by English law. On the contrary, when the secondary rule is considered, the defendants for their part are entitled to invoke "factors relating to the parties" (see section 12(2) of the 1995 Act), and so they rely upon the facts that Sovcomflot is the parent company of a nationalised Russian group of strategic importance and that the defendants are for the most part Russian individuals or companies said to be owned or controlled by Russians. These factors seem to me of more importance than the terms of the agreements with third parties through which the schemes were implemented, and, had I not concluded that the general rule requires the application of Russian law, I would have accepted the defendants' submission that the secondary rule applies and that English or any other law is displaced in favour of Russian law.
- It is true that the schemes said to have been devised by the conspirators were played out on the international stage. They implemented their schemes in different countries according to the business and activity involved. They used companies incorporated in the BVI and elsewhere. They carried on their banking and conducted their financial dealings through Swiss banks. They dealt with sales and purchases of ships and ship financing transactions through London. Sovcomflot dealt with charters in Switzerland. Because many of the schemes concerned sales and purchases and ship financing, much of the business about which the claimants complain was done through London. Because the schemes concerned shipping, the contractual arrangements by which they were conducted were governed by English law, as is commonly chosen by the parties to contracts of this kind. However, the focus of the conspiracy remained Russian and the collusion was based in Russia although the schemes were played out elsewhere.
- I come to the claimants' alternative contention about the commissions claims, that there were conspiracies to which Mr. Skarga was not a party. The thrust of those claims is that Mr. Nikitin, with Mr. Privalov's assistance, made agreements with the brokers whereby they made payments to him or his companies at the expense of the Sovcomflot group. Although the claimants' pleadings do not clearly distinguish these alternative contentions about the conspiracies, the shape of the pleadings does not rule the scope of the court's inquiry, and the law applicable to the issues that arise upon the alternative contention require separate consideration. Here any discussions or exchanges between Mr. Nikitin and Mr. Skarga and anything that Mr. Skarga did in Russia to give effect to an arrangement with Mr. Nikitin cannot be invoked by the defendants as being events constituting the tort or factors connecting the tort to Russia. The nature of the alternative contention in relation to the commissions claims is, to put it in general terms, that Mr. Nikitin approached Mr. Privalov and brokers working in the London market because he saw the opportunity to exploit the business that they were handling in London to his advantage and he enticed them, in breach of their duties to their principals, to assist him to exploit it. If that was the nature of the conspiracy, the significant events were Mr. Nikitin's meetings with the brokers and Mr. Privalov in London to establish the arrangements between them and the business conducted in England through the London market in order to give effect to the arrangements. In my judgment, the application of the general rule under the 1995 Act means that issues relating to a conspiracy of this kind in relation to commission schemes are determined by English law. Indeed, Mr. Berry in his closing submissions did not really dispute this.
- The position about the "Romea Champion" commission scheme is different from that of the other Sovcomflot commissions schemes. There is no evidence about where any events constituting the alleged tort occurred, except that commission was routed to Milmont through payments between Swiss bank accounts. In view of my conclusions of fact, I need not, I think, consider further which law governs this small claim.
- The 1995 Act also applies 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, and the same considerations to which I have referred in relation to the conspiracy claims lead me to similar conclusions in relation to these other claims. In so far as the claims are made on the basis that Mr. Skarga was party to the schemes, issues relating to them are to be determined in accordance with Russian law. I observe that the claimants did not submit that in these circumstances any claim against Mr. Nikitin or the Standard Maritime defendants on the basis of procuring a breach of fiduciary duty on the part of brokers or of Mr. Privalov or of FML because of Mr. Privalov's conduct is to be determined by a different law from claims put on the basis that they procured a breach of fiduciary duty on the part of Mr. Skarga in relation to the same scheme. I consider that they were right not to argue that such fine distinctions should be made. However, as with the conspiracy claims, the position is different if Mr. Skarga was not party to the schemes, and I consider, for the reasons explained in relation to conspiracy, that in these circumstances the issues are to be determined by English law.
- In reaching this conclusion, I do not overlook that, in the case of the claims in bribery, the general rule under the 1995 Act requires that consideration be given to where the bribe occurred. Payments were not made to Mr. Privalov or to Mr. Borisenko in Russia. The claimants' case is that Mr. Nikitin arranged for payments for Mr. Privalov's benefit to be made into accounts in the Isle of Man and, in larger amounts, into accounts in Switzerland. They said that Mr. Nikitin and Mr. Skarga arranged for payments for Mr. Borisenko's benefit to an account in Switzerland. As for payments and other benefits for Mr. Skarga, the claimants do not claim to have discovered where payments have been made to him on a comparable scale. The benefits that they claim to have identified are holidays in various countries other than either Russia or England, an educational visit to England for one of Mr. Skarga's children, payments to discharge a credit card account made in Switzerland and a payment said to relate to Russian land purchased by Mrs. Skarga, which was made into an account in Cyprus. None of these considerations materially strengthens the claimants' contention that English law governs issues between the parties. On the contrary, the nature of the bribery allegations made by the claimants to my mind strengthens the defendants' contention that Russian law applies to issues where the 1995 Act determines the governing law. Bribery includes not only payments and the provision of benefits but also the promise of them. The claimants' case is that Mr. Borisenko was bribed by promises made in Russia. They also say that, at least in relation to the SLB arrangements scheme, Mr. Privalov was promised payments by way of bribes when he met Mr. Nikitin and Mr. Skarga in Russia. If Mr. Skarga received significant bribes from Mr. Nikitin, it is likely that they were arranged and promised in Russia.
- There are claims against Standard Maritime defendants for knowing receipt of sums that they received in relation to RCB scheme, the newbuildings scheme, the Sovcomflot commissions claims, the hull no 1231 commission scheme and the "Romea Champion" commission scheme. The claimants' case is that, upon Mr. Nikitin's directions, various companies, including Standard Maritime defendants, received payments into bank accounts in Switzerland. As I have said, in some circumstances the place where the payment was received is likely to be relevant to determining which law has the closest and most real connection to issues relating to a claim for knowing receipt, and so to determining which law governs them, but when, as is alleged here, payments were made into accounts in a Swiss branch of a Swiss bank in the name of a BVI company owned or said to be owned through bearer shares by a Russian or by Russians, I do not find it easy to determine where the payment was received in any meaningful or substantial sense, and I am unable to accept that this question plays any significant part in deciding which law is most really and closely connected with the claim.
- I consider that in this case what is more significant is what led to the payments being made in circumstances that justify a claim against the recipient. This approach requires that the governing law should be determined by reference to similar considerations to those which apply under the 1995 Act. In particular, it means that the important considerations include where any breach of fiduciary duty that caused or allowed the payment to be made took place, and how and where the recipient came to know that the claimants were entitled to the monies paid. In other words, important considerations are that, as the claimants primarily contended, the payments were made because of events in Russia where Mr. Skarga, and also Mr. Borisenko, acted in breach of their fiduciary duties and Mr. Nikitin, through the arrangements that he had made, knew that the payments were made in breach of such duties. I therefore conclude that, in so far as the knowing receipt claims are brought on the basis that the payments were made in circumstances involving dishonesty and breach of duty on the part of Mr. Skarga, their closest and most real connection is with Russian law, and that issues relating to the claims are governed by Russian law. In so far as they relate to a commissions claim made on the alternative basis, they are based upon breaches of fiduciary duties committed by brokers or by Mr. Privalov, both of whom were working from London. Although the claims depend upon Mr. Nikitin knowing of the breaches of duty, I conclude that in these circumstances the closest and most real connection is with English law, and so issues are governed by English law.
- I reach similar conclusions with regard to the claims in the Intrigue action for similar reasons. The parties' submissions mirrored those in the Fiona actions. I consider that, in so far as the claims are made on basis that Mr. Izmaylov was party to schemes with Mr. Nikitin and others, the issues relating to those claims are governed by Russian law. The collusion between Mr. Nikitin and Mr. Izmaylov, which according to the claimants' primary case is the crucial relationship that involved NSC in the impugned transactions, took place in Russia, and Mr. Izmaylov worked in Russia to give effect to what they had arranged. In so far as commissions claims are pursued on the alternative basis that, notwithstanding there was no relevant breach of duty on the part of Mr. Izmaylov, Mr. Nikitin and the Standard Maritime defendants are liable for their part in schemes involving the brokers, I conclude that the issues between the parties are to be determined in accordance with English law.
- Before considering the various schemes and the evidence upon which the claimants rely in support of their specific allegations of dishonesty, I shall say something about some more general matters, including:
i) The personalities, relationships and disputes that are the background to this litigation, which according to the defendants explain why the claimants have brought their claims.
ii) The nature and extent of the investigations that the claimants have conducted into the defendants' affairs.
iii) The corporate and management structure of the Sovcomflot group and the NSC group.
iv) The financial position of the Sovcomflot group and their financial and business strategies.
v) The credibility of the evidence of some of the claimants' witnesses.
The defendants' case about why the Fiona actions were brought
- Mr. Nikitin was born in St Petersburg, attended the Ship Building Institute there in the 1970s and worked in the city between 1978 and 1982 and again from 1987. Between 1982 and 1987 he studied and worked in Moscow, and, when studying for a postgraduate qualification in foreign trade, he met Mr. Malov, and through him Mr. Katkov and Mr. Timchenko.
- In 1987 Mr. Adolf Smirnov, who was the Deputy General Manager of Kirishinefteorgsintez (which is generally known as "Kinef"), a major Russian refinery and a subsidiary of Surgutneftegaz, one of Russia largest oil and gas producers, was responsible for setting up a trading organisation for Kinef. He established Kirishineftekhimexport (or Kirishi petroleum chemical export), which is also known as and to which I refer as "Kinex", and he recruited Mr. Malov to be Kinex's Deputy General Manager. Kinex were responsible for trading Kinef's oil products and making overseas purchases. In the late 1980s Mr. Timchenko and then Mr. Katkov joined Kinex. According to Mr. Nikitin, around this time Mr. Timchenko established good relations with Mr. Vladimir Putin, who was then the deputy mayor of St Petersburg and who was, of course, to become the President of the Russian Federation and is its Prime Minister. Mr. Putin's deputy was then Mr. Igor Sechin, who was Deputy Chief of the Russian Presidential Administration while Mr. Putin was President and is now First Deputy Prime Minister.
- Kinex soon became a separate legal entity from Kinef, and in 1991 they moved to their own premises outside Kinef's Kirishi refinery. Kinex was run by Mr. Smirnov, Mr. Timchenko, Mr. Katkov and Mr. Malov (the "Kinex partners"), and proved to be very profitable during the period of "perestroika", particularly after it had expanded into oil trading. Mr. Timchenko was based in Helsinki, working for the Urals Group, and on behalf of the Kinex partners effectively came to control the Urals Group in Scandinavia. After the Russian Federation had been established on 25 December 1991, Mr. Timchenko and his Kinex partners continued to expand Kinex's operations.
- In 1994 Kinex became a shareholding company, and in 1995 and 1996 Kinex, Kinef and Surgutneftegaz were all privatised, Kinef becoming part of Surgutneftegaz but Kinex remaining independent. When 51% of Kinex was privatised in 1995, the shares were distributed to employees, including the top managers, Mr. Malov, Mr. Katkov, Mr. Timchenko and Mr. Smirnov. They bought more shares when the remaining 49% of the company was sold in 1996. In 1997 Kinex became a joint stock company, but in 1998, following the Russian financial crisis, it went through a bankruptcy process and was replaced by a new company called the Kinex Group, the sole and equal shareholders being the Kinex partners.
- In 1989 Mr. Nikitin and his father-in-law, a former sea captain, had set up a company based in St Petersburg providing survey and tallying services. It was very successful and Mr. Nikitin prospered. He had made his first $1 million by 1992. In 1992, Mr. Malov on behalf of himself and the other Kinex partners proposed to Mr. Nikitin that together they should develop Kinex's shipping business, and Mr. Nikitin should set up a shipping company which would charter vessels to carry Kinex's cargoes, the profits being shared equally between Mr. Nikitin and the Kinex partners. Accordingly, in 1992 Kirishi Shipping was established, and in 1998 the business was incorporated in the BVI under the name of PNP. Its offices were in St Petersburg. The beneficial owners of PNP were Mr. Nikitin, Mr. Malov, Mr. Katkov and Mr. Timchenko, who "took care of" Mr. Smirnov's share as well as his own. As Kinex prospered in the 1990s, the business of Kirishi Shipping and then PNP rapidly grew, and by the late 1990s they were handling up to 1 million tons of cargo each month and chartering around 200 vessels per year, including ships of NSC. They chartered on the spot market, but by about 2000 Mr. Nikitin had come to the view that PNP should start to hire vessels on time charters and he discussed this possibility with the Kinex partners.
- During this period, Mr. Nikitin came to know brokers through whom he chartered vessels for PNP, including Mr. Claudio Cepollina of Italia Chartering srl ("Italia") and Alexia Shipping. He also established relationships with bankers, including Mr. Michael Baum, whom he met as the general manager of a branch of Credit Suisse. When Mr. Baum moved to Wegelin Bank in St Gallen, Switzerland, Mr. Nikitin transferred his private banking to Wegelin, although the shipping business continued to bank with Credit Suisse. Through Mr. Nikitin's introductions Mr. Katkov, Mr. Malov and Mr. Timchenko also opened accounts at Wegelin.
- Mr. Nikitin also became a partner in the railway activities of Kinex, which later came to be managed through an off-shore company called Nikolas Invest Corporation ("Nikolas"). The profits were shared by Mr. Nikitin, the Kinex partners, and Mr. Aadu Lukas, who had an interest in and exercised some control over the Pakterminal berth in Tallinn, Estonia. In 1999 Kinex began to trade Surgut crude oil (as well as continuing to trade oil products produced by the Kirishi refinery) through a BVI company called Gunvor Energy. Crude oil from the pipeline carrying Surgut crude to the Kirishi refinery was transported by rail for shipment at the Baltic ports. This produced business for both PNP and the railway business in which Mr. Nikitin and his associates had an interest. The ultimate beneficial owners of Gunvor Energy were Mr. Nikitin, Mr. Timchenko, Mr. Katkov, Mr. Malov and Mr. Lukas, and also a Mr. Torbjorn Tornqvist, a friend of Mr. Timchenko.
- Mr. Timchenko's relations with Mr. Malov and Mr. Katkov deteriorated and in the spring or summer of 2003 the Kinex partners decided to end their collaborative ventures and to go their separate ways. Mr. Nikitin attributed this, at least in part, to Mr. Timchenko's belief that, because he enjoyed a good relationship with President Putin, he did not need to include Mr. Malov and Mr. Katkov in his new enterprises, including the business of Gunvor International which he set up in 2002. Further, Mr. Malov and Mr. Katkov resented that Mr. Tornqvist, whom Mr. Timchenko had introduced into the business, was, as they saw it, improperly exploiting his position. For whatever reason, the collaboration behind Kinex ended in acrimony. Messrs Malov and Katkov planned to disrupt Mr. Timchenko's business by gaining control of the companies that owned the rail link from Kirishi refinery to Estonia, the shares in which were held equally by Mr. Timchenko, Mr. Malov, Mr. Katkov and Mr. Nikitin. When Mr. Timchenko heard of the plan, he sought to acquire Mr. Nikitin's shares, but Mr. Nikitin preferred to sell them to Mr. Malov and Mr. Katkov and in return he acquired their shipping interests. Mr. Nikitin's evidence was that Mr. Timchenko threatened revenge, and I accept that he did make some aggressive threats against Mr. Nikitin.
- As a result of the division of their business interests in 2003, Mr. Nikitin took control of PNP, and acquired the interests owned by Mr. Malov, Mr. Katkov, Mr. Timchenko and Mr. Smirnov. PNP continued to operate from the offices in St Petersburg with a staff of about ten people, including a General Manager, who was Mr. Leonid Guskov from about the beginning of 2004, and Mr. Sergei Pavlov, who was mainly responsible for chartering. The staff also included a Mrs. Erastova, who dealt with accounts, and a Ms. Svetlana Malysheva, who now lives in England and still works for Mr. Nikitin.
- Mr. Nikitin's businesses continued to be enormously profitable. Undoubtedly this was not least because of the profitable arrangements that PNP and other Standard Maritime defendants made with Sovcomflot and, to a lesser extent, with NSC, but this in itself does not mean that the arrangements were improper. There was a remarkable and sustained boom in the shipping market over this period, until it suffered a crash of unprecedented severity in 2009. The strength of the market took by surprise many who were experienced and respected in it, and many commentators were sceptical about whether prices would remain so strong for so long. Those such as Mr. Nikitin who committed themselves to investment in it were able to earn enormous profits.
- In broad terms, in about 2000, the shipping market began to recover after two decades in which it had generally been depressed. The recovery was checked in 2001, particularly after the attacks in New York and Washington on 11 September 2001, and rates fell in late 2001 and into 2002. They stabilised in 2002, but there is room for debate about when the sustained boom really began. Mr. Colin Pearce, who gave expert evidence for the claimants about chartering rates, said that it did so in around November 2002, after the Turkish government had announced in October 2002 traffic control measures for larger (Suezmax and Aframax) tankers going through the Bosphorus on voyages into and from the Black Sea. Mr. Jens Huttemeier, who gave evidence for the defendants, considered that the market did not really "take off" until the autumn of 2004. It suffices for present purposes to say that between 2002 and the latter part of 2004 many in the shipping industry did not recognise how strong the market was or how sustained its strength would prove to be. For example, in February 2002, Dr Martin Stopford, the Managing Director of Clarkson Research Services Ltd., whose views are held in great respect, attended a banking conference held by Sovcomflot in Krasnogorsk and expressed a distinctly gloomy view of the tanker market, referring to "weak fundamentals" and a heavy order book for tankers with a "weak demand outlook". When he spoke at another such conference in Limassol, Cyprus in May 2004, he considered that the "short term" outlook for tankers was good, but warned "watch out from mid 2005 onwards". There is no dispute that by the autumn of 2004 at the latest the market was extraordinarily buoyant, and between 2005 and 2008 there was strong and sustained upward trend in prices upon which any short-term downward movements had no real impact.
- Mr. Skarga graduated from the St Petersburg Maritime Academy in 1992 with an engineering degree in marine transport management and joined Kinex. His duties involved him working with Mr. Nikitin upon export operations. Although Mr. Skarga worked from the Kirishi refinery and Mr. Nikitin from St Petersburg, they met frequently and went on business trips together. Through the business relationship, they became friends despite their different ages and circumstances. Mr. Nikitin, then aged 37 or 38 years, was considerably older than Mr. Skarga, who was aged about 21, and he was much richer than Mr. Skarga. During the 1990s Mr. Nikitin would pay for Mr. Skarga's family holidays and other expenses, such as hospital charges when his daughter was born. There was no suggestion that Mr. Nikitin was motivated to do so by anything other than generosity and friendship.
- Mr. Nikitin remained a close friend of Mr. Skarga. When Mr. Skarga became Sovcomflot's Director-General in 2000, he was aged 29. Mr. Nikitin continued to provide family holidays for Mr. Skarga, and they still spoke and met frequently. Mr. Nikitin would visit Moscow about once a month and usually met Mr. Skarga, and, when he came to St Petersburg, Mr. Skarga would visit him. They generally spoke by telephone once or twice a week. Mr. Nikitin's evidence was that he regarded Mr. Skarga as a friend rather than as a business associate. I accept that Mr. Nikitin was a genuine friend of Mr. Skarga, but he also recognised that Mr. Skarga was now an extremely useful business contact. He also had considerably more experience of the shipping industry than Mr. Skarga, and was in a position in which he could exert influence over his thinking about how Sovcomflot might develop.
- Mr. Izmaylov first met Mr. Nikitin in the summer of 2000, when Mr. Izmaylov was Deputy Director-General of Sovcomflot. Mr. Skarga invited Mr. Izmaylov and Mr. Borisenko to a lunch attended by Mr. Nikitin, Mr. Malov and Mr. Katkov. While he was still at Sovcomflot Mr. Izmaylov had lunch with Mr. Nikitin, Mr. Skarga and Mr. Borisenko on at least two other occasions. He did not develop a close relationship with Mr. Nikitin before he joined NSC. When he did so, Mr. Nikitin (in the words of his witness statement of 13 February 2009) "made it [his] business to speak to him as soon as possible".
- Mr. Skarga was appointed Director-General of Sovcomflot on 6 May 2000 in accordance with a Government Resolution signed by Mr. Putin. He had left Kinex on 24 March 2000 and moved to Moscow to work at the Ministry of Economic Development for a few weeks before taking up his appointment.
- Mr. Borisenko had been working for Sovcomflot as acting Director-General since November 1999 and had hoped for a permanent appointment. He believed that he had the support of Mr. Sergei Frank, who was then the Minister of Transport and a member of the General Board of Sovcomflot. Mr. Frank was indeed unhappy about Mr. Skarga's appointment, and at a meeting with Mr. Skarga in April 2000 Mr. Frank told him so. He would have preferred Mr. Borisenko to have the position. Mr. Skarga thought that this was because, when Mr. Borisenko had been acting Director-General, Mr. Frank had effectively controlled Sovcomflot and wished to continue to do so. Mr. Frank denied this, and I accept that he simply considered Mr. Borisenko better qualified. Certainly he was much more experienced. Mr. Frank respected the General Board's decision to appoint Mr. Skarga, and consented to it in his capacity of Minister of Transport.
- Mr. Skarga left Sovcomflot in October 2004 against the background of a dispute about whether Sovcomflot should merge with NSC, a proposal that Mr. Frank supported and that Mr. Skarga and Mr. Izmaylov, as President of NSC, resisted. Mr. Frank is now the Director-General of Sovcomflot, having succeeded Mr. Skarga. He has been involved in the shipping industry since 1989, and in 1995 became Deputy Director of the Department of Maritime Transport for the Ministry of Transport of the Russian Federation. From 1998 until February 2004 he was the Minister of Transport, and in that capacity between November 1998 and June 2003 he served as a member of the General Board of Sovcomflot. The last meeting of General Board that he attended in that capacity was on 31 July 2002, although he voted by ballot upon decisions of the General Board that are recorded as having been made at a meeting on 28 May 2003. He did not seek re-election to the General Board in 2003, because he perceived a potential conflict of interest with his responsibilities as Minister of Transport. It was suggested to him that his real reason for ceasing to serve on the General Board was that he faced allegations of corruption, but no convincing evidence supported the suggestion and I reject it.
- Mr. Frank resigned as Minister of Transport in February 2004, and he became the chairman of an operational committee to assist in the merger of the Ministries of Transport, Communications and Railways. In this capacity, he discussed with Mr. German Gref, who was Minister of Economic Development and Trade, the potential benefits of a merger between Sovcomflot and NSC, and, at Mr. Gref's suggestion, he undertook a study of the proposal. When Mr. Skarga and Mr. Izmaylov heard about this, they asked to meet Mr. Gref, Mr. Frank and Mr. Dimitry Kozak, who was then the Chairman of General Board of Sovcomflot, and in April 2004 they made clear their opposition to merger. Mr. Gref suggested that an advisor, such as J P Morgan, should examine various possible strategies for the future of the companies, including that the Sovcomflot group, instead of merging with NSC, might seek to raise $300 million through an Initial Public Offering ("IPO") on the New York Stock Exchange of shares in Fiona, a possible source of funding for Sovcomflot which had been under consideration since before 2002 and a proposal that Mr. Skarga supported. On 10 June 2004 Sovcomflot produced a feasibility study for an IPO, which contemplated changing Fiona's registration from Liberia to Bermuda in order to provide investors with a higher degree of security and selling between 40% and 45% of the shares for some $300 million.
- In June 2004 Mr. Skarga again met Mr. Frank, who had become an Assistant to Mr. Mikhail Fradkov, the Prime Minister of the Russian Federation. He reiterated his opposition to the merger proposal, and explained his support for an IPO. Mr. Frank told Mr. Skarga that he considered that the IPO proposals undervalued Fiona. According to Mr. Frank, Mr. Skarga indicated that Mr. Frank would be rewarded financially if he supported the IPO. Mr. Frank and Mr. Skarga clearly had quite different views about how Sovcomflot should develop, but I am unable to accept that Mr. Skarga would have made a suggestion of this kind to someone of Mr. Frank's position. There is no support for the evidence of Mr. Frank, whom, for reasons that I shall explain, I do not regard as a reliable witness, and I reject the allegation.
- At about the end of July or the beginning of August 2004, Mr. Frank recommended to the Ministry of Economy and Trade a merger between Sovcomflot and NSC. In about the middle of September, Mr. Igor Shuvalov, who was then Chief Economic Advisor to the Russian President and was designated to be the new Chairman of Sovcomflot, supported the merger proposal, and decided that Mr. Frank should replace Mr. Skarga as Director-General of Sovcomflot in order to pursue the policy.
- By about July 2004 it was widely rumoured that Mr. Skarga would be replaced as Director-General of Sovcomflot. He and others knew that his position was under threat. On 2 September 2004 Mr. Frank was re-appointed to the Sovcomflot General Board. At a meeting of the shareholders of Sovcomflot on 4 October 2004, Mr. Skarga's appointment as Director-General was terminated with effect from 7 October 2004, and Mr. Frank was appointed in his place. By a severance agreement dated 13 November 2004 Sovcomflot agreed to pay Mr. Skarga some 24 million roubles (or the equivalent of some $868,000) by way of compensation. Mr. Frank indicated that Mr. Skarga might, if interested, be able to stay with Sovcomflot in some capacity, but Mr. Skarga wished to go into politics. He was appointed as a Senator in the Upper Chamber of the Russian Federation Parliament on 27 October 2004. Mr. Skarga signed a handover document entitled "Act of Transfer and Acceptance", which named Mr. Frank as his successor. No suggestion had been made that Mr. Skarga had been dishonest or corrupt, or had acted against the interests of Sovcomflot. His disagreement with Mr. Frank had, however, been acrimonious.
- After the Fiona action was brought against Mr. Skarga, he was asked to resign from the Russian Senate and he did so by letter dated 25 September 2006. He left Russia on 17 October 2006 and has not since returned.
- According to Mr. Nikitin, after the Fiona action had been brought he heard "from sources whom I cannot name (for fear of their safety)" that Mr. Timchenko, together with Mr. Frank and Mr. Sechin, was "behind the criminal and civil action being taken against me". He and Mr. Skarga submitted that the Fiona actions against them, like the criminal proceedings, have been brought because of Mr. Nikitin's dispute with Mr. Timchenko and Mr. Skarga's dispute with Mr. Frank. They said that, even before Mr. Skarga had left Sovcomflot, moves had been made to undermine their positions and to compromise them. They gave evidence that on 22 July 2004 the police conducted armed raids on the offices of Henriot in St Petersburg, of Sovcomflot in Moscow and of NSC in Novorossiysk, and Mr. Skarga's evidence was that, when a few days later he spoke to Mr. Frank about the raids, Mr. Frank obviously knew about them. They maintained that Mr. Katkov and Mr. Malov have not been the target of proceedings, despite them having an interest in some of the transactions of which the claimants complain, because Mr. Frank is on friendly terms with them as well as with Mr. Timchenko. (Mr. Smirnov, who also had some involvement in Mr. Nikitin's business ventures, died in 2004 before these proceedings were brought.)
- This submission and the evidence upon which the defendants relied were disputed by the claimants. Mr. Frank denied a close relationship with Mr. Katkov, Mr. Malov and Mr. Timchenko. He said that he had met Mr. Katkov only 5 or 6 times since 2000; that he first met Mr. Timchenko in December 2004; and that he is uncertain whether or not he met Mr. Malov before 2005. There is no reliable evidence to the contrary, and I accept this.
- Mr. Frank also denied any knowledge of police raids. According to Mr. Izmaylov, officials came to NSC's offices demanding on behalf of the tax authorities documents and computers relating to dealings with Henriot, but left when they were told that the demand was illegal. Mr. Nikitin said that he learned what happened at St Petersburg from a member of the staff there, but was uncertain which employee reported it. I cannot accept that he would have forgotten who reported to him a co-ordinated armed police raid. I accept that there was some official demand for information such as described by Mr. Izmaylov, but I reject the more dramatic accounts of Mr. Skarga and Mr. Nikitin.
- In any event, this question does not affect the issues upon which the claims in these proceedings depend. As Mr. Popplewell submitted, the claimants' motives in bringing and pursuing the proceedings are of no direct relevance to what I have to decide. If the claimants have a claim that is good in law, they are entitled to succeed whatever their motives. The possible relevance of these issues might be that, if the defendants' contentions are well founded, they would support their submissions (i) that the claimants have gone to extreme lengths to find evidence of wrongdoing on their part, and this makes it the more telling that they have put forward little or no evidence that they were involved in bribery or were corrupt; (ii) that Mr. Frank is not a credible witness; and (iii) that the evidence of other witnesses called by the claimants is unreliable because they are likely to have been put under pressure to support the claimants' case. I prefer to rely upon other more direct evidence about how the claimants have sought evidence against the defendants and about the credibility of the witnesses, and I need say no more about the defendants' contentions about the motivation behind the proceedings.
The investigation after Mr. Skarga left Sovcomflot
- The claims in the Fiona action originate, it seems, in an investigation instigated by Mr. Frank into transactions that Sovcomflot had entered into with Mr. Nikitin and companies associated with him, including the Standard Maritime defendants. Mr. Frank started the investigation shortly after he was appointed as Director-General of Sovcomflot. The defendants say that its history shows that he was determined that, whatever the investigation revealed, Sovcomflot should bring proceedings against Mr. Skarga and Mr. Nikitin.
- On his account, Mr. Frank was first concerned about the chartering policy adopted by Sovcomflot because of press reports that Sovcomflot and NSC vessels had been chartered at "soft" rates and because major oil companies were not chartering their vessels. He said that his suspicions were reinforced by what he was told by others. In particular, Mr. Sergei Terekhin, who was the First Deputy Director-General of Sovcomflot until in October 2005 he replaced Mr. Izmaylov as President of NSC, suggested that the chartering arrangements with PNP and companies associated with Standard Maritime should be investigated, and also, Mr. Frank believed, that the SLB transactions should be; and, when Mr. van Boetzelaer met him in Moscow in early October 2004, he criticised as "stupid" some of the options to extend hire periods to which Sovcomflot had agreed. Mr. van Boetzelaer also told Mr. Frank that Mr. Nikitin and Mr. Skarga had put him under pressure to allow Mr. John Betty to leave Sovchart and work for Mr. Nikitin, and that Mr. Nikitin had tried to remove from Sovchart's offices their files relating to broking work for his companies.
- I shall consider the options to which Mr. van Boetzelaer was apparently referring when I examine the Sovcomflot time charters scheme. The other matters which Mr. van Boetzelaer is said to have reported to Mr. Frank seem to me unremarkable. Sovchart had held some files of Henriot and Remmy because they sometimes acted as Sovcomflot's broker when a vessel was chartered and for Henriot or Remmy upon a sub-charter of the same vessel. Mr. Nikitin asked Sovchart for the files relating to the sub-charters so as to arrange for them to be kept separately from the files about the head charters, but Sovchart were concerned that they should have ready access to them in case, for example, the Swiss tax authorities wanted to examine them. The question about where the files might be stored resolved itself because Sovchart ceased to act for Mr. Nikitin's companies when Mr. Betty left Sovchart to establish his own broking business. He had been their broker while he was at Sovchart, and continued to act for them when he established his own business. I do not consider that Mr. Nikitin's request about the files excites suspicion that he was seeking to conceal the terms of the sub-charters from Sovcomflot, or otherwise indicates wrongdoing on his part. Nor is it odd that Mr. Nikitin should try to assist Mr. Betty when he decided to leave Sovchart in September 2004 and continued to act for Mr. Nikitin and the Standard Maritime companies through his own business.
- The defendants dispute the evidence about what Mr. Frank was told by Mr. van Boetzelaer and Mr. Terekhin. Mr. Terekhin did not give evidence, and, although the claimants served two witness statements of Mr. van Boetzelaer, he declined to give oral evidence. His statements were in evidence, but much in them is inconsistent with other evidence and I do not regard them as reliable. No evidence significantly corroborates Mr. Frank's account of what he was told by Mr. Terekhin and Mr. Van Boetzelaer, and I do not accept that he was told anything about what Mr. Skarga had done or transactions for which he was responsible or which were concluded while he was in office that lends any support to the allegations against the defendants.
- For whatever reason, however, in the autumn of 2004, Mr. Frank instructed Mr. Vladimir Mednikov, who was then at the Moscow law firm of Jurinflot, to advise about the chartering arrangements entered into with Mr. Nikitin and companies associated with him. At about the beginning of 2005, Mr. Mednikov joined Sovcomflot and in due course was appointed their Vice-President and Legal Director. At around this time an "Investigation Committee" was established, although, as became apparent through Mr. Frank's cross-examination, in fact the so-called committee comprised only Mr. Mednikov and another lawyer, Mr. Sergei Polevoy.
- Mr. Frank and the Investigation Committee instructed Sovcomflot's auditors, Messrs Moore Stephens, to prepare a report about the purchase of newbuildings, and about the SLB arrangements made with Standard Maritime defendants in 2002 and their termination in 2004 in order to sell the vessels. No written instructions to Moore Stephens are in evidence, and apparently they were instructed orally.
- Moore Stephens produced a draft letter dated 29 April 2005 for discussion purposes. In Appendix B to the draft letter, which is entitled "Sale of New Building Contracts to Standard Maritime Holding Corporation" and was concerned with the newbuildings scheme transactions, Moore Stephens concluded that no evidence had come to their notice that indicated improper conduct by the management of Sovcomflot or Fiona in connection with the transactions with Standard Maritime defendants. They observed that the agreements which are said to be the subject of the newbuildings scheme were negotiated and finalised by Mr. Skarga, and that "the arrangements … were not subject to the degree of scrutiny that we would expect of a group the size and prominence of [Sovcomflot]". Moore Stephens also referred in Appendix B to discussions with Mr. Borisenko in the course of the audits in 2003 and 2004 and with Mr. Robert Thompson, who was the Fleet Director at Unicom, and wrote, "From these discussions we were advised that the overall rationale behind the transactions was to develop a relationship with Standard Maritime. In addition to the management of the Standard Maritime's fleet, this relationship was intended to develop into joint projects relating to the ownership and operation of tanker vessels". Mr. Borisenko accepts that he gave this explanation to Moore Stephens, but denied that it was true. I conclude that the explanation that Mr. Borisenko gave in 2003 and 2004 reflected his true understanding of the strategy that motivated Sovcomflot to enter into the transactions.
- Moore Stephens reported upon their investigation into the SLB arrangements and their termination (which are said to have been under the SLB arrangements scheme and the termination of the SLB arrangements scheme) in a letter dated 28 July 2005. They concluded, on the basis of the information that they had been given during their audits, that no evidence had come to their notice that indicated improper conduct by the management of Sovcomflot or Fiona in connection with the SLB arrangements. Similarly they said that they had seen no evidence indicating any impropriety in relation to the termination of the arrangements, but they observed that, on the face of it, the Standard Maritime lessors and owners had done very well out of the termination and questioned whether Sovcomflot could have negotiated more favourable terms. They said that the arrangements appeared to have been negotiated and finalised by Mr. Skarga, and that the transactions and their termination were not subjected to the degree of scrutiny that they would have expected.
- Moore Stephens reported in their letter of 28 July 2005 that they had spoken about the SLB transactions with "Mr. Borisenko (during the Fiona 2002, 2003 and 2004 audits) and senior members of the staff within the Fiona group in order to gain an understanding of the commercial rationale behind the transactions". Mr. Borisenko said in evidence that those to whom they spoke included "many, if not all, members of the Executive Board" and also Mr. Yuri Dobrynin, the head of Sovcomflot's Finance Department, and I accept that evidence. In 2002 Moore Stephens were told that the primary reason for entering into the SLB transactions was to fund the settlement of a debt owed by Megaslot to the Ministry of Finance; that Sovcomflot had entered into a large fleet expansion programme during 2001 and had entered into newbuilding contracts; and that the Arbat vessels that were the subject of the SLB arrangements were due for replacement in Sovcomflot's renewal programme. I conclude that these were indeed Sovcomflot's reasons for making the SLB arrangements, and that what Moore Stephens were told at the time was true.
- I do not rely upon Moore Stephens' conclusions that there was no evidence of impropriety in relation to these matters. I cannot tell upon what information they formed this view, and I have heard evidence, including evidence from Mr. Nikitin, Mr. Skarga and Mr. Privalov, which was not available to them. Equally and for the same reason, I do not consider that the claimants' case is supported by their observations about the transactions being entered into without the degree of scrutiny that they would have expected. I cannot tell what Moore Stephens meant by that or what evidence that they had to support this opinion, but I do not consider that Mr. Skarga decided to enter into these transactions without other executives being involved and participating in the decisions. The reports of Moore Stephens do, however, make clear what they were told in the course of their audits in 2002 and thereafter by Mr. Borisenko and others about the reason for the SLB arrangements and the arrangements for cooperation in ordering newbuildings that were made between Sovcomflot and Mr. Nikitin and Standard Maritime defendants.
The "Project Sturgeon" investigations
- At the end of 2004 and the beginning of 2005, Mr. Privalov was in St Moritz with Mr. Nikitin and Mr. Skarga. Mr. Nikitin said that he did not invite Mr. Privalov to join him and he suggested that "maybe [Mr. Privalov] heard about my plan and decided to come there", but I reject that suggestion. They arranged to be there together. Mr. Izmaylov too was in St Moritz at about the same time.
- In early January 2005 Mr. Skarga signed two documents which were back-dated to a time when he was still the Director-General of Sovcomflot and which he purported to sign on behalf of companies in the Sovcomflot group: the so-called "Supplemental Agreement" and an employment contract between Mr. Privalov and FML. I shall refer to these later in my judgment, and it suffices at this stage to say that Mr. Privalov was contemplating leaving FML and (as I find, if it be disputed) he had so told Mr. Skarga. The back-dated employment contract improved the terms upon which he could leave FML, and in particular it provided that he should be paid a year's salary if he did so and freed him from restrictions about working for a competing business after leaving FML.
- On 14 January 2005 Mr. Privalov gave one month's notice to terminate his employment with FML. Mr. Privalov had it in mind that he might work for Mr. Nikitin, and, as I conclude, whether or not Mr. Nikitin really contemplated engaging Mr. Privalov or using his services, he allowed Mr. Privalov to believe that he might do so. In the event Mr. Privalov did not, however, in fact end his employment when the notice expired on 13 February 2005.
- On 14 February 2005 Mr. Frank and Mr. Mednikov met Mr. Privalov in London at the Carlton Towers Hotel over breakfast before the Annual General Meeting of FML that was to be held in London that day. Mr. Borisenko attended at least part of the breakfast meeting. Mr. Frank and Mr. Mednikov asked for Mr. Privalov's laptop, but he refused to let them have it. They questioned him about missing files and about what Mr. Frank called "very strange transactions". The defendants said that Mr. Privalov was subjected to threats, which were described in a letter to Mr. Frank dated 7 April 2005 and written by Clyde & Co, Mr. Privalov's solicitors. They wrote that Mr. Frank and Mr. Mednikov "threatened Mr. Privalov by saying that [they] would employ all possible means in order to implicate Mr. Privalov in a case which [they] intended to bring against, inter alia, the former management if Mr. Privalov left the employment of Fiona Maritime on 14 February 2005. You further mentioned that you would employ the Kroll Detective Agency in order to fabricate the case against Mr. Privalov or even MI6 if that was necessary. You also threatened that you would make the Inland Revenue investigate all Mr. Privalov's expenses until they found something…". The letter described the meeting of over an hour becoming "increasingly hostile and aggressive towards Mr. Privalov". This is consistent with a letter (to which I refer below) dated 21 February 2005 from Mr. Privalov to Mr. Shuvalov, the Chairman of the Sovcomflot General Board, in which he complained of threats made to him. It is also consistent with evidence that Mr. Privalov gave in a witness statement dated 8 July 2005 when a freezing order was first made against him in the Fiona action, in which he specifically referred to a threat by Sovcomflot to retain Kroll Detective Agency to investigate him.
- In his oral evidence, Mr. Privalov said that he was threatened with an investigation that would cover, for example, his use of company credit cards. Mr. Frank said that he made it clear to Mr. Privalov that there was to be an investigation into serious concerns about Sovcomflot's business, but denied that the meeting was hostile or aggressive or threatening. He also denied that there was any mention of private investigators, and said that he never had anything to do with Sovcomflot instructing private investigators to look into the affairs of Mr. Privalov or anyone else. I reject Mr. Frank's evidence about the meeting with Mr. Privalov on 14 February 2005. He did threaten to instruct private investigators. He did so because he wanted Mr. Privalov's assistance with an investigation into transactions concluded under Mr. Skarga.
- After the breakfast meeting, on 14 February 2005, Sovcomflot instructed private investigators called Modus International (Forensic) Ltd. ("Modus"). This was the start of a wide-ranging enquiry conducted under the name of "Project Sturgeon". Mr. Frank said that the investigation was arranged by Sovcomflot's "legal team under Mr. Mednikov", but Mr. Frank was party with Mr. Mednikov to instructing Modus after the meeting with Mr. Privalov. It is clear, despite Mr. Frank's denial, that he met with Modus on 13 March 2005. Other investigators who had also been engaged by Sovcomflot, Hart Security Ltd. ("Hart"), reported that "Modus are attending a meeting with the Chairman of Sovcomflot on Sunday 13 March 2005". This can only refer to a meeting with Mr. Frank, although his official position was not stated accurately. Hart later reported that they were "instructed that, during a meeting with the Director-General, Sovcomflot on Sunday 13th March, they were to expect further taskings relating to Unicom".
- By a letter dated 21 February 2005 Mr. Privalov confirmed his resignation from FML, and on 21 February 2005 he also wrote to Mr. Shuvalov, sending copies of his letter to Mr. Kozak and to Mr. Skarga, to inform him of his decision to leave Sovcomflot. He wrote "Director-General of [Sovcomflot], Mr. S. O. Frank has implemented mental pressure towards me by threatening me with FSB, British Intelligence MI-6, private detective agency "Kroll International", UK tax institution "Inland Revenue", with a purpose of distortion of information concerning work of former management of OAO Sovcomflot, Chairman of the Board of Directors Mr. D N Kozak and Director-General D Y Skarga", and that he was not willing to "participate in political fights". Mr. Privalov gave evidence that he signed the letter after drinking and under pressure from Mr. Nikitin and Mr. Skarga, but it corroborates the account given in the letter of Clyde & Co and I reject Mr. Privalov's explanation for signing it. At least in broad terms, it fairly described Mr. Privalov's position in early 2005.
- Shortly after this Mr. Privalov went about, as he put it, "distancing himself" from companies that he had used to receive dishonest payments. He transferred all the funds from Getwire's bank account and arranged for Getwire to be dissolved; and he transferred Shipping Associates into the name of Mr. Bonehill of Norstar. Mr. Bonehill was to be paid some $1.2 million for providing this assistance. On 5 April 2005, Sisterhood transferred to Milmont some $1.9 million.
- By 7 April 2005 Mr. Privalov had concluded that Sovcomflot, or investigators acting for them, were examining his personal financial arrangements. He had learned of "pretext" calls to banks at which he and his wife had accounts, and his laptop computer (but nothing else) was taken in a burglary on 26 March 2005 of his secure home in London. By their letter dated 7 April 2005 to Mr. Frank, Clyde & Co complained of investigations that they alleged to be unlawful. They referred to telephone calls to the banks and the burglary, and asked whether anyone was or had been instructed directly or indirectly on behalf of Sovcomflot to investigate Mr. or Mrs. Privalov.
- By letter dated 3 June 2005 Ince & Co replied to Clyde & Co's letter on behalf of Mr. Frank. Mr. Frank said in evidence that he had instructed Ince & Co first to check "very carefully" whether there was any truth in Clyde & Co's letter. Ince & Co wrote that they had been instructed on behalf of Mr. Frank and that "Our clients" did not know who had made the telephone calls and that they were not made "by any member of this firm, by our clients, or by any agent of our clients". Mr. Frank knew that that was untrue. On 7 April 2005 there had been a meeting at Ince & Co with private investigators. An attendance note of the meeting stated, for example, "Hart were instructed to extend the profile of Mr. Privalov's 'personal banking' matrix comprehensively over the 9 month period preceding the Initial Period", and "Ince was instructed at the meeting to give provenance of Standard Maritime accounts to assist Hart with its profiling and subsequent analysis and investigations". Mr. Frank denied any recollection of the meeting, but after he had completed his evidence there was disclosed a handwritten note of Ince & Co that made it clear that he had attended it. He was fully aware of the activities of the investigators and his evidence to the contrary was dishonest.
- The Project Sturgeon investigation examined not only Mr. Privalov's affairs but also those of Mr. Skarga, Mr. Nikitin and Mr. Borisenko. At least initially, the objectives of the investigation into Mr. Skarga's affairs included identifying his assets and any possible bank accounts, and at the meeting on 7 April 2005 Hart were instructed to "continue to profile" his various accounts for a period going back to April or May 2004. Similarly attempts were made to investigate accounts associated with Mr. Nikitin. I observe that in a report dated 1 June 2005 Hart reported with regard to Mr. Skarga that, "Contrary to an earlier report, we can now confirm that, as far as we are aware at this point in time, the previous indication that there was a connection between Mr. Skarga and Sisterhood Participation Corporation would appear to be baseless". Nevertheless, in the Fiona action in which Mr. Skarga was joined as a defendant on 31 August 2005, it was said that Sisterhood was a vehicle through which bribes were paid to Mr. Skarga. That allegation is no longer pursued and I am not aware of the basis upon which it could ever properly have been made.
- On 2 June 2005 Sovcomflot withdrew the instructions of Modus and Hart and, through Richards Butler (rather than Ince & Co), other investigators were instructed. The defendants alleged that the Project Sturgeon investigations involved unlawful and illegal activities in different countries, including the United Kingdom. The claimants denied that they have "instructed [the] investigators to use any unlawful means of obtaining information". I do not need to determine this issue and I am not in a position satisfactorily to investigate it. It is clear, however, that from early 2005, if not earlier, the claimants were conducting a thorough, extensive and expensive investigation in order (among other things) to search out information about any assets that Mr. Skarga and Mr. Nikitin might have and any financial dealings between them. The investigation revealed no evidence of such financial dealings.
Departure of Mr. Izmaylov from NSC and aftermath
- In 2004 Mr. Izmaylov, like Mr. Skarga, had opposed the merger of Sovcomflot and NSC. He contended that for this reason Mr. Frank arranged for him to be removed as President of NSC, and then to have his affairs explored by private investigators; and that, as a result, these proceedings have been brought against him, and he has faced criminal proceedings brought by the Russian authorities.
- Mr. Izmaylov was removed from office at a meeting of NSC's shareholders on 14 October 2005. His dismissal was not related to the allegations made against him in these proceeding, but I am also not persuaded that it was because of his opposition to the proposed merger.
- By a contract signed by Mr. Izmaylov on 4 March 2005, Intrigue had agreed to buy shares in NSC from Gizelle Management Ltd. ("Gizelle"), a Cypriot company. The consideration, which was to the value of $158 million, was by way of the transfer to NCL Shipping Ltd. ("NCL"), a BVI company, of the shares in Kuzbass Shipping Ltd., which owned the "Kuzbass", and the shares in Kaspiy Shipping Ltd., which owned the "Kaspiy", and of a cash payment in the total of $12,000,000. NSC's Board of Directors had approved the agreement in principle on 25 February 2005. According to the claimants, Mr. Izmaylov signed this contract in defiance of an instruction from the Federal Agency for State Property Management, and at a meeting on 26 May 2005 the Agency had instructed Mr. Izmaylov to consider how the 4 March 2005 agreement might be undone. Mr. Alexander Agaev, who was the Financial Controller of Intrigue until 31 March 2007, had earlier written to NCL and Gizelle on 8 April 2005 asking whether it might be possible "to return the ships back and consider the deal purely on a cash basis". At a meeting on 6 September 2005, the NSC Board approved the proposal that the vessels should be bought back in consideration of Gizelle receiving back shares in NSC. However, Mr. Izmaylov negotiated a draft agreement between NCL, NSC and Intrigue which did not reflect that approval, and did not provide for the unconditional return of the "Kuzbass" and the "Kaspiy". At a meeting on 10 October 2005, the Federal Agency for the State Property directed that the draft should be re-negotiated, but Mr. Izmaylov signed an agreement in the terms of the draft on 12 October 2005. The agreement was subject to the approval of NSC's Board, which was not given.
- There was no other complaint against Mr. Izmaylov about his management of the company when he was removed as President of NSC. It had been reported to a meeting of the General Board on 2 September 2005 that in the first half of 2005 the net earnings of the NSC group were $161.8 million, some 105% above the net profits for the equivalent period in 2004, and the highest earnings achieved by the group. When he was dismissed, Mr. Izmaylov was paid the equivalent of $220,000 as compensation for the early termination of his employment.
- In October 2005 Mr. Mednikov instructed Mr. Piers Erskine of Corporate Intelligence Services Ltd. ("CIS") to investigate Mr. Izmaylov's affairs. Mr. Frank denied that he was aware of this, but I reject that evidence. Mr. Frank, together with Mr. Terekhin and Mr. Mednikov, had a meeting about the investigation with Mr. Erskine on 23 February 2006.
- The Intrigue action was brought in April 2007, but Mr. Izmaylov was not then a defendant, and no allegations were made about the NSC time charter scheme. After the merger of NSC and Sovcomflot had been completed in December 2007, Mr. Izmaylov was joined as a party to the proceedings in April 2008.
The corporate structure and governance of Sovcomflot
- Mr. Skarga contended that the structure and organisation of the Sovcomflot Group was such that business was concluded by or with the concurrence of the senior executives collectively, and subject to supervision of others. Even if, as the claimants alleged and he disputed, he had planned or sought to favour Mr. Nikitin or other third parties at Sovcomflot's expense, Mr. Skarga argued that he could not have done so. He also said that in fact the transactions about which the claimants complain were supported by experienced executives against whom no allegations of collusion or other wrongdoing are made.
- The sole shareholder of Sovcomflot at the times relevant to these proceedings was the Russian state, which was represented by the Ministry of Property Relations, who acted in consultation with the Ministry of Transport in some matters. Under governmental regulations the Government issued instructions to the General Board of Sovcomflot about what matters should be included upon the agenda of their meetings and how they should vote upon them. The Ministry of Property Relations and the Ministry of Transport received reports on the company's activities, including financial documents and accounts.
- Sovcomflot had a General Board and an Executive Board, but other bodies too reviewed the activities of Sovcomflot to protect the shareholders' interests. The shareholders appointed three or four persons to constitute an Audit Committee (sometimes referred to as an Inspection Committee or a Review Committee), which was an internal auditing body. Its function, in the terms of Article 1.2 of its Charter, was "internally [to] supervise the financial and business operations of the company in accordance with the law, and [to] report the results to the General Meeting of Shareholders and Board of Directors of the company". According to Mr. Skarga, it reviewed contracts and decisions made by Sovcomflot, and submitted annual audit reports; and its members regularly attended Sovcomflot's offices and examined documents so as to have detailed information about decisions taken by the Executive Board and transactions which they supported. However, according to the evidence of Mr. Khlyunev, who has been Sovcomflot's Chief Accountant since 2000 and whose evidence about this I accept, the Audit Committee was not concerned with whether the terms of transactions were commercially advantageous, but with such matters as whether administrative costs were properly incurred and whether there had been proper accounting in respect of tax, dividends and the like. He did not recall any of the transactions that are the subject of these proceedings being reviewed by the Audit Committee, and there is no evidence that they did so.
- Sovcomflot had another external review body called the Accounting Chamber, which was established under Federal Legislation, and inspected Sovcomflot's business by reviewing documents and, less usually, sending auditing personnel to Sovcomflot's offices. (Mr. Skarga complained that the claimants have not made proper disclosure of documents relating to exchanges between the Accounting Chamber and Sovcomflot, but there has been no application for disclosure of such documents, and I am not persuaded that there has been any significant failure to make disclosure in this regard.) The group's accounts were audited on a consolidated basis by Moore Stephens, and Sovcomflot's own accounts were audited by a Russian audit company based in Moscow called Finansovye I Bukhgalterskie Konsultanty ("FBK"). It was not the responsibility of these bodies to review whether transactions entered into by Sovcomflot were on commercial terms, and they were not in a position to do so. Equally, there is no evidence that I accept that the Ministries which received reports of Sovcomflot's activities were in a position to supervise the business activities in this way.
The Sovcomflot General Board
- Sovcomflot's General Board had at the relevant time eleven members including, as well as Mr. Skarga as the Director-General, government ministers and other high ranking persons. The Chairman was Mr. Kozak, the Deputy Director of Presidential Administration of the Russian Federation. As I have said, Mr. Frank was a member of the General Board from 1998 until 30 June 2003, but in fact attended no meetings after 31 July 2002 until he was appointed Director-General. The General Board reported to the Ministries of Property and Transport. The Corporate Charter provides that, "Any matters on management by the Company's routine business and affairs shall fall within the competence of meetings of the Board of Directors with the exception of any matters falling within the scope of authority of the General Meeting of Shareholders."
- Meetings of the General Board were usually held every two months. The General Board reviewed the quarterly, semi-annual and annual reports, which during the relevant period included reports prepared by Mr. Borisenko as the Executive Vice-President and Chief Financial Officer and by Mr. Terekhin as First Deputy Director-General, and also quarterly accounts for the group prepared by Moore Stephens International. For example, at its meeting on 19 February 2004 the General Board had papers about Sovcomflot's financial plans and budget; about "Main Areas of Operating and Financial Activities of [Sovcomflot] for 2004", which provided detailed information about plans to develop the fleet through sales and acquisitions; and about the "Cargo Base Development", which referred to long time charters with, among others, Henriot, and companies with options to extend their charterparties, including Remmy. I infer that the General Board will have received similarly detailed information in respect of the company's planning at other times.
- Nevertheless, I am not persuaded that the General Board were in a position to assess the commercial merits of the individual transactions of which Sovcomflot complain in these proceedings, or responsible for doing so. They were concerned with the strategic direction taken by Sovcomflot and their general financial and operational progress. Undoubtedly, members of the General Board could have pursued inquiries about individual transactions, but their responsibility was the business strategy adopted by the group and not to investigate whether particular transactions were in the interests of Sovcomflot. This assessment is supported by Mr. Frank's evidence. He said that, while he was aware of some of the impugned transactions, he did not know sufficient detail to appreciate that their terms were not commercial. Thus, for example, he knew that Sovcomflot were entering into chartering arrangements with PNP, but he did not know that Mr. Nikitin had any involvement or interest in other Sovcomflot transactions; and he knew about the newbuilding programme whereby Sovcomflot was modernising the fleet, but not that the Standard Maritime defendants acquired vessels that had been ordered by or in association with Sovcomflot. I accept that evidence.
- I therefore do not consider that generally it assists the defendants that the General Board did not criticise the transactions with the Standard Maritime defendants and other companies with which Mr. Nikitin was associated. However, I do consider this relevant to one criticism that the claimants make of the SLB arrangements. As I shall explain in more detail, under them Sovcomflot paid for funds at an effective interest rate of between 9.65% and 11.84% pa. This was set out, together with other financial information about the arrangements, in Sovcomflot's Annual Report for 2002, which was presented to the General Board in May 2003. Although Mr. Frank was no longer attending General Board meetings in 2003, I infer that he too received the report because he was still a member of the Board; and in any case the same information was in the Group's consolidated financial statements that were sent to the Ministry of Transport following the General Board's direction on 21 March 2003. The information was also in the report for the first six months of 2004, which was presented to the General Board on 27 November 2004 by Mr. Frank, who was then the Director-General, and Mr. Borisenko. Although Mr. Frank did not, as I understood his evidence, accept that he had read the report that he was presenting, I infer that he must have done so. I see force in the defendants' argument that, had it been the case that Sovcomflot had no need to raise the funds under the SLB arrangements or that the effective interest rate was too high for the decision to raise the funding to be justifiable, this would have attracted criticism from the General Board in 2003 and 2004. In fact it was not questioned.
The Sovcomflot Executive Board
- The Executive Board is described in the By-Laws of Sovcomflot as "the collegiate Executive Body of the company". Its members were appointed by the General Board, after the Executive Board had made recommendations to the General Board about its own membership. When Mr. Skarga joined Sovcomflot as the Director-General and joined the Executive Board, the other members were, as Mr. Frank and Mr. Borisenko agreed, all "very longstanding and experienced professionals in the shipping industry". In 2000 Mr. Frank had considered that three of them, Mr. Borisenko, Mr. Evgeny Ambrosov and Mr. Terekhin, were better qualified than Mr. Skarga to be appointed as Director-General.
- The claimants called four members of the Executive Board to give evidence: Mr. Borisenko, Mr. Lipka, and Mr. Khlyunev, all of whom were on the Board throughout the time that Mr. Skarga was the Director-General, and Mr. Sharikov, who served on the Executive Board from 1 January 2002, when he was promoted from being Head of the Commercial Operations Department to be Head of the Fleet Operations Department. I also heard evidence from Mr. Izmaylov, who was Vice-President before he left in 2001 to become the President of NSC. The other members of the Executive Board during Mr. Skarga's time in office were Mr. Terekhin and Mr. Ambrosov, who was a Senior Vice-President, left Sovcomflot in 2002 to become the President of FESCO, and returned to work for Sovcomflot in June 2009.
- The claimants do not allege corruption, dishonesty or other impropriety against Mr. Ambrosov, Mr. Lipka, Mr. Khlyunev or Mr. Sharikov. In the claimants' closing submissions Mr. Popplewell described as "agnostic" the claimants' position about "the extent to which, if at all, Mr. Terekhin knew of or suspected any of the impropriety", but it has never been suggested that he colluded with Mr. Nikitin or himself participated in anything improper. There is no evidence that he suspected wrongdoing, and it was not suggested to Mr. Nikitin or Mr. Skarga that Mr. Terekhin had been involved in any of the schemes or aware of them. There is no evidence about why Mr. Ambrosov and Mr. Terekhin did not give evidence, and no reason to think that the claimants could not have adduced evidence from them if they had so wished.
- Mr. Alexander Porechniy, Sovcomflot's company secretary, generally attended meetings of the Executive Board. He also prepared minutes of the Board meetings. If he did not attend a meeting, Mr. Lipka recorded what was said and gave Mr. Porechniy the information that he needed to prepare minutes. Mr. Porechniy circulated draft minutes to members of the Board who had attended the meeting, and they had the opportunity to suggest corrections to them. Subject to any changes, each person attending a meeting would sign them as an accurate record. As well as recording the resolutions, the minutes set out what was said by the Board Member or other executive who presented each agenda item, noted who had spoken upon each item, and recorded the voting upon each resolution.
- I consider that the minutes are accurate records of the meetings of the Executive Board. Mr. Dobrynin, who was the Head of Sovcomflot's Finance Department, said at one point in cross-examination that Mr. Porechniy sometimes concocted a false record by reporting that a member spoke when he had not done so. This was denied by both Mr. Lipka and Mr. Khlunyev, both of whom, unlike Mr. Dobrynin, were members of the Executive Board, and Mr. Borisenko said that he had no reason to believe that the minutes did not accurately record who spoke. I reject Mr. Dobrynin's evidence about this.
- According to the evidence of Mr. Skarga and of Mr. Izmaylov, meetings of the Executive Board were recorded by a tape recorder or similar device. There is no dispute that the meetings of the General Board were so recorded and the meetings of the Executive Board were held in the same room. Mr. Borisenko denied that the meetings of the Executive Board were recorded, and in his witness statements Mr. Porechniy (who did not give oral evidence) gave similar evidence. However, Mr. Lipka, who sometimes took minutes in Mr. Porechniy's absence, recalled that recording devices were used and he remembered occasions when he had handed a tape of a meeting to Mr. Porechniy. I conclude that at least some meetings were recorded. No recordings have been disclosed. They were probably not retained but were made only to assist Mr. Porechniy to write the minutes. This reinforces my view that generally the minutes are likely to be accurate.
- The Executive Board usually met each month, but it would meet more frequently if the need arose. Meetings would generally last for about 90 minutes. Each member of the Executive Board had one vote upon resolutions, and all votes carried equal weight. Mr. Porechniy collected items for discussion at board meetings from the Director-General and the Departments in Sovcomflot, and some two or three days before the meeting he sent out the agenda with briefing notes, or "spravka", about what was to be discussed. The briefing notes were often supplemented by further notes and written information, for example by way of spreadsheets, which might be sent out in advance or tabled at the meetings. The executive who was to present an agenda item was responsible for ensuring that the necessary information was before the Board.
- The claimants sought to advance a case that the Executive Board generally had put before it only information designed to promote proposals before the meeting. The briefing notes, unsurprisingly, presented the case for the proposals before the Board. Mr. Skarga accepted that, where a decision had been taken to enter into a transaction and it was then considered at a subsequent board meeting, the authors of briefing notes would "[put] the best ways … to promote the deal", because they or their Department had already concluded that the benefits of the proposal outweighed any disadvantages. This does not mean that the Board accepted the briefing notes uncritically.
- The claimants also said that the Board simply passed (or "rubber-stamped") proposals without any proper scrutiny or consideration of them. Thus, Mr. Borisenko said that meetings were not called to discuss or debate the merits of particular transactions, but to approve decisions already taken by Mr. Skarga. He referred to "ritualistic referral of transactions to the Executive Board for approval". On the other hand Mr. Izmaylov said that, while he was at Sovcomflot, matters that came before the Executive Board were fully and openly discussed and considered. I prefer the evidence of Mr. Izmaylov, and I reject the picture given in Mr. Borisenko's evidence. As I shall explain, I consider that Mr. Borisenko was a dishonest witness. I conclude that the practice was for the Executive Board to have an informed discussion of the matters before it.
- In reaching this conclusion, I recognise that there was support for the picture given by Mr. Borisenko in the witness statements of other witnesses. Mr. Sharikov's witness statement stated that, while Mr. Skarga was Director-General, the meetings of the Executive Board were "purely a formality", that there was "no real debate", and that the members could not question a proposal because the information in the briefing notes was inadequate. Mr. Lipka said in his statement that the Executive Board did not enter into "any detailed debate" about transactions. However, their evidence was very different when they were cross-examined, and I consider that their oral evidence is more reliable (upon this and upon other matters). Mr. Lipka gave evidence that board members would ask questions about the proposals that were presented. Mr. Sharikov said that the briefing notes that he presented in relation to charterparties would give the Board key economic information to enable them to assess the merits of a fixture (whether it was still to be concluded or the Executive Board was being asked to endorse a concluded fixture). Mr. Dobrynin confirmed that, when he prepared briefing notes, they gave "a fair and balanced presentation of the facts". The minutes show that often several members of the board contributed to a discussion on an item. Other executives, such as Mr. Dobrynin, were sometimes asked to attend meetings of the Executive Board and contributed to the Board's discussions. This, as I infer, was to ensure that the members were given full and detailed information about what they were considering.
- The proposals that were put to the Executive Board were almost always approved by them without dissent. (Occasionally the Board did not approve a proposal presented to it. For example, at its meeting on 30 July 2002 the Board did not approve Mr. Skarga's proposal to build river-going steamers and asked him to renegotiate the proposed terms, and in the event the proposal fell through.) That is not remarkable, because generally proposals had been discussed amongst the senior executives before they were formally put before a board meeting. Members of the Executive Board would be the less likely to vote in favour of a proposal without proper consideration because under the Bylaws and under article 71(2) of the Law on Joint Stock Companies (which I have already set out), and also under the terms of their employment contracts (as I infer, on the basis that the employment contracts of Mr. Skarga and Mr. Borisenko contained such a provision), the members of the Executive Board might be personally liable for losses caused by decisions if they voted in favour of them.
- There does not appear to be any consistent pattern about which transactions were placed before the Executive Board for approval. For example, as I shall explain, on 28 April 2001 the Executive Board considered and approved a proposal to buy five Aframax vessels in what I shall call the Astros vessels transaction and the Tsuneishi transaction, but the almost contemporaneous purchases in the Hyundai Mipo transaction and the Daewoo transaction were not, as far as appears in the minutes, considered at a formal meeting of the Board. Similarly, I can discern no pattern to which of the time charters entered into with the Standard Maritime defendants were formally considered by the Board. It was not suggested that this was because Mr. Skarga was preventing some transactions from being considered by the Executive Board or that this provides any evidence to support the claimants' allegations.
The Sovcomflot Executives
- Apart from their formal meetings, members of the Executive Board were in close contact with each other in their day to day business. They all worked at the same offices in Moscow, and on most mornings the more senior executives would meet for less formal discussions for about half an hour or rather longer, unless they were away on business or holiday. These gatherings would be attended by Mr. Skarga, Mr. Borisenko and Mr. Terekhin, and also by Mr. Izmaylov and Mr. Ambrosov while they were still at Sovcomflot. Sometimes other members of the Executive Board, such as Mr. Lipka and Mr. Sharikov, were invited to join the gathering to discuss particular matters. Mr. Borisenko described these discussions as "largely social", but he acknowledged that business was discussed. In my judgment, the more reliable picture of them was given by Mr. Lipka who spoke of the gatherings as essentially business meetings at which the "top managers" would discuss "the strategy of the company as a whole, the programme of the development of the fleet, purely commercial issues".
- I should say something about some of the executives at Sovcomflot and their responsibilities. Mr. Borisenko was the Chief Financial Officer while Mr. Skarga was in office and was in charge of Sovcomflot's Finance Department, which was in Moscow. He was in a position, as he acknowledged, to raise with the General Board any matters that concerned him about his department or the discharge of his responsibilities. The Group's offices in Cyprus had an accounting role and in particular ensured that accounts were prepared in accordance with international accounting standards, but the Finance Department in Moscow dealt with other financial and cash management functions. It arranged payments for the group and dealt, for example, with paying commissions to brokers upon ship sales, and monitored payments associated with loan agreements, charterparties and shipbuilding contracts. Mr. Borisenko was responsible for preparing, with others, the quarterly, half-yearly and annual accounts, for making recommendations about raising finance and for controlling expenditure and the company's finances generally. Mr. Dobrynin had been the Head of the Finance Department since October 1999, and he reported to Mr. Borisenko.
- Mr. Terekhin, the Deputy Director-General, had particular responsibility for commercial and technical matters concerning the deployment of the tanker fleet, including responsibilities for relations with charterers and for modernising the tanker fleet and acquiring newbuildings. He often was appointed to act as Director-General when Mr. Skarga was away. He had joined Sovcomflot at the age of 52 after working for NSC, and he had considerable experience in tanker chartering, ship finance and newbuilding construction. He was entitled to authorise Sovchart to enter into time charters. Mr. Lipka described him as a man who participated actively on the Executive Board, and said he asked "difficult questions and argu[ed] over certain issues and … prove[d] his point, adducing various arguments". He also described Mr. Terekhin as being "well versed in economic and financial issues". In his witness statement, Mr. Sharikov said that Mr. Terekhin had been "marginalised", but when cross-examined he agreed that Mr. Skarga and Mr. Terekhin worked closely together. Despite his attempt to explain this apparent inconsistency by saying that his impression was that Mr. Terekhin had been marginalised especially on "sale and purchase rates", I conclude that Mr. Terekhin was an active and energetic executive who would not have allowed himself to be "marginalised" from important decisions of any kind.
- On 1 January 2002, Mr. Sharikov was promoted from being the Head of Commercial Operations Department to be Head of the Fleet Operations Department, in succession to Mr. Valeriy Shatov, and he became a member of the Executive Board. He was responsible, according to an informal job description, for "Ensuring implementation of the Fleet Operations Department functions or efficiently managing the fleet from commercial and technical point of view in order to receive maximum available profit and to protect the companies' interests". His duties included: "Control of the timely chartering out of ships by the companies Fiona and Sovchart based on freight rates corresponding to the global market level and on terms not contradicting the company's interests", and "Carrying out broker operations for purchase and sale of ships and financing purchase operations". He had considerable experience of shipping and chartering, having worked for the Sovcomflot group in relation to sales and purchases, ship finance and fleet operations since 1986. As I have said, between April 2003 and September 2004 Mr. Novikov was the Deputy Manager of the Fleet Operations Department.
Fiona Board decisions
- Some of the transactions that are the subject of claims, in particular those connected with the newbuildings, were authorised or approved by resolutions of the Board of Fiona. There were six members of Fiona's board in 2000 and 2001: Mr. Skarga, Mr. Borisenko, Mr. Terekhin, Mr. Lipka, Mr. Ambrosov and Mr. Izmaylov. Mr. Ambrosov and Mr. Izmaylov were not replaced when they left Sovcomflot, and after 2002 there were four directors. The directors of Fiona never met as a board, but they signed minutes to record decisions that they needed to authorise or to ratify, including decisions relating to the purchases giving rise to the allegations about the newbuildings scheme. The relevant minutes were drafted by WFW, the London solicitors who acted for Sovcomflot group companies, and were sent to Mr. Lipka, who collected signatures of the directors.
- Mr. Borisenko described it as "a purely administrative function" to obtain the directors' signatures, and said that signing them was "a purely 'mechanical' exercise". He claimed that in practice he did not read the minutes before signing them, but simply asked Mr. Lipka what they were about. Mr. Lipka's evidence was that each of the four directors read the draft resolutions and relevant papers when signing the minutes. He described checking the minutes and said that he signed them only if he believed the transaction in question was in the best interests of the group. I accept the evidence of Mr. Lipka, and reject that of Mr. Borisenko.
The "Principal Directions"
- Sovcomflot are and at all relevant times were not only nationalised but "a strategically important shareholding company", and therefore had regard to national policies as well as purely commercial objectives when conducting their business. On 24 December 1999, before Mr. Skarga was appointed Director-General, the General Board had approved a document entitled "Principal Directions of Sovcomflot OAO's Development" (the "Principal Directions"), which determined "the principal ways in which the activities of Sovcomflot OAO should be improved in the interests of its owner – the Government of the Russian Federation". They were to be "implemented in close cooperation with, and the direct participation of, the members of Sovcomflot OAO's Board of Directors, who represent the interests of the State in the Company and are senior executives of the Russian Federation". They identified objectives which were to be achieved in two "stages", the second of which was to start in 2002, and they laid down the strategy that the General Board determined Sovcomflot should pursue during the period when Mr. Skarga was Director-General. Mr. Frank confirmed in cross-examination that the policies in the Principal Directions were not revoked at any time before 2005, and indeed for the most part they still remain in force.
- The stated objectives included some which are, as I see it, important in view of criticisms made of the Sovcomflot's dealings with Mr. Nikitin and the Standard Maritime defendants. They include:
i) the objective of improving Sovcomflot's finances, and in particular to repay loans from foreign banks.
ii) the plan to modernise Sovcomflot's fleet; and
iii) the aim to increase Sovcomflot's presence in the Russian market, in particular as carriers of Russian exports;
- The Principal Directions stated that the "ratio of borrowed funds to internal funds in the structure of Sovcomflot OAO's book liabilities is too high, leading to the high absolute level of the Company's financial costs and relatively low level of its net profits". One of the tasks specifically identified as requiring immediate attention in the second stage of the programme was stated in these terms: "To organise, with the assistance of the Finance Ministry of the Russian Federation and the Foreign-Trade Bank, the refinancing of the 580-million dollar credit extended by the bank KfW [Kreditanstalt fur Wiederafbau, an East German government-owned development bank] for the construction of 10 long-distance container carriers, and repay money into the federal budget in accordance with an agreed plan". This was a reference to the so-called Megaslot debt. In 1988 the Sovcomflot group had bought ten container ships from East German yards. They were acquired by ten separate ship-owning companies in the Sovcomflot group called Megaslot Shipping Company Ltd. I–X, the 3rd to 10th claimants in the Fiona action ("the Megaslot Companies"), and finance was provided by the German government-owned development bank, KfW. The vessels were chartered at low rates to a German Liner company, DXR Senator (and they were sometimes referred to as the "Senator" vessels).
- Sovcomflot had difficulty in financing the loan by KfW. After the crisis in 1998, when the Russian state defaulted on its sovereign debt, payments by Russian commercial banks were suspended and the rouble was devalued, the Russian Ministry of Finance took over the loan as part of the Paris Club restructuring of Russian state debts.
- On 30 October 2000 Megaslot entered into an agreement to repay the Ministry of Finance the total debt of $571.5 million (plus interest, commission and expenses) in 30 equal six-monthly instalments or ahead of schedule, and they could do so by assigning debt instruments to the Ministry. Megaslot's obligations were guaranteed by Sovcomflot. On 15 November 2000 Megaslot agreed with Vnesheconom Bank ("VEB") that VEB should be Sovcomflot's agent to acquire bonds for repaying the debt, and that they would deposit funds with VEB for this purpose. In 2000 $50 million was deposited with VEB and a further $105 million was deposited in 2001. The $155 million was used to purchase bonds with a nominal value of US$285.5 million, and on 26 July 2001 the bonds were transferred to the Ministry of Finance in settlement of $262 million of the debt.
- At the end of 2001 Sovcomflot's balance sheet consisted mainly of vessels (which were valued at $1,079 million: they had also paid $205 million for vessels under construction, for which a further $477 million was still to be paid) and cash for operations in the sum of $137 million. It was largely funded by liabilities to shareholders comprising $390 million of equity from the Russian government, loans from western banks secured on vessels amounting to $639 million and the outstanding Megaslot debt, which still stood at about $332 million with a further $28 million of interest due to accrue in September 2002. The secured debt was in line with that of other international shipping companies, but, because of the Megaslot debt, the total debt ratio of 69% was high. Sovcomflot's objective remained to redeem the balance of the Megaslot debt in 2002, and they were able to do so at a discount of about 50%. On 23 September 2002 the outstanding $360.3 million was repaid at a cost of $180.5 million through the purchase of bonds.
- At the end of 1999, the Sovcomflot fleet comprised 77 vessels, including tankers, bulk carriers and two passenger vessels. The fleet was aging, and some vessels needed to be replaced.
- The tanker fleet comprised these 34 vessels:
Mr. Privalov faxed to Mr. Caze a signed copy of the "Fee Letter" from Glefi XXXI to BCV, and a copy was sent to Mr. Borisenko. It referred to the Loan Agreement, and continued, "This letter constitutes our commitment to payment to you an arrangement fee of US$255,000, which is equal to 0.85% of the amount of the Total Commitments of US$30,000,000". The "Address Commission Letter" from BCV to Glefi XXXI referred to their agreement to pay this fee, and continued, "This letter confirms our agreement to pay to you or to your order an address fee equal to 0.35% of the amount of the Total Commitments, subject to our receipt from you of the total amount of the arrangement fee due to us".
i) The "Genmar" transaction, as a result of which the recipient companies were paid some $4.9 million.
ii) The "Astro vessels" transaction, as a result of which the recipient companies were paid $1.38 million.
iii) The "Tsuneishi" transaction, which led to the recipient companies being paid $1.242 million.
iv) The "Hyundai Mipo" transaction, which led to the recipient companies being paid $1.87 million.
v) The "Daewoo" transaction, which led to the recipient companies being paid some $3 million.
vi) The "Athenian" transaction, as a result of which the recipient companies were paid $6.7 million.
i) The rate of commissions paid by Sovcomflot was increased because Clarkson needed to pay Mr. Nikitin, and otherwise the prices received by the 30th to 36th claimants would have been correspondingly higher;
ii) The explanation that Clarkson gave Sovcomflot for the level of commissions was untruthful, and Mr. Privalov was party to the misrepresentation; and
iii) Clarkson disguised the payment to the recipient company, Pollak, by routing it through M J Gruber.
i) Mr. Nikitin insisted upon receiving a higher rate of commission than the 2% that Mr. Gale originally planned. Pollak were paid some $1.75 million more than 1.5% of the sale price, the level of payment that had been discussed between Mr. Nikitin and Mr. Gale when the Clarkson arrangement was made. Mr. Nikitin said that Clarkson decided how much to pay Pollak without him prompting them, and he suggested in his evidence that Clarkson paid generously in order to encourage him to introduce more business. I do not accept that Mr. Gale would have volunteered so large an amount, and in particular that he would have decided on his own to increase the payment to 2 1/3%, an increase that required him to invent the fiction that the buyers had changed their requirements.
ii) Mr. Nikitin knew that the money was paid to Pollak through M J Gruber because Clarkson wished to conceal that they were paying his company. Mr. Nikitin said that he left it to Clarkson to decide how to make the payment, that their decision about routing the payment as they did was not explained to him, and that he took it that they, as leading brokers, knew "how to do it properly". However, the only conceivable reason that Clarkson paid Pollak indirectly was to disguise the recipient, and they would have had no reason to do so if they considered it a proper payment. Mr. Nikitin is an acute businessman and he must have realised this.
i) Mr. Privalov and Mr. Gale arranged that the sellers should pay address commissions, and concealed them from Sovcomflot.
ii) Their purpose was to generate funds to pay Milmont 1.5% of the purchase price and the money was in fact paid to Milmont.
iii) As a result, the prices that Fiona agreed to pay under the memoranda of agreement and that the purchasing companies agreed to pay were correspondingly increased.
iv) There is no evidence that I accept that Mr. Skarga had any part in making these arrangements or was aware of the address commissions.
v) There is no evidence that I accept that Mr. Nikitin introduced the business to Clarkson or played any part in the transaction.
i) Clarkson negotiated prices that included address commissions which they intended should not be received by, or disclosed to, the buyers, but which they intended that they should use to make payments in accordance with the Clarkson arrangement.
ii) Clarkson disguised from the yards that the address commissions were not being paid to the buyers.
iii) By March 2001 Mr. Privalov knew that Clarkson were increasing the commissions (including address commissions) to be paid by the yards upon purchases in order to provide funds for payments under the Clarkson arrangements and that as a result the Sovcomflot companies paid considerably higher prices for the vessels.
iv) Clarkson and Mr. Privalov colluded to avoid any reference to commissions in their communications and other documents that might be seen by Sovcomflot, including by Mr. Skarga.
i) The $5.5 million was paid to RTB as part of the Sovcomflot Clarkson commissions scheme, and the payment was funded by sums paid by Athenian by way of commissions
ii) The $1.2 million was diverted to Milmont under the Tam commissions scheme. There is no dispute that the $1.2 million was in fact paid into Milmont's account at Wegelin between August 2001 and January 2002.
i) Mr. Richard Coleman, the Clarkson broker who was liaising with the sellers and their broker, Mr. Vlahoulis of Vakis Vlahoulis SA, wrote on 20 March 2001, "As you are aware there is a bit of paranoia about secrecy, including, on a "need to know basis" within the organisation." He requested that correspondence be directed to Mr. Privalov, who would send "contracts/specs to whoever needs them …". He finished his message, "Please let me know what is arranged - tks yr patience and please eat this message after reading".
ii) Holman Fenwick & Willan ("HFW"), who were acting for the sellers and Athenian, prepared an initial draft of a re-sale agreement that provided that Fiona should be responsible for payment of commissions and specified the amount and to whom they were to be paid. This was sent to WFW on 22 March 2001. In an e-mail of 28 March 2001 Mr. Gale commented to Mr. Privalov of the proposal that Fiona should be responsible for the payment of commissions, "No way – sellers to pay commissions as customary. Very important". On 3 April 2001, Fiona required that the buyers should not be responsible for paying any commissions and that the sellers should pay 2% commissions to Clarkson under a separate agreement. There was to be no reference to commissions in other contracts.
iii) In an e-mail dated 26 April 2001, Mr. Gale asked Mr. Coleman to explain to the sellers' brokers that "we are in a sensitive area over commissions … The buyers are insisting on 2 pct. … Commission must not appear any more in our exchanges, simply gross figures, but the Russians are working backwards to see what net figures they will pay".
iv) On 30 April 2001, Mr. Coleman passed on Fiona's offer to Mr. Vlahoulis, noting "Price USDlrs 53.400.000 cash net each vsl to sellers. This to represent USDlrs 54.600.000 gross to cover necessary commissions which to be paid on closing to H. Clarkson with the cash flow. (Commission agreement by way of private side letter Sellers/H.C)". The deal was agreed upon this basis, and on 1 May 2001 Mr. Coleman sent Mr. Vlahoulis a recap in similar terms. Mr. Coleman sent Mr. Vlahoulis a message on 3 May 2001 stating, "Please note that the commission is to be kept separate and confidential and confirm that the total is USDlrs 7.200.000 with USDlrs 1.000.000 your side. We will draft a commission agreement and send to you for approval".
v) The formal recap sent on 1 May 2001 referred to the price simply as "USDlrs 54.600.000, private side letter sellers/[Clarkson]".
i) The "SCI Gaurav" was sold to a company to be nominated by Ofer Maritime Ltd. in the Ofer Brothers Group. Norstar introduced the sale to FML, and Clarkson only dealt with some administrative matters after the deal had been reached. Clarkson charged the seller, Megaslot VI Shipping Company Limited, the 8th claimant in the Fiona action, 3% commission, amounting to $645,000. They passed to Milmont $430,000 (or 2% of the sale price), to Norstar $107,000 (or 0.5% of the sale price) and to Shipping Associates $26,875 (or 0.125% of the sale price). Clarkson kept only $80,635, the equivalent of a commission of 0.375% of the sale price.
ii) The "Mekhanik Kurako" was sold to Thomas Jacobsen & Co (who ultimately nominated Jaco Stove Shipping Ltd. as the buyers) under a memorandum of agreement dated 4 June 2003. The sale was largely negotiated by Norstar as the buyers' brokers directly with FML, and Clarkson were involved with minor and administrative matters after the agreement had substantially been reached. Clarkson charged the seller, Mekhanik Kurako Shipping Co Ltd., the 39th claimant in the Fiona action, commission of $150,000, or 3% of the sale price. They kept $18,750 (or 0.375%). They paid $100,000 (2%) to Milmont, $25,000 (0.5%) to Norstar, and $6,250 (0.125%) to Shipping Associates.
iii) By three memoranda of agreement dated 21 August 2003, the "Lesozavodsk", the "Socofl Stream" and the "Socofl Tide" were sold by Socofl Honesty Shipping Inc, Socofl Stream Shipping Inc. and Socofl Tide Shipping Inc, the 40th, 41st and 43rd claimants in the Fiona action, for a price of $3.75 million each to an Italian company called Navigazione Due Golfi (or their nominees). Again, the documents that survive and are in evidence suggest, and I conclude, that these sales were substantively concluded between Norstar and FML. On each of the Clarkson's internal fixture slips, the "Sellers' Broker" was recorded as "H. Clarkson/Fiona Maritime Agencies" and the "Buyers' Broker" as "H. Clarkson/Norstar Shipping, Monaco". For each of the sales, the commissions charged to the purchasers by Clarkson were 2%, amounting to $75,000. Clarkson passed $37,500 (1%) to Milmont, $18,750 (0.5%) to Norstar, and $4,687.50 (0.125%) to Shipping Associates. Clarkson kept $14,062.50 (0.375%).
Spreadsheets for Mr. Nikitin's commissions
i) Whether, by the Clarkson arrangement, Clarkson entered into any contractual agreement with Mr. Nikitin or any company associated with him.
ii) If so, whether it gives rise to any obligation upon Clarkson to make payments in respect of the purchases.
iii) Whether by the confirmation letters Clarkson entered into any contractual commitment.
iv) Whether, if Clarkson did enter into any contractual commitment, it is illegal and unenforceable.
i) There is no credible evidence that Mr. Skarga was party to making (or confirming) the Norstar arrangement or that he knew of it.
ii) Mr. Privalov introduced Sovcomflot's business to Norstar, and Mr. Nikitin played no part in doing so.
i) Mr. Izmaylov was party to the NSC Clarkson commissions scheme, by which Mr. Nikitin, Mr. Gale and Mr. Privalov arranged that the Clarkson arrangement should be operated in relation to vessels purchased by NSC; that between May 2002 and April 2005 Clarkson handled as NSC's brokers the purchases of 28 newbuildings and two second-hand vessels; and that in accordance with the arrangement Clarkson made payments to Milmont on the business. Clarkson received on the 30 purchases total commissions of $28,841,198, and they paid $17,340,919 to Milmont and also $3,252,568 to Shipping Associates, retaining for themselves $8,247,493.
ii) Mr. Izmaylov agreed to the Galbraith's commissions scheme whereby he arranged with Mr. Rokison that NSC should use Galbraith's as their brokers to sell vessels, and that Galbraith's entered into an arrangement with Mr. Nikitin to make payments from their commissions to his order. Galbraith's also had an arrangement with Mr. Privalov to make payments to Shipping Associates. Between April 2002 and April 2005 NSC sold 37 vessels through Galbraith's, and Galbraith's also negotiated refinancing arrangements for four newbuildings that NSC had bought and acted as NSC's brokers upon the purchase in March 2005 of the "Four Stream". Galbraith's were paid in total $16,996,463 by way of commissions, and they paid $7,329,052 to Amon, the company nominated by Mr. Nikitin to receive payments, $4,335,720 to other brokers and $1,186,222 to Shipping Associates, keeping for themselves $4,145,469.
i) Mr. Skarga dishonestly failed to tell the Executive Board that RCB were prepared to settle the debt for 45c. in the dollar. I have concluded that Mr. Skarga did not know this.
ii) Mr. Skarga did not tell the Executive Board that the letter containing Gemarfin's offer was designed to give the impression that it was from "an independent third party" who had already acquired the debt. The claimants referred to Mr. Privalov assisting Ms. Rumbold to draft the letter and to the fact that, when Mr. Privalov wrote to Gemarfin after the Executive Board meeting, they did not reply until October 2001. There is no evidence that Mr. Skarga knew how the letter came to be drafted or that Mr. Privalov had a part in its preparation, and I am unable to understand the significance that the claimants attach to the delay in Gemarfin responding to the offer made after the meeting.
iii) Mr. Skarga "dishonestly failed to tell the Executive Board that the plan which existed at 9 August 2001 was for Fiona itself to provide the funds for Gemarfin to purchase the RCB debt at 45c. in the $". This argument was not developed by Mr. Popplewell. The claimants would have to establish that this was the plan on 9 August 2001, and they have not proved this. In any case, where there is a series of back-to-back agreements of this kind, it is not unusual or remarkable that the price is passed down the chain of sellers.
i) A memorandum of agreement in Saleform 1993 of the Norwegian Shipping Association ("Saleform 1993") between Fili Shipping and Blanter for the sale of the vessel. The purchase price was to be paid to Fili Shipping's account at BCV in Switzerland.
ii) A charterparty in the Baltic and International Maritime Council ("Bimco") bareboat charter form "Barecon 89" between Blanter and Fili Shipping for the five year time charter.
iii) A second memorandum of agreement in Saleform 1993 between Fili Shipping and Blanter Shipping whereby Fili Shipping agreed to buy and Blanter agreed to sell the "Fili", and that the price of $10.5 million should be paid to Blanter's account at BCV in Switzerland on delivery of the vessel.
iv) A guarantee whereby Fiona guaranteed to Blanter the obligations of Fili Shipping under the charterparty and the second memorandum of agreement.
Each calculation, therefore, assumed a five years' charterparty, but Mr. Borisenko added, "Maybe try: 17m less 1%, 3 years 8,000 pd 12.6m: 10.64%", that is to say, he suggested the possibility of a three years' charterparty.
i) The Arbat vessels were chartered to Sovcomflot companies, which had rights to re-purchase them at the end of the charter periods; and
ii) The "Tromso Confidence" and the "Tropic Fidelity" were owned by Glefi Shipping XX Co Ltd. ("Glefi XX") and Glefi Shipping XXII Co Ltd. ("Glefi XXII"), two Sovcomflot companies. Buckingham and Marshall, which were controlled by Mr. Nikitin, agreed to sell them although they had no rights over them.
i) Mr. Willis had no previous experience of rights in a shipbuilding contract being transferred by a sale of the shares, the method used to transfer the rights to hulls nos 1585 and 1586 to Standard Maritime, and he accepted that such a sale "would be unlikely to attract many open market buyers".
ii) In the contracts with Titanium and Pendulum, HHI had agreed that, before the vessels were delivered, the benefits of the contracts might be assigned to a bank or financier providing finance in connection with the vessel but otherwise they were assignable only with HHI's prior written approval, which was not to be unreasonably withheld or delayed. They had also agreed that there might be a novation to another company in the group. In either case, the buyers' obligations were still to be guaranteed by Fiona. Mr. Willis accepted that shipyards do not generally like to have their contracts assigned or to enter into novations of their contracts, and are often reluctant to agree arrangements of either kind.
iii) Mr. Willis and Mr. Day agreed that the usual method adopted to transfer the benefit of a shipbuilding contract is to enter into a Norwegian Sale Form contract upon terms mirroring the shipbuilding contract. This would not bring the buyer into a direct contractual relationship with the yard, and particularly if, as here, the benefit is transferred some time before delivery of the vessel, this has potential disadvantages for the buyer. For example, the seller has little incentive to supervise the construction carefully.