Cadogan Petroleum Plc & Ors v Tolley & Ors

A variety of applications came before me in July. Some of them have been adjourned or otherwise dealt with by agreement. The matters that remain to be decided at this stage can be summarised in broad terms as follows:

The Claimants comprise a group of companies in the business of the exploration and exploitation of gas reserves, in particular in Ukraine. The First Claimant, Cadogan Petroleum plc, is now the ultimate holding company.

The Fourth Defendant, Mr Vasyl Vivcharyk, who is a Ukrainian national, was the chief operating officer of the Cadogan Group between 2007 and June 2009. The Fifth Defendant, VPV Oil Investments LLC (“VPV”), a Delaware company, is owned and controlled by Mr Vivcharyk.

The claims against Mr Vivcharyk and VPV (“the Vivcharyk Defendants”) fall into four parts. First, there are claims (“the Smith Claims”) relating to arrangements between the Cadogan Group and a group of companies referred to as “the Smith Companies” which supplied petroleum drilling equipment and services to the Cadogan Group. The Claimants allege that Mr Vivcharyk and Mr Mark Tolley, the First Defendant and the chief executive officer of the Cadogan Group between 2006 and March 2009, received secret commissions from the Smith Companies and that the contracts between the Cadogan Group and the Smith Companies were uncommercial and did not accord with normal industry practice. These claims are denied by the Vivcharyk Defendants.

Secondly, there are claims (“the GPS Claims”) relating to the acquisition by the Cadogan Group of two gas plants for the sum of $54 million. It is said by the Claimants that Mr Tolley and Mr Vivcharyk accepted secret commissions in respect of the transaction and that the gas plants were worth much less than the purchase consideration. These claims are also denied by the Vivcharyk Defendants.

Thirdly, there are claims (“the Ribelant Claims”) arising out of the Cadogan Group’s acquisition of a company called Radley Investments Limited in late 2007 or early 2008 from the Seventeenth Defendant, Ribelant Limited (“Ribelant”). Here, the Claimants allege that some of the $32.6 million paid to Ribelant by way of purchase consideration was dishonestly diverted to Mr Tolley and Mr Vivcharyk and/or paid to them as bribes or secret commissions. Once again, the claims are denied by the Vivcharyk Defendants.

It is noteworthy that, in the case of the Ribelant Claims, the Claimants maintain that money they paid to Ribelant can be seen to have reached the Vivcharyk Defendants. In brief summary, it is said that some of the $32.6 million that the Claimants paid to Ribelant was paid on, purportedly pursuant to equipment sale contracts, to accounts in the names of the former Fourteenth and Nineteenth Defendants, respectively AOE Energy Inc (“AOE”) and Bohai Energy Services Limited (“Bohai”), which, in turn, made payments of $423,000 and $970,000 to VPV. The Vivcharyk Defendants do not appear to dispute that the $423,000 and $970,000 sums were indirectly derived from payments made to AOE and Bohai by Ribelant, but they deny having known that that was the case.

Finally, the Claimants make complaints about expense claims made by Mr Vivcharyk and in relation to some properties in Ukraine which were owned by Mr Vivcharyk or persons associated with him and rented to members of the Cadogan Group. So far as the expenses are concerned, Mr Vivcharyk says that he made an honest mistake. As regards the properties, Mr Vivcharyk says that they were managed by others on his behalf and that he was unaware of the identities of the tenants.

Proceedings were issued on 19 June 2009. On the same day, Sir Andrew Park granted worldwide freezing injunctions against the Vivcharyk Defendants on a without-notice basis. The injunctions were continued by Peter Smith J, first, on the specified return date (viz. 29 June 2009) and, secondly, in respect of additional claims (notably, the Ribelant Claims), on 12 February 2010.

The freezing injunctions are subject to a limit of £15 million (so that, for example, they provide that a Defendant is not to “remove from England and Wales any of his assets which are in England and Wales up to the value of £15 million”). They also contain proprietary injunctions related to the Smith and GPS Claims. Mr Vivcharyk is required “not in any way [to] deal with, pledge, charge or dispose of any money, payment or other asset received by [Mr Vivcharyk] or VPV Oil Investments LLC between 1^st January 2006 and 1^st April 2009 from Smith Eurasia Limited or Global Process Systems LLC or Global Process Systems Inc or on their order, or any asset now representing the same”, and there is a similar prohibition in relation to VPV. It is also noteworthy that the orders of 29 June 2009 provided for each of the Vivcharyk Defendants to have “the right to apply to set aside or vary the terms of this Order without showing change of circumstances and to take all arguments otherwise available to him on the first return day”.

The Claimants’ case is now conveniently to be found in an abridged version of the Re-Amended Particulars of Claim which was served pursuant to an order made by the Chancellor on 29 March 2011. The relief sought includes declarations that various sums of money or their traceable proceeds are held on trust for the Claimants. In respect, for example, of the Smith Claims, the Claimants ask, among other things, for:

“Declarations that such bribes and secret commissions or their traceable proceeds are held on constructive trust for the Claimants and orders for payment of the same to the Claimants”.

The Vivcharyk Defendants are now the only Defendants actively defending the proceedings. The other Defendants either failed to acknowledge service or have now entered into settlements with the Claimants.

An eight-week trial is due to take place in May/June 2012.

It is the Vivcharyk Defendants’ case that the recent decisions of Lewison J and the Court of Appeal in Sinclair Investments (UK) Ltd v Versailles Trade Finance Group plc ([2010] EWHC 1614 (Ch) and [2011] EWCA Civ 347) render unsustainable the proprietary claims advanced by the Claimants in respect of the Smith Claims, the GPS Claims and the Ribelant Claims. As a result, the Vivcharyk Defendants say, they should be given summary judgment in respect of those claims or they should be struck out. On the same basis, the Vivcharyk Defendants ask that the proprietary elements of the freezing injunctions be deleted.

In Sinclair Investments (UK) Ltd v Versailles Trade Finance Group plc, a company referred to as “TPL” asserted a proprietary interest in sums a Mr Cushnie, a director of TPL, had received from selling shares in a company referred to as “VGP”. The claim was advanced on the footing that the apparent value of VGP had been artificially inflated by the misuse, in breach of Mr Cushnie’s fiduciary duties, of money entrusted to TPL. It was said that the proceeds of sale of the shares represented an unauthorised gain made by Mr Cushnie in the course of his fiduciary relationship with TPL and through the misuse of the TPL money.

While no bribes or secret commissions were alleged in Sinclair, the parties’ arguments and the Courts’ judgments alike “focussed on cases where the courts have had to consider whether, where an agent or employee accepts a bribe or secret commission or the like, his principal or employer beneficially owns the bribe” (paragraph 55 of Lord Neuberger MR’s judgment). Lord Neuberger MR (with whom the other members of the Court agreed) said that he was prepared to proceed on the basis that, “if a claimant beneficially owns a bribe received by a fiduciary, it follows that TPL’s proprietary claim to the proceeds of sale of the Shares [in VGP] must succeed” (paragraph 56).

It was argued on behalf of TPL that the decision of the Privy Council in Attorney-General for Hong Kong [1994] 1 AC 324 should be followed in preference to the approach taken by the Court of Appeal in Metropolitan Bank v Heiron (1880) 5 Ex D 319 and, in particular, Lister & Co v Stubbs (1890) LR 45 Ch D 1. In Lister, the Court of Appeal held that bribes that an employee had taken from suppliers to his employers were not held on trust for the employers. Cotton LJ said (at 12):

“[I]n my opinion this is not the money of the Plaintiffs, so as to make the Defendant a trustee of it for them, but it is money acquired in such a way that, according to all rules applicable to such a case, the Plaintiffs, when they bring the action to a hearing, can get an order against the Defendant for the payment of that money to them. That is to say, there is a debt due from the Defendant to the Plaintiffs in consequence of the corrupt bargain which he entered into; but the money which he has received under that bargain cannot, in the view which I take, be treated as being money of the Plaintiffs, which was handed by them to the Defendant to be paid to Messrs. Varley [i.e. the suppliers] in discharge of a debt due from the Plaintiffs to Messrs. Varley on the contract between them”.

In contrast, in Attorney-General for Hong Kong v Reid, where a prosecutor had accepted bribes in breach of the fiduciary duty he owed as a servant of the Crown, the Privy Council concluded that properties bought with the bribes were held on trust for the Crown. Lord Templeman, delivering the judgment of the Board, said (at 336):

“The decision in Lister & Co. v. Stubbs is not consistent with the principles that a fiduciary must not be allowed to benefit from his own breach of duty, that the fiduciary should account for the bribe as soon as he receives it and that equity regards as done that which ought to be done. From these principles it would appear to follow that the bribe and the property from time to time representing the bribe are held on a constructive trust for the person injured”.

Lord Templeman also referred approvingly (at 337) to an extra-judicial address (to be found at [1993] RLR 7) in which Sir Peter Millett (as he then was) had said:

“[The fiduciary] must not place himself in a position where his interest may conflict with his duty. If he has done so, equity insists on treating him as having acted in accordance with his duty; he will not be allowed to say that he preferred his own interest to that of his principal. He must not obtain a profit for himself out of his fiduciary position. If he has done so, equity insists on treating him as having obtained it for his principal; he will not be allowed to say that he obtained it for himself. He must not accept a bribe. If he has done so, equity insists on treating it as a legitimate payment intended for the benefit of the principal; he will not be allowed to say that it was a bribe”.

In Sinclair, however, Lord Neuberger said that he was “far from satisfied that [the Supreme Court] would follow Reid ... rather than Heiron ... and Lister” and that, in any event, it did not seem to him right to follow Reid (paragraph 76). In paragraph 80, Lord Neuberger said:

“[I]t seems to me that there is a real case for saying that the decision in Reid ... is unsound. In cases where a fiduciary takes for himself an asset which, if he chose to take, he was under a duty to take for the beneficiary, it is easy to see why the asset should be treated as the property of the beneficiary. However, a bribe paid to a fiduciary could not possibly be said to be an asset which the fiduciary was under a duty to take for the beneficiary. There can thus be said to be a fundamental distinction between (i) a fiduciary enriching himself by depriving a claimant of an asset and (ii) a fiduciary enriching himself by doing a wrong to the claimant. Having said that, I can see a real policy reason in its favour (if equitable accounting is not available), but the fact that it may not accord with principle is obviously a good reason for not following it in preference to decisions of this court”.

Summarising his conclusions on the proprietary claim to the proceeds of the shares, Lord Neuberger said in Sinclair:

“88 In my view, Lewison J was right to reject TPL's proprietary claim to the proceeds of sale of the Shares. It is true that the decisions in Reid ... , Sugden ... and (at least arguably) Pearson's case ... go the other way. However, there is a consistent line of reasoned decisions of this court (two of which were decided within the last ten years) stretching back into the late 19th century, and one decision of the House of Lords 150 years ago, which appear to establish that a beneficiary of a fiduciary's duties cannot claim a proprietary interest, but is entitled to an equitable account, in respect of any money or asset acquired by a fiduciary in breach of his duties to the beneficiary, unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary.

89 For the reasons I have given, previous decisions of this court establish that a claimant cannot claim proprietary ownership of an asset purchased by the defaulting fiduciary with funds which, although they could not have been obtained if he had not enjoyed his fiduciary status, were not beneficially owned by the claimant or derived from opportunities beneficially owned by the claimant. However, those cases also establish that, in such a case, a claimant does have a personal claim in equity to the funds. There is no case which appears to support the notion that such a personal claim entitles the claimant to claim the value of the asset (if it is greater than the amount of the funds together with interest), and there are judicial indications which tend to militate against that notion.”

I am told that the Court of Appeal’s decision in Sinclair has not been the subject of any appeal.

It is clear from that decision that the Court of Appeal considered that, the Supreme Court apart, the Courts are bound to follow Metropolitan Bank v Heiron and Lister & Co v Stubbs rather than Attorney-General for Hong Kong v Reid.

As I see it, it is also apparent from Sinclair that a distinction is to be drawn between (a) the exploitation by a fiduciary of property or opportunities subject to fiduciary obligations and (b) other exploitation by a fiduciary of his position. It can be seen from Lord Neuberger’s judgment that an asset or money which a fiduciary has “acquired … in breach of his duties to the beneficiary” (see paragraph 88 of the judgment) or “could not have obtained if he had not enjoyed his fiduciary position” (paragraph 89 of the judgment) will not necessarily be held on trust for the beneficiary of the fiduciary’s duties. The beneficiary cannot claim a proprietary interest “unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary” (paragraph 88 of the judgment).

That approach is to an extent inconsistent with the views advanced by Sir Peter Millett in the address quoted by the Privy Council in Reid. Sir Peter Millett considered that a fiduciary who had made a profit out of his position would “not be allowed to say that he obtained it for himself” and that equity would insist on treating a bribe “as a legitimate payment intended for the benefit of the principal”. Sinclair, however, proceeds on the basis that a fiduciary who has made a profit out of his position will not always hold it on trust for his beneficiary.

At first sight, accordingly, Sinclair does lend support to the Vivcharyk Defendants’ attack on the Claimants’ proprietary claims. However, Mr Richard Morgan QC, who appears with Mr Thomas Munby for the Claimants, put forward a number of arguments to contrary effect.

In the first place, Mr Morgan submitted that what was said about bribes in Sinclair was obiter and that, notwithstanding the Court of Appeal’s preference for Lister & Co v Stubbs, Attorney-General for Hong Kong v Reid should be followed. Reid, Mr Morgan suggested, provides an impeccable analysis of the relevant principles.

However, it seems to me that the Court of Appeal’s decision in Sinclair was based on (and I am therefore bound by) the proposition that “a beneficiary of a fiduciary's duties cannot claim a proprietary interest … in respect of any money or asset acquired by a fiduciary in breach of his duties to the beneficiary, unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary”. While the significance of that proposition doubtless extends beyond bribes and secret commissions, it means, I think, that I must proceed on the footing that a beneficiary will have no proprietary interest in a bribe or secret commission unless it can be said that it “is or has been beneficially the property of the beneficiary or the [fiduciary] acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary”. Further, I do not think it is open to me (or would be open to any other judge at trial) to choose to follow Reid instead of Lister & Co v Stubbs.

Another of Mr Morgan’s submissions echoed the thesis espoused by Sir Peter Millett in the address quoted in Reid. Mr Morgan argued that, whenever an act can be done rightfully, a fiduciary is not entitled to say that it was done wrongfully. As I have said above, however, it seems to me that Sir Peter Millett’s approach is not wholly consistent with that taken by the Court of Appeal in Sinclair.

Next, Mr Morgan argued that, in Sinclair, the Court of Appeal recognised that a bribe or secret commission could sometimes be the subject of a proprietary claim. Mr Morgan relied, for example, on Lord Neuberger’s reference (in paragraph 88) to a beneficiary of a fiduciary’s duties being unable to claim a proprietary interest “unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary”. In the present case, Mr Morgan contended, the alleged bribes and secret commissions would or might prove to have been acquired “by taking advantage of an opportunity or right which was properly that of the beneficiary”. The Claimants will, Mr Morgan said, have had the opportunity to reduce what they were to pay by at least the amount of the alleged bribes and secret commissions (compare Hovenden and Sons v Millhoff (1900) 83 LT 41), and the Vivcharyk Defendants obtained the bribes or secret commissions by taking advantage of that opportunity.

I have not been persuaded. There are undoubtedly authorities suggesting that proprietary claims can be made in respect of property obtained by the diversion of opportunities (in particular, maturing business opportunities) (see e.g. Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), at paragraphs 1342-1344, 1355 and 1356). I am not aware, however, of any case in which an opportunity to obtain a reduced price has been considered a relevant opportunity for this purpose. In any event, I do not think that a bribe or secret commission is to be viewed as the diversion of an opportunity to obtain a reduced price. In Sinclair, Lord Neuberger said that there is a “fundamental distinction between (i) a fiduciary enriching himself by depriving a claimant of an asset and (ii) a fiduciary enriching himself by doing a wrong to the claimant” and that “a bribe paid to a fiduciary could not possibly be said to be an asset which the fiduciary was under a duty to take for the beneficiary”. A bribe is to be seen as something the fiduciary obtained by doing a wrong rather than by depriving the beneficiary of an opportunity. Were the position otherwise, beneficiaries would (contrary to the view of the Court of Appeal in Sinclair) very frequently have proprietary interests in bribes and secret commissions since they could commonly be said to have been derived from opportunities to obtain a reduced price (or, where an asset is being sold, an increased one), and cases approved in Sinclair could have been expected to have been decided differently. As Lord Neuberger said in Sinclair (at paragraph 55), the money at issue in such cases “was not money which was part of the assets subject to [the fiduciary’s] duties, or derived from such assets”.

It was also suggested on behalf of the Claimants that proprietary claims could be made in respect of the sums that the Vivcharyk Defendants are alleged to have received (or at least those at issue in the Ribelant Claims) on the basis that the Vivcharyk Defendants received funds or assets which had originally come from the Claimants. It was pointed out that, in Sinclair, Lord Neuberger recognised that a proprietary interest could arise where “the asset or money is or has been beneficially the property of the beneficiary” (see paragraph 88 of the judgment). Here, the Claimants said, there is evidence that money the Claimants paid to Ribelant ultimately reached the Vivcharyk Defendants (see paragraph 7 above).

The decision of Lawrence Collins J in Daraydan Holdings Ltd v Solland International Ltd [2004] EWHC 622 (Ch), [2005] Ch 119 may be said to lend support to this submission. In that case, Lawrence Collins J said that, if the case before him had not been distinguishable from Lister & Co v Stubbs, he would have applied Attorney-General for Hong Kong v Reid (see paragraph 86). He also took the view, however, that Lister & Co v Stubbs could be distinguished on two grounds. He said:

“87 But even if I were bound by Lister & Co v Stubbs, in my judgment there are two very significant differences between this case and that decision which in any event justify the restitutionary remedy. First, the facts of this case make it a case where there is a proprietary basis for the claim and where the bribe derives directly from the claimants' property. This is not a case where the price is presumed (for the purposes of the personal remedy) to have been increased by the amount of the bribe. Rather it is a case where the evidence is that the price was actually increased by the amount of the bribe, and where the bribe was paid out of the money paid by the claimants for what they thought was the price. These factors make the claim one for the restitution of money extracted from the claimants.

88 Secondly (and independently), the portion representing the bribe was paid as a result of a fraudulent misrepresentation of the Sollands, to which Mr Khalid was a party, that the true price was the invoice price, when [in] fact the price had been inflated to pay the bribes. I do not consider that Halifax Building Society v Thomas [1996] Ch 217 rules out a proprietary claim to the proceeds of fraud. In that case the defendant fraudulently obtained a loan from the building society, and it sought a declaration that it could keep the proceeds of sale as against the Crown's competing claim to confiscate the surplus in execution of a criminal confiscation order. The Court of Appeal refused to make the declaration on the grounds that the fraudster was not a fiduciary, that there was no universal principle that wherever there was a personal fraud the fraudster would become a trustee for the defrauded party, and that the building society had, with knowledge of the fraud, affirmed the mortgage, and was therefore only a secured creditor. The decision is controversial …. But in the present case Mr Khalid was a fiduciary, and the claimants had not affirmed any of the contracts, and had rescinded the only contracts still to be performed.”

While the second of these points cannot help the Claimants, the first might be said to do so.

In Sinclair, Lord Neuberger, having noted that in Daraydan Lawrence Collins J had preferred to follow Reid, said (in paragraph 84):

“but (i) that was before the guidance given in Spectrum Plus [2004] Ch 37, [2005] 2 AC 680, referred to in para 73 above, (ii) as Lawrence Collins J pointed out at [2005] Ch. 119, paras 87-88, on the facts of that case, the decision was not inconsistent with the reasoning in Lister 45 Ch D 1, and (iii) it was a first instance judgment, and neither Tyrrell 10 HL Cas 26 nor Archer's case [1892] 1 Ch 322 was cited to him”.

A similar point arises in relation to Re Caerphilly Colliery Company (Pearson’s case) (1877) 5 Ch D 336. In Sinclair, Lord Neuberger commented on this case as follows (at paragraph 64):

“In that case, again, there appears to have been no issue as to whether the claim against Pearson was based on a proprietary interest or a duty to account in equity, and, as there was no suggestion that Pearson was in danger of bankruptcy, it is not clear that either party had an interest in raising that issue. I also note that Tyrrell 10 HL Cas 26 does not appear to have been cited. Further, as pointed out by Lewison J at [2010] EWHC 1614, para 36, given that the shares had been issued as part of the payment by the company for the acquisition of the colliery, Pearson's case LR 5 Ch D 336 ‘was a case in which the property that was subject to the trust had originally been the beneficiary's property’”.

Once again, therefore, there was reference to the fact that the benefit the fiduciary had received had formerly belonged to the beneficiary.

I do not consider, however, that Lord Neuberger’s treatment of Pearson’s case and Daraydan does in the end lend any significant support to the Claimants’ case. Lord Neuberger listed a number of matters which might be said to reduce the significance of Pearson’s case before going on to say (in paragraph 77) that “it may be true that the reasoning in Pearson’s case ... is inconsistent with [Heiron and Lister]”, which latter cases Lord Neuberger thought should be followed. Lord Neuberger cannot, as it seems to me, be read as expressing the view that the decision in Pearson’s case was justified by the fact that “the property that was subject to the trust had originally been the beneficiary’s property”. For similar reasons, I do not think Lord Neuberger can be taken to have endorsed each of the reasons (in particular, the first) that Lawrence Collins J gave for considering Lister & Co v Stubbs to be distinguishable. He did not need to arrive at any conclusion on the points Lawrence Collins J made, and he did not do so.

For my part, I cannot see that it could matter that an alleged bribe or secret commission had been paid from funds which could be tracked back to money which had once belonged to the Claimants. The position might have been different if the contracts in respect of which the bribes and secret commissions were allegedly paid had been rescinded (compare e.g. El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, at 734; reversed on other grounds). I am told, however, that the Claimants have entered into settlement agreements affirming the contracts relevant to the Smith and GPS Claims. Further, Mr Morgan said that the contract to which the Ribelant Claims relate has not been rescinded and that the Claimants still have the shares in Radley Investments Limited which were transferred under it; no claim for rescission of the contract is, moreover, to be found in the Re-Amended Particulars of Claim. In the circumstances, the Claimants cannot assert any proprietary interest in the money which they paid pursuant to their contracts: it became the payees’ rather than theirs both at law and beneficially. It follows that any bribes or secret commissions paid from sums derived from the payments were not paid from the Claimants’ money. Absent rescission, the money which the Claimants paid “cannot be said to be the money of the [Claimants]” (to adapt words of Cotton LJ in Lister & Co v Stubbs, at 12). Put in slightly different words, I do not think the mere fact that the money used to pay bribes or secret commissions derived from payments made by the Claimants could suffice to justify a proprietary entitlement which the Claimants would not otherwise enjoy when the Claimants (a) made their payments on an out-and-out basis and (b) have not elected to rescind the contracts pursuant to which the payments were made.

I should add that, although the Re-Amended Particulars of Claim refer to the $32.6 million having been paid to Ribelant “purportedly pursuant to the Radley SPA” (the “Radley SPA” being the written agreement between Ribelant and the Second Claimant for the sale of Radley Investments Limited), I do not understand it to be alleged by the Claimants that the apparent agreement between Ribelant and the Second Claimant was a sham or otherwise void. That being the case, it seems to me, as I have indicated, that Ribelant must have acquired title to the $32.6 million.

I should also add that I do not think that Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400, to which Mr Morgan made reference, takes matters any further. In that case, Millett LJ distinguished two different situations in which the expressions “constructive trust” and “constructive trustee” have been used by equity lawyers (at 408-409):

“The first covers those cases already mentioned, where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.”

In Halton International Inc v Guernroy Ltd [2006] EWCA Civ 801, the Court of Appeal considered that, for there to be a trust within the first of Millett LJ’s classes, “there must be a trust (or trustee-like responsibility) for specific existing property, not merely for the means to obtain it in the future” (see paragraph 23). Were it the case, say, that, contrary to my view, an opportunity to obtain a reduced price were properly to be considered property of a beneficiary, and a bribe diversion of that opportunity, there might be a good case for a trust within Millett LJ’s first class. However, I do not think that identifying the categories assists with deciding whether a bribe is indeed to be seen as diversion of an opportunity belonging to the beneficiary.

In all the circumstances, the Claimants have, in my judgment, no real prospect of succeeding on their proprietary claims in respect of the Smith, GPS and Ribelant Claims. I agree with Mr Richard Millett QC, who appears with Mr David Davies and Mr Anton Dudnikov for the Vivcharyk Defendants, that, having regard to the Sinclair case, the proprietary claims would fail even if the Claimants established the pleaded facts. Further, there does not appear to me to be any other compelling reason why the claims should be disposed of at trial rather than now. I shall, accordingly, give summary judgment in favour of the Vivcharyk Defendants with regard to the proprietary claims relating to the Smith, GPS and Ribelant Claims. I shall also delete the proprietary elements of the freezing injunctions. My dismissal of the relevant proprietary claims must mean that there is, on this aspect, no longer any serious issue to be tried.

The Vivcharyk Defendants ask that the maximum sum specified in the freezing injunctions (currently, £15 million) should be (a) expressed in US dollars instead of sterling and (b) reduced (according to the Vivcharyk Defendants, to $5,330,686 plus a modest allowance for the Claimants’ recoverable costs). The former change is uncontroversial, but the latter is disputed.

The basis on which the Claimants say that the present maximum sum remains appropriate (subject to conversion into dollars) is explained in a witness statement of a Mr Silver (a solicitor with the Claimants’ solicitors, Dewey & LeBoeuf) and, in particular, in a table to be found in that witness statement. Sums of $1.8 million, $6 million and $7.7 million are attributed to the Smith, GPS and Ribelant Claims respectively. The Claimants give credit for receipts pursuant to settlements with other Defendants (in the total sum of $4,760,000), but add $12.8 million in respect of their costs. As Mr Silver notes in his witness statement, the table has been prepared on the assumption that the Vivcharyk Defendants would be entitled to credit in respect of the full amount of the settlements, but also on the assumption that the full amount of the costs incurred by the Claimants must be taken into account. Overall, the Claimants’ calculations produce a figure of $23,540,000 (or “approximately £14.76 million”).

The Vivcharyk Defendants do not take issue with the figure which the Claimants put forward in respect of the Ribelant Claims. With regard to the figures for the Smith and GPS Claims, these were explained to me by Mr Morgan and seem justifiable. Mr Millett pointed out that the $1.8 million given for the Smith Claims was related to the amount of bribes or secret commissions said to have been paid to or for the benefit of Mr Tolley as well as the Vivcharyk Defendants, but there is a good arguable case that the Claimants will have suffered loss of at least the amount of all such bribes and secret commissions, especially having regard to Hovenden v Millhoff; the credit of $1.7 million which the Claimants have allowed also strikes me as reasonable. As for the GPS Claims, the evidence on which the $6 million figure is based is, in my view, sufficient for present purposes; more can be expected to become available when trial evidence is served.

The costs figure ($12.8 million) was a source of substantial dispute. Mr Millett argued that $12.8 million was an extravagant amount and should be disregarded, though he accepted that a “modest and proportionate allowance” should be made. He suggested that the amount of costs Mr Vivcaryk had himself spent to date, which he put at some £485,000, provided a rough and ready but fair guide.

As regards that last point, Mr Morgan said that Mr Vivcharyk’s (new) lawyers had incurred costs of the order of £0.5 million since the middle of June of this year. He also pointed out that the $12.8 million related to the costs of the proceedings against all the Defendants, not just the Vivcharyk Defendants, and suggested that it was appropriate for costs incurred in relation to other Defendants to be set against sums recovered from those Defendants on a pound-for-pound basis. Mr Morgan pointed out, too, that the $12.8 million represents past costs; the Claimants’ calculations take no account of the (doubtless very large) costs that the Claimants can be expected to incur in taking the case to trial.

All in all, I consider it appropriate to reduce the maximum sum specified in the freezing injunctions by only a modest amount, to $22 million.

By an application notice dated 29 June 2011, the Vivcharyk Defendants applied for specific disclosure of a variety of documents. The parties have succeeded in disposing of parts of the application by agreement. Issues, however, remain in relation to interviews which were conducted in May and June of 2009. The Vivcharyk Defendants seek disclosure of documents recording what was said in the interviews of eight individuals (namely, Mr Baron, Mr Corby, Mr Biddlestone, Mr Sawka, Mr Malanyuk, Mr Kempl, Mr Jovanovich and Mr Elgar), seven of whom were Cadogan employees. A draft order prepared on behalf of the Vivcharyk Defendants envisages that the disclosure would extend to “both contemporaneous notes of the interviews themselves and subsequent reports and/or summaries of what had been said in those interviews” but would not cover “legal advice given in relation to the interviews or what was said therein”.

The Claimants oppose the application for disclosure on the basis that litigation privilege applies. The Vivcharyk Defendants dispute that on three grounds. They argue that:

I shall take these points in turn.

It is common ground that litigation privilege “relates only to communications at the stage when litigation is pending or in contemplation, and only those made for the sole or dominant purpose of obtaining legal advice or conducting that litigation” (to quote from Beatson J in West London Pipeline and Storage Ltd v Total UK Ltd [2008] EWHC 1729 (Comm), at paragraph 51). In Axa Seguros SA De CV v Allianz Insurance plc [2011] EWHC 268 (Comm), Christopher Clarke J summarised the relevant principles in these terms (at paragraph 13):

“In order for a document to be protected by litigation privilege two conditions must be satisfied. Firstly, at the time that the document in question was created, litigation must be reasonably in prospect and not a mere possibility. It is not sufficient that there is a ‘distinct possibility that sooner or later someone might make a claim’, or that there was ‘a general apprehension of future litigation’: see USA v Philip Morris Inc [2004] 1 CLC 811 at [68] per Brooke LJ. But it is not necessary to show that there was more than a 50% chance of litigation. Secondly, the documents in question must have been made with either the sole or, at least, the dominant purpose of using it for obtaining advice about actual or anticipated litigation”.

Beatson J explained in the West London Pipeline and Storage case (at paragraph 86) that evidence in support of a claim for privilege will be conclusive unless:

“it is reasonably certain from:

(a)

the statements of the party making it that he has erroneously represented or has misconceived the character of the documents in respect of which privilege is claimed ….

(b)

the evidence of the person who or entity which directed the creation of the communications or documents over which privilege is claimed that the affidavit is incorrect ….

(c)

the other evidence before the court that the affidavit is incorrect or incomplete on the material points …”.

The circumstances in which the interviews now at issue were conducted are explained, in particular, in a witness statement of Mr Sharp, a partner in Dewey & LeBoeuf. According to Mr Sharp:

Mr Sharp concludes:

“It is correct that ‘the provisional decision to commence preparations for these proceedings’ … was taken on 8 June 2009. But that is, of course, a very different matter to the question of the dominant purpose of the investigations prior to that date which, based on the instructions I received, I consider were, from almost the outset, for the dominant purpose of preparing for litigation. In the circumstances, I have satisfied myself that my work product and that of other members of my firm was, from a time before the beginning of May 2009, for the dominant purpose of litigation and I am satisfied that the claim to privilege made in the Claimants’ list is a proper one”.

Mr Millett subjected Mr Sharp’s witness statement to detailed scrutiny. However, Mr Sharp has stated in terms that, before the relevant interviews began to be conducted (in May 2009), Dewey & LeBoeuf’s work was for the dominant purpose of litigation and that he is satisfied that the Claimants’ claim to privilege is a proper one. To my mind, there is no good reason to doubt what Mr Sharp says. I certainly cannot conclude, as it seems to me, that it is “reasonably certain” (to quote from West London Pipeline and Storage) that Mr Sharp’s evidence is incorrect or the claim for privilege ill-founded.

In the circumstances, litigation privilege will, in my judgment, have extended to the interviews at issue.

A company is not in general entitled to assert privilege against a shareholder. The law was summarised as follows by Blackburne J in Arrow Trading & Investments Est. 1920 v Edwardian Group Ltd [2004] EWHC 1319 (Ch), [2004] BCC 955 (at paragraph 24):

“It is well established by authority that a shareholder in the company is entitled to disclosure of all documents obtained by the company in the course of the company's administration, including advice by solicitors to the company about its affairs, but not where the advice relates to hostile proceedings between the company and its shareholders: see Re Hydrosan Ltd [1991] BCC 19 and CAS (Nominees) Ltd v Nottingham Forest plc [2002] BCC 145. The essential distinction is between advice to the company in connection with the administration of its affairs on behalf of all of its shareholders, and advice to the company in defence of an action, actual, threatened or in contemplation, by a shareholder against the company”.

In an earlier case, Woodhouse & Co (Ltd) v Woodhouse (1914) 30 TLR 559, Phillimore LJ said (at 560) that:

“The principle was that if people had a common interest in property, an opinion having regard to that property, paid for out of the common fund, i.e., company’s money or trust fund, was the common property of the shareholders, or cestuis que trust. But where the parties were sundered by litigation such an opinion obtained by one of them was privileged”.

In the same case, Lush J said that the principle “did not apply where the interests of the company and the shareholder were adverse”.

In the present case, Mr Vivcharyk was a shareholder in the First Claimant when the relevant interviews were conducted. Mr Millett argued, moreover, that litigation was not then in contemplation as against Mr Vivcharyk. On the basis of Mr Sharp’s witness statement, “the proceedings contemplated at the time of the interviews were those against Mr Tolley – not Mr Vivcharyk” (to quote from the skeleton argument of the Vivcharyk Defendants). Mr Vivcharyk is therefore, Mr Millett submitted, entitled to disclosure of the interview notes whether or not they may be privileged against, say, Mr Tolley.

Mr Morgan, on the other hand, pointed out that there are hostile proceedings between Mr Vivcharyk and the First Claimant. Further, Mr Morgan stressed that the Claimants’ case is that Mr Tolley and Mr Vivcharyk were conspirators. He argued that it would be an odd state of affairs if a shareholder could ask for (say) legal advice which the company had obtained in relation to a co-conspirator of the shareholder.

While the authorities to which I have been referred do not precisely cover the situation, it seems to me that Mr Morgan must be right. The interviews were conducted in contemplation of litigation against a person whom the First Claimant now alleges had been engaged in a conspiracy with Mr Vivcharyk. Whether or not the Cadogan Group knew it at the time, “the interests of the company and the shareholder were adverse” (to use Lush J’s words). If a company seeks legal assistance in relation to potential litigation against an individual who has been conspiring with one of its shareholders, it must be entitled to maintain privilege against the shareholder even if the shareholder has up to that point succeeded in concealing his role.

In short, I do not think that Mr Vivcharyk can insist on seeing the interview notes as a former shareholder.

The Vivcharyk Defendants contend that the Cadogan Group has waived privilege in the interviews by its reliance on them when applying for the freezing injunctions in 2009. Mr Sharp of Dewey & LeBoeuf swore an affidavit in support of that application in which he made reference to the interviews. In relation, for example, to the gas plants with which the GPS Claims are concerned, Mr Sharp said this:

“We interviewed Baron, Corby …, Biddlestone …, Sawka …, Malanyuk, Kempl, Jovanovich and Vivcharyk, concerning the Gas Plants’ history. The following paragraphs represent our distillation of their accounts, as well as our conclusions based on the documents we have reviewed”.

Of the paragraphs of Mr Sharp’s affidavit which follow, a solicitor acting for the Vivcharyk Defendants has said this:

“19.2

At paragraph 47, … Mr Sharp reported what Biddlestone and Sawka had told him with regard to the approval of the acquisition of the plants by Cadogan’s Executive Committee. It was reported that Mr Sawka had said that this approval was no more than a ‘rubber stamping’ exercise.

19.3

At paragraph 48, … Mr Sharp specifically refers to interviews of Kempl, Jovanovich and Malanyuk in Kiev. He reports that ‘[n]one of them had participated in any evaluation of proposals from other suppliers’ and that ‘[a]ll of them had been instructed (apparently by Vivcharyk) to just proceed to deal with GPS’. I would note that it is not clear what the word ‘apparently’ is intended to mean in this context. In particular, it is not clear, without seeing the interview notes themselves, whether Kempl, Jovanovich and Malanyuk actually specifically remember being instructed to proceed by Mr Vivcharyk or whether it is speculation (on their part or on the part of others).

19.4

At paragraph 50, … it is said that Biddlestone and Sawka had ‘generalised recollections that staff in the Ukraine had sought competing propositions from other suppliers, referencing a possible Polish supplier for example, but they had no detailed recollection at all, and Kempl and Malanyuk had no recollection of this whatsoever’.

19.5

At paragraph 56, … it was said that Duffy and Sawka had informed the investigative team that the Board was ‘never asked to approve or ratify the contractual arrangements with GPS’”.

The law relating to waiver was examined in Brennan v Sunderland City Council [2009] ICR 479. The judgment of the Employment Appeal Tribunal, given by Elias J, included this:

“63 … In our view the fundamental question is whether, in the light of what has been disclosed and the context in which disclosure has occurred, it would be unfair to allow the party making disclosure not to reveal the whole of the relevant information because it would risk the court and the other party only having a partial and potentially misleading understanding of the material. The court must not allow cherry picking, but the question is: when has a cherry been relevantly placed before the court?

64 Typically, as we have seen, the cases attempt to determine the question whether waiver has occurred by focusing on two related matters. The first is the nature of what has been revealed; is it the substance, the gist, content or merely the effect of the advice? The second is the circumstances in which it is revealed; has it simply been referred to, used, deployed or relied upon in order to advance the party's case? …

65 … Plainly the fuller the information provided about the legal advice, the greater the risk that waiver will have occurred. But we do not think that the application of the waiver principle can be made to depend on a labelling exercise, particularly where the categories are so imprecise. The concepts shade into each other, and do not have the precision required to justify their employment as rigid tests for defining the scope of waiver.

66 Having said that, we do accept that the authorities hold fast to the principle that legal advice privilege is an extremely important protection and that waiver is not easily established. In that context something more than the effect of the advice must be disclosed before any question of waiver can arise.

67 However, in our view, the answer to the question whether waiver has occurred or not depends upon considering together both what has been disclosed and the circumstances in which disclosure has occurred. As to the latter, the authorities in England strongly support the view that a degree of reliance is required before waiver arises, but there may be issues as to the extent of the reliance. Ultimately, there is the single composite question of whether, having regard to these considerations, fairness requires that the full advice be made available. A court might, for example, find it difficult to say what side of the contents/effect line a particular disclosure falls, but the answer to whether there has been waiver may be easier to discern if the focus is on the question whether fairness requires full disclosure.”

Earlier, in Nea Karteria Maritime Co Ltd v Atlantic & Great Lakes Steamship Corpn (No 2) [1981] Com LR 138, Mustill J had said the following (at 139) in a passage quoted with approval in later cases:

“where a party is deploying in court material which would otherwise be privileged, the opposite party and the court must have an opportunity of satisfying themselves that what the party has chosen to release from privilege represents the whole of the material relevant to the issue in question. To allow an individual item to be plucked out of context would be to risk injustice through its real weight or meaning being misunderstood”.

In the present case, Mr Sharp did not merely state that the relevant interviews had taken place. He referred in some detail to the content of what the interviewees had said. In fact, he claimed to provide “distillations” of the accounts of seven of the interviewees. Moreover, the Claimants relied on Mr Sharp’s affidavit (and hence on the interview material) to advance their position (by obtaining freezing injunctions).

Resisting the suggestion that privilege has been waived, Mr Morgan pointed out that Mr Sharp did not put in evidence or rely on the interview notes themselves. Mr Morgan invoked in support of his argument Digicel (St Lucia) Ltd v Cable & Wireless [2009] EWHC 1437 (Ch), where Morgan J said when considering (at paragraph 27) whether privilege had been waived in some legal advice:

“There needs to be a reference — and I stress the word ‘reference’ — to the contents of the legal advice for there to be the beginnings of a case as to waiver by deployment by the defendants”.

In the present case, Mr Morgan said, there was no “reference” to the interview notes.

In my view, however, Digicel does not assist the Claimants. The point that Morgan J was making was that there needed to have been reference to the contents of the relevant communication (i.e. the legal advice). In the present case, the relevant communications are to be found in what was said at the interviews. If privilege in respect of the interviews has been waived, then interview notes will (subject to paragraph 68 below) be disclosable as records of those communications, not because privilege has been waived in the notes as such. It is thus unimportant that Mr Sharp did not refer to the notes.

I have concluded that, in all the circumstances, privilege in the interviews has been waived. To my mind, fairness does require that what the interviewees said is disclosed in full. As I have already indicated, Mr Sharp went far beyond mere reference to the fact that interviews had taken place, and the Claimants deployed his evidence to advance their position. Further, without full disclosure it is impossible to know whether Mr Sharp’s references to what the interviewees said represent a fair “distillation” of their accounts, nor that the Claimants have not cherry-picked.

It may very well be, nonetheless, that the Claimants should not be required to disclose the interview notes as they stand, without redaction. In particular, if the notes contain the note-taker’s own thoughts or comments, either in words or by means of underlining, ringing or symbols, my provisional view is that the Claimants should be able to withhold these.

Another point arises from the fact that the debate before me tended to focus on the interview notes. Were the Vivcharyk Defendants to ask that the order extended to other documents which might have referred to the interviews (for example, letters from Dewey & LeBoeuf to their clients), I should wish to hear further argument as to what, if anything, should be included in the order.

Interviews took place in May and June of 2009 of Mr Vivcharyk as well as the eight individuals mentioned above. Argument was advanced at the hearing as to whether the Claimants were entitled to withhold their notes of Mr Vivcharyk’s interviews on the basis of litigation privilege. Following the hearing, however, the Claimants agreed to create and disclose transcripts of the interview notes excluding privileged comments or notations. In the circumstances, I do not need to rule on the claim for privilege previously made in respect of the interviews. If any issues remain between the parties in relation to the interviews of Mr Vivcharyk, they can be the subject of a further application or argument.

I can summarise the outcome as follows: