Fiona Trust & Holding Corporation & Ors v Privalov & Ors

This is another interlocutory dispute in the large scale litigation brought by 76 claimants, who are in the Sovcomflot group. They make claims against 29 defendants including a Russian businessman resident in England called Mr. Nikitin and a number of companies in which he is said to have an interest. I shall refer to those defendants as the “Nikitin defendants”. The claimants have estimated their claim for conspiracy to be for more than US$596 million, plus interest, and there are an enormous number of issues between the parties concerning events extending over a five year period.

The claimants’ case is that Mr. Nikitin bribed or granted other favours to Mr. Privalov, who was the managing director of the second claimant, Fiona Maritime Agencies Limited until February 2005 (with whom the claimants have reached settlement); Mr. Skarga, who was the Director General of Sovcomflot until October 2004 and who is a defendant in these proceedings; and a Mr. Borisenko, who was the Chief Financial Officer and First Deputy Director General of Sovcomflot, against whom proceedings have not been brought. It is said that Mr. Nikitin did so in order to enter into transactions of various kinds that were commercially disadvantageous for the claimants and commercially advantageous to the Nikitin defendants. The relief claimed against the Nikitin defendants includes both damages for conspiracy to injure and deceit and equitable relief including liability as a constructive trustee and an account of profits. Although the focus of the claimants’ case is that the defendants are liable to them for dishonest wrongs, Mr. Andrew Popplewell QC, who represents the claimants, did not confine their claims to liability for dishonesty and the claimants might pursue claims for equitable relief without establishing dishonesty.

The application is to strike out certain paragraphs (paragraphs 153 to 168) of the defence of the Nikitin defendants under CPR part 3.4 on the grounds that they disclose no reasonable grounds for defending the claims or alternatively for summary judgment on the issues there raised under CPR part 24.2. The claimants’ contention is that on their face these paragraphs do not disclose a defence or at least not a defence that has a real prospect of success. They do not argue that I can or should conclude on this application that the Nikitin defendants will not establish the factual matters that are pleaded or have no real prospect of doing so.

The controversial paragraphs are under the heading “Discretionary Matters” and they introduce a contention that, because of the matters pleaded, the claimants should not be granted equitable relief of any kind. They raise, as was explained by Mr. Nicholas Hamblen QC who represents the Nikitin defendants, a defence based on the discretionary nature of equitable relief and the maxim that he who comes to equity must have clean hands. The matters upon which the Nikitin defendants rely fall into two categories, which I shall call the “non-disclosure complaint” and the “investigations complaint”.

In essence the non-disclosure complaint is that the claimants failed to make proper disclosure when on 31 August 2005 they obtained from Simon J without notice a freezing order against Mr. Nikitin, and it has three parts. First it is said that, when they obtained their order, the claimants were aware, because board minutes so recorded, that the Executive Board of Sovcomflot had received reports of and discussed and resolved to approve transactions of which the claimants complain in these proceedings and that are alleged to have been made dishonestly by the defendants, although they relied upon these transactions when they obtained the freezing order. The second limb of the non-disclosure complaint is that Messrs Moore Stephens had audited the records of Sovcomflot and the claimants and had considered transactions that are now impugned, and they had expressed the opinion that no evidence had come to their notice that would indicate improper conduct on the part of the management of the claimants in connection with them. Thirdly, it is pleaded in paragraph 166 of the Defence that the claimants knew of market movements that would be likely to affect the question whether the impugned transactions were uncommercial. Neither Mr. Popplewell nor Mr. Hamblen referred to this third matter in their written or their oral submissions, and it is, to my mind, of peripheral importance.

The pleaded case of the Nikitin defendants is that the defendants would reasonably wish to rely upon these matters in defence of the claim and in answer to allegations that the impugned transactions were uncommercial and explicable only as a consequence of bribes or a conspiracy on the part of defendants; that the claimants were obliged to disclose these matters at the ex parte hearing; and that they were not disclosed.

It is to be observed that it is not pleaded that any failure to make proper disclosure in support of the freezing order was deliberate or reckless and that the claimant or anyone acting for them intended to do other than fulfil the duties of a party making an ex parte application of this kind. During the course of the hearing before me Mr. Hamblen said that the Nikitin defendants would say that the non-disclosure was deliberate or reckless, but no application to allege this (or otherwise to amend the pleaded case) was made although I made it clear that, subject to any application to amend the pleading, I would deal with the allegations as pleaded.

The investigations complaint concerns work carried out by and reports made by investigation companies instructed by or on behalf of the claimants under the designation “Project Sturgeon”. It is said that the claimants have engaged in extensive investigations into the affairs of (at least) Mr. Nikitin and the other Nikitin defendants and Mr. Skarga “in the course of which unlawful and illegal means have been used to obtain personal, financial and other confidential information … in breach of (inter alia) English, Swiss and Russian law”. As far as English law is concerned, it is said that the claimants acted in breach of section 55 of the Data Protection Act, 1998. It is alleged, among other things and by way only of example, that the investigators sought and obtained information from banks in the United Kingdom and Switzerland by “profiling” (said to be a euphemism for obtaining access to bank account information by unlawful and illegal means) and “pre-texting” (fraudulent and illegal impersonation in order to obtain access to information), and that they made inquiries of Mr. Nikitin’s Cypriot lawyers in order to obtain passwords that Mr. Nikitin used to communicate with them. It is also pleaded that there was a failure to disclose these activities when the freezing order was obtained on 31 August 2005, and that the claimants, through their solicitors, Messrs Ince & Co, concealed from the court their involvement in and knowledge of the illegal investigation undertaken on their instructions: that the claimants and Ince & Co “had attended meetings and received reports concerning the accessing of financial and other confidential information, which the claimants knew (it is to be inferred) could only have been acquired through the use of unlawful means”, and nevertheless, Mr. Stuart Shepherd, a partner in Ince & Co, concealed this in an affidavit sworn by him on 11 October 2006. The purpose of the affidavit was (among others) to support an application by the claimants for freezing orders against Mr. Nikitin and Mr. Skarga. The pleading of the Nikitin defendants refers particularly to paragraph 194 of the affidavit, but to give the immediate context, I set out paragraphs 193 to 195, underlining the parts of paragraph 194 which the pleading cites:

“193.

It is alleged by Mr. Lax that my clients are to be held responsible for fraudulent attempts to obtain information about Mr. Nikitin’s financial affairs. The Claimants are not responsible as alleged or at all.

194.

It is correct that the Claimants have utilised the services of professional investigators. However I can assure the Court that at no stage have the Claimants or any individual associated with them instructed such investigators to use any unlawful means of obtaining information, nor has it been suggested to the Claimants that information would be or has been so acquired.

195.

My clients have no idea whether the matters of which complaint is made by Mr. Lax have anything to do with the investigators that they have instructed or who have been instructed on their behalf. Should it be proved that this activity was unlawful and was the responsibility of any investigator associated with the Claimants, I am informed by [a representative of the claimants] that that company will immediately cease to retain instructions from the Claimants.”

The claimants continue to deny that they knew that the investigators used unlawful or illegal methods, but do not dispute that in determining their applications I should assume such knowledge and assume that they are guilty of the criminal conduct alleged in the controversial paragraphs of the pleading. However, the claimants say that they have not made any significant use of the investigations. While understandably they cannot entirely rule out the possibility of making some use of information obtained from the reports, they have no intention of relying upon them in support of their claims. They have disclosed the reports of the investigators in so far as they are relevant to the issues between the parties, redacting irrelevant matters including parts of the reports relating to the affairs of Mr. Privalov with whom, as I have said, they have reached a settlement.

I say that the claimants have not made any “significant” use of the reports, because they have, in the course of the lengthy interlocutory battles in this action, put in evidence one document obtained from the investigators. In June 2006 the claimants applied to amend their claim against the defendants to add additional complaints and also correspondingly to expand the freezing relief that they had against the defendants. These applications came before David Steel J at a series of hearings between October 2006 and May 2007. Mr. Michael Lax, who is the Nikitin defendants’ solicitor and was then a partner in Lawrence Graham LLP, gave evidence about documents sent by the Russian prosecutor to the Swiss prosecutor in connection with a request to investigate, amongst others, Mr. Nikitin. He referred to a statement by Mr. Mednikov of Sovcomflot about a credit card account said to be in the name of Mr. Skarga being paid by one of Mr. Nikitin’s companies referred to as PNP, and Mr. Nikitin’s denial of the assertion. Mr. Lax stated in his witness statement, “… it is likely that the …confidential banking information, and the fraudulent attempt to suggest that Senator Skarga’s credit card was paid … by PNP, emanated from Mr Mednikov or someone else at his request”. In this context and in order to challenge the suggestion that it was Mr Skarga’s account, Mr. Lax produced a copy of a document that was said to contain confidential information about a credit card account and to have been improperly obtained by the investigators or to set out information likely to have been improperly obtained by them. On its face the document so produced did not link the account to Mr Skarga, but it had been redacted at some stage in its transmission: it appears to have been passed by the investigators to Sovcomflot, and then (it is said, under compulsion) to the Russian prosecutors and thence to the Swiss prosecuting authority, who provided a copy to Mr. Nikitin’s Swiss lawyers. In response to this evidence the claimants produced, as an exhibit to a witness statement made by Mr. Shepherd, an unredacted copy of the document showing that Mr. Skarga was the named account holder for the credit card. That document exhibited by Mr. Shepherd derived from the investigations that the Nikitin defendants allege involved use of unlawful and illegal methods. Thus on this occasion the claimants used material obtained from the investigations in order to respond to the allegation made against Mr. Mednikov. They say that they have not otherwise deployed any material or information so obtained in the course of the litigation, and the Nikitin defendants do not suggest otherwise.

I should say something more about the non-disclosure defence and the procedural history of this litigation. As I have said, on 31 August 2005 the court granted a freezing order on the claimants’ application made without notice against the Nikitin defendants. It had a limit of US$225 million. Shortly before the return date for the freezing order on 15 September 2005, the claimants and the Nikitin defendants entered into an agreement, which was embodied in a consent order, that the defendants would not seek to discharge the order of 31 August 2005 and would provide US$225 million by way of security for the original claims against them. Although because of the agreement and the consent order the Nikitin defendants have not sought to have the freezing order made on 31 August 2005 discharged on the grounds of non-disclosure, they have raised allegations of non-disclosure upon other applications: in the context of an application by the Nikitin defendants to increase the security for the cross-undertaking in damages given by the claimants in relation to the freezing order that was heard by HHJ Mackie QC in February 2006, and in the context of the hearing before David Steel J when the claimants applied for further freezing relief.

It is the submission of the claimants that, in light of the judgments of HHJ Mackie QC and David Steel J and what was said by them about the allegations of non-disclosure, it is not open to the Nikitin defendants to continue to rely upon the allegations in defence of the equitable claims against them. HHJ Mackie QC heard detailed argument about the allegations of non-disclosure similar to those pleaded in the defence. In his judgment dated 24 February 2006 he said this at paras 100 to 106:

“100.

Looking at the case today and the defences now put forward, it would have been better if the minutes had been identified and translated, and if a somewhat different emphasis had been given to the Moore Stephens document.

101.

As regards the Moore Stephens documents, these were disclosed and referred to in the witness statement, albeit not specifically mentioned in the hearing. These are not in any sense dynamite; they are equivocal, to some extent, as I saw from the concern of both sides, at the hearing, to have certain passages referred to whenever their opponents were relying to adjacent ones.

102.

The issue is whether and how the minutes should have been disclosed, not precisely what they signify. But the importance of absence of disclosure is necessarily assessed by some evaluation of that significance.

103.

The starting point is the very considerable volume and weight of evidence, indicating, at an interlocutory stage - and of course I recognise that no one can yet reach final conclusions about the evidence, bribery, corruption and the entering into of commercial transactions which appear self-evidently uncommercial and not capable of easy explanation to any lawyer, or, I suspect, business person, with experience of this field of work. The minutes have to be seen in time context.

104.

I accept a number of the submissions of the claimants about the minutes. Disclosure, if made at the outset, would have been accompanied by evidence or submissions to the effect that, except in one case, this was ratification rather than approval and that that ratification was undermined by failure to inform the board of certain crucial matters and perhaps by complicity amongst some of those concerned.

105.

The defendants’ skeleton argument skilfully analyses the individual minutes and the extent to which they record careful consideration of the transactions, but the likely lack of full and accurate information to the board, it seems to me, undermines the significance of those submissions. The annals of fraud are full of ostensibly careful and well-considered board resolutions which later turn out to have been reached as a result of misleading and false information and/or disloyalty from those in positions of trust.

106.

The likely outcome if the documents had been disclosed from the start is only one factor for the court to bear if (sic) mind. Nevertheless, I doubt that disclosure would have made a material difference. Indeed, that may be the reason why no application has been made by the defendants to set aside the undertakings or the orders which preceded them.”

As I have said, the question of non-disclosure was again raised before Mr. Justice David Steel. In a judgment dated 21 May 2005 he said:

84.

The Defendants assert the Claimants have been guilty of non-disclosure to the extent that there should be no further freezing order relief even following on this inter partes hearing. The thrust of this complaint is directed at a failure to adduce the minutes of the executive board of Sovcomflot and the reports of Sovcomflot’s auditors before Mr. Justice Simon.

85.

The short answer is this:

i)

the failure is the subject of explanation and regret

ii)

the minutes and the reports are now available

iii)

the issue has already been determined against the Defendants in a judgment of His Honour Judge Mackie dated 24 February 2006.”

I am unable to accept the submission that these judgments debar the Nikitin defendants from pleading and relying upon the non-disclosure allegations in order to resist the claims for equitable relief. Of course, the claimants might argue that the trial judge is likely to reach a similar view about the non-disclosure allegations, but that is a different point: the previous judgments would not be binding upon him. After all, a trial judge would have different evidence before him and would be making an assessment of the significance of any non-disclosure for a different purpose. However, the real importance of the history of the proceedings and the judgments is that the non-disclosure did not in fact affect the course of the litigation: the freezing order obtained on 31 August 2005 was continued consensually, and by the judgments of HHJ Mackie QC and Mr. Justice David Steel and in accordance with their assessment of the non-disclosure it did not affect the terms (as to the undertaking in damages) upon which the freezing order was maintained or prevent the freezing order from being expanded.

Mr. Popplewell also argued that the matters pleaded in the paragraphs of the Nikitin defendants’ pleading that the claimants seek to strike out would “form a very substantial sideshow both in the run up to the trial and at the trial itself”. It is said that they will be the launching pad for extensive and disputed disclosure applications, give rise to questions of foreign law, and be the excuse for unwarranted personal attack upon Mr. Shepherd. Although this litigation presents a formidable task of case management, these considerations are not a proper basis for preventing the Nikitin defendants from raising an arguable defence. On the other hand, I cannot accept that it is sufficient to refuse the application for summary judgment, if it should otherwise be granted, that documents relevant to it would in any event be disclosable because they are relevant to other issues.

The claimants’ application therefore depends upon them showing that the pleaded misconduct is not of such a kind and does not have such a connection with the equitable relief that they seek that there is any real prospect of the Nikitin defendants succeeding in this defence, and that there is no other compelling reason that the issue raised by the defence should be disposed of at a trial. I formulate the question in the terms of CPR 24. There was some discussion before me as to whether the same or a more rigorous test is to be applied to an application to strike out the controversial paragraphs of the pleading under CPR 3, but I do not need to explore that question. It was not suggested that if the claimants do not succeed under CPR 24 they could succeed on this alternative basis.

If the Nikitin defendants are to defeat the equitable claims against them on the basis of the clean hands maxim, they have to do more than show simply that the claimants have been guilty of or responsible for some misconduct. As it was put by Lord Scott in Grobelaar v News Group Newpapers, [2002] UKHL 40, [2002] 4 All ER 732 at para 90:

“… it is long-established practice that an equitable remedy should not be granted to an applicant who does not come before the court with ‘clean hands’. The grime on the hands must, of course, be sufficiently closely connected with the equitable remedy that is sought in order for an applicant to be denied a remedy to which he ordinarily would be entitled. And whether there is or is not a sufficiently close connection must depend on the facts of each case.”

As to what constitutes a sufficiently close connection for the maxim to apply so as to deprive an applicant of equitable relief that he would otherwise have been granted, the test commonly cited is that of “an immediate and necessary relation to the equity sued for”, which was propounded by Eyre CB in Dering v Earl of Winchelsea, (1787) 1 Cox 818, 319-320, ER Vol 29 p.1184: “If [the defendant’s submission relying upon the plaintiff’s misconduct] can be founded on any principle, it must be, that a man must come to a Court of Equity with clean hands; but when this is said, it does not mean a general depravity; it must have an immediate and necessary relation to the equity sued for; it must be a depravity in a legal as well as a moral sense”: see Moody v Cox, [1917] 2 Ch 71,87 and Memory Corporation plc v Sidhu (No 2), [2000] 1 WLR 1443, 1457. I confess that for my part I find it difficult to understand what precisely is meant by the stipulation that there must be a “necessary” connection between the misconduct and the equity sued for. As Mr. Popplewell acknowledged during argument, the question whether the maxim should apply to deprive an applicant for relief will often arise when trickery on the part of the applicant designed to promote his case has been detected and so in the event the misconduct does not assist him to advance his case, but nevertheless, leaving aside the question of “clean hands”, he would be granted equitable relief. In such circumstances it cannot be that the applicant needed to succeed in his trickery in order to obtain equitable relief. It might be that the connotation of “necessary” is that the misconduct is inherently directed towards the equitable relief sought. But what is clear from the authorities is that there must be a sufficiently immediate relationship between the misconduct and the relief.

The enquiry whether the maxim is to be applied is, of its nature, fact-sensitive, and there is a danger in making any general statements about the limits of its application. However, the authorities do, I think, justify these observations: that the maxim is directed, at least typically, to conduct that is in some way immoral and deliberate; that not all misconduct deprives an applicant of equitable relief and the misconduct may be too trivial for it to import this consequence; and the court will assess the gravity and effect of misconduct cumulatively, so that, while the elements of misconduct taken individually might be too trivial for the maxim to be applied, they might be sufficient taken together.

Mr. Hamblen relies upon three decisions of the Court of Appeal in which claimants have been deprived of equitable relief because of their misconduct in connection with the presentation of their case in the course of the litigation: Armstrong v Sheppard & Short Ltd., [1959] 2 QB 384; J Willis & Son v Willis, [1986] 1 EGLR 62; and Gonthier v Orange Contract Scaffolding Ltd, [2003] EWCA Civ 873. These authorities are examples of cases in which the court regarded attempts to mislead the courts as presenting good grounds for refusing equitable relief, and show that this is so not only where the purpose is to create a false case but where it is to bolster the truth with fabricated evidence: see Gonthier v Orange Contract Scaffolding Ltd, esp at para 36. Further, as is clear from J Willis & Son v Willis, such misconduct can deprive a party of equitable relief notwithstanding the trickery was detected and therefore not pursued to the trial of the claim. However, in all these cases the misconduct was by way of deception in the course of litigation directed to securing equitable relief. The connection between the misconduct and the claim to equitable relief was far more immediate than that in this case.

Before assessing whether the allegations pleaded by the Nikitin defendants have sufficient connection with the claim for equitable relief to enable them to invoke the clean hands maxim, it is convenient to refer to another submission of Mr. Hamblen. He points out that the maxim has been applied in cases in which it was not pleaded and that it might be that in the course of this litigation the Nikitin defendants might come upon more information that would enable them to expand their allegations of misconduct and reinforce their argument. He therefore argues that the court should not strike out the pleaded case because the argument might be resurrected with additional allegations. I am not persuaded by this argument. If the Nikitin defendants come upon sufficient information to enable them to advance a different argument that the claimants’ misconduct should deprive them of relief, that new case can be considered when it is raised. It does not seem to me a sufficient basis for allowing them to pursue an argument if, as presently pleaded, it has no real prospect of success. I would add that Mr. Hamblen did not suggest the nature of or potential basis for any further allegations that might be made. I have seen nothing in the papers before me that suggests what they might be. I recognise that it might be said, I suppose, that if in their evidence the claimants’ witnesses deny knowledge of and responsibility for wrongdoing on the part of the investigators, if (as I am to assume for the purpose of this application) that denial is false, that would compound the misconduct. But this possibility does not seem to me a sufficient basis for maintaining the pleaded allegations in order to test whether the claimants might so support their denial of them.

Similarly, the Nikitin defendants say that “if it is material” they would seek permission to bring a counterclaim for an injunction, an inquiry as to damages and compensation under section 13 of the Data Protection Act 1998 on the grounds pleaded in the defence by way of the investigations complaint. However, the Nikitin defendants made no such application and it can be considered if and when it is.

Although the misconduct is to be considered cumulatively, I take first the non-disclosure allegation. Here, the important considerations are these. First, there is no pleaded allegation that the claimants deliberately withheld information that should have been disclosed, still less of positively misleading the court. Secondly, there is no allegation that the non-disclosure has affected the course of these proceedings in its interlocutory stages. Thirdly, the alleged non-disclosure will not affect the way in which the claim for equitable relief will be pursued and presented at trial, and its nature was such that it never could have done.

In these circumstances, to my mind there is no real prospect of the non-disclosure allegation constituting or even contributing to misconduct which would be a basis for withholding from the claimants the equitable relief that they seek.

What then of the investigations complaint? Here too the claimants rely upon the judgment of Mr. Justice David Steel given on 21 May 2006 because it was argued before him that, because of this misconduct, he should refuse the claimants the extended freezing order that they sought. He said this:

“I must touch on the complaint that these investigators (perhaps with the privity of the Claimants and/or their solicitors) have embarked upon illegal methods of enquiry in Switzerland and elsewhere. … It is right to say that the contents of the investigators’ reports were consistent with improper investigatory techniques having been used to identify and “profile” both bank accounts and credit card accounts. But the outcome of any illegal investigation plays no part in the deployments of the Claimants’ case for freezing order relief. Whilst this judgment should not be read as condoning illegal activity, I see no basis for being reluctant (still less refusing) to make freezing orders on the Claimants’ application.”

Thus, Mr. Popplewell is able to submit that the court has already held that the alleged misconduct in the course of the investigations had no sufficient connection with the equitable relief sought by the claimants by way of interim relief to invoke the cleans hands maxim, and it has no more connection with the substantive equitable relief sought in these proceedings. The claimants do not seek to rely upon anything resulting from the investigation to establish the defendants’ liability to them: indeed, at least Mr. Skarga, it appears, intends to rely upon the fact that the investigators did not, as he would argue, unearth anything of significance.

At one point, Mr. Popplewell sought to reinforce his argument by submitting that the claimants’ alleged misconduct must be weighed against the dishonest conduct of the defendants that would lead them to being liable to the claimants for an equitable remedy. I do not consider that that argument is available to him since the claimants do not accept that they must necessarily establish dishonesty in order to succeed in their equitable claims.

However, there are further arguments available to Mr. Popplewell that bear more directly upon the question whether there is a sufficiently close connection between the investigations complaint and the equitable relief sought. First, it is pointed out that the investigations of which complaint is made had ceased before these proceedings were brought against the Nikitin defendants: the reports of the investigators were made between about February or March 2005 and August 2005. Secondly, the reports have been disclosed subject to redaction of what is irrelevant, and, while the Nikitin defendants might challenge whether the redaction is justified and the court might have to rule upon that, there is no reason to suppose that further reports or other material from the investigations has been suppressed at any time during these proceedings, save in so far as it is said that the investigations and the methods used should have been disclosed on 31 August 2005. I am persuaded that in these circumstances, there is no sufficient connection between the investigation complaint and the equitable relief sought by the claimants to sustain the Nikitin defendants’ contention based on the clean hands maxim.

The claimants acknowledge that the investigation complaint relates to attempts to discover the defendants’ dishonest conduct, and although this is not specifically pleaded, the inference is and I proceed on the basis that the claimants would have deployed information that they obtained in support of their claims had anything useful and significant been found. Accordingly, Mr. Hamblen argues that the unlawful and illegal investigations are connected with the claims in as such as they were conducted with a view to advancing them. I accept that, but it does not seem to me that that in itself gives rise to any sufficient connection between the misconduct and the relief now sought. Despite Mr. Hamblen’s submission, I am unable to accept that this case is comparable with J Willis & Son v Willis (cit sup). It is not alleged that the claimants ever intended to put perjured evidence or false information forward in support of their claim, and it is not alleged that the claimants have in fact presented the results of the investigation in support of their substantive claim.

In my judgement, the non-disclosure complaint and the investigations complaint, whether considered together or separately, fall far short of amounting to a defence to the equitable claims that has any real prospect of success. There is no real prospect of the Nikitin defendants showing a sufficient connection between the alleged misconduct and the equitable relief that the claimants seek. Nor, to my mind, is there any other compelling reason that this issue should be tried. I therefore grant the claimants’ application for summary judgment upon this issue. In these circumstances, I do not propose to consider further the alternative application under CPR part 3.