Fiona Trust & Holding Corporation & 75 Ors v Yuri Privalov & 28 Ors

This judgment follows my judgment in these actions of 10 December 2010 (the “main judgment”). It concerns (i) a discrete issue about the claimants’ relief in respect of some transactions covered by the Sovcomflot Clarkson commissions scheme, (ii) the interest to be awarded to the claimants and (iii) costs. I use the same expressions and definitions as I have used previously and the paragraph numbers refer to the main judgment.

The issue about the claimants’ relief is whether Mr. Nikitin and Milmont are liable to account for sums received by Milmont under the Clarkson commissions scheme in respect of the HHI hulls nos 1585 and 1586, which were bought by Titanium and Pendulum respectively, and the Daewoo hulls nos 5272 and 5274, which were bought by Severn and Accent respectively. Titanium, Pendulum, Severn and Accent, now owned by Mr. Nikitin, are not claimants, and so the claimants do not claim damages or equitable compensation in respect of these purchases. However, Clarkson owed, and were in breach of, fiduciary duties to Fiona in respect of the negotiations for the purchases; see para 1523 as to HHI hulls nos 1565 and 1586 and Daewoo hull no 5274, and (although this is not an example cited in para 1523) Fiona had entered into a letter of intent for the purchase of Daewoo hull no 5272: para 995. Fiona claim that they are therefore entitled to an account of profits in respect of these purchases in so far as Milmont received payments relating to instalments of the purchase prices paid before Sovcomflot sold the ship-owning companies. They do not claim in respect of later payments.

Mr. Nikitin and Milmont advance two answers to this claim. The first is a pleading point based upon para 79A.74(3)(c) of the particulars of claim in the Fiona action:

“Claims are made in relation to the commissions agreed to be paid to Milmont in respect of Hyundai Hull Nos 1585 and 1586 and Daewoo Hull Nos 5272 and 5274 on the grounds that the share sale agreements entered into between Fiona and Standard Maritime have been rescinded ab initio by Fiona.”

It is said that the premise of the claim is that the share sale agreements were rescinded ab initio and, since they were held not to have been, the pleaded claim must be dismissed.

I am not persuaded by that argument. I accept the claimants’ response that, properly understood in its context, para 79A.74(3)(c) is directed to payments after the share sale agreements and that the claim in respect of earlier instalments is covered elsewhere: see paras 79A.110A and 79A.117 of the pleading. In any event, if I upheld the defendants’ argument, I should permit the claimants to amend their pleading.

Mr. Nikitin and Milmont also submit that they are not liable to account in respect of these four transactions because they have not profited from them since the price paid by Standard Maritime for the ship owning companies reimbursed Fiona for what Milmont had been paid by Clarkson. It is said:

Accordingly, Mr. Nikitin and Milmont submit that, through the prices paid by Standard Maritime for Titanium, Pendulum, Accent and Severn, they have paid any amount for which they are liable to account, and that they are therefore not liable to give any further account in respect of these transactions or at least that it would not be just and equitable to direct an account. They also submit that, by paying the full amount of the first instalment paid to the yards, which would have been lower but for the “address commissions” that the yards were deceived into paying, they have become subrogated to Fiona’s claim for an account in respect to the corresponding payments to Milmont.

I do not accept these arguments of Mr. Nikitin and Milmont. When Milmont received the relevant payments from Clarkson (as they did before Standard Maritime had bought or agreed to buy or made any payment in respect of the corresponding ship-owning company), they became liable to account to Fiona for what Milmont received, and to pay Fiona what was due upon the account. Their liability was not, in my judgment, discharged by the payments that Standard Maritime made to Fiona for the ship-owning companies. Standard Maritime never intended or purported to discharge those or any liabilities of Mr. Nikitin or Milmont, and Fiona never intended or purported to accept the prices for the ship-owning companies solely or partly in discharge of any such liabilities. Mr. Steven Berry QC, who represented Mr Nikitin and the Standard Maritime defendants, submitted that a party who is liable to account for a profit sufficiently discharges his obligations if he gives “a direction which in substance returns the profit”. I cannot accept that this is so when the payment relied upon is made under a distinct contract such as the share purchase agreements between Standard Maritime and Fiona. In any case, the “direction” was given by Standard Maritime, not by Milmont or Mr. Nikitin on his own behalf.

There are, as it seems to me, two other answers to Mr. Nikitin’s and Milmont’s submissions. First, it supposes that Clarkson would not have deceived the yards into paying (what they supposed to be) address commissions if they had not been paying corresponding sums to Mr. Nikitin’s order. There is no proper basis to suppose this. No doubt by deceiving the yards into making these payments Clarkson produced enough funds from the transactions that they broked to make payments to Mr. Nikitin’s order and for Mr. Privalov and still to retain some profit for themselves, and I infer that was their purpose in doing so, but that is not sufficient for Mr. Nikitin’s and Milmont’s argument.

Secondly, the argument supposes that, had the instalments on the prices paid to the yards not been increased by the “address commissions”, Fiona would still have sold the ship-owning companies for the amount of the instalments which had been paid, with the same “uplifts” in the case of Titanium, Pendulum and Severn. This might be so, but when assessing the profit of an accounting party liable for knowing receipt or dishonest assistance the court does not examine or seek to determine whether he would have profited in any event even if he were not at fault: see Murad v Al-Saraj, [2005] EWCA 959 (Civ) para 76 per Arden LJ, “For policy reasons, the court should decline to investigate hypothetical situations as to what would have happened if the fiduciary had performed his duty”. Therefore, in my judgment, when a payment does not purport to be made in respect of a liability to account, the court will not examine whether it would have been made had the accounting party not incurred the liability. This might, as Mr. Berry observed, result in a windfall for the recipient, but that is in the nature of the remedy of an account.

I therefore conclude that, when an account is taken of the knowing receipts of Milmont and the profits from Mr. Nikitin’s dishonest assistance in the Clarkson commissions scheme, Milmont and Mr. Nikitin are not entitled to bring into account to their credit any part of the prices paid by Standard Maritime to Fiona for the shares in Titanium, Pendulum, Accent and Severn.

I concluded in the main judgment that the claimants succeeded upon some of the commissions claims against Mr. Nikitin and the Standard Maritime Defendants (to whom I shall refer for convenience in the part of this judgment dealing with interest simply as “the defendants”). The award is to be in US dollars. The claimants have elected for equitable compensation in respect of the vast majority of impugned transactions, although they seek an account in respect of a few of them. There is no dispute that the claimants should be awarded interest upon the compensation until the date of judgment, and that the interest should be compound. The issues between the parties are about the rate of interest and about the rest periods to be used for the calculation. Although the amount of compensation has yet to be finally determined and I have yet to hear any argument about the precise date from which interest is to run, the compensation will be many millions of dollars, and interest will be paid for some five to ten years. The issues between the parties therefore involve substantial sums.

The claimants contend that the rate of interest should be US Prime Rate, the rate which banks in the United States charge their most creditworthy customers. Alternatively, they contend that the rate should be US$ three month LIBOR with an uplift of 2.5%, which for most of the relevant period would produce a rate of interest slightly lower than US Prime Rate. In either case, the claimants submit that the interest should be calculated on the basis of three month rests. The defendants submit that the appropriate rate is US three month LIBOR plus 0.85%, and that annual rests should be used.

The court’s jurisdiction to award interest, whether under statute or in equity, is discretionary, and the appropriate rate of interest and, where compound interest is awarded, the appropriate rest periods are matters of discretion. The purpose is fairly to compensate the recipient of interest for being deprived of money which he should have had: see Banque Keyser Ullman SA v Skandia UK Insurance Co Ltd and ors, (unreported, 11 December 1987) per Steyn J. An award of interest is not punitive and the use to which the party paying interest has put his money is not relevant to the exercise of the court’s discretion: Shearson Lehman Hutton Inc v Maclaine Watson & Co Ltd and ors (No 2), [1990] 3 All ER 723, 732h.

Staughton LJ in Baker v Black Sea and Baltic General Insurance Company Ltd. [1996] LRLR 353 observed at p.360 that the conventional rate for interest upon sterling awards of base rate plus 1% is “somewhat less than almost all plaintiffs would have to pay if they were borrowers, but significantly more than they could earn as lenders”. Nevertheless, the court usually decides what rate of interest will provide just compensation by considering the rate at which the recipient could have borrowed the funds of which he has been deprived: see Tate and Lyle Food and Distribution Ltd v GLC, [1982] 1 WLR 149, 154, Banque Keyser Ullman SA v Skandia UK Insurance Co Ltd and ors (loc cit) and Kuwait Airways v Kuwait Insurance [2000] 1 AER (Comm) 972, 991F. The Law Commission suggested in its report no 287 (2004) that the interest rate “should reflect the commercial reality of borrowing and investing”, and McGregor on Damages (18^th Ed) at paragraph 15-117 observes that the return on investments might well fall short of the cost of taking up a borrowing facility. However, the court’s practice has been consistent, and it was not suggested in this case that I should have regard to what return the claimants might have earned from investing the funds to which they were entitled.

As Staughton LJ said, the courts have adopted a convention of awarding interest upon sterling compensation of the UK Clearing Banks’ Base Lending Rate plus 1%, and this is for pragmatic reasons. It has also become conventional, at least in the Commercial Court, for interest to be awarded at US Prime Rate on compensation awarded in US dollars: see, for example, Kinetics Technology v Cross Seas Shipping (“The Mosconici”), [2001] 2 Lloyds Reports 313 at p.316 per David Steel J, Mamidoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery, AD, [2003] 1 Lloyd’s Rep 42 at paragraph 16 per Aikens J and AXL Resourses Ltd v Antares Underwriting Services Ltd & another, [2010] EWHC 3244 (Comm) per Gloster J. This rate was described by Langley J in Kuwait Airways v Kuwait Insurance, [2000] 1 All E R (Comm)] 973 at p. 992d/e as “The nearest equivalent of base rate plus 1%”, and he considered that “in normal circumstances” US prime rate would be the appropriate rate for interest on a US dollars award. The court will depart from these conventional rates if it would be just to do so, and the burden of demonstrating this is upon the party who seeks to displace the conventional rate: Shearson Lehman Hutton Inc v Maclaine Watson & Co Ltd and ors (No 2), (loc cit) at p.733L per Webster J.

A “broad brush” is taken to determine what rate of interest is just and appropriate: it would be neither practical nor proportionate (even in a case involving as large sums as these) to attempt a minute assessment of what will precisely compensate the recipient. In particular, the courts do not have regard to the rate at which a particular recipient of compensation might have borrowed funds. This policy is adopted in order to control the extent of the inquiry to ascertain an appropriate rate: see the Banque Keyser Ullman case (cit sup). The court will, however, consider the general characteristics of the recipient in order to decide whether to assess interest at a rate that is higher or lower than is conventional. So, for example, in Jaura v Ahmed, [2002] EWCA Civ 210, Rix LJ awarded interest at base rate plus 3% to reflect that “small businessmen” had been kept out of their money and in recognition of the “real cost of borrowing incurred by such a class of businessman”. Thus, the court will examine what was been called “a question of categorisation of the plaintiff in an objective sense” (see the Banque Keyser Ullman case, cit sup), recognise relevant characteristics of the party who is awarded interest and reflect them when determining the fair and appropriate rate. Any doubts expressed about this by Nourse LJ in Re Duckwari PLC (2), [1999] Ch 268 at p.273 have been set aside, and it was not in dispute before me.

The first question is whether I should depart from the conventional US Prime Rate. Mr. Skarga and Mr. Izmaylov said in witness statements made for this hearing that US Prime Rate was never used to set the interest on funds borrowed by Sovcomflot and NSC, and, unless they borrowed at fixed rates, their rates were calculated by reference to LIBOR. I accept this evidence: rates of interest on loans to shipping companies are often expressed by reference to LIBOR. In Petrobras v FPSO Construction Inc., [2007] EWHC 1357 (Comm) at para 287 Cresswell J cited a report approved by the Committee of the London Maritime Arbitrators Association (“LMAA”) in 2003, in which it was said that, although the Commercial Court had adopted a practice of basing awards of interest on the US Prime Rate: “On balance … we think that members should not adopt the Prime Rate as a benchmark where the claimant operates outside the US since commercial parties outside the US are not accustomed to using it as a reference point for loans … In the shipping field most commercial parties are likely to be familiar with the use of LIBOR rates and this is a factor which, in our view, should weigh in favour of using LIBOR as a benchmark for awards of interest.” Cresswell J then observed that the practice of the LMAA was to award interest compounded at 3 monthly rests.

Although, as I understand, more recently tribunals in LMAA arbitrations have sometimes considered that rates determined by reference to LIBOR do not reflect present market conditions, this does not undermine the defendants’ argument that it is more appropriate to assess interest to compensate shipping companies such as the claimants by reference to LIBOR rather than US Prime Rate. The LMAA are not alone in recognising that LIBOR can more appropriately be used. The US$ three month LIBOR rate (as well as Prime Rate) is suggested for interest on US dollar awards by the Chartered Institute of Arbitrators in their Practice Guideline 13, and McGregor on Damages (18^th Ed.) at para 15-116 observes that LIBOR “has very much come to the fore as an appropriate interest rate to award”, albeit often by agreement between the parties rather than by adjudication of the court. I conclude that, because LIBOR is used widely for setting interest rates on loans to shipping companies and US Prime Rate is not (at least for lending to borrowers outside the USA), it is more appropriate for determining the rate of interest to be awarded in this case.

It is convenient next to consider the appropriate period for rests. The rationale for adopting LIBOR is more closely to reflect what is usually used for shipping finance. It would be consistent with that, and to my mind just and appropriate, to adopt three monthly rests. I recognise that the courts have often ordered that interest should be compounded less frequently, but I observe that monthly or three monthly rests are recommended by the Practice Guideline 13 of the Institute of Arbitrators (at para 10.2).

It is not suggested that it would be just simply to award interest at US$ LIBOR rate: I must determine what uplift is appropriate. Again the report approved by the LMAA Committee provides a useful starting point. It observes that, “LIBOR is generally used for term borrowings normally backed by some form of security and not for short-term unsecured loans”. It continues that:

“A “spread” or margin is normally added to LIBOR financing operations. A typical uplift for a long-term secured loan might be 1.25%. To give effect to the principle that arbitrators are to ascertain the cost of a short-term unsecured loan we recommend that members should award 2.5% over LIBOR as this would be a reasonable average rate to charge a reasonably creditworthy company for an unsecured loan. In special cases (depending on the credit worthiness depending on the plaintiff) a higher or lower uplift may be appropriate.”

The view that an appropriate rate should be determined by reference to what might be charged for a short-term and unsecured loan reflects the judgment of Langley J in the Kuwait Airways case (loc cit). He observed (at p.991f) “[the] rate has almost invariably been expressed in terms of a short-term rate without reference to the possibility of lower rates for secured loans but with the acknowledgement that the better the “personal” covenant of the borrower the lower the rate is likely to be”. He also explained (at p.992b/c) why he saw no justification for awarding rates which apply only to term or secured borrowing: that to do so would “extend any examination of the financial affairs of the successful party beyond legitimate boundaries as well as … apply hindsight in the knowledge of how long it may take for the losing party to pay and what free assets may be available for security”.

I also consider that it is appropriate to take an uplift of 2.5% as a starting point because it involves little departure from the conventional US Prime Rate.

The defendants argued that an uplift of 2.5%, for which the claimants contended and which the LMAA report suggested, would be excessive in view of evidence about what interest Sovcomflot and NSC in fact paid on their borrowings. They recognised that it is generally not appropriate to examine the personal circumstances of a litigant, but submitted that the circumstances of this case justified it. First, they argued that the court has already received evidence during the trial about what interest Sovcomflot paid between 2002 and 2005, and that there is no reason not to use it to determine the rate of interest. During the trial, there was indeed some evidence about this, and evidence of this kind is not unusual in commercial cases. In itself this does not justify departing from the usual practice of disregarding the actual borrowing rates of the particular party who is to be awarded interest. This case demonstrated (i) that such evidence is likely to be too fragmentary to provide a properly complete picture for determining the appropriate rate at which to award interest, and (ii) that, even if evidence has been heard, it can readily become protracted and time-consuming to examine it with a view to deciding an appropriate interest rate.

The defendants, however, have a second argument. They identify general characteristics of Sovcomflot and NSC that should properly be taken into account in determining the rate of interest that companies of their kind would have to pay on their borrowings: (i) they are shipping companies; (ii) they are members of a large group with substantial turnover and assets; (iii) they are Russian companies or subsidiaries of Russian companies; and (iv) they are owned by the Russian state who, given their size and strategic importance, would be likely to support them if they faced financial difficulties. In the circumstances of this case, there is no real distinction between what rates Sovcomflot and NSC paid upon their borrowings and the rates generally paid by businesses with these attributes: there is no reason to think that they shared them with any other companies or groups (apart, possibly, from Primorsk Shipping Company to whom I refer at para 7 of the main judgment). Therefore, if I decline to consider evidence about what borrowing rates Sovcomflot and NSC pay and have paid for borrowings, the defendants effectively would be deprived of any evidence upon which they might argue for departing from the conventional rates.

The overall purpose is to determine a fair rate to compensate the claimants, and in the unusual circumstances of this case I accept that the defendants are entitled to rely upon evidence of the claimants’ borrowing rates. I bear in mind that, because of the sums involved in this case and the periods over which interest is to be awarded, substantial sums turn upon the rate of interest. I take comfort from the Petrobras case (cit sup) in which Cresswell J examined in some detail the particular circumstances of the claimant: see para 297 of his judgment.

The defendants relied upon witness statements of Mr Skarga and Mr Izmaylov. It suffices to consider Mr Skarga’s evidence: Mr Izmaylov said that NSC borrowed at a margin “a little more than the margin that Sovcomflot was paying on its loans – although that gap was reduced to something quite close to Sovcomflot’s margin with the help of Mr. Sawyer”. If the defendants’ contentions are not justified by Mr Skarga’s evidence about Sovcomflot, they are not assisted by Mr Izmaylov’s evidence about NSC.

Mr. Skarga’s evidence was that, when borrowing money from banks between 2000 and 2004, in general Sovcomflot paid an uplift of around 1.125% over US$ LIBOR and that the uplift on most loans was reduced to 0.75% following a re-financing in 2005. There is some support for this evidence: I have already concluded (at para 801) that between August 2001 and November 2002 Sovcomflot paid interest of between 3 month LIBOR plus 1.1% to 1.25% on loans secured on their ships: this was based upon the evidence of Mr. Orphanos. In their joint memorandum dated 1 February 2010, the expert witnesses on ship finance, Mr Jonathan Hill and Mr Raymond Bailey, agreed that a margin of 1.25% above LIBOR is a reasonable estimate of what Sovcomflot would have paid in 2002 to raise additional funds on the security of the fleet (assuming that they had been able to do so).

Mr Skarga referred to statements in the annual accounts for Sovcomflot for 2004 and 2005. The defendants relied upon the 2004 accounts as showing (i) that Sovcomflot were paying for secured loans an uplift above LIBOR of between 0.875% and 1.575%, (ii) that Sovcomflot also had some borrowings at fixed rates of between 4.1% and 5.3%, and (iii) that Sovcomflot had some unsecured loans at rates based on LIBOR with a margin of between 0.75% and 1.00%. The accounts for 2005 report that funding of $687.8m was re-financed and the average margin over LIBOR was reduced from 1.1% to 0.75%, the average credit period being extended from 5 to 8 years.

Mr. Andrew Popplewell QC, representing the claimants, was able to use these annual accounts to show that on some borrowings Sovcomflot were paying rates of more than LIBOR plus 1.25% or the equivalent thereof. In particular he referred to the fixed rate borrowings recorded in the accounts of 2004 and 2005: the rate of 4.1% to 5.43% was the equivalent of a margin over three months LIBOR of 2.5% to 3.4%; and borrowings at fixed rates of between 4.1% and 5.4% reported in the 2005 account correspond to a margin over LIBOR of something like 1.5% to 2.4%. Mr. Popplewell also reminded me that in 2002 Sovcomflot took an unsecured loan of $30 million from RCB upon which they paid interest of 8.5%: see para 795.

In my judgment the evidence upon which the defendants rely does not support their contention that the claimants could have borrowed funds for as little as LIBOR plus 0.85% over the relevant period. First, the evidence largely relates only to the period between 2002 and 2005, and no evidence has been produced about what rates were paid in later years. In any case, such evidence as there was is too fragmentary even about the earlier years to support any conclusion about the rates that the claimants would have had to pay generally for borrowings.

However that might be, the defendants’ contention faces a more fundamental difficulty. They rely generally (although not wholly) upon evidence about the rates for secured and medium term borrowings. They submit that it is appropriate and just to determine a rate for the interest to be awarded on the claimants’ equitable compensation by reference to the rate charged for such borrowings because shipping companies such as Sovcomflot and NSC, being “asset rich”, are typically funded by medium-term secured borrowings. I am not persuaded by these submissions: there is no cogent evidence that Sovcomflot and NSC at the relevant times had assets available to secure borrowings, and indeed, that is why Sovcomflot raised funds in 2002 through the SLB transactions. In any case, the reason that the court generally considers how much the recipient of an interest award would pay for short-term unsecured borrowings in order to determine the rate of interest on awards is not that it is supposed companies such as the recipients would usually raise funds by way of short-term unsecured borrowing in the course of their business, but because it is generally a just and fair basis upon which to determine the interest rate. The purpose is to compensate them for being deprived of funds to which they were entitled. If they had not been so deprived, they would have received the funds without encumbering their assets and any equity in them would have remained available to provide security for further borrowings were they needed. I can see no justification for determining a fair rate of interest on the assumption that the claimants would have used their assets as security for borrowings. Further, as Langley J explained in the Kuwait Airways case (loc cit at p.992c), the courts refer to short-term interest rates because it will not “apply hindsight in the knowledge of how long it may take for the losing party to pay”.

I conclude from the evidence relied upon by the defendants that the interest paid by Sovcomflot and NSC was not less, or certainly not significantly less, than what the LMAA Report described “As a typical uplift [over LIBOR] for a long-term secured loan”. There is no reason to think that the further uplift to 2.5% suggested by the LMAA to recognise that it is appropriate to assess a rate for an unsecured loan of a shorter term should not be adopted, and I conclude that the appropriate rate of interest is that for which the claimants contended in their alternative submission, three month US$ LIBOR with an uplift of 2.5%. For the reasons that I have explained, I consider that in this case it is appropriate to depart from the conventional US Prime Rate to this extent, but there is no evidence that justifies any further departure from what is conventional.

I therefore conclude that the defendants should pay interest on the claimants’ equitable compensation from a date to be determined until the date of judgment at the rate of three months US$ LIBOR plus 2.5% compounded with three monthly rests.

As I have said, for the most part the claimants have elected for remedies by way of equitable compensation rather than an account. If it be contended that interest on any sums payable upon an account should be calculated on a different basis from that on equitable compensation, I shall allow the parties to make further submissions.

The claimants submitted that Mr. Nikitin and the Standard Maritime defendants should pay them 60% of their costs in the Fiona actions and should also pay them any of Mr. Skarga’s costs that they are ordered to pay. With regard to the Intrigue action they submitted that Mr. Nikitin and his companies should pay the whole of their costs, or alternatively that they should pay 78% of them. Mr. Nikitin and the Standard Maritime defendants submitted that the proper orders in the Fiona actions are (i) that the claimants should pay 90% of their costs, and (ii) that, in so far as they are ordered to pay any costs, (a) they should be limited to no more than 10% of the costs to 1 July 2009 and no more than 5% of the costs thereafter, and (b) the amount should be reduced by the sum of US$2.5m paid by Clarkson under the Fiona/Clarkson settlement agreement. As for the Intrigue action, Mr. Nikitin and his companies contended (i) that the claimants should pay 80% of their costs and (ii) that, in so far as they are ordered to pay any costs, (a) they should be limited to no more than 20% of the claimants’ costs of the proceedings against them, or 10% of the total costs of the Intrigue proceedings, and (b) any liability for costs should be reduced by US$3.5m representing the payments in respect of costs under the Intrigue/Clarkson settlement agreement and the Galbraith’s settlement agreement. Both the claimants and Mr. Nikitin and the Standard Maritime defendants said that the costs awarded to them should be assessed on the indemnity basis.

The court has a discretion as to whether costs should be paid by one party to another, the amount of those costs and when they are to be paid. It is not obliged to make any order: CPR44.3(1). If the court decides to do so, “the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party”: CPR44.3(2)(a). Assuming an order is to be made, therefore, the starting point is to determine who is to be regarded as “the successful party” and who is to be regarded as “the unsuccessful party” for the purpose of applying the general rule. At least in commercial litigation, the party who “ends up receiving payment” is generally characterised as “the overall winner of the entire action”: Multiplex Constructions (UK) v Cleveland Bridge, [2008] EWHC 2280 (TCC) para 72. The claimants contend that therefore they were successful because they have succeeded in commissions claims in both the Fiona actions and in the Intrigue action and established their entitlement against Mr Nikitin, Milmont and Amon to a judgment for many millions of dollars.

Mr. Nikitin and the Standard Maritime defendants submitted, nevertheless, that they are to be regarded as the successful party. As I see it, they advance three main arguments. First, they say that most of the Standard Maritime defendants were successful parties: 17 of the 19 companies defended all the claims brought against them, and the claimants were successful only against Mr. Nikitin himself and against Milmont and Amon. Further, 12 of the claimant companies were wholly unsuccessful in the claims that they brought. However, I do not consider that the general rule contemplates that in a case such as this the court should consider separately the position of each individual claimant and defendant. Where two or more parties have common representation and common or associated interests, as in this case, the court will generally treat such groups of litigants as tantamount to a single party for the purpose of applying the general rule and determining for that purpose who was successful. It would be impractical to do otherwise, and it would not advance the overriding objective. As Lightman J observed in Bank of Credit and Commerce International SA v Ali (No 3), [1999] NLJ 1734, “for the purposes of the CPR success is not a technical term but a result of real life, and the question as to who has succeeded is a matter for the exercise of common sense”. Indeed, it was not suggested that I should make separate orders in favour of the successful parties and against the individual unsuccessful parties. Mr. Nikitin and the Standard Maritime defendants accepted that I should make one composite order in respect of the two Fiona actions as between all the claimants on the one hand and Mr. Nikitin and the Standard Maritime defendants on the other hand, and a single separate order in the Intrigue action.

The second argument advanced by Mr. Berry was that the court cannot conclude that the claimants are the successful parties in this litigation because Mr. Nikitin and certain of the Standard Maritime defendants are to apply for an order against the claimants in the Fiona action that they pay damages under undertakings given when they were granted freezing orders. They seek damages far in excess of any liability that they have to the claimants, and argue that, if their application is successful and they are awarded substantial damages, at the end of this litigation they will “end up receiving payment”.

In support of the argument that it is proper to consider who is the successful party by reference to the litigation as a whole, Mr. Berry cited the judgment of the Court of Appeal delivered by Rix LJ in Kastor Navigation Company Ltd. v AGF MAT, [2004] EWCA Civ 277, [2004] 2 Lloyd’s Rep 119, in which he said at (para 143):

“The general rule is that the “unsuccessful party” will be ordered to pay the costs of the “successful party” (CPR44.3(2)(a)). Does this mean successful party on any particular issue or successful party in the litigation? As a matter of construction it must be the latter. Where the rule refers to part of a case or a particular allegation or issue it says so”.

Rix LJ did not, I think, mean that the court should always wait until the conclusion of litigation in order to determine which party was successful and which was unsuccessful before applying the general rule in awarding costs. After all, the general rule is routinely applied when the costs are ordered upon interlocutory applications. The point that Rix LJ was making was that the application of the general rule requires consideration of the overall relative success of the parties in respect of the relevant hearing(s) or stage(s) in the litigation, that is to say generally those in respect of which an award of costs is being considered, and the court is not concerned, for this purpose, about which party has won on individual issues.

Thirdly, Mr. Nikitin and the Standard Maritime defendants submitted that it is not appropriate in this case to have regard to who has succeeded in the trial and this litigation overall, and a more refined approach is required. The point was put as follows:

“Although bundled together in one phase of one trial, this is not a simplistic unitary action. It was really a whole series of trials of different alleged dishonest schemes based on different factual scenarios. … The true analysis is that there were many different pieces of litigation between different parties or groups of parties, relating to different allegations, and there were different successful parties in these different pieces of litigation”.

I have already rejected this argument in so far as it is based upon the success of the majority of the Standard Maritime defendants and the lack of success of some of the claimants. However it is argued that, whether or not it would be right to group together as a single “party” all the claimants and to group Mr Nikitin and the Standard Maritime defendants as another “party” (or at least so to group (i) the parties to the Fiona actions and (ii) the parties to the Intrigue action), in any event there is in reality a fundamental division between the part of the case upon which the claimants succeeded and part of the case that they lost. The claimants lost their claims based upon their central allegation in the Fiona actions of dishonest collusion between Mr. Nikitin and Mr. Skarga and in the Intrigue action of dishonest collusion between Mr. Nikitin and Mr. Izmaylov, and that, it is said, was always their real and primary case. They succeeded upon a secondary and discrete claim against Mr Nikitin and two of the Standard Maritime defendants that they were party to “skimming” commissions through the London broking market.

I accept that in broad terms this submission fairly represents the result of the main judgment. However, I do not consider that Mr. Nikitin and the Standard Maritime defendants are therefore to be regarded as the “successful party” for the purposes of the general rule, or that the claimants are to be regarded as the “unsuccessful party”. This, as it seems to me, would be contrary to the proper application of the general rule that the Court of Appeal explained in A L Barnes Ltd. v Time Talk (UK), [2003] EWCA Civ 402, that the court should decide who is the successful party before segregating the litigation into different claims. (I observe that in Lloyds v Svenby, [2002] EWHC 576 (QB) at para 5, Stanley Burnton J considered that the Court should determine separately who succeeded upon a claim and who succeeded upon a counter-claim. I do not need to express any view about that: there is no counterclaim in this case.)

I therefore conclude that for the purposes of the general rule the claimants are to be regarded as the successful party as against Mr Nikitin and the Standard Maritime defendants in both of the Fiona actions and the Intrigue action. This leads to the question whether I should depart from the general rule: CPR 44.3(2)(b) provides that the court may do so, and “make a different order”. CPR 44.3(4) provides as follows:

“In deciding what order (if any) to make about costs the Court must have regard to all the circumstances, including-

(a)

the conduct of all the parties;

(b)

whether a party has succeeded on part of his claim, even if he has not been wholly successful;

and

(c)

any payment into court or admissible offer to settle made by a party which has drawn to the Court’s attention, and which is not an offer to which costs consequential under Part 36 apply”.

In this case there was no such payment into court or admissible offer.

CPR44.3 (5) provides that,

“The conduct of the parties includes –

(a)

conduct before, as well as during, the proceedings…

(b)

whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(c)

the manner in which the party has pursued or defended his case or a particular allegation or issue;

(d)

whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim.”

The Court may, under CPR44.3(6), use different forms of order to achieve the result that a party recovers only part of his costs, including that he should be paid “a proportion of his costs”, or “costs relating only to a distinct part of the proceedings”. It is not disputed in this case that, if I determine that any party is to be paid a part of his costs, it would be appropriate to achieve this by an order that he be paid a percentage proportion of them. This approach was commended by the Court of Appeal in National Westminster Bank v Kotonou, [2007] EWCA Civ. 227 at para 22:

“A more convenient method, while keeping in mind the issue based approach, is to assess all the costs together and then apply a proportion which reflects the fact that a party has won on some issues and lost upon other issues.”

In order to reach a fair determination upon costs as between the claimants and Mr. Nikitin and the Standard Maritime defendants, I must particularly consider (i) the extent to which the claimants were successful and (ii) the conduct of these parties before and after the proceedings were brought. I have already said that the claimants’ success was limited. The defendants defeated entirely the claims relating to these schemes: the RCB claim, the SLB arrangements scheme, the termination of the SLB arrangements scheme, the newbuildings scheme, the Sovcomflot time charters scheme, the Sawyer commissions scheme, the NSC time charters scheme and the “Romea Champion” commission scheme. The claimants were successful in respect of the Sovcomflot Clarkson commissions scheme, the Tam commissions schemes, the hull no 1231 commission scheme, the Norstar commissions scheme, the NSC Clarkson commissions scheme and the Galbraith’s commissions scheme. One measure of the claimants’ success is that, as Mr Berry observed, in the Fiona actions the claimants recovered something less than 5% of the amounts that they claimed and in the Intrigue action the claimants recovered some 12% of their total claims. As I have said, where the claimants succeeded in respect of a scheme, they did so only on their secondary case: I rejected in respect of all the schemes their primary allegations that Mr. Skarga and Mr. Izmaylov were involved in collusion. I observe that, apart from the evidence of Russian law, all or practically all of the extensive expert evidence adduced in the main actions (as opposed to the part 20 claims) was directed to allegations upon which the claimants failed.

The aspects of the claimants’ conduct which seem to me most importantly relevant to this decision about costs are these:

I do not overlook that Mr. Berry also submitted that I should also have regard to what he describes as “extraordinarily close cooperation” between the claimants and the Russian prosecution authorities. He observed, for example, that the claimants deployed in the action documents that had been obtained through international criminal process. I am not persuaded that this is a relevant consideration, and certainly it does not significantly add to the argument of Mr Nikitin and the Standard Maritime defendants. Co-operation with government agencies and prosecuting authorities is, on the face of it, proper, and I am not in a position reliably to conclude that the claimants are to be criticised in this regard.

I must also weigh Mr. Nikitin’s conduct both before and during the proceedings. (It was not suggested that his conduct should not, for these purposes, be attributed to the Standard Maritime defendants.) The main judgment explains the nature and extent of his dishonesty in his dealings with Sovcomflot and Intrigue, and it shows the extent of his dishonest evidence. I need not list all the relevant findings: he paid substantial bribes to Mr. Privalov, including payments under sham agreements, and, while it was not possible from the evidence to discern the reason for all the payments, he secured Mr. Privalov’s assistance in conducting the dishonest commissions schemes; he was party to creating forged and back-dated documents and to other dishonest devices; and his evidence on many matters was shown to be dishonest, both in relation to the commissions claims and about other schemes where the claims were dismissed.

The claimants urge that I should also have regard to my finding that Mr. Nikitin conferred on Mr. Skarga benefits which English law regard as bribes. I do not consider this an important consideration for present purposes: I have not found that this involved dishonesty on Mr Nikitin’s part (or on Mr Skarga’s part), and the significance of this conduct is dwarfed by the dishonest conduct and evidence both of Mr. Nikitin and of the claimants.

I bear in mind that the claimants have recovered some part of their costs under the settlement agreements with Clarkson and Galbraith’s.

Balancing these considerations I conclude that I should not order any payment of costs as between the claimants on the one hand and Mr. Nikitin and the Standard Maritime Defendants on the other hand. They should all bear their own costs. This involves a major departure from the general rule, but I consider that it is justified particularly (i) because the claimants failed in their primary case, and (ii) because of the conduct of the claimants before and during the proceedings.

Mr. Skarga applies for orders that the claimants pay his costs and that they be assessed upon the indemnity basis, apart from disbursements in respect of the experts’ fees, which should be assessed on the standard basis. He was successful in defeating all the claims against him in the Fiona actions, and the claimants in those actions were unsuccessful against him. Nevertheless, and despite the general rule in CPR 44.3(2)(a), the claimants submit that they should not be ordered to pay his costs.

Their first argument is that Mr. Skarga’s defence was funded by loans made to him by two of Mr. Nikitin’s companies, Standard Maritime and Raynor United SA. During the trial Mr. Nikitin said that he expected that the loans would be repaid by Mr. Skarga from an award of costs in his favour, and the inference was that he realistically recognised that otherwise they were unlikely to be repaid. It was not argued that Mr. Skarga was not liable for the costs of his defence and it was accepted by the claimants that, under the so-called indemnity principle (see, for example, Adams v London Improved Motor Coach Builders, [1921] 1KB 495), the source from which a litigant pays his legal costs is generally immaterial when deciding whether he should recover them from the other party. However the claimants argue that Mr. Nikitin, through his companies, funded Mr. Skarga’s defence because he regarded it to be in his best interests and, since “effectively, this was a further way in which Mr. Nikitin chose to conduct his own defence”, the claimants should not be ordered to pay Mr. Skarga’s costs any more than they should pay those of Mr. Nikitin and his companies.

I reject that argument. It might well be that Mr. Skarga will use any sum that he recovers under an order for costs in his favour wholly or in large part to repay the loans, and that the order will therefore indirectly benefit Mr Nikitin and his companies. However this is no reason not to make an order.

The implication of the claimants’ submission is that Mr. Skarga, despite his success in the litigation, should be left owing debts in respect of his costs without making any recovery from the unsuccessful claimants to discharge them. I do not consider that that would be just. Mr Popplewell suggested that Mr Skarga might avoid this result by applying for an order that Mr Nikitin pay his costs. I am not persuaded of this. This is certainly not a case of the kind in which the court would usually make a Sanderson order: typically such orders are made when a claimant brings alternative claims against two (or more) defendants (see Moon v Garrett, [2006] EWCA Civ 1121 para 25). In any case, Mr Skarga’s costs were incurred in respect of the claimants’ primary contention of dishonest collusion between him and (amongst others) Mr Nikitin, and I rejected the case based upon that contention against both Mr Skarga and Mr Nikitin. I do not consider it just that Mr Nikitin rather than the claimants in the Fiona actions should bear those costs.

The claimants’ second argument is that, having regard to Mr. Skarga’s conduct before and during the proceedings, no award of costs should be made in his favour. The claimants make these points:

I conclude that Mr. Skarga is entitled to an order that the claimants pay his costs. Having regard in particular to his conduct and the issues upon which he did not succeed, I am not persuaded that he should recover only part of them. That would not be just, especially in view of the scale of the allegations and claims against him and the dishonesty associated with the claimants to which I have already referred.

Where the court orders that costs be paid, they are assessed either on the standard basis or the indemnity basis: CPR44.4. In deciding the appropriate basis the court will have regard to the matters specified in CPR 44.3(4) to which I have already referred, including the conduct of the parties. The difference between assessment on the alternative bases was explained by Lord Woolf LCJ in Excelsior Commercial and Industrial Holdings Ltd. v Salisbury Hannah Aspden and Johnson, [2002] EWCA Civ 879 at para 15:

“The differences are two fold. First, the differences are as to the onus which is on a party to establish that the costs are reasonable. In the case of a standard order, the onus is on the party in whose favour the order has been made. In the case of an indemnity order, the onus for showing the costs are not reasonable is on the party against whom the order has been made. The other important distinction between a standard order and an indemnity order is the fact that, whereas in the case of a standard order the court will only allow costs which are proportionate to the matter in issue, this requirement of proportionality does not exist in relation to an order which is made on the indemnity basis. This is a matter of real significance. On the one hand, it means that an indemnity order is one which does not have the important requirement of proportionality which is intended to reduce the amount of costs which are payable in consequence of litigation. On the other hand, an indemnity order means that a party who has such an order made in their favour is more likely to recover a sum which reflects the actual costs of the proceedings…”.

I was referred to a wealth of authorities about whether costs should be assessed on the indemnity basis, including these: National Westminster Bank PLC v Rabobank Nederland (No 3), [2008] 1 Lloyd’s Report 16 at para 45, JP Morgan Chase Bank v Springwell Navigation Corp, [2008] EWHC 2849 (Comm), Amoco (UK) Exploration Co v British American Offshore Ltd, [2002] BLR 135 at paragraph 6, Balmoral Group v Borealis (UK) Ltd, [2002] EWHC 2531 (Comm), IPC Media Ltd v Highbury Leisure Publishing Ltd, [2005] EWHC 283 (Ch.) and Three Rivers District Council v The Governor and Co of the Bank of England (No 6), [2006] EWHC 816 (Comm). In the last of these Tomlinson J (at para 25) identified the following guiding principles:

“(1)

The court should have regard to all the circumstances of the case and the discretion to award indemnity costs is extremely wide.

(2)

The critical requirement before an indemnity order can be made in the successful defendant’s favour is that there must be some conduct or some circumstance which takes the case out of the norm.

(3)

Insofar as the conduct of the unsuccessful claimant is relied on as a ground for ordering indemnity costs, the test is not conduct attracting moral condemnation, which is an a fortiori ground, but rather unreasonableness.

(4)

The court can and should have regard to the conduct of an unsuccessful claimant during the proceedings, both before and during the trial, as well as whether it was reasonable for the claimant to raise and pursue particular allegations and the manner in which the claimant pursued its case and its allegations.

(5)

Where a claim is speculative, weak, opportunistic or thin, a claimant who chooses to pursue it is taking a high risk and can expect to pay indemnity costs if it fails.

(6)

A fortiori, where the claim includes allegation of dishonesty, let alone allegations of conduct meriting an award to the claimant of exemplary damages, and those allegations are pursued aggressively inter alia by hostile cross-examination.

(7)

Where the unsuccessful allegations are the subject of extensive publicity, especially where it has been courted by the unsuccessful claimant, that is a further ground.

(8)

The following circumstances take a case out of the norm and justify an order for indemnity costs, particularly when taken in combination with the fact that a defendant has discontinued only at a very late stage in proceedings:

(a)

Where the claimant advances and aggressively pursues serious and wide ranging allegations of dishonesty or impropriety over an extended period of time;

(b)

Where the claimant advances and aggressively pursues such allegations, despite the lack of any foundation in the documentary evidence for those allegations, and maintains the allegations, without apology, to the bitter end;

(c)

Where the claimant actively seeks to court publicity for its serious allegations both before and during the trial in the international, and national and local media;

(d)

Where the claimant, by its conduct, turns a case into an unprecedented factual enquiry by the pursuit of an unjustified case;

(e)

Where the claimant pursues a claim which is, to put it most charitably, thin and, in some respects, far-fetched;

(f)

Where the claimant pursues a claim which is irreconcilable with the contemporaneous documents;

(g)

Where a claimant commences and pursues large-scale and expensive litigation in circumstances calculated to exert commercial pressure on a defendant, and during the course of the trial of the action, the claimant resorts to advancing a constantly changing case in order to justify the allegations which it has made, only then to suffer a resounding defeat.”

I have already referred to some of the considerations upon which Mr. Skarga relies in support of his submission that the costs to be paid to him should be assessed on the indemnity basis. They include these:

It was also submitted that the litigation has had a devastating effect on Mr Skarga’s life: he has left Russia and lived for some five years in England, apart from his wife and children, and he has not worked since losing his position as a Russian senator. It does not seem to me that this can be regarded simply as a result of this litigation rather than of the criminal proceedings brought against him in Russia.

I recognise that Ms Susannah Jones, who presented Mr Skarga’s submission about costs, has identified powerful arguments in support of the application for an assessment on the indemnity basis, but on balance I conclude that Mr. Skarga’s costs should be assessed on the standard basis for three main reasons. First, as I have explained Mr. Skarga had behaved dishonestly in some of his dealings with Mr. Nikitin and Mr. Privalov: see para 1441. Secondly, Mr Skarga did not provide any credible or satisfactory explanation for some aspects of the impugned schemes, and it is understandable that the claimants had suspicions about his dealings with Mr Nikitin: see para 1451. Thirdly, Mr Skarga’s account of his dealings in relation to the impugned transactions was sometimes dishonest: see para 1436.

I therefore conclude that the Fiona claimants should pay Mr Skarga’s costs, and that they should be assessed on the standard basis.

Accordingly, Mr Skarga can recover only costs that are proportionate. Ms Jones invited me to express an opinion about whether it was appropriate that Mr Skarga was represented by two counsel throughout the trial, including during the evidence relating to the Intrigue action. In my opinion this was proportionate and indeed reasonable, given the close relationship between the claims in the Fiona actions and the Intrigue action.

Mr. Izmaylov successfully defeated the claim against him. The only basis upon which the claimants resisted an order that they pay his costs was that he, like Mr. Skarga, funded his defence through loans from Mr. Nikitin’s companies, Hayes and Standard Maritime. I have rejected this argument in relation to the loans to Mr. Skarga, and for similar reasons I consider that, applying the general rule, the claimants should pay all of Mr. Izmaylov’s costs.

Mr Izmaylov submits that the costs should be assessed on the indemnity basis, except that he too accepts that disbursements for experts’ fees should be assessed on the standard basis. His arguments were similar to Mr. Skarga’s:

I have explained the courts’ approach to decisions of this kind. I accept that Mr. Izmaylov’s costs should be assessed upon the indemnity basis. His case is to be distinguished from that of Mr Skarga because Mr Izmaylov had done nothing that could reasonably have excited the claimants’ suspicions about his integrity, because many of the allegations against him were, to my mind, always particularly thin and because his evidence was honest.

I add that, in my judgment, it was reasonable that Mr Izmaylov should have been represented by two counsel during the trial, including during the parts concerning the Fiona actions, which did not directly concern him.