Baturina v Chistyakov

As the defendant says, issues (1)a, (1)b and (3) should be considered together. They concern the question of whether he can bring an application for a stay on forum non conveniens grounds in the event that any of the proposed amendments are permitted and, if not, what impact that has on the amendment application. He has not advanced a stay application at this hearing.

As the defendant says, the claimant’s appeal against the first instance decision staying the proceedings on forum non conveniens grounds was allowed on the ground that since her monetary claim as pleaded was unsustainable, there was no point in granting a stay in favour of Russia. That, he says, takes this case out of the ordinary course. As he says, the Court of Appeal contemplated that an application could be made to stay the action in its amended form. (I have set out the relevant passages from the judgment above.)

In those circumstances, he contends that the need to apply to stay the proceedings on forum non conveniens grounds only arises to the extent that the amendments (if any) which are permitted result in the claimant’s claim becoming sustainable. Further, one of the issues that arose in relation to the defendant’s previous stay application in relation to the claimant’s un-amended case was the extent to which the claims made in the English proceedings would be able to be replicated in proceedings in Russia. Obviously, he submits, until it is apparent what claims are able to be made in the English proceedings, it is not clear what claims in Russian proceedings would need to be considered in this context.

The defendant submits that if the claimant (1) is able to amend her Particulars of Claim to plead a viable claim; and (2) is right that the defendant cannot then bring a stay application, she will, by virtue of her incompetence in initially pleading an unsustainable case, have precluded the defendant from seeking a stay of that viable case on forum grounds. Such a result would be manifestly unjust. In such circumstances it is submitted that the appropriate course would be for the Court to dismiss the amendment application, leaving it for the claimant to commence fresh proceedings in which she could make her new allegations. She would then need permission to serve those proceedings out of the jurisdiction and accordingly would need to persuade the Court that England is the most appropriate forum for the trial of her claim. The claimant could not complain about having to adopt this course as it will have been brought about entirely by her own conduct.

In her written case, the claimant asserted that the defendant should have reserved his position when he issued the summary judgment/strike out application if he wished to preserve his ability to seek a stay. This point was abandoned at the hearing. The contention advanced by the claimant is that the defendant should not be permitted to bring another stay application on case management grounds, since he could and should have advanced that case at this hearing had he wished to do so.

I accept the claimant’s case in this respect. The Court of Appeal plainly envisaged the amendment application (if there was one) and the stay application (if there was one) coming on at the same time: see paragraph 84 set out above. The defendant says that until it is apparent what claims are able to be made in the English proceedings, it is not clear what claims in Russian proceedings would need to be considered in this context. But in the usual way, the claimant’s amendment application was accompanied by a draft amended Particulars of Claim. It was known then what claims the claimant would seek to advance. Each party has expert Russian lawyers who have already given extensive evidence. The defendant could readily have submitted further expert evidence as to the claims sought to be advanced under Russian law and procedure, had that been thought necessary. As a matter of principle, a party must advance its arguments at the same time, and not in stages. The result is not unjust, because the defendant has not been deprived of the right to apply for a stay, but has not exercised it.

There is no dispute about the applicable legal principles. Amendments will not be allowed which plead a point which has no real prospect of success. The test is the same as on an application for summary judgment. Normally, this is not the subject of argument, since amendment is usually a technical matter. Accordingly, the Commercial Court Guide provides in paragraph C5.3 that “Questions of amendment, and consequential amendment, should wherever possible be dealt with by consent. A party should consent to a proposed amendment unless he has substantial grounds for objecting to it”. Although some of the proposed amendments are agreed here, others are disputed by the defendant, and in the circumstances understandably so. The disputed amendments all go to the question of recoverable loss.

The defendant further objected that the pleaded allegation of fraudulent misrepresentation did not contain proper particulars. It is a rule that full and specific details have to be given of any allegation of fraud (see Bullen & Leake & Jacob’s Precedents of Pleadings, Volume II, 7th ed at 58-11). The claimant sought to make good the deficiency by serving particulars by way of Voluntary Further Information in December 2014, and the issue was not pursued at the hearing.

As to the issue whether the correct approach in law on an amendment application is to consider the prospects of success of the proposed amended pleading as a whole or of the specific pleas sought to be advanced by the relevant amendments, it is clear that both are relevant. Neither party argued to the contrary.

The claimant submits that as a matter of factual causation it is plain that had she never caused Inteco to make the Loans, she would be in a substantially better financial position. Her factual case is that, either fraudulently or wrongfully, sums in excess of €60 million have been misappropriated. Since the lender of those sums (Inteco) lacks a cause of action against the alleged tortfeasor and contract breaker (the defendant), the claimant, as the person to whom the defendant made the alleged representations, and as the only other party to the Agreement, is the only person who can bring an action against the defendant in respect of those alleged wrongs.

The claimant submits that she has suffered loss in that she would now be in a substantially better financial position had she not entered into the Agreement and caused Inteco to make the Loans. That is because she would either (a) have never sold the Volinskaya Shares, and would retain those shares today (rather than the apparently worthless Loans); or (b) would have received a cash payment in the sum of €89,396,708, or equivalent, from Inteco in return for the sale of those shares (in other words, that sum would not have been deducted by way of set off but would have been paid over to her).

As a matter of the legal characterisation of her loss, she submits that she has either suffered (depending upon the point in time at which her loss is analysed) (1) a direct loss (considering the matter as it stands today) as a result of (i) having caused Inteco to make the Loans; and (ii) the subsequent transfer by her of shares in Volinskaya to Inteco and the assignment by Inteco to her of the Loans, or (2) an indirect loss qua shareholder (considering the matter at the time the wrongful acts took place) by way of diminution in the value of her interest in Inteco as a result of the making by Inteco of the Loans, in accordance with the principles set out in Johnson v Gore-Wood, ibid.

Alternatively, the claimant submits that she can recover for the factual loss she has suffered by way of restitution upon rescission or by way of a gains-based restitutionary remedy.

The defendant submits that the claimant has no real prospect of success in relation to any of her proposed amendments, such as might make her claim viable. In summary:

To reiterate, the disputed amendments all go the question of loss. The Court of Appeal did not suggest that the claimant’s pleaded case on liability was defective, and on this application the defendant has not argued that the claimant’s case does not cross the summary judgment threshold on liability, albeit the case is strongly denied.

The question in summary, therefore, is whether, in all the factual circumstances which at present are necessarily untested, the claimant has a real prospect of establishing a recoverable loss (or is entitled to a money judgment on an alternative basis) by way of one or other of the alternative legal “routes” to recovery set out in her amended pleading. She submits that the test is satisfied and that she has a real prospect of establishing a viable route to a recoverable loss, and the defendant submits to the contrary.

It is clear that disputes of fact are at the root of the dispute between the parties. The claimant’s case is that she suffered loss because in effect the defendant swindled her. The defendant’s case is that there was no swindle whatsoever, that she was well aware at all times how the money was being spent, and that so far as she can make out any claim, she has suffered no loss. The claimant submits that these are highly fact sensitive matters which cannot be determined on an amendment application. As a matter of approach, I am inclined to accept that submission.

I now consider the disputed amendments as follows.

The draft pleading (paragraphs 36(d)-(h) and 37(v)) is to the effect that the indirect loss the claimant says that she suffered by way of diminution in the value of her shareholding in Inteco became a direct loss when she took the assignment of the Loans from Inteco, sold the Volinskaya shares to Inteco, and later set off the mutual debts at full value. In this regard, she pleads that the Volinskaya shares were purchased for over €100m. She pleads that but for the defendant’s misrepresentations she would not have caused Inteco to make the Loans, and had the Loans not been made, she would either never have sold the Volinskaya Shares to Inteco, or would have received a cash payment in the sum of €89,396,708 (being the sale price of the Volinskaya Shares).

The defendant says that there are two fundamental problems with the approach adopted by the claimant, a failure to appreciate the chronology of events, and a failure to recognise the distinction between herself and Inteco.

As to timing, the alleged representations relied on were made between 18 August 2007 and 28 February 2008, and the defendant says that it is inconceivable that the claimant could have continued to have relied upon them in October 2010 when she entered into the assignment, or on 30 June 2011, when she claims that the set-off was effected.

As to the distinction between herself and Inteco, he says that the claimant herself did not make any financial contribution to the project. Inteco made the Loans, which would be terminated on the transfer to her of a 65% equity stake in the holding company. In the light of the terms of a (disputed) Supplementary Agreement, he says that it is unarguable that any representation about the claimant getting a 65% share in the holding company was false. She simply chose to repudiate the Supplementary Agreement rather than acquire her shares.

If the claimant has suffered a loss it is because, the defendant says, she chose (without reference to anything said or done by the defendant) to take an assignment of the Loans for full value, which Loans have proved irrecoverable, to date, from the debtor.

In relation to any claim in contract, the defendant says, the position is even more hopeless. In paragraph 34, the claimant claims that, having discovered the representations to be untrue, she has rescinded “and for the avoidance of doubt hereby rescinds” the Agreement. Having elected to pursue rescission, she is confined to the remedies rescission provides. The consequence of rescission is that property transferred under the rescinded agreement is restored to the transferor. However, there is none, because the claimant provided no consideration under the Agreement, the Loans being made by Inteco, not by the claimant. Assignment of the Loans simply gives the claimant a right of action against Sylmord.

In the circumstances, he submits that the claimant has no real prospect of establishing that she has suffered any direct loss which would be recoverable against the defendant in either contract or tort as a result of causing Inteco to make the Loans, or entering into the Assignment and providing the consideration in the form of the Volinskaya Shares, or entering into the Sale Transaction. Accordingly the proposed amendments relating to this claim should not be permitted.

For the reasons the defendant gives, I accept the force of the proposition that there may be real difficulties with this claim. However, answers are put forward on each point by the claimant. The answer to the first problem identified by the defendant is said to be found in the evidence of the claimant to the effect that she did not know at the time of the assignment and the pleaded transactions following it that the representations she relies on were false. She says that she continued to lend more money through her Austrian company, and would not have done so otherwise.

As to the second problem identified by the defendant, she says that he has not addressed the question, when does the court assess the loss? Is it at the date of the wrongful act, in which case it is a diminution of the value of the shares in Inteco, or is it at a later date, in which case she submits it would have been a direct loss. Either way, she submits that she has lost what she caused her company to put in by way of funds.

As regards the Supplementary Agreement, she denies that this ever became effective (which is disputed). I have not been addressed on that issue in much detail.

As for the factual disputes, the court cannot form a view on these matters at this stage, and it would be wrong to seek to do so.

As regards rescission, she says that a claim for damages for deceit is not inconsistent with rescission, and that a claim for damages for breach of contract is a true alternative which clearly will not arise if there is rescission, and the court says there was rescission, and that it was justified. On balance, and for the purposes of this application only, I consider that this is sufficient justification of what otherwise would be incompatible pleas as a matter of contract.

I cannot conclude therefore that this part of the pleading as regards loss said to be recoverable in English law in either tort or contract has no real prospect of success. It is a relatively low bar, and the claimant surmounts it.

These draft paragraphs 36(a)-(c) and 37(v) plead the claimant’s Johnson v Gore-Wood head of claim for indirect loss qua shareholder (considering the matter at the time the wrongful acts took place) by way of diminution in the value of her interest in Inteco as a result of the making by Inteco of the Loans.

The defendant says that the principal difficulties facing the claimant in advancing such a claim are in establishing that (1) Inteco suffered a loss; and (2) that loss resulted in a diminution in the value of her shareholding. In relation to (1), the Court of Appeal has already held that Inteco suffered no loss, and in relation to (2), the claimant received full value for her shareholding in Inteco. He says that where a company is defrauded there is no effect on share prices until the fraud is discovered, and the assignment of the Loans took place well before any issue arose about misrepresentation. He submits that the case as to sums advanced pursuant to the Loans being “invested in alternative, profitable ventures” or “deposited to earn interest” is entirely speculative, has no apparent factual basis and is wholly fanciful. The plea that her loss falls to be determined by reference to the “initial” diminution in the value of her interest in Inteco and that subsequent transactions, including the Assignment Transaction, are insufficiently connected to her loss to be taken into account.

I do not accept the validity of the proposition that the value of the shares was necessarily only affected when the alleged fraud was discovered. The claimant’s point is that it was inherent at the time of the alleged fraud.

Otherwise, for the reasons the defendant gives, I accept the force of the proposition that there may be real difficulties with this claim. Again, however, I cannot conclude that this part of the pleading has no real prospect of success. The legal issues as to recoverability of this kind of reflective loss are bound up with factual ones and cannot easily be separated from them. The claimant’s alternative plea that the assignment is res inter alios acta does not appear to be sound, but ultimately this is a legal point which could probably be argued anyway.

The claimant advances an alternative contractual damages claim in paragraph 37(vi) and (viii) based on returns she says she would have received from the investments. This subparagraph seemed on one reading to plead a claim of €928,473,000. There would be no prospect of the court allowing an amendment inflating the claim in this way, in my view. However, in oral argument the claimant accepted that parts of the draft must be deleted, making it clear that these alleged gains are limited to the alleged loss which has always been claimed in this action as set out later in the subparagraph, that is €71,282,500.

The defendant objects that even as cut down, such a claim does not arise in circumstances where there is rescission, and in circumstances where no profit can be identified. He submits that there is no real prospect of the claim made by that amendment succeeding.

The strongest point appears to be the lack of any material particulars of the allegation that profits would in fact have been received. However, at this stage in the action I am persuaded that it would not be right to disallow paragraphs 37(vi) and (viii).

Reliance loss is identified as issue (7), but is not discussed in the parties’ written submissions, and I say no more about it.

In broad terms, the above amendments were foreshadowed in paragraph 80 of the judgment of the Court of Appeal which is set out above. The claimant also seeks to plead claims for an account, in restitution, and for restitutionary damages. It was made clear in oral submissions that this was largely to cover all bases, given the previous history of the pleading. However, the question is whether such claims as pleaded in draft have a real prospect of success. If not, the court should not allow them to go forward even if, as was also made clear in oral submissions, they are not intended to result in a greater recovery than is sought in relation to the causes of action set out above in respect of which permission to amend has been given.

Paragraph 37(viii) claims an account and/or restitutionary damages from the defendant in respect of gains he is alleged to have made from his alleged breaches of contract. However, I agree with the defendant that no proper factual basis for this is pleaded, and that no viable remedy for an account or restitutionary damages subsists to make the defendant accountable for alleged gains made by Sylmord. I further agree with the defendant that this is not one of the very exceptional cases where an account has been ordered as a remedy for breach of contract (Attorney-General v Blake [2001] 1 AC 268 relied on by the claimant is not analogous), and that these remedies do not lie in respect of the claim in tort either. I do not allow this amendment.

In paragraph 36i) of the draft (dealing with the deceit claim), the claimant claims restitution from the defendant of the sums which she says she caused to be advanced under the Agreement (in other words the loan amount of €71,282,500). She pleads the fact that the defendant is the controller and beneficial owner of Sylmord, and argues that the concept of restitution is flexible enough to accommodate this. However, I do not consider that an adequate basis for a claim in restitution is pleaded against the defendant, who did not receive the money. The fact that he may have been controller and beneficial owner of the company does not alter this conclusion. I agree with the defendant as to the importance of the separate legal personality of the company in this regard (see generally Prest v Petrodel Resources Ltd [2013] 2 AC 415).

A similar analysis applies to the claim for restitutionary damages pleaded in paragraph 36j) (also dealing with the deceit claim), and I agree with the defendant that the draft pleaded claim for restitutionary damages in tort has no real prospect of success either. I do not allow the amendments under these paragraphs.

It is accepted by the defendant that in the event that an amendment to the Particulars of Claim is permitted, that will be on the basis that that amendment gives rise to a viable claim. In those circumstances these applications are not proceeded with.

As regards costs, I did not understand there to be a dispute that the claimant has to pay the defendant’s costs of the issues abandoned by the claimant identified in her proposed Amended Particulars of Claim. She accepts that in the usual way she must pay the costs thrown away and the costs of the amendments.

I reject the claimant’s application for the costs of preparing evidence in response to the witness statement of Mr Edel-Smolnikov of 28 October 2014 adduced on behalf of the defendant, reliance upon which was then withdrawn. This is work which would have to have been done in preparation for trial in any case.

The claimant applies ex parte for an extension of time to serve a claim form in related Protective Proceedings which have to do with the disputed Supplementary Agreement referred to above. The claimant seeks rescission, and the claim is brought to protect the position in relation to limitation. The defendant’s solicitors in the main action are not currently instructed in relation to this claim. This is a technical matter, and I am satisfied that the case is a proper one for an extension, and make the order as asked. Following service, the proceedings should proceed together.

The parties should now seek to agree directions for the future conduct of the action.