VTB Capital v Nutritek International Corp & Others:
Fried Frank partner secures landmark English Supreme Court ruling discharging $200million worldwide freezing order and dismissal of case
UK Supreme Court criticises freezing orders obtained by VTB as "highly unsatisfactory"; an "oppressive restraint" on Marshall Capital and Mr. Konstantin Malofeev, having been obtained and continued in a "wrongful" and "protracted"way.
Fried Frank Harris Shriver & Jacobson (London) LLP Partner Justin Michaelson has secured a landmark victory for Marshall Capital and Mr. Konstantin Malofeev in a $330 million cross border dispute with VTB Capital Plc
in a landmark 3-2 majority Supreme Court case involving worldwide freezing orders, issues of forum non conveniens, and the question of piercing the corporate veil.
The judgment was released to the public this morning. In the eagerly anticipated decision of VTB Capital Plc v Nutritek International Corp and others  UKSC 5, the UK Supreme Court rejected an appeal by VTB Capital Plc against the Orders of the Court of Appeal and the High Court dismissing their claim for $330 million against Marshall Capital and Mr. Konstantin Malofeev for want of jurisdiction on grounds of forum non conveniens. VTB's worldwide freezing order against Mr. Konstantin Malofeev was also dismissed. The English Supreme Court additionally clarified the circumstances in which the English Courts may pierce the corporate veil, following the attempt by VTB to pierce the corporate veil of the Borrower entity under their Facility Agreement to make Mr. Konstantin Malofeev liable.
The case highlights the factors taken into account by the English Court when deciding jurisdiction to hear international disputes and is the first Supreme Court level rejection of jurisdiction over Russian commercial disputes. The English Court is a popular, neutral venue to hear complex international commercial disputes. However the parties must either agree to the English Court resolving their disputes, or there must be other compelling reasons justifying the Court
accepting the case that link the dispute to the jurisdiction. The English Court must be "clearly and distinctly" the appropriate forum to try the dispute. All three levels of the English Court have now decided that England is not the appropriate forum for this case.
In relation to the merits of the claim, the Supreme Court referred to the facts of VTB's now dismissed claim and noted the "apparent failures" of VTB in following up their own due diligence enquiries. Lord Mance stated that the failures of VTB in this regard were "striking". He also observed that this was "likely to lead to questions as to how much, if any,weight was placed upon any such representation by VTB or VTB Moscow".
Further, in his speech on the freezing orders, Lord Wilson noted that the orders obtained against Konstantin Malofeev and Marshall Capital were "a highly unsatisfactory state of affairs". He said that "Mr. Malofeev has continued to be subject to a worldwide freezing order for some 14 months beyond the time when it was proper for such an order to be continued [the first dismissal of the Order]". Lord Wilson called VTB's appeal "inappropriate" that led to a "protracted wrongful continuation" of the freezing order. Lord Wilson noted that this was inevitably going to cause "oppressive restraint" on the business interests of Konstantin Malofeev.
Justin Michaelson, partner at Fried Frank Harris Shriver & Jacobson (London) LLP, said today: "My clients are delighted with the decision. VTB sought, quite wrongly, to use the English court's nuclear weapon of a freezing injunction as a tool of commercial pressure against Marshall Capital and Mr.Malofeev for 18 months, with no merits underlying their claim. We have succeeded at every judicial level in challenging the original Order obtained ex parte, but it is only now that Marshall Capital and Mr.Malofeev are finally vindicated and are able to try and carry on again as normal."
BRIEFING NOTES ON THE JUDGMENT:
(Paragraph references below refer to the Judgment)
- Lord Neuberger, Lord Mance and Lord Wilson rejected the appeals. Lord Clarke and Lord Reed dissented. The appeal was rejected on a 3-2 majority.
- On the freezing order, Lord Wilson stated that: "The continuation of the [worldwide freezing] order to date represents a highly unsatisfactory state of affairs…(paragraph 159) … but what turns out to have been the protracted wrongful continuation of the freezing order is another indication of the inappropriateness of a further appeal to this court in circumstances such as the present… at first sight, [Mr. Malofeev] is entitled to complain that it was an oppressive restraint on his economic activities… (paragraph 160)".
- On VTB's claim that they relied on representations, Lord Mance noted the apparent weaknesses at paragraph 60 where he states that "the informality of the alleged representations… and the apparent failures to follow it up by obtaining more formal confirmation is striking. It is likely to lead to questions as to how much, if any, weight was placed upon any such representation by VTB or VTB Moscow…"
- On the allegation that Konstantin Malofeev was aware of the activity at Nutritek, Lord Mance noted at paragraph 40 the evidence that Mr. Malofeev had himself commissioned the report from Ernst & Young to investigate what was happening. Lord Mance notes that the evidence before the Court explained that there was an "obvious inconsistency between Mr. Malofeev commissioning the Report and at the same time being responsible for any wrongdoing identified".
- On forum non conveniens generally, Lord Mance held that: "the Russian connection is of such strength and importance in this case that, despite the existence of some factors favouring England, [VTB] are quite unable to discharge the onus on them of showing that England is clearly and distinctly the appropriate forum for determination of the issues in this case..." (paragraph 71 of the Judgment).
- On jurisdiction challenges generally, Lord Neuberger urged Judges to take greater procedural control over first instance hearings. His Lordship stated that:" Judges should invoke the [new procedural powers introduced by the Jackson reforms and Woolf reforms]… to ensure that the evidence and argument on service out and stay applications are kept within proportionate bounds and do not get out of hand." (Paragraph 89 of the Judgment).
- On the applicable law of the alleged tort of deceit, the Supreme Court disagreed with the Court of Appeal and Arnold J by holding that English law was the applicable law, instead of Russian law. Despite this, however, the Supreme Court still held that England was not clearly and distinctly the most appropriate forum (paragraph 100 of the Judgment).
- Lord Neuberger's Judgment on piercing the corporate veil is now the highest level of authority for the principle, replacing previous Court of Appeal decisions. In the Judgment he confirms the existence of the principles and supports the test applied by Munby J in Ben Hashem v Al Shayif  EWHC 2380 (Fam)  1 FLR 115 that: "it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is (mis)use of the company by them as a device or facade to conceal their wrongdoing... at the time of the relevant transaction(s)..." (paragraph 128 of the Judgment). In relation to the underlying attack on the principle itself by the Second Respondent, Lord Neuberger declined to decide the point finally because it was not necessary to do so.
- On the principle of piercing the corporate veil to bring in another party to make them subject to an English jurisdiction clause, Lord Neuberger expressly rejected the principle raised for the first time in the case of Antonio Gramsci Shipping Corporation v Stepanovs  EWHC 333 (Comm),  1 Lloyds Rep 647 and stated: "[the principle] cannot be sustained: far from there being a strong case for the proposed extension [to the principle of lifting the corporate veil], there is an overwhelming case against it" (paragraph 137 of the Judgment). The principle was contrary to the fundamental principle of contract which is "what an objective reasonable observer would believe was the effect of what the parties to the contract, or alleged contract..." (Paragraph 140 of the Judgment). None of the parties intended to contract with Mr. Malofeev, nor did he conduct himself as if he was liable.