Background
Facts
Applications

Norwich Pharmacal orders against law firms
Comment


Disputes between Russian oligarchs continue to keep the London courts and legal profession busy. In the latest reported case(1) an application was heard for a Norwich Pharmacal order made on behalf of Rusal, an aluminium-producing company whose chief executive officer is Oleg Deripaska. Rusal made the application against the law firm Debevoise & Plimpton LLP(2) in a dispute over control of the Norilsk Nickel mining group, in which Rusal and Deripaska are engaged with Russian conglomerate Interros Internal Investments Limited and its president, Vladimir Potanin.

Background

A Norwich Pharmacal order is a pre-action order sought against a third party for disclosure of documents and information to enable the applicant to obtain details of a wrongdoing committed against the applicant by others, which the applicant would otherwise be unable to obtain. The classic case is where the applicant knows that it has been wronged, but not by whom, although a third party will be able to identify the wrongdoer so that the applicant can bring a civil action. That was the position in the landmark case, Norwich Pharmacal v Customs and Excise Commissioners,(3) in which the applicant, which held an exclusive licence to supply a patented anti-bacterial product in the United Kingdom, sought disclosure from Customs and Excise of details of 'grey imported' shipments of the product. The order is not available against mere bystanders, or to parties which would be witnesses in the action. The third party against which the order is sought must have facilitated or otherwise been involved in the wrongdoing.

The principle has been extended over the years as its boundaries have been tested. The Rusal case was another test of the limits in two respects. The first, which as the judge noted was unusual, but not unique, was that the application was for disclosure from solicitors acting for the defendants to the applications on the matters in dispute. The second - and apparently truly novel - aspect was that one of the justifications for seeking the disclosure was to assist Rusal in defending its interests at an extraordinary general meeting of Norilsk Nickel.

Facts

The dispute is about control of Norilsk, in which Potanin (through Interros) and Deripaska (through Rusal) each own a holding of 25% plus one share. Rusal purchased its interest in 2008. Shortly afterwards, a dispute arose which was resolved by Rusal and Interros entering into a cooperation agreement on various aspects of Norilsk's corporate governance. Such peace as there was seems to have been temporary and uneasy, and at an annual general meeting in June 2010, the battle for control flared up again. Rusal's representation on the board was reduced from four directors to three. Litigation, arbitration and regulatory proceedings ensued.

On December 16 2010 Norilsk offered to buy back Rusal's shares for $12 billion. Four days later, Norilsk announced that unnamed wholly owned subsidiary companies had sold 8% of Norilsk's share capital to Trafigura Beheer NV. Norilsk did not name the subsidiaries involved at the time - one was subsequently identified as a St Kitts and Nevis company, Corbiere. This was the first transaction in issue.

The Trafigura transaction had not been discussed or approved by Norilsk's board. It seems that under Russian corporate law (unlike under English law), wholly owned subsidiaries are controlled by the management of the parent company (which appoints their directors), rather than the board of directors of the parent company. Subsidiary companies are also permitted to own shares in their parent company, and possibly - although this was disputed - to exercise votes on those shares.

The second disputed transaction was approved by Norilsk's board on December 28 2010, immediately on the expiry of the offer to buy back Rusal's shares. In this buy-back transaction, Corbiere made a general offer to purchase Norilsk shares at what was said to be a premium to the market price. The offering circular stated that Corbiere would subsequently be exercising voting rights on the shares it purchased.

Rusal's concern is that the sale to Trafigura was, in fact, a transfer to a party related to Interros, while the buy-back transaction replenished Corbiere's shareholding, which Interros or related parties controlled through the management of Norilsk. It was common ground that foreign subsidiaries are not permitted to own more than 10% of the stock of a Russian company without regulatory permission.

Rusal responded by instituting two sets of proceedings in the Russian courts on January 13 2011, seeking declarations that each of the disputed transactions was invalid. These claims were rejected by the Russian court on procedural grounds, which required Rusal to cure the defects by pleading with greater specificity, and in relation to the Trafigura transaction, to present evidence that the transaction had been concluded.

Norilsk also issued proceedings in St Kitts and Nevis and obtained an interlocutory injunction restraining Corbiere and another Norilsk subsidiary, Rayleigh, from proceeding with the buy-back transaction.

After making the UK application, Rusal also lodged two sets of disclosure proceedings under the 28 USC 1782 procedure: in Connecticut against Trafigura; and in New York against two banks that were apparently involved in the transactions.

Applications

Rusal's application
The application was brought by two Rusal companies and one of the Rusal-appointed Norilsk directors. They sought disclosure of a wide range of documentation and information from Debevoise, primarily aimed at obtaining evidence that the buy-back transaction had been concluded in order to overcome the procedural defect identified by the Russian court. The scope of the application was narrowed during the hearing to a more focused request for the transaction documents for the Trafigura deal.

Director's application
The director's application had been brought on the basis that he needed the information in order properly to carry out his duties at the extraordinary general meeting which Rusal had called.

The judge dismissed this application. He accepted that Debevoise's submission that an extraordinary general meeting could not be characterised as a means of redressing a grievance or wrongdoing. He found that the director's complaint was in reality a complaint that Norilsk had failed to provide him with information, but that there was no suggestion that Debevoise had been involved in Norilsk's failure to provide the information to the director, unlike in the transactions themselves.

Rusal companies' application
The judge started by finding that Rusal had established an arguable case that it had been the subject of unlawful acts in one respect of its various complaints. Furthermore, he held that there was an arguable case that Debevoise's London office had been innocently involved in the arguable wrongdoing.

However, the application was dismissed on the grounds that Rusal had failed to establish that it was necessary, in the interests of justice, to make the order. There were two elements to this finding.

First, the application was premature, because the USC 1782 actions had yet to be determined. Thus, it was unnecessary for Rusal to be given disclosure from Debevoise when the company might obtain the material direct from parties that the judge described as principals.

Second, the Russian court's procedure provides a mechanism for disclosure which Rusal had not exploited (considering that it would be too slow to be effective). The judge stated that the evidence before him was that the Russian court had given Rusal until March 11 2011 to cure the procedural defect by presenting the evidence that the Trafigura transaction had been concluded. Although he noted that Debevoise's Russian law expert had not suggested that the Russian procedure would allow Rusal "to receive disclosure in the near future", he found that Rusal had failed to establish that there was any urgency (in a judgment dated March 1 2011), and that in the absence of such urgency, there was no need to grant the order.

Norwich Pharmacal orders against law firms

Although the application was refused on grounds that did not stem from the fact that disclosure was being sought from a law firm, the following observations can be drawn from the Rusal judgment:

  • It was common ground that, whatever the outcome, a law firm cannot be ordered to disclose information which is subject to legal advice or litigation privilege.
  • The judge considered that for the English courts to have jurisdiction to make such an order, it would be necessary to show that lawyers based in England had been involved in the wrongdoing. It would be insufficient to show that an international firm with an office in England had been involved only through personnel based in another office.
  • Any order against such a firm should be carefully measured so as not to have unjustifiable extraterritorial effect and not to risk putting lawyers in conflict with their professional obligations in other jurisdictions.

The judge made the following obiter (ie, passing) observations on the exercise of discretion to grant such an order against lawyers:

"While lawyers are not immune from being compelled to give evidence or produce documents (where privilege does not apply), nevertheless, an order that a lawyer do that is one that the court will scrutinise closely, since… it can cause injustice to the client and to the lawyer… This is the more so where the relationship between the lawyers and the client is not merely in relation to transactions, but is also in relation to litigation…

Norwich Pharmacal orders are always exceptional, because they interfere with the rights of third parties who are not said to have done anything wrong. Where the third parties are lawyers in a professional relationship with the alleged wrongdoer, then the case must be all the more exceptional. The facts of reported cases appear to suggest that an appropriate case for an order against an innocent lawyer will be likely to be a case where fraud is alleged against the client."

Comment

Although the English courts will maintain their discretion to make Norwich Pharmacal orders against legal representatives in appropriate circumstances, those circumstances will be continue to be drawn narrowly. Rusal suggests that applications made against solicitors will be treated similarly to applications against banks for disclosure of details of their customers' affairs. These, known as Bankers Trust orders,(4) which are widely deployed in asset-tracing claims, have always been subject to more stringent controls in recognition of the confidentiality inherent in the banking relationship. In particular, they are subject to requirements of urgency (ie, threat of dissipation) and the existence of strong evidence of fraud.

The approach to non-privileged documents in the hands of legal representatives appears to merge with the established approach in relation to privileged documents. There is no privilege in iniquity, which means that an application for Norwich Pharmacal-style disclosure can push aside the trammels of privilege if there is strong evidence of fraud.(5) Rusal appears to establish that there is no half-way house mechanism short of that.

For further information on this topic please contact Jake Hardy at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).

Endnotes

(1) United Company Rusal Plc v HSBC Bank Plc [2011] EWHC 404 (QB), March 1 2011.

(2) The applications were initially also made against HSBC and another bank, but these were dropped, and Rusal proceeded only against Debevoise.

(3) [1974] AC 133.

(4) After Bankers Trust Co v Shapira [1980] 1 WLR 1274.

(5) See, for instance Derby v Weldon (No 7) [1990] 1 WLR 1156.