In Kazakhstan Kagazy Plc v Zhunus,(1) the claimant companies succeeded in their claim against three former company directors in respect of fraudulent schemes involving construction projects and land acquisitions in Kazakhstan. While the claim was determined in accordance with the law of Kazakhstan, the judge provided useful guidance on what is required to prove a complex fraud. The judge rejected the defendants' argument that the claim was time barred under Kazakh law, but considered obiter that he would have disapplied the Kazakh limitation period on the basis that it would have caused the claimants undue hardship pursuant to Section 2 of the Foreign Limitation Periods Act 1984.
The claimants were a group of companies in the paper packaging and recycling business in Kazakhstan. The three defendants were former directors of the claimant companies. The claimants alleged that the defendants had breached their obligations under Kazakh law by:
- dishonestly causing three of the claimants to make payments between 2005 and 2009 to a construction company, which was secretly controlled by the defendants. They claimed that little construction work had actually been carried out and that the payments had been made from the construction company to a number of entities associated with the defendants;
- conducting a similar fraud in 2008 and 2009, procuring that the sixth claimant make payments to a contractor controlled by the defendants and enter into contracts for design services and the delivery of goods which were not substantially performed; and
- using nominee companies to acquire land cheaply in Kazakhstan, which they then sold to the second claimant for development at highly inflated prices.
The claimants argued that in all of the alleged frauds, the defendants had:
- used a number of corporate vehicles to siphon off funds from the claimants; and
- placed friends and relatives in the positions of directors and shareholders to hide their connections with these companies.
They claimed that payments to and between these vehicles were often elaborate with no proper explanation or documentation to sit behind them.
The first defendant denied that he was responsible for the relevant transactions and argued that he had acted honestly. The second and third defendants accepted that they had taken part in decision making, but denied that they had been involved in any fraudulent scheme. They also claimed that the proceedings were time barred under Kazakh law because the claimants had been aware of the material facts more than three years before the claim was commenced.
The judge agreed that the defendants had played the roles alleged in the three fraudulent schemes. While he applied Kazakh law, the judge provided some general guidance on what is required to prove a complex claim in fraud.
The judge noted that any pleading of fraud, whether under English law or otherwise, should be properly particularised and should not be inferred from facts which have:
- not been pleaded; or
- been pleaded, but which are consistent with honesty.
In addition, while a claimant is obliged to prove its case only on the balance of probabilities, where fraud is alleged, a claimant will in practice need more convincing evidence to establish that the fraud has taken place than it would if negligence were pleaded. This reflects the fact that it is inherently more unlikely that fraudulent, as opposed to negligent, conduct has taken place.
However, the judge accepted that context should be taken into account and held that although fraud may be inherently more improbable than negligence:
"once it has been demonstrated that a particular defendant has been dishonest in relation to evidence given on an important aspect of the case which that defendant is having to face, and so the Court is in a position where it is able to reach the view that the defendant is not an honest person, then, the likelihood of that defendant having behaved dishonestly more generally is bound to be greater than would otherwise have been the case."
The judge found that two of the defendants had lied in evidence and given elaborate false explanations when confronted with documents that contradicted their version of events. In the circumstances, it was highly probable that they had committed the frauds alleged by the claimants.
As explained above, the thrust of the claimants' case was that the defendants had caused payments to be made to various entities which they controlled (unbeknown to the claimants). The defendants alleged that these claims would succeed only if it could be shown that the funds had actually been received by the defendants.
The judge rejected the defendants' contentions and found that the claimants had proved their case by demonstrating that the defendants were connected to the entities which had received the funds. As the defendants had lied about their connections to these entities, "this inevitably calls into question why such lies have been maintained". It was not necessary to show that the funds had ended up in the defendants' pockets.
The judge held that the claimants' case was not time barred as a matter of Kazakh law. However, he went on to consider obiter whether Section 2 of the Foreign Limitation Periods Act 1984 would apply. This section provides that the foreign law of limitation will not apply where its application would conflict with public policy, including where this would cause undue hardship to a party to the proceedings.
A limitation period will be contrary to public policy only if it is in "conflict with fundamental principles of justice readily and clearly identifiable".(2) It is insufficient that the foreign limitation period is less generous than the equivalent English limitation period. This is based on the desire of the courts to uphold the system of private international law which "exists to fulfil foreign rights not destroy them".(3)
The judge rejected the following arguments that the application of the Kazakh limitation period in this case was contrary to public policy:
- It would be unjust, as time starts to run under Kazakh law even though the claimant does not know the identity of the alleged wrongdoer. In this case, the claimants did not lose a reasonable opportunity to pursue their claim because they were unaware of the wrongdoer's identity.
- Under Kazakh law, a claimant requires only a general knowledge that its rights have been violated for the limitation period to commence. The judge held that Kazakh law provides that the claimant should have reasonable grounds to believe this.
- Kazakh law contains a provision allowing the restoration of a limitation period for claimants who are natural persons (eg, where the claimant has been seriously ill), but not for corporate entities. The judge rejected this on the basis that such a provision is not contrary to public policy and is in any case similar to Section 28(1) of the Limitation Act 1980.
The judge approved Lord Denning MR's dictum in Liberian Shipping Corporation v A King and Sons Ltd ( 2 QB 86) that 'undue' in this context simply means excessive.
He specifically endorsed the Court of Appeal decision in Bank of St Petersburg v Arkhangelsky(4) and its approach (in deciding whether hardship was undue) of considering whether the consequences of losing the opportunity to pursue the claim were proportionate to the level of the claimants' fault in delaying the bringing of the claim. This was in contrast to an approach which asked whether the claimant was deprived of the reasonable opportunity to bring a claim timeously if acting with reasonable diligence and knowledge of the applicable limitation period.
The judge held that the application of the Kazakh limitation period would have caused the claimants undue hardship because:
- it would result in the "clearest possible undue hardship" if the victims of fraud on a significant scale could not bring a claim. The judge noted that the frauds in this case were not obvious and that if the claimants were at fault in delaying bringing the claim, it was not at such a level to justify not disapplying the Kazakh limitation period; and
- the frauds which had brought about the claims meant that the claimants had to face "a critical and ongoing financial crisis", meaning that they had to concentrate their efforts on matters other than the bringing of claims.
The judge rejected the argument that undue hardship would be caused simply because shareholders, employees and creditors of the claimants would all be prejudiced if the claim was time barred.
Although claimants have to work hard to prove fraud, it is clear that the courts recognise that it is often difficult to demonstrate that wrongdoers have received funds from complex fraudulent schemes. The courts will also take a dim view of dishonest evidence and take this into account when deciding how probable it is that the alleged fraudulent events occurred.
This case is a welcome reminder that delay in bringing claims will not necessarily be fatal when a claimant seeks to disapply a foreign limitation period on the grounds that its application would cause undue hardship. The court will consider the significance of the alleged fraud and whether the fraud itself prevented the claimant from pursuing the claim timeously. Claimants wishing to rely on more general public policy arguments will have to identify grounds of injustice that specifically affected their ability to bring a claim.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Geraldine Elliott or Emma West at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.