Disputes between Russian oligarchs continue to keep the London courts and legal profession busy. In the latest reported case1, Mr Justice Tugendhat heard an application for a ‘Norwich Pharmacal’ order made on behalf of Oleg Deripaska’s Rusal group. The application was made by Rusal against Debevoise & Plimpton LLP in furtherance of the dispute over the control of the Norilsk Nickel mining group in which Rusal is engaged with Vladimir Potanin’s Interros Internal Investments Limited.

A brief outline of the ‘Norwich Pharmacal’ order

As English lawyers will be aware, 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 him by others, which he would otherwise be unable to obtain. The classic case is where the applicant knows he has been wronged but not by whom, but a third party will be able to identify them so that the applicant can pursue them by way of civil action. That was the position in the landmark case of Norwich Pharmacal v Customs and Excise Commissioners2, in which the applicant was holder of an exclusive licence to supply a patented antibacterial product in the UK, and sought disclosure from Customs and Excise of details of grey imported shipments of that product. The order is not available against pure bystanders, or those who would, in time, be witnesses in the action. The third party against whom the order is sought must have facilitated, been involved with, or otherwise been mixed up in the wrongdoing.

In the way of the common law, the principle has been extended over the years as its boundaries have been tested. The Rusal case was another test of the limits of the principle in two respects. The first, which as the judge noted was unusual, but not unique, was that the application was for disclosure from solicitors who were 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 to defend its interests at an EGM of the company at the heart of the dispute – the Norilsk Nickel mining group.

The background to the dispute

The dispute is about control of Norilsk, in which Vladimir Potanin (through Interros) and Oleg Deripaska (through Rusal) each own a 25% plus one share holding. Rusal purchased its interest in 2008. Shortly afterwards, a dispute arose which was resolved by Rusal and Interros entering into a Co-operation Agreement as to various aspects of the corporate governance of Norilsk. Such peace as there was seems to have been temporary and uneasy. At an AGM 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.

Then, on 16 December 2010, Norilsk made an offer to buy back Rusal’s shares for $12bn. 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, but one was subsequently identified as a St Kitts and Nevis company called Corbiere. This ‘Trafigura transaction’ was the first transaction in issue.

The Trafigura transaction had not been discussed or approved by Norilsk’s board. It seems that, unlike the position in English law, under Russian corporate law wholly owned subsidiaries are controlled by the management of the parent company (who appoint their directors), rather than the board of the 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 the board of Norilsk on 28 December 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 made it clear that Corbiere would subsequently be exercising voting rights on the shares it purchased.

Rusal’s concern is that the sale to Trafigura was a transfer to a party related to Interros, while the Buy Back transaction replenished Corbiere’s shareholding, which Interros and/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 obtaining regulatory permission to do so.

Rusal responded by instituting two sets of proceedings in the Russian courts on 13 January 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 more 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 application, Rusal also lodged two sets of proceedings under the 28 U.S.C 1782 procedure in Connecticut against Trafigura; and in New York against two banks apparently involved in the transactions.

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 application sought a broad range of materials, but this was narrowed during the hearing to a more focused request for the transaction documents for the Trafigura deal.

The director’s application

The director’s application had been put on the basis that he was being prevented from being able to carry out his duties properly at the EGM which Rusal had called.

The judge dismissed this application, accepting Debevoise’s submission that an EGM could not be characterised as a means of redressing a grievance or wrongdoing. He also found that the true nature of the director’s complaint was that Norilsk was failing to provide him with information about the disputed transactions. However, there was no suggestion that Debevoise had been involved or mixed-up in Norilsk’s failure to provide the information to the director, unlike in the transactions themselves.

The 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 that arguable wrongdoing.

The application was however 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:

  • The first was that the application was premature, because the USC 1782 actions had yet to be determined. Thus, it was not necessary for Rusal to be given disclosure from Debevoise, when they might obtain the material direct from parties the judge described as principals  
  • The second was that Russian court procedure provides a mechanism for disclosure which Rusal had not exploited – its position being 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 11 March 2011 to cure the procedural defect by presenting the evidence that the Trafigura transaction had been concluded. Although he also noted that Debevoise’s Russian law expert made no suggestion that the Russian procedure would allow Rusal “to receive disclosure in the near future”, he still found that Rusal had failed to establish that there was any urgency (in a judgment dated 1 March 2011), and that in the absence of such urgency, there was no necessity to grant the order.

Norwich Pharmacal orders against law firms

Although the application was refused on grounds which 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 was subject to legal advice or litigation privilege  
  • The judge considered that for the English courts to have jurisdiction to make such an order, it was necessary to show that lawyers based in England had been involved or mixed up in the wrongdoing. It would not be sufficient that an international firm with an office in England had been involved only through personnel based in some other office  
  • Furthermore, any order against such a firm should be carefully measured so as not to have unjustifiable extra-territorial effect, and not to risk putting lawyers in conflict with their professional obligations in other jurisdictions  

Finally, the judge made the following obiter 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.”

Conclusion

While the English court will maintain its discretion to make Norwich Pharmacal orders against legal representatives in appropriate circumstances, those will be continue to be drawn very narrowly. In fact, Rusal suggests that applications made against solicitors will be treated in much the same way as similar applications against banks for disclosure of details of their customer’s affairs. Commonly known as “Banker’s Trust orders”3, these are widely deployed in asset tracing claims and 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 (threat of dissipation) and the existence of strong evidence of fraud.

One interesting aspect of this is that the approach to non-privileged documents in the hands of legal representatives appears to merge with the established approach in relation to ostensibly 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 strong evidence can be shown of the existence of fraud – see, for instance Derby v Weldon (No 7)4. Rusal suggests that there is no ‘half-way house’ mechanism short of that.