Court of Appeal rules that piercing the corporate veil will not create privity of contract and that Russian defendants to a claim in tort are outside the jurisdiction of the English court.
Further to our previous alert "From Russia with Love" (December 2011), the Court of Appeal has upheld the decision of the High Court in VTB Capital Plc v Nutritek International Corp & Others1 and has dismissed VTB's appeal.
The decision has important implications on three areas of commercial litigation:
- The Court of Appeal confirmed that piercing the corporate veil does not create privity of contract with the true controller of the company. In practice, this means that claimants will need to look for other ways to (i) establish a cause of action against controllers of companies, and (ii) anchor proceedings in England, as they will be unable to rely on exclusive jurisdiction clauses against puppet companies or puppeteers who are not themselves parties to the contract.
The decision also clarifies the circumstances in which the English court will allow a foreign party to be served with a claim in tort where the centre of gravity of the tort occurred fully or partially outside the jurisdiction. Broadly, a claimant must show that:
- There is a serious issue to be tried
- He has a good arguable case that his claim falls within one of the recognised "gateways" in the Civil Procedure Rules; and
- England is the proper forum for the resolution of the dispute.
- Finally, the Court made clear that evidence of dishonesty is not sufficient by itself to establish a real risk of dissipation of assets, which is the crucial element when considering whether to grant or continue a Worldwide Freezing Order ("WFO").
We understand that, at the time of writing, an appeal to the Supreme Court has been instituted. Accordingly, further developments may be forthcoming in this important area.
Parties considering litigation against suspected puppeteers of alleged sham companies and/or considering commencing a claim in tort against a foreign party should take careful note of this judgment. We set out below a summary of the lessons learned from this decision and our tips for litigating this type of claim.
- A jurisdiction and governing law clause in a contract will be ineffective as against a non-party, even if they are proved to be the contracting party's true controllers.
- The issue of jurisdiction in claims for torts committed across borders is not straightforward - care will need to be taken to identify jurisdiction before filing a claim form.
- Establishing a good arguable case of fraud against an individual, for instance where it can be shown that he operates through offshore companies both to commit the fraud and to create obstacles to enforcing judgments against him, will lend powerful support to an application for a WFO.
- Careful due diligence should be performed prior to entering into a contract. It was clear on the facts that this was not sufficiently done in this case. Once the true parties are ascertained they should be signatories to any agreements (for instance, having directors as warrantors) and specifically to any exclusive jurisdiction/arbitration clause.
- Claimants will need to look for causes of action other than under contract to bring proceedings before the English courts against non-parties. Examples that may be available include actions for conspiracy or the tort of deceit, or an injunction to prevent a contractual party from breaching a term and to procure that it is not breached by another, such as his servant or agent (per Gilford Motor Company Limited -v- Horne).2
- Following the first instance decision of Arnold J in this case, it cannot be assumed that litigants will be denied justice in Russia. This finding of Arnold J, which was not challenged by VTB on appeal, appeared to have been made by the judge on the basis of the expert evidence before him. We note that previous decisions have reached different conclusions on the issue of getting a fair trial in Russia. Accordingly, where claimants in cases with a Russian element wish to anchor proceedings in England, the importance of instructing a convincing Russian law expert early on in the proceedings cannot be understated.