April 2013: London Litigation Update

by Quinn Emanuel Urquhart & Sullivan, LLP
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Piercing the Corporate Veil: VTB Capital plc v. Nutritek International Corp and Others [2013] UKSC 5. In a recent case, the United Kingdom Supreme Court unanimously refused to pierce the corporate veil in order to treat an alleged controller of a company as a party to a contract entered into by that company. Accordingly, the claimant bank was unable to rely on a jurisdiction clause in the contract giving non-exclusive jurisdiction to the English courts.

VTB, a UK affiliate of the major Russian Vneshtorgbank group, lent $225 million to a Russian company, Russagroprom LLC (“RAP”), under a facility agreement (the “Agreement”). The stated purpose of the loan was to fund the acquisition by RAP of Russian dairy businesses from the defendant Nutritek, a British Virgin Islands (“BVI”) company. The parties to the agreement were VTB as lender, RAP as borrower, and two guarantors respectively incorporated in Cyprus and the BVI. The agreement was governed by English law and was subject to the non-exclusive jurisdiction of the English courts.

RAP defaulted on the loan, and VTB recovered less than $40 million by enforcing the security. Accordingly, VTB brought proceedings in England in which it alleged that it was induced to enter into the Agreement by fraudulent misrepresentations made by: (i) Nutritek; (ii) Mr. Konstantin Malofeev, Nutritek’s alleged controller; and (iii) two other BVI companies that were said to be jointly and severally liable for those misrepresentations. The key alleged misrepresentations concerned the nature of the transaction. In the Agreement, RAP and Nutritek were described as unrelated companies. The sale of the business was therefore represented to be an arm’s length transaction. According to VTB, however, both companies were under Mr. Malofeev’s control.

If established, the alleged misrepresentations would have enabled VTB to take jurisdiction in England under the jurisdiction clause in the Agreement, as opposed to being forced to rely on claims against the defendants in tort which, by virtue of prior decisions at first instance and on appeal, would have had to be brought in Russia.

The Supreme Court focused on whether the corporate veil could be pierced to make Mr. Malofeev a party to the contract. In answering that question, the Supreme Court noted that although there have been cases at first instance that have recognized the power to pierce the corporate veil in exceptional circumstances, the higher courts have not authoritatively ruled on whether and in what circumstances such a power can be exercised. To the extent that the courts can pierce the veil, however, the Court ruled that:

•     VTB’s claim was an extension of the cases where the veil has been pierced previously. To allow that extension would be contrary to authority and principle.

•     It would be wrong to treat Mr. Malofeev as a party to the Agreement as, on an objective view, (i) none of the parties intended to contract with Mr. Malofeev; (ii) Mr. Malofeev did not contract with those parties; and (iii) Mr. Malofeev did not lead any party to believe that he was liable under the Agreement.

•     To the extent that VTB had claims in tort against Mr. Malofeev personally, those claims could be brought in Russia, and there was no basis for the Supreme Court to interfere with the lower courts’ decision that England was not the most appropriate forum for them.

The effect of this decision is to suggest that novel bases for the piercing of corporate veils will not be welcomed by the English Courts and that Claimants will be limited to the narrow grounds established in earlier lower Court cases.

Legal Advice Privilege: R (on the Application of Prudential plc and Another) v. Special Commissioner of Income Tax and Another [2013] UKSC 1. The Supreme Court has confirmed that legal advice privilege cannot be claimed in respect of confidential communications between accountants and their clients for the purpose of requesting or providing legal advice and that it can only be claimed where such communications are between solicitors, barristers or foreign lawyers (including in-house lawyers) and their client.

The case related to information notices issued by HMRC under the Taxes Management Act 1970 to Prudential, seeking documents relating to a marketed tax avoidance scheme, details of which had been disclosed to HMRC under the Tax Avoidance Schemes (Information) Regulations 2004. Prudential brought proceedings for judicial review, seeking to quash or limit the notices and arguing that the notices unlawfully required Prudential to disclose documents that were subject to legal advice privilege.

Prudential argued in the Supreme Court that legal advice privilege should be available for advice on tax law given by accountants because accountants provide the same services as qualified lawyers in the context of giving tax advice. In that context, Prudential suggested that the determining factor for the application of legal advice privilege should be the advisor’s function rather than the advisor’s status, and that it was not relevant whether or not they were a qualified lawyer.

The Supreme Court dismissed the appeal (by a majority of five to two) and followed the decision of both the High Court and the Court of Appeal, confirming the existing position of the law in relation to privilege. The Supreme Court concluded that legal advice privilege should not be extended beyond its current scope at common law and that any such extension was a matter for Parliament. Thus, it is now very clear that the court will not permit a party to claim legal advice privilege over communications unless they are with a qualified lawyer. What remains to be seen is whether bodies of professionals such as accountants will therefore seek to bring about a change in the law via the legislative process.

Good Faith in Contracts: Yam Seng Pte Ltd v. International Trade Corp [2013] EQHC 111 (QB). A recent High Court judgment has made a clear shift towards recognizing an implied duty of good faith and fair dealing in commercial contracts. This is a marked departure from the traditional hostility that English courts have shown towards such claims. Mr. Justice Leggatt noted that it was unlikely that “English law has reached the stage … where it is ready to recognize a requirement of good faith as a duty implied by law … into all commercial contracts.” Nevertheless, he had no difficulty in implying a duty of good faith and fair dealing in this case based on the presumed intention of the parties, following the established methodology of English law.

The Judge started from the approach of the Privy Council in Attorney General for Belize v. Belize Telecom Ltd [2009] 1 WLR 1988, in which the Privy Council held that the orthodox tests for an implied term should be analyzed as part of the exercise of contractual construction—what would the contract, read as a whole against the relevant background, reasonably be understood to mean? The judge held that the relevant background included not only the facts known to the parties but also shared values and norms of behavior. Many such norms were thought to be taken into account by contracting parties without being spelled out expressly, for example an implied obligation to act honestly. The judge thought it hard to envisage any contract that would not reasonably be understood as requiring honesty in its performance and held that there is “nothing novel or foreign to English law in recognizing an implied duty of good faith in the performance of contracts” and that, in refusing to recognize such an obligation of good faith, as English courts typically have done, England was “swimming against the tide.”

Whilst the case turns on its own facts, it is noteworthy for its positive attitude towards recognizing an implied duty of good faith and fair dealing in commercial contracts. As Leggatt J noted, “the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced.” This is good news for claimants, particularly in the financial services area, who may have found the English courts a difficult place to find a remedy in recent years.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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