Supreme Court rejects appeal from Russia’s VTB Capital

Fried Frank Harris Shriver & Jacobson partner Justin Michaelson and SJ Berwin partner Tim Taylor QC have secured a Supreme Court victory for Marshall Capital and Konstantin Malofeev in a $330m cross-border dispute with state-owned Russian bank VTB Capital.

In a split ruling the Supreme Court clarified the circumstances in which the court can pierce the corporate veil as well as addressing the factors the courts should take into account when deciding jurisdiction to hear international disputes.

Brick Court’s Mark Hapgood QC and Fountain Court’s Stephen Rubin QC were instructed by Fried Frank partner Justin Michaelson for Marshall Capital and Malofeev at the Supreme Court. Michaelson ran the case whilst still a partner at SJ Berwin with partner Tim Taylor QC. He quit in September to join the US firm on 1 December.

They faced Brick Court heavyweight Mark Howard QC and Essex Court’s Paul McGrath QC, who were instructed for VTB by Herbert Smith Freehills partner Philip Carrington (10 October 2012).

The dispute centred on allegations of fraud and conspiracy against the respondents, who were involved in the acquisition by Russagroprom (RAP) of six Russian dairy plants and associated companies from Nutritek. VTB had loaned RAP $225m to fund the acquisition, but RAP later defaulted leaving the bank able to recover just $40m of the loan.

It was alleged that VTB made the loan following false inducements made by Nutritek. The respondents were alleged to have participated in the supposed fraudulent conspiracy.

The defendants challenged jurisdiction on the basis that Russia was the more appropriate forum for the dispute to be heard in. VTB then sought to add a claim for breach of the facility agreement, the basis of which was that the corporate veil of RAP could be pierced with the result that Malofeev and other parties to the conspiracy could themselves be held liable on the facility agreement.

This was potentially significant for the rule of jurisidiction since the facility agreement contained an exclusive jurisdiction clause in favour of the English Courts. However, the proposed claim involved a novel application of the piercing the veil doctrine.

Both the High Court and Court of Appeal (CoA) rejected the claim (20 June 2012), stating that the corporate veil could not be pierced.

A five-strong judicial panel delivered the ruling, with Supreme Court Justices Neuberger, Mance, and Wilson dismissing the case, making it the first Supreme Court level rejection of jurisdiction over Russian commercial disputes.

The court agreed with VTB that the CoA had erred in holding that Russian law as opposed to English law applied to VTB’s tort claims. Nevertheless the justices said that the appellate court’s decision on forum conveniens was a judgment with which the Supreme Court should not interfere.

The minority, Supreme Court Justices Clarke and Reed, held that they would have allowed the appeal on the basis that the English Court was the proper forum for VTB’s tort claims.

The legal line-up:

For the appellants VTB Bank: Brick Court’s Mark Howard QC and Essex Court’s Paul McGrath QC leading 11 Stone Buildings’ Iain Pester and Brick Court’s Tony Singla instructed by Herbert Smith Freehills partner Philip Carrington.

For the respondent Nutritek: 3 Verulam Buildings’ Michael Lazarus and Christopher Burdin instructed by Fried Frank partner Justin Michaelson (formerly of SJ Berwin) and SJ Berwin partner Tim Taylor QC.

For the respondent Malofeev: Brick Court’s Mark Hapgood QC and Fountain Court’s Stephen Rubin QC leadingJames McClelland of Fountain Court instructed by Fried Frank partner Justin Michaelson.