England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
MR JUSTICE WALKER
[2013] EWHC 3537 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		5th August 2014

LORD JUSTICE CHRISTOPHER CLARKE:

1. The question in this appeal is whether or not Walker J was right to stay the action in favour of the courts of Russia.
2. Elena Baturina, the claimant/appellant, is a wealthy woman, of Russian nationality. She used to live in Moscow, but now lives in London. Her husband was at one time Mayor of Moscow. Mr Alexander Chistyakov is a Russian national who resides in Russia. He is a businessman with interests in, inter alia, Russian real estate and energy companies. He is also the Chairman of a company listed on the London Stock Exchange. Prior to the events with which this action is concerned the two of them had worked on a real estate project in St Petersburg. As a result of that Mr Chistyakov approached Ms Baturina to discuss her possible participation in projects in Morocco.
3. On 28 February 2008 they entered into a Project Implementation Agreement ("the Agreement") in relation to development projects in Morocco. The Agreement is expressed to be between each of them personally, Ms Baturina being referred to as "Party 1" and Mr Chistyakov as "Party 2", although Mr Chistyakov claims to have been acting on behalf of a consortium of businessmen led by Mr Krupnov.
4. The Agreement recited the intention of the parties "to jointly engage in activities relating to the implementation of development projects in Morocco", and their intention to establish a joint venture and conclude a shareholders' agreement "which should determine the procedure for the interaction of the Parties relating to joint ownership of the shares" of what was described as "HoldCo" and management of the Project. It also recited the desire of the parties to ensure a common understanding of the agreements reached and to avoid differences relating to the interpretation of the content and implementation thereof.
5. The Agreement contained, inter alia, the following terms (in translation):

"1 Project

The parties hereby agree to engage in joint activities relating to the implementation of Development Projects in Morocco. The shares of the Parties in the Project implementation have been allocated in the ratio of 65 (Sixty-five).% - Party 1, 35(Thirty-five).%-Party 2.

2 Development Projects

Project activities are restricted to implementation of the Development Projects described in Appendix No 1 to these Principal Provisions (hereinafter the Project Portfolio)

The Parties shall jointly determine Development Projects in addition to those listed in Appendix No 1, to be included in the Project Portfolio…

3 Project Financing

Project Financing is effected by the Parties in the ratio of 65(Sixty-five)%-Party 1, 35(Thirty-five)%-Party2, in accordance with the Project Financing Schedule (Appendix No 2). Financing of the share of Party 1 shall be affected subject to confirmation of the costs actually incurred by Party 2 in corresponding shares.

Financing by Party 1 of project costs in excess of 65% may be performed further to a request from party 2……

4 Holdco

For the purposes of Project implementation, the Parties shall found a joint company in accordance with Moroccan law (hereinafter the "HoldCo"). The HoldCo shall exercise the functions of management company and shall be the cost and profit centre for Project implementation.

The equity interests in the authorised capital of HoldCo shall be distributed between the Parties in the proportion of 65 (Sixty-five) % for Party 1 and 35 (Thirty-five) % for Party 2. The shareholder of each of the Parties shall own a corresponding share of the issued and registered stock of the HoldCo, granting the right to vote, and shall also have all the other rights of a shareholder of HoldCo in accordance with the legislation of the country of the incorporation of the HoldCo, with due account of the provisions of the Shareholders' Agreement.

5 Shareholders

The company-non-resident of Party 1 (hereinafter the "Shareholder of Party 1") and the company-non-resident of Party 2 (hereinafter the "Shareholder of Party 2"), constitute the shareholders of the HoldCo.

The Parties shall have the right to engage third parties to participate in the Project within the framework of the shares owned by the Parties, only in cases where the consolidated representation of the Party in the Project is ensured.

6 Companies – holders of Projects

For the purpose of implementing separate projects, the Parties may establish companies-holders of projects, proceeding from the following principles:

a. jurisdiction – Morocco

b. sole shareholder – HoldCo. Further to the agreement of the parties on the participation in the capital of the Companies – holders of Projects, third parties may be engaged that may have a share of the profits and participate in the costs, etc.

c. one company is the holder of no more than one project.

7 Management of the HoldCo Companies – Holders of Projects

The Parties shall jointly manage the HoldCo, the Companies-Holders of Projects on the terms and conditions and pursuant to the procedure that should be reflected in the Shareholders' Agreement, with due account of the provisions of these Principle [sic] Provisions.

a. Procedure for managing the HoldCo

i. Decisions on all issues pertaining to the competence of the general shareholders' meeting of the HoldCo shall be adopted unanimously by the shareholders.

ii. For the purposes of managing the HoldCo, the Parties shall appoint Directors in an equal number from each of the Parties. Decisions on all issues falling within the competence of the Directors shall be adopted by them unanimously, unless another decision-making procedure with respect to any specific issues is specified in the Shareholders' Agreement.

iii. The demarcation of competence between the general meeting of shareholders and the directors of the HoldCo shall be determined in the Shareholder Agreement.

b. The General Director of the HoldCo shall be appointed by the Parties jointly from the list of candidates proposed by Party 1 and shall exercise the functions of General Director of the Companies-Holders of Projects.

c. The Finance Director of HoldCo shall be appointed jointly by the Parties from the list of candidates proposed by Party 2. The finance director of the HoldCo shall exercise the functions of Chief Accountant of the HoldCo and Companies-Holders of Projects. All the monetary and settlement documents, financial and credit obligations of the HoldCo and/or the Companies-Holders of Projects shall only be performed subject to the existence of two signatures: of the General Director and the Finance Director.

8 ….

9 Profits

The parties have agreed to distribute between the Parties profits from the implementation of the Project commensurate to their equity interests in the authorised share capital of the HoldCo – 65 (Sixty-five) % for Party 1, 35 (Thirty-five) % for Party 2.

10 ….

11 Legal force, binding nature

The Parties have agreed that these Principle Provisions are legally binding for the Parties.

12 Applicable Law

The Parties have agreed that these Principle Provisions , and also the Shareholders' Agreement shall be governed by English law, regardless of any conflict between its provisions and the law."

6. Appendix 1 to the Agreement specified the Projects to be developed and gave an assessment of readiness in points from 1 to 10 where 1 signified agricultural land and 10 that there was a construction permit. The assessment for the first project listed – Paradise Golf 1 – was 10. Paradise Golf 2 was given an assessment of 9. Two other projects were given an assessment of 8 and 7 and two an assessment of 2.
7. Appendix 2 set out a financing schedule for 9 projects, allocating the costs in the 35%/65% proportions.
8. As can be seen the scheme intended was that there should be a Moroccan holding company to be owned by two non-Russian resident companies belonging to Ms Baturina and Mr Chistyakov. Financing of the Project was to be in the ratio of 65% to Ms Baturina and 35% to Mr Chistyakov. Profits were to be distributed in the same proportions and those proportions were to be the proportions of the parties' equity interests in the authorised capital of the HoldCo. Both the Agreement and the Shareholders' Agreement were to be governed by English law; but there was no agreement as to jurisdiction.

HoldCo

9. In the event the HoldCo was intended to be Andros Bay Holding Offshore SARL, ("Andros") a Moroccan company. A Mr Assad Bargaz was appointed as a Local Director for the projects in Morocco.

Inteco

10. Ms Baturina was, at the time of the Agreement, the owner of 99 out of the 100 shares in Inteco CJSC ("Inteco"), a Russian construction company. The other share is held by the company itself. She later sold Inteco in circumstances which I will describe. Ms Baturina was also, and remains, the owner of an Austrian company - Inteco Beteiligungs AG ("Inteco Austria").

Sylmord

11. Sylmord Trade Inc ("Sylmord") is a BVI company, now in liquidation, which is said to be beneficially owned or controlled by Mr Chistyakov. It was incorporated in January 2007. It is said to have become the 100% owner of Andros.

The Loans

12. In 2008 Inteco made two loans ("the Loans") to Sylmord. The first loan of
    € 36,755,000, of which € 33,220,000 remains outstanding, was the subject of an agreement of 29 February 2008. The purpose of the loan was said to be "for financial support of the Andros Bay Holding Offshore SARL Company subscriber within Morocco development projects". The second loan of € 57,790,000, of which € 38,062.500 remains outstanding, was the subject of an agreement of 15 April 2008. Its purpose was said to be "for rendering the financial help for the founder of company Andros Bay Holding Offshore SARL within the limits of realisation development projects in Morocco." Both agreements were expressly governed by the law of Russia and provided for disputes to be settled by the Moscow City Arbitration Court (see paragraph 5.4 of the original agreements and the amendment thereof by an additional agreement of 29 May 2009). The repayment dates of both loans were extended by additional agreements to 31 December 2010. Andros was a guarantor of both loans.
13. Ms Baturina discovered that only a small proportion, € 9,663.000 of the € 71,822,500, loaned by Inteco to Sylmord was paid to Andros. Most of the monies loaned were paid to the following companies in the following amounts:

(i)	Joyton International SA	€	5,000,000
(ii)	Englobe SA	€	7,065,000
(iii)	Trading House BV	€	375,000
(iv)	Grupo Oxigeno Holding Offshore SARL	€	32,977,548
(v)	Vortex Finance Ltd	€	3,325,000
(vi)	Rosetta Ltd	€	1,553,000
(vii)	Rogers Management Capital Incorporated	€	1,273,885
(viii)	Ridgegrove Investments	€	5,050,000

All of these companies were incorporated in the British Virgin Islands, save Trading House BV, which was incorporated in the Netherlands; Grupo Oxigeno, which was incorporated in Morocco, and Rogers Management Capital, whose place of incorporation is not apparent. In the Particulars of Claim it is pleaded that Grupo Oxigeno was beneficially owned by Mr Andrey Krupnov, Mr Chistyakov's associate; and that Ridgegrove was beneficially owned by Mr Chistyakov.

14. On 29 February 2010 the two loans made by Inteco to Sylmord were assigned by Inteco to Ms Baturina for full value i.e. for the full amount of the principal and interest outstanding. She then sold Inteco.
15. Between February 2010 and July 2011 Inteco Austria made a series of loans to Sylmord. Inteco Austria issued proceedings for repayment against Sylmord in the BVI. Inteco Austria has obtained judgment for the amount due to it from Sylmord in the BVI (the judgment was unsuccessfully appealed) and Sylmord is now in liquidation.
16. A statutory demand for repayment of the Loans was made of Sylmord on behalf of Ms Baturina on 2 November 2012 but no proceedings have been issued.

The proceedings

17. The Claim Form was issued on 22 January 2013. The claim was expressed to be:

"for rescission of an agreement between the Claimant and the Defendant dated 28 February 2008, for repayment of certain loans made in connection therewith, for damages for breach of the said agreement, and for damages for deceit in connection therewith".

There was also a claim for interest.

18. Particulars of Claim were attached in which it was said that Mr Chistyakov made a series of representations in the discussions leading to the Agreement. These were pleaded as follows:

"6. In the course of the said discussions, Mr Chistyakov made a number of representations to Ms Baturina concerning the Projects. In particular he represented that:

a) The Projects, or at least some of them, were ready to commence as soon as finance was forthcoming (the "Readiness Representation");

b) All necessary permits had been obtained or were expected in the near future (the "Permits Representation");

c) Mr Chistyakov had already made a substantial investment in the Projects (the "Investment Representations");

d) Mr Chistyakov would contribute 35% of the financing for the Projects (the "Funding Representation");

e) Ms Baturina would have a 65% shareholding in the Moroccan company that would be the holding company for the Projects (the "Holding Company Representation");

f) It was an obvious and necessary implied representation that the funds to be provided by Ms Baturina would only be applied for the purposes of the Projects and were not to be applied nor diverted to any unauthorised purpose or third party (the "Application of Funds Representation")."

19. In paragraphs 8 and 12 it was pleaded that it was in reliance on those representations that Ms Baturina entered into the Agreement, and, pursuant to it, caused the loans to be made by Inteco for the express purpose of funding and developing the Projects.
20. Paragraph 9 pleaded that the majority of the representations were also incorporated into the Agreement and set out clauses 1, 2, 3, 4, 5, 6, 7, 8 and 12. Paragraph 10 said that it was an implied term of the Agreement that any financing to be advanced by Ms Baturina pursuant to the Agreement was to be applied exclusively for developing the Projects.
21. The pleading alleges that at the time of the Agreement no valid construction permits existed for the Projects; and none were obtained thereafter, save that a valid permit was obtained for the Paradise Gold project in July 2010. It further alleges that the Loans were paid to Sylmord on the express understanding that they would be paid on by Sylmord to Andros for the purposes of the Projects whereas of the total amount of € 71,282,500 only € 9,663,000 was paid to Andros. The rest was paid to the other companies set out in paragraph 13 above in the amounts there specified. The pleading alleges that Mr Chistyakov had failed to account for what had happened to the funds; or to invest any sums, alternatively sufficient funds to amount to his 35% share of the Projects.
22. The first cause of action relied on is deceit. Each of the representations pleaded is said to have been false and Mr Chistyakov is said to have known that, or to have been reckless as to whether they were false. In respect of the Funding Representation Mr Chistyakov is said not honestly to have intended to contribute any funding and in relation to the Application of Funds Representation he is said not honestly to have intended that the funds provided by Ms Baturina would only be applied for the purposes of the Projects.
23. In paragraph 34 it is said that, having discovered the Representations to be untrue, Ms Baturina had rescinded and "for the avoidance of doubt, hereby rescinds the Principal Agreement". The pleading then goes on to allege that Mr Chistyakov has breached a number of the terms of the Agreement including by his failure to pay or cause to be paid to Andros the funds advanced under the Loans for application for the purpose of the Projects; instead he had diverted them for/to unauthorised purposes/recipients.
24. In paragraphs 36 and 37 it is said that Ms Baturina has suffered loss and damage by reason of Mr Chistyakov's deceit [36] and breach of contract [37]. The particulars given are the same in each case and are as follows:

"PARTICULARS OF LOSS

a) Loss of the sums loaned to Sylmord, namely:

i. The principal sum loaned under the February 2008 Loan amounting to € 33,220,000.

ii. Interest owed pursuant to the February 2008 Loan Agreement amounting to € 12,505,284 as at January 2013, and continuing at the rate of 7.7% per annum.

iii. The principal sum loaned under the April 2008 Loan amounting to € 38,062,500.

iv. Interest owed pursuant to the April 2008 Loan Agreement amounting to € 13,962,065 as at 20 January 2013, and continuing at the rate of 7.7% per annum."

25. The prayer of the Particulars of Claim seeks (1) rescission or damages in lieu; (ii) repayment of the sum of € 97,750, 049; (iii) damages for deceit; (iv) alternatively damages for breach of contract; (v) interest.
26. The Claim Form and Particulars of Claim have certain curious features. The claim in the Claim Form is inter alia for repayment of the loans. But, although Ms Baturina is Inteco's assignee, Mr Chistyakov was not Inteco's debtor. In the Particulars the sole loss pleaded is the loss of the sums loaned to Sylmord. But the Lender to Sylmord was Inteco and it has suffered no loss because it has received full value of its loans when it assigned them to Ms Baturina.
27. It was, however, the claim as formulated that Mr Chistyakov, who was served personally within the jurisdiction, sought to stay. For the purposes of the stay application the parties adduced reports from experts on Russian law - Dr Asoskov for Mr Chistyakov; and Dr Labin for Ms Baturina. The content of these reports is addressed in considerable detail by the learned judge in paragraphs 33 – 140 of his judgment. The way in which the claim was pleaded led to a consideration by the experts as to whether the claim for damages as formulated in the Particulars of Claim would be one that could be maintained in Russia.
28. In the event the dispositive part of the learned judge's judgement is within a relatively short compass as are the points that are relied on in support of the contention that he was in error.
29. In paragraphs [142] – [147] the judge set out the principles applicable to whether a stay shall be granted. He referred [143] to the basic principle identified in Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460 that:

"a stay will only be granted …where the court is satisfied that there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of the action i.e. in which the case may be tried more suitably for the interests of all the parties and the ends of justice".

He referred [144] to the fact that the speech of Lord Goff identified a high hurdle for a defendant served within the jurisdiction, who had to show not merely that England is not the natural or appropriate forum but that there is another forum which is clearly or distinctly more appropriate than the English forum.

30. He recorded [146] that one of the features that was relied upon in the present case to resist a stay was the express choice of English law as the law to govern the Agreement and any shareholders' agreement that was to be entered into. He referred [147] to the observations of Laurence Collins J in Sawyer v Atari Interactive Inc [2005] EWHC 2351 that the express choice of English law may or may not be a significant factor in the determination of the appropriate forum, depending on the likely issues. Of relevance was whether there was a substantial difference between English law and the law which would be applied by the foreign court. He also referred [147] to the observation of Lord Mance in VTB Capital Plc v Nutritek International Corp [2013] UKSC 5 that the fact that the governing law is English was in general terms a positive factor because it is generally preferable, other things being equal, that a case should be tried in the country whose law applied.
31. In applying those principles he first accepted [148] that there were numerous links with Russia which could be conveniently summarised in a list produced by Mr Moverley Smith QC. They were the following:

"(1) the location of the vast majority of the principal witnesses who will be called at any trial is Russia;

(2) the language of the parties and of the witnesses so far identified is Russian;

(3) most of the documentation is in Russian;

(4) the negotiations at which the alleged representations the subject of the proceedings are alleged to have been made took place (on any view) principally in Russia;

(5) the principal and supplemental agreements were made in Russia;

(6) the parties are Russian nationals;

(7) Mr Chistyakov resides and carries on business in Russia;

(8) Until the autumn of 2011 Ms Baturina resided and carried on business in Russia;

(9) Russian law governs any tort claim;

(10) Any damage was suffered in Russia".

32. By contrast, he held [149] that:

"the only factors connecting the proceedings to England are (a) the provision in the principal agreement as to governing law of that agreement and the shareholders' agreement, (b) Ms Baturina now resides in England, (c) Ms Baturina holds relevant documentation here, and (d) Mr Chistyakov has business interests here".

33. In a later paragraph [154] he expressed the view that there was no reason to doubt that a Russian court would be able to assess the relevant English law on the question of what the parties were or were not entitled, or bound, to do under the Agreement or a further supplemental agreement. The latter provided for a transfer by Mr Chistyakov of 65% of the share capital of Andros to Ms Baturina, the conversion of the loans into that equity and the novation of the Inteco Austria loans so that HoldCo became the debtor. There is a dispute between the parties as to whether a binding agreement was ever made. If it was, Ms Baturina seeks (but not in these proceedings) to rescind it. He recorded that it was not suggested that there was any issue between the parties as to the relevant principles of English law. (There is a dispute as to whether that was so; but it may be that the judge was referring to the position as he understood it at the end of the hearing: see [67] ff below). Moreover an error in ascertaining English law could be corrected by the appropriate Russian appeal court.
34. As to any disadvantage to Ms Baturina if the claim was tried in Russia he held [156] that, since the tort claim was, in his view, governed by Russian law, there was no advantage to her to have the claim litigated here, a matter to which I shall revert. He also rejected [156] the evidence of Dr Labin to the effect that the tort claim would fail in Russia in the absence of a criminal conviction. From that finding there is no appeal.
35. As to the contract claim he agreed with Dr Asoskov that if Ms Baturina's account was correct - namely that it was only recently that she was or should have been aware that she had such a claim - the 3 year period for bringing such a claim in Russia would not have expired. (Dr Asoskov's evidence, to which the judge refers at [104], was, also, that under Article 1208 of the RCC ("The Law applicable to Limitation of Actions") "limitation of actions shall be determined according to the law of the country which is applicable to the respective relation". So if English law applied to the contract, as Dr Asoskov thought, the English limitation period would apply).
36. He also rejected [159] a contention that the Agreement would be unenforceable in Russia because it did not fit into one of the categories of contract specified in the RCC, and criticised what he said was Dr Labin's unexplained failure to comply with the duty of experts in that he failed to refer to the fact that the RCC provides for unnamed and mixed contracts. From this latter decision there is no appeal.

The grounds of appeal

Ground 1

37. There are four grounds of appeal. The first is that there were complex issues of English law in play as a result of which England and Wales was the suitable forum and Russia could not be said to be clearly more appropriate. The issues were identified as being (a) the law in respect of the validity of agreements to agree; (b) the law in relation to offer and acceptance; and (c) the law as to the recovery of indirect losses. That there were such issues had been debated before the judge.
38. The law in respect of agreements to agree is said to be relevant because in her witness statement filed in support of the application for a stay Ms Babirenko had characterised the Agreement as simply an agreement to agree. Whilst there are provisions in it about the possible addition of other projects which may merit that characterisation, the contention that the whole of the Agreement is unenforceable as being no more than an agreement to agree does not seem to me promising, particularly having regard to paragraph 11 by which the parties agreed that the Principle [sic] Provisions were legally binding and paragraph 12 whereby they agreed that they were to be governed by English law. In any event, the law of England in relation to whether there is an agreement to agree is not complex in relation to the present case, particularly because it does not seem to me to raise the issue as to whether an agreement to negotiate gives rise to enforceable obligations.
39. The law in respect of offer and acceptance is said to be important because Ms Baturina claims to have withdrawn the offer constituted by her signing the supplemental agreement before Mr Chistyakov did anything by way of acceptance. Again the law of offer and acceptance is not at all complex and its application in the present case largely depends on issues of fact.
40. In the case of both issues I would not anticipate a Russian court having any difficulty in applying English law.
41. I deal with the third issue below.

Ground 2

42. The second ground of appeal is that the learned judge failed to take into account the international character of the project and to appreciate that this was a case where there was no particular forum which could be shown to be the natural forum. Such a case, as Lord Goff indicated in Spiliada, is one where the Court should decline to stay an action since the putative foreign forum will not be clearly and distinctly more appropriate.
43. In support of that position Ms Dohmann QC for Ms Baturina submitted that the judge failed sufficiently to appreciate that the project related to a real estate venture in Morocco. Evidence would be needed as to the state in which the individual projects were as at February 2008 and thereafter; and what use, if any, had been made of the monies advanced by Inteco towards the fulfilment of the project. Such evidence would relate to what had or had not happened in Morocco; and would involve witnesses who were not based in Russia: in particular Mr Bargaz, the local director in Morocco; Mr Krupnov, who currently resides in Spain; and Ms Baturina herself, who is resident in London. In addition, although the evidence before the judge was that Mr Boris Baklarov, the former head of Commercial and Residential Real Estate at Inteco was said to be in Russia, she told us that he was now in London.
44. In paragraph 18 (3) of his judgment the judge recorded how Mr Chistyakov's account was that meetings took place in late 2007 and early 2008 involving Ms Baturina, Mr Chistyakov, Mr Krupnov and others. Six of these others were identified, of whom five were from Inteco and one was a representative of Mr Chistyakov. All resided in Russia. That, she submitted, was just a list of names. It was not apparent what evidence the named persons had to give. It is, however, Mr Chistyakov's case that the projects and their progress was the subject of a number of meetings in Moscow where the language used was Russian; and at which Ms Baturina's representatives were kept fully informed about the progress of the project. Further, although Mr Krupnov resides in Spain, there is no evidence that he speaks English.
45. With the exception of item 9 on the list (the law governing the misrepresentation) it seems to me that the judge was entitled to come to the conclusion that the factors to which he refers established a strong case for saying that Russia was the distinctly more appropriate forum.

Ground 4

46. The fourth ground of appeal is that the judge was wrong to find that, applying English conflict of law rules, the misrepresentation claim was governed by Russian law.
47. It was, rightly, common ground that for this purpose an English court would apply the provisions of the Private International Law (Miscellaneous Provisions) Act 1995 (PILMPA). Sections 11 and 12 of PILMPA provide, as follows:

"11. Choice of applicable law: the general rule

(1) The general rule is that the applicable law is the law of the country in which the events constituting the tort or delict in question occur.

(2) where elements of those events occur in different countries, the applicable law under the general rule is taken as being –

…

(b) for a cause of action in respect of damage to property, the law of the country where the property was when it was damaged; and

(c) in any other case, the law of the country in which the most significant element or elements of those events occurred.

…

12. Choice of applicable law: displacement of general rule

(1) If it appears, in all the circumstances, from a comparison of

(a) the significance of the factors which connect a tort or delict with the country whose law would be the applicable law under the general rule; and

(b) the significance of any factors connecting the tort or delict with another country

that it is substantially more appropriate for the applicable law for determining the issues arising in the case, or any of those issues, to be the law of the other country, the general rule is displaced and the applicable law for determining those issues or that issue (as the case may be) is the law of that other country.

(2) The factors that may be taken into account as connecting a tort or delict with a country for the purposes of this section include, in particular, factors relating to the parties, to any of the events which constitute the tort or delict in question or to any of the circumstances or consequences of those events."

48. The judge held that section 11 has the result that Ms Baturina's tort claims are governed by Russian law; and there is no appeal from this finding. In relation to section 12 he recorded Ms Dohmann's submission that the fact, which the evidence revealed, that the parties had reached a non-standard agreement and specifically considered the question of applicable law and decided that their transaction was to be organised according to the principles of English law, meant that it was substantially more appropriate for the applicable law to be that of England.
49. The judge rejected that submission in these terms:

"32 I am not persuaded that section 12, when applied to the facts of the present case, has the consequence asserted by Ms Dohmann. First, the principal agreement was indeed carefully drafted. It could have been drafted in a way which applied English law to tortious claims connected with that agreement. But that did not happen. Nor can it be suggested that the transaction was "organised" by reference to English law. On the contrary, it involved numerous contractual agreements, almost all of which were governed by Russian law and provided for Russian court jurisdiction. As to the consequences of applying Russian law of limitation, the representations were made in Russia, by an individual of Russian nationality with extensive Russian business interests to another individual of Russian nationality with extensive Russian business interests. I do not consider that in those circumstances it is substantially more appropriate that English law should govern. On the contrary, in my view all these factors make it substantially more appropriate that Russian law should govern, including Russian law as to limitation of actions."

50. I do not regard the fact that the Agreement has not been drafted in a way that applied English law to tortious claims connected with it as a factor of much weight when considering which law is appropriate. No doubt a clause can be drafted so as to provide that if any misrepresentations have been made which induced the contract any entitlement of the parties to any relief in respect thereof shall be governed by the law of England. That would be an unusual clause. I do not recall ever seeing one. Nor does the question whether the "transaction" was "organised" by reference to English law seem to me particularly helpful. The question is what law should govern any claim in tort based on a supposed misrepresentation inducing the Agreement. The transaction in question is, thus, the Agreement, which is governed by English law. The fact that the loans to Sylmord (to which the Agreement makes no reference) are governed by Russian law seems to me of peripheral relevance to the essential question. Even if the non payment of the loans constitutes the relevant loss the question is not as to the validity of the loans (which is not in issue) but whether the loss claimed is recoverable in misrepresentation.
51. What the reasoning in paragraph 32 of the judgment does not appear to take account of is the close link between a representation inducing a contract and the terms of the contract itself. Ms Dohmann submits that when the parties have expressly agreed that a particular law shall govern their contractual relationship, and a fortiori where there has been express discussion about the law of the contract during the negotiations which give rise both to the misrepresentation and the contract, it is substantially more appropriate that that law, which the parties have chosen, should govern any claim that a party was induced to enter into the contract by misrepresentation as is the position expressly provided for in the successor legislation to PILMPA namely the Rome II Regulation.
52. Ms Dohmann placed reliance on what I said in Kingspan Environmental v Borealis A/S [2012] EWHC 1147 at [611]:

"I have come to the conclusion that it is substantially more appropriate to disapply the general rule and treat the questions of misrepresentation and misstatement as subject to the law of Denmark. The contracts in question are international supply contracts made between business enterprises of comparable bargaining power. They are not consumer contracts nor were the claimants tricked into entering into them on these terms. When businesses of that character reach agreement they do so as a result of statements and/or assurances made and contractual documentation sent, exchanged or signed. English law distinguishes between (a) factual statements that induce the contracts; (b) contractual terms; and (c) collateral undertakings, and applies different rules to each. Other laws have different classifications. Given that these statements, terms and undertakings are the product of the same process which leads to the eventual contract it is substantially more appropriate, in my judgement, for the law of the contract, chosen by the parties, to apply to all of them."

53. In Fiona Trust v Skarga & Ors [2013] EWCA Civ 275 the Court of Appeal (per Longmore LJ at [19]) described this conclusion as "understandable and no doubt, correct ... in view of the closeness of the connection between a claim for misrepresentation and a claim for breach of the resulting contract".
54. Neither of these decisions was cited to Walker J. If they had been I doubt that he would have reached the conclusion that he did. Mr Moverley Smith drew attention to the observation of Lord Clarke of Stone-cum-Ebony JSC in VTB Capital that it was "quintessentially" for the judge to make an assessment of the significance of elements of the events for the purposes of section 11 (2) (c) and that the Court of Appeal would not interfere with that assessment unless it was satisfied that the judge made such an error in his assessment as to require the Court of Appeal to make its own assessment.
55. In my judgment such an assessment by this court is required. The factors relied upon by the judge are not, in my view, factors which significantly connect the relevant tort with Russia; the judge did not have before him the two authorities to which I have referred; and his analysis does not, as it seems to me, take account of the considerations that underpin those judgments. I have not ignored the fact that the misrepresentations are said to have induced both the Agreement and the loans (which are governed by Russian law). I do not regard that as making any significant difference. The Loans are themselves pleaded as being made pursuant to the Agreement and no claim is, or could be, made to rescind them or claim any relief in respect of them.
56. In my view Ms Baturina has much the better side of the argument that the applicable law of the tort is that of England.
57. That conclusion would, of itself, require this court (or, on remission, the Commercial Court) to reconsider whether Russia was clearly the appropriate forum. The answer to that could depend on whether Ms Baturina would encounter any difficulty in advancing her claim to rescission and damages on the ground of deceit in Russia. Such a difficulty might arise (a) because the Russian court would apply English law, but would find difficulty in doing so or in doing so correctly; (b) because the Russian Court would not apply English law at all; or (c) because there would in Russia be a limitation period which would mean that the claim was out of time.
58. It is not suggested that, if Russia applied English law, it would have any difficulty in doing so. According to Dr Asoskov "the factual allegations made by the Claimant perfectly fit the Russian cause of action (invalidity of a transaction made under the alleged influence of fraud (deceit)": see [89] below.
59. As to (b) the position is more fluid. Article 1187 of the RCC provides as follows:

"Article 1187. Characterisation of Legal Concepts in the Determination of the Applicable Law

"1 In determining the applicable law, the interpretation of legal concepts shall be made in accordance with Russian law, unless otherwise provided by statute.

2 If, in determining the applicable law, the legal concepts requiring characterization are not known to Russian law or are known under another verbal designation or with another content and cannot be determined by interpretation in accordance with Russian law, then foreign law may be applied in their legal characterization."

60. The effect of that provision as applied to the concept of rescission, appears from the evidence of Dr Asoskov to be that, when deciding on the applicable law, the court must first decide whether the concept, the applicable law of which is to be decided, is a Russian law concept. In his first report he expressed the view that although the Russian court "could make qualification under Russian law", i.e. treat it as a Russian law concept, it was "probable" that it would (a) regard the English legal concept of rescission of a contract due to alleged misrepresentation as one unknown to Russian law; (b) treat the concept as an English law one; and (c) apply the conflict of law provisions concerning delicts. In that case because both parties have Russian nationality the court would, by virtue of Article 1219 (2) of the RCC, apply Russian law. He called this Option 2.
61. Alternatively, if the Russian Court took the alternative course – Option 1 - it could apply the conflict of law provisions concerning material invalidity of a transaction. By Article 1215 (6) of the RCC the law of the contract determines, inter alia "the consequence of the invalidity of the contract". But there is no explicit legislative conflict of law rule relating to the grounds of material invalidity. However, prevailing academic opinion is that the list of issues in Article 1215 is not exhaustive and that the law of the contract should apply to the grounds, and not merely the consequences, of invalidity. So if rescission is treated as a Russian law concept the Russian court would probably apply English law to the question of material validity.
62. There would thus appear to be a risk that Russian law would apply. Accordingly, as to (c), if Russian law applies there would, as is common ground, under Article 181 of the RCC be a one year limitation period from the day that Ms Baturina learned or should have learned of the circumstances that might give rise to her cause of action and a claim in Russia would prima facie be out of time.
63. Since the judge held that, under English conflict of law rules the misrepresentation claim was governed by Russian law, Ms Baturina would, he held, be no worse off if the action was tried in Russia. He did not therefore need to consider whether any limitation problem could be met by an undertaking by Mr Chistyakov, which Mr Moverley Smith had indicated that he would be prepared to give, that no limitation point would be taken in Russia
64. Ms Dohmann submitted that it was entirely unclear whether or not Mr Chistyakov had authorised the giving of any undertaking or, if he had, whether that would be effective in Russia. Mr Moverley Smith informed us that he did indeed have (and had had at first instance) instructions to give that undertaking and drew our attention to paragraph 16 of Dr Asoskov's second report which indicates by reference to Article 199 (2) of the RCC that "limitation shall be applied by a court only on request of a party to the dispute made before the rendering of a decision by the court". If so an undertaking not to make the request should remove the prospect of a successful limitation defence.
65. If the only obstacle to the grant of a stay was the limitation problem, it would be open to the Court to grant a stay conditional on an undertaking by Mr Chistyakov to the court, the precise terms of which might require further consideration and on the court being satisfied that such an undertaking was given with his authority.

Ground 3

66. That brings me to the third ground of appeal which was to the effect that there would be in Russia no possibility of a claim for the losses that were asserted, so that to stay the action in favour of Russia would mean that, in practice Ms Baturina could not maintain her claim which was valid, or at least arguably valid, under English law. The fact that its success or otherwise depended on a difficult question of English law was, also, itself, said to be a ground for holding that Russia was not a clearly more appropriate forum.

The claim in respect of the Loans

67. This claim has a chequered history. At paragraphs 26 and 27 of his judgment the judge said this:

"26 At an early stage in the evidence Ms Duncan said that Ms Baturina would claim damages by reference to the decision of the House of Lords in Johnson v Gore Wood [2002] 2AC 1. She described this principle as being that where a company suffers loss but has no cause of action to sue to recover its loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so) even though the loss is a diminution in the value of the shareholding. In addition, Ms Duncan said that the claim for damages could also be quantified on the basis of the profits which Ms Baturina would have earned (or the loss which she would have avoided) had the principal agreement been properly performed by Mr Chistyakov. Those sums, said Ms Duncan, would have been received by Ms Baturina in her capacity as a shareholder and she was entitled to bring such a claim under English law.

27 Expert evidence of Russian law was prepared on both sides which included discussion of how Russian law would approach a claim to damages of the kind suggested by Ms Duncan. At a late stage, however, it became apparent that Ms Baturina's claim to damages would be said by her for the purposes of the present hearing to be "at large". The result was that I did not hear argument on whether Ms Baturina would indeed be able as a matter of English law to claim for damages in the manner suggested by Ms Duncan."

68. Paragraph 39 of the judgment, in section C 4.3 headed "Recovery of losses", began thus:

"This aspect of the expert evidence was said by Ms Baturina, at a time when reliance was placed on Johnson v Gore-Wood, to have particular importance"

69. At paragraph 158 of his judgment the learned judge said this:

"The third point [as to why Russia was not an available forum] concerned what had been said in Ms Baturina's skeleton argument in advance of the hearing. This concerned paragraph 20 of Labin 2. Paragraph 21 of Labin 2 makes it clear that the point in question is his view that "there is almost no chance that a Russian court would allow a claim to be brought by an individual for the recovery of damages for breach/non performance of a contract by reference to the actions of a controlled company." The evidence on this aspect is discussed in section C4.3 above. I agree with Dr Asoskov that Dr Labin's evidence is focussed on Russian law restrictions on shareholders recovering damages in respect of the company's loss. As explained in section C3 above, this flowed from what was said in Ms Duncan's evidence. However, as also explained there, no submissions were advanced to me so as to satisfy me that such a claim could be made as a matter of English law. Accordingly I do not consider that there is any "injustice" or "lack of availability" if Ms Baturina is unable to litigate in England."

70. Ms Dohmann disputes the proposition that the question whether damages could be recovered by Ms Baturina in respect of the company's loss was not in play. The point had been raised in Ms Duncan's witness statement. What the judge appears to have been referring to in his paragraph 158 is that on 31 July 2013 Ms Dohmann in her submissions said this:

"Now, at this formal application stage what we say is we claim a loss in the shape of damages as a general claim, damages at large. We also make specific claims and what we say in relation to that is that at the time of the breach of contract, that is before October 2010, if the contract was then broken but she did not know it because, for example, Mr Chistyakov had not put his 35 per cent in, she did not know that, at that time she was a shareholder of Inteco, who had provided at her direction the entirety of the loans. What she then did though was that she acquired the entirety of the debt and even the outstanding interest from Inteco. She acquired that personally and not in any company. She had caused Inteco, which she owned 100 per cent, to make the advances of over 71 million Euro. She then in October 2010 sold Inteco to other people and we would submit that she was surely acting honourably to take out the entire debt and interest from that company before it became the property of others and any recoverability and loss problem was hers personally at that time. Hers personally and not that of Inteco."

Discussion

71. This state of affairs is a muddle. The expert's reports were compiled after the Particulars of Claim had been served. In the light of the Particulars Dr Labin expressed the view that the pleaded claim would never be maintainable in Russia because it contravened certain imperative norms of Russian law.
72. There is, however, a logically prior question which is whether the claims, as pleaded, are maintainable in English law. In this respect Ms Baturina relied on some observations of Lord Bingham in Johnson v Gore-Wood [2002] 2 AC 1. At page 35 E after citing a number of authorities Lord Bingham said this:

"These authorities support the following propositions:

1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential, particularly at pages 222-3, Heron International, particularly at pages 261-2, George Fischer, particularly at pages 266 and 270-271, Gerber and Stein v. Blake, particularly at pages 726-729.

2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v. Sheard, at pages 195-6, George Fischer and Gerber "

73. The second principle applies where a company suffers loss but has no cause of action to recover that loss. The problem for Ms Baturina is that although Inteco has no cause of action (since none of the representations were made to it) it has also suffered no loss because it assigned the loans to Ms Baturina for full value. Inteco made the loans to Sylmord. Sylmord did not repay them. If nothing else had happened Inteco would have suffered a loss. But it has been made whole.
74. The cases cited by Lord Bingham in support of his second proposition are examples of cases where the claimant has suffered a personal loss in respect of which he has a cause of action, but the company has not. The loss can be said to be indirect in the sense that that it is the company which in the first place suffers loss, which impacts on the value of the claimant's shares or the distributions therefrom. The claimant's loss is not, however, necessarily identical to that which the company has suffered and has to be proved. It is, nevertheless, a loss which the plaintiff himself suffers.
75. Thus in Lee v Sheard the plaintiff, who was one of the two directors of a private company and the owner of nearly 50% of its capital, was injured in a collision. Because of his absence on account of his injuries the turnover and profits of the company decreased. The plaintiff recovered a sum representing the diminution of the distributions received by him from the company, which was said to be "his real loss". It was not, of course, the whole loss suffered by the company. The company could not recover itself because the action per quod servitium amisit was not open to it.
76. In George Fischer the plaintiff company was a holding company and sued in respect of the defective design of three cranes. It recovered damages which included the increased costs of operation and the loss of sales which were suffered by its 100% operating subsidiaries, which had no cause of action. The plaintiff's evidence to the effect that a £ 1 loss to the subsidiary as a result of breach of contract would result in a £ 1 loss to the balance sheet or profits of the holding company was not effectively challenged.
77. Gerber Garment was a claim for damages for patent infringement in which a substantial proportion of the loss claimed by the plaintiff was suffered by a 100% subsidiary. This court accepted that when a shareholder in a company had a cause of action against a wrongdoer, but the company had none, the shareholder could recover damages in respect of his loss (whether an income or a capital loss) by reason of the misfortune that had fallen on the company. Damages could therefore be recovered by reference to a reduction in the value of the plaintiff's shareholding. But the plaintiff had to prove its own financial loss and in that case it had not done so.
78. These authorities are, thus, cases of "indirect" loss suffered by the plaintiff on account of the impact of a loss to the company (which has no cause of action) on his/its personal position.
79. In the light of these authorities I am of the view that the monetary claim as pleaded whether in deceit or breach of contract is unsustainable. The sum claimed is the loss of sums loaned to Sylmord together with interest. Ms Baturina did not lend these sums and Inteco, which did, has not lost them. Mr Chistyakov was not the borrower and did not owe them. The claim pleaded is not a claim for personal loss indirectly suffered. There is no averment as to any diminution of the value of Ms Baturina's shareholding at any date or as to a personal loss which would have been avoided or profit which would have been earned by her but for the deceit and/or breach of contract alleged. The claim is for damages quantified by reference to the loans made by Inteco to Sylmord and the interest thereon. The assignment of the Loans is not even referred to.
80. It may be that a differently formulated claim would be sustainable. The court itself raised that possibility and Mr Moverley Smith accepted that that might be so. It might, for instance, be possible to allege that, if Ms Baturina had not been induced to enter into the Agreement by deceit, she would not have suffered a particular detriment to her personal financial position which she has in fact suffered, so that her reliance on what Mr Chistyakov said he intended had made her worse off; and/or to contend that at some stage Inteco suffered a loss which affected the value of her shares which, had the deceit not occurred, she would have avoided, and that her purchase of the Loans for full value should not be treated as cancelling out that loss (by making Inteco whole and, thus, restoring the value of the shares) since, in a sense, it was done in mitigation of it.
81. Miss Dohmann accepted that the pleading was defective. She relied on the fact that no application had been made to strike the claim out; alternative ways of putting the case were open; some of them had been ventilated in evidence and argument; further particulars of loss could be given; and there was a pleaded claim for rescission and damages arising out of the deceit and breach of contract pleaded. There has, however, been no application to amend nor any provision of further particulars and we must treat the Particulars of Claim as they are. If a different form of claim is to be made it needs to be pleaded, not least because any new pleading may, itself, throw up new questions or issues. It is not sufficient to point out that there is a claim for damages and that they are "at large" (whatever exactly that means).
82. Since the monetary claim set out in the Particulars of Claim is unsustainable as it stands there seems to me no point in granting a stay in favour of Russia. We should not export to a foreign jurisdiction - on the supposed footing that it is a clearly more appropriate forum - a claim which, to English eyes, is (a) governed by English law in relation to both tort and contract; and (b) appears in English law to be unsustainable. For such a claim there is no natural forum, not because several factors point to different jurisdictions but because the claim itself is bad.
83. I would, therefore, allow the appeal on that ground.

The future

84. What happens next will depend on the approach taken by the parties and, in particular Ms Baturina. If no application to amend is made, I would anticipate that Mr Chistyakov will apply to strike the claim out. If an application to amend is made it will have to be determined on its merits. Mr Chistyakov will have to decide whether to resist the amendment and seek to strike the action out; or to seek to stay the action in its amended form; or to seek the two forms of relief in the alternative.
85. If a stay application is made in relation to any new formulation of the claim (assuming that permission to amend is granted) it will be necessary for the Court to consider the question of a stay (if sought) in the light of (i) the pleadings as they then stand; (ii) the judgment of this court; and (iii) any other expert evidence that it thinks fit to admit. In this respect it may help to provide a recapitulation of the position.
86. As is apparent material issues relating to the question of a stay include the following:

i) according to English conflicts of law principles what law governs

(a) the contract and

(b) the deceit claim?

ii) what law will the Russian court apply to each?

iii) what disadvantage, if any will Ms Baturina face if her claim is heard in Russia?

87. The answer to (i) is English in both cases. The answer to (ii) and (iii) is less clear.

The deceit claim Dr Asoskov's first report

88. In respect of the deceit claim the question whether the contract could be rescinded could, according to Dr Asoskov's first report, fall to be determined in Russia either by Russian or English law. (I assume that, if Russian law governs the question whether the contract could be rescinded, it would also govern the consequences of rescission). In his first report he indicated that he thought that option 2 (Russian law) was "probable": see [60] above. However, in his second report [25] he described option 1 (English law) as "most probable".
89. If the deceit claim has to be determined in Russia by reference to Russian law, there would not appear to be any disadvantage to Ms Baturina, so far as the law other than the law of limitation is concerned, since Russian law has a very similar cause of action under Article 179 of the RCC which provides:

"1 A transaction made under the influence of fraud, duress, threat, an ill-intentioned agreement of the representative of one party with another party, and also a transaction that a person was compelled to make as the result of the confluence of harsh circumstances on conditions extremely unfavourable for himself that the other party used (an oppressive transaction) may be declared invalid by a court on suit of the victim.

2 If a transaction is declared invalid by a court on one of the bases indicated in Paragraph 1 of the present Article, then the other party shall return to the victim everything it received under the transaction and, if it is impossible to return it in kind, its value in money shall be compensated. Property received under the transaction by the victim from the other party shall be transferred to the income of the Russian Federation. If it is impossible to transfer the property to the income of the state in kind, its value in money shall be taken. In addition the victim shall be compensated by the other party for the actual damage caused to him."

According to Dr Asoskov, no real difficulty should be expected in a Russian Court applying English law.

90. Similarly, if the deceit claim falls to be determined in Russia by reference to English law Ms Baturina would not appear to be under any significant disadvantage because of the similarity of Russian and English substantive law: see [89] above.
91. If, however, her claim is determined according to Russian law, she would probably be out of time because of the short Russian limitation period: see [62] above. That should, however, I would think, be capable of being dealt with by an undertaking.
92. If her claim was treated as governed by English law she would enjoy the English limitation period: Article 1208 of the RCC: see [35] above

The contract claim Dr Asoskov's first report

93. As to any claim in contract Dr Asoskov's first report said this:

"4.8 As was mentioned in the answer to question 1 (c), pursuant to Art. 1210 of RCC "the parties to a contract may in concluding the contract or thereafter choose by agreement among themselves the law that is applicable to their rights and obligations under the contract". Thus, as a general rule, the law chosen by the parties themselves (lex voluntatis) will be considered as a law applicable to the contract (lex contractus). This means that in the situation at hand the Russian courts would most probably come to the conclusion that English law is the governing law.

4.9 However, the following reservation shall be made in this respect. According to Art. 1210 (5) of RCC "(i)f from the totality of the circumstances of the case existing at the time of the choice of applicable law it follows that the contract is in fact connected only with one country, then the choice by the parties of the law of another country may not affect the operation of the imperative norms of the country with which the contract is in fact connected". This provision received rather broad interpretation in the Russian case-law. In particular, in some cases Russian courts applied this provision to contracts that had some foreign element (e.g. one of the parties had foreign nationality), if such foreign element was considered not substantial⁹.

4.10 Taking into account that at the time of choice of applicable law both Parties were Russian citizens and resided in Russia, there is a probability that the Russian courts would qualify the Principal Agreement as a contract which was "in fact" at the time of its conclusion connected with Russia only. This would mean that all Russian imperative norms are to have priority over the provisions of English law chosen by the Parties."

[Bold added in this and later citations]

Dr Labin's first report

94. In his first report Dr Labin expressed the view that:

"the principal remedy claimed by Ms Baturina, namely an award of damages made by reference to monies advanced by companies owned and/or controlled by her (rather than monies that she personally advanced) would not be available in Russia" [19].

This was said to be because of a very formalistic approach adopted by Russia as to the identity of the parties to a claim in the light of which Dr Labin said that he believed that there was no prospect of Ms Baturina successfully recovering damages under Russian law by reference to monies advanced by companies owned and/or controlled by her (rather than monies that she personally advanced) [25]. At [35 b] he said that:

"… under Russian law, Ms Baturina is not able to claim damages for the losses she has suffered by reference to money that she has advanced to Mr Chistyakov through her companies, but may only claim for losses that she has personally advanced".

95. Then in paragraph 39 he said:

"… I agree with Dr Asoskov (paragraph 4.10) that the Russian imperative norms or mandatory provisions will prevail over the parties' choice of English law. In practice this means that before the Russian court determines whether English law is the governing law of the Principal Agreement and that accordingly the Breach of Contract Claim will be determined according to English law, it must first determine whether the Principal Agreement complies with the mandatory provisions of Russian law including limitation and the ability of a party to claim and recover for indirect losses."

96. The reference to "the mandatory provisions of Russian law including limitation and the ability of a party to claim and recover for indirect losses" is not particularly clear but I take Dr Labin to be saying that a claim by Ms Baturina for the loss of monies advanced by her company would affect the operation of an imperative norm.

Dr Asoskov's Second Report

97. In his second report Dr Asoskov said at para 22:

"22. I note that Dr Labin's analysis of the question focuses on the Russian law restrictions on shareholders recovering damages in respect of the company's loss. I agree with Dr Labin that, under Russian company law, a shareholder is prevented from claiming for losses that are properly the losses of the company. In some situations, a shareholder can bring such claims by himself/herself (e.g. in order to recover damages caused by the company's directors), but such claims would be qualified as so-called derivative suits⁵."

98. At paragraph 48 he said this:

"48. As set out in paragraph 4.5 of My First Report, it is my view that it would be open to the Russian courts to apply English substantive law and grant such types of remedies that are available to the claimant under English contract law. To clarify My First Report, my conclusion was that the Russian courts could possibly come to the conclusion that English law is the applicable law (paragraph 4.8 of My First Report). In paragraph 4.10 of My First Report, I indicated there was a possibility that the Russian courts might apply Russian imperative norms if, on the basis of Art.1210 (5) of RCC, it reached the conclusion the contract was connected with Russia only. The possibility of the Russian courts applying Art.1210 (5) of RCC is difficult to assess, since the application of this provision depends on the overall estimation by the court of the circumstances of the case. There are, therefore, two possibilities, either the Russian courts will apply English law or they will apply Russian law, depending on whether Art. 1210(5) is applied."

99. Paragraph 48 of Dr Asoskov's second report thus has a different form of expression to that used in the first report. At para 4.5. of his first report he expressed the view that in the situation at hand the Russian Courts would most probably come to the conclusion that English law is the governing law but that there was a probability that the Russian courts would qualify the Agreement as one which was "in fact" at the time of its conclusion connected with Russia only, which would mean that Russian imperative norms would have priority. In his second report he said "to clarify my First Report" that his conclusion was that the Russian Courts could possibly come to the conclusion that English law was the applicable law but that he had indicated that there was a possibility that the Russian courts might apply Russian imperative norms. There were, therefore, two possibilities.

Dr Labin's 2^nd Report

100. In paragraphs 19 to 24 of his second report Dr Labin said:

"19. It remains my view that the Russian Courts would apply Article 1210 (5) RF CC to produce the result that Russian law mandatory rules would be applied to the Breach of Contract claim, which would therefore preclude a Russian Court from granting the types of remedies available to the Claimant under English contract law.

20. Even if the Russian Courts were to apply English substantive law without applying Russian law mandatory rules, I still consider that the Russian Courts would apply Article 1193 RF CC^[1], to preclude Ms Baturina from obtaining the types of remedies available under English contract law, on the basis that the remedies sought are unknown the ...sic) Russian law and would be considered to be contrary to Russian public policy.

21. In practice, the formalistic approach of the Russian legal system constitutes a part of Russian public policy. I consider that in practice there is almost no chance that a Russian Court would allow a claim to be brought by an individual for the recovery of damages for breach/ non-performance of a contract by reference to the actions of a controlled company. I am not aware of any Russian Court decision in which the court, though applying foreign law, deviated to such a significant extent from the norms of Russian public policy to allow recovery as sought in the present action.

22. I consider this point to be of fundamental importance as it means that in my view Ms Baturina's claim would be defeated even if English substantive law were applied by a Russian Court.

23. I repeat what I say at paragraph 10 above in relation to derivative actions.

Question No. 2 (c): Under Russian conflict of law rules what would the applicable law be?

24. In paragraph 4.10 of Asoskov 1, Dr Asoskov said that there is a "probability" that "… all Russian imperative norms are to have priority over the provisions of English law chosen by the Parties, in accordance with Article 1210 (5) RF CC. This is what I understood Asoskov 1 to mean when I referred to it in paragraph 39 of my First Report. If, by reference to paragraph 49 of Asoskov 2, Dr Asoskov is now saying that it is only a "possibility" and not a "probability", I firmly disagree. I consider that under Russian conflict of law rules, Russian imperative norms and mandatory provisions would be applied to Ms Baturina's Breach of Contract claim, thereby defeating it."

101. This difference of view in relation to Art 1210 (5) does not matter greatly unless there is an identifiable Russian law norm, relevant for present purposes, which might alter the position that would otherwise arise under an English law contract. A norm that might have been relevant is the supposed refusal of Russian law to recognise a claim by an individual for a loss suffered by a company. Since, however, Ms Baturina has no valid claim to recover for a loss suffered by Inteco (as opposed to any "indirect" loss suffered by her), let alone for a supposed loss by Inteco that in the event Inteco has not suffered, the attitude of Russian law to such a claim is academic.

Events after the handing down of the judgment

102. After Walker J had handed down his judgment Ms Dohmann sought permission to appeal. She submitted that the judge had omitted to deal with her submission that if the parties have expressly chosen a law to govern their contract a defendant should not be permitted to have the case heard in a court which will not give effect to that express choice of law. This submission finds support in Banco Atlantico SA v The British Bank of the Middle East [1990] 2 Lloyd's Rep 504,508-9; Cadre SA v Asdigurari SA [2005] EWHC 2504 (QB); Stonebridge Underwriting v Ontario Municipal Insurance Exchange [2010] 2 CLC 349 [36][44]; Golden Ocean Group Limited v Salgaocar Mining Industries PVT Ltd [2011] EWHC 56 (Comm) [143] Erste Group Bank AG v JSC "VMZ Red October" and Others [2013] EWHC 2926 (Comm) [162-165].
103. The judge then added a postscript to his judgment in which he said that he accepted Dr Asoskov's clarification that when in paragraph 4.10 of his first Report he used the phrase "there is a probability" he had in fact in mind no more than a possibility. As he put it:

"What he said in paragraph 4.10 was preceded by, and clearly in my view was intended to refer to something less likely than, what he described in paragraph 4.8 of Asoskov 1, namely that "in the situation at hand the Russian courts would most probably come to the conclusion that English law is the governing law." When this is combined with the serious flaws already identified in so much of Dr Labin's evidence, I conclude that the Russian court would indeed most probably apply English law as the governing law of the principal agreement."

104. In reaching this conclusion the judge has, in my view, misread the clarification to which he refers. The clarification converted the two potential results from (i) "would most probably" and (ii) "there is a probability" to two possibilities. I am conscious that we are dealing with translations which may not perfectly pick up nuances; but, as it seems to me, if Dr Asoskov's evidence was to be preferred, as it was, it should be taken from his final clarification of his position. This appears to me to have been that there was a possibility either way, and, thus, a real risk that Russian law would be applied in the sense that "the choice by the parties of the law of [England & Wales] may not affect the operation of the imperative norms of [Russia]". Despite Dr Labin's reference in [39] of his first report to "the mandatory provisions of Russian law including limitation and the ability of a party to claim and recover for indirect losses" it is not apparent to me that imperative norms include the law of limitation. If they do, the Russian limitation period would be 3 years from the date when the claimant learned or should have learned of the breach: Articles 199 & 200 (1) of the RCC.
105. If the contract claim was to be determined in Russia by reference to English law, it was common ground that the English limitation period would apply: see paragraph 16 of Dr Labin's second report.

Another possible difficulty

106. There is, however, a further complication. In paragraph 26 of his First Report Dr Labin said:

"… I understand that the claim for damages can also be quantified under English law on the basis of the profits which the Claimant would have earned (or the loss which she would have avoided) had the Principal Agreement been properly performed by the Defendant although these sums would have been received by the Claimant in her capacity as a shareholder rather than directly. Again, Russian law would not permit such a claim to be made."

107. No authority is cited for this proposition, let alone one that shows it to be based on an imperative norm of Russian law. It is not clear to me why (if it does) Russian law should disentitle a claimant to recover a real loss of this kind. The proposition as expressed by Dr Labin would appear to rule out any of the claims made in the three cases which underpinned the second of Lord Bingham's propositions in Johnson v Gore Wood. The proposition is, also, inconsistent with what is said by Dr Asoskov at paragraph 3.11 of his first report that:

"In accordance with Art, 1215 and 1220 of RCC the issue of legal remedies available to the claimant is qualified as a substantive law issue. Thus, this issue will be decided under the governing applicable law. This means that if English law is recognised as the governing law, Russian courts will apply types of remedies specified in English law regardless of qualification or characterisation as substantive or procedural given to such rules in English law".

108. The proposition also seems inconsistent with the view expressed in a "Review of Commercial Court Practice in Applying the Public Policy Extension as a Ground for Refusal to Recognize and Enforce Foreign Judgments and Arbitral Awards" of February 2013, referred to by Dr Asoskov in paragraph 3.13 of his first report, to the effect that a foreign court decision providing for recovery of damages under foreign law could only violate Russian public policy when the Russian court came to the conclusion that the relevant legal remedies had as their purpose not compensation of the claimant's losses but the punishment of the defendant. In his third report Dr Asoskov expressed the view [19] that in that Review there are no provisions which come close to Dr Labin's conclusions. Dr Asoskov did not, however, deal with paragraph 26 in express terms in his second report.
109. If the present claim is amended to plead some form of tenable claim by Ms Baturina it will be necessary to be clear (a) whether or not such a claim would be one which could not succeed in Russian law; (b) if not, why not; and (c) whether the reason why it would not succeed is because it would affect the operation of the imperative norms of Russia. This may require amplification or clarification of the current reports.
110. In the light of the way in which this case has proceeded the judge has made no findings on the potential impact of Russian imperative norms. If, however, the claim would be one which could not succeed because it would affect the operation of these norms, it would be material to consider whether the risk that the Russian Court might apply Russian law to a claim which, under English conflicts of law principles, would be governed by English law as a result of the choice of the parties, was a factor that meant that Russia was not a clearly more appropriate forum.

Conclusion

111. I would, therefore, allow the appeal; set aside the order staying the action and remit the case to the Commercial Court. It seems to me desirable that any future application to strike out, amend or stay the proceedings should, if possible, be determined by Walker J.

Lord Justice Lewison

112. I agree.

Lord Justice Rimer

113. I also agree.

Note 1   “A norm of foreign law applicable in accordance with the rules of the present Division in exceptional cases shall not be applied when the consequences of its application would necessarily contradict the bases of the legal order (public policy) of the Russian Federation. In such a case, if necessary, the respective norm of Russian law shall be applied. A refusal to apply a norm of foreign law may not be based merely on the difference in the legal, political or economic system of the respective foreign law from the legal, political or economic system of the Russian Federation”.    [Back]