England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		28/6/2010

FINAL JUDGMENT ON COSTS
1. This Judgment is concerned only with the incidence of costs incurred in connection with the Defendant's applications to strike out the claim and/or for summary judgment dismissing the claim and with the Claimant's applications to re-amend the Particulars of Claim and to amend the Reply.
2. For the reasons given in the main judgment the Defendant's applications were dismissed and the Claimant's applications were substantially allowed.
3. This judgment on costs should be read in conjunction with my main judgment. In so far as it has been necessary to evaluate the strength of the Defendant's applications in relation to the developing and fluctuating state of the Claimant's pleadings in the course of 2009 I have applied those principles identified in the main judgment. They are not repeated in this judgment.
4. The arguments of counsel on the costs issues are helpfully summarised in their respective skeleton arguments. It is unnecessary to repeat them here.
5. The total amount of costs said to have been incurred by both parties from, and referable to, the issue of RA's application to strike out is the astonishing figure of £10.6 million. Of that RA is said to have incurred £3.7 million and BB is said to have incurred £6.9 million. Although both parties accept that some significant part of these costs has been incurred in the carrying out of work on factual and expert evidence and documents which would have had to be done in the preparation of this case for trial and therefore does not represent costs thrown away, there can be no doubt that a significant part of the total sum has been incurred exclusively in the cause of and in respect of the prosecution of the strike out application and the countervailing application to amend and re-amend BB's pleadings.
6. Accordingly, this is not one of those cases where it would be appropriate for this court to support its cost order with minimal, if not perfunctory, reasons, for not only are the costs extremely large but the issues as to the appropriate incidence of costs are unusually complex.
7. It is first necessary to investigate the development of BB's pleadings in the face of the strike out application, for, although that application eventually failed, it did so on the basis of the Particulars of Claim and Reply in their ultimate form, which was very different from their form at the time when RA first launched the strike out application. As a matter of principle, although a defendant who successfully defeats such an application is normally entitled to an order for costs which reflects his success, where that success would not have been achieved had it not been for emergency surgery to the pleadings after the issue of the defendant's application and, a fortiori, only a relatively short time before the hearing, the claimant cannot expect to recover costs which he has uncured in trying to protect the uncured pleading or to expect that a claimant should not be recompensed in respect of his costs in attacking that uncured pleading.
8. The application to strike out (by which reference I also include the application for summary judgment) was issued on 14^th November 2008. It was supported by a witness statement of Mr Mitchard QC and an expert report on Russian Law by Mr Rozenberg.
9. The Amended Particulars of Claim to which that application was directed alleged as follows:

(i) Approximately 86% of the issued shares in Sibneft had by December 1998 been acquired by entities on behalf of BB, AP and RA.

(ii) Under the 1996 Agreement it was orally agreed between BB, AP and RA that all the shares held by BB and RA would be transferred legally to RA or to entities controlled by him and that BB and AP could continue beneficially to own the shares so transferred "which would be held on trust for them by RA" with the effect that BB and AP could continue to be entitled to dividends and to any other payments made by Sibneft to its beneficial owners on the basis of the percentage split of 50% RA and 25% each BB and AP agreed under the previous so-called 1995 Agreement.

(iii) By about August 1997 the 1996 Agreement had been implemented and BB's and AP's respective shareholdings had been transferred to RA or to companies owned or controlled by him with the "beneficial ownership" of that shareholding "held on trust" by RA for BB and AP.

(iv) From about August 2000 RA informed AP that the interests of BB and AP in Sibneft could be expropriated by the Government in view of the Kremlin's knowledge of BB's and AP's "beneficial interests" in Sibneft. From this AP inferred (as RA intended) that he and BB should sell their beneficial interests in Sibneft to him or face the consequences.

(v) BB and AP therefore agreed to sell their beneficial interests in Sibneft to RA for US$1.3 billion, the price insisted on by RA at the Munich Airport meeting in May 2001.

(vi) Sale of those beneficial interests was implemented by means of the Devonia Agreement dated 12 June 2001 under which it was recited inter alia that BB and AP were beneficial owners of the Sibneft shares to be sold, that RA held such shares as nominee in trust for and on behalf of BB and AP and that BB and AP were aware that Devonia intended to transfer the beneficial interests in the shares to RA or his companies and that the price for those interests was to be paid in instalments, completing on about 20 March 2003.

(vii) RA's conduct amounted to intimidation and was unlawful and illegitimate because inter alia it amounted to threats to act in gross breach of trust and/or in breach of fiduciary duty, in as much it was flagrantly inconsistent with his "duty as a trustee".

(viii) BB's and AP's interest in Rusal would be held on trust of them by RA as agreed at the Dorchester Hotel meeting on 14^th March 2000 and the disposal without their consent by RA of shares in Rusal in which he and/or they had an interest was a breach of RA's duty to them as trustee under a trust in respect of the Rusal shares, such trust being governed by English Law, alternatively British Virgin Islands law.

10. On 26^th June 2008 RA served his Defence in which he denied the existence of any arrangement between BB, AP and RA for the transfer to RA of any shares in Sibneft as alleged by BB with regard to the 1996 Agreement and indeed that BB had any interest in Sibneft, except possibly, which was not admitted, to the extent that he had an interest in PK-Trast which had a very limited indirect interest in Sibneft shares owned or indirectly controlled by Firma Sins and OOO Firma Latis. Further, the Defence pleaded that the existence of any such trust as was relied on by BB would be governed by Russian law under which the concept of a trust did not exist. Consequently, BB and AP could have had no beneficial interests in any Sibneft shares transferred to RA. There was therefore no interest that could be expropriated, no interest that could be sold to RA and no interest that, but for such sale, could have been sold to any third party. Whereas it was conceded that RA had paid $1.3 billion to BB, this payment was made "in recognition of the political assistance and protection which BB had provided in respect of the creation of Sibneft" and not pursuant to the Devonia Agreement of which RA knew nothing prior to the commencement of these proceedings and which did not accurately record the nature of any transaction between BB, AP and RA.
11. The Defence further pleaded that, even on BB's own pleaded case, what RA had said to AP about expropriation of BB's interest in Sibneft could not amount to any threat or to a threat of the use of unlawful means by RA or by any person under RA's control or for who he acted as agent. Further, a threat to act in breach of trust and/or fiduciary duty was insufficient to amount to a threat of unlawful means for the purposes of the tort of intimidation.
12. The Defence also relied on the non-justiciability of BB's allegations on the grounds of act of state, comity and/or Sovereign immunity.
13. As to Rusal, RA denied that BB and AP had entered into any agreements with him under which BB and AP had any interest in Rusal. Alternatively, there was no concept of trust in Russian Law and since any such trust in respect of interests in Rusal must have been governed by Russian Law, BB and AP could have had no beneficial interests in Rusal and RA could have owed them no fiduciary duties with regard to the disposal of shares in Rusal to Mr. Deripaska. In any event, all BB's claims for breach of trust, breach of fiduciary duty and breach of contract by RA were time-barred under Russian Law.
14. BB's Reply was served on 2^nd October 2008.
15. While admitting that the concept of a trust did not exist in Russian Law, and that no such beneficial interest could be created, it pleaded that the 1996 Agreement gave rise to a trust not governed by Russian Law but by English Law. Alternatively, if the relationship between the parties was governed by Russian Law, BB was entitled under Russian Law to restitution of the Sibneft shares transferred to RA or to entities owned or controlled by him by an action in Russian Law under which no such concept existed to declare the attempted trust transaction invalid and for restitution of the shares or by reason of the Russian Law of "vindication". Even if he retained no beneficial interest under a trust in the Sibneft shares, BB was unlawfully intimidated by RA into forgoing the Russian Law rights of action for restitution and/or vindication.
16. As to Rusal, the Reply pleaded that, given that BB, AP and RA expressly set out to create a trust, it was implicit that the mutual intention could not have been to create a trust governed by Russian Law but rather British Virgin Islands Law or English Law.
17. The application to strike out was supported by Mr Mitchard's 2^nd Witness statement.
18. The grounds relied on are summarised in paragraph 7 in these words:-

"Claims in respect of Sibneft

7.1 On the facts alleged by the Claimant, Russian law would be the proper law of any alleged trust in relation to shares allegedly held in Sibneft on the Claimant's behalf (the "Sibneft Trust");

7.2 Russian law does not recognise the concepts of trust or beneficial interests. Accordingly the alleged Sibneft Trust would not be recognised and could be of no legal effect (this position under Russian law being common ground between the parties ? see paragraph 33 below);

7.3 Additionally, the suggested claims raised for the first time in paragraph R37.3 of his Reply to rights to restitution or vindication in Russian law are invalid or unsustainable as explained in Rozenberg 1 and therefore must fail;

7.4 The Claimant's version of events is factually incoherent and implausible;

7.5 Even if the Claimant's version of events were accurate, the facts alleged to have constituted intimidation are insufficient in law to amount to intimidation; and

7.6 Alternatively, the facts alleged, in so far as they could amount to intimidation, are non-justiciable on the ground of act of state, sovereign immunity and/or comity.

7.7 On the facts alleged by the Claimant, the proper law of any alleged trust in respect of shares in RUSAL (the "RUSAL Trust") would have been Russian law and, as Russian law does not recognise the concepts of trust or beneficial interest, such a purported trust would not be recognised and could be of no legal effect (as already noted, this position under Russian law being common ground between the parties ? see paragraph 33 below);

7.8 The alleged claim for breach of trust would in any event be time-barred under Russian law (this position under Russian law again being common ground between the parties ? see paragraph 65 below);

7.9 On the facts alleged by the Claimant, the alleged oral agreement that none of the Claimant, Defendant, Mr Deripaska or Mr Patarkatsishvili would sell his shares in RUSAL without the agreement of the others (the "RUSAL Contract") would also be governed by Russian law and, as such, any claim for breach of it would now be time-barred (the latter position under Russian law also being common ground ? see paragraph 69 below); and

7.10 The Claimant's version of events is factually incoherent and implausible in relation to both the alleged RUSAL Trust and alleged RUSAL Contract."

19. On 17^th April 2009 BB served evidence in response to the application to strike out. Apart from the main factual evidence in the witness statements of Mr Marino, of Addleshaw Goddard, and BB himself, there were also expert reports from Dr Rachkov on Russian Law and from Prof Bowring on the Russian political and legal regime.
20. Dr Rachkov's report accepted that the concept of trust and beneficial interests under it did not exist in Russian Law but he explained the requirements of the remedy of restitution for unjust enrichment and its applicability to shares in a company. He also explained the remedy of vindication and how it might apply on the alleged facts of the present case. His report thus provided evidential support for the alternative case as to the legal effect of the 1996 Agreement which had been advanced in paragraph R37.3 of the Reply served on 2^nd October 2008.
21. The witness statement of BB further explained and expanded on the impact on him of the alleged threats of expropriation of his interest in Sibneft made by RA to AP at the end of 2000.
22. In my judgment, if the strike out application had been brought on for a hearing following the service of this evidence in April 2009, it would certainly have become apparent that BB's pleaded case was in some disarray. The chief problem would have been the inconsistency between the characterisation of his and AP's interests in Sibneft following the 1996 Agreement and the allegation of a trust in respect of shares transferred to RA as pleaded in the Particulars of Claim and (in the absence of a trust) the nature of their rights to restitution and vindication advanced in the Reply, as explained in or Dr Rachkov's April 2009 report. This significant inconsistency arose, however, amidst a substantial area of disputed fact which included the Devonia Agreement and in particular its recitals and the provisions for payment to BB of precisely the same amount of money ? $1.3 billion ? which RA admitted paying to him under completely different circumstances. BB would also have had the problem of making good an alleged threat that there could be expropriation not of beneficial interests in Sibneft under a trust but of restitutionary rights and rights of vindication. There were thus significant areas of the claim which, because of the abandonment of the case on transfer of shares into a trust, had become obscure.
23. While recognising that the application to strike out that has been argued by Mr Popplewell QC and Mr Brindle QC before me has been on the basis of the vast pool of additional evidence and the subsequent pleadings put before the Court since April 2009 and that this application has not been fully argued as if it were heard at an earlier stage in its history, I have come to the very clear conclusion that what would have happened had the hearing taken place in April 2009 would have been this. The Particulars of Claim would have been shown to be inconsistent with the Reply and Dr Rachkov's report in respect of BB's interest in Sibneft and the interests which he claims to have sold, under threat to RA. Consequently those representing BB would almost certainly have applied for permission to amend in order to bring the pleadings into line with each other and with the expert evidence of Dr Rachkov. However, it would at once have been recognised that, although, if such amendments were made, there would be formidable issues of fact and that, even if they were resolved in his favour, BB would still have a difficult case, on intimidation, there was after all sufficient substance in his pleaded case as amended, to allow it to go to trial. In this connection, the inconsistent characterisation of those rights which were said to have been the subject of RA's coercive threats would not, for the reasons given in my main judgment, have been fatal to the integrity of the plea of intimidation. In my judgment, an application in April 2009 to strike out the Sibneft claim would therefore have been refused on the basis that the pleading inconsistencies could be cured and provided that they were cured, as I infer, would have been the case.
24. As for the Rusal claims, for the reasons substantially given in my main judgment, I do not consider that an application to strike out would have succeeded at that earlier stage.
25. Given that the main judgment concludes that on the state of the pleadings, as amended in substantially the form in which they emerged in the application for permission to amend dated 7^th August 2009, the application to strike out must be rejected, the remaining hypothetical issue is whether, had the application been heard on the basis of the pleadings as they existed at any time between April 2009 and 7^th August 2009, either or both of the Sibneft or Rusal claims would have been struck out. Of course, the hypothetical application to amend was not made in April 2009 but only on 13^th July 2009 ? one week before the actual hearing ? so one cannot start from the assumption that any surgery would have been done to the pleadings since the strike out application had been issued.
26. The proposed re-amendment of the Particulars of Claim retained the plea that under the 1996 Agreement BB and AP were to transfer their shares in Sibneft to RA. However, it was now pleaded that they would continue to own those shares beneficially but not under a trust and that those shares would be held for them, not on trust, but simply "by" RA who would upon request transfer to BB and/or AP "shares equivalent to their interest in Sibneft on the basis of the percentage split" agreed between them under the 1995 Agreement. The implementation of the 1996 Agreement was pleaded as giving rise to BB and AP "having beneficial interests" in the shareholding of RA. Indeed, the pleading referred repeatedly to BB's and AP's "beneficial interest."
27. Further, the re-amended pleading included in those aspects of unlawful and illegitimate conduct that RA's threats were in breach of fiduciary duty to BB and AP under the 1995 and/or 1996 Agreements and/or as common owners of Sibneft shares.
28. The Amended Reply, however, introduced further characterisations of BB's rights in respect of Sibneft. In particular, it was pleaded that the Agreement was a sui generis agreement under Russian Law but that, if in the alternative it was of no legal effect, BB and AP were entitled to restitution of the Sibneft shares which they agreed to, and did, transfer to RA, and/or to the value of services performed by BB under the 1996 Agreement by reason of the Russian law of restitution or vindication. Further, if the 1996 Agreement was of no legal effect under Russian Law, the 1995 Agreement remained binding as a joint activity or sui generis agreement, and if not binding, BB and AP had rights of restitution or vindication.
29. The 13 July amendments to the Reply also specified that the rights of BB the subject of the alleged threat to expropriate were the interests in Sibneft to which the 1996 Agreement as a Russian Law sui generis agreement gave rise or, if such agreement were of no legal effect, the right of restitution under the Russian Law of vindication, alternatively the rights to which the 1995 Agreement gave rise as a joint activity agreement or, if such agreement were of no legal effect, the right of restitution under the principle of vindication or under the Russian Law principles of unjust enrichment.
30. As to the Rusal claim, there were no 13 July amendments to the Particulars of Claim but the Reply was substantially amended by introducing a plea of express or implied choice of English Law as the governing law of the trust. This amendment was based inter alia on a Preliminary Agreement by BB, AP and RA with Mr Deripaska said to have been made before the Dorchester Hotel meeting and expressly governed by English Law, as well as an express oral agreement between BB, AP and RA that their arrangements about Rusal should be governed by English Law and a further written agreement dated 15^th March 2000 between RA, said to have been acting on behalf of BB, AP and himself, and Mr Deripaska which was expressly governed by English Law.
31. It will thus be seen that the 13^th July amendments introduced with regard to Sibneft a substantially changed account of the interests of BB in, and his rights in connection with, Sibneft and consequentially of those rights and interests which were the subject of RA's alleged threats and of which it is alleged BB was deprived in consequence of having been intimidated into selling his interests in Sibneft to RA. Further, the trust underlying the Rusal claim was no longer merely non-Russian by implication but was said to be governed by English Law on the basis both of express selection and/or by implication from connected English Law agreements.
32. As recognised in the main judgment, BB's case with regard to his alleged interests in Sibneft and the rights to which those interests gave rise vis-a-vis RA presented real difficulties. Nonetheless, although the abandonment of the reliance on a trust in respect of BB's interest in Sibneft but the retention of the allegation of a "beneficial interest" in a shareholding in Sibneft gave rise to apparent substantial intrinsic inconsistencies, not least because on the evidence there could only be a legal proprietary interest in shares, and not a split beneficial interest, on the evidence and materials before this court the claim could not be regarded as necessarily hopeless. The pleadings certainly called for elucidation. Whereas, the substantial changes in the Sibneft case and the Rusal case introduced in July 2009 raised serious questions as to the reality of the allegations underlying BB's claim, it was appropriate that those matters should be further elucidated by RFI procedures and, if so, explored at a full trial. For substantially the same reasons I have no doubt that, had the hearing taken place on the basis of the 13^th July amendments, the result would have been just the same in the ultimate result. To the extent that there remained inconsistencies in the pleadings, leave to amend would either have been withheld pending further elucidation or would have been given elucidation being left to RFIs. They would not have been regarded as such as to undermine the integrity of the claims so as to justify the claims being struck out.
33. It follows that the final form of the amendments which were ultimately the subject of the main judgment did not have the effect of rescuing claims which were otherwise necessarily doomed to be struck out. Although the history of BB's claims is one of substantial fluctuation in the formulation of important aspects of those claims, it is certainly not the case of an eleventh hour rescue of claims which were bound to fail or which at this preliminary stage could be seen to be so weak that a trial could not be justified. Rather, the final form of the proposed amendments which only emerged in the draft of 24^th July 2009 provided some elucidation of the inconsistencies and observations of the 13^th July 2009 draft and the ultimate draft of 7^th August 2009 added some further minor changes which were not of substance. It is not therefore correct to approach the issue of costs on the basis that all work done up to the ultimate amendments of 7^th August 2009 was futile save for that which would in any event be necessary in preparation for a full trial. Rather, the incidence of costs should reflect the need of those conducting RA's defence and prosecuting his application to respond to the substantial changes in the pleadings arising from the 13^th July draft and the ultimate amendments of substance in the 24^th July 2009 draft.
34. These attempts by BB to elucidate his case and to eradicate inconsistencies could and should have been made many months earlier. The delay in bringing forward the ultimate form of the pleadings which formed the subject of his application to amend considered in the main judgment clearly caused some costs to be thrown away by RA in preparing a response to the 13^th and 24^th July 2009 draft pleadings. To the extent that such costs were thrown away they should be treated as occasioned by BB's application to amend in its ultimate (7^th August 2009) form.
35. That said, given that, as I have held, RA was never in a position to mount a successful application to strike out, he should not be permitted to recover such additional costs as he incurred in preparing that application in response to the late draft amendment of 13^th July 2009 and the subsequent very late draft of the 24^th July 2009. In this connection I recognise that it may be a difficult exercise to separate the cost of work in responding to the amendment applications from the cost of work directed to prosecuting the strike out applications. On the materials before me I cannot give any specific assistance to that calculation.
36. In these circumstances, the appropriate order as to costs is as follows:-

(a) RA shall pay BB's costs of defending the applications to strike out and for summary judgment dismissing the claim as from the date of issue of those applications, including the costs of such part of the 20^th - 24^th July 2009 hearing as related to those applications and all the costs of the 2^nd - 13^th November 2009 and 31^st March 2010 hearings.

(b) BB shall pay RA's costs of and occasioned by BB's proposed applications to re-amend the particulars of claim and amend the reply dated 13^th July 2009, and of the proposed applications to amend the particulars of claim and reply dated 24^th July 2009 and of the application to amend the particulars of claim and reply dated 7^th August 2009 such costs to include all such costs as could have been saved had the draft amendments dated 7^th August 2009 been served on or before 13^th July 2009.

(c) Such costs as would in any event have had to have been incurred by either party in preparing evidence and investigating facts for the purposes of the main trial of these proceedings shall not be included in the calculation of these costs covered by the orders in (a) and (b). Such costs shall be costs in the case.

(d) There will be no order as to such costs as may have been incurred by either party since 14^th November 2008 which do not fall within (a), (b) or (c) above, save for the costs of the hearing on 20^th May 2010 as to which the parties may make further submissions.

(e) Such costs as may be payable pursuant to the above orders shall bear interest at Bank of England minimum lending rate plus 1 per cent from the date or dates of disbursement by the party concerned until judgment interest applies.

(f) All such costs are to be assessed if not agreed.

Application under CPR 44.3(8) has been made for a payment of costs on account prior to assessment. The quantification necessary to arrive at the appropriate amount and, indeed, necessary to identify which party will be the net paying party following assessment, requires an estimate which on the materials that have so far been put before me I regret that I am unable to make. If either or both parties believe that it is possible to make a reasonable estimate of the sums of costs under (a), (b) and (c) likely to be awarded to either party on a detailed assessment, they are invited to make further submissions within the next 21 days. I can then attempt to assess what payment of costs on account ought to be ordered.