QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| Claim no: 2005 Folio 534
Fiona Trust & Holding Corporation and 75 ors.
|- and -
|Yuri Privalov and 28 ors.
|And in the part 20 proceedings between:
|Yuri Nikitin and anr.
||Pt. 20 Claimants
|H. Clarkson & Company Ltd
||Pt. 20 Defendants
|Claim no: 2007 Folio 482
Intrigue Shipping Inc. and 50 ors
|H. Clarkson & Company Ltd. and 8 ors.
|And in the part 20 proceedings between:
|Yuri Nikitin and Anor.
||Pt. 20 Claimants
|H. Clarkson and Company Ltd.
||Pt. 20 Defendants
|Claim no: 2009 Folio 91
Fiona Trust & Holding Corp. and 9 Ors.
|Dmitri Skarga and 3 Ors.
|Claim no: 2009 Folio 281
Southbank Navigation Ltd. and 6 Ors.
|H. Clarkson and Company Ltd.
Andrew Popplewell QC
Dominic Dowley QC
Instructed by Ince & Co. for the Claimants in actions: 2005 Folio 534, 2007 Folio 482 and 2009 Folio 91.
Graham Dunning QC and Susannah Jones
Instructed by Stephenson Harwood for Mr. Dmitri Skarga
Steven Berry QC
Instructed by Lax & Co. for Mr. Yuri Nikitin and the Standard Maritime Defendants in actions: 2005 Folio 534, 2007 Folio 482 and 2009 Folio 91 and the Claimants in 2009 Folio 281 and the Part 20 claimants in 2005 Folio 534 and 2007 Folio 482.
Simon Bryan QC and Jern-Fei Ng
(instructed by Stephenson Harwood) for Mr. Tagir Izmaylov
John Odgers and Ian Wilson
(instructed by CMS Cameron McKenna LLP) for H. Clarkson & Company Ltd.
1, 2, 5, 6, 7, 8, 9, 12, 13, 14, 15, 16, 19, 20, 21, 22, 23, 26, 27, 28, 29 October 2009,
2, 3, 4, 5, 6, 9, 10, 11, 12, 13, 16, 17, 18, 19, 20, 23, 24, 25, 26, 27, 30 November 2009,
1, 2, 3, 4, 7, 8, 9, 11, 14, 15, 16, 17 December 2009,
1, 2, 3, 5, 8, 9, 15, 17, 18, 22, 23, 24, 25, February 2010,
22, 23, 24, 25, 26, 29, 30, 31 March 2010, And 9 July 2010.
Crown Copyright ©
Introduction 1 The parties 7 The trial 35 The claims 47 English domestic law 51 Russian domestic law 78 Private international law 140 Background 182 The hull no 1231 commission scheme 318 The schemes involving collusion with brokers for sales and purchases 329 The Sovcomflot Clarkson commissions scheme 344 The part 20 claim in the Fiona action 550 The Norstar commissions scheme 574 The NSC Clarkson and the Galbraith's commissions schemes 591 The Sawyer commissions scheme 659 The RCB scheme 677 The SLB arrangements scheme 714 The termination of the SLB arrangements scheme 830 The newbuildings scheme 891 The "Romea Champion" commission scheme 1026 The Sovcomflot time charters scheme 1046 The NSC time charters scheme 1190 The allegations that Mr. Skarga was dishonest 1268 The allegations that Mr. Izmaylov was dishonest 1455 Conclusions on the claims against Mr. Skarga and Mr. Izmaylov 1485 The case against Mr. Nikitin and the Standard Maritime defendants 1488 Relief against Mr. Nikitin and the Standard Maritime defendants 1519 The claims against unrepresented defendants 1544 Settlement monies 1545 The Southbank action 1556 Conclusions 1563
MR. JUSTICE ANDREW SMITH:
i) FML, which was incorporated to act as the London commercial agent of Sovcomflot's shipping business and was engaged in the purchase, sale and financing of vessels on behalf of the group and in particular in chartering the bulk carrier fleet.
ii) Sovchart SA ("Sovchart"), a Swiss company, which is the 29th claimant in the Fiona action and the 4th claimant in the second Fiona action. They operated from offices in Geneva until their activities were transferred to FML in London in August 2007 (after the transactions which are the subject of these proceedings), and they acted as the group's chartering agent for the tanker fleet. In August 2000 Mr. Jan van Boetzelaer became the managing director of Sovchart in succession to Mr. Alex Prezanti, and he held that position until August 2007.
iii) Unicom Management Services (Cyprus) Ltd. ("Unicom"), which was incorporated in and operated from Cyprus, and dealt (and still deals) primarily with the technical management of Sovcomflot's fleet. Some of the accounting and financial functions and treasury services of the group were also conducted from the Cyprus offices through various subsidiaries.
i) Continental Shipping Ltd. ("Continental"), which was incorporated in Liberia on 25 April 1997 and registered as a foreign company in the Isle of Man on 19 January 1998. Continental was de-registered in September 2000. According to Mr. Privalov, Mr. Vladimir Lyashenko, whom he had known since about 1995 and who had been the managing director of Far Eastern Shipping Company (UK) Ltd. ("FESCO UK"), the London commercial agents of OAO Far Eastern Shipping Company ("FESCO"), a major Russian shipping company, had a beneficial interest in Continental, and he was a director and had authority to transfer money from Continental's accounts. Continental had bank accounts with the Isle of Man branch of RBS, with the London Shipping Centre branch of RBS and with EFG Private Bank SA, Switzerland.
ii) Montrose Maritime Ltd. ("Montrose"), which was incorporated in the Isle of Man in August 1996. Its name was changed to Paribas Shipping Ltd. in April 1997 and to Fesco Management Ltd. in October 1999, although it had no association with the bank or the Russian transportation group that those names might suggest. Mr. Privalov has said that Mr. Lyashenko had a beneficial interest in Montrose, as he did in Continental, but I do not need to decide and do not decide whether he did so.
iii) Getwire Corporation ("Getwire"), which was established in Panama on 24 May 2001 and which opened an account with Credit Suisse in Switzerland in 2001 in circumstances which I shall explain later. Mr. Privalov was the sole beneficial owner of Getwire.
iv) Sisterhood Participation Corporation ("Sisterhood"), a BVI company, the 18th defendant in the Fiona action, which was incorporated in September 2002 and apparently used by Mr. Privalov from November 2002.
v) Shipping Associates Inc. ("Shipping Associates"), a Panamanian company, which is the 27th defendant in the Fiona action and the 7th defendant in the Intrigue action. Mr. Privalov used Shipping Associates to receive payments from Clarkson, Norstar and Galbraith's made in connection with business that they handled for Sovcomflot and NSC.
i) The "Sovcomflot Clarkson commissions" scheme, by which between 2001 and 2004 it was arranged that Clarkson should act as brokers for the Sovcomflot group to buy and sell ships and should pay "commission" upon the purchases and sales to Mr. Nikitin or at his direction. It is said that as a result the Standard Maritime defendants and other companies, namely Pollak and Horber, have been paid over $30 million, and Mr. Nikitin and Milmont are claiming that they are entitled to further sums of some $8.5 million in the part 20 claim in the Fiona action against Clarkson.
ii) The "Tam commissions" scheme, whereby, when in 2001 the Sovcomflot group were buying in the so-called "Athenian transaction" (which was itself one of the purchases comprised in the Sovcomflot Clarkson commissions scheme) six ships which were being built by Hyundai Heavy Industries ("HHI"), address commissions paid by HHI amounting to $1.2 million were diverted to Milmont.
iii) The "hull no 1231 commission" scheme, whereby, in the context of arrangements made to finance the purchase of hull no 1231, a vessel under construction by Tsuneishi Shipbuilding Co Ltd. ("Tsuneishi"), $105,000 paid by way of an address commission was diverted to Milmont.
iv) The "Norstar commissions" scheme, which was similar to, but on a smaller scale than, the Sovcomflot Clarkson commissions scheme, and whereby it was arranged that Mr. Christopher Bonehill, a broker who carried on business as Norstar Shipping ("Norstar") in Monaco, should act as Sovcomflot's broker for ship sales in 2002 and 2003 and pay "commission", which in the event amounted to some $238,000 in total, to Mr. Nikitin or at his direction.
v) The "RCB" scheme, whereby, as the claimants allege, in 2001 Mr. Nikitin arranged for Meino to acquire a debt owed (or said to be owed) by the Sovcomflot group to the Russian Commercial Bank Ltd. ("RCB"), and Mr. Skarga was party to arranging for the debt to be discharged on terms that improperly benefited Mr. Nikitin. The claim in respect of this scheme is about $3 million.
vi) The "SLB arrangements" scheme, whereby in 2002 the Sovcomflot group sold eight vessels, the Arbat vessels, to Standard Maritime defendants upon terms that they were to be leased back to the sellers on bareboat charters and re-purchased at the end of the charter periods. It is alleged that these arrangements (the sale and leaseback or "SLB" arrangements) were uncommercial and designed to benefit Mr. Nikitin and the Standard Maritime defendants at the expense of the Sovcomflot group. The compensatory damages claimed in respect of this scheme are some $17 million, and there is also a claim for an account of profits.
vii) The "termination of the SLB arrangements" scheme, whereby in 2004 the Standard Maritime defendants sold the eight Arbat vessels which were the subject of the SLB arrangements, and Sovcomflot were paid $20 million for their rights in respect of them. It is alleged that this was inadequate compensation for the rights that Sovcomflot relinquished. The claimants' primary compensatory claim is for some $159 million, and there is also a claim for an account of profits.
viii) The "newbuildings" scheme, whereby in 2003 and 2004 Sovcomflot entered into agreements with HHI and Daewoo Shipbuilding Marine Engineering Company Ltd. ("Daewoo"), and contracted to buy ships by way of newbuildings and acquired options to buy other vessels. It is alleged that they allowed some of the Standard Maritime defendants to acquire the benefit of options for no proper consideration, and also to acquire the benefit of contracts with HHI (by acquiring the vehicle companies who had entered into newbuilding contracts) at an undervalue. This gives rise to claims of some $212 million.
ix) The "Sovcomflot time charters" scheme, which relates to agreements that were made between 2001 and 2004 whereby certain of the claimants hired eight vessels to Standard Maritime defendants on time charterparties and also granted options to extend the period of hire of some of them. The charterparties and options are said to have been designed, at least in some cases, to benefit the Standard Maritime defendants and correspondingly to have been to the disadvantage of the claimants. The claimants claim some $219 million in respect of these allegations.
x) The "Romea Champion" commission scheme, whereby Milmont are said to have been paid improper commission in respect of a charter of the "Romea Champion". This claim is for only $16,599.50.
i) He dishonestly misappropriated commissions payable to Fiona or their subsidiaries in a series of refinancing transactions referred to as the Société Générale loan, the BCV loan and Hamburgische Landesbank and Credit Agricole Indosuez ("CAI") loans; and
ii) He unlawfully diverted business from FML and received secret profits for himself and his companies, Montrose and Continental.
It is not said that Mr. Skarga, Mr. Nikitin or the Standard Maritime defendants were party to these deceptions on the part of Mr. Privalov.
i) The "NSC Clarkson commissions" scheme, where the claimants in the Intrigue action make allegations similar to those made in the Fiona action about the Sovcomflot Clarkson commissions scheme, except that Clarkson acted as NSC's brokers only upon purchases. It is said that Milmont received over $10.5 million under the NSC Clarkson commission scheme, and Milmont and Mr. Nikitin also claim some $6.7 million in the part 20 claim in the Intrigue action.
ii) The "Galbraith's commissions" scheme, which is similar to the Clarkson commissions schemes, except that the brokers were Galbraith's rather than Clarkson and it mainly, but not exclusively, concerns sales by NSC. It is said that Amon received some $7,329,052.44 under the Galbraith's commissions scheme.
iii) The "NSC time charters" scheme, which is similar to the Sovcomflot time charters scheme in the Fiona action and concerns agreements made in 2003 and 2004 for the hire of seven vessels to Henriot. It is said that, at least in some cases, the terms were designed to benefit the Standard Maritime defendants and were to the disadvantage of the claimants. The companies who owned two of the vessels at the relevant time are no longer in the NSC group, and no claim is brought in respect of the charters of them, but the claims relating to the other five vessels are for some $128 million.
iv) The "Sawyer commissions" scheme, whereby Mr. Sawyer, after appointment as NSC's financial adviser, made payments to Amon of some $1.5 million which are said to have been unjustified and improper.
i) the transactions which give rise to the claim were all "normal business transactions" within the meaning of clause 6.2, and
ii) clause 6.3 confines any liability to Sovcomflot to "direct actual loss", and so excludes any claim for loss of profits.
Clause 6 provided as follows:
"6.1 Where a breach of this Contract takes place, the Employee shall be subject to disciplinary, administrative and financial liability in accordance with the procedure stipulated by the law of the Russian Federation.
6.2 The Employee shall not be subject to material liability for damage arising from normal business activities, commercial or manufacturing and business risk, nor if he/she voted against (or did not participate in the vote on) the Management Committee's decision which lead to losses to the Company, nor if losses arose through the Employee's execution of decisions made by the Company's management (Chief Executive Officer, Management Committee, Board of Directors, Meeting of Shareholders), which compelled the employee to carry out the actions, which caused damage.
6.3 Where the company suffers material damage as a consequence of the Employee's culpable conduct (actions or failure to act), he/she shall be subject to material liability to the Company in the amount of the direct actual damage confirmed by a court ruling that comes into force."
(In the agreed translation of clause 6.2 the expression "Management Committee" is used. This body was generally referred to as the Executive Board during the trial, and this is the expression that I shall use.)
"It is well recognised in cases such as Fyffes … and in Ultraframe … that there is an obligation to account for any profits made from a transaction induced by dishonest participation in the breach of trust. Together with an alternative remedy in damages that is the usual remedy of the principal against the other party to a transaction induced by the payment by that other party of a bribe or secret commission to the principal's agent".
"In my judgment the defendants are right to say that the "orchestration" of the sale to Gazprom and of the reinvestment of the proceeds do not amount to dishonest assistance. But that does not render them irrelevant to the dishonest assistance claim. There is authority that a claim may be made against a dishonest assistant either for compensation for loss which the claimant has suffered as a result of the misapplication of trust property or other breach of trust; or for an account (as a personal not a proprietary remedy) of any profit that the dishonest assistant may make from his dishonest assistance or from the underlying breach of trust: Fyffes Group v Templeman,  2 Lloyd's Rep 643; Ultraframe (UK) Ltd. v Fielding,  EWHC 1638 (Ch). It seems to me at least arguable that any profit made by Mr. Abramovich by reason of the inclusion of the participation interests in Sibneft when it was sold to Gazprom, was attributable to and resulted from the original dishonest assistance in relation to the ECMs (if there was any), even though the sale itself was not a further act of dishonest assistance, and that Mr. Abramovich would be accountable (on a personal basis) therefore. If, as the defendants assert, no value was attributed to the 49% interests by either of the parties to the sale, and Mr. Abramovich has, in effect, given them away, he is, nevertheless, accountable for whatever their true value was when he did so."
i) It is not necessary that the bribe be given in connection with a particular transaction or series of transactions. The possibility of a conflict between duty and interest might be created by a bribe paid to an agent in order to influence him in favour of the person paying it generally and not directed to any particular matter or intended to influence him in relation to a particular transaction. In the Fiona action the claimants have sought to link payments made to Mr. Privalov and Mr. Borisenko and arranged by Mr. Nikitin to particular schemes about which they complain, but, as I shall explain, I conclude that they have not established connections of this kind. This does not mean that they are not entitled to rely upon the payments as bribes. If a secret payment is made to an agent, it taints future dealings between the principal and the person making it in which the agent acts for the principal or in which he is in a position to influence the principal's decisions, so long as the potential conflict of interest remains a real possibility: see Daraydan Holdings v Solland,  Ch 115 at para 132.
ii) The law recognises that some gifts or benefits are too small to create even a real possibility of a conflict of interest and so too small to be treated as a bribe. The defendants say that some benefits that Mr. Nikitin is said to have provided to Mr. Skarga and Mr. Izmaylov were of insufficient value to be bribes, and were only what Gorell Barnes J called in The "Parkdale",  P 53, 58-9 "a little present". It is a question of fact depending on the circumstances of each case where the line is to be drawn between "a little present" and a bribe, and so unsurprisingly there is little guidance about this in the authorities, but the test, as I understand it, is whether it is sufficient to create a "real possibility" of a conflict between interest and duty: Imageview Management v Jack,  1 Lloyd's Rep 436 para 6 per Jacob LJ. It is not whether such a conflict is actually created.
iii) If a payment is made to an agent that creates a real possibility of this kind, it does not make "any difference whether the surreptitious profit was gained as a pure gift or for services rendered or for any other reason": Keogh v Dalgety & Co Ltd., (1916) 22 CLR 402, 418. An agent might have a conflict between his interest and his duty as a result of being rewarded for "moonlighting" for a person engaged in transactions with his principal.
i) Mr. Skarga could be liable only to Sovcomflot as his employer and only in contract and under the Russian Labour Code. He could not be liable in tort and could not be liable in the circumstances of this case to any other claimant.
ii) Similarly, Mr. Izmaylov could be liable only to NSC as his employer and could only be liable in contract and under the Russian Labour Code. He too could not be liable in tort and could not in the circumstances of this case be liable to any other claimant.
iii) None of the defendants could be liable to give an account or in unjust enrichment.
iv) In order for Mr. Nikitin or any of the Standard Maritime defendants to be liable in tort, harm would have to be directly caused by the defendant's unlawful fault.
v) There is no presumption that, if a bribe was paid, it influenced the recipient, and the claimants cannot succeed in a claim either against a person paying a bribe or a recipient without proving that the bribe influenced the recipient or otherwise caused loss.
vi) The defendants would be protected by different limitation periods, which appear generally to be more favourable to them than those available under English law.
"Where a claim concerns or arises from contractual relations (which would include the claims in the present case, being (i) claims arising from contracts said to have been uncommercial; and (ii) claims resulting from the alleged diversion of moneys by third parties in breach of contractual duties owed by them to the claimants), the provisions of the Civil Code … do not allow a party to the contract to avoid the structure of Russian law and to bring any non-contractual claim arising out of the same facts against the other party".
"1. A transaction made under the influence of fraud, duress, threat, a bad-faith 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 and also due to it in compensation for that transferred to 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."
Obligations arising as a result of causing harm
"1. Harm caused to the person or property of a citizen and also harm caused to the property of a legal person shall be subject to compensation in full by the person who has caused the harm.
A statute may place a duty for compensation for harm on a person who is not the person that caused the harm
A statute or contract may establish a duty for the person who has caused the harm to pay the victim compensation in addition to compensation for the harm.
2. The person who has caused the harm is freed from compensation for the harm if he proves that the harm was caused not by his fault. A statute may provide for compensation for the harm even in the absence of fault of the person who caused the harm.
3. Harm caused by lawful actions shall be subject to compensation in the cases provided by a statute. Compensation for harm may be refused if the harm was caused at the request, or with the consent, of the victim, and the actions of the person who caused the harm do not violate the moral principles of society."
i) If a claimant company had entered into a contract that resulted in loss, Russian law would not attribute that loss to the act of a defendant for the purposes of article 1064 unless the claimant showed that the defendant directly caused the company to enter into the contract. Thus, if an officer of the claimant accepted a bribe, the claimant would not have a claim against the briber in relation to a transaction unless it was established that the bribe directly brought about the decision to enter into it. This could not normally be done if, for example, those who so decided on behalf of the company (whether their board of directors or their management) took the decision to do so with knowledge of the relevant information about whether the company should enter into the contract. The bribery would only be a sufficient cause of the contract and so any loss or harm resulting therefrom if, because of the bribe, the recipient therefore caused the company to decide to contract, for example by misleading those taking the decision to do so.
ii) Similarly, if brokers such as Clarkson acted in breach of their duties so as to cause loss to their claimant principal, prima facie the brokers' breach of duty would be the direct cause of the loss. Professor Maggs did not consider that, if a defendant had entered into an agreement with brokers that they should do something which amounted to a breach of duty to their principal, Russian law would therefore regard the defendant's action as a direct cause of the principal's loss. The brokers' behaviour intervenes, and prevents the link in the chain of causation being sufficiently direct. I accept his evidence that, in order to succeed in a claim under article 1064, the claimant would have to show a more specific and direct link between the defendant's action and the loss, such as that the defendant and the brokers made an agreement that they should conceal the position from, and deceive, the principal, and that as a result the principal did not enforce his rights against the brokers.
iii) Russian law would not consider that a company has been caused harm simply because the value of its shares in a subsidiary was reduced by harm caused to the subsidiary. The harm suffered by the shareholder would not be sufficiently closely linked to the action of the defendant. In reaching this conclusion, I do not overlook that at one point in his cross-examination Professor Sergeev appeared to contemplate that, where a subsidiary company was caused harm, a parent company might also be treated as having been caused harm, but his answers about this were unclear. There is no dispute on the pleadings that direct causation is required and, if there be a difference between the experts, I prefer the opinion of Professor Maggs about this. Thus, I conclude that Sovcomflot and NSC would not have claims under article 1064 on the basis that they suffered harm because the value of their interest in their subsidiaries was reduced by the acts of the defendants.
"One who has compensated for harm caused by another person (by an employee in his performance of employment, official, or other labour duties, by a person driving a means of transport, etc.) shall have the right of a claim back (subrogation) against this person in the amount of compensation paid, unless another amount is established by a statute…".
"1. A person whose right has been violated may demand full compensation for the losses caused to him unless a statute or a contract provides for compensation for losses in a lesser amount.
2. Losses means the expenses that the person whose right was violated made or must make to reinstate the right that was violated, the loss of or injury to his property (actual damage), and also income not received that this person would have received under the usual conditions of civil commerce if his right had had not been violated (forgone benefit).
If the person who has violated a right has received income thereby, the person whose right has been violated has the right to demand – along with other losses - compensation for forgone benefit in a measure not less than such income."
"1. A person who, without bases established by a statute, other legal acts, or a transaction, has acquired or economized property (the recipient) at the expense of another person (the victim) shall have the duty to return to the latter the unjustly acquired or economized property (unjust enrichment), with the exception of the cases, provided by Article 1109 of the present Code.
2. The rules provided by the present Chapter shall be applied regardless of whether the unjust enrichment was the result of the conduct of the acquirer of the property, the victim himself, third persons, or occurred against their will."
I should also set out articles 1103, 1105 and 1107.
"To the extent not otherwise established by the present Code, other statutes or other legal acts, nor otherwise follows from the nature of the respective relations, the rules provided by the present Chapter shall also be applied to claims:
1) for return of performance under an invalid transaction;
2) for the recovery of property by an owner from another's illegal possessions;
3) of one party in an obligation to another for return of performance in connection with this obligation;
4) for compensation for harm including that caused by the bad-faith conduct of the enriched person."
"1. In case of the impossibility of the return of the unjustly received or economized property in kind, the acquirer must compensate the victim for the actual value of this property at the time it was acquired and also for the losses caused by later change in the value of the property if the recipient has not compensated for its value promptly after he learned of the unjust enrichment.
2. A person who has unjustifiably made temporary use of another's property without the intent to acquire it or of another's services must compensate the victim for what the person economized as the result of such use at the price existing at the time when the use ended in the place where it occurred."
"1. A person who has unjustly received or economized property shall have the duty to return to or compensate the victim for all incomes that he extracted or should have extracted from the property from the time when he learned or should have learned of the unjust enrichment.
2. Interest for the use of another's assets (Article 395) shall be calculated on the sum of unjust monetary enrichment from the time when the acquirer learned or should have learned of the unjust receipt or saving of monetary assets."
"Furthermore, Mr. Nikitin can possibly be viewed as a person who unjustly enriched himself from the uncommercial contracts concluded by the companies under his control which provides grounds for presenting a claim directly against him under Article 1102 of the [Civil Code].
Even though it was companies under Mr. Nikitin's control which benefited from the uncommercial contracts, in my view this would not be an obstacle for presenting an unjust enrichment claim against Mr. Nikitin as the ultimate beneficiary. Taking into account the underdeveloped state of the Russian corporate law and its application in practice, this method of protection of civil law rights of the persons aggrieved by the uncommercial contracts might face certain difficulties in Russia. However, these difficulties would lie in the practical sphere of providing the links of unjust enrichment rather than in existence of any formal obstacles in Russian law to the application of this method of protection of civil law rights."
Mr. Skarga's liability to Sovcomflot and Mr. Izmaylov's liability to NSC
"A person who by virtue of a law or constitutive document of a juridical person acts in its name must operate in the interests of the juridical person represented by him in good faith and reasonably. He shall be obliged at the demand of the founders (or participants) of the juridical person, unless provided otherwise by a law or contract, to compensate for losses caused by him to the juridical person".
Article 71 of the Law of Joint Stock Companies provides as follows in relation to those concerned in the management of a Joint Stock Company such as Sovcomflot or NSC:
"1. The members of the board of directors (or supervisory board), one-person executive body (director, general director), an interim sole executive body, members of the collegial executive body (management board, directorate), and likewise the management organization or manager must, when exercising their rights and performing duties, operate in the interests of the company and exercise their rights and perform duties with respect to the company reasonably and in good faith.
2. Members of the board of directors (or supervisory board), one-person executive body (director, general director), an interim sole executive body, members of the collegial executive body (management board, directorate), and likewise the management organization or manager shall bear responsibility to the company for losses caused to the company due to their actions (or failure to act), unless other grounds and extent of responsibility have been established by federal laws.
In the board of directors (or supervisory board) and the collegial executive body (management board, directorate) the members who have voted against decision which entailed the causing of losses to the company or who did not take part in the voting shall not bear responsibility. …".
"…the need for a relevant criminal finding for the purposes of establishing a civil claim is not a requirement of substantive law. Such a requirement is not identified in any substantive or even procedural law. It derives solely from court practice. A civil cause of action cannot be established in the court practice. It can only arise by virtue of law or regulatory legal acts. Court practice is not a source of law in Russia."
"(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 to be taken as being –
(a) for a cause of action in respect of personal injury caused to an individual or death resulting from personal injury, the law of the country where the individual was when he sustained the injury;
(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."
"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."
"Subject to what I shall say in a moment, characterisation or classification is governed by the lex fori. But characterisation or classification of what? It follows from what I have said that the proper approach is to look beyond the formulation of the claim and to identify according to the lex fori the true issue or issues thrown up by the claim and defence. This requires a parallel exercise in classification of the relevant rule of law. However, classification of an issue and rule of law for this purpose, the underlying principle of which is to strive for comity between competing legal systems, should not be constrained by particular notions or distinctions of the domestic law of the lex fori, or that of the competing system of law, which may have no counterpart in the other's system. Nor should the issue be defined too narrowly so that it attracts a particular domestic rule under the lex fori which may not be applicable under the other system:…".
"… it makes no sense simply to say that someone is liable in tort. He must be liable for something and the rules which determine what he is liable for are inseparable from the rules which determine the conduct which gives rise to liability".
"(1) The obligation to restore the benefit of an enrichment obtained at another person's expense is governed by the proper law of the obligation.
(2) The proper law of the obligation is (semble) determined as follows:
(a) If the obligation arises in connection with a contract, its proper law is the law applicable to the contract;
(b) If it arises in connection with a transaction concerning an immovable (land), its proper law is the law of the country where the immovable is situated (lex situs)
(c) If it arises in any other circumstances, its proper law is the law of the country where the enrichment occurs."
"If there is a contractual or similar relationship between the claimant and the defendant, the law of that relationship is likely to govern. If the parties are complete strangers and the defendant is a recipient from a wrongdoer, the place of receipt is likely to be relevant, although that may well not be so if, for instance, the place of receipt is a transitory home. If the defendant is the primary wrongdoer or the instigator of, or someone vicariously responsible for, the wrongdoing, it is likely to be relevant to examine where the wrongdoing and its effects took place."
"Briefly stated, the claimants contended that the design underlying the defendants' fraudulent activities was to generate funds outside Kuwait, the primary location chosen to effect such design being London. The moneys were largely obtained through Clarksons in London, Mr. McCoy playing a central role in the events which gave rise to the proceedings; of the 27 charterparties used by the defendants as part of their fraudulent conspiracy, only six were signed in Kuwait and the rest were signed in London; the overt acts of the conspirators in effecting their frauds were substantially committed in London, schemes I, II and III all involving the procurement of Clarksons to remove money from accounts held by them on the claimants' behalf in London, largely in cash or traveller's cheques delivered in London; and the bulk of the known enrichment took place in London rather than Kuwait."
i) In the case of the Sovcomflot Clarkson commissions scheme, the claimants said that (a) Mr. Nikitin made his arrangement with Clarkson in England, and (b) Mr. Privalov and Mr. Gale carried out the transactions under the scheme in London.
ii) In the case of the Tam commissions scheme, the claimants said that the scheme was carried out in England by Mr. Privalov and Mr. Andrew Wettern, an English solicitor and then a partner in the firm of Watson, Farley and Williams ("WFW") in London.
iii) In the case of the hull no 1231 commission scheme, the claimants relied upon the facts that Mr. Privalov conducted negotiations with BCV in England, as well as in Switzerland, and that the agreements by which the scheme was implemented were prepared by Mr. Wettern in England (although the loan agreement was executed in Russia).
iv) The claimants' case is that the arrangement between Mr. Skarga, Mr. Privalov and Mr. Bonehill for the Norstar commissions scheme was made or confirmed at a meeting in Switzerland. They relied, however, upon the fact that Mr. Privalov arranged in England for payments to be made under it and otherwise to carry it out.
v) The claimants recognised with regard to the RCB scheme that some of the relevant events, including discussions between Mr. Cepollina and RCB, meetings with RCB, arrangements with BCV and the formal closing of the agreement to acquire the debt, occurred in Switzerland, and that the Sovcomflot Executive Board meeting of 9 August 2001 took place in Russia. However, they said that the most significant elements of the wrongdoing took place in England because Lawrence Graham discussed the matter with Mr. Privalov and drew up documentation in England.
vi) In the case of the SLB arrangements scheme, the claimants relied upon the facts that Mr. Privalov negotiated the transactions in London, that Mr. Wettern prepared the documentation in London and that the documentation for the SLB arrangements concluded in November 2002 (to which I shall refer as the "November SLB arrangements") was executed in England. However, the documentation for the "Fili" transactions, and the SLB arrangements concluded in July 2002 (the "July SLB arrangements") was signed in Russia.
vii) In the case of the termination of the SLB arrangements scheme, the claimants observed (a) that Mr. Gale was in England when he reduced the value of the Arbat vessels, and (b) that the documentation was drawn up by Mr. Wettern in England and executed in England by Mr. Wettern and Mr. Privalov.
viii) In the case of the newbuildings scheme, the agreements whereby the Standard Maritime defendants acquired the benefit of the options and shareholdings were drawn up in England and executed in England. The claimants also relied upon the fact that the Supplemental Agreement to which I shall refer was drawn up by Mr. Wettern in England
i) The personalities, relationships and disputes that are the background to this litigation, which according to the defendants explain why the claimants have brought their claims.
ii) The nature and extent of the investigations that the claimants have conducted into the defendants' affairs.
iii) The corporate and management structure of the Sovcomflot group and the NSC group.
iv) The financial position of the Sovcomflot group and their financial and business strategies.
v) The credibility of the evidence of some of the claimants' witnesses.
The defendants' case about why the Fiona actions were brought
The investigation after Mr. Skarga left Sovcomflot
The "Project Sturgeon" investigations
Departure of Mr. Izmaylov from NSC and aftermath
The corporate structure and governance of Sovcomflot
The Sovcomflot General Board
The Sovcomflot Executive Board
The Sovcomflot Executives
Fiona Board decisions
The "Principal Directions"
i) the objective of improving Sovcomflot's finances, and in particular to repay loans from foreign banks.
ii) the plan to modernise Sovcomflot's fleet; and
iii) the aim to increase Sovcomflot's presence in the Russian market, in particular as carriers of Russian exports;
- 6 "Tromso" vessels, of 155,000 tonnes dwt, which had been built in South Korea in 1991 and 1992. They were designed to carry crude oil, and were generally chartered on the spot market for Atlantic voyages to carry oil from North Sea and West African ports to the east coast of America and the Gulf of Mexico.
- 7 Ore, Bulk, Oil ("OBO") carriers, of 96,000 tonnes dwt, which also had been built in South Korea and entered into service in about 1991 or 1992.
- 8 "Arbat" tankers, of 47,000 tonnes dwt, which had been built in 2001 and 2002. They were designed to carry dark and light petroleum products. Since April 1999 they had exported 490,000 tonnes of Russian oil under a contract with Rosnyeft-Sakhalinmornyeftegaz (Russian-Oil, Sakhalin Offshore Oil & Gas).
- 8 "Barents Sea" tankers, of 47,000 tonnes dwt, which had been built in Croatia in 1998 or 1999. They were designed to carry petroleum products and chemical cargoes.
- 3 "Liepaya" cargo carriers with a deadweight of 46,800 tonnes, which had been built in Poland in the mid-1980s. They were built to carry dark and light petroleum products, but one of them, the MV "Liepaya", had been modernised to carry chemicals.
- The MV "Zina", which was of 29,500 tonnes dwt and had been built in Bulgaria in 1989. She was designed to carry petroleum products.
- The MV "Kapitan Sokolov", an OBO vessel of 54,000 dwt, built in Sweden in 1983. She could carry dark petroleum products but had been employed in transporting dry bulk cargoes under voyage charters across the Atlantic.
- The 10 "Senator" container ships of 47,120 dwt.
- The "Kapitan Betkher", a bulk carrier of 36,600 dwt, which had been built in South Korea in 1985 and was designed to lift bulk cargoes.
- 12 "Sokol" multi-purpose vessels, of 9,300 tonnes dwt, built in Japan between 1987 and 1993, and designed to carry containers, timber, and general cargoes. These vessels had ice-class status and could operate in fairly difficult ice conditions.
- 10 "Socofl" timber carriers with a deadweight of 6,200 tonnes, built in Japan between 1990 and 1992.
- 8 "Uglegorsk" vessels, which were small multi-purpose ships of 4,160 dwt. They had been built in Turkey in 1991-1992 and had ice-class status.
"For a range of objective and subjective reasons, Sovcomflot OAO has failed to consolidate its position in the Russian transport-services market. The 490,000 tonnes of crude oil exported in 1999 under a long term contract with Rosnyeft-Sakhalimornyeftegaz cannot be viewed as volumes that match the technical capacity of Sovcomflot OAO".
"The principal objectives of the Company's activities are: … The development of the Company as a substantial national carrier, occupying a leading position in Russian shipping and strategic segments of the Russian carriage of goods business, being competitive on the international market; Establishment of the Company as a model participant in Russian shipping, as a centre of leading commercial experience, training of qualified management, a source of stable employment, a consumer of products and services of domestic companies."
"The principal purposes of the Company's activities shall be: … to develop the Company as the largest national carrier which leads in the Russian sphere of shipping and strategic segments of the Russian freight base and is able to meet competition at any international market; to ensure that the Company play a role of a system-forming factor in the Russian sphere of shipping, a centre of advanced trade experience or training of qualified staff, a stable source of jobs and a customer of products and services of domestic enterprises; …".
"It is our direct obligation, as a major Russian ship-owner, to support the developing energy sector of Russia and to concentrate on export transportation of Russian oil. Project "B-Maks" contemplates the reduction of the transportation costs for our clients with the simultaneous increase in safety in the Baltic region. We are pleased of such interrelation."
Evidence of Mr. Privalov and Mr. Borisenko
The Background to the Intrigue action
"Following our discussion, please see attached: Fee letter that the borrower will send you, agreeing to pay a fee of 0.85%, and Address commission letter that you will send back to the borrower, agreeing to pay the 0.35% address commission to the borrower or to its order. I propose that both letters should be dated on the date of signing the loan agreement, but with the stipulation that the payments must be made within five banking days thereafter. Please arrange for an exchange of these between yourself and Yuri. As I have explained, you will then receive a payment instruction from the borrower stipulating where the address commission is to be paid, together with a copy of the Power of Attorney under which it is signed".
Mr. Privalov faxed to Mr. Caze a signed copy of the "Fee Letter" from Glefi XXXI to BCV, and a copy was sent to Mr. Borisenko. It referred to the Loan Agreement, and continued, "This letter constitutes our commitment to payment to you an arrangement fee of US$255,000, which is equal to 0.85% of the amount of the Total Commitments of US$30,000,000". The "Address Commission Letter" from BCV to Glefi XXXI referred to their agreement to pay this fee, and continued, "This letter confirms our agreement to pay to you or to your order an address fee equal to 0.35% of the amount of the Total Commitments, subject to our receipt from you of the total amount of the arrangement fee due to us".
Duties of brokers
"The usual practice is for the amount of the commission to be agreed between the sellers and brokers with whom they are dealing, the amount being a total figure "for division" between all the brokers involved. Thus, if both parties are represented by brokers, the buyer's broker will indicate the amount which he claims for himself (including in this amount any payment which he may have agreed to make to another broker, or brokers, e.g. for introducing the buyer's business to him) and the seller's broker will then negotiate with the seller a figure for total commission, including his own and, likewise, that of any other intermediaries to whom he may be responsible. The buyer, therefore, pays the amount of the offer and no more, even to his own broker, unless there is some further agreement between them. The seller, on the other hand, receives only the net amount after deducting total commission, and the amount of commission is of particular importance to him. Sellers often try to reduce the total amount by negotiation with their own broker, and they can, if they so wish, discover the number and identities of the other brokers between whom the total commission will be divided. The amount of commission therefore forms part of the sale negotiations which the brokers are conducting on behalf of and with their principals, but it is unusual for the agreed terms to be included in the sale contract itself."
"…it is not usual market practice for brokers to disclose the identity of those to whom commission payments will be, or have been, made (and the amounts of any such payments). Moreover, during the course of these particular transactions your clients did not seek to impose on us a requirement setting aside the usual market practice. Consequently, no information about commission payments, other than the gross commission payable to us, was sought by, or provided to, your clients (this will account for their inability to trace any relevant documents on their files). Not only is such information commercially sensitive, it is often governed by specific restrictions on its disclosure. As a result, although in accordance with my promise to reveal what commission was for Clarksons, we are not in a position to accede to your request to provide you with details of to whom commission payments were made and their amount. However, should your clients wish us to do so, we will seek authorisation from third parties to provide to you details of their participation in the commission arrangements."
The Sovcomflot Clarkson commissions scheme
Sovcomflot look for new brokers
The parties' contentions about the Clarkson arrangement
"We are writing to you following our discussions about the continuation of Clarkson as brokers for the Fiona Group. We well appreciate that, when ordering new ships or arranging for sale or purchase of secondhand ships, there may be commercial requirements for the Fiona group to have two prices, a "headline" price and a net price actually payable or receivable by the Fiona Group as purchasers or sellers. In these circumstances, we are willing to act as intermediary on behalf of the Fiona Group, to collect and then to distribute an address commission for the benefit of the Fiona Group. We would achieve this by receiving a total commission payment equal to the aggregate of:
(a) our own broker's commission, as agreed with the Fiona Group from time to time; plus
(b) the address commission.
You will indicate to us in relation to each transaction how much address commission should be recoverable out of that particular transaction. We will then pay over to such bank account as may be nominated by an authorised representative of the Fiona Group from time to time the address commission that we have collected and which we are liable to account for."
"We write to you following our discussions together about the continuation of Clarksons as brokers for the Fiona Group. As we have explained to you, for commercial reasons the Fiona Group wishes to move away from the industry practice of there being "address commissions" included within the contract, either when ordering new ships or when arranging for sale or purchase of secondhand ships. Instead, in relation to projects in which you will act as broker for the Fiona Group, we request you please to confirm that you will agree instead to a method by which the commission due to Clarksons on any contract, either for ordering a new vessel or for arranging sale or purchase of a secondhand ship, will be agreed by us in each particular case, and that, out of the commission you receive, you will then pay to a company to be nominated within the Fiona Group the proportion of the commission which you collect that we have agreed on behalf of the Group will be retroceded back. As indicated, this arrangement will need to be agreed on a case-by-case basis, so that we agree in each case what the percentage division of Clarksons' headline commission will be. Please confirm your agreement to this arrangement in principle by countersigning this letter."
The first transactions
i) The "Genmar" transaction, as a result of which the recipient companies were paid some $4.9 million.
ii) The "Astro vessels" transaction, as a result of which the recipient companies were paid $1.38 million.
iii) The "Tsuneishi" transaction, which led to the recipient companies being paid $1.242 million.
iv) The "Hyundai Mipo" transaction, which led to the recipient companies being paid $1.87 million.
v) The "Daewoo" transaction, which led to the recipient companies being paid some $3 million.
vi) The "Athenian" transaction, as a result of which the recipient companies were paid $6.7 million.
The Genmar transaction
i) The rate of commissions paid by Sovcomflot was increased because Clarkson needed to pay Mr. Nikitin, and otherwise the prices received by the 30th to 36th claimants would have been correspondingly higher;
ii) The explanation that Clarkson gave Sovcomflot for the level of commissions was untruthful, and Mr. Privalov was party to the misrepresentation; and
iii) Clarkson disguised the payment to the recipient company, Pollak, by routing it through M J Gruber.
i) Mr. Nikitin insisted upon receiving a higher rate of commission than the 2% that Mr. Gale originally planned. Pollak were paid some $1.75 million more than 1.5% of the sale price, the level of payment that had been discussed between Mr. Nikitin and Mr. Gale when the Clarkson arrangement was made. Mr. Nikitin said that Clarkson decided how much to pay Pollak without him prompting them, and he suggested in his evidence that Clarkson paid generously in order to encourage him to introduce more business. I do not accept that Mr. Gale would have volunteered so large an amount, and in particular that he would have decided on his own to increase the payment to 2 1/3%, an increase that required him to invent the fiction that the buyers had changed their requirements.
ii) Mr. Nikitin knew that the money was paid to Pollak through M J Gruber because Clarkson wished to conceal that they were paying his company. Mr. Nikitin said that he left it to Clarkson to decide how to make the payment, that their decision about routing the payment as they did was not explained to him, and that he took it that they, as leading brokers, knew "how to do it properly". However, the only conceivable reason that Clarkson paid Pollak indirectly was to disguise the recipient, and they would have had no reason to do so if they considered it a proper payment. Mr. Nikitin is an acute businessman and he must have realised this.
The Astro vessels transaction
i) Mr. Privalov and Mr. Gale arranged that the sellers should pay address commissions, and concealed them from Sovcomflot.
ii) Their purpose was to generate funds to pay Milmont 1.5% of the purchase price and the money was in fact paid to Milmont.
iii) As a result, the prices that Fiona agreed to pay under the memoranda of agreement and that the purchasing companies agreed to pay were correspondingly increased.
iv) There is no evidence that I accept that Mr. Skarga had any part in making these arrangements or was aware of the address commissions.
v) There is no evidence that I accept that Mr. Nikitin introduced the business to Clarkson or played any part in the transaction.
The Tsuneishi transaction
"We should get a counter but it might be a close run thing as [Mr] Sato [of Tsuneishi] was not very impressed by the offer. The main problems/comments are:
4. Price – not encouraged by the price – although better than what had originally been requested but with 1.5% address need to be prepared to pay well over US$41mill as the address is an extra US$600,000!"
"In terms of the address commission, the buyers would like all commissions – including ours – to be covered by a single commission agreement with Clarksons. We will collect all the commissions on behalf of the buying companies and will distribute to the buying companies against their invoices. This is the way that the buyers want it and trust that this can be arranged."
"Since 2.5% comm. is rather big, to avoid the interference by Japanese Tax Authority, this kind of documents might be necessary".
The Hyundai Mipo transaction
The Daewoo Transaction
i) Clarkson negotiated prices that included address commissions which they intended should not be received by, or disclosed to, the buyers, but which they intended that they should use to make payments in accordance with the Clarkson arrangement.
ii) Clarkson disguised from the yards that the address commissions were not being paid to the buyers.
iii) By March 2001 Mr. Privalov knew that Clarkson were increasing the commissions (including address commissions) to be paid by the yards upon purchases in order to provide funds for payments under the Clarkson arrangements and that as a result the Sovcomflot companies paid considerably higher prices for the vessels.
iv) Clarkson and Mr. Privalov colluded to avoid any reference to commissions in their communications and other documents that might be seen by Sovcomflot, including by Mr. Skarga.
The Athenian transaction and the Tam commissions
i) The $5.5 million was paid to RTB as part of the Sovcomflot Clarkson commissions scheme, and the payment was funded by sums paid by Athenian by way of commissions
ii) The $1.2 million was diverted to Milmont under the Tam commissions scheme. There is no dispute that the $1.2 million was in fact paid into Milmont's account at Wegelin between August 2001 and January 2002.
i) Mr. Richard Coleman, the Clarkson broker who was liaising with the sellers and their broker, Mr. Vlahoulis of Vakis Vlahoulis SA, wrote on 20 March 2001, "As you are aware there is a bit of paranoia about secrecy, including, on a "need to know basis" within the organisation." He requested that correspondence be directed to Mr. Privalov, who would send "contracts/specs to whoever needs them …". He finished his message, "Please let me know what is arranged - tks yr patience and please eat this message after reading".
ii) Holman Fenwick & Willan ("HFW"), who were acting for the sellers and Athenian, prepared an initial draft of a re-sale agreement that provided that Fiona should be responsible for payment of commissions and specified the amount and to whom they were to be paid. This was sent to WFW on 22 March 2001. In an e-mail of 28 March 2001 Mr. Gale commented to Mr. Privalov of the proposal that Fiona should be responsible for the payment of commissions, "No way – sellers to pay commissions as customary. Very important". On 3 April 2001, Fiona required that the buyers should not be responsible for paying any commissions and that the sellers should pay 2% commissions to Clarkson under a separate agreement. There was to be no reference to commissions in other contracts.
iii) In an e-mail dated 26 April 2001, Mr. Gale asked Mr. Coleman to explain to the sellers' brokers that "we are in a sensitive area over commissions … The buyers are insisting on 2 pct. … Commission must not appear any more in our exchanges, simply gross figures, but the Russians are working backwards to see what net figures they will pay".
iv) On 30 April 2001, Mr. Coleman passed on Fiona's offer to Mr. Vlahoulis, noting "Price USDlrs 53.400.000 cash net each vsl to sellers. This to represent USDlrs 54.600.000 gross to cover necessary commissions which to be paid on closing to H. Clarkson with the cash flow. (Commission agreement by way of private side letter Sellers/H.C)". The deal was agreed upon this basis, and on 1 May 2001 Mr. Coleman sent Mr. Vlahoulis a recap in similar terms. Mr. Coleman sent Mr. Vlahoulis a message on 3 May 2001 stating, "Please note that the commission is to be kept separate and confidential and confirm that the total is USDlrs 7.200.000 with USDlrs 1.000.000 your side. We will draft a commission agreement and send to you for approval".
v) The formal recap sent on 1 May 2001 referred to the price simply as "USDlrs 54.600.000, private side letter sellers/[Clarkson]".
"As per your request, I attach the letter from Rody to Tam, agreeing to transfer the remaining $200,000 address commission for each vessel to Tam. The original is on its way to you by bike, so you can forward that to Dmitri Skarga. You have already a copy of the underlying HHI/Rody agreement. You will need to liaise with Athenian about the payment arrangements".
Continuing operation of Clarkson arrangement
Clarkson transactions for Sovcomflot in 2002
Sale transactions involving Norstar
i) The "SCI Gaurav" was sold to a company to be nominated by Ofer Maritime Ltd. in the Ofer Brothers Group. Norstar introduced the sale to FML, and Clarkson only dealt with some administrative matters after the deal had been reached. Clarkson charged the seller, Megaslot VI Shipping Company Limited, the 8th claimant in the Fiona action, 3% commission, amounting to $645,000. They passed to Milmont $430,000 (or 2% of the sale price), to Norstar $107,000 (or 0.5% of the sale price) and to Shipping Associates $26,875 (or 0.125% of the sale price). Clarkson kept only $80,635, the equivalent of a commission of 0.375% of the sale price.
ii) The "Mekhanik Kurako" was sold to Thomas Jacobsen & Co (who ultimately nominated Jaco Stove Shipping Ltd. as the buyers) under a memorandum of agreement dated 4 June 2003. The sale was largely negotiated by Norstar as the buyers' brokers directly with FML, and Clarkson were involved with minor and administrative matters after the agreement had substantially been reached. Clarkson charged the seller, Mekhanik Kurako Shipping Co Ltd., the 39th claimant in the Fiona action, commission of $150,000, or 3% of the sale price. They kept $18,750 (or 0.375%). They paid $100,000 (2%) to Milmont, $25,000 (0.5%) to Norstar, and $6,250 (0.125%) to Shipping Associates.
iii) By three memoranda of agreement dated 21 August 2003, the "Lesozavodsk", the "Socofl Stream" and the "Socofl Tide" were sold by Socofl Honesty Shipping Inc, Socofl Stream Shipping Inc. and Socofl Tide Shipping Inc, the 40th, 41st and 43rd claimants in the Fiona action, for a price of $3.75 million each to an Italian company called Navigazione Due Golfi (or their nominees). Again, the documents that survive and are in evidence suggest, and I conclude, that these sales were substantively concluded between Norstar and FML. On each of the Clarkson's internal fixture slips, the "Sellers' Broker" was recorded as "H. Clarkson/Fiona Maritime Agencies" and the "Buyers' Broker" as "H. Clarkson/Norstar Shipping, Monaco". For each of the sales, the commissions charged to the purchasers by Clarkson were 2%, amounting to $75,000. Clarkson passed $37,500 (1%) to Milmont, $18,750 (0.5%) to Norstar, and $4,687.50 (0.125%) to Shipping Associates. Clarkson kept $14,062.50 (0.375%).
Clarkson purchase transactions in 2003/2004
The Clarkson Documentation
"We have advised you that as an independent consultant, we are able to provide you on an ongoing basis, our ideas, which we anticipate will allow your company, and may indeed already have allowed your company to participate in the development of Russian controlled shipping companies and their subsidiaries.
We therefore agree that we will provide this service on the basis that we receive a commission for introducing our ideas, of which you will be advised/have been advised. We make no claim for commission on business we have not discussed. You will receive our ideas relating to the buying and selling activities of Sovcomflot and/or Fiona Trust and Holdings, or any of their Single Purpose Buying or Selling Companies, also relating to buying and selling activities of Novorossiysk Shipping, Novoship and/or Intrigue, or any of their Single Purpose Buying or Selling Companies. There may be other Companies and opportunities, including Chartering, which we may advise you in due course, on which basis we again may mutually agree specific arrangements on a case by case basis.
Our normal commission for such business resulting from our services to you is 1.5% on the gross value of the transaction, whether Buying or Selling, however this may be varied from time to time by mutual agreement, but we are anxious that Clarksons receive standard rates of commission for all business transacted.
We request that all such payments be made to Milmont Finance Ltd., or such other Companies we may nominate from time to time, including Horber Financial SA and RTB Overseas Ltd. You will be invoiced for our introductory commission and we would ask you to make prompt payment when requested.
We hereby assure you, that there are no Government Officials of any affiliation or nationality involved with this Company, nor any Officers, agents or Employees of any Company to which our information refers involved with this company, and on which basis we will be remunerated.
Owing to the rather delicate nature of our exchanges, it would be appreciated that no reference is ever made to its source, and this agreement is kept entirely confidential between us, although we appreciate it must be shown to proper parties legally entitled to see it under English Law. The name of this Company or any other Company nominated by us to receive introductory Commissions, must not be disclosed to any third party without our express permission, unless you are required to do so under English Law.
For the purposes of clarification, when we make any statement relating to this Company, such undertakings and statements are and will be true of any company nominated by this Company.
We would be grateful, for your confirmation of receipt of this letter, in due course."
"Thank you for your letter of 12 February 2001.
We are pleased that we are able to have made contact, and regularised, our relationship which has been growing in its scope, and we might add our thanks for the most valuable assistance we have received from you which has already resulted in productive, discussions with the entities you mention.
We look forward to keeping in touch with Mr. Yuri Nikitin, whom our Mr. Richard Gale has known since the early nineties, and their meetings and telephone conversations have proved a most valuable and productive source of ideas.
We do appreciate, as per our discussion with Mr. Nikitin, that owing to the sensitivity of the ideas exchanged, we should be very careful with our records of communications, and keep them absolutely confidential. Thus most if not all exchanges will be in face to face meetings and by telephone.
On this basis we are more than pleased with our arrangement.
We must clarify certain aspects.
You have advised us that we can expect Invoices for introductory commissions both from yourselves, and also Horber Financial SA of Panama and RTB Overseas Ltd. of BVI.
Formally we must ask you to confirm that you are responsible for the disbursement of funds, and that no party to whom we make payment, will disburse any proceeds, to any party or parties benefiting from same, who may liable to UK Taxes. Furthermore you undertake to advise us if there is any change in this status.
Some shipyards are beginning to insist, and we believe will formally insist in due course, that in the event that a Builder is obliged to refund any or all instalments received from Buyers, they will repay to the Buyers the net amount received under the shipbuilding contract, and will look to us to compensate (refund to) them commissions we have received. We would ask you under our agreement, to refund to us any such amounts disbursed to you.
"Your letter of 20 February has been received, and is acknowledged.
Please maintain contact with Mr. Yuri Nikitin. As you have stated, the ideas exchanged are of course extremely confidential, and communications should be maintained on their present basis, as stated in your letter.
For the sake of clarity, we confirm that no beneficiary of this or any Company nominated by us, including RTB Overseas of BVI, and Horber Financial SA, of Panama is a Company, entity or individual liable on these payments, to Tax in the UK, and we undertake to advise you if this changes.
You have explained the reason, for a potential claim against ourselves or any other Company nominated by us, for repayment of our introductory commissions, in the event of a refund by the Yard to the Buyer. We agree to refund amounts to you or the shipyard, as they fall due under the stated circumstances."
"You have again expressed your concern relating to the issue of UK Taxation.
We hereby advise you that Mr. Yuri Nikitin will take personal care that in any case of disbursement of the assets of Milmont or other accounts previously mentioned, or advised to you in the future, in writing, there will be no entity or person subject to UK Taxation."
Spreadsheets for Mr. Nikitin's commissions
Mr. Skarga's involvement with and knowledge of Clarkson arrangement
i) Whether, by the Clarkson arrangement, Clarkson entered into any contractual agreement with Mr. Nikitin or any company associated with him.
ii) If so, whether it gives rise to any obligation upon Clarkson to make payments in respect of the purchases.
iii) Whether by the confirmation letters Clarkson entered into any contractual commitment.
iv) Whether, if Clarkson did enter into any contractual commitment, it is illegal and unenforceable.
i) There is no credible evidence that Mr. Skarga was party to making (or confirming) the Norstar arrangement or that he knew of it.
ii) Mr. Privalov introduced Sovcomflot's business to Norstar, and Mr. Nikitin played no part in doing so.
i) Mr. Izmaylov was party to the NSC Clarkson commissions scheme, by which Mr. Nikitin, Mr. Gale and Mr. Privalov arranged that the Clarkson arrangement should be operated in relation to vessels purchased by NSC; that between May 2002 and April 2005 Clarkson handled as NSC's brokers the purchases of 28 newbuildings and two second-hand vessels; and that in accordance with the arrangement Clarkson made payments to Milmont on the business. Clarkson received on the 30 purchases total commissions of $28,841,198, and they paid $17,340,919 to Milmont and also $3,252,568 to Shipping Associates, retaining for themselves $8,247,493.
ii) Mr. Izmaylov agreed to the Galbraith's commissions scheme whereby he arranged with Mr. Rokison that NSC should use Galbraith's as their brokers to sell vessels, and that Galbraith's entered into an arrangement with Mr. Nikitin to make payments from their commissions to his order. Galbraith's also had an arrangement with Mr. Privalov to make payments to Shipping Associates. Between April 2002 and April 2005 NSC sold 37 vessels through Galbraith's, and Galbraith's also negotiated refinancing arrangements for four newbuildings that NSC had bought and acted as NSC's brokers upon the purchase in March 2005 of the "Four Stream". Galbraith's were paid in total $16,996,463 by way of commissions, and they paid $7,329,052 to Amon, the company nominated by Mr. Nikitin to receive payments, $4,335,720 to other brokers and $1,186,222 to Shipping Associates, keeping for themselves $4,145,469.
NSC's appointment of new brokers
NSC Clarkson commissions scheme
The Intrigue part 20 claim
The Galbraith's commissions scheme
Refinancing the Aframax vessels
Sales through Galbraith's
Mr. Izmaylov's knowledge of the payments to Milmont and Amon
i) Mr. Skarga dishonestly failed to tell the Executive Board that RCB were prepared to settle the debt for 45c. in the dollar. I have concluded that Mr. Skarga did not know this.
ii) Mr. Skarga did not tell the Executive Board that the letter containing Gemarfin's offer was designed to give the impression that it was from "an independent third party" who had already acquired the debt. The claimants referred to Mr. Privalov assisting Ms. Rumbold to draft the letter and to the fact that, when Mr. Privalov wrote to Gemarfin after the Executive Board meeting, they did not reply until October 2001. There is no evidence that Mr. Skarga knew how the letter came to be drafted or that Mr. Privalov had a part in its preparation, and I am unable to understand the significance that the claimants attach to the delay in Gemarfin responding to the offer made after the meeting.
iii) Mr. Skarga "dishonestly failed to tell the Executive Board that the plan which existed at 9 August 2001 was for Fiona itself to provide the funds for Gemarfin to purchase the RCB debt at 45c. in the $". This argument was not developed by Mr. Popplewell. The claimants would have to establish that this was the plan on 9 August 2001, and they have not proved this. In any case, where there is a series of back-to-back agreements of this kind, it is not unusual or remarkable that the price is passed down the chain of sellers.
i) A memorandum of agreement in Saleform 1993 of the Norwegian Shipping Association ("Saleform 1993") between Fili Shipping and Blanter for the sale of the vessel. The purchase price was to be paid to Fili Shipping's account at BCV in Switzerland.
ii) A charterparty in the Baltic and International Maritime Council ("Bimco") bareboat charter form "Barecon 89" between Blanter and Fili Shipping for the five year time charter.
iii) A second memorandum of agreement in Saleform 1993 between Fili Shipping and Blanter Shipping whereby Fili Shipping agreed to buy and Blanter agreed to sell the "Fili", and that the price of $10.5 million should be paid to Blanter's account at BCV in Switzerland on delivery of the vessel.
iv) A guarantee whereby Fiona guaranteed to Blanter the obligations of Fili Shipping under the charterparty and the second memorandum of agreement.
"17m less 1%, 5 years, 8000 pd, 10,5m : 11,7% p/a.
17m less 1%, 5 years, 8000 pd, 10,0m : 11,18% p/a.
17m less 1%, 5 years, 7500 pd, 10,5m : 10,42% p/a.
17m less 1%, 5 years, 7500 pd, 10,0m : 9,86% p/a.
17m less 1%, 5 years, 7000 pd, 10,5m : 9,12% p/a."
Each calculation, therefore, assumed a five years' charterparty, but Mr. Borisenko added, "Maybe try: 17m less 1%, 3 years 8,000 pd 12.6m: 10.64%", that is to say, he suggested the possibility of a three years' charterparty.
"The company does have such means available. However, to provide for normal current work and a stable financial position it is still necessary to have not less than 30-50 million US dollars in freely available assets. In connection with this it appears to be advisable to confirm the transaction with M/V "Fili". Selling the vessels and subsequently chartering her on bareboat charter allows an extra roughly 7 million US dollars net to be obtained without drawing on additional loans from financing banks. Opportunities to obtain credit at the present time are limited owing to implementation of the fleet renewal programme."
"Yu. A. Dobrynin reported to the Governing Body that owing to implementation of the programme for renewal of the fleet, the opportunities for obtaining credit at the present time were limited, but to provide for normal current work and a stable financial position it was necessary to have additional freely available funds and in connection with this it seemed advisable to approve a transaction for the sale of the Oil products tankers "Izmaylovo", "Arbat", "Nagatino" and "Ostankino" with the vessels being chartered subsequently on bareboat charter. The said transaction would allow 100% financing to be obtained without drawing on additional bank loans while keeping the vessels on the fleet's books … ".
The claimants' allegations about the SLB arrangements scheme
Sovcomflot's need for funding.
The decisions to raise funds by SLB arrangements
"I do not consider it likely that Sovcomflot's management would have undertaken the type of detailed analysis I have made in order to assess the cost of the financing alternatives open to them in 2002. However, they were aware of the different cost of debt, lease and equity capital and must have been aware of the limitations they had on raising additional secured debt funds due to the falling value of their vessels in 2001 and 2002 as well as the difficulty of raising new equity to sit side-by-side with that provided by the Russian State. In 2002 they had many new investment projects in which to invest, such as the redemption at a 50% discount of the MinFin loan, payments for their committed newbuilding contracts and new investments to be made in the Sakhalin crude oil and LNG transportation projects. They were also aware in 2002 of the major task ahead to raise new loans from international shipping banks to fund Sovcomflot's large, committed newbuilding program. In my opinion, a clever and resourceful ship owner, such as Sovcomflot, could have concluded that, on balance, the higher cost of SLB financing compared to bank debt was acceptable because of the limited amount of alternative bank debt available, the impracticality of accessing such additional bank debt at that time and the benefit of retaining the additional debt capacity that was available for future use, considering the good return on capital that could reasonably be expected to be obtained from the funds raised from the SLBs."
Could Sovcomflot have raised cheaper SLB funds elsewhere?
"Arbat-Drytank says willing to compete with Norwegian/German indication 16 mil and [bareboat charter at $]8250, funny thing is, that there seems to be a consensus from potential buyers around this level – would be inclined to say 17.5 million at 8000 for 5 yrs which gives 10pct return basis future value of 10 million (current estimated value for 86 built) – the downside risk on residual would of course be for buyers account".
Who were the "Investors"?
Account of profits
The use of the valuations
History of the sale to Primal
i) The Arbat vessels were chartered to Sovcomflot companies, which had rights to re-purchase them at the end of the charter periods; and
ii) The "Tromso Confidence" and the "Tropic Fidelity" were owned by Glefi Shipping XX Co Ltd. ("Glefi XX") and Glefi Shipping XXII Co Ltd. ("Glefi XXII"), two Sovcomflot companies. Buckingham and Marshall, which were controlled by Mr. Nikitin, agreed to sell them although they had no rights over them.
The alleged scheme about the Tromso vessels
"This letter confirms the agreement that we have reached, following discussions together, about ordering new oil tanker vessels.
1 You will keep us informed about your programme of ordering new ships.
2 When you order new ships, we may decide to order additional ships of the same type at the same time. If so, we will collaborate together to place series of orders. This will be of mutual benefit, because:
(a) you will get a better price for the ships you have already decided to order, because of the "bulk-volume discount effect";
(b) we will be able to utilise the technical skills of your designers and supervision teams, to buy suitable vessels ourselves;
3 Taking into consideration the benefits you will derive from our orders as described in (2) above, we may agree with you that you will provide security arrangements for our orders (e.g., to cover our buying company's obligations to shipyards by your guarantee) but all payments to the shipyards for ships that we order will remain our sole and full responsibility.
4 You will arrange for us to have access to and use of your supervision teams, to supervise construction of our vessels also. We will pay for this.
5 After delivery, you will arrange for us to be able to utilise Unicom as managers of our vessels. We agree to use them, and to pay reasonable fees.
6 The arrangements under (4) and (5) will need to be documented formally.
7 In relation to employment of vessels after delivery, we agree at all times to collaborate and to work together, with the objective of mutually advantageous optimisation of use of your and our fleets. Within the scope of this, we will both share with each other all vessel employment opportunities that may arise that may be suitable. Nevertheless, ultimate decision-making for employment of each vessel will be held by the group which owns it."
Ship values and expert evidence
The value of HHI hulls nos 1564 and 1565
The value of Titanium and Pendulum
i) Mr. Willis had no previous experience of rights in a shipbuilding contract being transferred by a sale of the shares, the method used to transfer the rights to hulls nos 1585 and 1586 to Standard Maritime, and he accepted that such a sale "would be unlikely to attract many open market buyers".
ii) In the contracts with Titanium and Pendulum, HHI had agreed that, before the vessels were delivered, the benefits of the contracts might be assigned to a bank or financier providing finance in connection with the vessel but otherwise they were assignable only with HHI's prior written approval, which was not to be unreasonably withheld or delayed. They had also agreed that there might be a novation to another company in the group. In either case, the buyers' obligations were still to be guaranteed by Fiona. Mr. Willis accepted that shipyards do not generally like to have their contracts assigned or to enter into novations of their contracts, and are often reluctant to agree arrangements of either kind.
iii) Mr. Willis and Mr. Day agreed that the usual method adopted to transfer the benefit of a shipbuilding contract is to enter into a Norwegian Sale Form contract upon terms mirroring the shipbuilding contract. This would not bring the buyer into a direct contractual relationship with the yard, and particularly if, as here, the benefit is transferred some time before delivery of the vessel, this has potential disadvantages for the buyer. For example, the seller has little incentive to supervise the construction carefully.
The Value of Accent and Severn
The contracts with HHI for hulls nos 1564 and 1565
"… in case [Kosta and Vicco] fail to fund either Buyer in relation to any instalment of the contract price under either contract and, in such situation, Fiona (in order to avoid to a call under the corresponding Guarantee) funds such Buyer to enable it to pay such contract price instalment to the Builder then, at the option of Fiona, the ownership of all the shares of such Buyer may be transferred to Fiona, which should only be obliged to pay to [Kosta and Vicco] as compensation an amount equal to the difference between: (a) the instalments already paid by that Buyer under the relevant contract that have been funded by [Kosta or Vicco]; and (b) the market price for sale of the relevant vessel, less instalments remaining to be paid under the Contract concerned unless also all costs and interest"
The sale of the shares in Titanium and Pendulum
The sale of the shares in Accent and Severn