Case No: CL-2014-000331 |
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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ELENA BATURINA |
Claimant |
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- and - |
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ALEXANDER CHISTYAKOV |
Defendant |
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Mr Stuart Isaacs QC, Mr Nicholas Cherryman and Ms Elizabeth Houghton (of or instructed by King & Spalding LLP) for the Defendant
Hearing dates: 1st, 2nd, 3rd, 6th, 7th, 8th, 9th, 10th, 15th and 16th March 2017
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Crown Copyright ©
MRS JUSTICE CARR :
Section A | Introduction |
Section B | The parties |
Section C | Other witnesses of fact |
Section D | Expert witnesses |
Section E | Factual overview |
Section F | The agreement in February 2008 |
Section G | Ms Baturina's overarching case of dishonesty against Mr Chistyakov |
Section H | The claim in deceit |
Section I | The claim for breach of fiduciary duty |
Section J | The claim for breach of contract |
Section K | The alleged oral conversion and supplemental agreements |
Section L | Causation and quantum |
Section M | Conclusion |
A. Introduction
B. The parties
C. Other witnesses of fact
a) For Ms Baturina:
i) Mr Alexey Makeev ("Mr Makeev"): was an engineer. He died in May 2015 and his statement has been admitted under CPR 33.2(2). Accordingly, his evidence has not been tested in cross-examination. He only became involved in the Projects in July 2010 when he became employed by the Hermitage Group (until 2012). He states that since then he has effectively managed what remains of the assets of subsidiary companies involved in the Projects alongside the management of other business and property interests in Morocco. He also states that he now acts as a "consultant to a company that [he] understand[s] to be connected to [Ms Baturina]". His evidence in summary is that the Hermitage Group was in sole management of the Projects for much of the period when he was there. He states that there were issues with the main Projects, that Paradise Golf was virtually unviable and that Ouad Lau was a fantasy. He says that the land comprising Paradise Golf was very steep, geologically unstable and riven with fissures. He makes further remarks as to the dissipation of funds from Sylmord Trade Inc ("Sylmord"). He refers to various calculations and tables setting out Mr Chistyakov's funding contributions to the Projects. Mr Chistyakov discounts his evidence on the basis of his late arrival to the scene, his relationship with Ms Baturina and the fact that his evidence strays far into matters on which he is not qualified to comment;
ii) Mr Mark McDonald ("Mr McDonald") : is a director of Grant Thornton (BVI) Ltd and was appointed joint liquidator of Sylmord on 28th August 2014. He gives details in his three witness statements of Sylmord's accounts, particularly in relation to the payments made by Sylmord for the purposes of the Projects. His evidence is not concerned with the beneficiaries, and it does no more than support other evidence as to the amounts of these payments. He gives the anticipated sale prices of Sylmord's assets in liquidation and further distributions. He was not required for cross-examination;
iii) Ms Michelle Duncan ("Ms Duncan"): is Ms Baturina's English solicitor in these proceedings, as indicated above. She was not required for cross-examination. She gives evidence of Ms Baturina's interest in Inteco. She exhibits notes of meetings that she had with a Mr Stepanenko (referred to below) on 6th and 12th December 2012. They broadly support and are consistent with the evidence that he gave both in his witness statement and in cross-examination, and he was not challenged by reference to them;
b) For Mr Chistyakov:
i) Mr Mikhail Edel-Smolnikov ("Mr Smolnikov"): acted as Mr Chistyakov's representative in relation to the Projects and was otherwise a long-time consultant to him. He was able to provide some more detail on the negotiations between the parties but it became clear from his evidence that no-one on Mr Chistyakov's side was heavily involved in the early project management or the negotiations. I found Mr Smolnikov to be a serious-minded witness on the detail. I am convinced that he did not believe at any time that Mr Chistyakov was doing anything wrong or underhand, for example, in terms of allowing payments to be made out from Sylmord to third parties, including to Ridgegrove. Mr Smolnikov was open with Ms Baturina's representatives at Inteco at all times and saw nothing to hide. In particular, even though Mr Stepanenko said that he did not know at the time that Ridgegrove was Mr Chistyakov's company, I prefer Mr Smolnikov's evidence that he informed Mr Stepanenko in terms by telephone that Ridgegrove was Mr Chistyakov's company. His testimony on this was compelling. He freely admitted that documentation was sometimes prepared on Mr Chistyakov's behalf to satisfy banking requirements and for "technical" reasons only. The documentation on occasion did not reflect genuine transactions (such as an ostensible agency contract dated 6th June 2008 between Sylmord and Ridgegrove). I accept Mr Smolnikov's evidence that Mr Chistyakov would not have been troubled with or aware of such matters, which were for Mr Smolnikov to manage on his behalf. Mr Chistyakov did not sign any of the documents. Whilst Mr Smolnikov clearly has loyalties to Mr Chistyakov, I do not assess him as being blinded by such attachment so as to give false evidence;
ii) Mr Andrey Krupnov ("Mr Krupnov"): has been involved in Moroccan property development for a number of years. He was clear (and graphic) in his evidence as to the nature of the Moroccan property market, confirming that it was a complex, drawn out and risky process. He was and remains passionate about the Projects. He was vivid in his evidence as to Inteco's involvement in and understanding of the Projects. Even if he was prone to exaggeration at times, I accept his evidence that Inteco was very present on the Projects, carrying out its own investigations and enquiries, and that Mr Krupnov engaged with the Inteco representatives fully;
iii) Mr Soloschansky: was a Vice President of Inteco with particular responsibility for the Projects at all material times. His witness statement was misleading insofar as it implied that he had seen the PPA at the time (see in particular paragraphs 34 to 36 of his statement). In fact Mr Soloschansky had not seen the PPA before this litigation. I therefore treat his evidence with a significant degree of caution, but it is oversimplistic to conclude that as a result of such shortcoming, his evidence should be discounted in its entirety, particularly where it corresponds with or is supported by other evidence. He was clear that his understanding at the time was that this was a share purchase agreement. Ms Baturina suggests that his evidence is motivated by hostility towards her because of two unrelated claims that she has brought against him in Russia. I reject this assertion, which he addressed in his evidence in chief and which he shrugged off quite calmly in cross-examination. The evidence is that Ms Baturina has to date failed outright in both claims against him in the Russian courts, including after appeal. I accept the germ of his evidence that, at all times, he was aware that there was a consortium on the other side of this transaction that included at least Mr Chistyakov and Mr Krupnov;
iv) Mr Anton Stepanenko ("Mr Stepanenko"): was junior to Mr Soloschansky and Mr Edel within Inteco and 37 years old in 2008. He was assigned to the Projects from 2008 to March 2011, and had a close involvement throughout, with close dealings with Mr Smolnikov at all times. He described clearly his functions and activities on the Projects, amongst other things commissioning substantial marketing research from Chorus Consulting in around October 2008. He was well aware of the involvement of Mr Chistyakov, Mr Krupnov and others in a consortium. He was a helpful witness.
D. Expert witnesses
a) For Ms Baturina :
i) M. Reda Guessous ("Mr Guessous"): is a French civil engineer now working as a real estate valuer in Morocco. He provided valuation reports of offices and also the land at Tetuan Azla and Paradise Golf as at 2008 and as at 2016. He was not an impressive expert witness. He revealed for the first time in cross-examination that he had never in fact himself visited any of the sites the subject of his valuations (though he stated that he knew the areas). He had relied heavily on members of his team for the purpose of his valuations. Perhaps more importantly, he was young and had no real valuation experience in Moroccan real estate in 2008. He did not start working in Morocco until mid 2008, and then in the residential property market. Beyond that he was able to confirm that Chorus Consulting was a company with a good reputation, though its report was not a valuation report and it did not specialise in real estate. He agreed that the report of Chorus Consulting Hospitality and Leisure, Chorus SARL ("Chorus") was consistent with two January 2008 valuations commissioned by a Mr Hassan Laarbi Amar ("Mr Hassan"), an associate of Mr Krupnov and involved in the Projects, insofar as it stated that there was a scarcity of plots and high demand for beachfront properties;
ii) Mr Andrew Wynn ("Mr Wynn"): is a managing director at FTI Consulting, a global business advisory firm. He carries out valuation and damages assessment work in commercial disputes. He was a professional and straightforward expert witness. He was instructed to proceed on the assumption that the initial loans, as defined below, caused Inteco's assets to be depleted by €74,817,500, and duly did so. His opinion, amongst other things, was that the diminution in the value of Inteco's shares due to such depletion "would have been the same amount as that depletion at the date of depletion". Assuming that Ms Baturina was the 100% shareholder in Inteco, she would have suffered a loss of the same amount. On payment to Inteco, the increase in value of Inteco's shares would be the same as the sums repaid, save for the effect of the interest income on the tax paid by Inteco. The amounts paid by Ms Baturina for shares in a Russian company known as Volinskaya TD ("Volinskaya") in 2011 fell within an appropriate valuation range;
iii) Mr Ilya Shershnev: is a real estate specialist. He valued the fair market value of certain propery owned by Volinskaya in Moscow as at 17th January 2011 at around RRUB13.6 billion with a range of RRUB10.8 to 16.3billion;
iv) Mr Kartashkin: is a practising Russian lawyer. His evidence has already been referred to above. It related to the legal nature of the holding of Inteco shares through Kontinental Fund under Russian law, the nature of Ms Baturina's control over Inteco whilst her shareholding was held through Kontinental Fund and whether or not Kontinental Fund had standing to bring a legal claim and, if so, in whose name and for whose benefit. He was not called for cross-examination.
b) For Mr Chistyakov :
i) Mr Valery Knyazev ("Mr Knyazev"): is a chartered certified accountant at Haberman Illett LLP and a member of the association of valuers in Russia, amongst other things. Although, as he identified, he made certain errors in recording fully accurately his opinions in, for example, his joint statement with Mr Wynn, he was a most impressive expert witness, whose oral evidence was easy to follow and understand. In his first written report, the thrust of his conclusion was that Ms Baturina had simply not provided sufficient details so as to enable him to undertake a sensible valuation exercise. For the purpose of his second report, he was instructed to provide a "critical review" of Mr Wynn's first report. He remained of the opinion that there was an insufficient basis for a meaningful or realistic assessment of Ms Baturina's alleged damages to be possible. Amongst other things, he did not agree with Mr Wynn's conclusion that there would necessarily be a 1:1 ratio between the value of the initial loans and any diminution in shareholder value, and did not agree with the assumption upon which Mr Wynn had been asked to (and did) proceed;
ii) Mr Alexander Molotnikov ("Mr Molotnikov"): is a Russian lawyer and Associate Professor in the Business Law Department of Moscow State University. His evidence responded mainly to the issues addressed by Mr Kartashkin. He was cross-examined briefly. He confirmed that if Ms Baturina bought units in Kontinental Fund from Inteco, thus buying all of Inteco's units, the proceeds would all go to Inteco and she would own all of the units constituting Kontinental Fund.
E. Factual overview
Prior dealings of the parties
The August 2007 meetings
The consortium's preparations for the deal
"I've spoken with Inteco. They confirmed their readiness to buy 65% in the Tetouan Project. They are ready to pay in November…."
The lead up to the PPA
The terms of the PPA
"PRINCIPAL PROVISIONS OF THE PROJECT IMPLEMENTATION TRANSACTION…..
These Principal Provisions have been signed ……
By Baturina Elena Nikolaevna, hereinafter referred to as the Party 1 and
Chistyakov Aleksander Nikolaevich, hereinafter referred to as the Party 2…..
WHEREAS: the Parties expressed intention to jointly carry out activities on implementation of development projects in Morocco;
WHEREAS: the Parties expressed intention to jointly carry out activities in the most efficient manner, the Parties intend to establish a joint venture and enter into a shareholders' agreement determining the procedure of co-operation between the Parties pertaining to the joint holding of HoldCo shares and Project management (Hereinafter referred to as the Shareholders' Agreement);
WHEREAS: the Parties wish to ensure a common understanding of the reached agreements and exclude any disagreement as to the interpretation of their contents and implementation.
The Parties have agreed as follows:
1. Project
Herewith the Parties agree to work together to implement Development projects in Morocco. The shares of the Parties pertaining to Project implementation shall be distributed as 65 (Sixty-five)% Party 1 and 35. (Thirty-five)% Party 2.
2. Development Projects
The activities under the Project shall be limited to the implementation of the Development Projects as defined in Annex No. 1 to these Principal Provisions (hereinafter referred to as the Projects Portfolio).
The Parties shall jointly determine which Development Projects, over and above those listed in Annex .1, shall be included into the Projects Portfolio.
The Parties understand that some of the Development projects included into the Projects Portfolio are only valuable for the image of the activities of the partnership carried out in Morocco and have no direct economic return. The key objective for such projects shall be to achieve the break-even point within the shortest time possible. The number of such "image projects" shall be strictly limited and the investment into such shall be minimal.
Upon deciding on the inclusion of a Development Project into the Projects Portfolio, the Parties shall agree on the stage, up to which the project shall be implemented – securing land title, approval of the master plan and obtaining construction permission, construction and sale of real estate, etc. As soon as a Project reaches the agreed stage, the Parties shall jointly consider the feasibility of funding the following stage and decide either to continue or sell the Project. In the case that no agreement can be reached by the Parties as to further implementation of a Project, the Party willing to continue the implementation of a project shall have the preemptive [sic] right to buy the share of the other Party in the Project at a price agreed by the Parties.
3. Funding of the Project
The Project shall be funded by the Parties proportionally: 65 (Sixty-five) % – Party 1 and 35 (Thirty five) % – Party 2 in accordance with the Projects Funding Schedule (Annex 2). The share of Party 1 shall be funded pro rata, as long as it has been confirmed that Party 2 has actually incurred its pro rata expenses.
Party 1 may fund the expenses in the amount exceeding 65% only subject to a request being made by Party 2 and according to the principles of interest-bearing and repayable provision of funds as to the share of Party 2. In the above case, the Parties shall determine the following conditions in writing: the amount, terms of repayment of the investment as to the share of Party 2, payment (interest) for provision of the money, correlated with the terms of implementation of the respective Development Project and the terms of exiting. The interest for the provision of funds shall be accrued in accordance with the average market rate for lending at the current moment.
The provision of funds by Party 1 within the framework of a standalone project is permitted in the amount of no more than 15 (Fifteen) % of the share of Party 2 in this project, for a term of no more than 1 (One) year. If these terms and conditions are violated, the ratio of the shares of the Parties in this project shall be redistributed commensurate to the funds actually invested.
The targeted investment brought by the Parties on the Project shall not exceed 500,000,000 (Five hundred million) Euros for 2008-2010. As soon as the above investment amount is reached, any new projects may be included into the Projects portfolio and any agreed Projects Portfolio may be funded only by means of:
(a) selling projects from the Portfolio,
(b) refinancing, i.e. obtaining income from the sale of real estate at the stage of implementation (construction) of projects within the Portfolio,
(c) upon agreement of the Parties, by means of increasing the investment limit (in exceptional cases).
4. HoldCo
For the purposes of implementation of the Project, the Parties shall establish a joint venture company under the laws of Morocco (hereinafter referred to as HoldCo). HoldCo shall operate as a management company, shall be the cost and profit center in the course of the Project's implementation.
The equity participation interests in the capital of HoldCo shall be distributed between the Parties as follows: 65 (Sixty-five) % Party 1, 35 (Thirty-five) % Party 2. The shareholder of each of the Parties shall own the respective proportion of the issued and registered voting shares of HoldCo, and shall enjoy all and any other rights of a HoldCo shareholder under the laws of the country of HoldCo's incorporation, subject to the provisions of the Shareholders' Agreement.
5. Shareholders
Non-resident company of Party 1 (hereinafter referred to as the Shareholder of Party 1) and non-resident company of Party 2 (hereinafter referred to as the Shareholder of Party 2), being shareholders of HoldCo.
The parties should be entitled to involve third parties in the Project within the number of shares belonging to the Parties only in case a consolidated representation of the Party in the Project is ensured.
6. Companies - holders of the Projects
[…]
7. Management in HoldCo, Companies-holders of the Projects
[…]
8. Standstill for Sale
[…]
9. Profit
[…]
10. Confidentiality
[…]
11. Legal effect, binding power
The Parties agreed that these PPA shall be legally binding upon the Parties.
12. Applicable law
The Parties agreed that these PPA and the Shareholders' Agreement shall be governed by English Law, disregarding its conflicts-of-law-rules.
IN WITNESS OF THE ABOVE, Party 1 and Party 2 have signed these PPA in 2 (two) counterparts in the Russian language.
Party 1:
(signature)
Elena Nikolaevna Baturina
Party 2:
(signature)
Aleksander Nikolaevich Chistyakov"
The February and April 2008 loan agreements
a) In accordance with clause 2.2(a), Sylmord pledged 65% of the shares in Andros Bay on 18th March 2008. The pledge agreement valued this 65% shareholding at €49.5m, and stated that Andros Bay owned 99.9% of Kudla Investissements, and 99% of each of Kudla Tetuan, Kudla Nord and Kudla Grupo;b) In accordance with clause 2.2(d), Andros Bay pledged 100% of the shares in Kudla Investissements on 29th February 2008. The pledge agreement valued these shares at €9.6m, and stated that Kudla Investissements owned the 8ha Plot;
c) In accordance with clause 2.2(g), Kudla Investissements guaranteed Sylmord's obligations on 13th March 2008. The guarantee agreement stated that Kudla Investissements owned the 8ha Plot and the 48ha Plot;
d) Clauses 2.2(b)-(c), (e)-(f) and (h)-(j) envisaged that Inteco would receive the following further security, although there is no evidence that any of the relevant security agreements were ever executed: guarantees by Andros Bay, Atlantis and Kudla Tetuan; pledges by Andros Bay of shares in Atlantis and Kudla Tetuan; and pledges by Kudla Investissements of the 8ha Plot and the 48ha Plot.
a) In accordance with clause 2.2(e), Andros Bay guaranteed Sylmord's obligations. The guarantee agreement stated that Andros Bay owned 99.9% of Kudla Investissements, and 99% of each of Kudla Tetuan, Kudla Nord and Kudla Grupo;
b) In accordance with clause 2.2(f), Mr Hassan pledged 100% of the shares in Atlantis. The pledge agreement valued these shares at €10.5m, and stated (incorrectly) that Atlantis owned the 10.5ha Plot;
c) In accordance with clause 2.2(g), Andros Bay pledged 99% of the shares in Kudla Tetuan. The pledge agreement valued this 99% shareholding at €22m, and stated (incorrectly) that Kudla Tetuan held the "long-term lease right" of a 57ha plot ;
d) In accordance with clause 2.2(j), Sylmord pledged 65% of Andros Bay. The pledge agreement valued this 65% shareholding at €49.5m, and stated that Andros Bay owned 99.9% of Kudla Investissements, and 99% of each of Kudla Tetuan, Kudla Nord and Kudla Grupo.
e) Clauses 2.2(a)-(d), (h)-(i) and (k)-(m) envisaged that Inteco would receive the following further security, although there is no evidence that any of the relevant security agreements were ever executed: guarantees from Atlantis, Kudla Tetuan, Rusland SARL ("Rusland"), and Kudla Nord; a pledge by Andros Bay of shares in Kudla Nord; a pledge by Atlantis of the 10.5ha Plot; a pledge by Kudla Tetuan of the 57ha plot; a pledge by a Mr Tariq Ahrir of shares in Rusland; and a pledge by Rusland of a 1,268ha plot.
Initiation of the Projects
Company | Location | Date | Amount |
Joyton International SA ("Joyton") | British Virgin Islands | 27/03/2008 | €5,028.69 |
27/03/2008 | €4,995,000.00 | ||
Englobe SA ("Englobe") | British Virgin Islands | 27/03/2008 | €1,000,028.69 |
22/04/2008 | €6,065,028.01 | ||
Trading House BV | Netherlands | 27/03/2008 | €375,048.69 |
Grupo Oxigeno Holding Offshore SARL ("Grupo Oxigeno") | Morocco | 28/03/2008 | €5,100,048.66 |
21/04/2008 | €570,048.02 | ||
22/04/2008 | €4,990,048.01 | ||
05/05/2008 | €65,047.61 | ||
16/05/2008 | €1,338,027.51 | ||
06/06/2008 | €9,382,047.76 | ||
09/06/2008 | €3,412,547.98 | ||
09/06/2008 | €3,120,047.97 | ||
16/06/2008 | €10,000,047.89 | ||
Vortex Finance limited ("Vortex") | British Virgin Islands | 28/03/2008 | €3,325,028.65 |
Rosetta Ltd ("Rosetta") | British Virgin Islands | 28/03/2008 | €1,553,048.66 |
Rogers Management Capital | 22/04/2008 | €1, 273,885.00 |
|
Ridgegrove | 10/06/2008 | €5,000,047.97 | |
01/07/2008 | €50,048.00 |
"I've set it as a goal to me to draw up Regulations, in accordance with which all the key actions on the projects will be approved, such as: tenders, selection of counterparties, approval of architectural plans, purchase and sale of land plots and their respective prices, etc.
This is necessary to avoid situations when Andrey relates to us post factum on the events that took place…."
Problems with the project management and initial funding disputes
Assignments of the initial loans and the Supplemental Agreement
Legal proceedings
F. The agreement in February 2008
The parties' respective cases in overview
a) Contends (by late amendment in December 2016) that Ms Baturina entered into the PPA on behalf of and as agent for Inteco and, having given no consideration, she has no standing to sue on it. Alternatively,
b) Denies that there was any oral agreement prior to signing the PPA that Ms Baturina would discharge part of her funding obligation by causing loans to be advanced;
c) Contends that the PPA required Ms Baturina to pay a purchase price of €83,915,000 (in accordance with the amounts set out in Appendix 1) to buy a 65% equity stake in the Projects - Mr Chistyakov, Mr Krupnov and others having already invested in those Projects. Ms Baturina agreed to purchase from Sylmord a 65% equity stake in Andros Bay by reference to the agreed prices set out in Appendix 1. The terms of the PPA did not impose any restrictions on Sylmord with regard to the application or use of the purchase price funds. In addition, Ms Baturina agreed to provide approximately 65% of day-to-day financing as set out in Appendix 2 of the PPA. Mr Chistyakov's obligation under clause 3 was limited to an obligation to contribute to ongoing financing, as opposed to initial acquisition costs;
d) Denies the existence of the Purposes term.
The law
a) its natural and ordinary meaning;b) any other relevant provisions of the contract;
c) the overall purpose of the clause and the contract;
d) the facts and circumstances known or assumed by the parties at the time that the document was executed;
e) commercial common sense; but
f) disregarding any evidence of the parties' subjective intentions. The test is an objective one, namely to identify the intention of the parties by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.
"[15] When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions. In this connection, see Prenn [1971] I WLR 1381, 1384-1386; Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] I WLR 989, 995-997, per Lord Wilberforce; Bank of Credit and Commerce International SA v Ali [2002] I AC 251, para 8, per Lord Bingham of Cornhill; and the survey of more recent authorities in Rainy Sky [2011] I WLR 2900, paras 21-30, per Lord Clarke of Stone-cum-Ebony JSC."
"[17] First, the reliance placed in some cases on commercial common sense and surrounding circumstances (e.g. in Chartbrook [2009] AC 1101, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.
[18] Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.
[19] The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. Judicial observations such as those of Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974] AC 235, 251 and Lord Diplock in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 , 201, quoted by Lord Carnwath JSC at para 110, have to be read and applied bearing that important point in mind.
[20] Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party…
[21] The fifth point concerns the facts known to the parties. When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time the contract was made, and which were known or reasonably available to both parties. Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties...."
"…The subsequent behaviour or statements of the parties can, however, be relevant, for a number of other reasons. First, they may be invoked to support the contention that the written agreement was a sham….Secondly, they may be invoked in support of a claim for rectification of the written agreement. Thirdly, they may be relied on to support a claim that the written agreement was subsequently varied, or rescinded and replaced by a subsequent contract (agreed by words or conduct). Fourthly, they may be relied on to establish that the written agreement represented only part of the totality of the parties' contractual relationship."
The parties to the PPA
a) The deep involvement of Inteco representatives at every stage from the very outset and continuing through with due diligence on the Projects and into the negotiations leading up to the PPA;b) On her own case, she delegated heavily to her employees at Inteco. There was no division between her role as President of Inteco and her personal affairs. She was at all relevant times acting as the President of Inteco.
He also relies on the fact that it was Inteco that made the loans, that Ms Baturina did not contribute any of her own monies or assets to the Projects and to the fact that the Projects were managed by Inteco employees with minimal involvement from Ms Baturina.
"…iv) Where the issue is whether a party signed a document as principal or as agent for someone else, there is no automatic relaxation of the parol evidence rule. The person who signed is the contracting party unless a) the document makes clear that he signed as agent for a sufficiently identified principle or as the officer of a sufficiently identified company or b) extrinsic evidence establishes that both parties knew he was signing as agent or company officer."
The proper construction of clauses 3 and 4
The alleged Purposes term
"[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."
"I would add six comments on the summary given by Lord Simon in BP Refinery as extended by Sir Thomas Bingham in Philips and exemplified in The APJ Priti. First, in Equitable Life Assurance Society v Hyman [2002] 1 AC 408 , 459, Lord Steyn rightly observed that the implication of a term was "not critically dependent on proof of an actual intention of the parties" when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting. Secondly, a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term. However, and thirdly, it is questionable whether Lord Simon's first requirement, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable. Fourthly, as Lord Hoffmann I think suggested in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 , para 27, although Lord Simon's requirements are otherwise cumulative, I would accept that business necessity and obviousness, his second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied. Fifthly, if one approaches the issue by reference to the officious bystander, it is "vital to formulate the question to be posed by [him] with the utmost care", to quote from Lewison, The Interpretation of Contracts 5th ed (2011), para 6.09. Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of "absolute necessity", not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon's second requirement is, as suggested by Lord Sumption in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence."
G. Mr Chistyakov's alleged dishonesty : Ms Baturina's overarching case
"Although there is a single civil standard of proof on the balance of probabilities, it is flexible in its application. In particular, the more serious the allegation or the more serious the consequences if the allegation is proved, the stronger must be the evidence before a court will find the allegation proved on the balance of probabilities. Thus the flexibility of the standard lies not in any adjustment to the degree of probability required for an allegation to be proved (such that a more serious allegation has to be proved to a higher degree of probability) but in the strength or quality of the evidence that will in practice be required for an allegation to be proved on the balance of probabilities."
) Mr Chistyakov did not target Ms Baturina as a victim of some fraudulent design. Thus, Mr Chistyakov did not seek Ms Baturina out in the first instance to join the Projects. Her interest developed only as a result of Mr Soloschansky's response to Mr Chistyakov's mention of his involvement in Moroccan property. Mr Soloschansky knew that at the time Ms Baturina was looking to diversify her property interests outside Russia, as Ms Baturina accepted was the case. Indeed, Mr Chistyakov was a relatively reluctant participant in the venture with Ms Baturina, becoming party to the PPA at her insistence. Ms Baturina was always in fact a most unlikely target for a fraud, given her intelligence, sophistication and independent resources;b) Mr Chistyakov was not a Moroccan property development specialist, as Ms Baturina and those representing her knew at all material times. Mr Chistyakov did not see Mr Benmakhlouf's valuations for Paradise Golf at the time. He did not believe that the price that Ms Baturina/Inteco was willing to pay under the February 2008 agreement was a matter for him. It was a matter for them;
c) Mr Chistyakov was at all times aware of the involvement of Inteco personnel on behalf of Ms Baturina both before and after the PPA (and at all times when he is alleged to have made dishonest representations) and at all times aware of the depth and availability of her capabilities. Whether or not Ms Baturina's representatives used their position to full advantage, the fact is that, to Mr Chistyakov's knowledge, they had access to the Projects (and details of their funding) at all times. In any event, it appears that, to Mr Chistyakov's knowledge, they did use their position to full advantage. Ms Baturina set up her Moroccan project department. Her representatives attended all key meetings; they visited the sites; they prepared an analytical brief for Mr Smolnikov on 26th February 2008; they called and held investor meetings for the Projects which took place at Inteco's offices; they conducted their own due diligence; they set up decision-making processes to ensure that Inteco had control over the Projects; they were involved in raising finance for the Projects and bank negotiations;
d) There is no suggestion that Mr Edel, Mr Soloschansky or Mr Stepanenko or any of Ms Baturina's other representatives were doing anything other than acting in her best interests at all material times and that Mr Chistyakov ever believed otherwise. This is a very unpromising background for an alleged fraud on the part of Mr Chistyakov, which would involve serious wrongdoing on his part under the very noses of those acting for Ms Baturina - and for her alone;
e) I do not accept that Mr Chistyakov in any way sought to conceal his ownership of Ridgegrove and, as set out above, I prefer Mr Smolnikov's clear recollection that he had given Mr Stepanenko the relevant details in discussions during 2008. In writing, Mr Smolnikov responded fully to Mr Stepanenko's requests about the project payments to Ridgegrove and other companies, so as to allow him to account for them to his lawyers when seeking bank financing, including by making a number of corrections where Mr Stepanenko had misunderstood. That is inconsistent with a scenario in which Mr Smolnikov was trying to mislead. One such entry by Mr Smolnikov clearly linked Mr Krupnov with Grupo Oxigeno. Even if I were wrong in my finding that Mr Stepanenko was not in any event told that Mr Chistyakov was behind Ridgegrove, this would suggest that information as to the ownership of Ridgegrove would have been readily forthcoming had Mr Stepanenko raised any questions about Ridgegrove;
f) I am in no doubt that Inteco, on behalf of Ms Baturina, was aware in broad terms that on the other side of the transaction to her behind Mr Chistyakov sat a consortium involving Mr Krupnov in particular, who was a Moroccan property specialist, and others, including Mr Hassan. Ms Baturina's position was that she was unaware of this. This is very difficult to accept, given that her right-hand men were so obviously aware of it, but I need make no positive finding in this regard for present purposes. On any view, Mr Chistyakov had no reason to think that she would not be told. The involvement of others was blindingly obvious from the documentation and every witness from Inteco, apart from Ms Baturina, accepts that this was fully understood;
g) I struggle to see how Mr Chistyakov's conduct, particularly after conclusion of the PPA, can be equated with dishonesty. His exposure to the Projects was consistent; he did not draw back from the Projects after Ridgegrove had received initial payments and, effectively, on Ms Baturina's case the main fraud (in the shape of wrongful payments out to Ridgegrove (and Grupo Oxigeno)) was complete. He continued to participate. When the projects ran into trouble in 2010 he appears to have caused Ridgegrove (at least in principle) to make loan facilities available. The introduction of Mr Makeev to the Projects through the Hermitage Group in 2010 is also not suggestive of a guilty conscience on the part of Mr Chistyakov;
h) It was clear from Mr Chistyakov's evidence, consistent with that of Mr Krupnov, that he was not at the heart of the consortium. His only initial investment related to Tetuan Azla 1. He was working throughout full-time in Moscow at FGC.
H. The claim in deceit
The case advanced
a) An express oral representation that "Mr Chistyakov would contribute 35% of the financing for the Projects" ("the Funding Representation");b) An implied representation that "the funds to be provided by Ms Baturina would only be applied for the purposes of the Projects and were not to be applied nor diverted to any unauthorised purpose or third party" ("the Application of Funds Representation"); and
c) An implied representation that "as at the date of the Principal Agreement, to the best of Mr Chistyakov's knowledge the land prices which were reflected in correspondence prior to and ultimately stated in Appendix One were not higher than the fair market value of the plots in question" ("the Appendix One Representation").
Each is said to have been made by Mr Chistyakov knowing it to be false, alternatively recklessly.
a) That Mr Chistyakov made an express oral representation that "the Paradise Golf Project was ready to commence as soon as finance was forthcoming and the Tetuan Azla Project would shortly be ready to commence" ("the Readiness Representation"). This was an allegation amended materially during the course of the litigation and then withdrawn very shortly before trial;b) That Mr Chistyakov made an express oral representation that "All necessary permits for the first phase of the Paradise Golf Project had been obtained, and those for the Tetuan Azla Project would be granted in the near future" ("the Permits Representation"). This was also amended materially during the course of the litigation and then withdrawn very shortly before trial;
c) An allegation that Mr Chistyakov made an express oral representation that he had already made a substantial investment in the Projects ("the Investment Representation");
d) An allegation that Mr Chistyakov made an express oral representation that Ms Baturina would have a 65% shareholding in the Moroccan company that would be the holding company for the Projects ("the Shareholding Representation").
Again, each of these representations (with the exception of the Shareholding Representation) was alleged to have been made by Mr Chistyakov knowing it to be untrue, alternatively recklessly.
The relevant law
"81. RZB must show that RBS made to it a statement which amounts to a representation, that is to say a statement of fact upon which RBS was entitled to rely. Whether any and if so what representation was made has to be "judged objectively according to the impact that whatever is said may be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee". MCI WorldCom International Inc v Primus Telecommunications Inc [2004] EWCA Civ 957, per Mance LJ, [30]. The reference to the characteristics of the representee is important. The Court may regard a sophisticated commercial party who is told that no representations are being made to him quite differently than it would a consumer.
82. In the case of an express statement, "the court has to consider what a reasonable person would have understood from the words used in the context in which they were used": IFE Fund SA v Goldman Sachs International [2007] 1 Lloyd's Rep 264 , per Toulson J at [50] (upheld by the Court of Appeal at [2007] 2 Lloyd's Rep 449). The answer to that question may depend on the nature and content of the statement, the context in which it was made, the characteristics of the maker and of the person to whom it was made, and the relationship between them […]
87. Lastly C must show that he in fact understood the statement in the sense (so far as material) which the court ascribes to it: Arkwright v Newbold (1881) 17 Ch D 301; Smith v Chadwick (1884) 9 App.Cas 187 ; and that, having that understanding, he relied on it."
"85. The essential question is whether in all the circumstances it has been impliedly represented by the defendant that there exists some state of facts different from the truth. In evaluation the effect of what was said a helpful test is whether a reasonable representee would naturally assume that the true state of facts did not exist and that, had it existed, he would in all the circumstances necessarily have been informed of it…."
"But it appears to me that when once (sic) it is established that there has been any fraudulent misrepresentation or wilful concealment by which a person has been induced to enter into a contract, it is no answer to his claim to be relieved from it to tell him that he might have known the truth by proper enquiry…."
The Readiness and Permits Representations
The Funding Representation
"Q. …..the funding representation was made orally…..
A. The funding representation was actually the signed one. Our agreement provides that he was going to provide funding for his equity interest. Now, whether he confirmed that orally or not, yes he did."
The Application of Funds Representation
"Ms Baturina had informed Mr Chistyakov that she had no experience of doing business in Morocco and was only prepared to consider an investment in the Projects on the basis of a joint investment with Mr Chistyakov.
Both Ms Baturina and Mr Chistyakov were aware that the funds to be advanced by Ms Baturina would effectively be advanced into the control of Mr Chistyakov who was to arrange for the proposed Moroccan holding company to be acquired and/or established (and in the event the funds were advanced to Mr Chistyakov's own company, Sylmord).
The entire basis for the discussions between Ms Baturina and Mr Chistyakov (and the subsequent agreement into which they entered) was that Ms Baturina was to invest (together with Mr Chistyakov) in the Projects. It was obvious to both Ms Baturina and Mr Chistyakov, and was necessary to give business efficacy to the proposals and representations being made by Mr Chistyakov, that the funds to be advanced would only be applied for the purposes of the Projects and were not to be applied nor diverted to any unauthorised purpose or third party."
"Q. I want to know from you very clearly what you say was said or done by Mr Chistyakov which led you to believe that he was making the application of funds representation.
A. Chistyakov and I entered into a loan agreement which clearly set out the purposes that the funds had to be applied for. No representations were needed. According to that agreement the money had to be used to purchase the land from those who used to own the land, and there's no way Chistyakov could have been one of those owners.
Q. Are you talking now about the February 2008 and the April 2008 loan agreements?
A. Da.
Q. Those were not agreements to which you were a party.
A. Correct. I was not.
Q. So I come back to my question: what do you say was said or done by Mr Chistyakov which led you to believe that he was making to you the application of funds representation?
A. We reached the loan agreement and that agreement was signed by my deputy on behalf of the company that I was representing.
Q. The loan agreement in February 2008 was concluded the day after the principal agreement, wasn't it?
A. Yes.
Q. So nothing in the loan agreement could have induced you to enter into the principal agreement?
A. I'm not sure I understood your question. The loan agreement was signed after the execution of the principal agreement.
Q. Yes, so it couldn't have induced you to enter into the principal agreement because the principal agreement had already been concluded.
A. Correct.
Q. And that applies even more in the case of the April 2008 loan agreement?
A. Correct.
Q. What your case on this comes down to is no more than that it was obvious or necessary to give business efficacy that the defendant was making such a representation to you?
A. I'm not sure I understand the question to be honest.
Q. Never mind. Apart from what you've told the court about the loan agreements, you're not able to point to any specific words or conduct which led you to believe that Mr Chistyakov was making the application of funds representation, is that right?
A. Well, he simply had to transfer the money to the appropriate recipients, which is something he never did."
The Appendix One Representation
"Q. And again I want to know, please, what was said or done by Mr Chistyakov which led you to believe that he was making such a representation?
A. On 30 January he told me a valuation had been received in Morocco which had been commissioned by Krupnov and the market price was about 120 per square metre, something that they actually had been thinking was going to be the case.
Q. You make no reference to that in the voluntary information that you've provided.
A. I'm so sorry."
The Subsequent Representation
"He said that as everyone knows, the projects were delayed a great deal. But they were then moving forward."
I. The claim for breach of fiduciary duty
a) It was a joint venture and/or joint enterprise; and/orb) It was a venture in respect of which, as Mr Chistyakov knew, Ms Baturina was significantly dependent on Mr Chistyakov who had introduced the Projects to her on the basis of his knowledge of Moroccan property ventures and his contacts in relation thereto; and/or
c) It was an agreement to which Ms Baturina was to advance an initial sum of up to €94,545,000 for the purpose of the Projects, which monies were to be used at the direction of Mr Chistyakov who thereby had total control over their distribution; and/or
d) It was understood by the parties that it was Mr Chistyakov's responsibility to obtain all necessary construction permits and to complete the preparatory work on the Projects. This allegation was never actively pursued by Ms Baturina. To the extent necessary, I do not find that there was any such understanding.
"The phrase 'joint venture' is not a term of art either in a business or in a legal context, and each relationship which is described as a joint venture has to be examined on its own facts and terms to see whether it does carry any obligations of a fiduciary nature"
"In relationships falling short of partnership, but having in them elements of joint enterprise or joint venture, there is no hard and fast rule as to the existence or otherwise either of a duty of good faith, a fiduciary duty or a duty of disclosure. Each case will turn on its own facts, but if the relationship is regulated by a contract, then the terms of that contract will be of primary importance, and wider duties will not lightly be implied, in particular in commercial contracts negotiated at arms' length between parties with comparable bargaining power, and all the more so where the contract in question sets out in detail the extent, for example, of a party's disclosure obligations."
"In the absence of agency or partnership, it would require particular and special features for such fiduciary duties to arise between commercial co-venturers. It is clear, however, that in special circumstances they can arise: Snell's Equity (32nd ed) at 7–006; Murad v Al-Saraj [2004] EWHC 1235 (Ch) at [325]-[341], [2005] EWCA Civ 959."
a) Ms Baturina was at all material times a powerful and rich businessperson with ready access to all of the independent and specialist advice that she might want. Moreover, she was experienced in the construction industry. She admitted that she had one of the largest construction business empires in Russia. Whilst he had various business interests, Mr Chistyakov by contrast was much less established and experienced than her. Ms Baturina describes him as a "junior business partner who was trying to build his business profile". It cannot be said that Ms Baturina was vulnerable viz-a-viz Mr Chistyakov in any sense;b) Nor were they close, either professionally or socially. They had very limited involvement prior to the summer of 2007. Mr Chistyakov's unchallenged evidence was that they only met some 10 times in all. There are no letters or emails passing direct between them at any material time up to 28th February 2008. Ms Baturina agreed that they never communicated or dealt with each other "in a very close way";
c) Nor was Ms Baturina "significantly" dependent, let alone wholly dependent, on Mr Chistyakov's advice and recommendation. On the contrary, Ms Baturina was the more experienced party with greater resources. Mr Chistyakov's evidence was that it was he, in fact, who relied on Inteco. He was not experienced in construction development and had only limited previous experience in Moroccan property. I find that Mr Chistyakov did not know that Ms Baturina was "significantly dependent" on him on the basis of his knowledge of Moroccan property ventures and his contacts. She was very clear that she made her own assessment as to whether or not to invest in the Projects. No-one was "twisting [her] arm". She knew that it was up to her to satisfy herself as to whether she or Inteco was going to invest;
d) The circumstances in and terms under which Ms Baturina agreed to pay over very large sums of money were agreed by Ms Baturina. Mr Chistyakov did not have complete control over the distribution of those monies, as evidenced by Inteco's monitoring of the payments out. In addition, her investment through Inteco was secured by a raft of share pledges and guarantees and, importantly, the loans were of short duration (namely three months). Each of the initial loans was extended but those extensions were within Inteco's gift. It was open to Inteco to call them in during the course of 2008;
e) Mr Chistyakov did not have sole responsibility for the joint venture. There was no unequal involvement in the day-to-day running of the venture or in the control of the venture. As set out above, Ms Baturina set up her own department in Inteco to manage the venture on her behalf. She and her representatives had direct access to Mr Krupnov as they wished. There is ready evidence of Mr Stepanenko and others being pro-active in the management of the Projects.
J. The claim for breach of contract
"Our payments to date comprise ….about EUR 363,000. This amount corresponds to 3.9% of the total investment in the project. We have to pay another EUR 462,000 to reach 8.75%. The situation with our partners is the same – to date, only Hassan and Inteco have performed their financing obligations. In view of withdrawal of funds by Hassan, Inteco has greatly exceeded their obligations. This will become known to them in due course…."
Company | Location | Date | Amount | ||
Joyton | British Virgin Islands | 27/03/2008 | €5,028.69 | ||
27/03/2008 | €4,995,000.00 | ||||
Englobe | British Virgin Islands | 27/03/2008 | €1,000,028.69 | ||
22/04/2008 | €6,065,028.01 | ||||
Trading House BV | Netherlands | 27/03/2008 | €375,048.69 | ||
Grupo Oxigeno | Morocco | 28/03/2008 | €5,100,048.66 | ||
21/04/2008 | €570,048.02 | ||||
22/04/2008 | €4,990,048.01 | ||||
05/05/2008 | €65,047.61 | ||||
16/05/2008 | €1,338,027.51 | ||||
06/06/2008 | €9,382,047.76 | ||||
09/06/2008 | €3,412,547.98 | ||||
09/06/2008 | €3,120,047.97 | ||||
16/06/2008 | €10,000,047.89 | ||||
Vortex | British Virgin Islands | 28/03/2008 | €325,028.65 | ||
Rosetta | British Virgin Islands | 28/03/2008 | €1,553,048.66 | ||
Rogers Management Capital | 22/04/2008 | €1,273,885.00 |
|||
Ridgegrove | 10/06/2008 | €5,000,047.97 | |||
01/07/2008 | €50,048.00 | ||||
One World Inc | 31/03/2009 | €5,052.66 | |||
31/03/2009 | €1,795.66 | ||||
31/12/2009 | €3,671.23 |
K. The alleged oral conversion and supplemental agreements
a) That there was no oral conversion agreement;
b) That no contract was ever concluded on the terms of the supplemental agreement. Whilst she signed and sent the supplemental agreement to Mr Chistyakov's lawyers on 16th March 2011, that offer was never accepted. She withdrew the offer by letter dated 18th October 2012 before Mr Chistyakov had signed and returned it;
c) Alternatively, the supplemental agreement would not preclude or compromise Ms Baturina's claims. It merely set out how the transactions necessary to transfer the shares and terminate the obligations to repay were to be effected. The transactions were never executed. Any termination of Sylmord's obligation to repay the Initial Loans would not in any event preclude or compromise Mr Chistyakov's obligations arising from the rescission of the PPA or his liability for deceit, breach of fiduciary duty and/or breach of contract;
d) In the further alternative, Ms Baturina is entitled to rescind the supplemental agreement and to equitable compensation and/or damages in respect of such of her claims as may have been precluded or compromised. But for Mr Chistyakov's deceit and/or breaches of fiduciary duty she would not have entered into the supplemental agreement. Additionally, she entered into the supplemental agreement in reliance on the Subsequent Representation.
a) It is common ground that Ms Baturina signed the Supplemental Agreement (which had been prepared back in October 2010 and dated 29th October 2010) in March 2011 in Vienna. The signed copy was sent to Mr Chistyakov's in-house lawyer by email on 16th March 2011. It was also sent by Ms Babirenko, Mr Chistyakov's in house lawyer, to a Mr Tikhomirnov of the Hermitage Group by email attachment on 1st April 2011;b) Mr Chistyakov then counter-signed the Supplemental Agreement by 19th August 2011, most probably between 11th August (when there was a meeting between the parties' representatives, including their in-house lawyers) and 19th August 2011. The document signed by both parties is within the documents disclosed;
c) That document was sent to Inteco and was with Ms Baturina's in-house lawyer, Ms Strelina, by 19th August 2011. On that day Ms Strelina emailed Ms Babirenko, Mr Chistyakov's in-house lawyer, as follows under the heading "Re: Purchase and sale of shares of Sylmord":
"…With regard to participation of Chistyakov in the transactions. There is no need for the purchase and sale of shares. As for the shareholders' agreement, at the present moment it is essential because Memorandum and Supplementary agreements concluded between [Ms Baturina] and [Mr Chistyakov]…"
"2. The Parties jointly understand that the Convertible were given out with the aim of subsequent conversion into a participation interest in Holdco ([Andros Bay]) under the [PPA] in particular :
Party 1[Ms Baturina] issued the Convertible as payment for the participation interest corresponding to 65% of the Charter Capital of Holdco.
Thus, the Borrower's obligation to the Lender to repay the Total debt amount on the Convertible shall be terminated in full from the Time of transfer of the title to the interest corresponding to 65% of the Charter Capital of Holdco to the Party 1, while the transfer by Party 1 to Party 2 [Mr Chistyakov] of the participatory interest in HoldCo shall be effected by means of the signing between the Lender and the Borrower of a Release Agreement or some other agreement providing for conversion of the Total debt amount into the 65% participation interest of Party 1 in HoldCo.
Party 2 shall not make any payments whatsoever, nor transfer any other property (property rights) to Party 1 due to the termination of the Borrower's obligations under the above Convertible, and Interest Pledge Agreements and Surety Agreements, indicated in Annex No. 1.
The transfer to Party 1 of the 65% interest in the Charter Capital of Holdco, provided for by clause 2, can also be transferred to the affiliated person of Party 1 determined by the same Party 1.
3. The Parties guarantee that, starting from the Time of transfer of title to the interest equal to the 65% participation interest in HoldCo to Party 1, and termination of the obligations under the Convertible under the procedure provided for by clause 2 above, the Parties shall have no financial claims to each pertaining to the fulfillment of the obligations of the Parties provided for by the PPA as to participation of Party 1 in Holdco. After the transfer of the title to the interest and termination of the obligations on the Convertible according to the procedure provided for by clause 2, party 1 shall not lay any other property claims to Party 2 and (or) the Borrower pertaining to the Borrower's fulfillment of its obligations under the Convertible, as well as Surety Agreements and Interest Pledge Agreements concluded to secure repayment of the Total Debt amount by the Borrower. "
L. Causation and quantum
Background
a) Any claim to damages by reference to the appreciation in value of the Initial Loans which would have occurred if deployed in Inteco's business, invested in alternative profitable ventures which were available to Inteco at the time or deposited to earn interest;b) Any claim by reference to Inteco's value at the date of sale being substantially greater had the Initial Loans not been made, because such sums would have been invested in alternative, profitable ventures and the purchase price which Ms Baturina received for the sale of Inteco would have been greater;
c) Any claim to damages by reference to loss of profits as a result of her investment in the Projects.
The case for Ms Baturina
a) No value should be put on Sylmord's covenant to repay;b) The Court should assess the position in the light of the facts now known, which make it clear that Sylmord's covenant was worthless;
c) In reality, the only value which Inteco could be said to have received was security over the assets ultimately acquired by Andros Bay and its subsidiaries. These were insufficient to offset Inteco's advances.
a) The fact that Inteco did not write down the value of the initial loans at any date prior to the assignments is not a good ground for holding that there was no loss. It is well-established that it is possible for a claimant to suffer loss of a type which constitutes actual damage for the purpose of constituting a tort before he/she is aware of it, as is apparent from for example s. 14A of the Limitation Act 1980;
b) The fact that there was no breach of the initial loans by Inteco because Sylmord did not default on its obligations to Inteco is not to the point. The absence of a cause of action does not inform the question of whether or not a loss has in fact occurred.
a) As a conversion of her existing indirect loss, in the process extinguishing any claim that Inteco might have had or in future have. There is no basis for Mr Chistyakov's submission that once a loss has been identified as a reflective loss, it cannot be "rescued". This is something for Mr Chistyakov to make out on the facts – see Shaker v Al-Bedrawi [2003] Ch 350 (at 83) – and he has not done so. The rule against reflective loss does not extinguish a shareholders' cause of action, but operates as a procedural bar only for as long as the policy considerations which underpin it continue to apply – see Giles v Rhind [2003] Ch 618; Webster v Sandersons Solicitors [2009] PNLR 37 (at 36 onwards) and Kazakhstan Kagazy plc and others v Zhunus and other [2017] 1 WLR 467 (at [37]). There are no policy considerations justifying Ms Baturina now being barred from recovering any of her alleged losses; orb) As a new loss arising at a time when Inteco had no claim.
"(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss…...
(2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding…..
(3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other….."
"…On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation….the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 223) the loss claimed is "merely a reflection of the loss suffered by the company". In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for…."
a) The principle behind category 1 respects company autonomy and affirms the rule in Foss v Harbottle [1843] 2 Hare 461. Lord Millett (at 66D-G) also referred to policy considerations motivated by concern to prevent conflicts of interest arising at board level;b) The rationale behind categories 2 and 3 reflects the fact that, where a company has and will have no cause of action to recover a loss, a claim by a shareholder does not engage the considerations underpinning category 1. There is no difficulty in recovery, subject to the normal principles of causation and remoteness.
Mr Chistyakov's position
a) Neither the amounts paid for the assignment of the initial loans nor the Volinskaya transaction are "wasted expenditure" by Ms Baturina in performance of the PPA. In no sensible way can they be viewed as sums paid under the PPA; they were sums paid under entirely different and separate contracts;b) Ms Baturina's case entirely confuses reliance loss (that is to say, expenditure incurred,) and expectation damages (which are forward looking);
c) It is not correct that either transactions were contemplated at the time of the PPA. The conversion agreement was, but that is separate.
a) As a matter of fact and law, Inteco's assets were not depleted by €74,817,500 upon the initial loans being made. Mr Wynn agreed that the making of a loan does not amount to a depletion of a person's assets. As the current assets may decrease, the amount of receivables due to it increase, leading to a "neutral" overall effect. In Mr Knyazev's view, Inteco was replacing one type of assets with another type. The fact that Sylmord had no other assets did not alter his view that there was no depletion. This is reflected in the fact that Inteco did not write off the loans, but rather assigned them for full value in 2010;b) Authorities such as Nykredit Mortgage Bank plc v Edward Erdmann Group Ltd (No 2) [1997] 1 WLR 1627 (HL) do not assist. They address cases of negligent overvaluation by surveyors and the question of when loss arises to complete the cause of action in tort. In contractual cases between lender and borrower, no cause of action accrues until there has been contractual default;
c) Because the assignments here took place before Ms Baturina sold her interest in Inteco, Inteco (and so Ms Baturina's shareholding) were made whole before there could be any crystallising effect on the value of her shares.
The primary "reliance loss" claim for direct loss : analysis
"It seems to me that a plaintiff in such a case as this has an election: he can either claim for loss of profits; or for his wasted expenditure. But he must elect between them. He cannot claim both. If he has not suffered any loss of profits - or if he cannot prove what his profits would have been - he can claim in the alternative the expenditure which has been thrown away, that is, wasted, by reason of the breach."
(and see generally Chitty on Contracts at 26-022 to 26-024).
"§1.3A(iii) ……Traditionally the expectation measure has been contrasted with the 'reliance' or tort measure. This is often said to be a separate measure of loss based on the claimant's expenditure rather than the expectation principle. In truth such thinking is unhelpful. The basic principle is as stated by Parke B in Robinson v Harman. Where but for the breach the claimant would not have entered into a transaction, the claimant can recover all the losses suffered in that transaction (as well as lost profits that would have been made in the alternative transaction). But this is not because any different measure applies to the expectation measure, putting the claimant in the position it would have been in but for the breach…
In contract law the claimant cannot recover damages measured by the expenditure incurred in entering into the contract that was breached by the defendant, ie damages to put the claimant in the position as if it had never contracted with the defendant… However, as discussed below, where the position that would have arisen but for the breach is uncertain, the courts may rely on a presumption that the claimant would have broken even, and therefore would have earned the revenue (the expectation measure) equal to the expenditure in the transaction. Such an award is not an award of a reliance measure; rather a conventional expectation award but under which the measurement is assisted by a rebuttable presumption."
And at § 18.3C:
"…..The reason why expenditure is a useful proxy (for the minimum revenue that would have been earned) is that it is easy to prove. Whereas it may be difficult to prove the total amount of revenue that would have been received – i.e. that a profit would have been recovered and how much it would have been – the claimant will be able to prove the historical fact of how much expenditure it has occurred."
"131. As Mr Haque points out, McGregor deals with the principle of reliance loss under the rubric: "An alternative measure: recovery for expenses rendered futile by the breach" . The well-known case of Anglia Television v Reed [1972] 1 QB 60 was an example of this: Anglia TV were seeking to recover expenses that they had incurred in putting together the production in question such as director's fees, designer's fees and the like. They were not seeking to recover money paid to Mr Reed for his promised performance.
132. But in a case where the innocent party has paid money under the contract and seeks to recover it, there will either have been a total failure of consideration or not. If there has, there is no difficulty and the money can be recovered; if however there has not, then ex hypothesi the defaulting party has nevertheless provided some part of the contractual performance for which the money was paid, some part of the benefit bargained for under the contract (see Paragraph 123 above). To allow the innocent party to recover the entirety of the money he has paid as wasted expenditure seems to me wrong in principle, as he has received some of the performance that he paid it for. In the present case it would mean that Mr Khan could recover the whole £110,000 from Mr Malik even though Mr Malik had in performance of the contract contributed his own money to the purchase of Elgin Road and Chatsworth Road in a way that must have benefited Mrs Khan by reducing the AIB debt secured on her property, and the Maliks had also given up any claim to recover the £100,000 debt from her. I do not think this would be right in principle."
"In the months after I left Russia, my business in Russia came under attack. I therefore instructed my Vice Presidents to start to prepare for a process of separating those business interests which I was able to securely retain from Inteco. This included all of my non-Russian business interests. As a part of this process, Inteco's rights under the Initial Loans were assigned to me for full value by way of agreements dated 29 October 2010….At this stage I had not yet sold Inteco, although it was already clear I would have to do so in due course…"
"Q. So by the time we get to August 2010, looking at paragraph 118, your husband's position was becoming somewhat precarious. Is that fair?
A. Yes.
Q. And indeed you say that the decree requiring your husband to resign was delivered by armoured personnel carriers at a dacha at which you were staying, and then understandably as you say in 119, your family's position in Russia became difficult, and in October you moved to London with your daughters in the light of your profound concerns about the security and safety of your family?
A. Yes.
Q. And in the subsequent months, as you say, your business in Russia came under attack.
A. Yes.
Q. And it was those considerations and the risk of your assets being taken from you in Russia that led you to sell your 50 per cent share in Volinskaya to Inteco.
A. No, not quite. These thoughts, these considerations, led me to take those assets which are not in Russia to separate them from Inteco and one of those assets was the loan, the Moroccan loan, and in order to be able to take it out, I paid Inteco by the shares in Volinskaya, i.e. that land.
Q. Your assets in Russia were at risk of being potentially expropriated, weren't they?
A. Moreover, that is exactly what happened as it turns out now. They were expropriated.
Q. And that's what in due course led to the setoff agreement in June 2011?
A. The agreement, the setoff agreement, between whom and whom?
Q. The setoff agreement of 30 June 2011 that we'll come and look at later between you and Inteco.
A. Am I right in understanding you that at the moment we're talking about my undertaking the debts of Andros Bay before Inteco and transfer it to Volinskaya? Is that what we're talking about now, just to clarify?
Q. Yes. This was all connected with the risk with your assets being under attack in Russia and, as you've told us, they were in fact expropriated subsequently.
A. Yes, part of the assets indeed were expropriated by the state through the court procedures later on, yes, indeed."
a) That Mr Chistyakov had provided project financing proportionate to his 35% share in our joint venture, with the exception of that due for July and August 2010; andb) That the Projects could now proceed on the basis that the Paradise Golf construction permit had been reissued and that it would be possible to obtain the necessary permits for the Tetuan Azla development.
a) I have found that there was no such meeting or representation by Mr Chistyakov in August 2010;b) Ms Baturina does not state in terms that she would not have entered the assignments had she not held these beliefs. This is striking in circumstances where, in the very next paragraph of her witness statement [125], she states in terms that she would not have made the last two tranches of the Austrian loans in December 2010 and August 2011 had she been aware that Mr Chistyakov's alleged representations were false and/or of his alleged breaches of contract. Nor does she say that she would only have paid some lesser (unparticularised) amount instead.
The alternative "reliance loss" claim for indirect loss - diminution in value of shareholding in Inteco : analysis
"…the valuation, it's forward looking exercise, you have to get more information apart from the financial statements, you have to look at prospects of the business, and you have to look at the budget, their plans, their operational structure. In case of Inteco, because it's a huge business, big conglomerate, developing a lot of sites especially…in developing country like Russia, you have get access to this project information as well….."
The counterfactual
M. Conclusion
a) The claim in deceit fails;b) The claim for breach of fiduciary duty fails;
c) The claim for breach of contract succeeds in part;
d) Ms Baturina has failed to establish recoverable loss as a result of Mr Chistyakov's breach of contract.