Legal Briefing

Supreme Court provides guidance 
on forum conveniens and piercing the corporate veil


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Dispute resolution | 01 April 2013

This article considers the Supreme Court decision in VTB Capital plc v Nutritek International Corp & ors [2013]. Perhaps the most striking aspect of the case is that it casts doubt on the notion that the Court has the power to pierce the corporate veil. The Supreme Court also held that, even if the power to pierce the corporate veil does exist, it does not enable a claimant to hold parties that control a company jointly and severally liable under contracts entered into by that company. 


These issues arose in the context of an application for permission to serve proceedings out of the jurisdiction and the Supreme Court also provided important guidance on the circumstances in which England will be the proper forum (forum conveniens) to determine a case, and the practicalities of dealing with jurisdictional disputes.

THE DISPUTE: RUSSIAN DAIRIES

The claimant, VTB Capital plc (VTB) was an English incorporated bank, which was majority owned by JSC VTB Bank (VTB Moscow), a state-owned bank based in Moscow. VTB entered into a loan agreement and other associated agreements (the Agreements) with a Russian company called Russagroprom LLC (RAP), under which VTB lent RAP $225m. The advance was ostensibly to enable RAP to buy a number of Russian dairy companies from Nutritek International Corp (Nutritek). RAP subsequently defaulted on the loan, leaving VTB with a shortfall in excess of $185m.

VTB claimed that it had been induced, in London, to enter into the Agreements by fraudulent misrepresentations (i) about the true value of the dairy companies; and (ii) that RAP and Nutritek were not under common control (it being VTB’s case that both RAP and Nutritek were in fact under the ultimate control of the fourth defendant, Mr Malofeev, a Russian businessman resident in Moscow, and that the purchase of the dairy companies was not, therefore, an arm’s length deal).

VTB brought claims in deceit and conspiracy against Nutritek, Mr Malofeev and another BVI company also said to be under the control of Mr Malofeev (Marcap BVI), on the basis that they were jointly and severally liable for the misrepresentations described above. As explained in greater detail below, in order to make Mr Malofeev and Marcap BVI jointly and severally liable with RAP under the Agreements, VTB also sought to pierce the corporate veil of RAP.

VTB sought and was granted permission to serve the defendants out of the jurisdiction. The defendants then applied to Arnold J to have service set aside, predominantly on the grounds that England was not the appropriate forum for the dispute. Arnold J upheld the defendants’ application and set aside service of the claim form. VTB made an unsuccessful appeal to the Court of Appeal and then made a further appeal to the Supreme Court.

SERVICE OUT OF THE JURISDICTION: THE TEST AT FIRST INSTANCE AND ON APPEAL

As the defendants were domiciled outside the European Economic Area, the common law rules applied to the question of whether the English Court had jurisdiction to hear the tortious claims. Under the common law, a claimant seeking permission to serve out of the jurisdiction must satisfy the Court that:

  1. they have a good arguable case that the Court has jurisdiction within one of the ‘jurisdictional gateways’ set out in paragraph 3.1 of Practice Direction 6B of the Civil Procedure Rules (CPR);
  2. there are reasonable prospects of succeeding on the merits; and
  3. England is the proper jurisdiction in which to bring the claim (forum conveniens).

In the Supreme Court, it was common ground that VTB could satisfy the first two tests. The focus, therefore, was on whether England was the appropriate forum for the claims in deceit and conspiracy. The Supreme Court referred to Lord Goff’s classic statement of principle in Spiliada Maritime Corporation v Cansulex Ltd [1987], that the underlying aim in all cases of disputed forum is ‘to identify the forum in which the case can be suitably tried for the interests of all the parties and for the ends of justice’. That test is now reflected in CPR 6.37(3), which provides that permission is not to be given to serve out of the jurisdiction unless the Court is ‘satisfied that England and Wales is the proper place in which to bring the claim’.

It is also important to note that, when considering whether to grant permission to serve out of the jurisdiction, a trial judge is conducting a balancing exercise with which, as Lord Goff said inSpiliada, an ‘appellate court should be slow to interfere’. In order to succeed on appeal, therefore, it was not sufficient for VTB to convince the Supreme Court that it would have come to a different conclusion if it had been in the position of the trial judge. VTB need to show that the reasoning of Arnold J (and the Court of Appeal) was flawed. It was only if such flawed reasoning existed that the Supreme Court could be asked to look at the issue afresh.

VTB’S ARGUMENTS AND THE SUPREME COURT’S DECISION

The two points of particular interest raised by VTB in the Supreme Court were that England was the forum conveniens because:

  1. The alleged torts took place in London because that was where VTB was induced to enter into the Agreements.
  2. Contrary to the findings of Arnold J at first instance and the Court of Appeal, the claims in tort were governed by English law.

By a majority of three to two, the Supreme Court rejected these arguments. For reasons which are outside the scope of this article, the Supreme Court (unlike Arnold J and the Court of Appeal) agreed with VTB (or at least was prepared to proceed on the basis) that the alleged torts were governed by English law and accepted that, in general terms, this would be a factor in favour of trial taking place in England. This is ‘because it is generally preferable, other things being equal, that a case should be tried in the country whose law applies.’ However, in this particular case, the majority of the Supreme Court took the view that this was a factor of ‘very little potency’ because the key issues in this particular dispute were factual not legal.

Similarly, the Supreme Court held that the place of commission of the torts was a relevant starting point which ‘will normally establish a prima facie basis for treating that place as the appropriate jurisdiction’. However, that consideration ‘may be dwarfed by other countervailing factors’. Here the common design on which the respondents’ tortious responsibility was alleged to have been based was formed in Russia. Both the alleged fraudulent misrepresentations ‘emanated’ from Russia and significant aspects of the facts which were said to have rendered the representations untrue existed in Russia: particularly, the dairy companies’ businesses and financial position. The transaction was effectively negotiated and decided upon in Moscow and the decision to make the loan had in fact been taken in Russia by the credit committee of VTB Moscow.

Having rejected VTB’s arguments and investigated the reasoning of Arnold J in some detail, Lord Mance, with whom Lords Neuberger and Wilson agreed, concluded both that Arnold J’s analysis could not be faulted in any substantial respect and that he would, in any event, have reached the same conclusion because, in summary, the major part of the factual subject matter involved Russia, and it was clear that the great bulk of evidence on both sides would have to come from Russian witnesses.

In his judgment, Lord Neuberger also made some forceful comments about the approach that should be taken to forum disputes. He made it clear that:

‘… hearings concerning the issue of appropriate forum should not involve masses of documents, long witness statements, detailed analysis of the issues, and long argument’.

He emphasised that this effectively amounts to the parties preparing for the 
trial itself and that incurring such effort, time and cost is disproportionate. Furthermore, it would provide an opportunity for a richer party to wear down a poorer party or for a party with a weak case to discourage a party with a strong case from enforcing its rights. Instead, he explained, the court can and should only form preliminary views on the relevant issues. He stated that, in keeping with the Woolf and Jackson reforms, judges should invoke their powers to ensure that evidence and argument on service out and stay applications are kept within proportionate bounds and ‘do not get out of hand’.

Lord Neuberger also noted that the onus is on a claimant to satisfy the court that there is a serious issue to be tried on the merits of the claim, and not on a defendant to satisfy the court that they have a real prospect of successfully defending it. This means that ‘as a matter of principle, a defendant is entitled to keep his powder dry: he can simply put the claimant to proof of its case’. Therefore, there is no need for a defendant to advance a positive case and put forward their evidence; they just need to identify the relevant legal issues as clearly as possible. Although this is not the point that Lord Neuberger was making, this can sometimes be a sensible tactical approach to interim issues generally. Defendants should be wary of being rushed into setting out their cases in detail before they have had an opportunity to investigate the issues in full. An overzealous attempt to win an interim issue may run the risk of undermining more important points that a party wishes to raise at trial.

ATTEMPTING TO PIERCE THE CORPORATE VEIL

None of the defendants was a party to 
the Agreements. However, VTB argued 
that Mr Malofeev and Marcap BVI controlled RAP and that their use of RAP ‘as the corporate vehicle to enter into’ the Agreements ‘involved the fraudulent misuse of the company structure’, which therefore entitled VTB to pierce the corporate veil, exposing Mr Malofeev as the ‘puppeteer’ behind RAP. As a result, VTB argued, Mr Malofeev and Marcap BVI were jointly and severally liable with RAP under the Agreements.

In the Supreme Court, Mr Malofeev and Marcap BVI boldly sought to resist this argument on the following two bases:

  1. The Court cannot pierce the corporate veil ‘whatever has been said about it in previous cases’. In all, or at least almost all, of the cases where the principle has been applied, it was either common ground that the principle existed (such that the Court did not have to decide the point) and/or the result achieved by piercing the veil of incorporation could have been achieved by a less controversial route.
  2. Even if the Court can in principle pierce the veil, it could not do so in this case, because VTB’s argument (that the effect of piercing the corporate veil was that Mr Malofeev and Marcap BVI were liable under the Agreements) represented an illegitimate and unprincipled extension of the circumstances in which the veil 
can be pierced.

CAN THE CORPORATE VEIL BE PIERCED?

The argument that it was not possible to pierce the corporate veil in any circumstances was a striking one, given the number of cases where judges have either granted relief on the basis of piercing the corporate veil, or where they have proceeded on the assumption, or concluded, that there is power to do so. Nevertheless, Lord Neuberger (who gave the only reasoned judgment on the point) saw some force in the argument.

He noted that there was no House of Lords (or Supreme Court) authority confirming that such a power existed – the issue arose in Woolfson v Strathclyde Regional Council [1978], but the most that could be said about that case was that the House of Lords was prepared to assume that the power existed without deciding the point. Furthermore, there was ‘great force’ in the argument that the well-known decision in Salomon v A Salomon & Co Ltd [1897], was an example of the House of Lords rejecting an early attempt to pierce the corporate veil, not on the facts, but as a matter of principle.

Lord Neuberger also drew support for the proposition that it is not possible to pierce the corporate veil from the:

‘… fact that the precise nature, basis and meaning of the principle are all somewhat obscure, as are the precise nature of circumstances in which the principle can apply’.

Many of the cases contained pejorative expressions (such as ‘façade’, ‘the true facts’, ‘sham’, ‘mask’, ‘cloak’, ‘device’, or ‘puppet’) which were dangerous as they assisted ‘moral indignation to triumph over legal principle’, thereby causing uncertainty and confusion in the law.

This did not necessarily mean, however, 
that it was not possible to find an identifiable principle behind the Court’s approach to piercing the corporate veil. 
Lord Neuberger noted that the principle could not be invoked merely where there has been some impropriety and he referred to the statement of Munby J, in Ben Hashem v Al Shayif [2008], that:

‘… it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is, (mis)use of the company by them as a device or façade to conceal their wrongdoing… at the time of the relevant transaction(s)’.

Lord Neuberger also recognised that there were other arguments in support of the idea that the corporate veil can be pierced. He said that:

‘… there is obvious attraction in the proposition that the court can pierce the veil of incorporation on appropriate facts, in order to achieve a just result’.

Furthermore, whether or not they could 
be explained on a different basis, there 
were some cases which had been decided on the basis of piercing the corporate veil and all the leading textbooks referred to 
the principle.

Having considered the various arguments, Lord Neuberger declined to decide the point because, as explained below, the alternative argument put forward by Mr Malofeev and Marcap BVI succeeded. The position, therefore, remains unclear. However, it is important that there is now a Supreme Court judgment where the argument that it is not possible to pierce corporate veil was described as ‘worthy of serious consideration’.

COULD VTB PIERCE THE CORPORATE VEIL IN THIS PARTICULAR CASE?

As explained above, VTB argued that, by piercing the corporate veil, Mr Malofeev and Marcap BVI could be held jointly and severally liable with RAP under the Agreements. As Lord Neuberger noted, VTB was, in effect, claiming that Mr Malofeev and Marcap BVI should be treated as if they were, or had been, co-contracting parties with RAP under the Agreements.

Lord Neuberger found no support for such an argument in any of the decided cases save for a recent decision of Burton J in Antonio Gramsci Shipping Corporation v Stepanovs [2011] (which he followed in his later decision in Alliance Bank JSC v Aquanta Corporation [2011]). At first instance, Arnold J declined to follow Gramsci and the Court of Appeal overruled it. VTB’s case therefore, involved an extension to the circumstances where it had traditionally been held that the corporate veil could be pierced.

Lord Neuberger noted that, given that 
the principle has already been subject to judicial criticism, a strong justification 
would be required before the Court would be prepared to extend it and that, moreover, on the facts there was an overwhelming case against it. In particular:

  1. Even accepting that the Court can pierce the corporate veil in certain circumstances, the notion that Mr Malofeev and Marcap BVI were jointly and severally liable with RAP was inconsistent with the reasoning 
and decision in Salomon. A company should be treated as being a person by the law in the same way as a human being.
  2. Where B and C are the contracting parties and A is not, there is ‘simply no justification’ for holding A responsible for B’s contractual liabilities to C simply because A controls B and has made misrepresentations about B to induce C to enter into the contract.
  3. None of the actual parties to the Agreements intended to contract with Mr Malofeev and Marcap BVI. Nor had 
Mr Malofeev or Marcap BVI intended to be parties to the Agreements or conducted themselves as if they were parties. In those circumstances, treating Mr Malofeev and Marcap BVI as parties to the Agreements would contravene 
one of the most fundamental principles on which contractual liabilities and rights are based, namely what an objective reasonable observer would believe was the effect of what the parties to the contract, or alleged contract, communicated to each other by words and actions, as assessed in their context.

KEY POINTS

  • The Supreme Court considered the argument that it is not possible to pierce the corporate veil to be ‘worthy of serious consideration.’
  • Even if the power to pierce the corporate veil does exist, it does not entitle a claimant to hold parties that control a company jointly and severally liable under contracts entered into by that company.
  • Although not decisive in this case, the applicable law and the place where alleged torts have occurred will be important considerations when considering the forum conveniens for the determination of a dispute.
  • Lord Neuberger warned parties to avoid incurring unnecessary or disproportionate costs in jurisdiction disputes and encouraged judges to use their case management powers to prevent this from happening.