Foreign Judgments – Enforceability – Fines and Penalties

In JSC VTB Bank v Skurikhin and others [2014], the court  considered an application for summary judgment on the basis that final, binding and conclusive judgments had been obtained in Russia and none of the defences raised had a real prospect of success or gave rise to any compelling reason for a trial.

VTB entered into 40 loan agreements with a group of companies known SAHO. The loans were secured by guarantees from D. The loans and guarantees were subject to Russian law and to the jurisdiction of the Russian courts. VTB brought proceedings in the Russian courts for sums due under the loan agreements, and under related guarantees.

VTB secured judgments against D in the Russian courts. In the context of enforcement proceedings in the English courts, VTB applied for summary judgment on the basis that (a) the Russian judgments were “final, binding and conclusive”, (b) D had never suggested that they were not, and (c) that, although the Russian judgments referred to “penalties or fines”, they were actually recoverable contractual remedies.

D defended the summary judgment application. Although it was accepted that, on their face, the Russian judgments were “final binding and conclusive”, he raised the following five objections to enforcement of those judgments which, he said, had a real prospect of succeeding at trial:

  • The judgments were obtained as part of a fraudulent scheme to obtain control of the SAHO companies.
  • It would be contrary to English public policy to enforce the judgments.
  • The judgments were obtained in a manner contrary to natural justice.
  • There were compelling reasons, under CPR 24.2(b), why the case should not be disposed of without a trial.
  • The court should not enforce judgments insofar as they included sums that amounted to penalties.
A foreign judgment for a definite sum which is final and conclusive on the merits is generally enforceable by claim and unimpeachable for error of law or fact. There are four material exceptions to the common law rule on the conclusiveness of foreign judgments. A judgment can be impeached in the following circumstances:
  • Fraud:  This is partly on the basis that a party should not be able to take advantage of his own wrongdoing (see, for example, Gelley v Shepherd [2013]), and also takes account of the principle that “fraud unravels all” (see HIH Casuallty v Chase Manhattan Bank [2003]). The principle extends to all types of fraudulent conduct. In principle, a foreign judgment could be impeached for fraud irrespective of whether new evidence was produced or whether the fraud was alleged in the foreign proceedings (see, for example, AK Investment CJSC v Kyrgyz Mobil Tel Ltd [2012]) or whether the fraud was known and could have been raised in the foreign proceedings (Syal v Heyward [1948]). However, in such circumstances, the court would probably want to know why it had not been raised previously.
  • Public Policy. The ambit of this exception cannot be precisely defined and can change over time, as it is based on public policy. It can extend to a refusal to recognise or enforce judgments that offend universal principles of morality.
  • Natural Justice. See the principles clearly set out in Pemberton v Hughes [1899]. This will usually focus on the regularity of the proceedings, and will take account of the right to a fair trial.
  • Fine or a Penalty. A “penalty” in this sense means “a sum payable to the State, and not to a private claimant.  The question whether enforcement of a judgment can be refused on public policy grounds when the judgment is for exemplary, punitive or manifestly excessive damages is undecided. S.A. General Textiles v Sun & Sand Ltd [1978] and Lewis v Eliades [2004] are examples of cases where English courts have recognised the enforceability of awards of damages that would not have been awarded by an English court. However, an Australian decision (Schnabel v Lui [2002]) held that damages imposed to penalise a party would amount to a penalty even if they were not payable to the state.

The judge concluded that D had no prospect of successfully defending enforcement of the principal sums and contractual interest that was claimed, and granted summary judgment for those claims. However, he held that there was an arguable defence, on public policy grounds, to elements of the claims characterised as “penalties”.

The judge highlighted the need to remember that the fraud exemption is “carefully delineated” and should not be given an expansive application.  He concluded that the allegations of a fraudulent scheme on the part of VTB lacked reality, and was an artificial construct designed to avoid the consequences of the fact that SAHO had no defence to what were straightforward debt claims.

As to public policy and natural justice the judge noted that these argument relied upon the factual assumption based on the fraud exemption, and (a) it was difficult to see why enforcement could be contrary to public policy, unconscionable, unjust or immoral, if the fraud exception did not apply and (b) as there was no consistent and coherent explanation of why he had not advanced defences that were available to him, in the foreign proceedings there was no breach of natural justice.

D provided a breakdown of sums claimed under the Russian judgments (split into principal, interest and penalties). Approximately 20% of the sum claimed comprised “penalties” (that is, it did not represent actual loss or a genuine pre-estimate of loss and was over and above the contractual interest). These sums were described as “default interest” or “penalties” in translations of the Russian judgments, and represented sums incurred for being in default of payment obligations under the loans.

Referring to the conflicting decisions in S.A. General Textiles and Schnabel, the judge noted that the approach in Schnabel might lead to an argument that a judgment for exemplary damages was unenforceable. In his view, the question of whether a judgment for a very high rate of interest that had been awarded by a foreign court, was enforceable at common law should not be decided on the basis of the English court’s view of the appropriate rate of interest. Rather, the English court should consider whether the foreign court’s approach was contrary to domestic public policy.  He held that D had an arguable defence that sums of interest identified as “penalties” were not recoverable (being punitive in nature), albeit that they were not payable to the state.

The judgment highlights the uncertainty about the precise scope of the exception to the common law rule on the conclusiveness of foreign judgments for “fines or penalties”: in particular, whether damages imposed to penalise a party will constitute a penalty even where they are not payable to the state.

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