Posts tagged: credibility

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.

Persuasion

Much of what we do is about persuading – whether in a mediation, before a Tribunal or negotiating.  The key to successful persuasion is as follows:

Reciprocity: make the other side indebted to you – be a first mover and give something unexpected and, so far as possible personalised: “You have this room, it’s better and I have stocked it with my wife’s cookies”

Scarcity: don’t just emphasise the benefits of your position, what are its unique features and what will they lose if it is not accepted: “I am authorised to give you a special price not available to anyone else.  It is only available today.”

Authority: people are more generous to those in authority – an ethical, no-cost endorsement is valuable currency: Could your receptionist say “You are here to see Mr Ashford – we like him, always the gentleman and clients love him.”

Consistency: a big step often follows a small step – invite a small, voluntary and public step and build from there: “Could you see yourself paying a £1 to settle this … [establishes the direction of flow of money] … Could you see yourself paying £…”

Liking: people like to deal with people who they perceive as similar – pay compliments and co-operate towards mutual goals: from a main contractor to a sub-contractor “That was a very clever argument – how can we use that to get more from the employer”

Consensus: if similar people in the same position have acted in a particular way others are likely to follow – “The rest of the team have accepted a pay freeze, will you do the same”

Divorce and International Arbitration – Unusual Bedfellows?

Divorce and international arbitration lawyers are unlikely bedfellows but speeches in the Supreme Court in a divorce case may assist the international arbitration community.

In Prest v Petrodel Resources Ltd & Ors [2013] the Supreme Court considered an appeal against a refusal to order certain companies to transfer properties to a wife in partial satisfaction of a divorce settlement.  The husband was found to be the ultimate beneficial owner of complexly structured offshore companies and had failed to comply with orders for full and frank disclosure of his assets.  The companies themselves were similarly obstructive.  The question was whether there was a legal basis for the assets of the companies being available to meet the husband’s liability to pay the wife a substantial settlement.

The Supreme Court rejected the option of piercing the corporate veil (which will be regarded as the most significant part of the decision) holding that it was a limited principle which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.  It also rejected an argument based on the wording of the relevant statute.

The companies were found to hold the properties on trust for the husband on conventional trust arguments.  The importance for the international  arbitration community was the use of adverse inferences to found the factual basis for the trusts.  Adverse inferences are common in international arbitration and are recognised by e.g. Article 9(6) of the IBA Rules.  The Supreme Court approved the following statement from R v IRC ex p Coombs [1991]:

“In our legal system generally, the silence of one party in face of the other party’s evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence.  Thus, depending on the circumstances, a prima facie case may become a strong or even overwhelming case.  But, if the silent party’s failure to give evidence (or give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party, may be either reduced or nullified.”

The Court modified that general proposition for financial aspects on divorce as (i) there is a public interest in ensuring proper financial support especially (but not only) where there are children involved;  and (ii) although there is a large adversarial element there is also a substantial inquisitorial element in divorce proceedings so the burden of proof – the classic riposte to the invitation to draw adverse inferences – is not in play in the same way.  Judges are entitled to draw on their own (judicial) experience and take notice of inherent improbabilities without engaging in pure speculation.

The Court found that the companies’ refusal to co-operate was deliberate and although an affidavit was presented the deponent refused to be cross-examined on it and that was found to be at the instigation of the husband.  “It is a fair inference from all [the] facts, taken cumulatively, that the main, if not the only, reason for the companies’ failure to co-operate is to protect the … properties.  That in turn suggests that proper disclosure of the facts would reveal them to have been held beneficially by the husband …” 

It is clear that the result was one that the Court was, on the facts, very pleased to arrive at but is shows adverse inferences being drawn and a proper test for doing so.  The public policy feature to modify the general proposition might also be relevant and be available to be invoked by the victim of a fraud or similar conduct contrary to public policy.  

 

Mediation Tip: Gain Credibility & Respect

A couple of recent mediations have highlighted a (poor) tactic.  At some stage financial offers usually need to be made – typically by a Defendant (if there are proceedings).

Defendants will often have submitted a mediation position statement / brief and spoken during the opening session of how hopeless the case is.  To reinforce that view they will want to make a low offer (far below the likely settlement spectrum). 

Doing so is, I suggest, a poor tactic.  The aim of the negotiation process should be to have a credible position and gain respect.  Offering very low and coming up quickly is not credible nor does it gain respect – indeed the opposite can be the case.

Defendants should make a serious offer on a reasoned and dispassionate basis and then move slowly from there.  Starting too low can be a mistake.  The chance of overbidding (i.e. offering to pay at your first offer more than the Claimant would accept) is very rare.

Be bold – it will work!

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