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By John Helmer, Moscow

The UK Court of Appeal yesterday cut short Russian tanker company Sovcomflot’s 7-year lawsuit, ruling that two earlier High Court judgements exonerating the conduct of former chief executive of Sovcomflot, Dmitry Skarga, must stand. The dismissal by the High Court of most of Sovcomflot’s claims against former chartering partner, Yury Nikitin, has also been endorsed in the judgement issued by a 3-judge panel on March 6. At least $8 million in an award to Skarga by the High Court must now be paid by Sovcomflot. In addition, Skarga will seek further compensation from Sovcomflot of at least $1 million for the costs of the failed appeal.

Sovcomflot has yet to issue a statement on the outcome of one of the bitterest cases of maritime litigation ever waged by a Russian state company in an international court, directed by the current chief executive Sergei Frank (title image) against his predecessor. According to Sovcomflot’s last financial report, “On 2 November 2011 the London’s Court of Appeal (Civil Division) granted the Group leave to appeal against certain important elements of the previous Judgement handed down on 10 December 2010. The Claimants’ appeal will be heard by the Court of Appeal in London starting on 4 March 2013.” Sovcomflot is reporting that from its pending appeal litigation in the UK, it stands to gain “in the region of $172.0 million plus interest.”

The High Court judgements by Justice Andrew Smith, issued in December 2010 and March 2011 and upheld this week, found the current chief executive of Sovcomflot, Sergei Frank, to have been “dishonest”. Smith ruled: “I could not rely upon the statements even of honest witnesses because their oral evidence departed so far from them. I do not accept that they ever gave the witnesses’ real account of events… The claimants [Sovcomflot] made and pursued allegations that were obviously unsustainable when proper disclosure was eventually made, often during the trial… I consider it relevant that the claimants’ primary contentions of corrupt conspiracies were pursued almost entirely on the basis of dishonest evidence. Further… many specific allegations that had been pleaded and relied upon in the claimants’ opening submissions were either not developed or not supported by evidence that survived cross-examination.”

Sovcomflot has reported a bottom-line loss of $8.6 million in the September quarter of 2012. In its financial reports, the company describes the UK litigation as a “contingent asset”; it has not acknowledged the contingent liabilities if the High Court judgements against the company are enforced, and it loses the appeal lodged by Nikitin against the Novoship judgement issued last December.

According to Sovcomflot’s financial report for 2011, it has “expensed” $11.2 million “relating to legal costs and provisions for the costs of certain of the Defendants”. This week’s Court of Appeal judgement allows Nikitin to resume a loss claim against Sovcomflot for $180 million.

The UK court outcome, and the detailed evidence accepted by the UK judges, cast once more a shadow over attempts by Morgan Stanley and the federal property agency to sell Sovcomflot shares on an international stock exchange, following the decision last year to move from the London Stock Exchange to the New York Stock Exchange. Here is the story until now.

Mike Lax, lead solicitor in the Court of Appeal defence against Sovcomflot and its UK subsidiary, Fiona Trust & Holding, said: “There is still a separate appeal to be dealt with, and that will be heard on Monday. This is Novoship’s appeal against the Judge’s decision to award Novoship no costs in spite of the fact that they had made a substantial recovery on the commission claims. Whilst this appeal is also important, it is nothing compared with the Fiona [Sovcomflot] appeal which, had it succeeded, could have reopened the door to a claim for hundreds of millions of dollars. That door is now shut and will soon be bolted.”

The latest ruling was issued for the 3-judge panel by Lord Justice Sir Andrew Longmore on March 6. “We are satisfied for reasons that we will in due course produce in writing that the judge [High Court Justice Smith] was right in choosing Russian law in this case and not English law. As we see it therefore there is no need to go into any of the other matters in this appeal court on the two.” Longmore was joined by Lord Justices Sir Colin Rimer and Sir Stephen Tomlinson.

In British jurisprudence, the Court of Appeal is usually restricted to deciding issues of the law applicable to High Court judgements; appellate judges are usually very reluctant to retry issues of fact and evidence already decided by the lower court. In this week’s hearing, however, Sovcomflot’s factual allegations against Skarga and Nikitin ran into sharp criticism from the bench.

On the opening day of court argument on March 5, Justice Longmore (right) called Sovcomflot’s contentions into immediate doubt. “So we have the slightly curious situation of your clients having suffered no loss but wanting to recover, as I understand it, (a) the amount of the [alleged] bribes.”

Sovcomflot’s advocate, Michael Brindle QC, (right) replied: “Yes.”

LORD JUSTICE LONGMORE: Which is comparatively small, as found by the judge [Smith] at any rate.
LORD JUSTICE LONGMORE: And (b) what I suppose would be a substantial claim for an account of profits.
MR BRINDLE: Indeed, that’s right, my Lord. I don’t think I would accept that that was curious, but that, nevertheless, is the position. Your Lordship has analysed it correctly.
LORD JUSTICE LONGMORE: So it is a vindictive claim rather than a compensatory claim.”

Brindle was also asked by Justice Tomlinson to explain why a complex refinancing of Sovcomflot’s Soviet-era debt, which Skarga had negotiated with Swiss banks, should come under UK law. “As I understand it, the main plank in your argument is that the connection with English law comes in through the proper law of the transactions that were entered into; and this is a Swiss law transaction?” [Brindle] That particular one is, yes. [Tomlinson] How do you get that in as governed by English law?” After hearing the reply, Tomlinson concluded: “Swiss law would be the only one that could displace Russian law.”

The Sovcomflot claim that a holiday in Finland which Skarga took with Nikitin was a bribe was mocked by Justice Longmore: “You are asserting, are you, that the law is that of Finland?” The judge told Sovcomflot’s lawyer after another round of question and answer: “I think we are passing in the night.”

Longmore returned to criticize Sovcomflot’s litigation as motivated for reasons lacking in legal grounds. “So we set up as a law of morals, do we?” “You haven’t suffered any damages…You haven’t lost the bribe in any tortious sense… It’s not a tortious claim at all… I’d have some difficulty pretending that it was and going into all this interesting exercise.”

Longmore’s dismissal of Sovcomflot’s case is unusually explicit: “I have some difficulty with the idea of finding what the proper law is of a non-existent claim.”

The irony of the case is that the state-owned company chaired by government ministers Igor Shuvalov, Sergei Naryshkin, and Ilya Klebanov, as well as former federal transport minister Frank and the state’s prosecutors, have pursued Skarga and the others in London because they knew Russian law left their targets innocent of the allegations, and impossible to prosecute in the Russian courts. The result was that in several months of UK court cross-examination of witnesses, and thousands of pages of testimony, Sovcomflot became the only state-owned Russian corporation to have had its internal accounting, corporate governance and management practices examined in forensic detail, in the public record. That record has now been finalized by the Court of Appeal. Sovcomflot’s claims have been dismissed.

When Shuvalov — Sovcomflot board chairman from 2004 to 2007 and the initiator, with Frank, of the High Court litigation — was accused publicly of corruption himself involving $119 million in payments, he insisted that Russian law, not UK law, applied to his case.

Nikitin is appealing against last December’s High Court judgement against him on unrelated facts and claims by Novoship, another Sovcomflot subsidiary. No hearing date has been set yet. Because that case is separate from the Sovcomflot litigation, and because the Court of Appeal has now decided the Sovcomflot case in favour of Nikitin too, he is expected to resume his High Court claim against Sovcomflot for $180 million. This is the amount of money Nikitin argues he lost because of freeze orders enforced by Sovcomflot against several hundred million dollars of his assets over the 6-year course of the litigation. Now that Sovcomflot has lost, Nikitin is asking the court for restitution and compensation.

If Nikitin also overturns the ruling in the Novoship case, a lawyer close to the proceedings believes he will have a further claim for compensation in relation to the $90 million Nikitin has been obliged to lodge with the court as security pending the outcome of that case.

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