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By John Helmer, Moscow

In a unanimous three-judge ruling issued on Friday, the UK Court of Appeal has rejected a claim from Novoship, the state shipping company which is part of the Sovcomflot group, for recovery of more than $243 million in profits and interest. Novoship had claimed the money was earned corruptly by vessel charterer, Yury Nikitin. The court upheld Nikitin’s appeal, overruling a High Court judgement of December 2012, and decided that Nikitin’s profits had been earned honestly.

In a judgement written for the appellate court by Lord Justice Sir Andrew Longmore, the court upheld an order for Nikitin to pay $410,304.39. That amount, Nikitin’s lawyers say, had been offered at the start of the court case, but refused. According to Mike Lax, Nikitin’s solicitor, “as soon as Novoship alleged that the money was tainted, Mr Nikitin offered to repay it, even though he did know the background. We made a Part 36 offer to this effect at the commencement of the litigation which was not accepted by Novoship. Since Novoship have done no better than the offer we made from the outset, it is likely that Novoship will also have to pay most of our costs and their own costs of the litigation.”

Longmore had ruled in March of 2013 to dismiss other bribery claims by Sovcomflot against former chief executive Dmitry Skarga and former Novoship chief executive Tagir Izmailov. In that case, documented here, Longmore judged that Sovcomflot’s litigation had been vindictive and dishonest.


The latest Court of Appeal ruling exposes the Sovcomflot group, led by chief executive Sergei Frank (lead image), to an assessment for about $12 million in costs; more, if lawyers for Novoship are granted leave to appeal to the Supreme Court, and then lose the judgement, as occurred when Frank failed to overturn the Skarga and Izmailov awards.

Lawyers for Nikitin say they are now proceeding with a claim to recover from Sovcomflot more than $184 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 course of the litigation which began in 2005. Once the UK courts had decided that Sovcomflot had lost most of its claims, Nikitin is asking the court for restitution and compensation. A hearing this month before High Court Justice Andrew Smith will decide whether this case will go forward.

In a note on contingent liabilities of the auditor’s report on Sovcomflot’s 2013 financials, the company said: “Management is of the opinion that the claimed amount is speculative and the likelihood of this claim being successful is remote.”

clarkeNikitin’s successful appeal last Friday overturned the judgement of then-High Court Justice Christopher Clarke (right) that Nikitin should repay profits earned after he had engaged in “dishonest assistance” in order to secure charters from Novoship UK (NOUK). At the time, Novoship was an independent Russian shipping company; since 2007 it has been a subsidiary of the state-owned Sovcomflot. For that judgement, read this. Since then Clarke has since been promoted to the Court of Appeal.

The near-decade of litigation in London has exposed for the first time the operations of Russia’s state shipping companies in contracting with shipyards for new tankers; arranging bank financing; fixing charter terms for oil tankers; and determining what the auditors approve for the consolidated accounts. The court rulings have decided that so-called address commissions or business introduction and facilitation payments, which are common practice in the international shipping industry, can amount to corrupt bribes. As Longmore also ruled last week, “corruption rots the entire business relationship between principals once the agent through whom negotiations are conducted is known to have taken bribes. That is so even if the bribes are given by a principal to other transactions, but the bribes are known about (and shared in) by the parties to the transactions in question.”

However, the Court of Appeal has now ruled there was no causal link between the bribes identified in the evidence and the substantial profits Nikitin earned. “Since the ship owning companies [Novoship] wished to avoid the risk of fluctuating rates for freight, and wished to secure a long term income, they necessarily wished to lay off the risk on to the charterer. Thus the profits that Mr Nikitin in fact made were the kind of profits that the ship owning companies deliberately decided to forgo. In our judgment they cannot be described as profits which ought to have been made for the beneficiary, and therefore they fall outside the rationale for the ordering of an account [repayment].”

“… we do not agree with the judge that the same considerations that apply to a fiduciary apply to a dishonest assistant who has no fiduciary duties. We agree with the judge that if Mr Nikitin (or his companies) had not entered into the Henriot charters, the profits would not have been made. In other words, “but for” entry into the charters the profits would not have been made. But in our judgment the simple “but for” test is not the appropriate test. In our judgment what Mr Nikitin acquired as a result of his dishonest assistance (and also as a result of Mr Mikhaylyuk’s breach of fiduciary duty) was the use of the vessels at the market rate. That was merely the occasion for him to make a profit. The real or effective cause of the profits was the unexpected change in the market. As the judge recognised at para 525 Mr Nikitin made the profits “because he judged the market well”. We would therefore hold that there was an insufficient direct causal connection between entry into the Henriot charters and the resulting profits.”

The crux of Frank’s claims against Nikitin, Skarga and Izmailov has been that, because they opted for long-term chartering contracts to fix vessel rates, and because that strategy turned out to be highly profitable for Nikitin, the dealmaking must have been corrupt, and to Sovcomflot’s disadvantage. The UK courts have now dismissed most of these claims.

Chief executive Frank himself claims credit for protecting Sovcomflot from the downturn in vessel chartering rates by opting against volatile spot-rate charters and locking in the same type of long-term charter as his predecessors signed. According to a Sovcomflot release on operating results last November, “Sovcomflot’s business model remains robust. Our conservative chartering policy, with 65 per cent of vessels engaged in long-term employment and industrial projects, continues to serve the company well.”

In earlier judgements, the UK judges have also decided that Russian law on bribery to assist commercial transactions excludes the possibility of the type of money recovery, which lawyers for the Sovcomflot group have sought under UK law. Sovcomflot denies that Frank has been dishonest, vindictive, or personally responsible for pursuing the costly litigation in London. “The decision to litigate is a collective one, endorsed by the whole Sovcomflot Board,” a spokesman has said, as reported here.

Despite the British court rulings, the Russian prosecutor continues to pursue Nikitin, Skarga and Izmailov on criminal allegations.

The London court records and company financial reports show that Sovcomflot commenced the litigation with claims for compensation totalling $880 million. So far, it has been ordered to pay Skarga and Izmailov costs and indemnity of about $30 million. Sovcomflot’s costs in outsourced lawyers, detectives, accountants and others are estimated by court sources between $50 million and $90 million. In 2012 and 2013 Sovcomflot’s accounts refer to $18.1 million in “legal costs and provisions”.

Recovery from Nikitin is reported in the 2013 financial report to amount to $60.9 million, of which $8.9 million has been received so far. Apart from Nikitin, Sovcomflot is unable to recover any money from the others it has sued, and is obliged to take “steps to locate and freeze assets of these defendants”. One settlement Sovcomflot claims is “confidential between the parties and it is probable that further assets will be recognized in the future.” Before Nikitin’s $184 million compensation claim is decided, Sovcomflot has spent significantly more on the London litigation than it has received.

The separate Novoship claims began at $172 million, with a bill for interest of about $74 million. Counting the $410,304.39 confirmed for Nikitin to pay, and subtracting Novoship’s and Nikitin’s costs, net recovery appears to be negative. According to Longmore’s judgement of July 4, the claims for repayment have turned out to be “disproportionate on the facts of this case.”

Sovcomflot’s house lawyer, Vladimir Mednikov, has announced that “we are not satisfied with the Court’s finding”; and an application for leave to appeal to the Supreme Court is expected to follow. In the financial report issued on March 14, Sovcomflot said: “it is possible that the Group will face further liabilities.”

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