This case involved three of Ukraine’s most prominent businessmen, allegations of misrepresentation, deceit, conspiracy, claims and counterclaims valued in excess of US$1 billion and an eight-week High Court trial in which 14 counsel were instructed.
For the purposes of this blog, comment is confined to Picken J’s interesting discussion of the Article 4(3) “escape clause” in Rome II at -. For the particularly diligent, the remainder of the 1,105 paragraph judgment can be read here.
In very brief summary of the facts which were relevant to the applicable law arguments:
- Avonwick Holdings held a 33.84% stake in the Industrial Union of Donbass, a Ukrainian metallurgical business. Avonwick was the ‘corporate vehicle’ of Mr Gaiduk.
- In mid-2009 Mr Mkrtchan and Mr Taruta, who also owned stakes in the Industrial Union of Donbass, proposed to Mr Gaiduk that a Russian buyer wanted to acquire Mr Gaiduk’s interest in the Industrial Union of Donbass for $750 million. Mr Gaiduk alleged that it was represented to him that all three men would receive the same amount for their respective stakes.
- In December 2009, the directors of the respective corporate vehicles approved the transaction which gave Mr Mkrtchan and Mr Taruta the right to acquire Mr Gaiduk’s shares in the Industrial Union of Donbass.
- On 30 December 2009, the share purchase agreement between Mr Mkrtchan and Mr Tartua’s corporate vehicles and the Russian buyer took place. The price of the shares was US$2.716 billion.
Picken J termed this part of the litigation as the ‘Avonwick claim’. It was submitted on behalf of Mr Mkrtchan that the applicable law for the Avonwick claim against Mr Mkrtchan was Ukrainian law. Counsel for Avonwick argued that English law was applicable under Article 4(3), alternatively that Cypriot law applied under Article 4(1) (which at trial was accepted to be materially the same as English law).
In determining the applicable law of the Avonwick claim against Mr Mkrtchan, the court considered the default applicable law under Article 4(1). In a short discussion at paragraphs - of the judgment, Picken J set out that the law of Cyprus applied because Avonwick’s directors were based in Cyprus and the steps necessary to transfer the shares to Mr Mkrtchan and Mr Taruta took place in Cyprus.
The court then considered the question as to whether Ukraine was ‘manifestly more closely connected’ with the alleged torts in the Avonwick claim and whether, therefore, under Article 4(3) the applicable law was Ukrainian law. The judgment provides a helpful overview of the relevant authorities.
The parties agreed that the burden was on Mr Mkrtchan in seeking to disapply Article 4(1), a proposition supported by Gaynor Winrow v Hemphill and another  EWHC 3164 at  per Slade J.
In order for a case to come within the ambit of Article 4(3) it needed to be ‘exceptional’ as Cockerill J set out in FM Capital Partners Ltd v Frédéric Marino  EWHC 1768 (Comm) at .
When considering whether or not a case was ‘exceptional’ the court is directed by Article 4(3) to consider ‘all of the circumstances’, which can include a wide variety of features. Such circumstances can include:
- Where the alleged wrongdoing was planned, orchestrated and implemented (see: Flaux J in Fortress Value Recovery Fund ILLC v Blue Skye Special Opportunities Fund LP  2 BCLC 351 at );
- Focusing on the country in which the ‘puppet masters pulling the strings’ carried out the alleged acts (see: Gaynor Winrow at [8 and 50]);
- The location of the assets at the heart of the wrongdoing (see: Fortress Value at ); and
- any pre-existing relationship between the parties, such as a contract, that is closely connected with the tort/delict in question (as per Article 4(3)).
It was further suggested by counsel for Mr Gaiduk that the law appliable to claims between the claimant and a third party, which were related to the claim between the claimant and the defendant, can be a relevant consideration in determining the country with which the tort is manifestly more closely connected for the purposes of Article 4(3). Pickard v Motor Insurers’ Bureau  EWCA Civ 17 was relied upon in support of that argument. Picken J dismissed this argument saying that:
Put shortly, the fact that in the present case precisely the same claims which are brought against Mr Mkrtchan are brought against the other three defendants (Azitio, Dargamo and Mr Taruta), and those will all be tried under English law, is of somewhat lesser significance. The more so, in my view, given that it is not English law which is applicable by virtue of Article 4(1) but the law of Cyprus since the fact that Cypriot law and English law are to be treated as identical in this case cannot, in such circumstances, amount to a reason why Cypriot law should not be displaced in favour of Ukrainian law. For this reason, I do not base my decision concerning Article 4(3) on this further consideration.
A further argument was made by counsel for Mr Gaiduk that English law governed the claimant’s claim pursuant to Article 12 of Rome II, by virtue of an English governing law clause in the ‘Castlerose SPA’ (the name of the agreement for the sale and purchase of the shares). This was also rejected by Picken J; he noted Bryan J’s judgment in The Republic of Angola and others v Perfectbit Limited and others  EWHC 965 (Comm) at : “both the leading texts indicate that a claim by a contracting party against a non-party for misrepresentation or the like can fall outside Article 12”. Specific reference was made to Dicey, Morris & Collins on the Conflict of Laws (15th Ed.) at paragraph 35-093 (“Scope of Article 12”), which states:
Art. 12 ‘covers only non-contractual obligations presenting a direct link with the dealings prior to the conclusion of a contract. The means that if, while a contract is being negotiated, a person suffers personal injury, Art.4 or other relevant provisions of this Regulation should apply’. The terminology and these various observations suggest that Art.12 will apply to fault-based claims, for example, to non-disclosure, fraudulent or negligent misrepresentations and duress which occur during the negotiation of a contract.
Picken J concluded that Ukraine was more closely connected for the purposes of Article 4(3). He gave the following reasons:
- Mr Gaiduk, Mr Mkrtchan and Mr Taruta were domiciled in Ukraine at all material times;
- The wrongdoing was alleged to have been planned, orchestrated and implemented in Ukraine;
- Mr Mkrtchan and Mr Taruta were ‘puppet masters’ who pulled the strings from Ukraine;
- The sale and purchase of shares were ultimately directed by parties from Ukraine;
- The heart of the alleged wrongdoing was in relation to Mr Gaiduk’s interest in the Industrial Union of Donbass, a company incorporated and operated in Ukraine;
- The ultimate victim of the alleged wrongdoing was Mr Gaiduk; and
- The alleged wrongdoing was closely connected to a pre-existing relationship between the parties and their other joint business interests in the Ukraine.
The court therefore agreed with the submission that the Avonwick claim was to be governed by Ukrainian law pursuant to Article 4(3). Ultimately, for various reasons given at -, the Avonwick claim was dismissed.