Novoship (UK) Limited & ors v Nikitin & ors [2014] EWCA Civ 908

Analysis

Mr Mikhaylyuk (M), a manager for the first respondent, NOUK, with responsibility for negotiating the charters of vessels owned by companies within the Novoship group, the remaining respondents, owed fiduciary duties to all the respondents. M had arranged a series of schemes by which he defrauded his principals and enriched himself and others by the payment of bribes given to him by those who chartered his principals’ vessels. These schemes included one concerning vessels chartered to companies owned and controlled by Mr Ruperti (R) which R then sub-chartered at substantially higher rates. M required R, as a price for obtaining those charters, to make substantial payments of bribes to himself and to a company called Amon International (Amon), the second appellant, which was owned and controlled by Mr Nikitin (N), the first appellant. Contemporaneously, M arranged charters of other vessels to Henriot Finance Limited (Henriot), the third appellant, another company owned and controlled by N.

At first instance, the judge held that Amon must pay the respondents the $410,304.39 paid to it by R in bribes and that N and Henriot were liable to account to the respondents for the profits they had made from the Henriot charters. The judge held that, by reason of the payments of bribes, there was a realistic possibility of a conflict between M’s duty to his principals and his personal interest. In those circumstances M was in breach of fiduciary duties owed to his principals in negotiating the Henriot charters. Further, N dishonestly assisted M’s breach because he negotiated the Henriot charters when he knew Amon had dishonestly received the bribes and that in negotiating the Henriot charters M was continuing a relationship which was corrupt at inception and had not been cleansed. N and Henriot were liable to account to the respondents for their profits from the Henriot charters as there was a sufficiently direct causal connection between the dishonest assistance and the profit. It was no defence that the charters were at commercial rates and not disadvantageous to M’s principals.

On appeal the appellants contended that the judge had made errors of fact concerning the reasons for the payments to Amon, the finding that M acted in breach of fiduciary duty in negotiating the Henriot charters which were made at market rates without any bribery and the finding that N had dishonestly assisted any relevant breach of fiduciary duty. In addition, the appellant contended that the judge had made errors of law concerning the availability of the remedy of an account of profits for dishonest assistance in a dishonest breach of fiduciary duty and whether any profit must have been earned by reason of the dishonest assistance if the defendant was to be held liable to account for it. The respondents cross-appealed in respect of the interest awarded on the judgment debt pursuant to s44A of the Administration of Justice Act 1970.

Held, allowing the appeal to the extent of setting aside the judge’s order so far as it awarded an account of profits against N and Henriot, dismissing the appeal in relation to the $410,304.39 due from Amon and dismissing the cross-appeal:

1. 1) With regards the payments to Amon:
2. a) It was inherently unlikely that the judge had got the burden of proof wrong. The judge did not make the elementary error that because he rejected N’s evidence about the payments, that the respondents’ case must be right. The payments to Amon were admitted and called for an explanation. The judge was plainly aware that one possible outcome was that the respondents might not have proved there was any dishonesty or bribery on the part of R or N in relation to the Amon payments. However, he found that these payments were bribes required by M to be paid to secure the charters relating to R’s companies for seven reasons. It was true that the first reason was that the judge rejected N’s evidence as to the reasons for the payments and that in giving his second reason (namely the fact that the payments were being kept secret) he said N must have been aware of the proposal to make Amon a beneficiary of the bribes. However, the most that can be said is that there may have been some infelicity of expression in the judge stating that a defendant’s evidence or account of the facts is implausible without expressly reminding himself that it is the claimant who has to convince him that, on the balance of probability, his factual assertions are correct (paras [13], [14], [16] and [18]).
3. b) The judge used all the evidence to infer that R was paying some of M’s bribes to N. This was an entirely natural inference which the judge was entitled to draw. His reasons for rejecting the assertion that the payments were legitimate payments for introductory services provided to R by N were compelling. The false evidence given by N justifiably formed the first reason for the judge’s conclusion that the payments did represent bribes and his other reasons were equally compelling. The fact that the judge could not ascribe a definite motive to the payments is no reason for holding that the payments made were not bribes. Once the judge had ruled out that the payments were legitimate payments, the only possibilities were that M wished to confer a benefit on N or that the court could reach no conclusion about the nature of the payments. The judge decided that this was not a case where no conclusion could properly be reached since he had no doubt that the payments were linked to the commissions on hire of the vessels (paras [24], [36], [39], [40] and [41]).
4. c) The judge’s finding that N knew the payments to Amon represented part of the bribes was not surprising. Once the judge concluded that N knew that the money to Amon was coming from R’s companies and that the charters in respect of which the commission was being paid were charters to R’s companies, it was highly improbable that N did not know what the monies represented whereas M and R did (paras [42] to [44]).
5. 2) With regards M’s breach of fiduciary duty:
6. a) The court rejected the submission that because it had been held in a previous case that the Henriot charters were not uncommercial and that M appeared to have acted in his owners’ best interests in relation to the Henriot charters, there was no realistic possibility of a conflict. The whole relationship with N was corrupt and corruption rots the entire business relationship between principals once an agent through whom the 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 by the parties in question (paras [52] and [53]).
7. b) If an agent or employee receives a bribe which he then shares with another, he is in breach of his fiduciary duty in then negotiating other transactions with that other person for as long as he has not disclosed the matter to his principal (para [54]).
8. c) There remained a risk that M might favour N since he had in fact already done so. M had not revealed his breach of duty regarding the bribes relating to the charter to R’s companies and N had no reason to suppose that he had done. M was thus continuing to act dishonestly in relation to those charters while at the same time negotiating the Henriot charters. That, of itself constituted a breach of M’s continuing fiduciary duty to his principals (para [52]).
9. 3) With regards N’s assistance, if M was in breach of fiduciary duty in negotiating with N for the Henriot charters, it followed that N, in conducting such negotiations in the knowledge and belief that M had not informed his principals of the bribe, assisted that breach of duty (para [55]).
10. 4) With regards the assistance being dishonest, once N knew that he was the beneficiary of corrupt bribery arrangements conducted by M and R, it was dishonest to conduct negotiations with M who he knew was receiving bribes in which he had himself shared. It did not matter that the bribes originated from R, that the judge could not determine the motive for giving these to Amon or that there were no bribes offered for the Henriot charters (paras [57] to[60]).
11. 5) With regards the appropriate remedy, an account of profits is available against one who dishonestly assists a fiduciary to breach his fiduciary obligations even if that breach does not involve a misapplication of trust property. For the purposes of accounting for profits, it does not matter whether the defendant is the payee or payer of the bribe, the only question is whether he is a dishonest assistant in the breach of fiduciary duty (paras [58] and [93]).
12. 6) With regards causation, the same considerations that apply to a fiduciary as regards causation do not apply to a dishonest assistant who has no fiduciary duties. Whilst the common law rules of causation, remoteness and measure of damages do not apply in the case of a fiduciary duty, there is no reason why they should not be applied by analogy where a claim is against one who is not a fiduciary. The common law does not apply a simple but for test of causation but distinguishes between a breach which is the effective cause of a loss and one which is merely the occasion for the loss. All N acquired as a result of the dishonest assistance was the use of the vessels at the market rate. This 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. Accordingly, there was an insufficient direct causal connection between the entry into the Henriot charters and the resulting profits and the appeal would be allowed in part (paras [107], [108], [114] and [115]).
13. 7) Further, where a claim for an account of profits is made against one who is not a fiduciary, the court has a discretion to withhold the remedy where it would be disproportionate in relation to the form and extent of the wrongdoing. The profits made by N were the kind that the respondents deliberately decided to forgo not profits which ought to have been made for the beneficiary and therefore fall outside the rationale for the ordering of an account. Accordingly, the court would also allow the appeal in part because an account of profits would be disproportionate on the facts of the case (paras [119]-[120]).
14. 8) In dismissing the cross-appeal, the judge was not wrong to exercise his discretion, pursuant to s44A of the Administration of Justice Act 1970 to order that the interest rate applicable to a judgment in a currency other than sterling be at a lower interest rate than that prescribed in s17 Judgments Act 1838 (8% per annum). The compensatory principle provided sufficient grounds for departing from the prescribed rate applicable to sterling judgments. It is reasonably clear that s17 of the Judgments Act 1838 was to ensure that judgment creditors were not penalised by being kept out of their money. That there has since been a wide divergence between the sterling judgment debt rate and prevailing interest rates does not affect the essential purpose of the Judgments Act 1838 (paras [132] to [138])
15. 9) Further, that, in the eye of the law, simple interest is generally regarded as adequate compensation and therefore the judge was not wrong to refuse to adopt a higher interest rate to take account of the fact that he was prevented by statute form awarding compound interest on the judgment debt (which he had found appropriate to do in respect of the period prior to judgment). To award an artificially high rate of interest in order to achieve the equivalent of compound interest posed its own problems since the court cannot know how long the judgment will be outstanding for (paras [139] to [141]).

JUDGMENT LONGMORE LJ [1] This is the judgment of the court to which we have all contributed. Introduction [2] When Odysseus penetrated the underworld, he encountered, among many other ghosts, that of Eriphyle whom Homer (Od. 11.326) calls ‘hateful’ because she had been bribed by Polyneices with Aphrodite’s golden necklace to reveal the whereabouts of …

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