Normans Bay Ltd. v Coudert Brothers (a firm) [2003] EWHC 191 (QB)

Case No 01/TLQ/1237[2003] EWHC 191 (QB)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 19th February 2003
Before
THE HONOURABLE MR JUSTICE BUCKLEY
Between
NORMANS BAY LIMITEDClaimantCOUDERT BROTHERS (a firm)Defendant
George Leggatt QC and Tom Adam (instructed by Brooke North) for Claimant.Michael Swainston QC and Simon Birt (instructed by Barlow Lyde & Gilbert) for Defendant.Hearing Hearing dates: 28 th and 29 th November 2002, 4 th, 5 th, 6 th, 9 th, 10 th, 11 th, 12 th, 13 th, 16 th, 17 th, 18 th and 19 th December 2002, 15 th and 16 th January 2003
Approved JudgmentI direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic..............................Mr. Justice Buckley
[1]The events giving rise to this claim largely occurred in Russia in 1993 and thereafter. The Claimant was then known as Illingworth Morris Limited and I shall refer to it as “IML”. It was a well known British clothing manufacturer and sold garments under such leading brand names as “Crombie”. The chairman and owner of IML was and is Mr Alan Lewis CBE (“Mr Lewis”). The Defendant is a firm of solicitors with an office in Moscow. I shall refer to it as Coudert. The claim is for damages for professional negligence.[2]In the early 1990’s there was continuing political and economic change in Russia. In particular, a programme of privatisation was in full swing. Mr Lewis had identified a Russian clothing manufacturer called Bolshevichka as an attractive investment for IML. Bolshevichka and its managing director, a Mr Gurov, were enthusiastic about the prospect of an investment by IML and in the autumn of 1993 49% of the shares in Bolshevichka were put up for sale by tender. IML was the successful bidder. 51% of the shares had first been sold to employees of the enterprise as part of the privatisation process.[3]A brief summary of the privatisation process will suffice at present. The State Committee for the Management of State Property (“the GKI”) was the government body with overall responsibility for supervising the privatisation programme. The entity to be privatised was required to prepare a privatisation plan for approval by the GKI. To be included in the plan, and of central importance in this case, was an investment programme. When the GKI had approved the privatisation plan, the enterprise was transformed into a joint stock company whose shares were initially held by a Property Fund on behalf of the GKI and sold by the Property Fund to the first investors. The Property Fund with responsibility for this task was the Russian Federal Property Fund (“the RFPF”) which in this case delegated its function to the Moscow Property Fund (“the MPF”).[4]The two methods by which shares were sold to investors and which are relevant here were a voucher auction and an investment tender. Under the privatisation programme each Russian citizen was given the right to collect one privatisation voucher. These vouchers were freely transferable and could be used to buy shares in an enterprise that was to be privatised. Under legislation, 29% of the shares of a company were required to be sold at a voucher auction, unless the GKI otherwise directed. Investment tenders were conducted by a Tender Commission appointed by the relevant Property Fund. Bidders were required to put in their bids in accordance with the tender terms and to undertake to make an investment in the company in accordance with the investment programme approved by the GKI.

Background Events

[5]Mr Lewis had made plain in negotiations with Mr Gurov that he would not be interested in buying only 20% of Bolshevichka’s shares. Since Bolshevichka and Mr Gurov were in favour of IML’s investment, representations were made to the GKI and supported by the Moscow City Council to exempt Bolshevichka from the requirement of a voucher auction so that IML could acquire or at least bid for the full 49%. The representations were successful and on 29th April 1993 the GKI issued Decree 763-r which approved Bolshevichka’s privatisation plan and ordered 49% of the shares to be sold by tender. On 6th May 1993 the GKI issued a further Decree 797-r which approved a supplement to Bolshevichka’s privatisation plan to which was annexed the investment programme that the successful bidder would be required to implement. It is said to have provided for a total investment of US$5,500,000 over three years. The stipulation of three years is not admitted by the Defendant.[6]Bolshevichka prepared draft tender terms which were submitted to the MPF Tender Commission for approval. Bolshevichka and IML had had discussions and the draft tender terms were prepared by Bolshevichka specifically with IML in mind. Indeed, bearing in mind the references to the possession of licences to manufacture garments under leading brand names such at Christian Dior and Crombie, the transfer of know how and equipment for a new production line for Bolshevichka and the ability to provide marketing and sales operations for European markets, IML was the likely winner. There was no company in Russia which could meet the requirements and no foreign company had by then shown interest in the investment. The draft terms submitted to the MPF and indeed IML’s bid referred to a total investment of US$5,500,000 over five years. IML’s bid had been prepared after discussions with Bolshevichka and specifically to meet its requirements. It was submitted on 10th November 1993 which was the last date stipulated. There was one other bidder, a small Russian company called Obergan which had been established by a former Bolshevichka manager. It had a share capital of only $4 and no apparent assets. It also offered to invest US$5,500,000 over five years but there was apparently no adequate evidence of its ability to do so. On 12th November 1993 the MPF Tender Commission elected IML the winner of the tender and the result was officially announced on 16th November 1993.[7]Under the terms of the investment tender IML was required to enter into an agreement to purchase the shares within 30 days, that is by 16th December 1993. A Share Purchase Agreement (“SPA”) was duly concluded between the MPF and IML on 16th December 1993. An Investment Agreement between Bolshevichka and IML was signed on 14th February 1994.[8]In February 1996 the Moscow Prosecutor commenced proceedings in the Moscow Arbitration Court, in effect, to have the whole process including the tender, the SPA and the Investment Agreement declared invalid. The basis of the challenge was that there was a discrepancy between the five year investment period in IML’s bid and the three year period (as alleged) stipulated in the investment programme approved by the GKI. A further ground was that approval from the Federal Anti-Monopoly Committee of Russia had not been obtained. The case was heard on 24th April 1996 and by its judgment the Court declared the results of the investment tender, the SPA and the Investment Agreement invalid. The main ground for the Court’s decision appears to have been the discrepancy between three and five years as mentioned above. IML appealed to the Cassation Division of the Court but its appeal was rejected on 30th May 1996 on procedural grounds. An application was then made by IML to the Federal Court of Arbitration of the Moscow District but that application was rejected and by Resolution dated 22nd July 1996 the Court resolved to leave the Decision of the Arbitration Court unchanged. IML lodged a Statement of Protest and Appeal on 1st November 1996 in an attempt to appeal to the Higher Arbitration Court. In order to pursue such an appeal it was necessary to persuade a Judge of the Court to enter a protest against the lower Court’s Decision. IML failed to persuade a Judge to enter such a protest and there the matter rested.[9]In October or November 1993 IML had instructed the Defendant to act for it. The precise terms of Coudert’s instructions are in dispute. But IML alleges that they included the obligation to ascertain that there was no legal problem arising from the privatisation process which might render the SPA and Investment Agreement invalid and that Coudert should have discovered the discrepancy between three and five years in the investment programmes mentioned and advised IML accordingly. It is IML’s case that had it been properly advised it would have taken steps to cure the problem by adopting the three year period in the SPA and Investment Agreement. In the event, IML has lost its investment and incurred wasted expenditure and claims damages against Coudert. Coudert denies each and every necessary ingredient of the claim and I shall have to deal these various issues individually.[10]I do not believe this background is in dispute, but I find it emerged from the evidence.[11]Broadly speaking Counsel were agreed on the issues to be decided.

Coudert’s Instructions

[12]One of the unhelpful features of this case is that there is no clear record of Coudert’s instructions; no letter to the client, no attendance note or other document properly setting out what Coudert was to do. It is not even recorded or agreed when Coudert was instructed. It is thus not surprising that each side’s case has displayed a degree of flexibility, Coudert’s rather more than IML’s. Another evidential problem is that the events in question occurred so long ago. This led each side, in my view, to reconstruct in their evidence what they believed must have happened or to draw on how they had acted in other similar circumstances. Mr Sheedy, the solicitor in Coudert’s Moscow office principally concerned with this matter, was convinced that it was agreed or understood between himself and Mr Lewis that Coudert would not take any steps from the 24th November 1993 to obtain or even view the relevant privatisation documents, including the investment programme. He was so convinced, not because he claimed to remember, but because he had not done so and as he protested in evidence he was a “cautious solicitor” and not “a bumbling idiot”. Mr Lewis, on the other hand, believed that he had instructed Coudert in October 1993, that is before IML handed in its bid, and that his instructions included that Coudert should carry out full legal due diligence and, in particular, consider IML’s tender package and warn him if there were any legal problems. I accept Mr Lewis honestly believed that, but cannot accept it as entirely accurate. In my view he was drawing on other occasions when he had similarly instructed solicitors in potential takeover or investment situations. There is, for example, a fax message to Sue Doust, Mr Lewis’ assistant in London, from Mr Simpson, the partner at Coudert who was in their London office, dated 1st November 1993, acknowledging receipt of a four-page investment tender document, an agreement concerning a partnership and a charter of partnership. The fax ends “It is not clear to me what you actually want of us for me to draft anything.” That is not consistent with any clear instructions or understanding between Mr Simpson and Mr Lewis as recently as 26th October 1993, the date from which Mr Lewis believed Coudert was clearly instructed.[13]It seems, and I do not believe that this was in dispute, that Mr Lewis met Mr Christopher Haan when they were both part of a delegation to St. Petersberg and Moscow in 1991. At that time Mr Haan was a senior partner at S.J. Berwin & Co. Subsequently in June 1993 by which time IML was anticipating an investment in Bolshevichka, Mr Lewis telephoned Mr Haan to discuss the matter in general terms. Mr Haan was by then a partner with Coudert and stated that the firm had considerable expertise in such matters and had an office in Moscow. The upshot of the conversation was that Mr Lewis decided to instruct Coudert and Mr Haan introduced him to Mr Simpson in London, who had also been a partner of S.J. Berwin & Co. Mr Lewis spoke to Mr Simpson on or about 16th June 1993. It is against that background that Mr Lewis again spoke to Mr Simpson on 26th October 1993 and it is then that Mr Lewis believed he instructed Coudert as I have mentioned. There is some evidence of that conversation in that Mr Simpson sent an internal memorandum to Mr Haan on that day in which he says:
“He is finally sending us this week the papers in relation to the Russian matter. It sounds as if it is a tender of some sort in relation to obtaining a 49% holding in a Russian company which manufactures suits, etc. He wants the usual estimate of costs! One of the questions is what company should own the 49% investment. . . . . .”
That memorandum is in somewhat general and imprecise terms. It patently does not reflect any specific instructions or understanding that Coudert would undertake legal due diligence in respect of the tender. That state of affairs persisted, at least on Coudert’s side, on the 1st November 1993 as evidenced by the fax message I have already quoted. On 6th November 1993 there was a meeting in Moscow at the Metropol Hotel between Mr Lewis, Mr Vladimir Lugovskoy, a consultant and Mr Lewis’ representative in Moscow in this matter and Mr Sheedy. Mr Sheedy regarded this meeting as no more than an opportunity for Mr Lewis to meet him and to decide whether Coudert should be formally instructed. Mr Lewis says in his witness statement that Mr Sheedy understood from Mr Simpson that Coudert had been instructed on the acquisition of shares in Bolshevichka, that they discussed various aspects of the transaction, including the investment programme and that the clear understanding was that Coudert was responsible for legal due diligence. There is no easy reconciliation of these two very different accounts. However, I have no evidence of any response from Mr Lewis to the 1st November fax from Mr Simpson, nor any other indication that Coudert, through Mr Sheedy or otherwise, gave any specific advice on the tender documents before 10th November 1993 when IML submitted its bid. Whilst I do not doubt that Mr Lewis genuinely believes that Coudert was instructed from the 26th October 1993 and that he understood or at least expected legal due diligence to be carried out, I could not so to conclude in respect of IML’s bid. The position concerning IML’s precise instructions is not much clearer on the documents after IML was declared the winner in the tender on 12th November 1993. Mr Lugovskoy informed Mr Sheedy that IML had been successful and there was a meeting between them on 18th November 1993 during which they spoke to Mr Lewis on the telephone. Coudert’s case is that this was its first substantive involvement in the matter.[14]In his written closing submissions Mr Swainston QC for Coudert submitted:
“Coudert’s case is that they were engaged to document a deal which had been done, in the sense that IML’s bid, prepared by IML alone without Coudert’s input, had already been drafted. It is accepted that in these circumstances, Coudert had a duty to use reasonable care to identify potential legal issues which might undermine the agreements that they were required to prepare. However, it is a separate question whether they were retained to go further and take steps to resolve those issues, and that depends on their further instructions.”
The reference to agreements that Coudert was required to prepare is a reference to the SPA and Investment Agreement. Mr Swainston went on to submit that having identified any particular legal issue, IML could decide either to take the risk of it or to address the problem itself or even abandon the transaction. This attempt to drive a wedge between identifying some potential legal problem and any further duty to address the problem, in my view, fails. In this case, as Coudert’s own witnesses accepted, they realised that if the privatisation process was flawed, it could invalidate the tender and subsequent agreements. It is accepted that Coudert was instructed to draft and advise upon the SPA and Investment Agreement. At various points they counselled against rushing into the SPA, given that IML had 30 days in which to sign that contract pursuant to the terms of the tender. Coudert could not properly advise on the SPA and Investment Agreement or even whether it was wise to pursue them at all without checking the privatisation process and in particular the investment programme. In the context of this investment, such investigation should have been neither particularly time consuming nor expensive to a firm holding itself out as a specialist in this field. In my judgment it would have been part of the ordinary duty of a competent solicitor advising IML in the circumstances described to carry out that work unless it had made plain to the client that for some reason it was not to do so. Coudert did not, as I find, tell IML that it was placing such a limit on the scope of the work it had undertaken. Indeed the legend to their bill which both Mr Simpson and Mr Sheedy stated accurately described their responsibilities, included “research and advice to IML on privatisation laws and regulations.” I need not follow Mr Swainston’s very full submissions on this theme further because they were, in my view, wholly undermined by the evidence of Coudert’s own witnesses, namely Mr Sheedy, Mr Simpson and its expert Mr Sexton. It is sufficient to note that in cross-examination Mr Sheedy accepted that Coudert’s instructions placed him under an obligation to do appropriate due diligence, which would have included looking at the documents which governed the privatisation of Bolshevichka including the privatisation plan, any supplement and the investment programme. He said he realised that if there was any flaw in the privatisation or tender process it could lead to invalidity, including invalidity of the SPA and investment agreement. In the end Mr Sheedy specifically accepted that he had instructions from Mr Lewis to see the privatisation documents before the SPA was signed and he agreed that was not done. He also agreed that but for a telephone conversation with Mr Lewis on the 24th November 1993 he would have been under an obligation to continue with due diligence, in particular, his attempt to see the privatisation documents. With respect to that evidence from Mr Sheedy in cross-examination, he also clearly had in mind express instructions from Mr Lewis by way of notes which he made on Mr Sheedy’s draft contract which specifically asked him to confirm, inter alia, “proof of privatisation” and “proof of 49% decree”. This was faxed back to Mr Sheedy on 19th November 1993. During the trial Coudert’s solicitors wrote to IML’s solicitors stating that the somewhat restricted interpretation that Mr Sheedy had placed on those instructions in his witness statement was on reflection too narrow. The letter concluded that having considered the matter further, Mr Sheedy believed that the request involved that he should review Bolshevichka’s privatisation documents. Mr Sheedy accepted that in evidence.[15]In view of the above Coudert’s case on the scope their instructions depended almost entirely upon Mr Sheedy’s assertion, made in a further witness statement produced during the course of the trial, that there was an agreement with Mr Lewis in a telephone conversation on 24th November 1993 that Coudert would do no further due diligence. Prior to this further witness statement, it seemed that Coudert’s case included reliance upon a fax from Mr Sheedy on 23rd November 1993, in which he referred to his visit with Mr Lugovskoy to Bolshevichka’s premises for a meeting with Mr Gurov. In it he stated that he was unable to make any meaningful progress on due diligence because the financial director Ludmila Fyodorovna was hostile to his request to review certain background privatisation documents and would not permit him to make copies of them. In his witness statement Mr Sheedy says that he was shown into the office of Ludmila Fyodorovna in order to inspect the privatisation plan whilst Mr Lugovskoy went off to discuss matters with Mr Gurov; the documents had been placed on a table in the office but that he was able to inspect them for only two minutes before he was called away to meet Mr Gurov. In the fax message Mr Sheedy had said:
“I would therefore suggest that any further due diligence be conducted by presenting written requests to review documents, with Mr Lugovskoy acting as an intermediary.”
In the event Mr Sheedy did not maintain in evidence that the fax was notice to Mr Lewis that Coudert did not intend to make further attempts at due diligence. Mr Swainston did not maintain that line in submission, but relied upon the alleged agreement between Mr Lewis and Mr Sheedy in their telephone conversation on the 24th November 1993.[16]For the avoidance of doubt, I would find, in any event, that Coudert’s instructions included or had come to include by 23rd November 1993, the task of obtaining or reading the privatisation documents, including any supplements and investment programme and advising IML appropriately in the light of such documents.[17]Two questions then remain. Firstly, whether there was any sufficient agreement between Mr Sheedy and Mr Lewis in their telephone conversation on 24th November to limit Coudert’s instructions by excluding the above mentioned task and second, whether, as Mr Swainston maintained, IML was sufficiently made aware that Coudert had not obtained or read the documents but nevertheless decided to take the risk of proceeding to sign the SPA and investment agreement.[18]As I have mentioned, Coudert’s suggestion that their instructions were altered during the telephone conversation on 24th November 1993 first appeared in a further witness statement by Mr Sheedy produced at the trial. It is a fact that Mr Sheedy was in Court on the first day of the trial when Mr Leggatt QC for IML, submitted that Coudert would only be able to make good its defence that it had no obligation to continue with due diligence if it could establish “a specific agreement that from now on Coudert need not do anything more.” That was a reference to the 23rd November 1993 fax. When questioned about this Mr Sheedy said in evidence:
“. . . . . . . When I was writing this statement (his first witness statement) . . . . I suppose it was not in my mind that I needed to specify precisely the moment when an instruction was given to stop. When it became clear on the first day of the trial that that was indeed the focus, well, I sat down and I thought about it and I determined that that is exactly when it happened.”
[19]Despite the fact that Mr Sheedy was unable to recall even the gist of this important conversation and that Mr Lewis strongly denied in evidence that there was any such agreement, Mr Swainston maintained the submission that such agreement was reached in the telephone conversation. He relied upon Mr Sheedy’s evidence that there must have been some such agreement since he did not pursue the due diligence and he is a cautious lawyer. He also relied upon the fact that Mr Lugovskoy made a further visit to Bolshevichka on 24th November 1993 to attempt to secure copies of the documents, as support for Mr Sheedy’s conclusion that IML, through Mr Lugovskoy, would themselves undertake the task. Finally, he sought to support the submission by suggesting that all matters of due diligence which remained undone were addressed, on Mr Lewis’ instructions, through warranties and/or representations which were sought from Bolshevichka. He referred to Mr Lewis’ notes on the draft SPA prepared by Mr Sheedy, to which I have already referred, in particular, the reference to Mr Sheedy confirming with Mr Gurov “proof of privatisation”. Also Mr Sheedy’s notes of a telephone conversation on 23rd November with Mr Lewis and Mr Lugovskoy which included:
“Ensure following (Gurov has agreed): . . . . . Provide proof of privatisation Provide proof of waiver of 49% decree”
Mr Swainston submitted that the Protocol, which was to be the vehicle for extracting warranties and/or representations from Bolshevichka, was to be accepted by Mr Lewis in place of the further due diligence and that in any event Mr Lewis was not risk-adverse, had been sufficiently advised by Coudert that the due diligence had not been done and was content to proceed nevertheless. Provide proof of privatisation Provide proof of waiver of 49% decree”

Provide proof of privatisation

[20]Quite apart from the fact that the suggestion of a specific agreement between Mr Lewis and Mr Sheedy on 24th November 1993 was something of an afterthought by Mr Sheedy and had formed no part of Coudert’s pleaded case, as Mr Leggatt pointed out, it is quite extraordinary that there is no written support whatsoever for such an agreement; no attendance note, no letter confirming the agreement to the client, no memo to the partner concerned, namely, Mr Simpson in London. Mr Leggatt, understandably, drew attention to a short passage from Mr Simpson’s evidence:
“A. What I think we were instructed on was a share purchase agreement, the investment advisory agreement, and due diligence to extent that it was possible for us to do due diligence. Q. And that never changed; it did not change at any point, did it? A. I do not think it changed, but I do not know. Q. So far as you were involved or knew, it did not change? A. So far as I was aware, no, it probably did not change, in those sort of basic heads. Q. You were not party to any discussion or agreement that it should change? A. I do not recall anything.”
Q. And that never changed; it did not change at any point, did it? Q. So far as you were involved or knew, it did not change?

Q. You were not party to any discussion or agreement that it should change?

[21]Mr Leggatt also relied upon Mr Lewis’ own evidence to the effect that it was incredible to suggest that he would have proceeded without this due diligence and if Coudert had said that it could not carry it out for any reason, he would simply have instructed another firm. In fact, as I shall find later, the evidence suggests that it would have been relatively easy to view the relevant documents. Mr Leggatt put a somewhat different interpretation on Mr Lewis’ notes on Mr Sheedy’s draft of the SPA and Mr Sheedy’s notes of the telephone conversation on 22nd/23rd November (Moscow/London time) and the references to providing proof of privatisation. He submitted that this was clear evidence of Mr Lewis’ concern that this aspect of due diligence should be carried out and not, as Mr Swainston submitted, evidence of an intention to go ahead without due diligence, but making the best of the situation by obtaining warranties through the Protocol. The fact of the matter is that IML did not sign the SPA, despite Coudert’s impression that they were intent on doing so, until 16th December 1993. Mr Sheedy in cross-examination agreed that the reason the SPA was not signed on or around 22nd November 1993 was:
“IML accepted . . . . . that there were too many unresolved issues to permit them to sign off on the agreement in the time scale they had envisaged.”
As Mr Leggatt pointed out, even if there were commercial reasons for not signing the SPA at about this time and indeed until the 16th December, it is difficult to see why Mr Lewis should have decided to abandon due diligence at that stage. If there was to be delay in signing the agreement that very delay gave the opportunity for the due diligence to be carried out.[22]It is clear that Coudert was aware of the risk that Mr Lewis would be taking if he signed the SPA without the appropriate due diligence. This is recorded, in particular, in fax messages to Mr Lewis on 19th November and 2nd December 1993. Mr Leggatt also referred to Mr Sheedy’s first witness statement (paragraph 99) in which he refers to his fax to Mr Simpson on 2nd December 1993 advising of his concerns over the haste with which he perceived IML wished to complete the transaction and continuing lack of due diligence. Doubtless it was that concern which prompted Mr Simpson to send his fax message to Mr Lewis on the same day pointing out:
“You are also aware I think that the attempts to have some due diligence done has so far met with non-cooperation.”
He went on to reiterate the risks if the contract was signed at that time and pointed out that if it was it was a risk Mr Lewis must take on himself. As Mr Leggatt submitted none of this is consistent with a clear agreement already arrived at with Mr Lewis that no further due diligence would be done.[23]Mr Sheedy said in evidence that his conclusion as to the agreement reached on 24th November 1993 was not based on recollection but “logic and deduction”; he would not have failed to do further due diligence unless instructed to that effect. In answer to this logic, Mr Leggatt submitted that it would be dangerous to assume that any professional was incapable of being negligent on any occasion; that even on Mr Sheedy’s hypothesis, he had behaved unprofessionally in agreeing such a fundamental change in Coudert’s instructions without informing his partner, Mr Simpson, that he had done so and without making any other note or writing a letter to the client confirming that. Mr Leggatt also pointed out that these events were nine years ago, at which time Mr Sheedy was not himself a partner and had not been a lawyer for anything like the “almost twenty years” that he mentioned in his evidence; he had only recently arrived in Russia and had not been involved seriously in any other privatisation transaction, albeit the office had two other matters in hand and Mr Sheedy was “generally aware of what was going on”.[24]I accept Mr Lewis’ evidence on this aspect of the matter and find Mr Leggatt’s submissions the more persuasive. I am afraid I find that this matter was on this occasion, simply mishandled by Coudert. As mentioned Mr Sheedy did not have significant experience in these matters at the time. Coudert’s Russian expert, a Mr Pekowsky, was, perhaps unfortunately, working in Paris at the material time. It appears that he was the author of the fax letter sent to Mr Lewis on 19th November 1993 by Mr Haan. That was a comprehensive review of the matter and suggests to me that if he had been more closely involved these problems would probably not have arisen. I find that there was no such agreement on 24th November 1993 as Mr Sheedy has deduced and that Coudert’s instructions remained the same.

Could Coudert Have Reviewed The Privatisation Documents, In Particular The Investment Programme?

[25]IML’s case here is simply that on Mr Sheedy’s own evidence Bolshevichka was prepared to let him see the documents which were available at its premises; its only restriction was that it was not prepared to allow copies to be taken. Mr Sheedy did not regard that as unusual at the time. Further, several witnesses were called to support the claim that copies of the documents could, in any event, have been obtained elsewhere.[26]On Mr Sheedy’s own evidence Bolshevichka made the documents available to him on 23rd November 1993. The reason he gave for not asking to continue his reading after his meeting with Mr Gurov was simply that he had no reason then to believe that he would not see the documents again. There is no evidence and no reason to suppose that Bolshevichka would have refused to allow Mr Sheedy to review the documents at its premises had he sought to do so. He did not. Further, he gave no other reason for not returning to Bolshevichka other than the alleged agreement with Mr Lewis on 24th November 1993. Mr Sexton in his report stated:
“There is absolutely no good reason for Bolshevichka to have refused – IML as its future share holder would have had the right to inspect these documents in any event at its pleasure.”
On the available evidence I can only find that Mr Sheedy could have reviewed the material documents at Bolshevichka’s premises had he sought to do so.[27]Mr Swainston could not really challenge that aspect of IML’s case and contented himself with a strong attack on the alternative submission that the documents would in any event have been available from other sources.[28]In view of my above finding I will deal only shortly with IML’s alternative case. The following witnesses were called: Mr Medvedev the head of the GKI’s Department of Foreign Investment until his retirement in April 1993, who said he remained in regular contact with the GKI after he left it; Mr Mostovoy the first Deputy Chairman of the GKI between 1992 and 1995; Mr Lipkin who was the head of the GKI’s main Methodological Department from 1992 to 1994 and then First Deputy Chairman (later Chairman) of the RFPF; Mrs Nikiforova who was the secretary to the MPF Tender Commission whose evidence was read; Mrs Nikonova who was employed as an Administrative Co-ordinator by Steptoe & Johnson, an international law firm with a Moscow office and finally Miss Alexandrova, IML’s expert. Miss Alexandrova gave evidence to the effect that the various institutions had a legal obligation to provide copies of the documents to potential investors and that as winner of the tender IML would have been entitled to them. Mrs Nikonova gave evidence from her own experience in Moscow that it usually took her no more than a few hours to obtain relevant documents concerning a privatisation and at worst one or two days. The other witnesses gave factual evidence to the effect that privatisation was, at the time, regarded enthusiastically by the authorities who were keen to attract foreign investment into Russia; that they personally gave instructions to their staff to co-operate with foreign investors, that in many instances they became personally involved with requests for documents or other information and that they had no doubt that information and/or copies of the documents could and would have been obtained. Mr Sexton in his expert report expressed the view that it would have been highly unlikely that the privatisation documents would have been made available by the GKI, the RFPF or the MPF and sought to undermine the evidence of Mr Medvedev and Mr Mostovoy as “largely self serving and not credible” and, in effect, suggested that they had given false statements. As Mr Leggatt elicited in cross-examination, Mr Sexton had no personal experience to support his views but was really speculating. More importantly when asked what his own firm did when they required documents from government agencies in the early 1990’s he said they used consulting companies who would obtain the documents for them. He said it was easy to use the services of such companies, that most law and accounting firms did so, that these companies had published tariffs of charges and they would obtain relevant documents relatively quickly albeit it might take up to one week.[29]Despite Mr Swainston’s sustained attack on the witnesses I accept the broad effect of their evidence. I do so because it is consistent with the whole privatisation process that was taking place in Russia at the material time and the object of it. No contrary evidence was called. Even if some of the witnesses might have exaggerated somewhat in an attempt to present themselves and their agencies in a favourable light I do not believe they wholly invented their evidence and, finally and importantly, because their evidence was supported by Mr Sexton himself. The fact that the consulting companies to which he referred were readily able to obtain these documents for any law firm employing them, manifestly supports the basic assertions put forward by the other witnesses.[30]I note that each side caused letters to be written more recently to various institutions in an attempt to elicit whether such documents would have been available or not. I would not regard these as conclusive one way or the other and in view of the overwhelming effect of the evidence I have mentioned, I need not say more about them. On the evidence before me it is plain that Mr Sheedy could have read the relevant documents at Bolshevichka’s premises or obtained them from any one of the agencies mentioned or employed one of the consulting companies to obtain them.

Breach of Duty

[31]I can deal with this shortly. Mr Swainston did not identify it as a separate issue in his closing submissions; quite rightly, in my view, since all the witnesses effectively agreed that the privatisation documents including the Investment Programme were fundamental documents to be seen in this matter and if, as I have found, Coudert had a duty to view them and did not do so, it would be difficult to conclude that they were not in breach of duty. Mr Swainston did, however, submit that Mr Lewis knew, because Coudert had told him, that the due diligence had not been done and that he went on regardless. I reject that submission because I accept Mr Lewis’ evidence to the effect that he was not told that Coudert had failed to review the documents before the SPA was signed. Further, that it never occurred to him that documents to be exhibited to the Protocol would not have been read by Mr Sheedy. There is no evidence that Mr Lewis was clearly informed that the documents had not been reviewed by Mr Sheedy after the reference to: “You are also aware I think that the attempts to have some due diligence done have so far met with non-cooperation.” in the 2nd December 1993 fax message that I have mentioned. Mr Lewis was entitled to assume that he would be told if there remained a problem before the Share Purchase Agreement was signed about a fortnight later. Up to and including the 2nd December 1993 the tenor of Coudert’s messages to Mr Lewis was simply that due diligence had not been carried out thus far and if he rushed into signing the SPA he would be at risk of subsequent adverse repercussions. Mr Lewis did not rush into signing. The SPA was signed at the last minute. He was not told that the due diligence had still not been done and I accept his evidence he assumed it had.[32]These issues concerning Coudert’s instructions, their scope and whether they were varied, have only arisen because of the lack of contemporary documentary records that I would expect a conscientious solicitor to have made. Any uncertainty as to a solicitor’s instructions, in particular, their scope, ought to be resolved and the prime responsibility for that must rest with the solicitor. Misunderstandings and uncertainties should not arise; there ought to be some record of instructions and variations to them. If Coudert Had Reviewed The Privatisation Documents In Particular The Investment Programme, What Would It have Revealed?[33]This issue arises from Coudert’s non-admission of the supplement to the Privatisation Plan which IML had presumably disclosed at the time. The non-admission was pleaded by way of re-amendment of the Defence in January 2002. IML responded by obtaining from the Russian Ministry of Property (successor to the GKI) an authenticated copy of the Decree 797-r dated 6th May 1993 and the attached supplement. Coudert was not impressed and the non-admission stands. In the event this became one of the central issues at the trial. In his closing submissions Mr Leggatt criticised the allegations of possible fraud and forgery that Coudert put forward, in particular, in Mr Swainston’s cross-examination of Mr Lugovskoy who had obtained one of the two authenticated copies put in evidence by IML. It was, in effect, suggested to Mr Lugovskoy that on his visit to the Ministry of Property Relations he had, in some way, procured its authentication of a misleading document. Although Mr Leggatt did not object during the cross-examination, I must agree with the criticism. I do not think that a “non-admission” is a sufficient basis for putting what amounts to dishonesty or fraud to a witness. I reject the allegation but, theoretically at least, that still leaves the possibility of some mistake or confusion concerning the supplement.[34]As I have mentioned the GKI’s approval of the Privatisation Plan and Investment Programme put to it by Bolshevichka was in two stages, the second of which, the 6th May 1993 Resolution 797/r, included a supplement to the Privatisation Plan which contained the Investment Programme. Coudert does not admit that this Investment Programme referred to three years as opposed to five. Mr Swainston drew attention to various aspects of the evidence which he submitted were sufficient to demonstrate that IML had not proved that the Investment Programme approved by the GKI stipulated three years. His submissions were fully deployed in writing. I have considered them all and only attempt a summary: i. Mr Lugovskoy in his first witness statement said that the only term discussed with Bolshevichka was five years, albeit a disclosed note by a Mr Robertson of KPMG of a discussion with Sue Doust notes:
“When negotiating the original agreement IML proposed a three year Investment Programme and the same period for Bolshevichka to have the licence to use some of IML’s brand names. Mr Gurov of Bolshevichka held out for a five year licence period for the brands and IML yielded this but changed the Investment Programme to be on a five year basis also . . . . .”
The logical time for negotiations concerning the period of the investment would be prior to the approval by the GKI of the Investment Programme Bolshevichka was required to submit for GKI approval; ii. The above is supported by a document headed “Assumption of Tender Terms”. This document was agreed to have been prepared by Mr Gurov and it makes chronological sense for it to have been prepared before the GKI Resolution and it contains an Investment Programme over five years; iii. There are similarities between Mr Gurov’s document and the approved supplement to the Privatisation Plan; iv. It is agreed that the Privatisation Plan prepared by Bolshevichka was designed to favour IML and it makes sense that all these matters would have been agreed before Bolshevichka submitted the Plan for GKI approval; v. A disclosed draft of the MPF announcement of Tender Terms refers to a five year investment Plan (although in the event the tender announcement did not mention this). The author of this document should be presumed to have known the terms of the Investment Programme as approved by GKI; vi. Mr Lugovskoy having noticed the omission in the tender announcement to refer to the Investment Programme raised the matter with Mr Igor Golovanov, the First Deputy Chairman of the MPF, who confirmed that there was no problem regarding the investment of $5,500,000 over a five yearly basis. Again it is presumed Mr Golovanov would have known of the terms of the GKI approved Programme; vii. Obergan’s bid included an Investment Programme over five years and it is very similar in terms to the draft tender announcement mentioned above; viii. In announcing IML as the winner of the tender the Tender Commission stated that IML had “met all the conditions of the tender and provided all the guarantees as to the fulfilment of the Investment Programme . . . .”; ix. Obergan challenged the result (essentially on grounds that its bid was higher than IML’s). The Moscow Property Fund replied on 20th December 1993, inter alia, that “no violation of the applicable legislation on holding auctions able to lead to the invalidity of a privatisation transaction have been found during the examination of your claim . . . . . .”; x. In the subsequent Obergan litigation in which it unsuccessfully challenged the result of the tender the MPF supported IML and appeared to believe that the approved Investment Programme was five years; xi. It is unlikely that during the course of the Obergan litigation, which involved several hearings up to the Supreme Russian Arbitration Court, no one realised that there was a discrepancy between the approved Investment Plan and IML’s bid; xii. In the 1996 proceedings launched by the Moscow Public Prosecutor he took two points: the three/five year point and that IML had failed to obtain approval from the Anti-monopoly Committee. The attachments to the Moscow Prosecutor’s writ have not been disclosed and there appears to have been no real check that any version of the Investment Programme appended to the Prosecutor’s case was authentic; xiii. The only document which Steptoe and Johnson, solicitors than acting for IML, appear to have had was apparently a draft because it was undated and signed by a working party. Mr White of Steptoe and Johnson in evidence confirmed that was the only document he was aware of; xiv. No one at the time appeared to check the document relied upon by the Prosecutor until Mr Lewis raised the point in July 1996 but there is no evidence as to the result of his inquiry.[35]Mr Swainston also relied upon the overall history of this matter and what he claimed to be inadequate discovery; that Mr Lugovskoy was not independent and it may be that he “manipulated the open public record or used improper means to induce a public official or officials to produce a false one.” That is a reference to the authenticated copy that Mr Lugovskoy obtained from the successor to the GKI. In light of all these points Mr Swainston submitted that all parties at the time seemed to have accepted that the approved Programme was five years; no reliable contemporary authenticated version of the Investment Programme was in evidence and those that are could have been obtained improperly by Mr Lugovskoy and/or Mr Gurov; in Mr Gurov’s case for the purpose of the Prosecution in 1996.[36]Mr Leggatt objected to the allegations against Mr Lugovskoy and I have already found them to be unwarranted. He pointed out that Coudert had not produced any evidence but contented itself with sniping and making improper allegations in respect of IML’s evidence. In particular, he pointed out that IML had adduced two authenticated copies of Decree No. 797-r sealed with the official seal of the Ministry of Property, the GKI’s successor. He submitted that in the absence of other evidence those should be regarded as conclusive. He referred to the Evidence Act 1851 in this respect. He further submitted that IML had produced a copy of the supplement which it obtained from Bolshevichka at the time of the Obergan proceedings and since this was produced at a time before the three/five year point had arisen it cannot be open to Mr Swainston’s charges of forgery; in the 1996 proceedings, the Russian Courts found as a fact that the Investment Programme specified by GKI Decree No. 797-r was a three year programme and that was the principal ground upon which they declared IML’s investment to be invalid. He also pointed out that the MPF was supporting IML during these proceedings and if there had been any doubt that the original approved Investment Programme was three years, MPF would have taken that point; instead it contended that IML’s failure to comply with the three year Programme did not justify invalidation of the transaction. Mr Leggatt made further submissions as to the detail of some of the assumptions upon which Mr Swainston’s submissions were based.[37]In the end I have to balance the evidence adduced by IML against Mr Swainston’s circumstantial case and the submissions that he has made. Mr Swainston has raised some doubts in my mind, but in the end I find IML’s evidence and any inferences which may properly be drawn from it more persuasive. I regard the two authenticated copies provided by the GKI’s successor and the finding by the Russian Courts in the 1996 proceedings as very powerful evidence that the GKI approved Investment Programme was indeed three years. Whether Bolshevichka and the MPF overlooked the discrepancy or did not at the time regard it as significant remains unclear. I do regard it as strange and, as I believe I remarked during Mr Swainston’s submissions, he raised a good circumstantial case for doubting whether the approved Investment Programme did contain the three year provision. However, I have to decide the matter on the evidence. The clear evidence to which I have referred and upon which Mr Leggatt was able to rely, to my mind, cannot be over-ridden by the doubts that Mr Swainston has so skilfully engendered, but without any direct evidential support. I find that the supplement to the Privatisation Plan including the Investment Programme which was approved by the GKI referred to an investment of US$5,500,000 over three years. If The Privatisation Documents Had Been Reviewed By Coudert And The Investment Programme Was Over 3 Years, What Advice Would/Should Coudert Have Given To IML?[38]Mr Leggatt submitted that since no factual evidence had been called by either side in an attempt to show what advice Mr Sheedy would have given to IML, which was not surprising since Mr Sheedy had not in fact considered the point in question, the correct approach was for the court to decide what advice Mr Sheedy ought to have given to IML. That approach involves assuming that Mr Sheedy was a competent solicitor exercising proper skill and care and also a consideration of the information reasonably available to him, both legal and generally. I accept this as the correct approach despite Mr Swainston’s criticism that it involved viewing the matter with 20/20 hindsight. Clearly, the standard to be expected of Mr Sheedy was that he would exercise the degree of care and skill reasonably to be expected of a competent solicitor holding himself out as possessing a degree of expertise in these matters, which Coudert clearly did. I would only add that a range of advice may have been acceptable, in the sense that some lawyers could quite reasonably have been more or less bullish from IML’s point of view concerning the prospects of overcoming the perceived problem. I think it right to put Mr Sheedy at the point in that range that would be most favourable from Coudert’s point of view. I believe that is relevant in view of the next issue identified by both Counsel. Mr Swainston submitted that the most that could have been said was that there was “a real possibility of curing the problem by stipulating a three year investment period in the agreements, but that there was a risk that this would be ineffective and impracticable.” He further submitted that competent advice would have identified a possibility of curing the problem by seeking a fresh tender. In a later submission Mr Swainston submitted that, as a matter of Russian law, no cure, apart from a fresh tender, was available and in support of that submission he relied upon Mr Sexton’s evidence and the later decisions of the Russian courts in 1996 as strong supporting evidence. I bear those submissions in mind. I treat the later court decisions as evidence of Russian law, albeit not determinative of the issue I have to decide, since they were not available to Mr Sheedy and there was, in the event, no decision from the highest Russian court on this point. The decision of the Moscow Arbitration Court on 24th April 1996 was that the Minute of the Tender Commission identifying IML as the winner of the tender competition was invalid. The Federal Arbitration Court of the Moscow Circuit affirmed that decision.[39]Mr Leggatt relied upon the evidence of Ms Alexandrova, IML’s expert, to the effect that the problem of three/five years could have been cured by inserting 3 years as the investment period in the SPA and Investment Agreement. He also referred to the relevant Russian legislation on this topic; guidance given by the Supreme Arbitration Court and also referred to the GKI’s own view, expressed in an Information Letter dated 13th November 1995.[40]Mr Leggatt submitted, and I accept, that the likely starting point for a lawyer’s enquiry would have been Article 30 of the Privatisation Law which identifies the circumstances in which transactions involving the acquisition of state enterprises could be declared invalid. The relevant one for present purposes is where there have been “gross violations” of the Tender Rules. The next inquiry would probably have taken a lawyer to the Model Regulation on Investment Tenders approved by the GKI Order No. 770-r of 13th November 1992 (“the Investment Tender Regulations”). As he confirmed in evidence Mr Sheedy looked at these Regulations as part of his research. They were also referred to in the letter drafted by Mr Pekowsky dated 19th November 1993 to which I have referred. Regulation 3 states that privatisation of state enterprises at a tender involves the acquisition into private ownership of:
““objects of privatisation” including shares when, “the purchasers are required to make investments in the enterprise undergoing privatisation in accordance with the Investment Programme envisaged by the Privatisation Plan”
. Regulation 4 identifies a tender as:
“a method of selecting, on a competitive basis, purchasers to implement an Investment Programme specified by a Privatisation Plan”
. It is to be noted, and was accepted by Mr Sexton in cross-examination, that Regulations 3 and 4 refer to “purchasers” and not “bidders” or “participants in tenders”. Mr Leggatt’s submission was that it is clear from those provisions that the purchaser must implement the Investment Programme specified in the Privatisation Plan and that by implication he must agree to do so. However, any such agreement could only take place in the SPA i.e. when the investor became a “purchaser”. It was agreed by the experts that success in a tender simply conferred on the winner a right to enter into an SPA (which was itself conditional on the purchaser entering into the Investment Agreement). Mr Leggatt’s submission on these Regulations was that a reasonable lawyer would have understood them to require only that IML should bind itself to invest in Bolshevichka in accordance with the Investment Programme approved by the GKI, but that it would be sufficient if that was done in the SPA and Investment Agreement. If, contrary to this view, a failure to provide for the correct investment period in the bid did amount to a violation of the Tender Rules it would not amount to a gross violation provided the SPA and Investment Agreement complied. Mr Leggatt accepted that a reasonable lawyer would not be confident of the above analysis on the basis of the Investment Tender Regulations alone but that there were two further matters that would have confirmed the position to his satisfaction. On 2nd December 1993 by Decree No. 32 the Russian Supreme Arbitration Court of the Plenum of the Russian Federal Supreme Arbitration Court had given guidance: “When resolving disputes connected with the invalidation of privatisation transactions, it should be borne in mind that gross violations of the Tender . . . . . . . Rules” which, under paragraph 1 of Article 30 of the (Privatisation Law) constitutes one of the grounds for the invalidation of a privatisation transaction, shall mean . . . . . such violations of the Tender . . . Procedures as may lead to the incorrect identification of a winner.” (Mr Leggatt’s emphasis). Mr Leggatt submitted that even assuming IML’s submission of the bid proposing a five year Investment Plan involved a violation of the Tender Rules, that did not lead to “the incorrect identification of a winner”; if IML had correctly stipulated for three years in their bid, manifestly they would still have been declared the winner; such a bid would have been even more favourable than the one submitted. Thus he submitted that the Supreme Arbitration Court guidance strongly supported the conclusion arrived at on the construction of the Investment Tender Regulations.[41]The GKI had jurisdiction to give guidance, see Article 4 Paragraph 1 of the Privatisation Law. Its Information Letter No. AK-/9351 dated 13th November 1995 (on Certain Issues Connected to the Conduct of Investment Tenders), at paragraph 2 states:
“The absence in the Information Announcement on the holding of an Investment Tender on information of the Mandatory Requirements (Conditions) for the successful bidder which are mentioned above shall not serve as grounds for the non-inclusion of such requirements as the purchaser’s obligations in the sale agreement for the shares to be concluded with the successful bidder, nor for a failure by the purchaser to fulfil such obligations.”
And at paragraph 3:
“In connection with the fact that the requirements described above are basic conditions for any Investment Tender for the sale of packets of shares of joint stock companies created in the process of privatisation of state and municipal enterprises, failure to include them among the purchaser’s obligations in the sale agreement for the shares may be grounds for an action for the invalidation of the transaction brought in accordance with Chapter 8 of the Civil Code of the Russian Federation.”
The mandatory requirements (conditions) referred to include a requirement that the proposed investments by the purchaser shall be within three years. Mr Leggatt’s submission was that these paragraphs expressly provide that a failure to include the three year obligation in the SPA may be a ground for an action for the invalidation of the transaction but do not provide that a similar failure in a potential purchaser’s bid shall have that effect; overall it is clearly implicit that provided the relevant requirement is included in the SPA there will not be grounds for invalidation of the transaction. Of course, Mr Leggatt had to accept this Guidance was issued later, but he relied upon the evidence of Mr Mostovoy that the approach set out in the letter reflected the official view of the GKI at the material time, that is, late 1993 and 1994 and that when Letters of this kind were issued by the GKI it was invariably because the issue had arisen in a number of cases. Mr Lipkin also confirmed that the GKI’s view at the material time was to the same effect. I accept that evidence. I also find that an obvious and therefore reasonable step for a solicitor to have taken was to ask the GKI for its view.[42]Mr Sexton’s evidence was to the contrary. I did not find such references as he made to specific provisions in the legislation, persuasive. I did, however, see some force in his broad view that there was an obligation on a bidder to stipulate for three years because as he put it “It flows from the legislation. It makes sense. There is a natural flow to this process.” To my mind it would make sense for a bidder to be under such an obligation or at least to be presumed to have indicated a willingness to make such an investment in the absence of express reference. It would not have surprised me to find a provision that an indication of intent to invest over a longer period, contrary to the mandatory requirements, would invalidate the bid. However, it could also be assumed that the Legislature was content to leave the matter to the relevant Property Fund and its Tender Commission. The property Fund could reasonably be expected to insist on the three year period in its sale contract with the successful bidder. On the whole, I find that Mr Leggatt has the better of the legal argument and, in particular, that a reasonable lawyer at the time would have been heavily influenced by the view which I have found the GKI would have expressed if asked. The Russian courts were not bound by such a view but it is one they were bound to take into account and would undoubtedly have been reassuring to the enquirer. I should have mentioned that I found Ms Alexandrova to be a persuasive witness. She is a qualified Russian lawyer with experience in this field and I found her evidence impressive. She did make a mistake but was prepared to accept it frankly when put to her by Mr Swainston. Mr Sexton did not possess a formal qualification in Russian law. He had some general experience and had appeared as an advocate in Russian courts albeit he was not qualified under the new Russian Advocacy Law. I did feel that he was rather more concerned than was Ms Alexandrova, to support the client’s case. On the whole I preferred the opinions of Ms Alexandrova.[43]I find that a lawyer in Mr Sheedy’s position, that is working for a firm which held itself out as expert in this field, should have concluded that IML would be, at least, reasonably safe provided the three year stipulation was included in the SPA and the Investment Agreement. Mr Sheedy should, and I find would, have advised in such terms but without feeling able to use the language of certainty.

If Coudert Had Given Proper Advice To IML What Would IML Have Done?

[44]Bearing in mind all the evidence I have heard, in particular, Mr Lewis’ own evidence, I have no doubt that he considered this a good investment opportunity at the time. However, I am equally satisfied that he did listen to advice from lawyers and approached such investments in a professional and reasonably cautious manner. It was fair comment by Mr Leggatt that he would be unlikely to have achieved the success he has, which is considerable, were it otherwise. Bolshevichka was manifestly keen, even determined, that the enterprise should be privatised and that IML as opposed to Obergan should be the purchaser of its shares. I need not go into detail but Mr Gurov was concerned by the spectre of the Mafia, in particular, that it would be likely to gain control through Obergan and he was very concerned to complete the transaction with IML as swiftly as possible. I conclude from this that Mr Gurov would not at all have favoured the idea of a new tender had that featured in Mr Sheedy’s advice. Further, although I do not place undue weight on this aspect of the matter, but it is relevant, the evidence overall suggested that the Russian courts at least below the highest level were not entirely reliable and were open to influence, in particular from powerful individuals or state agencies. At the material time Bolshevichka and the agencies concerned were supportive of IML and no doubt would have encouraged Mr Lewis, through Mr Gurov, to proceed with the SPA and Investment Agreement. In particular, the GKI was supportive of IML at this time. It was the GKI’s unusual decree allowing 49% of Bolshevichka’s shares to go to tender, that cleared the way for IML in the first place. I find against this general background and the findings I have already made, that the advice that Mr Sheedy would probably have given would, at least, have been sufficiently positive for Mr Lewis to proceed with the SPA and Investment Agreement including a three year period for IML’s investment. Mr Lewis confirmed in evidence that he would have been prepared to provide for a three year period, notwithstanding the discussions concerning licences and I accept that evidence.

Would The Transaction Have Failed In Any Event?

[45]Mr Leggatt submitted that if the issues considered thus far were resolved in IML’s favour the case should be viewed as a loss of a chance. In other words having found that IML, if properly advised, would have entered into the SPA and Investment Agreement with a three year investment period, the outcome from that depended, to an extent, upon the actions or decisions of others. In particular, the attitude of Mr Gurov, the MPF and the GKI, not to mention decisions of the courts if they were pressed into action.[46]Mr Swainston disagreed. He submitted that since the reference to five years in IML’s bid was incurable as a matter of Russian law, the claim failed and no assessment of damages could therefore arise. It was not a loss of chance case. I was referred to Allied Maples v. Simmons and Simmons (1995) 4 All ER 907, Hotson v. East Berkshire H.A. (1987) 1 AC 750 and Gregg v. Scott(2002) EWCA Civ 1471: CA 29th October 2002 amongst other helpful authorities. I would not care to be too dogmatic concerning the ratio decidendi of Gregg v. Scott, but it seems reasonably clear from that decision and from Hotsonthat if there is a finding of fact that the outcome for a patient, whether suffering illness or injury, would have been the same notwithstanding any breach of duty by a treating doctor or hospital, the purely statistical loss of or reduction in the chance of a better outcome is not to be regarded in law as damage. I do not regard those authorities as preventing the assessment of damages in this case on the basis of loss of a chance, provided that I find the chance to be a real as opposed to fanciful one.[47]On 13th July 2000 Master Eyre ordered that the issues of liability, including causation, should be tried first. He identified, for the avoidance of doubt, certain other pleaded issues which were to be included. In Allied Maples v. Simmons and Simmons the assessment of the chance was held to be part of the assessment of damages and not part of liability or causation. However, both parties have made full submissions on various issues which were deemed relevant to the outcome as it would have been, had IML opted to proceed as I have found. It was thus tacitly accepted throughout that I should decide those issues. Since they involve consideration of the evidence I have heard, including the experts, that is obviously desirable and I shall do so.[48]Mr Swainston submitted that apart from Russian law there were other issues, which I shall consider, which would have had the same effect. They included, the loss of Mr Gurov’s support and the failure to obtain approval from the Anti-monopoly Committee (AMC).[49]Under this general heading, therefore, I shall deal with the separate issues which arise, the first of which is Russian law. I have largely dealt with this topic under an earlier heading, albeit with a different emphasis, since the question there was different. Mr Swainston referred to the decision of the Moscow Arbitration Court of 24th April 1996 affirmed by the Federal Court of Arbitration of the Moscow Circuit on 22nd July 1996. He submitted that the chain of logic adopted by the Arbitration Court was unassailable, namely, that since the court held that the Minute of Tender was invalid, everything consequent upon it, including the SPA and Investment Agreement must also be invalid. He submitted that in view of those decisions I should find as a fact that under Russian law the result of the Investment Tender was invalid and could not have been cured by later action.[50]I have already summarised Mr Leggatt’s submissions on Russian law when considering the advice Coudert should have given. As to the court decisions, Mr Leggatt pointed out that since IML had failed to persuade a judge to enter a protest against the Federal Court’s decision, the case did not go to the Supreme Arbitration Court and we do not know its view. Whilst accepting that the Judge Yakovolev (Chairman of the Supreme Court) had refused to enter a protest, he submitted that he may well have been influenced by two matters that he saw fit to comment on in his Refusal, namely, that: “Also, a sale (SPA) of the object of privatisation by tender was completed with inconsistency from the approval Privatisation Plan and amendments thereto.” and that IML’s arguments regarding the contribution of an investment 81% of the size of the total value was not confirmed by documents.[51]If I had been presented with a decision by the highest Russian judicial authority on the relevant issue, that may well have been determinative. However, the position is as I have indicated and two factors are noteworthy: I do not know the extent to which Russian courts would consider themselves bound by the decisions mentioned and I see scope for argument as to whether the decision would necessarily have been the same if the SPA and Investment Agreement had stipulated for three years. However, there is the previously mentioned aspect of this matter upon which Mr Swainston himself relied in various other contexts and put to several witnesses in cross-examination, namely, the Russian courts, below the highest level, were not at the time entirely reliable. They were influenced by representations from sources other than the parties directly involved. Several of the witnesses I heard accepted that view and so do I. It is particularly relevant here because in 1996 IML had lost the support of Bolshevichka and Mr Gurov, in 1994 they had not. If the SPA and Investment Agreement had been concluded in accordance with the GKI approved Investment Programme, I am entirely satisfied that the Moscow Prosecutor would not have challenged the tender in 1994. IML then enjoyed everyone’s support and I regard it as unrealistic to suppose he would have acted on his own initiative. As to 1996, faced with the correct SPA and Investment Agreement which the GKI would have supported in 1994, I regard it as improbable that the Prosecutor would have been prompted to act by Mr Gurov alone. The MPF remained supportive of IML and I find that the GKI would at worst have adopted a neutral stance. Thus I cannot accept Mr Swainston’s submission on the effect of Russian law. If the so-called cure had been attempted, I find it would probably have succeeded. In reaching that conclusion I have taken into account Counsels’ submissions on Russian law and my view that in fact a challenge would probably not have been made. However, in my view, it is sufficient that I do not regard Russian law, either theoretically or in practice, as certain, in the sense Mr Swainston submitted. I find that if IML had completed the SPA and Investment Agreement including an investment term of three years there is a real chance that the cure would have been successful. I do not presently assess the chance, albeit my finding on a balance of probabilities gives some indication.[52]The next point relied upon by Mr Swainston was IML’s failure to obtain approval from the AMC for its share purchase (the SPA). This was another issue which generated debate between the experts and pages of written submissions from Counsel; quite rightly since the relevant legislation is far from easy to follow. Mr Swainston submitted that the failure to obtain AMC approval was another fatal defect. Again, in my view, the issue involves more than consideration of the relevant Russian legislation. Even if Mr Swainston is correct that approval was required, I need to consider the prospect of a challenge by the Prosecutor on that ground alone and its prospects, whether approval could have been obtained and whether Coudert can rely upon this point at all if the failure to obtain approval was its fault.[53]I shall take the last point first. The evidence as a whole, including from Mr Sexton, made plain that AMC approval was clearly an important matter in respect of IML’s purchase of the shares. Mr Sheedy himself realised this. He did not suggest that it would be reasonable for a solicitor in his position to fail to deal with it. Clearly it would not. He said that he did not deal with it because Mr Lugovskoy, in effect, told him he need not do so. His evidence was:
“I do not recall his precise words but I asked about whether they were considering anti-monopoly approval and he said something to the effect that: do not worry, we are taking care of that. Something to that effect. But it was clear that it was not something I needed to be concerned with.”
Mr Lugovskoy’s evidence was rather different. It was that he told Mr Sheedy that Mrs Bukharina of Bolshevichka had raised the issue with him back in August 1993 and subsequently told him that approval was not required. He denied ever telling Mr Sheedy that he need not consider it.[54]Mr Swainston could point only to two action sheets prepared by Mr Lugovskoy at Mr Lewis’ behest, as contemporary corroboration of Mr Sheedy’s account. The action sheets apportioned responsibility for AMC action to Mrs Bukharina and Mr Lugovskoy. However, the first of those was dated 7th August 1993 and the second 16th February 1994, long after the SPA had been signed.[55]Mr Leggatt relied upon the evidence, or rather the lack of it, as being wholly insufficient to justify Mr Sheedy’s inactivity. Given the accepted importance of the issue and that it might be thought to invalidate the SPA or expose it to a challenge, I accept Mr Leggatt’s submission. I have no evidence that Mr Sheedy explained the significance of a failure to obtain approval to Mr Lugovskoy, who was not a lawyer, or that he took any steps to check or satisfy himself that proper approval had been received. I would regard it as part of a solicitor’s duty to do so, even if the client had indicated that he would deal with such a question. It would take much clearer evidence than exists here to justify the solicitor doing nothing. Once again, in so far as Mr Sheedy was intending to convey that he was sufficiently instructed to ignore this important topic, it is very surprising that no contemporaneous documentation evidencing such instructions exists. There is no attendance note, no letter to the client, no memo or other communication to the partner in charge, Mr Simpson. I consider it inherently unlikely that Mr Lugovskoy would have given such clear instructions and find that he did not.[56]If Coudert had sought approval, there is nothing to suggest it would not have been forthcoming. If Mr Lewis had known that Coudert had not dealt with the point, I am satisfied he would have told Mr Sheedy in no un certain terms, to do so.[57]In view of those findings it follows that Coudert cannot avail itself of this line of Defence. However, I will deal shortly with the submissions on Russian law.[58]The starting point is Section 50 of the Regulations “On the Issuance of Securities and Circulation of Securities and on Stock Exchanges in the RSFR” as approved by Resolution No. 78 of the Russian Federation Government (the Securities Regulations):
“The acquisition of 35% or more of any issuer’s shares . . . . by a single legal entity or citizen . . . . shall require the prior consent of the RSFSR State Committee on Anti-Monopoly Policy. This requirement shall not apply to the founders of a joint stock company upon its foundation, if its charter capital does not exceed Roubles 50,000,000.”
Regulation 14 of the Commercialisation Regulations provided:
“The requirements established by the (Securities Regulations) shall not apply to the issue of shares and certificates by a joint stock company created according to the procedure established by the present Regulations.”
Mr Leggatt submitted that the sale of the 49% of Bolshevichka’s shares by the MPF to IML was the “issue of shares” within the meaning of Regulation 14 so that Section 50, above, did not apply in respect of the SPA. He supported that by reference to Regulation 32 of the Securities Regulations which provides that:
“The issue of securities into circulation (emission) is the sale of securities to their first owners (investors) citizens and legal entities.”
He also referred to the Regulations “On the Procedure for Registration and Issue of Shares by Open-Type Joint Stock Companies Founded in the Process of Privatisation.” In particular, Regulation 2 which sets out the procedure for an issue of securities of joint stock companies into circulation. The final step in the procedure is the open sale of the shares and Mr Leggatt submitted that it was clear that the issue of shares is only completed when they are sold to investors. He also relied upon a further provision of Regulation 14 of the Commercialisation Regulations which provides that the Privatisation Plan for the enterprise shall constitute the prospectus for the issue of its shares, and submitted that a prospectus was required when shares were sold.[59]Mr Swainston submitted that issue and circulation within the meaning of the Commercialisation Regulations were different concepts. He also referred to Regulation 9:
“By 1st November 1992, the Committee (the GKI), as the founder of the open-type joint stock company, shall submit for state registration a copy of the ratified Privatisation Plan, an application for registration and the charter of the joint stock company. The joint stock company shall be registered according to the procedure established by applicable law.”
[60]He submitted that this indicates the general procedure and also that the general law apart from the Privatisation Regulations applies where appropriate. He also referred to Regulation 10 of the Privatisation Regulations which provides for the founder (the GKI) to transfer to the appropriate Property Fund the rights of the founder of the joint stock company, the registered issue prospectus (Privatisation Plan), a letter confirming the registration of the company’s shares and the certificate for the appropriate packet of shares to be placed by open sale.[61]Regulation 32 of the Securities Regulations also expressly states that:
“An issue shall take place: Upon the foundation of a joint stock company and the placement of its shares among its founders . . . .”
Regulation 42 states that the issue of securities may be carried out by private placement or open sale. These are familiar processes, the problem is to interpret those provisions alongside the Commercialisation Regulations. Clearly the founder of the joint stock company in a privatisation process is the GKI which in turn transfers its rights to the appropriate Property Fund, in this case the MPF. Regulation 9 of the Commercialisation Regulations specifically refers to GKI as the founder of the joint stock company in question. Regulation 12 provides that the GKI shall transfer the rights of the founder (and his packet of shares in the form of entries in accounts) to the Property Fund. Regulation 14 I have already quoted. The Regulations dealing with the procedure for registration of the issue of shares provide for the issue to be subject to state registration at the legal address of the founder (the GKI). Regulation 2 then sets out the steps which go to make up an issue into circulation. It is these steps which, as Mr Leggatt pointed out, culminate in the placement of shares on favourable terms to, inter alia, staff members and open sale of the shares. The question is whether the reference to issuing securities into circulation is, as Mr Swainston submits, a separate concept from an issue of securities, and if so to which does Regulation 14 refer. Alternatively, as Mr Leggatt submits the issue referred to in Regulation 1 of the procedural regulations is a reference to the whole process of issuing shares in the course of privatisation to staff members and investors. Apart from the regulations I cannot see why it would necessarily be thought appropriate to exempt the sale of shares to an investor company such as IML from the Anti-Monopoly provisions. Mr Leggatt pointed out that the AMC was represented on the Tender Commission and submitted that was probably regarded as sufficient. On the other hand any suggestion that Anti-Monopoly provisions would apply to the GKI in the context of privatisation would be absurd. I cannot think it was considered necessary to include Regulation 14 simply for the avoidance of any doubt concerning such a proposition. I also have in mind that this was a special case in that IML would not normally have been able to acquire 49% of the shares by tender. Usually a purchaser or investor would not be acquiring 35% of the shares in a tender. On balance I favour Mr Leggatt’s interpretation of the various provisions.[62]Mr Swainston was, however, able to point to the decision of the Moscow Arbitration Court upheld by the Federal Court of Arbitration of the Moscow Circuit whereas Mr Leggatt found support in two letters from the Federal AMC which confirm that approval would not have been required. The Anti-Monopoly point was clearly dealt with by the Moscow Arbitration Court in its Decision but was the secondary issue. It was not referred to by Judge Yakovolev but I do not consider that Mr Leggatt can draw much comfort from that.[63]My conclusion on this issue is that AMC approval was probably not necessary but even if it was any challenge on this ground alone would have been very unlikely. As I have mentioned the AMC had a representative on the Tender Commission and no point was taken on this before 1996. That is not surprising because the evidence before me did not suggest that the AMC would have been concerned by any aspect of the purchase. Bolshevichka was one of many Russian textile enterprises, it did not have a dominant position in the market. IML had no existing share of the Russian market and the AMC noted in its letter dated 29th November 1996:
“. . . . . neither Illingworth Morris Limited Company nor the A O Bolshevichka, meet the criteria which required them to seek approval of the transaction pursuant to Article 18.”
Again I reserve any assessment of the chance involved.[64]Mr Swainston also submitted that the transaction was bound to fail, in the sense that it was invalid as a matter of Russian law, because it failed to comply with the so-called “80% rule”. This rule required 80% of the total number of shares of an enterprise undergoing privatisation to be sold for privatisation vouchers. In fact on 16th November 1993 the Tender Commission when announcing IML’s success in the tender stipulated the 90% of the shares must be paid for in privatisation vouchers up to their par value. Mr Swainston’s submission seemed to accept that IML had complied with the Tender Commission’s stipulation but nevertheless in reliance upon Mr Sexton’s evidence, submitted that IML’s payment contravened Russian law because it had not paid in vouchers for 80% if that was calculated by reference to the purchase price as opposed to the par or nominal share value. I can see that it is arguable that the rules calling for payment in vouchers for no less than 80% of the total number of shares in a joint stock company could be interpreted as meaning that the purchase as opposed to par value should be used. Such an argument would no doubt be supported by emphasising the reference to the total number of shares as opposed to any reference to par value as in the MPF’s own stipulation.[65]Mr Leggatt relied upon Mrs Nikiforova’s evidence which was that during the time she was the secretary of the Tender Commission the invariable practice in many hundreds of investment tenders was to calculate the amount payable by means of privatisation vouchers based on the nominal value of the shares sold and that she was unaware of any challenge to that practice. Mr Leggatt also relied upon Ms Alexandrova’s evidence that in any event the obligation was specifically addressed to the state authorities and in the event of non-compliance it was the authority or its officials who would be guilty and punishable with fines. Mr Leggatt also relied upon the fact that even in 1996 when there was a serious challenge to the validity of this transaction neither the Moscow Prosecutor, GKI nor any other agency nor indeed the court itself relied upon this point. Mr Swainston also referred to Article 30 of the Privatisation Law which listed amongst the violations entailing invalidity of a transaction “. . . . . . illegal means of payments were used in the purchase”. Ms Alexandrova, to my mind convincingly, stated that payment in Roubles would not as a matter of general Russian law be regarded as “illegal means of payment”.[66]While I see force in Mr Swainston’s argument based simply upon a construction of the rule itself, bearing in mind the evidence as a whole and in particular that no-one took this point in the 1996 proceedings, I cannot imagine that it would have raised its head in the event that IML had entered into the SPA and Investment Agreement on the basis a three year investment period. I accept Mrs Nikiforova’s evidence. There was also evidence that the MPF understood and applied the rule on the basis of par value as indeed did the Tender Commission itself.[67]Even if Mr Swainston’s construction argument would have found favour with a Russian court, I was persuaded by Ms Alexandrova’s evidence that this would have been regarded as an administrative misdemeanour calling for a fine of the officials responsible but would not have invalidated the transaction.[68]Mr Swainston’s final ground for asserting that the transaction was doomed was based upon the admitted fact that Mr Gurov and Mr Lewis eventually fell out with each other. He submitted that Mr Gurov obstructed every attempt by IML to further the business of Bolshevichka so that nothing was done to take IML’s investment forward. Mr Lewis in evidence said that the difficulties began in mid-1995 and arose from the question of control of the company. It was his view that the 1996 proceedings arose out of this disagreement. However, as Mr Leggatt submitted, at least part of a lawyer’s brief is to protect his client against the souring of relations between the parties in the future. Looking at this ground on its own, the hypothesis must be that the Russian courts could have been persuaded to invalidate an otherwise valid transaction simply because Bolshevichka, through Mr Gurov, no longer wished to pursue it. Notwithstanding the evidence as to the unreliability of the lower Russian courts, such a proposition would require much stronger evidence than Mr Swainston was able to point to here. The evidence was that at the highest level the legal process was sound and the higher courts respected. I reject this point. All these points will fall to be considered in the assessment of IML’s chance of curing the problem created by the inclusion of five years in its bid.

Limitation

[69]Coudert introduced this plea in paragraph 13 of its Re-Re-Re-Re-Amended Defence served on 11th December 2002 during the trial. Mr Leggatt’s comment that this was something of an after-thought might well be considered justified. This action was commenced on 6th December 1999 and it seems to me, on my findings, that Coudert was in breach of its contractual obligations after the 6th December 1993 and indeed up to the signing of the SPA on 16th December 1993. A cause of action in tort is not complete until damage is suffered, which I would hold was 16th December 1993 at the earliest when IML entered into the SPA. I could find no substance in these points. Mr Lewis came under fire in cross-examination on the basis that he, or others for whom he was responsible, had behaved badly, even dishonestly, in various respects. These included representations about Christian Dior licences, a receipt from the Tender Commission for documents received and IML’s corporate arrangements. I do not consider any of those attacks was made good and I reject them. Mr Lewis made some factual mistakes in evidence, but I also reject the suggestions made that those were dishonest mistakes.

Summary of Findings

[70]i. Coudert had a duty to consider the privatisation documents including the Investment Programme and advise IML accordingly; ii Coudert was in breach of that duty; iii. But for Coudert’s breach of duty, IML would have entered into the SPA with the MPF and the Investment Agreement with Bolshevichka on the basis of a three year Investment Programme; iv. There was a real chance that the SPA and Investment Agreement would not have been held invalid or even challenged in the circumstances mentioned in iii.; v. IML’s damages therefore fall to be assessed on the basis of loss of a chance. I have made my findings on the balance of probabilities in case it should be held hereafter that it is the correct approach to the case.[71]At the very end of submissions Mr Swainston raised a point on contributory negligence which Mr Leggatt protested had not been pleaded and in any event pursuant to Master Eyre’s Order should have been dealt with during this hearing; since it had not been it was now too late. The point arose out of an alleged later opportunity that IML had to take part in a tender of shares. I doubt that I can now deal with this point since it would appear to involve or be susceptible to further evidence. If Mr Swainston wishes to pursue this point I will hear argument when this judgment is handed down or on a convenient date.[72]Finally, neither Counsel addressed me on the quantification of the chance and consequently I have not assessed it. Since I have found that to be the appropriate approach to the assessment of damages and since I have heard all the evidence and made findings upon it, it seems to me that I should do so and that my assessment should then be adopted by whoever conducts the assessment of damages should one become necessary in the absence of agreement.. I shall myself consider this matter and invite Counsel to make submissions, if they wish, as above. - 0 – 0 – 0 -