Commercial Innovation Bank Alfa Bank v Kozeny (Bahamas) [2002] UKPC 66

Judicial Committee of the Privy Council
Case No Privy Council Appeal No. 5 of 2002Venue FROM THE COURT OF APPEAL OF THE COMMONWEALTH OF THE BAHAMAS
Between
Commercial Innovation Bank Alfa BankAppellantKozeny (Bahamas)Respondent
Before
Lord Nicholls of BirkenheadLord SteynLord HoffmannLord MillettLord Rodger of EarlsferryDate 11 December 2002
[1]:- Lord Nicholls of Birkenhead Lord Steyn Lord Hoffmann Lord Millett Lord Rodger of Earlsferry [Delivered by Lord Steyn ] The question is whether a default judgment, which was entered on 30 April 1999 by the Meshansky Inter-Municipal Court of Moscow against the respondent ("Mr Kozeny") in favour of the appellant ("Alfa Bank"), is enforceable in the Commonwealth of the Bahamas. In the Bahamian courts the issue arose whether the Alfa Bank was entitled to summary judgment against Mr Kozeny on the Russian judgment. The trial judge thought the answer was clearly Yes and granted summary judgment. The Court of Appeal thought differently, reversed the decision of the trial judge and remitted the matter for a further hearing at first instance. By leave the Alfa Bank now appeals to the Privy Council. Exceptional as it is for the Privy Council to consider such an interlocutory issue, the fact is that the matter is now before the Board and their Lordships must examine it.[2]In outline the chronology is as follows. By a Credit Facility Agreement dated 2 October 1997 the Alfa Bank provided Mr Kozeny with a credit facility in the sum of US$50 million at an interest rate of not less than 18 per cent per annum. The stipulated date for repayment was 30 December 1997. The Agreement was governed by Russian law and provided that "the Parties shall settle ... disputes in Meshansky Inter-Municipal Court of Moscow". A Contract of Guarantee dated 2 October 1997 was entered into between Alfa Bank, Mr Kozeny and Audia Investments Limited, the latter guaranteeing the obligations of Mr Kozeny. Audia Investments Limited ("Audia") was a company incorporated in the Virgin Islands. The due performance of Audia was secured by a further written agreement.[3]On 14 September 1998 Alfa Bank made a demand against Mr Kozeny for repayment of sums advanced under the Credit Facility Agreement. On 28 September 1998 a demand for repayment was made under the Contract of Guarantee. No payment was received by the Alfa Bank.[4]On 26 November 1998 Alfa Bank brought a claim against Mr Kozeny to recover the principal sum of US$5,784,261.80 and interest of US$994,893.03 (totalling US$6,779,154.83) owing under the credit facility in the agreed Moscow court. The claim was served in late January or early February 1999 upon Mr Kozeny by sending a copy of the proceedings in the post to Usteristrasse 14, CH-8021, Zurich, Switzerland, the address given in the Credit Facility Agreement. This was the address of Von Meiss Blum & Partners, the Swiss lawyers acting for Mr Kozeny. By a letter dated 15 February 1999 to the Moscow Court the Swiss lawyers stated that they could not confirm that notice of the proceedings had been or could be communicated to Mr Kozeny.[5]On 30 April 1999 the Moscow Court heard the proceedings. Mr Kozeny did not appear at the hearing. The Moscow Court held that Mr Kozeny had been duly notified of the date of the hearing and that he had failed to submit his objections about the merits of the claim. The Court entered judgment in default against Mr Kozeny in favour of the Alfa Bank for US$6,779,154.83 and Court fees and duty in the amount of Roubles 1,776,477 (US$67,520.98).[6]Under Russian law Mr Kozeny had the opportunity to appeal against the judgment within 10 days and as a party not present at court he had the right to file a petition for review of the judgment within 15 days. Mr Kozeny decided not to lodge an appeal or petition for review.[7]Alfa Bank then took proceedings to enforce the Russian judgment in The Bahamas where Mr Kozeny resides. On 15 November 1999 Alfa Bank issued a writ of summons. Mr Kozeny entered an appearance. On 24 January 2000 Alfa Bank applied for summary judgment pursuant to Order 14, Rule 1 of the Rules of the Supreme Court 1978.[8]When the application for summary judgment came before the trial judge, there were four affidavits before him, namely a formal affidavit exhibiting the Russian judgment, a first affidavit of Gerald O'Mahoney (solicitor for the appellant), which described the background, an affidavit by Mr Kozeny in opposition to the summary judgment application, and an affidavit in reply by Mr O'Mahoney. Numerous exhibits were attached to the affidavits.[9]Before the judge the application for summary judgment was resisted on a number of grounds which have since been abandoned. The principal ground, which has survived, was that Alfa Bank obtained the Russian judgment fraudulently in that they had dishonestly withheld a material document. A Letter of Understanding executed on the same date as the Credit Facility Agreement provided that Audia "takes over the position of the borrower as of finalisation of this registration process" for the opening of a bank account for Audia in Russia. It was alleged that these requirements had been fulfilled by 22 December 1997. Secondly, it was argued that Alfa Bank could and should have arranged for personal service of the Russian proceedings on Mr Kozeny. Thirdly, Mr Kozeny applied for an adjournment to prepare evidence of Swiss law about the effect of the Letter of Understanding.

The judge observed about the principal ground:

"Clutching at straws, the defendant falls back on the device of asserting that he was not really the borrower, Audia Investments Limited having taken over as borrower; the plaintiff knew this and therefore the plaintiff intentionally misled the Moscow court. In my view such assertion cannot be regarded as sustainable in the real world ..."
About the second ground he said:
"I cannot believe that he did not know of the proceedings, and, in any event, due service occurred under Russian procedural law, with service on the defendant at the address (given in the Agreement) of his Swiss lawyers."
He rejected the application of Mr Kozeny for an adjournment to file evidence of Swiss law, saying no further affidavit was called for. The judge gave judgment in the sum asked for and ordered interest to be paid.[11]Mr Kozeny appealed to the Court of Appeal. By a judgment given on 7 February 2001 the Court of Appeal allowed the appeal and remitted the matter for a fresh hearing. The Court of Appeal did not analyse the issues and the evidence. The thrust of the Court of Appeal's reasoning on the principal ground was as follows:
"Whatever may have happened in the Russian proceedings, the appellant was certainly entitled to raise this issue of fraud in these proceedings and to assert facts based on Swiss law that the letter of understanding did have the effect that he was contending for and was an answer to the claim in this jurisdiction."
The Court of Appeal did not address the other arguments which were advanced by Mr Kozeny before the judge.[12]On appeal to the Privy Council it was common ground that the Russian judgment was prima facie enforceable in The Bahamas. The principal question was whether the judgment is impeachable for fraud: Dicey and Morris, The Confict of Laws, 13th ed. 2000 Vol 1, Rule 43, at 518. Mr Kozeny's case was that the judgment was impeachable for fraud not by the Moscow court but on the part of Alfa Bank. Bearing in mind that the Bahamian proceedings were for summary judgment, the question is whether there was a triable issue whether fraud had been committed in the obtaining of the judgment.[13]Counsel for Mr Kozeny submitted that Alfa Bank dishonestly concealed the Letter of Understanding from the Moscow Court. He said it amounted to a fraud on the Moscow Court since it amounted to a misrepresentation that it was Mr Kozeny instead of Audia who was liable to be sued as borrower for repayment of the loan. He said that Audia had in fact replaced Mr Kozeny as the borrower under the Credit Facility transaction with the consent and knowledge of Alfa Bank. Counsel treated as his trump card a letter dated 22 December 1997 from Mr Kozeny's Swiss lawyers to Alfa Bank. It read as follows:
"In captioned matter I have been informed by our correspondent attorney Mr Igor Kondrashov that the company Audia Investments Limited is now registered in Moscow and has opened an I-account and an USD-account. Therefore and as agreed when signing the Credit Facility agreement, please arrange for the change of debtor of the Credit Facility agreement from Mr Viktor Kozeny to Audia Investments Limited, the company which gave you the securities as collateral until today. It might be a good idea to arrange for this now when we extend the maturity date. You have told me on the phone a few days ago that you will compile the various drawings and will draft a single Credit Facility Agreement for the whole amount drawn until to date."
He stated that this letter shows that Audia had replaced Mr Kozeny as borrower by 22 December 1997.[14]This argument must now be put in context. Audia was not a party to the Credit Facility Agreement. Audia was also not a party to the Letter of Understanding. It can be accepted that it was the intention of Alfa Bank and Mr Kozeny that Audia would in due course become the borrower instead of Mr Kozeny. The question is whether it happened. The only way in which Mr Kozeny could have been "replaced" (to use counsel's terminology) by Audia was by a subsequent tripartite agreement between Alfa Bank, Mr Kozeny and Audia. No written agreement to this effect exists. There is also no evidence of an oral agreement of such a nature. The letter of 22 December 1997 on which counsel placed such heavy reliance was not written on behalf of Audia. Moreover, it does not record an impression that Mr Kozeny had already been replaced as borrower: it contemplates future action.[15]It is argued that such replacement had taken place by 22 December 1997. Yet on 29 December two agreements were executed which are entirely inconsistent with that case. The first was an extension of the Credit Facility Agreement until 30 June 1998. Mr Kozeny continued to be the borrower. Secondly, there was also an extension of the Guarantee of Audia. Moreover, a letter dated 25 September 1998 from the Swiss lawyers of Mr Kozeny to Alfa Bank revealed that there were negotiations to "prolong" the credit line in favour of Mr Kozeny until the end of 1998. All this is entirely inconsistent with the suggestion that Mr Kozeny had been replaced as borrower by 22 December 1997.[16]Against this background one poses the question: is there anything whatever to cast doubt on the honesty of Alfa Banks' statement that for the purposes of the Russian proceedings they regarded the Letter of Understanding as irrelevant? The answer must be No. The Court of Appeal was in error in concluding that there was a triable issue.[17]The second argument on behalf of Mr Kozeny was based on the undoubted principle that a foreign judgment may be impeached if the proceedings in which the judgment was obtained were opposed to natural justice: Dicey and Morris, op cit, Rule 45, at 527. Counsel argued that the defendants should have arranged for Mr Kozeny to be personally served. This defence could only avail Mr Kozeny if there was an injustice in that judgment went against him in proceedings of which he had no knowledge. Mr Kozeny and his Swiss lawyers have carefully avoided saying that he was unaware of the Russian proceedings. Like the trial judge their Lordships are satisfied that Mr Kozeny was in fact informed of the proceedings by his Swiss lawyers. This argument therefore fails.[18]That leaves the last argument advanced by counsel for Mr Kozeny. He submitted that the trial judge erred in refusing the application for an adjournment to file evidence of Swiss law. He concedes, however, that only a new contractual agreement in the nature of a novation could have relieved Mr Kozeny of his personal liability as a borrower. The argument that the conclusion of such an agreement by 22 December 1997 can arguably be inferred has already been rejected. In these circumstances the judge was right in concluding that there was no need for a further affidavit on Swiss law. This argument must also be rejected.[19]Their Lordships are satisfied that the Court of Appeal erred in allowing the appeal from the decision of the trial judge. Their Lordships will humbly advise Her Majesty that the appeal should be allowed, the judgment of the Court of Appeal of 7 February 2001 set aside and the order of the trial judge of 26 July 2000 reinstated. The respondent must pay the appellants' costs in the Court of Appeal and before their Lordships' Board.