Peters & Peters

Objectivity and Detachment: Lessons for Contempt Applications in Hard-fought Litigation

Philip Gardner and Emmy Ehrenberg-Shannon discuss the recent case of Navigator Equities Limited and Another -v- Mr Oleg Deripaska [2020] EWHC 1798 (Comm) and the important guidance it provides for contempt applications and private prosecutions arising out of hard-fought litigation.

The dispute between Mr Chernukhin and Mr Deripaska (of which this judgment forms a part) is one of the most high profile of the oligarch disputes which regularly come before the English Court. The underlying dispute relates to ownership of significant property holdings in Moscow and was determined in Mr Chernukhin’s favour in an arbitration brought under the auspices of the LCIA. Both Mr Chernukhin and Mr Deripaska subsequently engaged in litigation before the English Court relating to the LCIA award and the enforcement thereof. The litigation is notable for:

  • The high value nature of the dispute engaging multiple jurisdictions and a sensitive political context;
  • The uncompromising approach to the dispute taken by both sides in a ‘no stone unturned’ approach in all proceedings;
  • The initiation of a private prosecution by Mr Derispaska of Mr Chernukhin for allegedly seeking to pervert the course of justice; and
  • The application, brought by Mr Chernukhin, to commit Mr Deripaska for alleged contempt of the English Court, when Mr Deripaska had already satisfied the LCIA award and so complied with the ultimate order of the English Court which upheld the LCIA award.

The judgment is an important guidepost for professional advisors who are engaged in high-stakes litigation and, in particular, disputes where the parties themselves have a highly acrimonious relationship. The comments and conclusions of Mr Justice Baker make clear the need to remain objective and consider the need for relevant expertise at an early stage whenever matters of contempt and/or private prosecutions are raised.

Background facts and procedural history

The judgment of Navigator Equities Limited and Another -v- Mr Oleg Deripaska [2020] EWHC 1798 (Comm) arises in the context of a lengthy and procedurally complex litigation, essentially fought between two Russian businessmen, being Mr Anatolevich Chernukhin (‘Mr Chernukhin’) on the one side and Mr Oleg Deripaska (‘Mr Deripaska’) on the other.

In summary, the litigation relates to a dispute over very valuable property holdings in Moscow, which were owned through a joint venture vehicle, Navio Holdings Ltd (‘Navio’). A shareholder agreement relating to Navio was concluded in May 2005 between (1) Mr Deripaska and his company Filatona Trading Ltd (‘Filatona’) and (2) a Ms Lolita Danilina (‘Ms Danilina’) and Navigator Equities Ltd (‘Navigator’) (the ‘Shareholder Agreement’). The underlying dispute centred on whether Ms Danilina was acting as Mr Chernukhin’s nominee when she became party to the Shareholder Agreement, and whether she did so with Mr Deripaska’s knowledge. Mr Chernukhin claimed that she was his nominee, that Mr Deripaska was aware of this and that he was therefore a true joint venture partner in Navio.

In November 2015, the matter was brought before the LCIA. The arbitrators granted an award in Mr Chernukhin’s favour in July 2017, the consequence of which was that Mr Deripaska and Filatona were to buy Mr Chernukhin’s shares in the joint venture (the ‘LCIA Award’). Mr Deripaska challenged the LCIA Award pursuant to s.67 of the Arbitration Act 1996 and a hearing was set for late 2018 (the “s.67 Challenge”).

In April 2018, US sanctions were imposed on Mr Deripaska and, as is the norm when US sanctions are imposed, on any business that was considered by the US authorities to be owned or controlled by him.

In May 2018 Mr Chernukhin and Navigator obtained a worldwide freezing order against Mr Deripaska (the ‘WFO’) in support of their attempts to enforce the LCIA Award. At the June 2018 return hearing it was agreed that the WFO would be replaced by three undertakings relating to specific shares in En+ Plc (‘En +’), a Jersey based company, the value of which was more than sufficient to cover the buyout ordered by the LCIA Award (the ‘Undertakings’). The Undertakings were given by (1) Mr Deripaska, (2) B-Finance Ltd (the company which owned the relevant shares in En+ and which was indirectly owned or controlled by Mr Deripaska) (‘B-Finance’) and (3) Reynolds Porter Chamberlain LLP (‘RPC’) (solicitors for Mr Deripaska).

In short, the relevant parts of the Undertakings were as follows:

  • Mr Deripaska’s undertaking required him to ensure that the relevant shares in En+ (as owned by B-Finance) remained ‘available for direct enforcement’ and prevented him from ‘[taking] any steps or [procuring] the taking of any steps’ which might impede B-Finance from upholding its undertaking.
  • B-Finance’s undertaking required the company to not dispose or otherwise deal with the En+ shares pending the outcome of proceedings. It also required that, should Mr Deripaska fail in the s.67 Challenge, and subsequently fail within 42 days to comply with the LCIA Award, the company would take ‘all necessary steps to sell such quantity of the shares as is required’ to meet the payment due.
  • RPC’s undertaking required the firm to, ‘hold the Share Certificates and not dispose of or otherwise deal with the shares in any way’ pending the outcome of proceedings. The undertaking further required that, should the s.67 Challenge fail, RPC would take ‘appropriate steps to facilitate the sale of such number of shares as are required to satisfy any Order of the Court’.

In February 2019 the Commercial Court rejected the s.67 Challenge and upheld the LCIA Award.

In or around May 2019, En+ was redomiciled from Jersey to a Russian Special Administrative Region in response to the US sanctions.

On 30 September 2019 Mr Deripaska made the payment required under the LCIA Award and the buyout of Mr Chernukhin’s shares in Navio was subsequently completed on 1 October 2019. A consent order dated 4 October 2019 discharged the Undertakings.

Applications before the Court

In November 2019, Mr Chernukihn and Navigator issued a contempt application against Mr Deripaska (the ‘Contempt Application’). In summary, the Contempt Application alleged that the redomicilation of En+ was prohibited by the Undertakings and that Mr Deripaska was in breach of his undertaking because he actively facilitated or failed to block the redomicilation.

Alongside the Contempt Application, Mr Chernukhin and Navigator also issued a claim for damages as a result of breach of contract, alleging that the Undertakings amounted to a commercial contract and that the redomiciliation therefore breached not only the Undertakings but also that contract (the ‘Contract Application’).

In February 2020, Mr Deripaska filed a cross-application to strike out the Contempt Application as an abuse of process.  Mr Justice Baker agreed, and struck out the Contempt Application. Thereafter, Baker J agreed to hear arguments relating to the Contract Application in order to determine whether Mr Deripaska’s undertaking amounted to a contract and, if so, whether that contract had been breached.

The Contempt and Abuse Applications

Baker J gave several key reasons for his decision to strike out AC’s application as an abuse. These can be summarised as follows:

  1. The timing of Mr Chernukhin’s application, i.e. after the payment that the Undertakings were designed to protect was paid and the Undertakings subsequently discharged, meant that the Contempt Application was only purportedly brought in the public interest to see punished an historic alleged breach of Mr Deripaska’s undertaking. Mr Chernukhin’s deemed knowledge of the redomiciling, and the use Mr Chernukhin sought to put the Contempt Application to in negotiation were indications of abuse.
  2. Mr Chernukhin did not bring the Contempt Application dispassionately; the inference to be drawn from the facts was that ‘the contempt application was issued and has been pursued by the claimants out of […] [Mr Chernukhin’s] deep-rooted personal animosity towards [Mr Deripaska]’ and as tit-for-tat having been unsuccessfully privately prosecuted by Mr Deripaska.
  3. The question of whether Mr Deripaska acted in breach of his undertaking, in the context of the Contempt Application, was being deployed to ‘vex and harass the defendant, not in order to draw serious misconduct to the attention of the court so as to allow the court to take its own view of what, if any, sanction it should draw in the public interest’.
  4. Importantly, those acting for Mr Chernukhin had ‘come to argue the case for Mr Deripaska to be found guilty of contempt’ and served an affidavit ‘replete with tendentious comment, argument, and irrelevant but prejudicial material’. The Judge concluded that they were assisting the claimants in ‘seeking to load the dice against him [Mr Deripaska]’ and lacked the necessary objectivity.

In coming to these conclusions, Baker J analysed the nature of contempt proceedings. Whilst he distinguished contempt proceedings from private prosecutions, the Judge nonetheless referred to contempt proceedings as a ‘quasi-prosecution’ and ‘quasi criminal in character’.  He noted the serious repercussions of such applications, emphasised the requirement that they be brought with legitimate motive and stressed the need for courts to be astute to prevent contempt applications being pursued for non-legitimate aims. Baker J further explained that any applicant pursuing a contempt charge will be doing so ‘as much as quasi prosecutor serving the public interest as it does as private litigant pursuing its own interests in the underlying dispute’. An applicant pursuing a contempt charge must act dispassionately and present evidence in such a way as to ‘allow the facts to speak for themselves […] [and] the court to make a fair quasi criminal judgement’.

The Contract Application

As for the Contract Application, the Court concluded that, whilst it is possible for undertakings given to the court to also equate to an enforceable contract between the parties, whether or not this is the case will depend on the relevant facts and circumstances of the case at hand. In the present case, the Undertakings, with reference to the context in which they were given, were not capable of being construed as a commercial contract.

Baker J further noted that, even if the Undertakings were capable of being construed as a contract, there was no breach and resultantly no damages. The Judge reasoned that:

  1. The allegation that Mr Deripaska took a relevant step to procure redomiciliation was speculative; the unchallenged evidence was that Mr Deripaska was in favour but had no involvement in B-Finance decision making.
  2. Should the redomiciliation have meant the shares in En+ were no longer available for direct enforcement, then Mr Deripaska’s failure to take steps to prevent it might have brought about a breach of his undertaking. However, the shares remained available for enforcement throughout the redomiciliation process.

Key takeaways

The decision in Navigator Equities presents some important lessons that should be borne in mind whenever contempt proceedings are considered, particularly when they arise in the context of long running or hard-fought litigation. Although contempt cases are not, and should not be confused with, private prosecutions, their ‘distinctive character’ requires lawyers to act ‘dispassionately’, ‘even-handedly’, ‘fairly’ and at all times ‘solely in the public interest’ in their pursuit of contempt charges. It is also crucial that the applicable criminal standard of proof remains at the forefront, so that previous civil success does not influence or cloud judgement.

This case is an essential reminder of the ongoing judicial concern as to what Baker J articulated as ‘a significant general increase in hostility and aggressiveness in the conduct of disputes’. Such a trend, which will be well-familiar to practitioners, presents a clear risk to a successful litigation strategy and should be kept carefully in mind.

Given Baker J’s obiter statement that the question of motive is subjective and to be decided with reference to the subjective motive or purpose of the claimant (as opposed to a purely objective question as to whether there was some form of proper purpose for pursuing a contempt charge), the reasons for bringing contempt proceedings need thorough scrutiny. It will undoubtedly be beneficial for practitioners to pay attention to the Judge’s final comments and consider the question of separate legal teams. In the case of private prosecutions such a precaution is clearly essential both for reasons of objectivity and because of the criminal law expertise required by such proceedings.

In the case of contempt applications, however, while civil litigators must always guard against any loss of objectivity, the existing litigation team will often be favoured for reasons of familiarity with the case, expertise and cost effectiveness. Indeed, the existing litigation team’s experience of the case will often assist them in assessing any potential contempt and whether it warrants such an application. The Judge did not endorse any general rule of separate legal teams though the possibility of separate teams for contempt should be kept carefully in mind (and would be preferable in some circumstances).