Piercing the corporate veil: not on this occasion

In a landmark ruling, the Court of Appeal has held that there was no legal, factual or principle basis on which the court could pierce the corporate veil in order to make the controller of a company a party to a contract entered into by the company. The court’s decision is in keeping with the settled principles of contract law such as the separate legal personality of a company and the doctrine of privity of contract.

In a landmark ruling, the Court of Appeal has held that there was no legal, factual or principle basis on which the court could pierce the corporate veil in order to make the controller of a company a party to a contract entered into by the company (VTB Capital plc v Nutritek International Corp and others [2012] EWCA Civ 808).

In doing so, the court overruled the decisions in Antonio Gramsci Shipping Corp v Stepanovs [2011] EWHC 333 (Comm) (see bulletin Jurisdictional enforcement against non-party "puppeteer" (www.practicallaw.com/8-505-7370)) and Alliance Bank JSC v Aquanta Corporation [2011] EWHC 3281 (Comm) (see box "Corporate veil").

The court's decision is in keeping with the settled principles of contract law, such as the separate legal personality of a company and the doctrine of privity of contract.

The dispute

The dispute concerned allegations of fraud and conspiracy brought by the claimant bank, VTB, against three companies and a Russian individual in relation to the sale of nine Russian dairy businesses.

VTB loaned $225 million under a facility agreement to Russagroprom LLC (RAP), the buyer, to fund the acquisition of the dairy businesses from Nutritek, the seller. RAP eventually defaulted on the loans, and VTB only recovered around $40 million by enforcing the security.

VTB alleged that it was induced to enter into the facility agreement by misrepresentations made by Nutritek as to the value of the dairy businesses, and the fact that RAP was under the common control of the other three defendants: Marshall Capital Holdings Limited, Marshall Capital LLC and Konstantin Malofeev.

Initially, VTB sought to make the three defendants liable as joint tortfeasors to the deceit and/or as parties to the conspiracy to defraud VTB. Subsequently, it also made an application to amend its particulars of claim to include a claim in contract against the defendants on the grounds that the court could pierce the corporate veil of RAP and hold the defendants, as the alleged controllers, liable for breach of the facility. This would allow VTB to rely on the English jurisdiction clause in the facility agreement.

The defendants argued that the English court had no jurisdiction to hear the claim, and that Russia was the proper forum for the dispute.

The decision

The court analysed all the cases which have addressed the issue of lifting the corporate veil, from In re Darby [1911] 1 KB 95 to Gramsci, and held that the principle of piercing the corporate veil was limited to situations where it was necessary to provide a practical solution in specific factual circumstances.

The court held that, on the present facts, VTB's claim in contract was not founded on a cause of action known to English law, and there was no principled basis on which the law might be incrementally developed to recognise VTB's claim in contract against the defendants.

However, in appropriate cases, the corporate veil could be pierced to identify substantially the company with those in control of it. This would justify the grant of a remedy against the controller of the company as well as the company in cases where it was just and convenient (for example, in Gilford Motor Company v Horne [1933] 1 Ch 935 and Jones v Lipman [1962] 1 WLR 832). The courts would grant such a remedy by way of the exercise of a discretionary jurisdiction.

This logic could not be extended to treat the controller as having been a party to the company's contract as that would directly contradict the fundamental principle of separate legal personality recognised in Saloman v A Saloman & Co Ltd [1897] AC 22 (see box "Corporate veil").

In fact, to treat the three defendants as parties to the facility agreement would be to make a fundamental inroad into the basic principle of law that contracts are the result of consensual arrangements between, and only between, those intending to be parties to them.

In this case, VTB had a perfectly good remedy against the defendants by way of a claim in deceit. There was no lacuna in the law that required to be filled by such a substantial interference with the settled law of contract.

Implications

This decision may be seen as limiting the ways in which the English court may exercise its jurisdiction over foreign parties, thereby making English courts less attractive for litigants seeking remedies against parties outside the jurisdiction. However, by reaffirming the well-established and long-standing principles of contract law and rejecting what would otherwise have been a controversial development in this area, the court has provided more commercial certainty to parties.

This means that individuals and companies around the world can continue to feel comfortable in opting for English law jurisdiction clauses in written contracts without any uncertainty over which entities/individuals would be treated as a party to the contract. The certainty of the fundamental legal principles and consistency in their interpretation offered by the English courts is one of the primary reasons why it is favoured as a jurisdiction for the determination of disputes by international parties.

By not developing the law on piercing the corporate veil in the way in which VTB was seeking to, the court has clarified that it would not adopt jurisdiction to subject parties to a contract to which they had neither agreed nor intended that they should be subject.

Justin Michaelson is a partner and Swati Tripathi is an associate at SJ Berwin LLP. SJ Berwin represented Marshall Capital and Konstantin Malofeev.

An application has been made by VTB to the Supreme Court for permission to appeal.