#5129 - Base Metal Trading V. Shamurin - Conflict of Laws BCL

Base Metal Trading v. Shamurin

Facts

BMTL, a Guernsey company, claimed damages against Mr Shamurin, a Russian national and its former director and employee, for breach of a common law, equitable and/or implied contractual duty of care by entering into speculative trades on the London Metal Exchange on its behalf. It was common ground that such claims were not actionable under Russian law and in any event would have been time-barred in Russia. The judge held that Russian law was the proper law of each claim. He also indicated that even if Guernsey law or English law (which were taken to be the same) applied no breach of duty had been established against Mr Shamurin. BMTL now accept the judge's finding that Russian law was the proper law of Mr Shamurin's contract of employment, but challenges his other findings.

Mr Shamurin and his two Russian friends, Yuri and Mikhail Zhivilo, who at all relevant times were resident and working in Moscow saw the opportunity to make money from the export of non-ferrous metal from Russia to the West. To this end they formed a number of Russian companies to invest and trade in metal. By the autumn of 1992 they were considering setting up a foreign company. The structure envisaged was that the foreign company would make short-term loans to the Russian companies to enable them to purchase metal in Russia. The metal so purchased would then be sold on to the foreign company which would take title outside Russia and sell it to western companies. This would enable the foreign company to generate profits outside Russia in hard currency and attract customers reluctant to become involved in the confused banking, legal and regulatory situation prevailing in Russia at the time. The company was therefore to be established in a stable jurisdiction with a clearly defined legal system. A company established in or associated with the United Kingdom was one obvious choice. Such a company would also be able to borrow at more favourable interest rates than those on offer to Russian companies.

Against this background and for these reasons BMTL was incorporated in Guernsey on 4 December 1992 with nominee directors and shareholders.

Within days of its incorporation Yuri and Mr Shamurin each became a director and 50% shareholder of BMTL. They agreed that each would be paid a salary of $3,300 per month for their services to the company and that Mr Shamurin would be its managing director. No formal contracts of employment were drawn up but it was common ground that each director of the company was also its employee. Yuri's role in BMTL was to buy the metal in Russia and arrange for its delivery. Mr Shamurin was to sell the metal to the foreign purchasers and be responsible for the company's activities outside Russia.

BMTL’s claim: BMTL's claim however is based on the fact that in 1993 and 1994 it made losses which it puts at more than $6m as a result of Mr Shamurin's speculative metal trading on the LME. At trial Mr Shamurin accepted that some of these losses were the result of speculative trading, but contended that each speculative transaction had been discussed with the Zhivilos brothers. The judge rejected Mr Shamurin's evidence about this and found that they knew nothing about his speculative trading until August/September 1994 by which time it was no longer possible for him to conceal the losses and consequent calls for margin from the brokers.

Judgment of the Lower Court

Contractual Claim: The judge rejected the contractual claim against Mr Shamurin under the provisions of article 6 of the Rome Convention on the Law Applicable to Contractual Obligations which became part of the English law by virtue of the Contracts (Applicable Law) Act 1990. Article 6(2) provides that in the absence of an express choice of law a contract of employment shall be governed by the law of the country in which the employee habitually carries out his work in performance of the contract. This was obviously Russia. However BMTL relied on the proviso to article 6, contending that the contract was more closely connected with Guernsey. The judge disagreed.

Claim in Tort: As to the claim in tort the judge correctly asked himself, at para 37, "where in substance was the tort committed?" He identified the gravamen of the case against Mr Shamurin as being a decision to speculate or a policy of speculation. This decision was made or policy pursued in Moscow from where all aspects of BMTL's business were conducted. Although the trades were done in London, where BMTL had its bank account, in reality the loss was felt by BMTL in Russia, manifested by its lack of liquidity. He concluded, at para 38, that it would be "a triumph of form over substance to conclude that Mr Shamurin's supposed tort was in substance committed in England". The judge's conclusion that the substance of the tort was committed in Russia meant that he had to consider double actionability because the events in question pre-dated the Private International Law (Miscellaneous Provisions) Act 1995. Applying the general rule, the acts complained of would have been a tort if done in England, but because they were not actionable in Russia the claim would fail.

Claim in Equity: So the question for the judge in our case was whether, despite the great similarity between the tort and equity claims, a different choice of law was appropriate for the claim in equity. The judge decided that it was not. It was held:

“I am inclined to follow the lead of the learned editors of Dicey & Morris in regarding claims which would in domestic law be regarded as arising out of equitable wrongs as being governed by the proper law of the obligation. When the obligation is in reality derived not from the somewhat artificially constructed acceptance of responsibility to act as a director but from prior agreement between the two persons owning and controlling the company, by one of whom the obligation is said to be owed to the company, I would take a great deal of persuasion that the duty owed by the director to the company is governed by a law other than that which governs the agreement by which it is generated. It would be anomalous to apply one system of law to an issue which would have arisen at law, and another to an issue which would have been for the courts of equity to deal with. So the judge rejected BMTL’s claims on the basis that each was governed by Russian law. He went on however to say that he had the gravest doubts whether the claim could succeed even if English law applied. This was because BMTL had failed to establish that Mr Shamurin owed it a duty not to speculate.”

Holding

Do director’s duties of care fall within “contractual obligations”?

First, Mr Jarvis submits that the common law and equitable duties of care relied on by BMTL in this case are contractual obligations for the purposes of article 1 of the Rome Convention and so are governed by the same law (Russian) as the contractual duty of care.

Argument: To distinguish the duties in contract, tort and equity on the basis that the latter are imposed by law applies the domestic definition of contract to the interpretation of the Convention. This is not the correct approach. The relationship between a director and a company is consensual even if it does not amount to a contract under domestic law. Therefore the defining feature is a voluntary assumption of the obligations of the position and should therefore be characterised as contractual. The fact that the obligation is not specifically and expressly agreed does not prevent it being a contractual obligation for the purposes of article 1. An obligation implied into a contract as recognised by English law is still within article 1. Such an obligation is "imposed" by law, albeit to give effect to the parties obvious but unexpressed intentions and/or business efficacy.

Rejected: Interesting though Mr Jarvis's submissions are, I do not accept them. The language of the Convention does not support them. A contractual obligation is by its very nature one which is voluntarily assumed by agreement. Terms may be implied into that agreement, but that is because they are necessary to make what has been agreed work and so this does not undermine the fact that the obligation is consensual. There is nothing consensual about the imposition of a tortious or equitable duty of care. It arises from a voluntary assumption of responsibility, but that is a state of affairs which is not dependent upon agreement.

Can the Claimant choose the choice of law by framing the claim as tort or contract?

Argument: Mr Jarvis's second respondent's notice point is based on an article by Adrian Briggs "Choice of choice of law" [2003] LMCLQ 12. The author notes that a claimant may as a matter of English domestic law rely on concurrent causes of action in contract and tort (see Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 ) but questions whether he should be permitted to choose which cause of action to rely on for the purposes of private international law. The author makes the point that there is often only one duty which has been broken (as here), even though domestic law has a variety of ways of conceptualising it. In such a case the claimant should not be allowed an unrestricted choice to rely on any way of putting his case which picks up a law which favours it and to discard any which would defeat it. Such choice may leave a defendant having to defeat the claim under several different laws. This is unfair. The answer was for the English courts to prevent the right to accumulate causes of action and...