This article was originally published in Fraud Intelligence and can be accessed here.
Leigh Crestohl, Partner
Tatneft v Bogolyubov & Others: The hazards of short limitation periods
On 24 February 2021, the English Commercial Court dismissed as time-barred Russian oil giant Tatneft’s $334.1 million claim against Ukrainian oligarchs Igor Kolomoisky and Gennady Bogolyubov ( EWHC 411 (Comm)). To many, it may appear perverse that a claim pursued against the perpetrators of an allegedly brazen and dishonest scheme should end in that way.
This outcome serves as a reminder that limitation periods are not mere technicalities. The case offers insight about the challenges associated with litigating complex fraud matters, particularly where short foreign limitation periods apply.
Background to the Claim
The interested reader will find a more detailed treatment of the background, and the alleged unlawful activities, in an earlier summary judgment decision in 2016.
The factual matrix extends back to a dispute in 2007 concerning the ownership and control of Ukrtatneft JSC (“UTN”), which owns a refinery in Kremenchug, in Ukraine’s Poltava region. UTN was a joint venture between Tatarstan, a semi-autonomous region of Russia, and Ukraine in relation to a pipeline which transported high viscose oil to Ukraine for refining. The oil was supplied to UTN through a chain of successive oil supply contracts, with payments flowing back along the chain. At the start of the supply chain was Tatneft’s commission agent, Kompaniya Suvar-Kazan LLC (“S-K”), and then three further intermediary companies before the final sale to UTN.
Prior to controversial events in 2007, Tatneft was a shareholder in UTN. The “Privat Group” (controlled by Kolomoisky and Bogolyubov) also had a shareholding. On 19 October 2007, a large group stormed the refinery and its administrative offices and one of the Defendants was re-installed as Chairman. Following this “raid”, Tatneft’s shares in UTN were effectively confiscated and later acquired by the Privat Group in circumstances which lie at the heart of Tatneft’s claim.
As a consequence of those events, S-K remained unpaid for certain oil debts. In 2008, S-K reached a settlement with the intermediary companies, who had no means to pay, and S-K acquired the right to claim directly against UTN for more than $421 million of oil debts. Although S-K successfully enforced against UTN assets in Russia, this left a significant shortfall.
In May 2008, Tatneft also commenced an arbitration against the Ukraine under the Russia-Ukraine bilateral investment treaty, which ended with an Award dated 29 July 2014 in Tatneft’s favour (“the BIT Arbitration”). Although somewhat peripheral to the facts of the claim in England, the BIT Arbitration played a prominent role in the limitation defence.
Proceedings in England
In March 2016, Tatneft sued Kolomoisky, Bogolyubov and their associates in the High Court claiming some $350 million in damages, having taken an assignment of rights from S-K.
Tatneft alleged that the Defendants collectively executed an unlawful scheme, using sham agreements with companies they controlled, to siphon funds from the intermediary companies along the contractual payment route. Those funds (which would otherwise have been used to pay the oil debts) were diverted to purchase Tatneft’s confiscated shares in UTN. At the conclusion of the scheme, the Privat Group increased its ownership in UTN, UTN’s liability for the oil received from Tatneft disappeared from its balance sheet, and the intermediary companies were deliberately forced into bankruptcy, leaving S-K without any obvious remedy against either UTN or the intermediaries. This alleged “oil payment siphoning scheme” was claimed to violate Article 1064 of the Civil Code of the Russian Federation, which establishes a general rule of civil liability for wrongful acts similar to the delict regimes in many civil law jurisdictions. Under Russian law, such a claim is subject to a three-year limitation period. The contentious question was the point in time at which the limitation period had begun to run.
The claim had a poor start. In November 2016, only seven months after it was started, Mr Justice Picken dismissed the claim by summary judgment, having concluded that it suffered from serious inconsistencies which could not withstand “critical scrutiny” (at para 63). The Court of Appeal interpreted Tatneft’s pleaded case more generously and reversed the summary judgment decision some 12 months later ( EWCA Civ 1581). However, the merits of the limitation issue had not been decided for the purpose of the summary judgment application. Thus, this issue would loom large almost 4 years before the trial even began.
The trial and outcome
At the 10-week trial before Mrs Justice Moulder, the central issues revolved around what constituted sufficient "knowledge" in Russian law for the limitation period to start to run, and at what point in time Tatneft and S-K (which had assigned its rights of action to Tatneft) acquired that knowledge. This involved resolving competing points of evidence from Russian law experts as well as an assessment of documentary and witness evidence from Tatneft and S-K as to their actual state of knowledge.
The Defendants argued that Tatneft must have had sufficient knowledge to start a claim years earlier, because the involvement of Kolomoisky and Bogolyubov was expressly mentioned in various places during the course of the BIT Arbitration. Other contemporaneous documents also demonstrated knowledge of the misappropriation of the oil payments and Tatneft’s suspicions as to the role of the Privat Group. Moreover, it could reasonably be inferred that those beliefs or suspicions would have been shared with its commission agent S-K.
For its part, Tatneft argued that it would be unfair for time to run against the victim of a dishonest enterprise before it has knowledge of the particulars necessary to plead out a case, or before having even identified the proper defendant. Tatneft argued that such a finding would engage issues of fairness and public policy. The necessary elements to plead the case, it was suggested, only came to light some years later as a result of "revelations" during more recent investigations. Witnesses from both Tatneft and S-K also gave evidence as to their actual state of knowledge. Tatneft also heavily relied upon apparent equities of the case concerning the dishonest scheme and the fact that its two alleged architects declined to give evidence. It would be unfair were the Defendants allowed to escape liability because of the delay in exposing their scheme.
The Court concluded that for time to start running for limitation purposes, Russian law did not go so far as to require Tatneft to be in a position to start proceedings or “plead out” a case. "Knowledge" for this purpose amounted only to a belief, surpassing mere speculation, that the claimant's rights were violated. It is not necessary for the claimant to have in hand the evidence to prove the claim (at para. 55, 632). This, the judge reasoned, is why the Russian legislator provided a three-year period in which to gather the relevant evidence and, where necessary, identify the proper defendant, and there was nothing unfair about enforcing policy choices made by foreign legislators in setting limitation periods (at paras. 632-637).
As such, it was not necessary for Tatneft to know the specific means by which the funds had been siphoned, in order to know that there had been a violation of its rights and for time to begin to run. It was sufficient to know that funds had been misappropriated through the diversion of money for the defendants’ own financial benefit. Following an elaborate review of the evidence in a 153-page judgment, the judge concluded that both Tatneft and S-K possessed sufficient knowledge far earlier than their witnesses claimed, such that the limitation period had expired before the claim in England was commenced (at paras. 311 and 544-546).
In reaching these conclusions, the judge emphasised that she found the testimony given by all four witnesses presented by Tatneft to be unreliable, observing that witnesses “…in some instances...have been or are likely to have been untruthful in their evidence to the court” (at para. 378). Her conclusions were fortified by concerns over Tatneft’s missing disclosure for a key period and the absence of several material witnesses. The coincidence of those elements were, in her view, a “striking feature” of Tatneft’s case on limitations (at para. 648).
Although the outcome turned on the trial judge’s appreciation of the evidence, and the delay to file an appeal has yet to expire, the decision is nevertheless instructive.
One obvious conclusion to draw is that the victim of a fraud needs to move quickly and weigh the risks of acting on a still imperfect evidential picture against the possibility of a time bar. Parties need to be aware that “knowledge” for the limitation purposes may not be synonymous with a readiness to begin proceedings. Although limited to the English Court’s application of Russian law in this case, this conclusion may be relevant to other similar legal systems.
The Court’s reasoning highlights a certain tension between the substantive requirements of a limitation period on the one hand and the procedural difficulties that a claimant faces in starting a claim on the other. A serious fraud can be difficult to investigate, especially in modern times when a cross-border element is present and technologically sophisticated means may have been employed. Deception and opacity are common hurdles that are difficult to overcome in this context, and short limitation periods can be onerous for the victim of an elaborate fraud. This is especially true in England where, due to ethical considerations, English lawyers will require concrete evidence and detailed particulars of wrongdoing to start a case alleging serious dishonesty or fraud.
The Court’s decision also underscores the fact that consideration of a limitation defence is distinct from the merits of the claim (at 642). The judge showed little concern for whether the defendants may otherwise have been liable, distinguishing an earlier Court of Appeal dicta that a successful limitation case may allow a defendant to commit “the perfect fraud” (at paras. 23-25). It may be that her views were influenced by her overall conclusion that concealment had not caused the claim to become time-barred in this case (at para. 637).
The decision shows the importance of properly documenting relevant facts at the time and preserving that evidence. This is likely to be the Court’s first port of call in subsequent proceedings. Consistent with recent trends, the judge preferred to rely upon contemporaneous documents over witness evidence particularly where, as here, the trial occurs many years after the events (at para.105). Moreover, the decision highlights a number of tools available to an English judge to control the perceived misuse of the adversarial fact-finding process. In this case, the judge found that every witness on behalf of the claimant had been evasive, unreliable and untruthful whilst presenting a “consistent narrative” (at 644). It is unhelpful to a party for witnesses to coordinate their evidence to advance the party’s case, especially if inconsistent with inferences naturally to be drawn from contemporaneous documents (at para. 308). Equally, the court can draw an adverse inference against a party from the absence of an obvious key witness. Thirdly, the unavailability of documentation for a relevant period may lead the court to draw adverse inferences, notwithstanding apparently innocent explanations. Therefore, document retention is essential particularly for litigation in England that relies heavily on disclosure.
Finally, a case of this kind can be a very costly undertaking. At the time of the summary judgment application in 2016, the materials produced by the parties already filled 70 double sided bundles. This gives some idea of the scale proceedings. A press release from Mr Kolomoisky’s solicitors suggests Tatneft spent £87 million pursuing this case to trial. This highlights the importance of investigating matters wisely before instituting proceedings, as ill- conceived or tactical “high stakes” litigation in this context can have expensive consequences.