Fraud Update - September 2015

10 September 2015


Our fraud and asset recovery experts bring you the latest news and legal decisions affecting the fraud industry.

Damages recoverable in fraud claims

In the recent case of OMV Petrom SA v Glencore International AG [2015] EWHC 666, the English Court had to consider and determine the correct measure of damages to be awarded in a case of deceit.

This case provides useful guidance as to the level of damages recoverable and the principles will be applicable more widely to all fraud claims.

Background

SC Rafirom SA (Rafirom) purchased shipments of crude oil from the Defendant through an agent and imported it through Romania. The contract entered into between the parties stipulated that the crude oil would be of Iranian Heavy and GOSM grade. The documents provided with the shipment confirmed that the oil was indeed of these grades. However, some of the shipments consisted of other blends. OMV Petrom SA (a successor in title of the original purchaser) issued a claim against the Defendant alleging deceit.

The Defendant accepted that it had acted fraudulently but defended its position by saying that the agent was aware of the fraud from the outset and entered into the contract because of shortages of crude oil at the time. Furthermore, the Defendant argued that the representation had been made to the agent and was not intended to be repeated to Rafirom.

The Court rejected the Defendant's argument and found in the Plaintiff's favour. The Court then had to determine the appropriate level of damages to be awarded to the Plaintiff.

The Plaintiff argued that the damages which should be awarded are the difference between the price paid for the shipments and the actual value of the shipment which was delivered. This amounted to $47 million. The Defendant argued that the amount payable should be the difference between the less valuable yield derived from refining the blends delivered and the yield which would have been derived from refining the contractually agreed grades of crude oil. It was submitted that this would amount to approximately $6 million.

Decision

The Court once again found in favour of the Plaintiff and held that the loss suffered by the Plaintiff was the price paid, giving credit for the actual value of the oil delivered as at the date of purchase. It was irrelevant what the Plaintiff did with the oil. However, a further claim for exemplary damages was declined, given the large sum which the Plaintiff was already entitled to recover from the Defendant.

The Court refused to apply the contractual principles in assessing the appropriate level of damages in a fraud claim. The principles adopted by the Court in this case ensure that the Plaintiff is essentially placed in the same position as it would have been had the false statement not been made, but taking into account the benefit which the Plaintiff did actually receive (being the price of the oil which was delivered).

The Privy Council makes new law in fraud case

We have been acting for The Federal Republic of Brazil and the Municipality of São Paulo since 2005 in the largest corruption and asset recovery case ever to be undertaken by Brazil. The case involves Paulo Maluf, the former mayor of the City of São Paulo and currently a high-profile political figure in Brazil.

In August 2015, the case culminated in the Privy Council handing down a landmark judgment in favour of the Federal Republic of Brazil and the Municipality of São Paulo, which has changed the law in Jersey and arguably, in England as well.

Background

Our clients commenced proceedings in Jersey against two BVI companies (which were under the practical control of Paulo Maluf) in March 2009, claiming US$10,500,055.35 (plus interest) on the grounds that the Defendants were liable in knowing receipt and/or restitution on the grounds of unjust enrichment. The basis for the claim was that monies received by the Defendants constituted the proceeds of fraud, as a result of a multi-million US dollar 'kick-back' scheme arising from a large construction project in São Paulo, Brazil.

The Royal Court of Jersey handed down judgment "unhesitatingly" in favour of our clients on all counts. The Defendants appealed the judgment. However, the Court of Appeal dismissed the Defendants' appeal on all grounds, including in relation to the principle of backwards tracing, which had not been previously applied or established in Jersey law.

The Defendants applied to the Privy Council for permission to appeal. The Defendants were granted permission to appeal but only in relation to a limited point of law, namely whether Jersey law recognised the principle of backwards tracing and if so, whether it applied in this case. The appeal was heard on 7 May 2015.

Decision

On 3 August 2015 the Privy Council handed down its judgment (The Federal Republic of Brazil and another v Durant International Corporation and another [2015] UKPC 35).

The Privy Council dismissed the Defendants' appeal and held that backwards tracing is available in certain circumstances, namely when a claimant can establish that there is a close causal and transactional link between the relevant payments. This judgment has clarified the law in this area in Jersey and arguably in England as well, which was previously unsettled.

Lord Toulson said at [38] that it is "particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect. If the court is satisfied that the various steps are part of a coordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appears in the bank account of an intermediary before a reciprocal credit entry".

This means that the Federal Republic of Brazil and the Municipality of São Paulo, are entitled to recover the full proceeds of fraud perpetrated against the Municipality, plus compound interest, which totals more than US$28 million. More widely, this judgment will have a significant effect on the law of civil fraud, particularly from an international perspective.

The recent developments in the Petrobas case

The most recent development in the Petrobas scandal has seen Nestor Cervero, the former international chief of the state-run oil firm, sentenced by a Brazilian Court to more than 12 years in prison. The case concerns corruption and money-laundering in connection with a bribe allegedly paid to the speaker of Brazil's lower house of Congress.

It remains to be seen whether the recent sentencing of Mr Cervero and other individuals allegedly involved with facilitating the payment of the bribes, will result in charges being brought by prosecutors in Brazil against the politicians who are believed to have benefitted from the extensive kick-back scheme.

The possible introduction of "unexplained wealth orders" in the UK

The UK Government is currently considering proposals to introduce "unexplained wealth orders". If they are introduced, individuals who suspiciously become rich over a very short period of time will have to disclose the source of their wealth to the authorities. A failure to do so may result in the assets in question being confiscated.

The proposal has been submitted with a view to revealing the owners of property in the UK which is held by foreign companies or often held by a complex structure in order to keep the beneficial owner hidden from prying eyes.


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