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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Base Metal Trading Ltd. v Shamurin [2004] EWCA Civ 1316 (14 October 2004) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2004/1316.html Cite as: [2005] WLR 1316, [2005] 1 WLR 1316, [2004] EWCA Civ 1316, [2005] 1 WLR 1157

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM COMMERCIAL COURT
MR. JUSTICE TOMLINSON
2000 Folio 362

		Royal Courts of Justice Strand, London, WC2A 2LL
		14th October 2004

Lord Justice Tuckey:

1. This appeal raises a number of important choice of law issues. They arise from a judgment of Tomlinson J. who dismissed a claim by Base Metal Trading Ltd. (BMTL) against Mr Shamurin. 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.
2. The story goes back to the collapse of the Soviet Union in 1991. 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 U.K. 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.
3. Against this background and for these reasons BMTL was incorporated in Guernsey on 4 December 1992 with nominee directors and shareholders. London solicitors and local accountants were employed to do this. The company's objects are defined very broadly in its memorandum of association. Articles 73 to 99 of its Articles of Association deal with directors. The business of the company is to be managed by the directors who may exercise all such powers of the company as are not required to be exercised in general meeting (Article 80). The directors may appoint one of their number to be managing director to whom they can entrust any of their powers upon such terms and conditions and with such restrictions as they may think fit, either collaterally with or to the exclusion of their own powers (Article 99).
4. BMTL's registered office was in St Peter Port but it had tax exempt status because it was not intended to and did not carry on any business in Guernsey other than of an administrative nature. The company formation documents stated that the central management and control of BMTL's business would be exercised in Russia and that the reason for incorporating in Guernsey was that it was a convenient offshore location.
5. 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.
6. 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. Yuri's statement says:

We would discuss our work but there was no question of our duplicating each other's work or one of us supervising the activities of the other… We understood we were employed by BMTL and the functions of directors employees and shareholders were performed by us without making distinctions.

7. On 16 December 1992 BMTL resolved to appoint the Moscow Narodny bank in London to act as its bankers. Sterling and U.S. dollar accounts were opened by Mr Shamurin and the bank was to act on his instructions alone.
8. Before BMTL started physical metal trading Yuri and Mr Shamurin had agreed that the company's exposure on its resale price on physical trades resulting from the time lag between the date of purchase of the metal and the date of its resale would be hedged by means of future trades on the LME. To enable this to be done Mr Shamurin opened metal trading accounts with three LME brokers.
9. BMTL had an accommodation address in London but the judge held that it never had any place of business here. Apart from when Mr Shamurin travelled abroad, BMTL's business was conducted entirely from Russia where it had an office in Moscow. Its bank accounts in London were operated from Moscow via telex and fax and cash was regularly drawn in Moscow by bank transfer made to accounts there. Instructions to the LME brokers were given by Mr Shamurin from Moscow.
10. BMTL's accounts for 1993 show sales of about $40m. and a profit of $6m.. The judge records that each of Yuri, Mikhail (whose role in BMTL was obscure) and Mr Shamurin drew $566,000 that year. The following year substantial payments, (described in the cash book as "to cover the office's expenses") were made to various individuals in Russia.
11. But the friends fell out in late 1994 after which Mr Shamurin left BMTL and much acrimonious litigation followed, including these proceedings and proceedings in Guernsey. In the Guernsey proceedings Mr Shamurin complained that he had been unlawfully deprived of his interest in BMTL. The Zhivilos brothers contested the jurisdiction of the Guernsey courts and started the proceedings here, as the judge found, "in part as a spoiling act to divert and deplete Mr Shamurin's resources". We are told that the Guernsey proceedings have recently been dismissed because Mr Shamurin has been unable to comply with an order for security for costs. The judge "rather doubted" whether the Zhivilos brothers expect to be able to recover the amount of any judgment BMTL may obtain in these proceedings from Mr Shamurin.
12. 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.

The Judgment

13. The trial took 18 days. The judge found that the setting up of BMTL and agreement as to what it was to do was the product of discussion between Yuri and Mr Shamurin before the company was incorporated. He noted counsel for BMTL, Mr Hollander Q.C.'s, submission that the contract upon which BMTL sued was in substance "a joint venture or partnership between two individuals with equal rights and powers" and added:

The longer I have listened to the evidence in this case and the longer I have thought about it, the more it has become clear that this was a joint venture or partnership rooted in Russia, moulded by contemporary conditions there, and that any attempt to manufacture in BMTL a relevant cause of action against one or other of the joint venturers is artificial. The nature of the exercise is vividly illustrated by the manner in which the case is pleaded ….

14. After referring to the facts which I have summarised including the agreement about hedging the amended particulars of claim alleged:

10. As a director of the claimant under the above circumstances, the defendant owed the claimant a duty, based on common law and equity to exercise reasonable care and skill in the business he transacted on behalf of the claimant and in his conduct of the claimants affairs. …

11. Further or alternatively, it was an implied term of the defendant's contract of employment with the claimant that he would exercise reasonable care and skill in the performance of the services rendered by him under that contract of employment…

13. It was implicit in the above mentioned policy for hedging, as originally agreed … that the futures trades concluded by the defendant on behalf of the claimant would be confined to hedging. However in repeated breach of the contractual obligation and the duties of care and skill set out in paragraph 10 and 11 above the defendant unreasonably, and without [Yuri's] knowledge and consent, repeatedly departed from the agreed policy by concluding a large number of futures trades on behalf of the claimant with the LME brokers with a view to speculation, rather than hedging.

So the content of the duty alleged and the facts giving rise to its breach were alleged to be the same whether the claim was put in contract, tort or equity. The pleading went on to allege that if speculative trading was permissible Mr Shamurin was in breach of duty for failing to carry it out with reasonable care and skill, but this allegation was withdrawn at trial.

15. The judge rejected the contractual claim against Mr Shamurin under the provisions of Article 6 of the Rome Convention 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.
16. As to the claim in tort the judge correctly asked himself "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 that it would be "a triumph of form over substance to conclude that Mr Shamurin's supposed tort was in substance committed in England".
17. 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. But BMTL relied on the exception to the general rule derived from the decisions in Boys v Chaplin [1971] AC 356 and Red Sea Insurance v Bouygues [1995] 1 AC 190 and submitted that England (or Guernsey) had the most significant relationship with the occurrence and the parties so the lex delicti (Russian law) should be ignored in favour of the lex fori.
18. The judge concluded that he could see no grounds whatever for departing from the general rule in this case. Neither England nor Guernsey had a significant relationship with either the occurrence or the parties. There was therefore nothing unfair about applying the general rule.
19. There is no doubt that a director owes an equitable as well as a common law duty of care. In Bristol and West Building Society v Mothew [1998] CH 1 this court was concerned to draw the distinction between such a duty and a fiduciary duty. Millett L.J. explained that (16):

The common law and equity each developed the duty of care, but they did so independently of each other and the standard of care required is not always the same. But they influenced each other and today the substance of the resulting obligations is more significant than their particular historic origin. In Henderson v Merrett Syndicates Ltd. [1995] 2 AC 145, 205 Lord Browne-Wilkinson said:

The liability of a fiduciary for the negligent transaction of his duties is not a separate head of liability but the paradigm of the general duty to act with care imposed by law on those who take it upon themselves to act for or advise others. Although the historical development of the rules of law and equity have, in the past, caused different labels to be stuck on different manifestations of the duty, in truth the duty of care imposed on bailees, carriers, trustees, directors, agents and others is the same duty: it arises from the circumstances in which the defendants were acting not from their status or description. It is the fact that they have all assumed responsibility for the property or affairs of others which renders them liable for the careless performance in what they have undertaken to do, not the description of the trade or position which they hold.

I respectfully agree…

A little later Lord Justice Millett said (17):

Although the remedy which equity makes available for breach of the equitable duty of skill and care is equitable compensation rather than damages, this is merely the product of history and in this context is in my opinion a distinction without a difference. Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case.

20. 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. BMTL had submitted that Guernsey law, the law of the place of its incorporation, should be applied. The judge disagreed saying he was not bound by any authority to reach that conclusion. He added:

I am inclined to follow the lead of the learned editors of Dicey and 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. In that regard I respectfully agree with Tipping J. when he said in giving the leading judgment in the New Zealand Court of Appeal in Attorney General of England and Wales v R [2002] NZLR 91 at 103:

It is difficult to see the logic or overall desirability in making a distinction between legal issues and equitable issues (except possibly in terms of remedy).. the making of such a distinction can lead to quite unnecessary difficulties and potential inconsistencies. It would also tend to depart from the general direction in which most legal systems comparable to ours have been moving in recent times.

Law and equity should be viewed as a consistent whole. The individual influences of the earlier discrete streams now work together to produce the appropriate outcome. While many doctrines are still recognisable as legal or equitable and an understanding of their historical origins often remains helpful, the focus now should be on their combined influence rather than on their originally separate functions. 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.

21. 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. It had not been suggested that any particular transaction had been negligent. What was alleged was that it was a breach of duty to speculate at all. Earlier in his judgment the judge had said:

I also find it odd to suggest that for Mr Shamurin to conduct the business of BMTL in a manner which had not been the subject of prior agreement with Yuri is itself the failure to exercise reasonable care and skill. It seems to me that what would more plausibly need to be relied upon is some express or implied prohibition couched in absolute terms. Nowhere in the particulars of claim is it suggested that there was agreement that the business of BMTL should be subject to a limitation over and above its objects, which objects are amply wide enough to embrace dealing on the LME in futures contracts not simply by way of hedging. The closest that the pleader comes to this is the suggestion that as a result of the policy that price fluctuation risk on physical purchases and sales would be hedged… it was implicit that the futures trades concluded by Mr Shamurin on behalf of BMTL would be confined to hedging. However I do not consider that that proposition can be said to be implicit at all. If it were, I would have expected it to be alleged either that it was an implied term of Mr Shamurin's contract of employment that he should not enter into futures contracts for any purpose other than hedging or that his equitable duty as a director necessarily carried with it a similar limitation. Furthermore I find incompatible with the manner in which the claim is put Yuri's clear acceptance in evidence that, since he and Mr Shamurin were co-directors each with a 50% beneficial share in the company, he did not have the power to stop Mr Shamurin binding the company in a manner of which he did not approve nor even the power to give him recommendations as to how he should conduct business on the company's behalf. If that be so, and it is obviously correct, then I ask rhetorically of what relevance is it that Mr Shamurin acted, if he did, without Yuri's knowledge and consent.

The Respondent's Notice

22. Before the judge Mr Jarvis Q.C. for Mr Shamurin took two points which the judge felt it unnecessary to decide. They are the subject of a respondent's notice and logically fall to be considered at this stage.
23. 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.
24. The relevant provisions of the Convention are:

The High Contracting Parties …

Anxious to continue in the field of international private law the work of unification of law which has already been done within the community, in particular in the field of jurisdiction and enforcement of judgments,

Wishing to establish uniform rules concerning the law applicable to contractual obligations,

Have agreed as follows:

Article 1 Scope of the Convention

1. The Rules of this Convention shall apply to contractual obligations in any situation involving a choice between the laws of different countries.

2. They shall not apply to:…

(e) questions governed by the law of companies … such as the creation, by registration or otherwise, legal capacity, internal organisation or winding up of companies … and the personal liability of officers and members as such for the obligations of the company;

Article 18 Uniform interpretation

In the interpretation and application of the preceding uniform rules, regard shall be had to their international character and to the desirability of achieving uniformity in their interpretation and application.

25. Mr Jarvis submits that the fact that voluntary assumption of liability in English domestic law is the basis for the imposition of a tortious and/or equitable duty of care does not mean that such obligations are not contractual in nature for the purposes of the Rome Convention. 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.
26. Mr Jarvis was unable to refer to any English or European case which directly supported his submissions. He referred us to Peters v Znav [1983] ECR 987, Arcado SPRL v Haviland SA [1988] ECR 1539 and Handte [1992] CR I-3967 where the European Court had considered the meaning of the words "matters relating to contract" in Article 5 (1) of the Brussels Convention. These cases undoubtedly support the well-known proposition that the words in such a treaty have to be given a Convention rather than a domestic meaning. Mr Jarvis relied in particular on the passage in Handte at para. 15 where the court said:

It follows that the phrase "matters relating to a contract" … is not to be understood as covering a situation in which there is no obligation freely assumed by one party to another.

I have to say however that use of the double negative somewhat blunts the force of this passage.

27. Mr Jarvis submitted that a director's duty of care to the company is not one of the questions excluded by Article 1. 2 (e) of the Convention because this was not a matter of internal organisation of the kind identified in the Article. This was confirmed, he submitted, by the Giuiliano-Lagarde report to which section 3 of the 1990 Act permits reference as an aid to construction of the Convention. The report says that the exclusion (282/12):

… affects all the complex acts, (contractual administrative registration) which are necessary to the company or firm and to the regulation of its internal organisation… Examples of internal organisation are the calling of meetings, the right to vote, the necessary quorum, the appointment of officers of the company ….

28. 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 dependant upon agreement.
29. Unlike the Brussels Convention which deals with both contract and tort the Rome Convention only deals with contract. The Giuiliano-Lagarde report makes it clear that the intention was for the Convention to cover both contractual and non-contractual obligations but (282/7):

… the Group decided in March 1978 to limit the present convention to contracts alone and to begin negotiations for a second convention on non-contractual obligations after the first had been worked out.

30. There is no support for Mr Jarvis's submissions in the text books either. Dicey and Morris (13^th Edition) at para. 32-025 says:

Article 1 of the Rome Convention provides that the rules of the Convention "shall apply" to contractual obligations, but there is no reason to suppose that it should be interpreted as excluding the application of conflict of laws rules relating to tort in the case of concurrent claims in contract and tort.

Plender: The European Contracts Convention (2nd edition) at paras. 3.9 and 3.10 says:

In all Member states the word "contract" implies a voluntary agreement giving rise to obligations capable of being enforced by law… For the purposes of [Article 1] a "contractual obligation" appears to connote an obligation in accordance with principles common to the laws of the Contracting States, enforceable by reason of a voluntary agreement reached between the parties.

31. Mr Jarvis' second respondent's notice point is based on an article by Adrian Briggs: Choice of Choice of Law [2003] LMCLQ 12-38. 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) 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 pile up choice of law opportunities in cases like the present by characterising the claim as either contractual or tortious but not both.
32. I have only briefly summarised the article, but it was prompted by an observation by Mance LJ in Raiffeisen Zentralbank Oestereich AG v Five Star General Trading [2002] EWCA Civ 68; [2001] QB 825 that the traditional approach to a case involving private international law – characterisation of the issue, selection of conflicts rule, identification of law selected – required to be judged by whether it produced the most appropriate law to resolve the questions presented to the court for decision. The article also relies on the fact that for the purposes of the Brussels Convention a claim is either a matter relating to a contract or a matter relating to tort. It cannot be both (see Kalfelis v Bankhause Shroeder [1988] ECR 5565).
33. Again these are interesting submissions but I cannot accept them. Domestic law allows concurrent claims in contract and tort and it has always been assumed that English private international law does so also. Thus Dicey at para. 33-073 under the heading Relationship Between Contract and Tort says that an injured employee is free to choose whether to frame his claim in contract or tort or both. Plender at paras. 8 – 28 and 29 says:

… it is not clear whether the characterisation of an issue as falling within the Rome Convention would preclude the application of the Lex Fori that the plaintiff may formulate his action as suits him best in the case of concurrent liability. The better view is that it should not, since such a rule is essentially one of procedure and certainly not a conflict rule… If the lex fori treats the facts of the case as disclosing a cause of action in both contract and tort the question whether the plaintiff may opt for whichever claim is more favourable to him should be simply treated as a domestic law question relating to concurrent claims which has nothing to do with conflict of laws.

34. I do not think Lord Justice Mance's observation, made in an entirely different context, really advances the argument on this point. The argument based on the Brussels Convention is tenuous. If that Convention gave jurisdiction to the courts of different countries depending upon whether the same claim was framed in contract or tort it would be most undesirable. But there is not the same problem with a court which has jurisdiction having to apply different laws.
35. Moreover I think we are bound by authority to reject these arguments. In Coupland v Arabian Gulf Oil Company [1983] 1 WLR 1136 the plaintiff employee, injured whilst working for the defendant in Libya, sued in contract and tort. The judge held that Libyan law was the proper law of the contract, but that this was of no relevance to the claim in tort which could proceed here if the plaintiff could satisfy the double actionability rule. The defendant argued that the English double actionability rule should not be applied because there was a Libyan contract. This court rejected that argument. Goff L.J. (with whom Oliver and Waller LJJs agreed) said (1153):

The plaintiff can advance his claim as he wishes, either in contract or in tort; and no doubt he will, acting on advice, advance the claim on the basis which is most advantageous to him. It appears that he is likely to proceed primarily on the basis of his claim in tort, for reasons which I suspect are connected with the assessment damages.

That being so, I ask myself: what impact does the existence of the contract have on the claim in tort? In my judgment, on ordinary principles a contract is only relevant to the claim in tort in so far as it does, on its true construction in accordance with the proper law of the contract, have the effect of excluding or restricting the tortious claim.

This passage seems to echo precisely in a public international law context what Lord Goff was later to say in the context of the domestic law about concurrent claims in contract and tort in Henderson v Merrett and is, I think, binding on us. The judge in this case suggested that the solution advanced by Mr Briggs might only be open to the House of Lords. I agree.

36. But reference to the contract excluding the tortious claim brings me to a further point raised by Mr Jarvis. He says Mr Shamurin's contract of employment in this case does exclude the claims both at common law and in equity because Russian law does not impose the duty of care contended for.
37. There are two problems with this submission. The first is that this point was not pleaded, at least clearly, was not apparently argued before the judge, is not mentioned in the respondent's notice or skeleton argument for this appeal and is contrary to the admission made on behalf of Mr Shamurin which was recorded by the judge in his judgment that:

It is accepted by Mr Shamurin that, if any relevant relationship between himself and BMTL is governed by English or Guernsey law, he owes the duties of care and skill alleged.

The second problem is that section 310 of the Companies Act 1985 makes void any provision in any contract which exempts any officer of the company from liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence or breach of duty.

38. Mr Hollander objected strongly to this point being taken. Had it been taken below BMTL might have withdrawn its claim in contract which the judge was doubtful about from the outset and obtained more precise evidence about Russian law.
39. I think it would be unfair to allow Mr Jarvis to take this point now. This is illustrated by the fact that on the second morning of the appeal he put before us information from Guernsey lawyers to the effect that there was no Guernsey provision similar to section 310 in force at the relevant time, although there is now. BMTL had no opportunity to deal with this. In any event I am extremely doubtful whether the route by which it is said the exemption arises (application of the Rome Convention) would justify the exclusion of tortious or equitable liability in accordance with the principles laid down in such cases as Tai Hing Cotton Mill Limited v Liu Chiong Hing Bank Limited [1986] AC 80.
40. So for the reasons I have given I do not think that the judge's judgment can be supported on the grounds set out in the respondent's notice or for the additional reason which I have just considered..
41. I turn therefore to consider BMTL's appeal on the basis of the judgment.

Tort Claim

42. I start with the common law tort claim. Mr Hollander challenges both the judge's conclusions about where the tort was committed and whether the exception to the double actionability rule should be applied.
43. There is no issue about the law here. It is accepted that the judge correctly directed himself in accordance with Metall Und Rohstoff v Donaldson Lufkin and Jenrette Inc [1990] 1 QB 391 and the two cases to which I have referred on double actionability.
44. Mr Hollander however relied on a line of cases which he says show how the courts have determined where the substance of the tort is committed. He says these cases should have led the judge to conclude that the torts in this case were committed in England. They show, he submits, that more weight is given to the place where the wrongful act is acted or relied upon or where the loss arises than to the place where the wrongful act was committed. Thus, in Distillers v Thompson [1971] AC 458 where Distillers manufactured a drug and sold it in England to an Australian company without a warning, leading to a pregnant mother purchasing it in Australia where her baby was born deformed, the proper law of the claim against the manufacturers was held to be New South Wales law. So too in Diamond v Bank of London and Montréal [1979] QB 333 where misrepresentations were made by telex or telephone outside the jurisdiction, but were acted on in England, it was held that the tort was committed where the messages were received. In Castree v Squibb [1980] 1 WLR 1248 a defective machine manufactured in Germany purchased in England by the manufacturers agent caused personal injuries to the plaintiff in England; the substantive wrongdoing was treated as putting a defective machine on the English market with no warning as to its defects. In Cordoba Shipping v National State Bank of New York [1984] 2 Lloyd's Rep. 91 negligent mis-statements made in a telex from New Jersey to London were acted on in this jurisdiction; the Court of Appeal held that for the purpose of Order 11 the tort was committed within the jurisdiction. Finally in Metall Und Rohstof acts of inducing breach of contract were committed in New York but the breaches induced occurred and damage was suffered in England so the Court of Appeal held that the substance of the tort was committed here.
45. In this case Mr Hollander relies on the fact that Mr Shamurin's instructions to the brokers were received by them in London and acted upon in London. Unless the brokers had acted upon them no tort would have been committed. The brokers executed the trades in London on the LME. There was no question of the instructions being acted upon anywhere else. By acting on the instructions, the brokers incurred obligations as principals in respect of which they were entitled to indemnity from BMTL. Moreover the loss was suffered by this Guernsey company through its trading bank account which was in London. It was from here that margin payments were made to the brokers.
46. I do not think the cases relied on by Mr Hollander which were referred to by the judge in his judgment, compel the conclusion that the judge was wrong. The fact that the brokers acted upon BMTL's instructions in London is not material to the commission of the tort as such, although it may go to where the loss was suffered. Reliance by the brokers on the instructions which they received is not comparable to reliance by the injured claimants in the cases referred to. In our case the wrongful acts, being the decisions to speculate and give instructions accordingly, all took place in Russia. The place where the loss occurs is not determinative. When damage has occurred which makes the tort complete the right approach is to look back over the series of events constituting it and ask where in substance the cause of action arose (see Distillers v Thompson (468)). The judge after this long trial was entitled to conclude that BMTL really felt its loss in Russia. As part of its claim it had alleged that it had been unable to fulfil a contract in Russia because of the liquidity crisis caused by Mr Shamurin's activities. The judge obviously did not ignore the fact that the trading losses occurred in London where BMTL had its bank account, but again it does not seem to me that these factors compelled the judge to conclude that all BMTL's loss had occurred here, still less that the substance of the tort was committed here.
47. As to the exception to the double actionability rule, Mr Hollander submits that it would be unfair to allow Mr Shamurin to escape liability in tort by reliance on Russian law. Mr Shamurin's duty was owed to a Guernsey company. The judge should have focussed on this and not on the underlying relationship between the individuals involved.
48. I do not accept this submission. It was perfectly open to the judge to reach the conclusion he did. Indeed it was almost inevitable given his (now unchallenged) conclusion that the contractual claim did not fall within the proviso to Article 6 of the Rome Convention.
49. For these reasons I would dismiss BMTL's appeal against the judge's decision on the tort claim.

The Claim in Equity

50. The claim in equity was at the forefront of BMTL's appeal. Mr Hollander's starting point was that matters concerning the constitution of a company had to be governed by the law of the place of its incorporation. (See Rule 154 (2) of Dicey) at para. 30 – 020. Para. 30 – 024 notes that there is a dearth of authority, but the cases at least establish that the law of the place of incorporation determines whether directors have been validly appointed, who are the corporation's officials authorised to act on its behalf and other similar matters. The third supplement to Dicey adds that the law of the country of incorporation should also determine the extent of the duties of the directors.
51. Mr Hollander therefore submits that the judge's conclusion on this issue was wrong. The duties of a director are inextricably bound up with the company's constitution and internal management within its statutory and regulatory framework. Corporate governance would be impossible to supervise if the law applicable to a director's duty was not the law of the place of the company's incorporation. The judge's reasoning appears to ignore the existence of BMTL altogether although no one suggested that it was a sham company.
52. The third supplement to Dicey cites the decision of Moore-Bick J. on a CPR Part 24 application by Mr Shamurin in this case [2002] CLC 322 and Konamaneni v Rolls Royce Industrial Power (India) Limited [2002] 1 WLR 1269 in support of the passage about directors duties.
53. Mr Shamurin's Part 24 application was based upon the contention that Russian law governed every aspect of his relationship with BMTL. He was represented by Mr Briggs who advanced the submissions which feature in the respondents notice with which I have already dealt. Moore-Bick J. rejected these submissions. In rejecting the submission that Mr Shamurin's liability as a director was governed by Russian law the judge said:

It was not disputed that under English law a person owes a duty of care to a company of which he is a director. … The precise nature and extent of that duty, however, is a matter to be determined by reference to the law governing the internal affairs of the company. Whether a director who is employed by the company to carry out commercial functions on its behalf, as Mr Shamurin was in this case, can be held accountable to the company in his capacity as a director for the way in which he carries out his work must, I think, depend on the law governing the relationship between the company and its directors.

54. In Konamaneni the claimants, minority shareholders in an Indian company, sought to bring a derivative action on its behalf against two English companies who were alleged to have paid bribes to the managing director of the Indian company. Laurence Collins J. held that the English court had jurisdiction to hear the claim, but service of the proceedings should be set aside because the place of incorporation of a foreign company would almost invariably be the most appropriate forum for the resolution of issues relating to the existence of the right of shareholders to sue on behalf of the company. In his consideration of the forum issue the judge referred to the choice of law rules which govern the exercise of discretionary powers by directors. One such case was Pergamon Press v Maxwell [1970] 1 WLR 1167 where Pennycuick J. had said (1172):

It cannot be open to an English court to control the exercise of a fiduciary power arising in the internal management of a foreign company.

Collins J. said that the point being made was that:

The extent of the duties of the director of a foreign company is governed by the law of that company's place of incorporation.

This point was, he said, "unexceptional and indeed obvious".

55. Mr Jarvis submitted that the issue of Mr Shamurin's equitable duty of care to BMTL was not a question of its constitution or internal management and the judge was not bound to characterise it as such. Constitutional or statutory obligations and obligations for the internal management of the company are different in kind from obligations to the company. Moore-Bick J's. interlocutory judgment did not deal specifically with the equitable duty and in any event went too far. Konamaneni and the Maxwell case were concerned with the constitution and internal management of the companies concerned. There was no logical reason to apply different laws to the common law and tort claims. Equity should follow the law in the manner advocated in the New Zealand case cited by the judge (Attorney General v R).
56. I have reluctantly concluded that I must accept Mr Hollander's submissions on this issue. The equitable duty arises from and only from the directors relationship with the company. If it does not relate to the constitution of the company, it must I think relate to its internal management. A director's duties to his company are inextricably bound up with these matters and must therefore be governed by the place of the company's incorporation. Any other result would create huge uncertainty and hamper the requirement for good corporate governance and proper regulatory control. The judge does not appear to have attached any weight to these factors. He based his decision on the more general rules relating to equitable wrongs in the chapter in Dicey entitled "Restitution" and not on Rule 154 (2) to which I have referred which comes in the chapter entitled "Corporations and Corporate Insolvency". The pre-incorporation agreement between the co-venturers was not relevant to their post incorporation duties to the company.
57. I also agree with Arden L.J.'s additional reasons for reaching this conclusion. But, I have reached it reluctantly because I do think it is unfortunate that our choice of law rules enable the existence of what was, for present purposes, precisely the same duty of care to be determined by different laws. Mr Jarvis would say the answer to this is that I should have been bold enough to accept one or other of his respondent's notice points. Mr Hollander would say that this is a good reason for applying the exception to the double actionability rule. But for reasons I have explained I do not think it is right to take either course. As long as English law permits a choice of choice of law anomalies will occur. The anomaly in this case is perhaps not so great when one considers that the duty of care in tort is not company specific, whereas the equitable duty is. The company provides the context in which the director assumes responsibility but is not crucial to the existence of the common law duty.
58. As Guernsey law, the law of BMTL's place of incorporation, imposed an equitable duty of care on its directors I conclude that the judge was wrong to hold that Russian law governed this aspect of Mr Shamurin's relationship with the company.

Breach of Duty

59. It follows that the outcome of this appeal now depends upon whether the judge's tentative view that no breach of duty had been established is correct.
60. Mr Hollander submits that the judge's approach to this issue was wrong. Whether there was anything forbidding Mr Shamurin to speculate was not the right question. The right question was whether he had the power to speculate without the agreement of his co-director and shareholder. No such power was conferred on him by the articles and Yuri never agreed to speculation. The fact that speculation was intra vires the company was not to the point. That only meant that the company could not deny liability to the brokers, but did not confer power on Mr Shamurin to speculate on its behalf. Alternatively it was implicit in the agreement about hedging that speculation was not permitted. If it is agreed that you will do one kind of trade it is implicit that you will not do any other kind. What is more, by falsely contending that his speculation had been agreed 1 Mr Shamurin was in effect accepting that he could not do so without Yuri's agreement.
61. One thing is clear and that is that these parties did not at any time act in a way which suggested that they were conscious of their duties to the company and the powers which they exercised on its behalf. No meetings of its board or shareholders took place to discuss its business. Large sums of money were paid to Yuri, Mr Shamurin and others for reasons which were not fully explained. It is therefore very diffuclt to discover what powers were conferred on Mr Shamurin and I do not think it would be right to subject the question to the rigorous analysis which would be justified if one was considering the position of a director in a well run English company. Mr Shamurin was BMTL's managing director and responsible for its activities outside Russia which included entering into future trades on the LME. The allegation is that he had no power to enter into any speculative trade. In the circumstances I do not think one can say this. The manner and extent of Mr Shamurin's speculative trading was the subject of a further allegation of breach of duty which was withdrawn. Whether Mr Shamurin had the power to speculate must be answered by asking whether he could enter into any speculative trade at all. I think he could. I do not think it was implicit from the agreement about hedging that he should not speculate. An agreement to do something does not usually equate to an implicit agreement not to do anything else. Obviously the answer would be different if speculation was outside the powers of the company although I accept that simply because it was within the company's power is not determinative.
62. For these and further reasons given by Newman J. in his judgment I think the judge's tentative view that BMTL had not established any breach of duty was right.

Conclusion

63. The judge was right to conclude that Russian law was the proper law of the claim in tort. Guernsey law, the law of the place of BMTL's incorporation, was the proper law of the claim in equity. The judge was right to conclude that BMTL had failed to establish any breach of duty by Mr Shamurin. Accordingly I would dismiss this appeal.

LADY JUSTICE ARDEN:

64. I agree with the judgment of Lord Justice Tuckey, save on the question of breach of duty. In addition, while I agree with his conclusion as to the proper law of the equitable duty of care, I would give some additional reasons for that conclusion. I gratefully adopt his statement of the facts and his reasons and use the same abbreviations. I will deal with the proper law point first.

Proper law of a director's equitable duty of care

65. In my judgment, the question of the liability of a director by virtue of his office falls within the category of company law issues described in article 1 (2) (e) of the Rome Convention ("the company law exclusion"). My Lord has already set out this exclusion in paragraph 24 of his judgment. The company law exclusion is to be construed against the background that the European Union has made substantial progress on the approximation of the company laws of Member States so that there is less need for the Rome Convention (which is of course a treaty of the European Union) to stipulate what the proper law should be. As to the EC's company law harmonisation programme, see generally Vanessa Edwards, EC Company Law (Clarendon, 1999).
66. Moreover, the matters mentioned in the company law exclusion are aspects of company law, which, under generally accepted principles of the conflicts of laws in the member states, are considered to be governed by the law of the place of incorporation. Thus, for example, the Statute for a European Company (which came into effect on 8 October 2004), regulating the new societas europaea ("SE"), leaves a number of matters, including matters as to the liability of the directors of the SE, to be governed by the law applicable to public limited companies of the member state in which the SE has for the time being its registered office (which must be in the state in which the SE is currently registered, i.e. then incorporated): see Council Regulation (EC) No 2157/2001, articles 9, 51.
67. The principle of conflicts of law that the law of the place of incorporation applies to matters of substantive company law has been applied by the English courts. For instance, when a company incorporated abroad was in liquidation here, the English courts applied the law of the place of incorporation to the question of entitlement to surplus assets: see Re Banque des Marchands de Moscou [1958] Ch 182. (Several of the cases in this area arise out of the liquidation in England of Russian banks that had been dissolved under Russian law in the course of the Russian Revolution, but had assets in this jurisdiction at the time of their dissolution). As to the conduct of the liquidation generally, however, the English courts must apply the mandatory scheme laid down by English law even if the company is incorporated abroad (Re Suidair Aviation [1951] 1 Ch 165). This mandatory scheme contains a provision to enable the liquidator to claim compensation for breach of duty against directors (Insolvency Act 1986, section 212), but it does not lay down the content of a director's duty. Following the conflicts principle under discussion, that would be a matter for the law of the place of incorporation of the company. In Shaker v Al-Bedrawi (Peter Gibson and Arden LJJ and Bodey J) [2003] 2 WLR 922, [2003] 1 BCLC 157, (2003) BCC 465, (pet.dismissed) [2004] 1 WLR 232, this court proceeded on the basis that the law of Pennsylvania was the proper law of the duties of directors of a company incorporated there, and indeed that the same law governed the ability of such a company to make a distribution to its members: see [60] to [72].
68. Another example of a matter governed by the law of the place of incorporation is the determination of the circumstances as a matter of substantive law in which the shareholders can bring actions on behalf of the company (often called a "derivative" actions):see Konamaneni v Rolls-Royce Industrial Power (India) Ltd [2002] 1 WLR 1269. The question whether a shareholder has a right to bring a derivative action may have to be distinguished in future from the question whether the shareholder has satisfied any procedural rules from bringing a derivative claim, for example by serving prior notice on the company. My provisional view is that these are matters of procedural law for the lex fori rather than the law of the place of incorporation.
69. In my judgment, the law of the place of incorporation applies to the duties inherent in the office of director and it is irrelevant that the alleged breach of duty was committed, or the loss incurred, in some other jurisdiction. Accordingly, these duties can only be modified by contract to the extent that the law of the place of incorporation allows. It is not open to the company and the director to contend that they have contractually varied the liabilities imposed by the law of the place of incorporation by the terms of a contract for the appointment of the director governed by some other law, unless it is also shown that the law of the place of incorporation would allow this. In the matter of directors' duties - which are essential to good corporate governance and to any effective system of law regulating companies - party autonomy is the exception not the rule, and its scope is always a matter for the law of the place of incorporation.
70. Thus, had the question arisen, it would not, in my judgment, have assisted Mr Jarvis to show that as a matter of Russian law the Russian contract of employment on its true interpretation excluded the duty of care inherent in the office of director without succeeding on the anterior question that the law of the place of incorporation of BMTL would have permitted this. There was no evidence about this at trial as the application of section 310 of the Companies Act 1985 was raised only in this court.
71. Section 310 has not yet been set out in these judgments. It provides in material part:

"(1) This section applies to any provision, whether contained in a company's articles or in any contract with the company or otherwise, for exempting any officer of the company or any person (whether an officer or not) employed by the company as auditor from, or indemnifying him against, any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company.

(2) Except as provided by the following subsection, any such provision is void."

72. We have been shown amendments made to Guernsey law by the Companies (Guernsey) Law 1994 (commenced on 31 March 1995 after the date of the employment contract in this case) to introduce a provision broadly equivalent to section 310, but we have not been shown the Guernsey law before that date nor is there evidence as to the judge-made law of Guernsey before 1994. For example, it was doubtful whether even before the enactment of section 310 (which was first introduced in 1929) whether a company could have excluded liability altogether, including, for example, liability to account for property that had been misappropriated (see generally Cook v Deeks [1916] AC 554, P.C., Daniels v Daniels [1978] Ch 406) or dishonesty. By way of completeness I would point out that the apparently draconian effect of section 310 is mitigated by section 727 of the Companies Act 1985. This enables the court to grant relief against liability for breach of duty. The existence of that section underscores the point that in general the duties of directors are not as a matter of English law a matter for party autonomy.
73. Likewise I consider that the judgment of the judge was in error in characterising the question of the proper law of the equitable duty in this case as one in substance of contract because the division of management responsibilities sprang out of the pre-incorporation agreement of Yuri and Mr Shamurin (judgment, paragraphs 42 to 44). This conclusion fails properly to take into account the point made above that the duty of a director arising by law is a matter for the law of the place of incorporation. Logically, the position post-incorporation has in any event to be considered, and cannot be disregarded, because, unless the agreement continued after that date, the respondent BMTL would not be bound by those parties' agreement at all and it is fundamental to the case that it is bound by that agreement.
74. In all the circumstances, I disagree with the judge's conclusion that to apply the law of the place of incorporation to the equitable duty of care is "mechanistic". For the reasons given above, it seems to me to be justified by the generally accepted principles of conflict of laws, and precedent. Furthermore, the result protects creditors and shareholders against the risk of managers entering into agreements which dilute the minimum standards set for directors by the law of the place of incorporation and reinforces the role of that law in regulating the companies over whose formation and continued existence it has control. The equitable duty is not a mere mirror image of the common law duty of care, whose content the parties can control, and thus to be treated, as the judge thought, as of no independent significance. I appreciate that the judge did not have the advantage of having section 310 drawn to his attention but, insofar as the assumption underlying the judge's conclusions here is that in this context there is in substance only one stream of law, that assumption would have been in contradiction of the passage from the judgment of Millett LJ in Bristol & West v Mothew (with which Otton LJ agreed) and the judge may have strayed into the area that has, perhaps somewhat unkindly, been referred to as the "fusion fallacy" (Meagher, Gummow and Lehane's Equity, Doctrines and Remedies, 4 ed (2003) paragraphs 2-100 to 2-320).
75. Companies are increasingly trading across national borders and moving their trading operations from country to country. They must not by so doing escape proper regulation or otherwise creditors and shareholders will suffer. The only system of law that can consistently and effectively regulate such multinational companies is the law of the place of incorporation. Accordingly I would strongly disagree with any suggestion that the duties imposed on directors of BMTL by the law of the place of its incorporation should be regarded as irrelevant or "mechanistic".
76. As a matter of English substantive law, the duties of a director arise as a matter of law and do not depend on the content of any agreement between the company on the one hand and the director on the other hand. The duties would have been imposed even if there had been no contract of employment conferring executive functions on Mr Shamurin. That the duties are imposed as a matter of law is supported by section 310 of the Companies Act 1985, set out above. That section applies to liabilities arising "by virtue of any rule of law" in respect of negligence and other matters. Furthermore, the effect of that section is that it is not open to the company and the director to agree to lower the standards that the law imposes.
77. My Lord's conclusion is further supported by the fact that when a person agrees to accept an appointment as a director he does so (in the absence of contrary agreement) on the terms of the articles of association of the company (Re New British Iron [1898] 1 Ch 324; see generally Buckley on the Companies Acts (last updated May 2004) para. T[A82.3]). It is perhaps difficult to see how he could accept appointment on any other terms unless otherwise agreed. I will assume without deciding the point (as it may be one of some complexity) that the articles of an English company may be so drafted as to be governed by some law other than English law. I also assume that Guernsey law is the same as English law as that it is the assumption on which this case proceeds. On those assumptions, the parties could have agreed that BMTL's articles should be governed by Russian law. But no one has suggested that this is the case here. The articles are in a form which is relatively common in the UK. They are governed by Guernsey law. Now in the present case there was a contract of employment which the judge found was governed by Russian law. By contrast Mr Shamurin accepted office as a director by signing the statutory consent to act in English form. There is no reason why the law governing the appointment of Mr Shamurin as a director should not be separate from that which governs his executive functions. The appointment of Mr Shamurin as a director would be likely to be Guernsey law. On that analysis, the case for the equitable duty of care being governed by the same law seems less anomalous.

Was the judge right to doubt whether a good cause of action existed for negligence?

78. The matter on which I, respectfully, depart from my Lord's conclusions and the additional reasons given by Mr Justice Newman, is in relation to the last point in my Lord's judgment, that is whether the Judge erred in his conclusion that there was no cause of action under English law. I agree with my Lord, Lord Justice Tuckey, that the fact that the company's objects were wide enough to include the business of speculating in metal futures does not mean that Mr Shamurin had power to enter into these contracts. However, I have reached a different conclusion from my Lord and Mr Justice Newman because I do not, as they do, consider that it is necessary to find that there was a prohibition or restraint on speculative contracts.
79. The judge dealt with the point now under discussion very shortly. He was satisfied that speculative trading had occurred but held:

" Even if the matter were governed by English law I have the gravest doubts whether the claim can succeed…I do not consider that BMTL has established the existence of an obligation in Mr Shamurin owed to BMTL not on its behalf to indulge in speculative futures trading…" (judgment, paragraph 46)

80. The judge was clearly troubled by the fact that the agreement that BMTL would carry out futures contracts for hedging purposes was made before the incorporation of BMTL. I think that the judge was wrong in law to be troubled by this fact (I deal with this point in more detail below) or by the fact that company or board meetings were not held formally. Since the only shareholders and directors were Yuri and Mr Shamurin, they were entitled to make decisions informally if they wished. That is the course normally adopted in a company of this kind.
81. But the point on which Mr Hollander has concentrated was that the judge clearly thought that it was necessary for BMTL to prove some limitation on Mr Shamurin's authority. Here I agree with Mr Hollander that the judge asked the wrong question. The relevant question was whether Mr Shamurin was given that power in accordance with the company's constitution. The power to run the business of BMTL was in the usual way conferred on the board of directors. We are told that Yuri and Mr Shamurin agreed that Mr Shamurin should be the managing director of the company. Article 99 of the company's articles provides that the managing director shall have any of the powers of the board conferred on him by the directors. On that basis, it is not for BMTL to show that there was a limitation on Mr Shamurin's powers. It is for Mr Shamurin to show that the power to enter such contracts was within the powers conferred on him by the board of directors. This conferral could have been by informal agreement of the two directors: there did not have to be a board meeting and a formal board resolution. The analysis would be the same whether Mr Shamurin was a managing director or an ordinary director or simply an agent of BMTL. He would have to show that the board (that is, Yuri and himself) had delegated some relevant function to him. In other words, this is not just a question of the way the company's articles are framed; it would be the same if the question was one of agency governed by the general law. The articles did not confer on Mr Shamurin any spontaneous executive power of his own. As an ordinary director, with no power of the board delegated to him, he would only be able to carry out functions on behalf of the company collectively with the other director.
82. By way of analogy, I would refer to the recent case of Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28. The issue before the House was not one of a director's liability for breach of duty but whether the burden of a "poison pill" agreement had become binding on a company. It was not enough that the agreement had been executed on its behalf by its managing director and another director; it had to be shown that the directors had actual or ostensible authority to execute it on behalf. As Lord Scott of Foscote put it in the different context of that case at [28], "Did they have actual authority to do so? That is the first question."
83. The only evidence of any of the powers of the board being conferred on Mr Shamurin was that he would carry out the agreed policy for hedging on the London Metal Exchange. The agreement as to this policy was made before the company was formed but there is no suggestion that this did not continue to be their agreement after the company was formed. What the agreed policy entailed was that, when Yuri and Mr Shamurin so agreed in relation to any specific contract for the purchase of metal in Russia, Mr Shamurin would enter into a futures contract which hedged the price risk on that purchase and thus protected BMTL from adverse price movements between the date of purchase in Russia and the date of resale on the LME. As Yuri and Mr Shamurin were the sole directors and shareholders of the company, their informal agreement on this would as a matter of law bind the company on its incorporation. Mr Hollander relied on the Duomatic principle. This principle is so named after the decision in Re Duomatic [1969] 2 Ch 365 but it is of much greater antiquity. The principle is discussed in detail in Buckley on the Companies Acts at [381A.6] to [381A.7]. The opening part of these passages demonstrate the width of the principle:

"In a series of cases, commencing with Re Express Engineering Works Ltd;¹ Re Oxted Motor Co Ltd2, and Parker & Cooper Ltd v Reading3, it has been held that, where it can be shown that all the members⁴ of a company assent⁵ to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.^"

84. The same principle applies to meetings of directors: Runciman v Walter Runciman [1992] BCLC 1084 at 1092d; Barron v Potter [1914] 1 Ch 895.
85. The question whether authority was conferred on Mr Shamurin was a question of fact for the judge. He assumed, rather than made a finding on the evidence, that Mr Shamurin would have had that power, and for the reasons given above in my judgment he was wrong to approach the matter in this way. It has not been suggested that authority to engage in speculative trading was implied as a result of the particular form of the agreed hedging policy.
86. The appellant's case is that it was negligent for Mr Shamurin to engage in speculative futures contracts when they were outside the scope of his authority. In my judgment, on the facts of this case, it is difficult to see why that result should not follow if the underlying premise is correct that Mr Shamurin had no power to engage in speculative futures contracts. There is no doubt that he knew the difference between the two types of trading as the judge rejected his case that the agreed policy was that he should engage in speculative trading as well as hedging contracts. The speculative trading led in the main to successive and massive losses. The pleading relies on the fact that the dealings were repeated: see paragraph 13 of the amended particulars of claim. Even if, however, there had only been a single speculative trade, it would be negligent for Mr Shamurin to have entered into it in excess of his authority unless he acted reasonably in so doing. There is no finding that Mr Shamurin acted reasonably in this regard. Nor is there any finding that, if Mr Shamurin's authority was limited as BMTL contended, his mistake as to his authority was, given the way BMTL was set up and run, a reasonable one. The standard of care to be expected of a director under the general law is that which would be shown by a reasonably diligent person having the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and the general knowledge, skill and experience that the director has: see Re D'Jan of London Ltd [1993] BCC 646 at 648. (This double-barreled formulation thus has subjective aspects.) In effect the amended particulars of claim relied only on the first only of these tests but there is no finding that, even if Mr Shamurin had no authority, that test was met.
87. The judge placed some reliance for his conclusion on the evidence of Yuri that he could not stop Mr Shamurin binding the company in a manner of which he did not approve. This is not a point relied on by the respondents. Mr Hollander submitted that the judge ought not to have drawn any inference as to the need for authorisation from this evidence. The reference made by Yuri was to the practical difficulties which he was having in stopping Mr Shamurin because Mr Shamurin was the only director with signature powers for bank transfers and Yuri could not as 50% shareholder remove or overrule him. The judge specifically found that Yuri had not agreed to the speculative trades as Mr Shamurin alleged in his defence. In those circumstances I accept the submission made by Mr Hollander that the evidence referred to by the judge could not in law support the conclusion that the BMTL had no cause of action as a matter of English law for breach of the equitable duty of care in the circumstances of this case.
88. In the circumstances, I would allow this appeal and enter judgment for the appellant with damages to be assessed.

Mr Justice Newman:

89. I agree with the judgment of Tuckey LJ and that, for the reasons he gives, the appeal should be dismissed.
90. I wish to add only some comments of my own on the issue of "breach of duty", since that is the ground upon which the appeal fails.
91. BMTL's pleading (the amended Particulars of Claim) on this issue proceeded by the following steps:

(1) the existence of an oral agreement between Yuri and Shamurin" that [BMTL's] price exposure on its resale price on physical trades resulting from the time lag between the date of the purchase of the metal and the date of its resale would be hedged by means of future trades on the London Metal Exchange ("LME") (paragraph 5). This agreement was thereafter referred to as the "hedging policy" (paragraph 8);

(2) a contention that "it was implicit in the above mentioned policy for hedging, as originally agreed and/or as agreed in relation to each proposed physical trade, that the futures trades concluded by the Defendant on behalf of the Claimant would be confined to hedging" (paragraph 13);

(3) an allegation that the duty of care and skill owed by Shamurin, as a director (pleaded in paragraph 10), was breached by "the Defendant unreasonably, and without YZ's knowledge and consent, repeatedly" departing from the agreed policy by concluding futures trades "with a view to speculation" (paragraph 13).

92. It was not alleged that Shamurin's contract of employment, although based on precisely the same facts, contained an implied term that the futures trades "would be confined to hedging". Had such a term been pleaded, application of the principles governing the existence of an implied term in contract would not have yielded that result and it is difficult to see why, as a matter of law, the same facts should give rise to an "implicit" restraint to the same effect, on the futures trading in which Shamurin was permitted to engage acting in his capacity as a director of BMTL.
93. The hedging policy was specifically devised to be ancillary to the physical trades undertaken by BMTL. As such, the policy says nothing about Shamurin's power to engage the company in activities which were not connected with physical trades. Further, absent an implicit restraint, it was capable of being regarded as some evidence that he had the power to engage in futures trading.
94. Had the hedging policy been agreed in terms which made it plain that speculation on the futures market of the LME was not to be a company activity, the fact that such speculation fell within the widely drafted objects of the company would not prevent the restraint having effect. That said, given that the agreed hedging policy provides no support for the restraint, the intra vires character of the activity is consistent with the terms of the policy as agreed. In my judgment, BMTL's approach to the issue pointed towards an acknowledgement that Shamurin had the power to engage in futures trading, but it sought to limit the consequences by the assertion of a restraint.
95. Absent the restraint, a search elsewhere in the evidence for contextual support for the contention that the power of Shamurin was governed by an overall policy of strict control, involving express agreement by the directors to all the activities to be undertaken by BMTL, founders with the evidence of Yuri as quoted by Tuckey L.J., in paragraph 6 of his judgment and the occasions of the directors' dealings with BMTL's assets to which he refers in paragraph 61 which it is not suggested were unauthorised, but for which the source of authority was not investigated.
96. It follows that I am unable to accept that the judge asked the wrong question or adopted the wrong approach. His approach to the issue of Shamurin's authority was driven by the case advanced by BMTL, asserting it arose "implicitly". It should not now be allowed to invite the Court of Appeal to adopt a different approach to the evidential analysis. The judge came to careful and considered conclusions of fact on the relationship of Yuri and Shamurin both before and after the incorporation of BMTL. He regarded the claim as "somewhat contrived and artificial". When considering whether it can now be urged that Shamurin had to establish the existence of authority to engage in futures trading other than hedging, one has to have regard to the judge's conclusion set out in paragraph 21 of his judgment:-

"The evidence certainly demonstrates that they felt free to distribute its funds for purposes not obviously related to the immediate business of BMTL. Furthermore each of Yuri, Mikhail and Mr Shamurin drew US$566,000 in salary or wages in 1993, rather more than the agreed amount of US$3,000 per month, and notwithstanding BMTL's case that Mikhail was not an officer of BMTL. In 1994 substantial payments were made to various individuals, such payments being described in the cashbook somewhat euphemistically as 'to cover the office's expenses'".

97. I am by no means confident that, had the judge been asked to approach the issue in the way now advanced by Mr Hollander, it would have found favour with the judge and survived the judge's conclusions on the evidence that BMTL was "artificial" and an "extraordinary inversion of reality".
98. It follows, that I can see no basis for a conclusion that a breach of duty occurred.