English Commercial High Court (QB): How the court should proceed when an application for similar relief can be made to arbitrators; Whether a court in one European member state can grant an injunction to restrain proceedings brought in breach of an arbitration clause in another member state?

Sally Roberts court case

 

In the case of Nori Holdings Ltd. v. Public Joint-Stock Company (Bank Otkritie Financial Corporation) [2018] EWHC 1343 (Comm), the English Commercial High Court addressed the following issues:

  1. How the court should proceed when an application for similar relief can be made to arbitrators;
  2. Whether such an injunction can or should be granted to restrain foreign proceedings brought in accordance with the insolvency law of a foreign state; and
  3. Whether the decision of the Court of Justice of the European Union (CJEU) (in West Tankers Inc v Allianz SpA (Case C-185/07) [2009] AC 1138) that a court in one European member state cannot grant an injunction to restrain proceedings brought in breach of an arbitration clause in another member state remains good law.

Detailed case analysis follows:

Factual Matrix

A bank advanced a loan to certain entities of a group of companies under three Loan Agreements which were governed by Russian law and provided for the jurisdiction of the Moscow Arbitrazh Court. The loans were secured by pledges of shares. The pledges were given by the claimants in the form of five Pledge Agreements which were governed by the law of Cyprus. Three of these Pledge Agreements contained an arbitration clause which provided for arbitration in London under the rules of the LCIA. One of the loans was also secured by a pledge of shares which was expressly subject to the jurisdiction of the Moscow Arbitrazh Court. Thereafter, these arrangements were changed and the net effect of these new arrangements was to replace the Bank’s short-term loans secured by pledges of shares in a company with long-term unsecured bonds. The Claimants sought an anti-suit injunction before English Commercial High Court to restrain the further pursuit of the proceedings against them in Russia and Cyprus and requiring the Bank to terminate the proceedings against them. They do so on the ground that the pursuit of those proceedings constitutes a breach of the arbitration clauses in the Pledge Agreements and the Pledge Termination Agreements.

Applicable Legal Principles

Section 9 of the English Arbitration Act

9 Stay of legal proceedings.

(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

(2)An application may be made notwithstanding that the matter is to be referred to arbitration only after the exhaustion of other dispute resolution procedures.

(3)An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim.

(4)On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.

(5)If the court refuses to stay the legal proceedings, any provision that an award is a condition precedent to the bringing of legal proceedings in respect of any matter is of no effect in relation to those proceedings.

New recital (12) in the Recast Regulation (with Paragraph number added)

“(1) This Regulation should not apply to arbitration. Nothing in this Regulation should prevent the courts of a Member State, when seised of an action in a matter in respect of which the parties have entered into an arbitration agreement, from referring the parties to arbitration, from staying or dismissing the proceedings, or from examining whether the arbitration agreement is null and void, inoperative or incapable of being performed, in accordance with their national law.

(4)       A ruling given by a court of a Member State as to whether or not an arbitration agreement is null and void, inoperative or incapable of being performed should not be subject to the rules of recognition and enforcement laid down in this Regulation, regardless of whether the court decided on this as a principal issue or as an incidental question.

(5)       On the other hand, where a court of a Member State, exercising jurisdiction under this Regulation or under national law, has determined that an arbitration agreement is null and void, inoperative or incapable of being performed, this should not preclude that court’s judgment on the substance of the matter from being recognised or, as the case may be, enforced in accordance with this Regulation. This should be without prejudice to the competence of the courts of the Member States to decide on the recognition and enforcement of arbitral awards in accordance with [the New York Convention], which takes precedence over this Regulation.

(6)       This Regulation should not apply to any action or ancillary proceedings relating to, in particular, the establishment of an arbitral tribunal, the powers of arbitrators, the conduct of an arbitration procedure or any other aspects of such a procedure, nor to any action or judgment concerning the annulment, review, appeal, recognition or enforcement of an arbitral award.”

Arbitration Clause

“In the event of any dispute or disagreement arising under, or in connection with, this Agreement, such dispute or disagreement shall be resolved by binding arbitration held in London under the rules of the London Court of International Arbitration (which rules are deemed to be incorporated herein; hereinafter – the ‘Rules’), save that no requirements of the Rules as to the nationality of arbitrators shall apply, with 3 (three) arbitrators appointed in accordance with the Rules (where each of the Pledgee and the Pledgor shall appoint one arbitrator; the two arbitrators so elected shall appoint the chairman). The London Court of International Arbitration shall be the appointing authority. The working language of the proceedings shall be English. The Parties’ addresses for service of process shall be the addresses specified in this Agreement.”

Russian Proceedings

The Bank commenced proceedings in the Moscow Arbitrazh Court against the claimants. In these proceedings the Bank sought the invalidation and reversal of the Pledge Termination Agreements, so as to restore the Bank to the position in which it was prior to these transactions being concluded. The Moscow Arbitrazh Court made an interim order restraining dealings in shares. However, this interim order did not have extra-territorial effect so that none of the shares affected by the impugned transactions have actually been frozen. The claimants’ argued that they have not been properly served with the Russian proceedings and that, if and when they are served, those proceedings should be stayed as against them in favour of arbitration.

LCIA Arbitration

Some of the Claimants commenced arbitration against the Bank by filing a Request for Arbitration with the LCIA. In the arbitrations the claimants sought declarations that each of the Termination Agreements were valid and that each of the Pledge Agreements had been validly terminated. They also sought an anti-suit injunction. By its response, the Bank has indicated that it intends to advance a defence and possible counterclaim based on its contention that the impugned transactions were fraudulent and that the Termination Agreements are void or should be set aside.

The Cypriot proceedings

There are two sets of proceedings in Cyprus. First, by some Claimants who applied without notice for an order in support of the LCIA arbitrations to prevent the Bank from taking any steps to register any pledges of shares. Second, by the Bank who commenced further substantive proceedings in the courts of Cyprus against the claimants and nine others. It alleged that the impugned transactions were the result of a fraudulent conspiracy to defraud it and that the purchase of the bonds and termination of the loans and pledges were unlawful and void. Thus the Cypriot proceedings essentially duplicate the Russian proceedings so far as the relief sought and the grounds for such relief are concerned.

Parties’ Contentions

The Bank submitted that any application for anti-suit relief should be made to the arbitral tribunal and that there was no need for the court to intervene and that the court should allow the arbitrators to make their own decision whether to grant an anti-suit injunction or declaratory relief. The Bank further argued that that since Cyprus is an EU member state, the decision of the CJEU in West Tankers Inc v Allianz SpA (Case C-185/07) [2009] AC 1138 prevents the grant of an anti-suit injunction to restrain the pursuit of those proceedings.

The Claimant submitted that the Bank could not advance this submission while continuing to challenge the jurisdiction of the arbitrators and contending that the arbitrations had been improperly commenced. The Claimant countered the CJEU case arguing that it is not a good law relying on recital 12 of the Recast Brussels Regulation (Council Regulation 1215/2012) and the reasoning of Advocate General Wathelet in Proceedings concerning Gazprom OAO (Case C-536/13), [2015] 1 WLR 4937 as having effectively reversed the decision in West Tankers (Supra).

Analysis

Citing The Angelic Grace [1995] 1 Lloyd’s Rep 87, cited with approval by the Supreme Court in AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JS [2013] UKSC 35, [2013] 1 WLR 1889, the Court noted that where court proceedings are brought (otherwise than in the courts of an EU or Lugano Convention state) in breach of an agreement to arbitrate, the court will generally grant an anti-suit injunction to prevent any further breach unless there are strong reasons not to do so.

The Court further cited section 37 of the Senior Courts Act under which the Courts are empowered to grant such an injunction. It does not depend on whether an arbitration has been or is about to be commenced. When such an injunction is sought, it is for the court to determine whether there is a binding arbitration agreement and whether the pursuit of the foreign proceedings constitutes a breach of the agreement.

Relying on Section 7 of the Arbitration Act, 1996 (the Act) and Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40, [2008] 1 Lloyd’s Rep 254, the Court observed that an arbitration agreement is distinct from the contract of which it forms part and will be binding notwithstanding the invalidity of the main contract unless the ground for invalidating the main contract applies equally to the arbitration agreement.

Relying on Starlight Shipping Co v Tai Ping Insurance Co Ltd [2007] EWHC 1893 (Comm) the Court noted that arbitrators can grant anti-suit relief on a final basis. Further, as per Section 39 of the Act read with Article 25.2 of the LCIA Rules and Starlight Shipping (Supra), arbitrators can also grant such relief on a provisional basis where the parties so agree, as they do in the case of an LCIA arbitration, although such a provisional order would not qualify as an award capable of recognition or enforcement under the New York Convention.

The Court held that it is clear from AES (Supra) that (in a case outside the Brussels/Lugano regime) the court has jurisdiction to grant anti-suit relief and should ordinarily do so in accordance with the principles summarised above. Where a court has jurisdiction the Act provides a mechanism for a party who wishes to contend that the jurisdiction should not be exercised because the claim should be decided in arbitration. That mechanism is section 9 which gives effect in domestic law to Article II (3) of the New York Convention.

The Court noted that a dispute as to whether the pursuit of foreign court proceedings is a breach of an arbitration clause is a matter which falls within the scope of a conventional arbitration clause. It is therefore “a matter which under the agreement is to be referred to arbitration”. If that were not so, an arbitral tribunal would not have jurisdiction to order anti-suit relief, as its jurisdiction is limited to determination of the matters which the parties have agreed to refer to it. Accordingly it may be that a defendant to court proceedings claiming anti-suit relief can obtain a mandatory stay of the proceedings under section 9. In practice, however, that does not happen for the obvious reason that the position of the defendant in the court proceedings is that it is not in breach of the arbitration clause, either because that clause is “null and void, inoperative or incapable of being performed” or because it does not apply to the claim in the foreign proceedings. It is hard to see how a defendant to a claim for anti-suit relief could assert that it was entitled to a stay while at the same time denying any breach of the arbitration clause. That is the position here. The Bank denies the jurisdiction of the arbitral tribunal and (at least so far as the Russian proceedings are concerned) denies that its foreign proceedings are in breach of any arbitration clause. In those circumstances it is hard to see how it could have applied for a stay under section 9. In any event it has not done so but has resisted the claimants’ claim for anti-suit relief on the merits. It is therefore too late for any application for a stay.

Where there has been no application for a stay under section 9 there is no reason why the court should not exercise the jurisdiction to grant anti-suit relief which it undoubtedly has. There is nothing in the Act to abrogate the power to grant an anti-suit injunction or to qualify the established principles for the exercise of that power.

According to the English High Court, the Singapore Court of Appeal in Larsen Oil & Gas Pte Ltd v Petroprod Ltd [2011] SGCA 21 had made a general presumption applicable to the construction of arbitration clauses that in the absence of express language such clauses do not extend to claims to avoid a transaction made by a liquidator or other office holder in insolvency proceedings. The English Court while refuting to go with this dictum of Singapore Court of Appeal and held that the presumption which applies to the construction of arbitration clauses in Singapore, as established in this case, does not form part of English law. The Court also refuted the Singaporean case on the issue of arbitratbility holding that the modern view in English law, as is apparent from the Act, is that commercial parties who agree to arbitrate do not deprive themselves of fundamental rights of access to the courts.

With regard to the issue of whether an injunction can or should be granted to restrain foreign proceedings brought in accordance with the insolvency law of a foreign state, the Court held that the court will generally grant an injunction to restrain the pursuit of foreign proceedings unless there are strong reasons not to do so. Citing Lord Bingham, the Court noted that what is contemplated, therefore, is that (subject to general equitable considerations, for example as a result of delay in seeking relief) in circumstances where a court would stay domestic proceedings as being contrary to an exclusive jurisdiction or arbitration clause, it will be appropriate to grant an anti-suit injunction. However, there is an important distinction in this respect between the two kinds of clause. In the case of breach of an exclusive jurisdiction clause, the court has a discretion to grant a stay and may take account of factors going to such matters as forum non conveniens, whereas in arbitration cases a stay under section 9 of the Act is mandatory.

In the particular circumstances of the case, the Court held that this case is materially different because it is not possible to achieve submission of the whole dispute to a single forum. In those circumstances the parties’ agreement to arbitrate is the decisive factor. Some degree of fragmentation is unavoidable but, it is common for a dispute to involve multiple parties, some but not all of whom have contracts containing arbitration clauses. In such circumstances a party is entitled to a mandatory stay of domestic court proceedings notwithstanding that court proceedings will continue against other parties. If a mandatory stay of domestic proceedings and an injunction to restrain foreign proceedings are indeed opposite and complementary sides of a coin, fragmentation of proceedings does not provide a strong reason to refuse an injunction.

With regard to the ruling of CJEU in West Tankers Inc v Allianz SpA (Case C-185/07) [2009] AC 1138, the Court held that the fundamental point decided in this case was that a court order which undermined the effectiveness of the Brussels Regulation by preventing a court in another member state from deciding for itself whether it had or should exercise jurisdiction under the Brussels Regulation was incompatible with the Brussels Regulation, regardless of whether the proceedings in which the order was made were themselves within the scope of the Brussels Regulation.

The Court further added that Article 1.2(d) of the Recast Regulation (which preceded the Brussels Regulations) itself continued to exclude arbitration from its scope, while a new Article 73.2 provided that: “This Regulation shall not affect the application of the 1958 New York Convention.” The effect of recital (12) is clear. Effect is given to it by the combination of Article 1.2(d) and Article 73.2 of the Recast Regulation. Thus paragraph (1) of the Recast Regulation affirms the exclusion of arbitration from the scope of the Recast Regulation while making clear that a court with jurisdiction under the Recast Regulation can and should apply Article II (3) of the New York Convention in determining whether to exercise that jurisdiction or to stay the proceedings in favour of arbitration.

Conclusions

In the circumstances of the case, the Court held that the availability of anti-suit relief from the arbitrators is not a reason for the court to refuse an injunction. The Court further held that the commercial parties who agree to arbitrate do not deprive themselves of fundamental rights of access to the courts. The Court also held that there is nothing in the Recast Regulation to cast doubt on the continuing validity of the decision in West Tankers (Case C-185/07) [2009] AC 1138 which remains an authoritative statement of EU law. The Court issued anti-suit injunction against Bank to discontinue the Russian proceedings as against the claimants. Further the Court held that the Bank must not commence proceedings against the claimants seeking the same or equivalent relief in any court of a state which is not a member of the European Union or a party to the Lugano Convention.

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