In Cruz City 1 Mauritius Holdings v Unitech Limited and others (11 November 2014), the English Commercial Court addressed the following issue: “whether the English court has jurisdiction to make a freezing order in aid of enforcement of a London arbitration award against subsidiaries of the award debtor against whom no substantive claim is asserted and who have no presence or assets within the jurisdiction”. The Court decided that it did not.
This decision demonstrates that there is a limit to the policy of the English Courts of doing everything possible to support the enforcement of arbitration awards. It now appears that the Court will not give relief to applicants seeking to freeze the assets of non-UK subsidiaries of a party against whom an arbitration award has been made where those subsidiaries are not parties to the arbitration agreement.
The Claimant (Cruz) had been granted permission to serve arbitration claim forms on five companies (the Subsidiary Defendants) and to add them to proceedings. Their parent was the First Defendant, the Indian company Unitech Limited (Unitech). Unitech had persistently failed to satisfy a London arbitration award exceeding US$350 million in Cruz’s favour, despite several enforcement measures, including a worldwide freezing order over Unitech’s assets and an order appointing receivers over Unitech’s shareholdings in the Subsidiary Defendants.
The arbitration claim form served by Cruz sought a Chabra order in relation to the Subsidiary Defendants – that is, an order in accordance with TSB Private Bank International SA v Chabra1. Chabra orders permit the assets of third parties to be frozen even where the claimant has no substantive claim against the party whose assets it seeks to freeze. They are only granted where the claimant has a good arguable case that such assets are beneficially owned by the defendant, or in other limited circumstances where the assets may in due course become available to the claimant as judgment creditor.
Since none of the Subsidiary Defendants was incorporated in England and Wales and none had any assets or business in the jurisdiction, Cruz had obtained an order permitting service on them out of the jurisdiction. The Subsidiary Defendants applied to set aside the order, submitting that both grounds upon which Cruz had asserted English jurisdiction were invalid.
Cruz’s primary ground for asserting jurisdiction was under CPR62.5(1)(c), that Cruz was seeking “some other remedy affecting an arbitration award”.
The Court rejected this approach, citing a long line of authority in support of the proposition that service out of the jurisdiction under CPR 62.5(1)(c) was permissible only against a party to the arbitration or arbitration agreement in question.
These authorities stressed that arbitration is a consensual process in which parties have voluntarily agreed to the determination of their disputes in a certain forum. The same is not true of persons not party to the arbitration agreement, including subsidiaries of parties to an arbitration agreement. Consequently, there could be no rationale for permitting service on third parties who had not made such a voluntary submission.
Having declined to find jurisdiction on the first ground, the Court considered Cruz’s alternative submission, under CPR6, Practice Direction (PD) 6B, para 3.1(3). This permits service out of the jurisdiction in relation to a claim:
“made against a person [the defendant] on whom the claim form has been or will be served (otherwise than in reliance on this paragraph) and –
- there is between the claimant and the defendant a real issue which it is reasonable for the court to try; and
- the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim.”
The Court approached this by way of three key questions:
- Was there a ‘claim made’ against Unitech, such that it could be treated as the ‘Anchor Defendant’ against whom there must be a claim in order for service on a third party to be permissible?
- Was there a ‘real issue’ that it was “reasonable for the court to try” between Cruz and Unitech?
- Were the Subsidiary Defendants ‘necessary or proper’ parties to any trial between Unitech and Cruz?
As to question 1, the Defendants submitted that a “claim made” had to be a substantive claim, and that the only claims brought against Unitech in the English Courts had been for ancillary orders such as the freezing order and the order appointing receivers.
The Court agreed, holding that the language of PD 6B para 3.1(3) clearly required a substantive claim against the ‘Anchor Defendant’ and that relief ancillary to the enforcement of an arbitration award did not meet this threshold.
Turning to question 2, the Court found that as the substantive claim between Cruz and Unitech had been decided at arbitration, this could not be the ‘real issue’. Similarly, as the ancillary orders awarded in Cruz’s favour had already been made, these could not be ‘reasonable for the court to try’.
Accordingly, even if the Court was wrong in relation to question 1, Cruz would still have failed to meet the requirements for service out.
The Court concluded that the Subsidiary Defendants could not be ‘necessary and proper’ parties for the purposes of question 3.
The Court had no jurisdiction over the Subsidiary Defendants and their application to set aside the order for service upon them out of the jurisdiction succeeded.
It appears that permission for service out under CPR62.5(1)(c) on a person not party to an arbitration agreement will be very difficult to obtain going forward. Under PD 6B para. 3.1(3), a claimant must have a substantive claim against the anchor defendant before it can serve on a third party. In such cases, there must also be a ‘real issue’ triable before the English Court.