Exclusive jurisdiction clauses or arbitration agreements are meant to ensure that disputes are heard in a single forum that is acceptable to both parties. The tribunal is selected so as to be neutral, independent and experienced in dealing with the issues. When differences do arise, however, not all parties are willing to stand by their agreement. Some deliberately seek to undermine the contractual dispute resolution mechanism, by commencing proceedings in a jurisdiction believed to offer an advantage to the rogue party. Parallel proceedings and a ‘race to judgment’ may ensue. 

In Spliethoff’s Bevrachtingskantoor BV v Bank of China Ltd [2015] EWHC 999, the Commercial Court was recently asked to enforce a judgment of the Chinese Courts obtained in blatant breach of an arbitration clause and in contravention of injunctions meant to restrain the Chinese proceedings. The case serves as a useful reminder of the issues, both legal and tactical, that arise where there is a clash of competing courts or tribunals. It also shows that having a foreign judgment recognised in England may not always be the end of the story.

Background: a multiplicity of proceedings

Spliethoff’s Bevrachtingskantoor BV (“SBV”), one of the largest Dutch ship operating companies, had entered into two shipbuilding contracts with a Chinese shipyard and a related entity. Both contracts contained London arbitration clauses, and were governed by English law.

Bank of China had provided two guarantees in support of some of the shipbuilder’s obligations under those agreements. SBV paid almost US$ 27 million by way of advance instalments to the yard. The contracts provided that, in the event of termination, these advance payments were to be refunded to SBV. Bank of China’s guarantees secured that obligation to repay SBV. The guarantees were also subject to English law.

The vessels were so late that SBV exercised its termination rights under the contracts. SBV asked for a refund of the advance instalments. The yard refused. SBV then made written demands under both guarantees, requiring Bank of China to pay it the US$ 27 million. Proceedings in London and in China ensued, and ultimately formed the background to SBV’s claims against Bank of China under the guarantees that were decided by the Commercial Court in April 2015. 

Arbitration and court proceedings in England:

  • Two arbitral tribunals, appointed under each of the shipbuilding contracts, both found that SBV was entitled to terminate by reason of the yard’s delay, and that SBV was, therefore, entitled to recover the advance payments. 
  • Following litigation commenced by the yard in China, SBV obtained anti-suit injunctions to restrain the yard from continuing with the Chinese proceedings in breach of the arbitration clause. SBV was granted an interim injunction by the Commercial Court, and final injunctions from two further arbitral tribunals. The arbitrators also found that SBV was, in principle, entitled to damages for any loss suffered by SBV as a result of the Chinese proceedings - so damages that might amount to the exact same sums that the yard might be awarded by the Chinese Courts, which would in effect cancel out the oppressive foreign proceedings. 

The yard did not comply with any of the awards or court orders made in England.

Litigation in China:

  • While the arbitration proceedings were ongoing, the yard sought interim relief from the Qingdao Maritime Court. The Chinese Court made ex parte, interim orders requiring SBV to pay the sum of US$ 16.3 million, or put up a guarantee in that amount, and prohibiting Bank of China, or any of its overseas branches, from making payments to SBV under the guarantees.
  • The yard also advanced substantive claims for damages against SBV in the Chinese litigation. It alleged that SBV had fraudulently conspired with the manufacturers of the engines for the two ships, such that refurbished, and defective, engines had been supplied unbeknownst to the yard, and had been passed off as new. 
  • SBV challenged the jurisdiction of the Chinese Court. When the jurisdictional objections were dismissed at first instance, SBV appealed all the way to the Supreme People’s Court. This appeal did not operate as a stay of the yard’s substantive proceedings, and so SBV decided to participate fully in a number of hearings concerning the substantive claims whilst waiting for the ultimate decision on jurisdiction.
  • The Supreme People’s Court dismissed SBV’s jurisdictional challenge. Thereafter, following further hearings in which SBV defended the claims on the merits, the Qingdao Maritime Court upheld the yard’s fraud claims. It held SBV liable for substantial damages.
  • While SBV appealed that judgment to the Supreme People’s Court, it was common ground in the Commercial Court that under Chinese law, the decision at first instance in favour of the yard was final and effective. As of April 2015, when the Commercial Court claims were decided, the yard was actively seeking to locate assets of SBV located within China, with a view to enforcing the judgment of the Qingdao Maritime Court.

The Commercial Court Claim against Bank of China

SBV’s claim in the Commercial Court was against Bank of China under the guarantees, rather than against the yard. Bank of China resisted the claim on a number of grounds. A number of arguments made in the bank’s defence depended on the nature of the contract between Bank of China and SBV. Bank of China argued that the contract was a true guarantee, given by way of security, rather than an on-demand guarantee, or a performance bond. 

The distinction under English law between a guarantee and a performance bond is an important one. In the present case, if the contract was really a guarantee, then Bank of China might not have to pay, because the Chinese Courts had found SBV guilty of fraud. Under a true guarantee, SBV’s fraud would discharge Bank of China - always provided that the judgment of the Qingdao Maritime Court was recognised by the Commercial Court. 

A guarantor or surety can rely on a number of equitable defences that relate to the underlying contract. Fraud affecting the underlying transaction will usually discharge the guarantor. A material alteration of the obligations in the underlying contract will also have that same effect, unless the guarantor has consented to it. That is because the law takes the view that the surety has only promised to guarantee performance of the bargain as it was originally agreed (and not any subsequent variations): this is usually referred to as the rule in Holme v Brunskill [1878] 3 QBD 495.

If, on the other hand, the contract between Bank of China and SBV was in law a performance bond, then the Chinese judgment would be irrelevant, irrespective of whether it had to be recognised in England. A performance bond is not a contract of surety, but rather one of indemnity. The issuer of a performance governed by English law bond cannot have regard to any dispute relating to the underlying contract, and the obligation to pay under the bond is entirely separate and distinct. None of the equitable defences available to a surety are open to a party that has in fact given a performance bond. As the Commercial Court recognised, in international commerce, performance bonds are treated as the equivalent of cash, and it is important that there is certainty that any financial institution that has issued such a bond will pay on demand.

Of course, if the Chinese judgment holding that SBV had been dishonest and fraudulent did not have to be recognised, then Bank of China might have had to pay out even if the contract were a true guarantee, and not a performance bond. As against that background, Carr J proceeded to consider the issues. 

Recognition of the Chinese judgment in breach of the arbitration clause

As regards recognition of the judgment of the Chinese Courts, the first question was whether SBV had voluntarily submitted to the jurisdiction. If SBV had so submitted, then it might not matter that the Chinese litigation had blatantly and deliberately been pursued in breach of the arbitration clauses.

Recognition of the Chinese judgment was governed by Civil Jurisdiction and Judgments Act 1982 (“CJJA”). Sections 32 and 33 of the CJJA specifically deal with proceedings that contravene any agreement for settlement of disputes (such as an arbitration clause or an exclusive jurisdiction provision), and set out the statutory criteria for determining whether a party has ‘submitted’ to foreign proceedings. A party will be deemed to have submitted if it agrees to the foreign proceedings or advances a counterclaim, but it will not submit if it only participates in the litigation in order to (i) contest the jurisdiction of the court or (ii) “to protect, or obtain the release of, property seized or threatened with seizure in the proceedings”.

The judgment of Carr J provides further guidance on the test that the English Courts will apply when considering whether a party has submitted to the jurisdiction of a foreign court:

  • Participating or appearing in the proceedings in order to defend the merits of the claim will generally be treated as having submitted.
  • Any formal steps taken in the proceedings (beyond simply objecting to jurisdiction) will put the onus on the party arguing that it did not submit.The question that the English Court will ask is:

“… were the acts of the defendant which are pointed to “obviously and objectively” inconsistent with the defendant’s submission to the jurisdiction of the foreign court: if they were, they will not be characterised as submission … but otherwise they will.”

  • It would be odd if, when considering recognition of a foreign judgment, the English Court found that a defendant had submitted to the jurisdiction of a foreign court, when that would not also be the position under the foreign law in question.The English Court will therefore want to be satisfied that there has also been a submission to jurisdiction in accordance with foreign law.

SBV had submitted to the jurisdiction of the Chinese Court

Here, SBV had fully participated in the Chinese proceedings after the Supreme People’s Court had dismissed its jurisdictional challenge. At that stage, as the Commercial Court noted, SBV faced a simple (although perhaps stark) choice: either SBV ceased to take any further part in the Chinese litigation, risking adverse orders or judgments against it, or SBV defended the claims on the merits. SBV chose the latter, and in doing so submitted to the jurisdiction of the Chinese Courts. Carr J noted that, in effect, SBV could not have its cake and eat it, too: 

Had SBV been successful in so doing, it would no doubt have regarded that as conclusive and the judgment as binding and to be recognised in that regard.

As regards Chinese law, both parties had led expert evidence, but there had been no positive case that SBV, having fully taken part in the trial before the Qingdao Maritime Court, would not be treated as having submitted under the Chinese law - something that would have been surprising, to say the least. The Commercial Court therefore concluded that the position under Chinese law was perfectly in line with a finding that SBV had submitted.

SBV also sought to rely on the statutory proviso in Section 33(1)(c) of the CJJA, pursuant to which a party that takes steps to protect its property against seizure or enforcement measures is not to be taken as having submitted. SBV did challenge a number of such (ex parte) orders, but, once these challenges had been dismissed, it then went on to participate in the trial of the substantive claims. In doing so, SBV stepped beyond the boundaries of the ‘protection of property’ exception.

Does the English Court retain a discretion to nonetheless refuse recognition?

That left one point to be decided. SBV may have submitted to the Chinese Courts, but the litigation had been in flagrant breach of the arbitration clauses. English law recognises that public policy militates against upholding judgments obtained by a party riding roughshod over the contractual dispute resolution procedure. 

In Philip Alexander Securities & Futures Ltd v Bamberger [1996] CLC 1757, Waller J stated that:

There are cases where it is in blatant disregard of an arbitration provision that a party has commenced proceedings abroad and where the party is acting vexatiously and oppressively. In such cases, judgments obtained on the substance of the dispute (it can be argued) should not be recognised … It would seem to be me prima facie that if someone proceeds in breach of, and with notice of, an injunction granted by the English court to obtain judgments abroad, those judgments should not, as a matter of public policy, be recognised in the UK.

SBV prayed in aid that same public policy, as qualifying Sections 32 and 33 of the CJJA. SBV invited the Commercial Court to carry out an evaluative exercise of the Chinese judgment, in order to determine whether it ought to be recognised. SBV’s argument was that even though it might have submitted to the jurisdiction of the Chinese courts, the English Court nonetheless retained a discretion not to enforce a judgment that was so clearly against public policy.

SBV relied on statements made by Rix LJ in the Court of Appeal in AES Ust-Kamenogorsk Hydropower Plant LLP v AES Ust-Kamenogorsk Hydropower Plant JSC [2012] 1 WLR 920, to the effect that:

It was common ground before the judge, and it has been common ground in this court, that section 32(3) [of the CJJA] gives to the English court discretion whether to recognise or enforce in circumstances where the general rule does not apply. I am not sure that discretion is the right concept here; it may be that it would be better to say that whether the foreign judgment should be recognised or enforced is a matter for evaluative judgment.

The general rule set out in the statute that was referred to by Rix LJ was that judgments given in breach of an arbitration clause or a similar provision should not be enforced unless that breach had in effect been waived by a submission: in other words, the Court of Appeal suggested that Parliament had intended for the Courts to retain some element of a discretion, perhaps meant to be applied in circumstances where a party felt it was caught between a rock and a hard place and ended up going too far in taking part in the foreign proceedings.

Carr J rejected the argument, and expressly disagreed with the statement made by Rix LJ, which was obiter. The relevant provisions in the CJJA were plainly meant to govern the circumstances in which a foreign judgment obtained in breach of an arbitration clause should not be recognised or enforced. Parliament had provided that recognition of such a judgment should be refused in all cases, unless the defendant had submitted to the jurisdiction of the foreign court. There was, therefore, a clear exception - and one that SBV fell squarely within. None of the authorities that SBV had pointed to concerned a situation where a party resisting a judgment given in breach of an arbitration clause had in effect accepted the jurisdiction of the foreign court by fighting the claim on the merits. 

The decision makes it clear that there is no room under English law for a party participating fully in foreign proceedings that it considers to be in breach of contract, whilst reserving its position on jurisdiction. The advice to any party faced with the same predicament as SBV, and who intends to resist recognition or enforcement in England, must therefore be to abandon and take no further part in any such litigation as soon as the jurisdictional issues have been dealt with, and to make no submission on the merits. 

A twist in the tale: SBV was entitled to demand payment under the guarantee after all

At this point, one can be forgiven for thinking that matters look rather bleak for SBV. However, SBV did in fact go on to snatch victory from the jaws of defeat. It was able to persuade the Commercial Court to order Bank of China to pay out under the guarantee, irrespective of a Chinese judgment holding SBV liable for fraud which the English Courts had to recognise. SBV did this by successfully arguing that the guarantee was not really a guarantee, but a performance bond. In arriving at that conclusion, the Commercial Court looked at substance and not form, and was clear that any labelling or references to the contract being a ‘guarantee’ could not be decisive. 

Having reviewed the authorities, Carr J identified four general principles:

  • the question of whether a document such as each of the Guarantees is a true guarantee or a performance bond is a matter of construction to be determined on a case-by-case basis;
  • there are certain factors which may be indicative of the nature of the instrument, but these are not necessarily decisive;
  • the question that the Court will always be faced with is what, objectively, the parties to the contract intended;
  • in the modern commercial world, parties are capable of drafting agreements that are clear and that oblige the surety to pay regardless of the existence of any underlying liability if that is what they intend.

Carr J also cited with approval a presumption set out in Paget’s Law of Banking as to when an instrument will be a performance bond, or an ‘on demand guarantee’:

Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee. …

It is helpful to consider the decision on this point by looking at some of the wording of the contract, and in particular a proviso that Bank of China relied on heavily in arguing that it was a true guarantor, and was not obliged to stand as surety when SBV had been found guilty of fraud in China.

The contract proclaimed that:

We, Bank of China, Shandong Branch, as the primary obligor, not as security, do hereby irrevocably, unconditionally and absolutely guarantee repayment to you by the Seller”.

It then went on to state expressly that Bank of China’s obligations were not affected “… by any dispute between [SBV] as the Buyer and [the yard as] the Seller under the Shipbuilding Contract or by the Seller’s delay in the construction and/or delivery of the Vessel due to whatever cause …”. The contract also stated that Bank of China would pay “within 30 days after our receipt of the relevant written demand from you for repayment.” The promise to pay was, however, made subject to the following proviso: 

However, in the event of any dispute between you and the Seller in relation to:

  1. Whether the Seller shall be liable to repay the instalment or instalments paid by you and
  2. Consequently whether you shall have the right to demand payment from us,

And such dispute is submitted either by the Seller or by you for arbitration or appeal in accordance with article XIII of the contract, we shall be entitled to withhold and defer payment until the arbitration award or court order is published. We shall not be obligated to make any payment to you unless the arbitration award or court order orders the Seller to make repayment. If the Seller fails to honour the award or court order, then within thirty (30) days after the publication of award or court order we shall refund to you to the extent the arbitration award or court order orders but not exceeding the aggregate amount of this guarantee plus the interest described above.

Carr J first of all found that the guarantee satisfied important elements in Paget’s presumption, being a contract issued by a bank in international commerce, including ‘on demand’ wording. It was essentially limited to repayment of the instalments (as opposed to be being a guarantee for the yard’s manifold and considerably more extensive and financially onerous obligations under the shipbuilding contracts). 

She did not agree with Bank of China that the promise to pay on demand was undermined by the proviso requiring SBV to refer any dispute to arbitration. The judge found that, in any event, under the contract Bank of China was never concerned with or could have regard to the substance of any dispute between SBV and the yard. If SBV fell within the arbitration proviso, then all this meant was that SBV would have to provide an additional document in support of a demand for repayment: an arbitration award. This SBV was able to do, having referred the matter to London tribunals. Accordingly, Bank of China was liable. The Chinese judgment holding that SBV had engaged in dishonesty was not, on a true construction of the guarantee, sufficient reason for Bank of China to object to SBV’s demand.

One can only speculate whether Carr J’s decision that the contract was a performance bond was in any way motivated by the underlying merits. It certainly offered a very elegant way of ensuring that SBV was not left out in the cold.