In Swallowfalls Limited v (1) Monaco Yachting & Technologies S.A.M. and (2) Mr Peter Landers JR, the English Commercial Court (the Court) rejected an attempt to resist summary judgment by the defendants (Monaco and L), on the basis of counterclaims for set-off in respect of alleged breaches of a construction agreement. Monaco and L had submitted the counterclaims to arbitration and the tribunal had dismissed those claims following failure by Monaco to comply with orders (including peremptory orders) for security for costs. The tribunal had not reached a decision on the merits of those claims.

In an unusually strongly worded judgment, the Court held that for Monaco and L to litigate the counterclaims that had already been the subject of an arbitration would be an abuse of process and that any other conclusion on the facts would be “offensive to justice” and “would not serve the public interest“.

This is a sensible decision: any other conclusion would have offered the defendants a second chance to prosecute claims against Swallowfalls in the court, in circumstances in which they had agreed to arbitrate them, insisted that they should be arbitrated, and agreed to be bound by the outcome of that arbitration. Whilst the tribunal had not reached a decision on the merits of the claims, the arbitration had reached a final outcome which was the dismissal of the claims given Monaco’s failure to provide security for costs.

The case demonstrates that a party must comply with orders for security for costs or risk being unable to prosecute its claims. The defendants were given a number of chances to provide security and offered a number of methods by which it could be provided. The scant reasons provided for failing to comply with the tribunal’s orders did not impress the Court. Whilst the tribunal’s course of action may seem draconian, the Court noted that proceedings in the Commercial Court would ultimately be dismissed after enduring non-compliance in the same way.

The case also shows that a party is not able to “hop” between forums, as convenience or circumstance dictate. The defendants had argued before the Court that the claims should be arbitrated, and having repeatedly failed to comply with the tribunal’s orders, the defendants were not at liberty to raise those claims as counterclaims in the litigation.  

 

Background

The defendants had commenced the arbitration against Swallowfalls for breach of the construction agreement. Swallowfalls started proceedings in the English courts to enforce a loan agreement and guarantee against Monaco and L. In response to Swallowfalls’ claims, Monaco and L raised as counterclaims for set-off, the claims which it had brought against Swallowfalls in the arbitration. The proceedings in the English courts were then stayed pending the resolution of the matters referred in the arbitration.

During the arbitration, the defendants did not comply with orders by the tribunal that they provide security for costs to Swallowfalls. This led the tribunal to issue a final and peremptory order against Monaco in respect of the security and, following non-compliance, the tribunal granted Swallowfalls’ application to dismiss the claim under s41(6) of the Arbitration Act 1996, issuing a partial final award, followed by a second award on costs.

The parties agreed that the stay should be lifted, and Swallowfalls sought summary judgment on the claims under the loan agreement and guarantee. The defendants contended that the Court should consider whether the counterclaims under the construction agreement provided a defence of set-off to Swallowfalls’ claims.

The Court’s decision

The Court rejected the defendants’ submission that the dismissal of the claim by the tribunal was limited in its scope finding that, by reason of s46(1) of the Arbitration Act 1996 and the terms of the tribunal’s award, Monaco and L’s claims were dismissed “with all the consequences of finality that such an award brings”.

To allow the defendants to raise the counterclaims by way of defence of set-off was an abuse of process: “to litigate the subject-matter of the arbitration through the counterclaim, would be to vex the claimant … for a second time with those allegations“. It was not accepted that Swallowfalls had not had to meet the counterclaims yet. On the contrary, Swallowfalls had had to meet the claims in the arbitration until the final outcome of the arbitration was reached and that final outcome was dismissal. The Court was not required to consider Swallowfalls’ other arguments, which were based on issue estoppel and the availability of set-off.

This decision gives a strong message to parties who do not comply with peremptory orders issued by a tribunal. It is not clear whether the defendants in this case were unable to satisfy the tribunal’s requirements as to security – what is apparent is that the Court was not persuaded by their explanations. If the defendants did take a strategic decision with regard to the arbitration on the basis that the claims could be pursued as counterclaims in the litigation, it was a strategy which did not pay off. The course of action taken by Monaco and L in the arbitration led to their claims being dismissed without any consideration of the merits, but with the same final and binding effect as if they had been rejected by the tribunal.