Crescendo Maritime Co. and another v Bank of Communications Company Ltd and others [25.11.15]

Commercial Court grants anti-suit injunction in favour of London arbitration and declaratory relief in respect of alleged fraudulent backdating of a shipbuilding contract.

Background

A shipbuilding contract had been backdated in order to avoid the application of regulations under the International Convention for the Safety of Life at Sea (SOLAS) regarding tank coatings. The builder terminated the contract and commenced London arbitration against the buyer (the builder/buyer arbitration). The buyer believed that it was entitled to cancel the contract due to delay and to receive a refund of the purchase price instalments which it had paid in advance to the builder. The instalments were secured by refund guarantees provided on behalf of the builder by a Chinese bank.

The bank refused to pay out under the guarantees. The buyer commenced London arbitration against the bank (the buyer/bank arbitration), appointing the same arbitrators as in the builder/buyer arbitration. The two arbitrations were to be handled concurrently.

In the buyer/bank arbitration the bank’s defence was that the buyer had concealed the fact that the shipbuilding contract was ante-dated, which amounted to fraud. In addition the bank claimed that the buyer had assigned its rights to the buyer’s lender bank, Alpha, and therefore the buyer did not have title to sue the bank. However, the bank subsequently stopped participating in the buyer/bank arbitration and instead commenced an action in China against the builder, the buyer, Alpha and others. The Chinese court ordered the freezing of the sums under the refund guarantees, restraining the bank from making any payment out under them.

The buyer and Alpha applied to the Commercial Court for an anti-suit injunction to restrain the Chinese proceedings in favour of London arbitration. The injunction was granted on an interim basis in October 2014.

In December 2014 the London arbitration tribunal published its awards in the builder/buyer arbitration and the buyer/bank arbitration, finding in favour of the buyer and ordering the bank to pay US$18.6 million under the refund guarantees if the builder failed to pay this sum to the buyer. The refund guarantees were not void for fraud or illegality. The tribunal found that the buyer had not assigned its rights to Alpha.

The buyer and Alpha then applied for a permanent anti-suit injunction. Alpha also sought a declaration of non-liability to the bank.

Decision

Mr Justice Teare granted a partial permanent injunction restraining the Chinese litigation, and partial declaratory relief.

The bank advanced three arguments opposing the application for an anti-suit injunction, all of which were rejected:

  • The buyer/bank arbitration and the Chinese litigation were dealing with different allegations. While the bank was claiming in both proceedings that it had been tricked into agreeing to provide the refund guarantees, in the Chinese proceedings the bank was alleging non-disclosure whereas in the buyer/bank arbitration it was alleging misrepresentation. Teare J did not consider that this difference was a strong reason not to enforce the arbitration clause.
  • China was the natural forum as the alleged fraud had been committed in China, the builder and the bank were Chinese and most of the evidence was in China. Teare J agreed that China was the natural forum but found this to be of little relevance in circumstances where the parties had chosen London arbitration as a neutral forum. In addition he was guided by the earlier decision in Toepfer v Cargill [1997] in which forum conveniens considerations were regarded as having little or no weight in the context of arbitration clauses.
  • The bank was not able to sue Alpha in London arbitration in light of the London arbitration tribunal’s ruling that Alpha was not an assignee of the buyer’s rights. Teare J rejected this as a reason not to enforce the arbitration agreement. The bank’s attempt to re-litigate the merits of the fraud allegation which the London arbitration tribunal had considered and dismissed was oppressive and vexatious.

The permanent anti-suit injunction was to restrain the bank from suing the buyer alone. Alpha was not a party to the arbitration agreement and therefore the bank’s pursuit of Alpha could not be restricted to London arbitration.

The bank was likely to have been aware of the backdating of the shipbuilding contract and therefore had not been deceived by this. Alpha was entitled to declaratory relief that it did not conceal from the bank that the shipbuilding contract had been backdated, and that it had no liability to the bank for loss or damage suffered by the bank as a result of entering into the refund guarantees.

Comment

The backdating of shipbuilding contracts (in this case in an attempt to evade the tank coating requirements with which the yard could not comply) is a practice fraught with danger for buyers and builders, and is not recommended. Even if it does not make the shipbuilding contract itself unenforceable, if there is evidence of deception of third parties it may make related contracts void for illegality, thereby providing banks for example with defences to claims under refund guarantees. Backdating might also adversely affect rights and obligations under mortgages and insurance contracts.

Chinese banks often seek recourse to Chinese courts to prevent payment under refund guarantees, and those courts will often take jurisdiction despite agreements to arbitrate contained in the guarantees. Anti-suit injunctions in favour of arbitration are no longer possible against European Union domiciled defendants, but remain available otherwise. The decision is welcome reassurance of the robust approach taken by the English courts to protect a contractual right to have disputes determined in arbitration.