The circumstances in which the English Court will decline to grant interim relief in support of foreign arbitrations and the potential issues of selecting a lex fori which is different from the lex arbitri

Company 1 v Company 2 [2017] EWHC 2319 (QB)

Interim measures of protection have an important role to play in international commercial arbitration, particularly in order to prevent the dissipation of assets or the destruction of evidence by an untrustworthy defendant. English arbitration law responds to these risks in two principal ways:

  • The first line of defence is the powers conferred on arbitral tribunals to make orders for interim measures of protection, whose purpose is, depending on the circumstances, to maintain the status quo, provide a means of preserving assets out of which an eventual award may be satisfied or preserve evidence that may be relevant to the resolution of the dispute.
  • But what if the tribunal is not yet constituted, or lacks the power to grant certain forms of relief (such as a worldwide freezing order)? The answer to this problem has traditionally been to have recourse to national Courts (though arbitration institutions are increasingly responding to the former issue by making provision for the appointment of an emergency arbitrator). Here, again, the English Courts are typically supportive and have a wide range of powers under the Arbitration Act 1996 (the Act) to grant interim relief in support of domestic arbitration proceedings (i.e. arbitrations seated within England & Wales, or Northern Ireland).

The Act also empowers the English Courts to grant interim relief in support of foreign arbitration proceedings (i.e. those not seated within England & Wales or Northern Ireland) but here, as with many issues involving the relationship between international commercial arbitration and national legal systems, there is a territorial issue to be addressed: to what extent should the English Court intervene in support of arbitration proceedings which are more naturally subject to the jurisdiction of a different national legal system, namely the Courts of the seat?

This issue of international comity is dealt with in the Act in section 2(3), where it is provided that whilst the powers exercisable in support of arbitration proceedings enumerated in s44 of the Act may be exercised in relation to foreign arbitrations proceedings, this is subject to the proviso that "the court may refuse to exercise any such power if, in the opinion of the court, the fact that the seat of the arbitration is outside England and Wales or Northern Ireland, or that when designated or determined the seat is likely to be outside England and Wales or Northern Ireland, makes it inappropriate to do so".

The principles pertinent to the operation of the s2(3) proviso were recently addressed by the High Court in the case of Company 1 v Company 2.[1] The dispute arose from a joint venture agreement between the claimant, Company 1 (a BVI company), and the first defendant, Company 2 (a Cyprus company). The joint venture resulted in the formation of a third entity, Company 3, in the BVI. Company 2 was controlled by the second defendant, Mr A, a US citizen. The joint venture agreement included an arbitration clause selecting Switzerland as the seat of arbitration but specified English law as the procedural law which would govern the arbitration.

A number of disputes had arisen under the joint venture contract, leading to a multiplicity of legal proceedings:

  • Two sets of Swiss arbitration proceedings (each of Company 1 and Company 2 commenced their own proceedings within a few days of each other in June 2017, each apparently unbeknown to the other, and each alleging various breaches of the joint venture agreement by the other party);
  • Proceedings before the BVI Courts, in which Company 2 sought urgent interim relief to restrain Company 1 via its nominated directors on the board of Company 3 from seeking to take control of Company 3's bank mandates or to remove funds from Company 3's bank account. The relief was granted on an interim basis with a return date of 13 July 2017 although, at the time of the hearing in England in [2017] EWHC 2319 (QB) on 13 September 2017, a full hearing did not appear to have taken place and therefore these proceedings were still "live".
  • Proceedings before the English Courts under an arbitration claim form dated 20 July 2017. The application on that occasion was brought by Company 1 and sought a worldwide freezing order in the sum of £8m in order to prevent the dissipation of assets pending the outcome of the arbitration proceedings. The application was compromised by a Consent Order agreed on the day of the hearing which provided for the payment of US$746k into a bank account held jointly by the parties' respective solicitors or a third party escrow account. All parties had liberty to apply.

The present application was again made by Company 1, in reliance upon the liberty to apply preserved following the adjournment of its previous application, seeking (i) either an order requiring additional disputed sums to be paid into a special bank account in the joint names of the parties’ solicitors or, in the alternative, a freezing order in respect of those sums; and (ii) an order requiring Company 2 and Mr A to provide copies of various documents (which they had undertaken to provide in the earlier Consent Order). For the purposes of this discussion, the Court made two pertinent findings:

  1. That it had jurisdiction under s44 of the Act to hear the application; but
  2. That it would be inappropriate for the Court to exercise that jurisdiction in the present circumstances.

Jurisdiction

The Act places certain limitations upon the power of the Court to intervene in support of arbitral proceedings (wherever seated), which are embodied in the following subsections of s44:

(3) If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets.

(4) If the case is not one of urgency, the court shall act only on the application of a party to the arbitral proceedings (upon notice to the other parties and to the tribunal) made with the permission of the tribunal or the agreement in writing of the other parties.

(5) In any case the court shall act only if or to the extent that the arbitral tribunal, and any arbitral or other institution or person vested by the parties with power in that regard, has no power or is unable for the time being to act effectively.

Similarly to the provisions of s2 which seek to strike a balance between the willingness of the English Court to assist arbitration proceedings whilst seeking to discourage the Court from trespassing without good reason on the jurisdiction of the Courts of the seat, so too does the Act seek to strike a balance between acting in support of an arbitral tribunal and emasculating it by being too ready to intervene in issues that are within the tribunal's jurisdiction.

With that in mind, it is perhaps not surprising that the Court found that the jurisdictional hurdle was a relatively low one. There were two questions:

  1. Was this a matter of urgency; and
  2. Was the relief sought necessary to preserve evidence or assets?

On the first question, the Court held that there would almost inevitably be a significant element of urgency when a freezing order is sought in circumstances where a tribunal has yet to be constituted – the relief sought is by its nature time sensitive, and the absence of a tribunal to grant any form of interim relief grants an application to the Court the requisite element of urgency.[2]

On the second question, the freezing injunction application sailed across this hurdle too – again, by definition, the inevitable effect of this relief is that assets will be preserved that would not otherwise be safeguarded, and so the test of necessity is also satisfied. This test of necessity is not to be confused with the question of necessity which arises in relation to the merits of the application itself (i.e. necessity to prevent the dissipation of assets).

The application for the delivery up of certain documents was, however, less successful, primarily because the Court concluded that this was in substance an application for disclosure. The proper time to bring such an application, it was said, was in due course when the tribunal was constituted so that, absent any evidence that the documents sought were likely to be destroyed, it could not be said to meet the test of necessity. Nothing was said of the fact that the delivery up of these documents had already been promised by the defendants in the earlier Consent Order. The Court's reasoning here therefore appears somewhat inconsistent – either the jurisdictional hurdle is a low one, to be evaluated by reference to the effect of the relief sought and without reference to the merits of the relevant application itself, or it calls for a more involved assessment of whether the application responds to a genuine threat. The approach must be consistent. It is submitted that it is right that the jurisdictional hurdle should be a low one, taking the relevant application at face value based upon what the effect would be of the relief if granted and leaving detailed consideration of whether the relief is in fact necessary to the determination of the application itself.

Is it appropriate for the English Court to exercise its jurisdiction?

On this question, the Court found against Company 1 and had no hesitation in concluding that it would not have been appropriate. Three factors appear to have been particularly influential in this conclusion:

  1. Firstly, the parties to the English proceedings were already involved in litigation in the BVI. Given that the BVI proceedings were still ongoing when Company 1 made its application in England, there was no reason why the application could not have been made in the context of the BVI litigation.
  2. Secondly, the connection with England was "tenuous". The only link of substance was the fact that Mr A, although a US citizen, resided in England. Against that, the companies involved in the arbitration were formed in the BVI and Cyprus and the bank account in which the disputed funds were lodged was in Switzerland.
  3. Finally, and in any event, the Swiss court (as the court of the seat of arbitration) was more appropriate than the English court for the granting interim relief.

On the first two points in particular, the analysis of the Court poses as many questions as it provides answers.

As to the significance of the BVI proceedings,[3] the analysis of the Court is somewhat confused. Whilst it is correct that the BVI Courts were seized of the matter insofar as there were extant proceedings before those Courts in relation to the injunctive relief sought by Company 2, nothing is said of the fact that the English Courts are also in a similar sense seized of the matter by virtue of the previous arbitration claim form and the Consent Order (the entering of which would have the effect of displacing the defendants' objections to the jurisdiction of the Court). Why, therefore, is such significance attached to the ongoing proceedings before the BVI Courts to the exclusion of the proceedings before the English Courts? If the "default" forum for interim relief is the Courts of the seat, why are the BVI Courts any less inappropriate a jurisdiction for applications for interim relief than England? It is submitted that the analysis of the Court in relation to the multiplicity of proceedings is in that regard flawed – it is absolutely right to note that two national Courts being seized of a matter which is the subject of a binding arbitration agreement is undesirable, but it by no means necessarily follows that the English Court should have been the one to yield. One wonders whether this outcome may have been different had the merits of the application itself been different.

In relation to the "tenuous" connection with this jurisdiction,[4] nothing at all was said of the fact that the joint venture agreement was also English law (though in fairness to the Court, this point does not seem to have been taken by counsel). Moreover, the fact that the parties had specified English law as the lex fori was given very short shrift by the Court. This point in particular would have benefitted from fuller reasoning because of the specific questions raised by the selection of a lex fori which is different from the laws of the seat of the arbitration (and, therefore, the interaction between this fact and the undoubtedly correct general proposition at point 3 that the Courts of the seat are the most appropriate venue for applications for interim relief[5]).

In selecting English law as the lex fori, the parties must be taken to have intended that elements of the Act would apply to any arbitration commenced pursuant to the terms of the joint venture agreement. This can cause a tension, however, because a significant part of the Act assumes that arbitrations to which its provisions apply are to be seated in England (subject to those provisions which expressly apply to foreign arbitrations). A question of construction can therefore arise as to which provisions of the Act were intended by the parties to apply to their arbitration and, therefore, what was to be the role of the English Courts. One possible construction is that the parties intended simply to refer to ss33 – 41 of the Act. Even in this case, however, a role is envisaged for the Court because of its jurisdiction to enforce peremptory orders of the tribunal. Unless such references are all to be read as references to the Courts of the seat, a degree of uncertainty remains as to whether the parties, in specifically selecting English law as the lex fori, specifically envisaged some role for the English Courts in relation to the arbitral proceedings. In simply not engaging with this point of construction, an opportunity was missed by the Court to explore these difficult issues.

Conclusion

In situations in which English arbitration law is selected as the lex fori but the seat of the arbitration is outside of England, questions can arise as to the division of responsibility between the English Courts and the Courts of the seat, particularly in circumstances where the arbitration is 'ad hoc' and there is not a detailed set of institutional rules. In this case, on the facts the links between England and the dispute were fairly weak – the judge noted that he had "struggled to understand" why proceedings had been brought in England.

In practical terms, this case is a reminder that when drafting an arbitration clause the parties need to think carefully when choosing both the seat of the arbitration and the local arbitration law that will govern the arbitration, especially if it is decided that the two should be different. Whilst in some areas this situation is relatively unusual it is certainly not unheard of, for example it is relatively normal in Bermuda Form arbitrations. Important questions to take into account will be what sort of disputes may arise, the nature and location of a party's assets which one would want to enforce against and what measures one party may take to both protect its assets from enforcement and what steps the other party could take to enforce against them.