Arbitration just got easier

The Court of Appeal today got rid of a decision that has bugged arbitration lawyers for some 18 years.

An XL insurance policy contained an arbitration clause as follows: “Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years’ experience of insurance or reinsurance.” Question: was a senior insurance silk with rather more than ten years’ experience in insurance (in this case the redoubtable Alastair Schaff QC) eligible?

The answer was No,  according to Morison J’s unreported 2000 decision in Company X v Company Y (17 July 2000): experience of insurance was (his Lordship had said) not the same thing as experience in insurance law. Nonsense, said the Court of Appeal in Allianz Insurance Plc & Anor v Tonicstar Ltd [2018] EWCA Civ 434. Experience in insurance was perfectly wide enough a phrase to encompass experience gained by prectising insurance law. True, in some cases there might be a clear divide between an area of life and the law relating to it (sport and sports law, for example): but not so with insurance. Nor was the Court worried that the earlier decision had stood for 18 years: error ought to be corrected, and little if any injustice would be caused if it was.

So there you have it. Arbitration books will be that bit shorter in future — and, in the view of us at Maricom, a good thing too.

Non-exclusive jurisdiction under Brussels I Recast: a logical but odd result.

Cockerill J’s decision last month in UCP Plc v Nectrus Ltd [2018] EWHC 380 (Comm) may well encourage some lawyers to groan further about the effects of EU law on questions of jurisdiction. The background was a corporate dispute of spectacular dreariness: suffice it to say Nectrus alleged UCP owed it several million, while UCP had a claim for damages against Nectrus arising out of the same events. The relevant contract contained a non-exclusive English jurisdiction clause. Nectrus sued in the Isle of Man: a month or so later UCP sued in England. Nectrus sought to argue forum non conveniens to remove the hearing to Douglas. UCP argued that the English court not only should not but could not decline jurisdiction. It observed that the court had jurisdiction under Art.25 of Brussels I Recast, and that the limited lis alibi pendens provisions in Arts.33 and 34 were not applicable (since they only affected jurisdiction under Arts.4, 7, 8 and 9 and not jurisdiction by virtue of agreement). Cockerill J agreed, following dicta from Popplewell J in IMS SA v Capital Oil & Gas Industries [2016] 4 WLR 163  and the IISTL’s own Peter Macdonald-Eggers QC in Citicorp Trustee Company Ltd v Al-Sanea [2017] EWHC 2845 (Comm). Logical, certainly, in the light of the acepted interpretation of Brussels I. But it does have the effect that a non-exclusive jurisdiction clause now means not so much “You can, but don’t have to, sue in England” as “You can sue me outside England, but if you do I can still insist on proceedings taking place here.” Not quite the same thing, most lawyers will (one suspects) conclude.

Ultra vires or ineffective: a no-nonsense approach to contractual effectiveness

A short technical point of interest especially to those dealing with foreign state or semi-state entities arises out of a decision of Andrew Baker J a week ago in Exportadora De Sal SA De CV v Corretaje Maritimo Sud-Americano Inc [2018] EWHC 224 (Comm).

The power of a Ruritanian state corporate entity  to conclude a contract is governed by the law of the place of incorporation, i.e. Ruritania. The validity of the contract, and whether anything has happened which has the effect of preventing the parties being liable, or discharging an existing duty, is controlled by the governing law of the contract: if there’s an English law and jurisdiction clause, this means English law, to the exclusion of Ruritanian. But where is the boundary between the two?

A Mexican 51/49 state/private entity contracted for the building of a self-unloading salt barge (don’t say you don’t learn about interesting gadgets on Maricom) for about $27 million. The contract specified English law and London arbitration. The Mexican entity broke its contract, and following arbitration went down for about $7 million.  However the builders, when they tried to enforce the award, encountered a plea that the Mexican entity concerned had had no power under Mexican law to contract for the barge except through a specified tender process; that this hadn’t happened, that there had indeed been a Mexican administrative decision to cancel the contract on that basis, and that this nullified not only the contract but any submission to the arbitral process contained within it.

Andrew Baker J gave the buyers short shrift for a number of reasons we need not go into here. As regards the no-power argument, however, he made the important point that it was a non-starter. Although possibly dressed up as an ultra vires point, it was really nothing of the sort: viewed as a matter of substance it was a question of substantive validity. Substantive validity being governed by English law, the fact that under Mexican law the contract had been declared entirely ineffective was simply beside the point. As his Lordship observed, this decision was merely a mirror-image of the earlier Haugesund Kommune et al. v Depfa ACS Bank [2012] QB 549, where an ostensibly validity-orirnted rule had been held on a proper construction actually to go to the vires of a contracting party. But  the Exportadora de Sal case is none the less a useful weapon in the armoury of an English international commercial lawyer faced with an impressive-sounding plea that an apparently English contract was ultra vires under the laws of Backofbeyondia.



International insolvency outside the EU: contract under English law and we’ll see you right.

Before the twenty-first century there was a clear and undoubted rule in international insolvency known as the Gibbs rule (Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399). Whatever recognition or other co-operation we might be prepared to grant foreign insolvency proceedings, if an obligation was governed by English law and otherwise valid, its validity could not be affected by any act of foreign courts or authorities proceeding under their own insolvency law.

There is no doubt that this is no longer the case for EU insolvencies: the EU Insolvency Regulations of 2000 and more recently 2015 have clearly put paid to any such exceptionalism. But what of non-EU insolvencies? Since 2006 there has been some question whether the simple Gibbs rule might have been affected by the UNCITRAL-based CBIR (Cross-Border Insolvency Rules), which now give the English courts considerable scope to replicate in England the effects of a foreign insolvency proceeding in a debtor’s own COMI (centre of main interests, essentially where its business was run from). Progressive and academic opinion (the latter as usual generally aping the former) consistently suggested that the answer ought to be Yes, on the basis that modified universalism in insolvency needed to become more global and less narrowly jurisdictional.

Today, however, Hildyard J, in a careful judgment in Bakhshiyeva v Sberbank of Russia & Ors [2018] EWHC 59 (Ch), a case on the dry subject of paper issued by a Baku bank, gave the answer No. The bank, OJSC, with connections to the Azeri state, was highly insolvent. It went into Chapter 11-style reconstruction in Azerbaijan, successfully applying to have the proceeding recognised in the UK under the CBIR. A vote of an overwhelming number of creditors, valid under Azeri law, agreed a complex debt-for-government-bonds-and-new-lower-debt arrangement under which OJSC would then continue trading. Two financial institutions, one English (Templeton) and one Russian (Sberbank), holding English-law-governed debt issued by OJSC, held out. They took no part in the vote, though as a matter of Azeri law they were bound by it.

The question was, could the English court prevent these two minority creditors bloody-mindedly enforcing their rights in full against the bank once the moratorium created by the Azeri proceedings was over? As stated above, the answer was No. Whatever one might think of the Gibbs rule, it was too solidly anchored to have been removed by the side-wind of the CBIR. Nor should it be bypassed by, for example, admitting that the debt still existed but then reducing it to something like the grin on the Cheshire cat by preventing its enforcement against the assets of the debtor.

There is much to be said for Hildyard J’s solution, both on grounds of legal certainty and also because Parliament has occasionally stepped in in other areas, but not this one, to prevent abuse of international creditors’ rights (notably, in enforcing statutory debt relief for poor countries against vulture funds and the like).

It may, moreover, be important not only for bondholders — who will obviously be opening discreet magnums of champagne this evening — but for other creditors, including maritime ones. Charter claimants and bunker suppliers whose rights are governed by English law will now, it seems, be able to watch smugly from the sidelines while shipping companies go into reconstruction, waiting for the proceedings to end before pouncing, catlike, on the very same companies, seizing their London accounts and arresting their vessels for the full amount of their claim as soon as they venture far from home. Commerce red in tooth and claw, you might say: but then that’s how it’s always been in shipping.


Carry on suing in England – at least if you’re suing a non-European

In matters of tort foreign defendants domiciled in the EEA are reasonably well-protected from the exorbitant jurisdiction of the English courts. Both Brussels I Recast and Lugano II limit jurisdction to cases where where the act leading to liability, or the harm done by it, happened in England: furthermore, Euro-law makes it clear that the reference to harm here is fairly restrictive, referring only to direct harm and not to the financial effects of it, such as the straitening of an English widow’s circumstances following a wrongful death abroad.

By contrast, there is no such luck for defendants domiciled outside the EEA. For some time conflicts lawyers have remarked that English claimants, especially personal injury claimants, find it remarkably easy to establish jurisdiction against them. This is because CPR, PD6B 3.1(9), allows service out not only where damage results from an act “committed … within the jurisdiction” but also in all cases of damage “sustained …within the jurisdiction.”, and in a series of cases such as Booth v Phillips [2004] 1 WLR 3292 and Cooley v Ramsey [2008] ILPr 27 this has been held to cover almost any loss, even consequential, suffered in the jurisdiction. And in Four Seasons Holdings Inc v Brownlie [2017] UKSC 80 the Supreme Court by a majority (Lords Wilson and Clarke and Lady Hale vs Lords Sumption and Hughes) has now weakly upheld this distinction.

International law enthusiasts will know that this case arose out of a car accident in Egypt in which the late Prof Ian Brownlie was tragically killed and his widow was injured. The actual decision was in the event a foregone conclusion: by the time the case reached the Supreme Court it was clear that the defendants, the franchising company behind the Brownlies’ Egyptian tourist hotel which had organised the fatal car ride, had never contracted with the Brownlies and was not liable in tort for the acts of the hotel itself. Nevertheless, the majority in the Supreme Court, doubting the decision of the Court of Appeal on this point, made it clear that, while not finally deciding the issue, they were not prepared to condemn the older authorities. It seems likely that future cases will follow their lead.

One further point. Lord Sumption and Lady Hale made the point that the decision whether a contract was made in England, another of the “gateways” in non-EEA cases (see CPR, PD6B 3.1(6)), was in the light of cases like Entores v Miles Far East Corpn [1955] 2 QB 327, pretty arbitrary and could do with a look from the Rules Committee. They were right. Let’s hope something gets done.

Valuers’ negligence: no claim for more than lender loses

Not often do you find a Supreme Court decision in only 15 paragraphs that is clear, sensible and palpably right. Today we got just that in the valuers’ negligence decision of Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2017] UKSC 77. Although a land case, this is of equal, and large, significance to ship and other finance.

In 2011 Tiuta lent £2.475 million for a bijou Home Counties development against a valuation by De Villiers of £2.3 million undeveloped / £4.5 million complete, of which no complaint was made. After some months the developers ran into difficulties. In 2012 Tiuta made a new loan of £3.088 million against the same development, of which £2.799 million went to discharge the old loan plus accrued interest, and the balance of £289,000 was new money. This latter advance was made against a new valuation by De Villiers in the sum of £3.5 million undeveloped / £4.9 million complete. Shortly after all this, the developers went bust and Tiuta lost big money.

Tiuta sued De Villiers for their loss, alleging negligence in the second valuation. De Villiers riposted that they could not possibly be answerable for more than £289,000, since even if they had not been negligent Tiuta would still have been exposed to the original, largely irrecoverable, balance of £2.799 million. To everyone’s surprise, a majority in the Court of Appeal disagreed. The 2011 loan had been paid off and was now out of the reckoning: the 2012 loan in the figure of £3.088 million counted as an entirely new advance made against the suspect valuation, and on principle any loss on it was recoverable. McCombe LJ, the dissentient, was left gasping and stretching his eyes (remember Hilaire Belloc’s Matilda?) at the idea that new money injection of a mere £289,000 could give Tiuta, free gratis and for nothing, a claim of up to £3 million that had not been there before.

The Supreme Court swiftly restored orthodoxy. Whether the lenders provided new money of £289,000 and left the existing loan of £2.799 million untouched, or provided a new loan of £3 million-plus which was partly used to pay off the original loan, the result was the same: the only net increase in exposure was £289,000 and that was all that was recoverable. Nor could Tiuta get home by saying that the repayment of the original loan was somehow a collateral benefit to Tiuta: as Lord Sumption observed with merciless logic, it was in fact neither collateral nor a benefit.

Advantage PI insurers, to be sure. On the other hand, this still leaves some questions unanswered. If the first lender had been someone other than Tiuta, the result would presumably have been different. Does this mean that if a lender wants to avoid the result in Tiuta, all it has to do is to make sure that when it lends several times to the same project, each loan is made by a separate subsidiary special purpose vehicle (quite easy to arrange)? One suspects lawyers are already busy dealing with questions like this and advising accordingly.

Getting a freezing order can damage your wallet — official

The decision in Fiona Trust v Privalov [2016] EWHC 2163 (Comm) (noted in this blog here) has been upheld in the Court of Appeal: see SCF Tankers Ltd & Ors v Privalov [2017] EWCA Civ 1877. Readers will remember that Russian shipping conglomerate SCF (aka Sovcomflot, previously Fiona) sued another Russian businessman for serious money, alleging that he had bribed its officers to enter into all sorts of disadvantageous agreements, and in support of the action got a freezing order for something over half-a-billion dollars. Having recovered a measly $16 million, it was then hit by Males J with an order on its undertaking in damages amounting to something close to $50 million — a costly victory indeed. Little of substance to report about the CA decision: it essentially approved the findings below on causation and mitigation. Males J’s judgment, and our blog post, remain the go-to place for detailed discussion of the principles to be applied.

Service of arbitration proceedings in cyberspace — don’t make idle assumptions.

In Glencore Agriculture BV v Conqueror Holdings Ltd [2017] EWHC 2893 (Comm), decided today, Conqueror had a smallish demurrage claim in respect of a 30,000 dwt bulker, the Amity, which charterers Glencore had ordered to wait idle for a time before taking on a cargo of corn at Ilychevsk in Ukraine. Glencore’s point of contact with Conqueror in arranging the nuts and bolts of loading and dealing with the delay had been one FO, a fairly junior Glencore man: not surprisingly all messages had been sent by email to and from FO’s Glencore email address.

There was an arbitration clause in the (Synacomex) charter. To get the arbitration ball rolling for its demurrage claim, Conqueror sent notice of its appointment of an arbitrator to FO’s email address (but nowhere else). Nothing happened, despite a number of reminders sent to the same address: in the event Conqueror’s arbitrator determined the claim in Conqueror’s favour as sole arbitrator.

Glencore applied for a declaration that the award did not bind it, under s 72 of the Arbitration Act 1996 (and also ss 67-68 of the same Act). Had there been proper service? Popplewell J said No. The issue in an arbitration case fell to be decided on ordinary principles of agency. FO, being a fairly junior dogsbody in the Glencore corporate machine, had neither express nor implied authority to receive formal service of claims: nor had there been any holding out of him as having it, merely because he had made the arrangements for the loading.

Entirely correct, in the view of this blog. And one doesn’t have to be very sympathetic to Conqueror. They could always have used old-fashioned snailmail sent to Glencore’s head office: see s 76(4(b) of the Act. It seems, with respect, that someone at Conqueror just indolently assumed that it would do to email a contact in the company he happened to have dealt with before. That won’t, and shouldn’t, do. One more simple point for solicitors acting for arbitration parties to add to their checklist.

Good news for English judgment creditors — oh, and the beneficiary of a credit is who the credit says it is.

In Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64 Shell bought two parcels of Iraqi oil in 2013 from the state Iraqi oil company SOMO. Its bank, Credit Agricole in London, issued letters of credit governed by English law naming SOMO as beneficiary, but containing a clause as follows (essentially to comply with the Iraqi sanctions regime):

“[A] Provided all terms and conditions of this letter of credit are complied with, proceeds of this letter of credit will be irrevocably paid in to your account with Federal Reserve Bank New York, with reference to ‘Iraq Oil Proceeds Account’.These instructions will be followed irrespective of any conflicting instructions contained in the seller’s commercial invoice or any transmitted letter.
[B] We hereby engage with the beneficiary and Central Bank of Iraq that documents drawn under and in compliance with the terms of this credit will be duly honoured upon
presentation as specified to credit CBI A/c with Federal Reserve Bank New York.”
Taurus subsequently got an arbitration award against SOMO of something like $9 million, which it wanted to enforce against the benefit of the letter of credit under a TPDO (garnishee in old-fashioned English). Three questions: (1) who was the creditor under the LCs,  SOMO or the Central Bank? (2) where was the debt situated? (3) should a receiver be appointed?
On the situation of the debt, the whole court agreed, reversing the CA, that it was London, where the debtor, the London branch of Credit Agricole, was situated. It followed that the English court had jurisdiction to make a TPDO. There was no reason to treat a LC debt as any different from any other debt: Power Curber International Ltd v National Bank of Kuwait S.A.K. [1981] 1 W.L.R. 1233, regarding such debts as situated in the place of payment, was wrong.
All their Lordships felt that a receivership order was appropriate.
On the identity of the creditor, the decision was by a majority. The majority said, reversing the CA, that it was SOMO. They were named as beneficiaries. The agreement to pay the Oil Proceeds Account in New York made no difference in this respect: it was merely a collateral agreement. (Presumably Taurus had some arrangement with the Central Bank to collect from them: we are not told).
On balance, a good decision for creditors chasing funds through TPDOs. Its effect is essentially that any LC issued by a London bank, even a branch of a foreign institution, now seems fair game, even if payable in Mannhein, Manila or Madagascar. Forget Brexit: London is likely to remain the place to be.