02 October 2019

UK Dispute Resolution Round-Up – Q3 2019

This article was written by Dorothy Murray, Natalie Quinlivan, James McKenzie, Edmund Northcott and Valentine Kerboull.

Q3 2019: the last three months have proven to be a turbulent period in the UK, with Brexit uncertainty continuing to dominate the headlines.

Our Q3 update starts with a key decision arising from the Brexit saga: the Supreme Court’s historic ruling regarding the prorogation of Parliament, also our top case for Q3.  We then consider what we have learnt from the High Court about the enforceability of ADR clauses and of ‘mega’ arbitration awards (both decisions reinforcing the importance of careful drafting of dispute resolution clauses), and from the Supreme Court on access by non-parties to documents in litigation and the interpretation of Brussels Recast.  In policy updates, we look at developments within the sanctions space and the Serious Fraud Office’s recent guidance for corporates in the context of corruption investigations.

Speed Read

TOP CASE FOR Q3: 

The Supreme Court rules Boris Johnson’s advice to the Queen to prorogue Parliament was unlawful … In a paradigm-shifting unanimous decision, the Supreme Court in R (Miller) v The Prime Minister; Cherry and ors v Advocate General for Scotland [2019] UKSC 41 found that the Prime Minister’s advice to Her Majesty to prorogue parliament was unlawful and therefore void. In doing so, the Supreme Court has confirmed that it is the function of the court to determine the limits of the prerogative power and that Government must justify any attempt to circumvent parliamentary sovereignty and accountability in this regard.  

Our view: Although the Court described the circumstances of its judgment as a “one off”, the decision nevertheless has the potential to have real knock-on effects on the limits of prerogative powers more generally.  Whether the judgment will be applied more widely remains to be seen.

THE BEST OF THE REST

  1. If parties provide for a mediation stage in tiered dispute resolution clauses, they will be held to it. The English High Court in Ophen Operations UK Limited v Invesco Fund Manager Limited [2019] EWHC 2246 (TCC) held that a mediation clause was a condition precedent to the commencement of litigation and stayed proceedings so that the parties could undertake mediation. The decision serves as a reminder of the English courts’ strong support for express agreements to alternative dispute resolution (“ADR”) procedures (in this case, mediation).

    Our view: With many of our clients, particularly in the construction and infrastructure sectors, favouring multi-tiered dispute clauses, the decision will be a welcome reminder of the English courts’ support for the enforceability of mandatory ADR clauses.  The decision, however, should also serve as a warning as to the care should be taken to ensure that a dispute resolution clause contains a clear and certain mechanisms for ADR.  It is prudent to seek legal input on the drafting of any multi-tiered dispute resolution clause or risk denying the court or tribunal jurisdiction until the pre-conditions have been met.
  1. The constitutional principle of open justice is confirmed by the Supreme Court … In Cape Intermediate Holdings Ltd v Dring (for and on behalf of Asbestos Victims Support Groups Forum UK) [2019] UKSC 38 the Supreme Court unanimously held that non-parties to litigation are entitled to access certain documents from trial.   The decision confirmed that the range of circumstances where access to court records by non-parties may be granted extend beyond those listed in the court rules.  At the court’s discretion, the public are therefore entitled access to parties’ submissions and arguments, in addition to documents which have been placed before the court and referred to during the hearing.

    Our view: The relevant part of the CPR giving non-parties access to documents beyond statements of case was seen as a “new power” on its introduction in 2006 but this decision confirms the Court’s inherent powers and is likely to make it easier for non-parties to access a wider range of documents, including disclosure and witness statements. However, the non-party must explain why such access is sought and how granting access will advance the open justice principal.  This requirement means wide ranging fishing exercises are unlikely.
  1. England remains staunchly pro-arbitration, with Courts prepared to uphold and enforce the very biggest awards. The English High Court (Commercial Court) in Process & Industrial Developments Limited v The Federal Republic of Nigeria [2019] EWHC 2241 (Comm) has enforced a USD 9 billion ‘mega award’ against Nigeria, a matter of national importance to Nigeria.  The Court had to decide whether England was the correct seat of the arbitration and if enforcement should be resisted on public policy grounds. The court found both that England was the correct seat of the arbitration (and that Nigeria were estopped from challenging the seat, in any event) and that there was a strong public interest in favour of enforcing arbitral awards.  

    Our view: The High Court’s pro-arbitration stance is in keeping with earlier decisions and should serve as a reminder of the importance of the seat of arbitration and the care therefore that should always be taken to clearly spell this out in an arbitration clause to avoid unnecessary disputes.
  1. The Court of Appeal demonstrated its power to restrain foreign arbitral proceedings … In Sabbagh v Khoury [2019] EWCA Civ 1219 the Court of Appeal has upheld an anti-arbitration injunction granted by the English Commercial Court making it clear that the English courts have power to restrain foreign arbitral proceedings where they are oppressive and vexatious, even if the English courts are not the natural forum for the dispute.

    Our view: The Court of Appeal has provided useful guidance on the circumstances in which English courts may exercise their power to restrain foreign arbitrations.  Mr Justice Knowles was at pains, however, to stress the exceptional nature of the case so such injunctions are unlikely to be granted lightly.
  1. The company matters jurisdictional exception under EU law is a narrow one. In Akcil & Ors v Koza Ltd & Anor [2019] UKSC 40, the Supreme Court confirmed that Article 24(2) of the Brussels I Recast Regulation (EU) No. 1215/2012 (“Brussels Recast”) is to be construed narrowly.  In proceedings principally concerned with company law matters, Article 24(2) gives exclusive jurisdiction to the courts of the Member State where a company has its seat.  Where there are two distinct claims, it is not correct to make an overall evaluative judgment of both and so hold that both fall within Article 24(2).  Each claim should be assessed on its own.

    Our view: While Brussels Recast may no longer apply in the UK after a hard Brexit, the Supreme Court’s decision was based on European law, which will continue to apply in the European Union.  We regularly advise clients on cross border corporate disputes and the risk of having to run parallel proceedings is key when selecting causes of action and assessing costs.
  1. The High Court’s wide-ranging jurisdiction to grant security for costs applications confirmed… In PJSC Tatneft v Bogolyubov [2019] EWHC 1400 the High Court granted an order for security for costs against a claimant incorporated in Russia, on the basis that there was a real risk that any costs order against it would have to be enforced in Russia, where there was in turn a real risk of substantial obstacles to enforcement.  This was despite the fact that there was evidence that the claimant also had assets in Switzerland and Cyprus, where there was no such risk.

    Our view: The decision makes it clear that enforcement obstacles are a key consideration in the court’s determination whether it is just to make an order for security for costs.  The case also highlights the court’s emphasis on the relative prejudice that will be caused to parties by the award of security, a factor which was ultimately decisive in this case.
  1. A party who has been shown to be unwilling to perform may be denied reliance on what looks like a contractual frustration clause.  In a rare decision from the Court of Appeal on  frustration, exception clauses and force majeure, the judgment in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102 held that a party seeking to rely on a frustration or exceptions clause may be required to prove causation (that “but for” the event it would have performed). This depends on the wording of the exact clause; labels are as ever not definitive. Further, even though the Court agreed that deliveries were impossible after the Samarco dam burst on 5 November 2015, the charterer was liable for substantial damages due to its actual breach.   

    Our view: This is all about careful drafting of the contractual terms to ensure they achieve what the parties intend and expect.  Any party seeking to rely on a contractual provision to avoid performing its obligations may be required to evidence that it is ready and willing to perform the contract.
  1. The EU Blocking Regulation operates in practice to protect non-US EU businesses, while the English Court strictly applies the EU’s own sanctions against Iran to deny interest becoming due on an outstanding arbitral award.  Since the re-imposition of certain secondary sanctions against Iran by the US, non-US businesses have been operating under a cloud of risk.  Although the EU Blocking Regulation was updated to ensure that EU businesses can continue to make investment decisions in Iran and Cuba despite the strong extraterritorial reach of certain US sanctions and export controls, scepticism existed in respect of how much protection that offered in reality.  Two Italian related cases have provided some welcome clarity in this regard, relying on the EU Blocking Regulation decisions to disregard the purported application of US secondary sanctions.   Companies must abide by the EU’s own sanctions, however, and the “no claims” clauses in these may cost a significant amount in accrued interest on outstanding debts, witness the attempts by Iran’s Ministry of Defence to enforce an arbitral award in Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd [2019] EWHC 1994 (Comm) (24 July 2019).

    Our view: Sanctions litigation is on the rise and the current geopolitical environment between the US, the PRC, the EU and Iran means that a business with any connection, existing or anticipated, to Iran should seek advice on the possible application of sanctions.
  1. The SFO views cooperation as “above and beyond” legal obligation and will actively test claims to privilege. …  The long-awaited Corporate Cooperation Guidance from the UK's Serious Fraud Office (“SFO”) sets out the SFO’s expectations if a leniency agreement, such as a deferred prosecution agreement, is sought.  Notably, the SFO regards co-operation as meaning providing assistance that goes “above and beyond” the requirements at law.  Further, if the company elects not to waive privilege over documents, including witness first accounts, then this claim to privilege must be properly established through certification by independent counsel.  Even if properly asserted, the SFO will take this into account when assessing what credit to give the company. 

    Our view: The SFO’s position regarding the application of privilege means corporates will need to tread carefully.  For any corporates who uncover a compliance issue, the first step should be to assess the issue internally and seek advice relating to all potentially relevant jurisdictions before approaching a prosecutor.
  1. Bitcoin can be frozen, even where the defendant fraudster is a person unknown. Proving it’s worth as a court of the future, the Commercial Court granted an asset preservation order over identifiable Bitcoin in a UK wallet, valued at in excess of GBP 1 million, which had been stolen from the claimant in a spear phishing attack. Bitcoin, like all crypto assets, is not currently a regulated asset. In Robertson v Persons Unknown, case number CL-2019-000444, the Court agreed there was a serious issue to be tried as to whether the claimant could claim and retain title to the Bitcoin as personal property. 

    Our view: The pragmatic approach taken by the Commercial Court in this interim decision will provide comfort to those who hold crypto assets, that some of the usual tools in fraud claims are available to them. The decision highlights the suitability of the English common law to deal with disputes of this nature, adapting easily to deal with novel issues.

Long Read

  1. R (Miller v The Prime Minister; Cheery and ors v Advocate General for Scotland [2019] UKSC 41

    The Supreme Court’s judgment of 24 September 2019 concerned the lawfulness of the Prime Minister’s (Boris Johnson’s) advice to Her Majesty to prorogue parliament.  The prorogation of parliament in the United Kingdom marks the end of a parliamentary session and forms part of the royal prerogative powers, which are the remaining portions of the Crown’s original constitutional authority.  

    On either 27 or 28 August 2019, the Prime Minister had advised Her Majesty to commence the prorogation of Parliament from 9 and 12 September until 14 October 2019.  Two challenges were made by: 

    1. Ms Gina Miller in the English Divisional Court on 5 September 2019; and 

    2. Ms Joanna Cherry QC MP and a cross party group of MPs in Scotland in first the Inner House of the Court of Session on a pre-emptive basis on 30 July 2019 (where it was held not to be justiciable) and then the Outer House of the Court of Session.  

    The latter of these two challenges was ultimately successful (the Outer House of the Court of Session finding that the case was justiciable and that the decision was unlawful) and the former was not (with the Divisional Court finding that the case was not justifiable). 

    Both decisions were appealed to the Supreme Court, which was asked to determine finally whether the Prime Minister’s advice to the Queen to order the prorogation of parliament (an exercise of prerogative power) was lawful.  In order to determine this question, the Supreme Court considered:

    1. whether the lawfulness of the Prime Minister’s advice to the Queen could be reviewed by the court, i.e. was it justiciable;

    2. if it was justiciable, by what standard should it be judged; 

    3. whether the advice was lawful by that standard; and 

    4. if unlawful, what remedy the Court should grant.

    Lady Hale (President of the Supreme Court) and Lord Reed structured their eminently clear judgment on behalf of the court using these four issues and that structure is maintained here.  

    Justiciability

    Before considering the issue of justiciability, the Supreme Court noted that whilst the Courts cannot decide political questions, the mere fact that the legal dispute in question concerns the conduct of politicians or political controversy does not mean the Court cannot consider it (the court gave the examples in the Case of Proclamations (1611) 12 Co Rep 74 and Entick v Carrington (1765) 19 State Tr 1029; 2 Wils KB 275 in support of this). 

    Further, the Court noted that, although the Prime Minister is accountable to Parliament, this does not mean that the courts have no supervisory role to play.  The Supreme Court emphasised that this was especially true in the present circumstances as, by virtue of the act of prorogation, the Prime Minister cannot be held to account by Parliament as its legislative powers had been suspended.

    Having dealt with those preliminary issues, the Supreme Court noted that the question of justiciability raised two questions: (i) whether a prerogative power exists (which both parties agreed was justiciable) and for which Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374 was given as authority); and (ii) whether such power was open to legal challenge on one of the recognised grounds of judicial review. 

    Although the Supreme Court noted that the subject matter of some prerogative powers might mean that they were not amendable to judicial review of the exercise within their lawful scope, the legal limits to the power to prorogue Parliament was justiciable.  It was the function of the Court therefore to identify that limit and determine if the Prime Minister’s advice trespassed beyond it.  To do so, the court held it was necessary to identify a standard by reference to which the lawfulness of the Prime Minister’s advice could be judged, to which they turned to next.

    The standard

    In identifying a standard, the Supreme Court built on the jurisprudence in the Case of Proclamations and R (UNISON) v Lord Chancellor [2017] UKSC 51 which established that, in the absence of statutory indication to the contrary, the courts are empowered to set limits to the exercise of powers conferred by statute.
      
    Although a prerogative power is different from a statutory power, the Supreme Court noted that such power is only effective to the extent that it is recognised under the common law.  The power was therefore held to be limited by common law, statute and the constitutional principles with which it would otherwise conflict.  Here, the Supreme Court expressed that limitation as:

    a decision to prorogue Parliament (or to advise the monarch to prorogue Parliament) will be unlawful if the prorogation has the effect of frustrating or preventing, without reasonable justification, the ability of Parliament to carry out its constitutional functions as a legislature and as the body responsible for the supervision of the executive” (our emphasis)

    Having established that standard, the court turned back to the issue of justiciability and held that it could effectively determine the legal limits of the prerogative power.  An issue which could be resolved by the application of this standard was therefore justiciable.  

    Lawfulness

    Here, the Supreme Court noted that the advice had the effect of preventing Parliament from carrying out its constitutional role for an unnecessarily lengthy amount of time.  The Court noted that the Prime Minister had not provided any explanation for why such an extended prorogation was needed to prepare the Queen’s Speech (the only reason given for prorogation), a process that unchallenged evidence had explained usually takes 4 to 6 days.  

    Therefore, there was no “reasonable justification” for the Prime Minister’s advice to the Queen to prorogue Parliament. Rather, the court held it had the effect of undermining Parliamentary sovereignty and preventing Parliament from holding the Government to account at a time of heightened constitutional tension.  In the Supreme Court’s own words:

    It is impossible for us to conclude, on the evidence which has been put before us, that there was any reason - let alone a good reason - to advise Her Majesty to prorogue Parliament for five weeks, from 9th or 12th September until 14th October. We cannot speculate, in the absence of further evidence, upon what such reasons might have been. It follows that the decision was unlawful.” 

    Remedy

    The Supreme Court concluded that as the Prime Minister’s advice to the Queen was unlawful, it was void and of no effect.  Therefore, this led to an Order to prorogue parliament based on unlawful advice, which was therefore itself “unlawful, null and of no effect”. 
     
    The result of this was that Parliament had never been prorogued, and it made declarations accordingly.
  1. Ohpen Operations UK Limited v Invesco Fund Manager Limited [2019] EWHC 2246 (TCC)

    In its judgment of 16 August 2019, the High Court considered the enforceability of an ADR obligation.  The Claimant, Ohpen, had been engaged by the Defendant, Invesco, to develop and implement a digital online platform (the “Agreement”).

    The parties agreed that the launch of the platform would take place on a certain date. When the launch date was not met, Invesco terminated on the grounds of material and/or repudiatory breach. Ohpen contested breach and the termination but accepted Invesco’s own repudiatory breach.

    In January 2019, the parties attended a without prejudice meeting but were unable to settle the dispute. Ohpen commenced proceedings against Invesco for breach of the Agreement.  Invesco therefore applied to the court to stay the proceedings on the ground that Ohpen’s proceedings constituted a breach of the Agreement.

    The Agreement’s dispute resolution clause included a multi-tiered ADR clause including negotiation and providing that the parties “shall” refer the dispute to mediation.  The clause also provided relevantly that “if a Dispute is not resolved in accordance with the Dispute Procedure, then such Dispute can be submitted by either Party to the exclusive jurisdiction of the English courts” (our emphasis).

    In a clear distillation of the current English authority on the enforceability of agreed provisions, the court held that the following key principles should be applied when a party seeks to enforce an ADR clause as a condition precedent:

    1. The agreement must create an enforceable obligation requiring the parties to engage in alternative dispute resolution. 

    2. The obligation must be expressed clearly as a condition precedent to court proceedings or arbitration.

    3. The dispute resolution process to be followed does not have to be formal but must be sufficiently clear and certain by reference to objective criteria, including machinery to appoint a mediator or determine any other necessary step in the procedure without the requirement for any further agreement by the parties.

    4. The court has a discretion to stay proceedings commenced in breach of an enforceable dispute resolution agreement. In exercising its discretion, the Court will have regard to the public policy interest in upholding the parties' commercial agreement and furthering the overriding objective in assisting the parties to resolve their disputes.

    The court found that the ADR clause in the Agreement created an enforceable obligation which was clearly expressed as a condition precedent.  It was therefore a mandatory step and the court decided to exercise its discretion to stay the proceedings to allow for a mediation to take place.

    This decision serves as a useful summary of the key principles in applying ADR steps as pre-conditions and should serve as a reminder to parties in both litigation and arbitration that care should be taken to comply with any conditions precedent before commencing proceedings.

    As we go to press with our Q3 update, another judgment by the Court of Appeal, in Lomax v Lomax [2019] EWCA Civ 1467, further emphasises the court’s encouragement of ADR through its case management powers.  In that case, the court demonstrated its willingness (at least in a family law context) to intervene to order ADR (there, early neutral evaluation), even where one of the parties refused to consent to it.
  1. Cape Intermediate Holdings Ltd v Dring (for and on behalf of Asbestos Victims Support Groups Forum UK) [2019] UKSC 38

    Cape Intermediate (“Cape”) manufactures and supplies asbestos and was involved in litigation regarding the alleged exposure of certain of its employees to asbestos. At the conclusion of the trial, but before judgment was handed down, the Asbestos Victims Support Group (the “Forum”) (not a party to the proceedings) applied without notice to have access to the records of the court.

    The Forum made this request because it believed the documents would contain information about the knowledge of the asbestos industry and the dangers of asbestos, which was relevant to its line of work helping groups to meet, share issues of common concern and take collective action on behalf of the victims of asbestos-related disease.

    In first instance, the Master granted the order sought and further ordered that all documents at court were to remain there and those removed from court be returned.  Such documents included, trial bundles, witness statements, and documents referred to during the proceedings.  Cape appealed on the ground that the Master did not have jurisdiction to make an order of such broad scope. The Court of Appeal agreed and set aside the Master’s order on the basis that “records of the courts” were limited to specific documents only such as the statements of case.

    The case arrived before the Supreme Court which considered three issues:

    (a) What is the scope of the relevant part of the Civil Procedure Rules – CPR rule 5.4C(2) – and does it give the court power to order access to all documents which have been filed, lodged or held at court?

    (b) Is access to court documents governed solely by the CPR save in exceptional circumstances? Or does the court have an inherent power to order access outside the Rules?

    (c) If there is such a power, how far does it extend and how should it be exercised?

    The Supreme Court held that the courts had an inherent power to order access outside of the CPR. It considered the court rules to represent a minimum, rather than an exhaustive list, of the circumstances in which non-parties can have access to documents used at trial.  At the court’s discretion, the public are therefore entitled to access parties’ submissions and arguments, in addition to documents which have been placed before the court and referred to during the hearing.

    This is a surprising decision in many ways (as the relevant part of the CPR was largely seen as a new power on its introduction in 2006) and will be a cause for concern to a litigant who is keen to protect its reputation or commercially sensitive information from prying eyes.  The decision is likely to make it easier for non-parties to access a wider range of documents. However, the non-party must explain why such access is sought and how granting their request will advance the open justice principal.  It will be for the court to decide whether the value of the information in advancing the purpose of open justice outweighs the risk of harm in providing the information.  
  1. Process & Industrial Developments Limited v The Federal Republic of Nigeria [2019] EWHC 2241 (Comm)

    In its 16 August 2019 judgment, the English High Court (Commercial Court) has enforced a USD 9 billion arbitral award against the Republic of Nigeria (“Nigeria”).  

    The underlying arbitration concerned a Gas Supply and Processing Agreement (the “GSPA”) entered into between Process & Industrial Developments Limited (“PID”), a company founded by two Irish businessmen, and Nigeria in 2010 (the “Arbitration”).  Pursuant to the GSPA, Nigeria was to supply natural gas to PID.  PID was to construct and operate a facility for processing the natural gas by removing natural gas liquids, returning the clean gas to Nigeria for use in power stations at no cost to Nigeria.  In 2012, PID alleged that Nigeria had not been supplying the natural gas as promised under the GSPA and filed a Notice of Arbitration claiming a repudiatory breach of the GSPA by Nigeria.  

    After a series of partial awards and procedural orders, the tribunal (chaired by Lord Hoffman) issued a Final Award on 31 January 2017 in favour of PID, ordering Nigeria to pay nearly USD 9 billion in damages for PID’s lost profits over the 20-year life of the GSPA (the “Final Award”).

    The GSPA had a 20-year term and contained an arbitration clause which provided relevantly that:

    The venue of the arbitration shall be London, England or otherwise as agreed by the Parties. The arbitration proceedings and record shall be in the English language. …" 

    PID applied to the English Court to have the Final Award enforced pursuant to s.66 of the Arbitration Act 1996.  Nigeria resisted enforcement on the basis that:

    1. the Arbitration should have been seated in Nigeria and the Nigerian Courts had set aside part of the Final Award rendering it incapable of enforcement in England; and

    2. even if the Arbitration was seated in England, the Final Award was excessive, punitive and contrary to England’s public policy.

    The English High Court had to consider whether the parties had agreed England as the seat of the arbitration and whether enforcement of the award should otherwise be refused on grounds of public policy.  The Court found that:

    1. The language in the arbitration clause, that the “venue of the arbitration shall be London, England”, meant that the juridical seat was England, not just that the hearings would take place in London.  Alternatively, the court held there had been agreement by conduct between the parties as neither side sought to challenge or set aside any of the partial awards or procedural orders which clearly stated that the “seat” or “place” of the arbitration was London, England.  Mr Justice Butler noted his decision was in line with the jurisprudence referred to in Arbitration Law ed. Merkin, para. 1.30, Shashoua v Sharma [2009] EWHC 957 (Comm) and Enercon GmbH v Enercon (India) Ltd [2012] EWHC 689 (Comm).

    Although the court found that there had been express agreement to England as the seat, it also considered PID’s alternative argument that Nigeria were estopped from challenging the seat of the arbitration at the enforcement stage, as this issue had been decided on by the arbitral tribunal in an unchallenged procedural order.   Mr Justice Butler agreed with PID’s argument, applying the criteria for issue estoppel set out in Good Challenger Navegante S.A. v Metalexportimport S.A. 2004 1 Lloyd's Rep 67, at [50]. 

    2. There was therefore a “strong public policy in favour of enforcing arbitral awards” and that it was not contrary to English public policy to enforce an award “even if the damages awarded are higher than this Court would consider correct”.

    In a late development as we went to press on this Q3 update, Nigeria applied for and, on 26 September 2019 was granted, permission to appeal and a stay of execution.  The stay is subject to Nigeria paying GBP 200 million as security.  Failure to do so will result in the stay being lifted.  We will continue to monitor developments in the case. 

    In the meantime, the Court’s pro-arbitration stance will provide comfort to companies operating in foreign jurisdictions who rely on English-seated arbitration clauses (and, indeed, the ability to enforce awards arising from them) to protect their rights.  The decision should further serve as a reminder to those companies about the importance therefore of the seat of arbitration and that care should be taken to clearly spell this out in an arbitration clause to avoid unnecessary disputes. 
  1. Sabbagh v Khoury [2019] EWCA Civ 1219

    In a judgment of 12 July 2019, the Court of Appeal has confirmed the English court’s jurisdiction to grant anti-arbitration injunctions in exceptional circumstances where a foreign arbitration would be vexatious and oppressive given the ongoing proceedings in England. 

    In a long running family dispute, Ms Sabbagh had commenced proceedings in the English Commercial Court against Mr Khoury.  After the commencement of those proceedings, Mr Khoury and others began arbitration proceedings in Lebanon and, in July 2017, applied to challenge the jurisdiction of the English courts to hear that dispute (on the basis that they were subject to the arbitration agreement).  The Court of Appeal held that Ms Sabbagh’s claims did not fall within the scope of that agreement and refused to stay the proceedings.  Ms Sabbagh subsequently obtained an injunction in the Commercial Court restraining the defendants from pursuing the arbitration and Mr Khoury appealed that decision to the Court of Appeal.

    The grounds for the appeal were that:

    (a) The injunction granted was not within the English court’s power under the Arbitration Act 1996 (“AA”) and the New York Convention (“NYC”); and

    (b) Further, to grant an injunction, England had to be the ‘natural forum’ for the litigation but was not.

    The Court of Appeal rejected the first ground of appeal by holding that the AA and Convention had not displaced the court’s jurisdiction under section 37 of the Senior Courts Act to grant injunctions to restrain foreign arbitration(s) or otherwise constrained such jurisdiction such that it could not be properly exercised.  The Court of Appeal stressed however that courts should only grant such injunctions in exceptional circumstances.

    On the second ground, the court dismissed the claim that England must be the natural forum for the dispute in order for an injunction to be granted.  An anti-arbitration injunction did not involve any direct interference with the jurisdiction of a foreign court (except in the very indirect way of relieving it of its role as the supervisory court for the arbitration).

    The case provides useful clarification on the basis upon which the English courts can assist a party which is seeking to restrain foreign arbitral proceedings.  Although the judgment makes clear that this power should only be exercised in “exceptional” circumstances, it will be for further authority to give clearer expression to what these circumstances are. 
  1. Akcil & Ors v Koza Ltd & Anor [2019] UKSC 40

    The Supreme Court gave judgment on 29 July 2019, clarifying the scope of article 24(2) of the Brussels I Recast Regulation (EU) No. 1215/2012 (“Brussels Recast”).

    Art 24(2) relates to company law matters and provides that “in proceedings which have as their object the validity of the constitution, the nullity or dissolution of companies or other legal persons or associations of natural or legal persons, or the validity of the decisions of their organs the courts of the Member State in which the company, legal person or association has its seat” have exclusive jurisdiction.  This article takes precedence over the other jurisdictional grounds in Brussels Recast.

    It applies where the principal subject matter of the proceedings is a matter of company law.  The mere fact that an issue in dispute involves assessing a company law issue is not enough to invoke the exclusive jurisdiction of art 24(2).

    The case involves a control battle for the Koza mining conglomerate. A Turkish plc group company (”Plc”) had been subject to a criminal investigation into terrorist financing and trustees had been appointed.  Those trustees sought to replace the directors at one of the English subsidiaries of Plc, Koza Ltd.  This was challenged by Koza Ltd and one of its shareholders who sought an injunction from the English Courts based on a company law claim (the change notices were not valid under Koza Ltd’s constitution) and an authority claim (the trustees had no authority because their appointment was unlawful under Turkish law, was in breach of natural justice, etc).  

    There was no dispute that the company law claim fell within art 24(2) and as such the exclusive jurisdiction of the English Court.  The dispute was about the authority claim.

    The lower courts accepted jurisdiction over both claims, holding that their role was to form an evaluative judgment of principal subject matter of both the claims, and doing so, found them so linked that they both fell within art 24(2) scope.

    The Supreme Court disagreed.  The special jurisdictional rule art 24(2) – as a derogation from the core rule of jurisdiction within the EU based on domicile of the defendant – is to be interpreted narrowly and consistently across the EU.  This was evident from the scheme and underlying objective of Brussels Recast and decisions of the Court of Justice of the European Union on art 24(2), particularly Hassett (Case C-372/07) [2008] and Berliner Verkehrbetriebe (Case C-144/10) [2011].  

    There is therefore no basis to make an overall evaluative assessment of different claims. Where there were two distinct claims, as here, they could and should be considered separately and a mere link between the claims is not sufficient to bring them both within art 24(2). 

    As a result, the English Court had no jurisdiction over the authority claims concerning the validity of decisions of the Turkish plc whether under art 24(2) (or as including the trustees as a necessary and proper party to the company law claim).  That claim would have to be pursued elsewhere.
  1. PJSC Taftnet v Bogolyubov [2019] EWHC 1400

    In this 5 June 2019 judgment, the High Court considered a security for costs application against a Claimant (Taftnet), incorporated in Tartarstan, one of the constituent members of the Russian Federation, with assets in that territory as well as in Switzerland and Cyprus.  The parties agreed that the court had discretion to order security for costs pursuant to Rule 25.13(2)(a) of the Civil Procedure Rules because the Claimant was a Russian company and, thus, resident out of jurisdiction and not resident in a contracting state of the Brussels, Lugano or Hague Conventions or Brussels Regulations.

    The issue in dispute was therefore whether the court should exercise its discretion in awarding security for costs.  The Court of Appeal decision in Nasser v United Bank of Kuwait [2002] 1 WLR 1868 established that such discretion must be exercised in a manner which is not discriminatory for the purposes of Articles 6 and 14 of the European Convention for the Protection of Human Right and Fundamental Freedoms.

    Accordingly, the High Court had to consider whether: (i) there was a real risk of substantial obstacles to enforcement by reason of the Claimant’s country of residence or the location of its assets; and (ii) it was just to make such an order for security. The High Court held that, on the facts, there was a real risk of non-enforcement of any costs order it made in Russia because:
      • There is no bilateral treaty between the United Kingdom and Russia requiring enforcement of judgment or costs orders made by the courts of the other states.

      • There was a real risk therefore that it may be necessary to establish reciprocity to enforce an English costs judgment and the claimant had been unable to identify a case in which an English court had enforced a Russian costs-only judgment.

      • The preponderance of evidence showed falling enforcement rates in Russia, particularly involving cases with Ukrainian claimants or subject matter (as was the case here).

      • The risk that a Russian court may refuse enforcement due to sanctions against various of the defendants.
    The High Court also held that it was just to make an order for security for costs.  The Claimant was clearly able to put up security in the manner requested and was not able to point to other specific prejudice if ordered to do so.  Conversely, the Defendant, would be potentially prejudiced if no security for costs was ordered.  

    The decision is a useful distillation of the court’s approach to security for costs and application of the Nasser condition, the satisfaction of which the court made clear does not automatically entitle a party to security.  However, the Court was swayed in particular in its decision that the Claimant could not point to any prejudice it would suffer in doing so, conversely to the prejudice the Defendant might suffer if no security was put up.
  1. Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102

    The case concerned a long-term contract of affreightment for the shipment of iron ore pellets from Brazil to Malaysia. The charterer was in default since it did not supply cargoes to ship as it was obliged to under the contract The charterer claimed that it was prevented from supplying cargoes for shipment as a result of the Samarco dam collapse on 5 November 2015 and was therefore excused from having to perform under the terms of the agreement.

    A question arose whether the clause in question was a “contractual frustration clause”, which has the immediate effect of terminating the contract in the same way of the common law doctrine of frustration or an “exceptions clause”, which did not terminate the contract but limited or exempted a party’s liability for breach in defined circumstances.

    At first instance, the High Court found that:

    (a) The dam burst halted operations at the relevant iron ore mine, such that it was impossible for the charterer to perform the contract in respect of the shipments in issue had it been willing to. 

    (b) However, even if the dam burst had not occurred, the charterer would have defaulted anyway for other reasons (for example, no shipments had taken place during the second half of 2015 due to a collapse in demand in the Malaysian markets). Was this fact relevant to breach of loss? The Court held that while an assessment of causation (the “but for” test) is not applicable to contractual frustration clauses, the clause here, properly construed, was an exceptions clause, meaning that the charterer who would have defaulted anyway could not rely on it to excuse its breach.  The existence of the clause was relevant to the question of damages though as once the dam burst, there could have been no performance so only nominal damages were awarded.

    The Court of Appeal, on a close textual analysis, upheld the construction of the clause, holding that its words supported the application of a “but for” test.   differentiated an exception clause from a force majeure clause (which is akin to the common law doctrine of frustration).  The latter is concerned “with the effect of an event upon a contract for the future”. However, an “exceptions clause is concerned with whether or not a party is exempted from liability for a breach of contract at a time when the contract remained in existence and was the source of contractual obligations”.  When considering an exceptions clause in a subsisting contract, the “but for” test should apply. The charterer had, on the facts, no intention of performing its obligations and therefore could not rely on the exceptions clause as a defence.

    In relation to damages, the Court of Appeal overturned the first instance decision and affirmed the compensatory principle.  The innocent party must be put back in the position it would have been in had the contract been performed by the defaulting party.   In the case of actual breach (as here) there is no room to take into account hindsight (the fact and effect of the flood): “[T]here is no trace here of any need to identify the reason for the breach or to undertake a different exercise depending on that reason. The court’s task is simply to ascertain the value to the claimant of the performance which the defendant should have rendered”.
  1. Head-to-head: US Secondary Sanctions and The EU Blocking Regulation, Council Regulation (EC) 2271/96

    Several cases this quarter have tested the interaction between US secondary sanctions and the EU blocking regulation, which have been at odds since the summer of 2018, and give some comfort to non-US businesses. On 8 May 2018, the US announced its withdrawal from the Joint Comprehensive Plan of Action resulting in the reimposition of certain US extraterritorial sanctions and export controls targeting Iran and Cuba.  As a result, non-US businesses acting outside the US but dealing with Iran and Cuba suddenly found themselves subject to the extraterritorial application of US sanctions, so-called “secondary sanctions”, which apply to conduct with no jurisdictional nexus to the United States.

    The EU responded by updating the Blocking Regulation, Council Regulation (EC) 2271/96, the purpose of which is to ensure that EU businesses can continue to make business decisions in Iran and Cuba despite the strong extraterritorial reach of certain US sanctions and export controls.  This is achieved through the provision of a range of protections and prohibitions, such as:

    (a) Article 4 – a protection in favour of EU persons and entities by way of an assurance that any US court judgment or administrative determination against an EU person or entity giving effect to the US sanctions listed in its annex will not be enforced in an EU court; and

    (b) Article 5 – a prohibition against any EU person or entity from complying with certain of the re-imposed US secondary sanctions.

    Until recently, it was unclear whether the Blocking Regulation would provide any protection in the face of aggressive enforcement by the United States’ Office of Foreign Asset Control (“OFAC”).  However, two Italian decisions during Q3 show that the Blocking Regulation has real teeth. 

    The first case (reported on www.europeansanctions.com)  involved an Italian company controlled by partners in Iran, which was notified by its bank that their banking services would be terminated due to concerns about US sanctions. The Italian company successfully obtained an injunction to prevent the bank from terminating its services, which it said would be a breach of Article 5 of the Blocking Regulation.

    The second case was in the Italian courts and related to an Italian company that had an existing supply contract with an Iranian company.  Payment was made through a US-designated bank and was subsequently frozen by the Italian entity’s bank.   The Italian court held the US designation to be ineffective in the EU and ordered release of the funds.

    These decisions are to be contrasted with the case of Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd [2019] EWHC 1994 (Comm) (24 July 2019) which related to the application of the EU’s own sanctions against Iran.

    Here, the Commercial Court held that EU law precluded Iran’s Ministry of Defence (“Modsaf”) from enforcing the substantial interest component of an outstanding arbitration award in respect of the period beginning in 2008, when sanctions targeting the ministry took effect.

    The reasoning behind this decision is where an entity is subject to sanctions, the relevant EU regulation provides that no claims made in connection with any contract or transaction that has been affected by the regulation can be satisfied if they are made by sanctioned entities, including interest accruing during the sanctions period. These restrictions are referred to as a “no-claims” clause and prevents funds being transferred between a sanctioned and non-sanctioned person. 

    For any business operating internationally, the above cases demonstrate the importance of understanding and, where necessary, obtaining advice regarding the applicable sanctions regimes and how they relate to one another.  This is also a fast-evolving litigation space and, with increasingly aggressive warning letters being issued by OFAC in respect of Iran, we anticipate more cases in this area before the end of 2019.
  1. The Serious Fraud Office’s Corporate Cooperation Guidance

    On 6 August 2019, the Serious Fraud Office (“the SFO”) recently published its long-awaited Corporate Cooperation Guidance (“the Guidance”).  As part of the SFO Operational Handbook, it outlines the steps the SFO expects corporates to take when seeking a leniency agreement, such as a deferred prosecution agreement (“DPA”).  The key message is that the SFO regards co-operation as assistance that goes “above and beyond” the requirements at law.

    Since the introduction of DPAs in 2014, the SFO has concluded just four with: (i) Standard Bank, (ii) XYZ Limited, (iii) Tesco Plc and, (iv) Rolls Royce.  Each DPA gave an insight into the SFO’s sometimes inconsistent expectations when it comes to corporate co-operation.  Lisa Osofsky, the director of the SFO, has now sought to clarify matters and the Guidance is a step towards the creation of a predictable landscape for corporates who are seeking a DPA.  

    The Guidance sets out the SFO’s expectation in respect of cooperation by providing examples of best practice, such as:

    (a) Identifying suspect wrong-doing and criminal conduct, together with the people responsible, regardless of their seniority or position;

    (b) Reporting this to the SFO within a reasonable time period upon learning of the suspected wrongdoing; and

    (c) Preserving the availability of evidence and providing such evidence promptly and in an “evidentially sound format”.

    The Guidance also sets out some common-sense scenarios that the SFO will factor against a company, such as: protecting specific individuals, putting people on notice and creating a risk to the preservation of available evidence, remaining silent on certain issues and using tactical delays when reporting issues.

    While the Guidance is generally to be welcomed, its restrictive stance on the application of privilege remains a problem for corporates and means we can expect more disputes around claims to privilege – see the SFO v ENRC [2018] decision https://mp.weixin.qq.com/s/6v6-auEkOEx0-teUbf-WlQ 

    Under the Guidance, if the company elects not to waive privilege over documents, including witness first accounts, then this claim to privilege must be properly established through certification by independent counsel.  Even if properly asserted by this measure, the SFO will take this into account when assessing what credit to give the company for co-operation.  

    This is a less flexible approach then that adopted by US prosecutors where a waiver of privilege is expressly not a requirement for cooperation credit and therefore cuts across Lisa Osofsky’s supposed aim of Americanising the SFO’s approach to corporate enforcement.

    The position in the UK remains that if an issue is uncovered internally, the first step taken by the company should be to assess the issue internally, seeking appropriate external advice relating to all potentially relevant jurisdictions before deciding on whether and how to approach self-reporting.

  2. High Court grants asset preservation order over Bitcoin

    In August 2019, in the first English decision of its kind, the Commercial Court granted an asset preservation order over identifiable Bitcoin in a UK wallet, valued at in excess of GBP1 million.

    Bitcoin is a form of cryptocurrency or virtual asset defined by the Financial Actions Task Force (“FATF”) as “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes”.  All electronic transactions with Bitcoin are recorded in the Bitcoin “blockchain”, that is, a distributed electronic ledger of all transactions with Bitcoin or fractions of them.  

    Although Bitcoin is treated by its users as akin to money for certain purpose, it is not currently regulated meaning that stolen funds do not benefit from the same protections that exist for a bank account.  This is something that the UK government and financial regulators have begun to grapple with in order to support innovation and properly protect the consumer base – see: Financial Crime & Cybersecurity https://mailchi.mp/78670ae485d2/financial-services-regulatory-newsletter-july-2019 

    In the absence of an established position regarding the status of crypto assets, the case of Liam David Robertson v Persons Unknown highlights the important role the pragmatic English courts can play when a party finds themselves in unchartered waters.  The claimant was fraudulently induced by an email spear phishing attack to send 100 Bitcoin to the first defendant, who in turn transferred 80 of the Bitcoin to the second defendant.  Through the use of a blockchain intelligence company it was possible to track 80 of the Bitcoin to a digital wallet held by the UK arm of San-Francisco headquartered Coinbase. 

    Upon learning of the fraudulent transfer, the claimant quickly sought an interim asset preservation order in the Commercial Court in relation to the 80 Bitcoin.  Relying in part on the recent Singapore International Commercial Court decision  that held that Bitcoin were personal property that can be the subject of a trust, the claimant successfully argued that there was a serious issue to be tried as to whether the claimant could claim and retain title to the Bitcoin as personal property.

    In addition to an asset preservation order that froze the 80 Bitcoin, preventing any dealings with them or any instructions being given to Coinbase to transact with them, the Court also made  Bankers Trust orders requiring Coinbase to disclose information relating to the second defendant, which resulted in permission being granted to serve the claim on the second defendant based in Nigeria.

    Although this case is an interim decision and believed to be the first of its kind, we are likely to see many more over the coming months.  The pragmatic approach taken by the Commercial Court highlights the suitability of the English law in this regard, with the flexibility of the common law adapting easily to deal with fraud in all its forms, even involving crypto-assets.

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In March 2019, King & Wood Mallesons (KWM) established the Belt & Road Center for International Cooperation and Facilitation (BRCICF).

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We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

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