Divorce and International Arbitration – Unusual Bedfellows?

Divorce and international arbitration lawyers are unlikely bedfellows but speeches in the Supreme Court in a divorce case may assist the international arbitration community.

In Prest v Petrodel Resources Ltd & Ors [2013] the Supreme Court considered an appeal against a refusal to order certain companies to transfer properties to a wife in partial satisfaction of a divorce settlement.  The husband was found to be the ultimate beneficial owner of complexly structured offshore companies and had failed to comply with orders for full and frank disclosure of his assets.  The companies themselves were similarly obstructive.  The question was whether there was a legal basis for the assets of the companies being available to meet the husband’s liability to pay the wife a substantial settlement.

The Supreme Court rejected the option of piercing the corporate veil (which will be regarded as the most significant part of the decision) holding that it was a limited principle which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.  It also rejected an argument based on the wording of the relevant statute.

The companies were found to hold the properties on trust for the husband on conventional trust arguments.  The importance for the international  arbitration community was the use of adverse inferences to found the factual basis for the trusts.  Adverse inferences are common in international arbitration and are recognised by e.g. Article 9(6) of the IBA Rules.  The Supreme Court approved the following statement from R v IRC ex p Coombs [1991]:

“In our legal system generally, the silence of one party in face of the other party’s evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence.  Thus, depending on the circumstances, a prima facie case may become a strong or even overwhelming case.  But, if the silent party’s failure to give evidence (or give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party, may be either reduced or nullified.”

The Court modified that general proposition for financial aspects on divorce as (i) there is a public interest in ensuring proper financial support especially (but not only) where there are children involved;  and (ii) although there is a large adversarial element there is also a substantial inquisitorial element in divorce proceedings so the burden of proof – the classic riposte to the invitation to draw adverse inferences – is not in play in the same way.  Judges are entitled to draw on their own (judicial) experience and take notice of inherent improbabilities without engaging in pure speculation.

The Court found that the companies’ refusal to co-operate was deliberate and although an affidavit was presented the deponent refused to be cross-examined on it and that was found to be at the instigation of the husband.  “It is a fair inference from all [the] facts, taken cumulatively, that the main, if not the only, reason for the companies’ failure to co-operate is to protect the … properties.  That in turn suggests that proper disclosure of the facts would reveal them to have been held beneficially by the husband …” 

It is clear that the result was one that the Court was, on the facts, very pleased to arrive at but is shows adverse inferences being drawn and a proper test for doing so.  The public policy feature to modify the general proposition might also be relevant and be available to be invoked by the victim of a fraud or similar conduct contrary to public policy.  

 

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