Posts tagged: evidence

Foreign Judgments – Enforceability – Fines and Penalties

In JSC VTB Bank v Skurikhin and others [2014], the court  considered an application for summary judgment on the basis that final, binding and conclusive judgments had been obtained in Russia and none of the defences raised had a real prospect of success or gave rise to any compelling reason for a trial.

VTB entered into 40 loan agreements with a group of companies known SAHO. The loans were secured by guarantees from D. The loans and guarantees were subject to Russian law and to the jurisdiction of the Russian courts. VTB brought proceedings in the Russian courts for sums due under the loan agreements, and under related guarantees.

VTB secured judgments against D in the Russian courts. In the context of enforcement proceedings in the English courts, VTB applied for summary judgment on the basis that (a) the Russian judgments were “final, binding and conclusive”, (b) D had never suggested that they were not, and (c) that, although the Russian judgments referred to “penalties or fines”, they were actually recoverable contractual remedies.

D defended the summary judgment application. Although it was accepted that, on their face, the Russian judgments were “final binding and conclusive”, he raised the following five objections to enforcement of those judgments which, he said, had a real prospect of succeeding at trial:

  • The judgments were obtained as part of a fraudulent scheme to obtain control of the SAHO companies.
  • It would be contrary to English public policy to enforce the judgments.
  • The judgments were obtained in a manner contrary to natural justice.
  • There were compelling reasons, under CPR 24.2(b), why the case should not be disposed of without a trial.
  • The court should not enforce judgments insofar as they included sums that amounted to penalties.
A foreign judgment for a definite sum which is final and conclusive on the merits is generally enforceable by claim and unimpeachable for error of law or fact. There are four material exceptions to the common law rule on the conclusiveness of foreign judgments. A judgment can be impeached in the following circumstances:
  • Fraud:  This is partly on the basis that a party should not be able to take advantage of his own wrongdoing (see, for example, Gelley v Shepherd [2013]), and also takes account of the principle that “fraud unravels all” (see HIH Casuallty v Chase Manhattan Bank [2003]). The principle extends to all types of fraudulent conduct. In principle, a foreign judgment could be impeached for fraud irrespective of whether new evidence was produced or whether the fraud was alleged in the foreign proceedings (see, for example, AK Investment CJSC v Kyrgyz Mobil Tel Ltd [2012]) or whether the fraud was known and could have been raised in the foreign proceedings (Syal v Heyward [1948]). However, in such circumstances, the court would probably want to know why it had not been raised previously.
  • Public Policy. The ambit of this exception cannot be precisely defined and can change over time, as it is based on public policy. It can extend to a refusal to recognise or enforce judgments that offend universal principles of morality.
  • Natural Justice. See the principles clearly set out in Pemberton v Hughes [1899]. This will usually focus on the regularity of the proceedings, and will take account of the right to a fair trial.
  • Fine or a Penalty. A “penalty” in this sense means “a sum payable to the State, and not to a private claimant.  The question whether enforcement of a judgment can be refused on public policy grounds when the judgment is for exemplary, punitive or manifestly excessive damages is undecided. S.A. General Textiles v Sun & Sand Ltd [1978] and Lewis v Eliades [2004] are examples of cases where English courts have recognised the enforceability of awards of damages that would not have been awarded by an English court. However, an Australian decision (Schnabel v Lui [2002]) held that damages imposed to penalise a party would amount to a penalty even if they were not payable to the state.

The judge concluded that D had no prospect of successfully defending enforcement of the principal sums and contractual interest that was claimed, and granted summary judgment for those claims. However, he held that there was an arguable defence, on public policy grounds, to elements of the claims characterised as “penalties”.

The judge highlighted the need to remember that the fraud exemption is “carefully delineated” and should not be given an expansive application.  He concluded that the allegations of a fraudulent scheme on the part of VTB lacked reality, and was an artificial construct designed to avoid the consequences of the fact that SAHO had no defence to what were straightforward debt claims.

As to public policy and natural justice the judge noted that these argument relied upon the factual assumption based on the fraud exemption, and (a) it was difficult to see why enforcement could be contrary to public policy, unconscionable, unjust or immoral, if the fraud exception did not apply and (b) as there was no consistent and coherent explanation of why he had not advanced defences that were available to him, in the foreign proceedings there was no breach of natural justice.

D provided a breakdown of sums claimed under the Russian judgments (split into principal, interest and penalties). Approximately 20% of the sum claimed comprised “penalties” (that is, it did not represent actual loss or a genuine pre-estimate of loss and was over and above the contractual interest). These sums were described as “default interest” or “penalties” in translations of the Russian judgments, and represented sums incurred for being in default of payment obligations under the loans.

Referring to the conflicting decisions in S.A. General Textiles and Schnabel, the judge noted that the approach in Schnabel might lead to an argument that a judgment for exemplary damages was unenforceable. In his view, the question of whether a judgment for a very high rate of interest that had been awarded by a foreign court, was enforceable at common law should not be decided on the basis of the English court’s view of the appropriate rate of interest. Rather, the English court should consider whether the foreign court’s approach was contrary to domestic public policy.  He held that D had an arguable defence that sums of interest identified as “penalties” were not recoverable (being punitive in nature), albeit that they were not payable to the state.

The judgment highlights the uncertainty about the precise scope of the exception to the common law rule on the conclusiveness of foreign judgments for “fines or penalties”: in particular, whether damages imposed to penalise a party will constitute a penalty even where they are not payable to the state.

Service of Arbitration Claim Form on Solicitors

In Cruz City 1 Mauritius Holdings v Unitech Ltd and Others [2013], the Court considered an application for an order requiring disclosure of assets worldwide and in the context confirmed the validity of the commercial court’s practice of permitting service of arbitration claims on solicitors within the jurisdiction where:

  • The underlying arbitration is seated within the jurisdiction (thereby engaging the court’s supervisory jurisdiction).
  • There is “good reason” for service to take place quicker than under the applicable service convention – the court will be satisfied in “the vast majority of cases” that good reason exists confirming the pro-arbitration policy of the English courts.

Therefore, it followed that the fact that arbitration enforcement proceedings and the application for disclosure had been served on the defendants’ solicitors in London, did not provide grounds for setting aside service.  The Court went on to hold that the court had jurisdiction to require disclosure of assets, even though the defendant was outside the jurisdiction and ordered such disclosure to be made.

The court has jurisdiction under section 37(1) of the Senior Courts Act 1981 (SCA) to order freezing injunctions, including ancillary orders requiring a defendant to disclose its assets worldwide. In Maclaine Watson & Co Ltd v International Tin Council (No 2) [1989] and The Naftilos [1995], it was held that such ancillary disclosure orders could be made even if no freezing injunction was ordered. Freezing injunctions may be granted in support of arbitral proceedings, including proceedings to enforce arbitral awards, pursuant to section 37(1) of the SCA or section 44 of the Arbitration Act 1996 (1996 Act).

In Masri v Consolidated Contractors International (UK) Ltd and others (No 4) [2008] , the House of Lords held that CPR 71 does not enable an order for examination to be made against an officer of a corporate judgment debtor who is outside the jurisdiction.

Service out of the jurisdiction by an alternative method may be ordered pursuant to CPR 6.15. However, this power will only be exceptionally exercised (Cecil v Bayat [2011] and Abela v Baardarani [2011]).  Nevertheless, in the arbitration context, the Commercial Court has generally allowed arbitration claim forms to be served within the jurisdiction on the solicitors representing the relevant party in the underlying arbitration.  This “invariable practice” was referred to in Kyrgyz Republic Ministry of Transport Department of Civil Aviation v Finrep GmbH [2006] and Joint Stock Asset Management Co Ingosstrakh-Investments v BNP Paribas [2012].

Criz City v Unitech concerned an LCIA arbitration seated in London, awards having been made against three defendants. Permission to enforce the awards was granted pursuant to section 66 of the 1996 Act . The arbitration claim form was stamped “not for service out of the jurisdiction” and was served, with the court’s permission, on the defendants’ solicitors in London. The claimant applied for a further order compelling the defendants to disclose their assets worldwide, pursuant to section 37 of the SCA. This further application was also served, with the court’s permission, on the defendants’ solicitors.

The defendants argued that:

  • There were no sufficiently exceptional circumstances justifying service on the defendants’ London solicitors and service should be set aside.
  • Masri precluded the court from ordering a foreign defendant to disclose its assets.

 The Court rejected the defendants’ arguments and granted the disclosure order noting that neither Cecil v Bayat or Abela was concerned with arbitration claims.  In Kyrgyz, Tomlinson J had commented that the Commercial Court’s “invariable practice” was to permit service of an arbitration claim form within the jurisdiction on the solicitors representing the defendant in the underlying arbitration.  The Court of Appeal had subsequently referred to this practice, without disapproval, in BNP Paribas.It followed that it was open to the Commercial Court to continue to implement its usual practice in respect of arbitration claims concerning arbitrations seated within the jurisdiction, as long as there is good reason for service to be achieved faster than it would be under the relevant service convention.

Furthermore, the fact that the current application was made pursuant to section 37 of the SCA did not prevent it from being an “arbitration claim” for these purposes. The claim was one “affecting arbitration proceedings” within the definition of an arbitration claim in CPR 62.2(1)(d). This conclusion was consistent with the overriding policy in favour of enforcement of arbitration awards.

Finally, the Court rejected an argument that the claimants ought to have applied for permission to serve the claim form out of the jurisdiction (rather than permission to serve on the defendants’ London solicitors). Where a claimant seeks an order for alternative service within the jurisdiction, it is unnecessary to apply for permission to serve out provided the court is informed that the proposed defendants are outside the jurisdiction.

In Masri, the issue was whether the court had jurisdiction to make an order under CPR 71.2 directing an individual non-party to attend court.  Here, by contrast, the order requested was not an order addressed to a non-party outside the jurisdiction but, rather, an order against defendants who are subject to the court’s jurisdiction.  There was nothing in the ratio of Masri that would prevent the court from making such orders pursuant to the SCA.

It followed that the court had jurisdiction to make the order for disclosure and, in light of the policy in favour of enforcement of arbitral awards, it would be just and convenient to do so.

I am pleased to announce the ‘birth’ of the Guide to the IBA Rules

I am pleased to announce the ‘birth’ of  “The IBA Rules on Taking Evidence in International Arbitration – A Guide”.  The Guide reproduces the Rules and the Commentary by the IBA Committee and I have added my own thoughts on how practitioners and arbitral tribunals might approach issues that arise from the Rules.

The IBA Rules are commonly used in international commercial arbitration (and investor – state arbitrations) and yet there are few guides to their use and interpretation.  I trust my thoughts benefit the discussion of their application.

The book is available from the publishers, Cambridge University Press, at http://www.cambridge.org/gb/knowledge/isbn/item6969277/?site_locale=en_GB (and other good bookshops!)

 

 

Admissible Evidence under s69

In Dolphin Tanker Srl v Westport Petroleum Inc [2010] the Court rejected a submission that the scope of admissible evidence on an appeal under section 69 of the Arbitration Act 1996 had been broadened by recent authority, or by recent revisions to CPR PD62.  The Court confirmed the general rule that only the award and the relevant contract were admissible. The extraneous evidence adduced by the applicant (including expert evidence showing the commercial background to the contract) was excluded.

The Court summarised the relevant principles as follows:

  • There has been no relaxation of the general rule that only the award and the relevant contract are admissible. This rule is not affected by the recently revised PD 62 (which allows a party to put before the court “any document (such as the contract or the relevant parts thereof) which is referred to in the award and which the court needs to read to determine a question of law”).
  • There is a limited exception to the general rule where the award has set out the relevant contractual terms in abbreviated form, or has summarised the effect of an identified contractual exchange, or has identified documents as having contractual effect, without setting out their terms. In such cases, the documents referred to or summarised are admissible because they are highly relevant to the identified question of law. The court “needs” to see the documents (for the purposes of PD 62) because it cannot carry out its appellate function without them.
  • An appeal on a question of law is confined to the facts found by the award.
  • Although all contracts must be construed against their commercial background, the only admissible findings in relation to that commercial background are those in the award.

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