Conflict of laws - Whether proceedings should be stayed
Joint Stock Company Aeroflot Russian Airlines v Berezovsky and others: Chancery Division (Mr Justice Floyd): 18 June 2012
Article 23 of Council Regulation (EC) 44/2001, so far as material, provides: '(1) If the parties, one or more of whom are domiciled in a state bound by this Convention, have agreed that a court or the courts of a state bound by this Convention are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction. Such jurisdiction shall be exclusive unless the parties have agreed otherwise. Such an agreement conferring jurisdiction shall be either (a) in writing or evidenced in writing; or (b) in a form which accords with practices which the parties have established between themselves; or (c) in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned.'
Section 9 of the Arbitration Act 1996, so far as material, provides: '(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter. (2) An application may be made notwithstanding that the matter is to be referred to arbitration only after the exhaustion of other dispute resolution procedures.
'(3) An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim. (4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed...'
The claimant, A, was the 51% state-owned airline of the Russian Federation. A brought an action in which it alleged that it was the victim of frauds perpetrated on it by the first two defendants, B and G, using companies controlled by them, namely the third to seventh defendants (respectively Holdings, Cyprus, Services, Leasing and Finance), which were all companies then in the Forus Group. Between October 1996 and February 2000, B was the deputy secretary of the Security Council of the Russian Federation. B was alleged to have inserted G and his team into A, in late 1994. On the basis of G's recommendation, A entered into an advisory mandate with Services under which Services would, inter alia, assist A in the identification and selection of suitable partners to participate in its investment projects.
Clause 6 of the advisory mandate provided that the agreement was subject to Swiss law. A series of agreements were entered under which Services and the fourth defendant lent money to A. The credit agreements included (i) an agreement dated April 1996 under which Services agreed to advance up to $30m to A (the first credit agreement); and (ii) an amending agreement dated May 1997 (the amending agreement); and (iii) an agreement dated November 1997, under which Services agreed to advance up to $50m to A (the second credit agreement). The second credit agreement was later amended to substitute Cyprus for Services as lender.
Clause 14 of the first credit agreement provided that: 'This agreement shall be governed in all respect by substantive laws of Switzerland...’. The amending agreement substituted the following clause for clause 14 of the first credit agreement: 'This Amendment shall be governed in all respects by the substantive law of Switzerland. All disputes arising in connection with the present agreement shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules'. Clause 13.1 of the second credit agreement provided that the applicable law was Swiss law.
A's case was that it had been induced to enter into the agreements by misrepresentations or unlawful acts by G. A contended that such monies as had been received by the defendants under, or as a result of, the agreements and as had not been accounted for to A, had been acquired without any lawful basis under Russian law, and, accordingly, that the defendants were liable to account to A. The case against the Forus Group was that each of the companies in the group had assisted in the breaches of duty of G. In the instant applications, Holdings, Cyprus, Services and Finance (respectively Luxembourg, Cypriot, Swiss and British Virgin Islands companies) (the applicants) applied to challenge the jurisdiction of the English court to entertain the actions against them. B and G were sued on the basis that England was their state of domicile.
The challenges of the defendants depended on the terms of Council Regulation (EC) 44/2001 (the Judgments Regulation) (on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters) or the equivalent provisions of the Lugano Convention. Holding, which was domiciled in Luxembourg, had been served with the claim on the basis of article 6(2) of the Judgments Regulation), which provided that a person domiciled in a member state might also be sued '(1) where he is one of a number of defendants, in the courts for the place where any one of them was domiciled, provided the claims were so closely connected that it was expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings'.
Holding sought an order declaring that the court had no jurisdiction over the claim against it and setting aside the proceedings against Services, or stayed. Services was domiciled in Switzerland and was sued pursuant to the Lugano Convention. It was common ground that the jurisdiction clause in the advisory mandate, and the arbitration clauses in the first and second credit agreements, if valid, covered the instant dispute. Services contended that if the jurisdiction clauses were valid, the court had to refuse jurisdiction in relation to Services on the basis that Switzerland had exclusive jurisdiction. Further or alternatively, Services sought a stay based on the arbitration clauses under section 9 of the Arbitration Act 1996. Cyprus had been served out of the jurisdiction without the court's permission on the basis that the court had power to hear the claim under article 6 of the Judgments Regulation.
Finance was not party to any jurisdiction agreement or arbitration clause. Permission to serve out of the jurisdiction in the BVI had been granted, pursuant to Civil Procedure Rule 6 on the basis that there was a real issue between A and B and G which it was reasonable for the court to try and that Finance was a 'necessary and proper party. The issue for determination was whether the English court had jurisdiction to hear the claim; in particular: (i) whether the jurisdiction clause was valid so that the English court had no jurisdiction in respect of the claim against Services; and (ii) whether the remaining defendants could rely on the arbitration clauses in the first and second credit agreements, thereby excluding the English court in respect of jurisdiction. In respect of issue (i), A contended that the jurisdiction clauses were invalid. Consideration was given to article 23 of the Judgments Regulation and to section 9 of the 1996 act.
The court ruled: (1) It was settled law that the court had to be satisfied, or as satisfied as it could be having regard to the limitations which an interlocutory process imposed, that factors existed which allowed the court to take jurisdiction. It was settled law that when a jurisdiction clause was subject to article 23 of the Judgments Regulation, a court seized of the issue of whether it was valid and applicable had to not apply national laws to the issue of validity (see ,  of the judgment).
In the instant case, the evidence showed that A had agreed to the jurisdiction clause. It followed that the jurisdiction clause in the advisory mandate was enforceable and the court was obliged to declare that it did not have jurisdiction over the claim against Services (see ,  of the judgment). Jurisdiction would be declined in respect of Services (see  of the judgment). Provimi Ltd v Roche Products Ltd  2 All ER (Comm) 683 applied; Bols Distilleries (t/a Bols Royal Distilleries) v Superior Yacht Services Ltd  1 All ER (Comm) 461 applied.
(2) In determining whether to grant a stay pending arbitration the court had first to decide whether there was an arbitration agreement, and whether the agreement covered the matters in issue in the litigation. If the court decided those questions in the affirmative, and there was no assertion that the agreement was ‘null and void, inoperative, or incapable of being performed’ a stay was mandatory. If any of those matters was asserted, however, the court would have to go on to decide them, and if satisfied as to any of them, would refuse the statutory stay. If an agreement was null and void, inoperative, or incapable of performance under its applicable law, that was a matter which was properly to be taken into account under section 9(4) of the 1996 act.
It was settled law that section 9(1) required a concluded arbitration agreement before the court could order a stay, and not merely an arguable case that there was such an agreement The correct approach was that the burden of establishing the matters identified in section 9(4) rested on the party asserting them, namely the claimant. The use of the word ‘satisfied’ in subsection (4) was an indication that the court had to come to a clear conclusion that the agreement was null and void, inoperative or incapable of performance (see , , ,  of the judgment).
The fact that the court declined jurisdiction over Services did not affect the position in relation to the other defendants. The claims against them remained as closely connected to the claims of B and G. The tests under the Judgments Regulation in respect of Holding and Cyprus had been satisfied. Similarly, Finance remained a proper party to the claim against B and G. On the basis of the evidence in the instant case, it would be an abuse of right under Swiss law for Cyprus to rely on the arbitration clause in the second credit agreement in circumstances where to do so would cause fragmentation of the dispute. Arbitration clauses were designed to give parties a convenient alternative forum to the courts for resolving their disputes.
The exercise of the right in the second credit agreement would not achieve that aim, but would succeed in hiving off from the body of any dispute an arbitrary fragment, making the dispute more difficult to try and promoted the likelihood of conflicting judgments. Accordingly, on the assumption that the arbitration agreement was valid, Cyprus' application for a stay under section 9(4) would be refused (see , ,  of the judgment). The applications of Holding, Cyprus and Finance would be dismissed (see  of the judgment). Albon (t/a N A Carriage Co) v Naza Motor Trading SDN BHD  2 All ER 1075 applied; A v B  1 All ER (Comm) 591 applied.
Philip Marshall QC and Simon Hattan (instructed by Pinsent Masons LLP) for A; Francis Tregear QC and Alexander Pelling (instructed by Streathers Solicitors LLP) for the third to fifth and seventh defendants.