English Court finds no jurisdiction to grant freezing orders against non-party foreign subsidiaries of the award debtor in English-seated arbitration

The Commercial Court has held that it has no jurisdiction to make a freezing order to aid the enforcement of a London-seated arbitration award against subsidiaries of the award debtor who have no presence or assets within the jurisdiction, who were not party to the arbitration agreement or the arbitration proceedings and against whom no substantive claim is asserted (decision of 11 November 2014, Cruz City 1 Mauritius Holdings v. Unitech Limited et al. [2014] E.W.H.C. 3704 (Comm.)).

This is a significant decision as it shows the limits of how far the English court is willing to go in order to assist in the enforcement of an arbitral award. Parties seeking enforcement of an arbitral award in England and Wales against a counterparty with foreign subsidiaries who are not a party to the arbitration will most likely be unable to obtain a freezing order against those subsidiaries to aid enforcement.

Background

The claimant (Cruz City) had been attempting to enforce an arbitral award (currently exceeding US$350 million including interest) in its favour against the first defendant (Unitech) and the second defendant (Burley).

Cruz City obtained a worldwide disclosure order, a worldwide freezing order and an order appointing receivers. Following disclosure, Cruz City's enforcement attempts became more focused on Unitech's direct and indirect shareholdings in five subsidiaries (none of which have officers, assets, or any conduct of business in England and Wales). In these most recent proceedings, Cruz City sought to obtain freezing injunctions against these subsidiaries' assets.

For a more detailed factual and procedural history, see here and here.

Freezing injunctions against third parties: "Chabra relief"

In TSB Private Bank International SA v. Chabra [1992] 1 W.L.R. 231, it was held that where a claimant could show a good arguable case that assets apparently owned by a third party were in fact beneficially owned by the defendant against whom there was a cause of action, it could obtain a freezing injunction. Whether they were in fact beneficially owned by the defendant could be determined at a later stage and, if so, they would then be available to satisfy any judgment made against the defendant. Subsequent cases have extended the scope of Chabra relief, such that it may now be available to a judgment creditor, if necessary by the appointment of a liquidator or receiver, by exercising the rights of the judgment debtor to compel the third party to contribute to the funds or property of the judgment debtor.

Did the court have jurisdiction?

The English court may give permission to serve an arbitration claim form out of the jurisdiction in certain limited circumstances or "jurisdictional gateways". The claimant argued two alternative jurisdictional gateways in its claim for Chabra relief:

• Under CPR 62.5(1)(c), a court may give permission to serve an arbitration claim form out of the jurisdiction if the claimant seeks a "remedy … affecting an arbitration …, an arbitration agreement or an arbitration award".

("Gateway 1")

• Under CPR PD 6B, para 3.1(3), a court may give permission for service out of the jurisdiction on C where there is a claim made by A against B and (a) there is between A and B a "real issue which it is reasonable for the court to try"; and (b) C is a "necessary or proper party to that claim".

("Gateway 2")

The five subsidiaries argued that the English court did not have jurisdiction over them as the claim for Chabra relief did not fall within either gateway.

The court noted the long-established "Cardinal Principle" that doubts regarding jurisdiction with respect to foreign defendants should be resolved in their favour (The Hagen [1908] P. 189, 201), before embarking on the analysis of the two gateways advanced by Cruz City.

Gateway 1: CPR 62.5 (1)(c)

Males J. examined relevant case law and concluded that Gateway 1  does not apply to persons that are parties neither to the relevant arbitration agreement nor to relevant arbitration proceedings.

Gateway 2: CPR PD 6B, para 3.1(3)

The court had regard to case law (Belletti v. Morici [2009] E.W.H.C. 2316 and Linsen International Ltd v. Humpuss Sea Transport Pte Ltd [2011] E.W.H.C. 2339) which established the requirement of a "substantive dispute" between the claimant (here Cruz City) and the anchor defendant (here Unitech) before the English court. Cruz City's claim for a freezing injunction was, however, a claim for ancillary relief and contradicted the long-standing approach to construction of the rules for service out of the jurisdiction, namely that they are generally to be construed as relating to claims which involve the determination and enforcement of legal rights, and not to applications for interim relief which involve no process of adjudication upon substantive rights (cf. Mercedes Benz AG v. Leiduck [1996] A.C. 284). There was, therefore, no substantive claim against Unitech in the English court, as this claim had been determined in arbitration.

The court also considered the procedural history, noting that, as against Unitech, Cruz City already had the benefit of a worldwide disclosure order, a worldwide freezing order and an order appointing receivers. The additional freezing order sought would have added "no substance", and, therefore, there was no "real issue [between Cruz City and Unitech] which it is reasonable for the court to try". This gateway, therefore, failed on both the "substantive dispute" and the "real issue" limbs.

Comment

This judgment contains a helpful analysis of the legal principles and applicable rules governing the jurisdictional hurdles when seeking interim measures against entities that are not parties to either the relevant arbitration agreement or the relevant arbitration proceedings. On the basis of this decision, Chabra applications against foreign non-parties in aid of enforcing an award would now appear highly unlikely in England and Wales. The alternative route to jurisdiction via s. 44 of the Act and the gateway under CPR 62.5(1)(b) (Gateway 1) was also given little credit by the judge. While he recognised the principle of supporting arbitration, he restricted it to what he considered it to be its "proper bounds".

In practice, an award creditor may frequently be faced with the situation that the most direct enforcement strategy may be targeting such entities (even if it is only to pressure the award debtor by freezing its subsidiaries' assets). However, a shotgun approach at the award debtor's group structure chart will be barred by the English courts' hesitation to involve entities that have not demonstrated the necessary intent to be involved in the arbitration (either by being party to the arbitration agreement or by taking part in the arbitration proceedings).

Similarly, Gateway 2 would only be available if there was (i) a substantive claim against the anchor defendant, although in practice in order to achieve this the claimant would likely have to commence court proceedings parallel to the arbitration proceedings which itself would be a breach of the arbitration agreement; and (ii) a real issue to be tried. Paradoxically, a better armed party (with  measures already taken against the anchor defendant / award debtor such as in this case) will find it more difficult to convince a court to grant measures against the subsidiaries, on the basis that they would not add much in substance.

Accordingly, the best approach for an award creditor in these circumstances would appear to be to concentrate on effective measures against the award debtor itself which by their nature may extend to its subsidiaries (worldwide freezing orders, appointment of receivers). Conversely, an award debtor can concentrate on its own attempts to resist applications of any orders sought against it on the basis that its subsidiaries are unlikely to be targeted by any direct orders.

For further information, please contact Andrew Cannon, Partner, Vanessa Naish, Professional Support Lawyer, Maximilian Szymanski, Associate or your usual Herbert Smith Freehills contact.