Stay of enforcement of guarantee on basis that guarantor agrees to be bound by pending arbitration award

In [Stemcor UK Ltd v Global Steel Holdings Ltd and Pramod Mittal] the English High Court (the Court) was required to consider the Claimant's application for summary judgment in respect of its claim for sums payable pursuant to two guarantees, at the same time as the Defendants' application for a stay of the court proceedings pending the resolution of related arbitration proceedings regarding the debts underlying those guarantees between Stemcor and Global Ispat Koksna Industrija Lukavac.

The Court found in favour of the Defendants in both applications. Summary judgment was denied on the basis that the Claimant had not established that there was no real prospect of the Defendants' defence of set off (against the principal debtor's cross claims in the arbitration proceedings) succeeding. The Court also confirmed that the Defendants were not necessarily required to join the principal debtor to the court proceedings in order to rely on the defence of set-off.

The Court granted the Defendants' application for stay of the court proceedings, pending the outcome of the arbitration. A persuasive factor in its decision was that the Defendants agreed to be bound by the result of the arbitration, and so the Claimant would have recourse against both the Defendants and the principal debtor in the event that it succeeded in the arbitration, and would still retain the right to pursue the guarantor in the event of an unsuccessful outcome against the principal debtor in the arbitration.

In addition, although the Court proceedings were commenced first, the Court found the relative progress of the arbitration, and delays in progressing the Court proceedings, to be relevant factors.

The case raises a number of important practical points for parties in drafting dispute resolution clauses in agreements with related guarantees, including highlighting the risk that attempts to provide for multiple forum options in related agreements may lead to a stay of proceedings in favour of arbitration. Attempts to provide for speedy recourse against a guarantor may therefore be undermined. The case also demonstrates that commencing Court proceedings prior to related arbitration proceedings is not a conclusive factor in persuading the Court to give precedence to the Court proceedings.

Background

Stemcor entered into a Prepayment Agreement and a Coke Sales Contract with Global Ispat Koksna Industrija Lukavac ("GIKIL"). These agreements provided for resolution of disputes by way of LCIA arbitration. Stemcor entered into two guarantees in relation to GIKIL's liabilities under the Prepayment Agreement and Coke Sales Contract, with Global Steel Holdings Ltd ("GSHL"), a 52% shareholder in GIKIL, and Pramod Mittal, a director of GSHL. The guarantees provided that the English court had jurisdiction to resolve disputes. GIKIL accumulated debts to Stemcor because (1) the prepayments were not sufficient to allow GIKIL to purchase sufficient coal to manufacture the coke which it was required to produce under the Coke Sales Contract (the "Coal Debts") and (2) the prices at which Stemcor sold the coke to final buyers were too low to discharge the prepayments in full.

The litigation and arbitration proceedings

On 6 August 2013, Stemcor issued proceedings in the Court, against GSHL and Mittal, claiming for payment of GIKIL's debts under the guarantees. On 4 November 2013, GIKIL commenced LCIA arbitration proceedings against Stemcor, claiming for losses as a result of Stemcor's alleged breach of the Coke Sales Contract (the "Cross-Claims"). On 17 December 2014, Stemcor issued an application for summary judgment in relation to the Coal Debts and two days later GSHL and Mittal issued an application to stay the court proceedings pending the outcome of the arbitration.

The Court determined that the summary judgment application should be heard before the application for stay. If there was no real prospect of the Cross-Claims succeeding, then duplicative proceedings would be unlikely (and a stay less necessary); if there was a real prospect of success, then duplicative proceedings on the merits would be more likely and the application for a stay strengthened.

The summary judgment application

The Court first considered whether Stemcor could show that there was no real prospect of a successful defence by GHSL to its claim for the Coal Debts. As that defence would take the form of a set off of GIKIL's Cross-Claims in the arbitration, the court had to consider whether there was any prospect of those Cross-Claims succeeding.

For a number of reasons, the Court found that Stemcor had not established that the Defendants had no real prospect of succeeding on the issue. Further, whilst Stemcor was critical of the quantum of the first Cross-Claim, it did not contend that there was no real prospect of it being established. Having determined that Stemcor had not established that the Defendants had no real prospect of succeeding on the first Cross-Claim, the Court did not consider the other Cross-Claims.

The application for stay

The Defendants raised a number of arguments justifying the stay of proceedings and the Court found that all of these had force.

In particular, the Court relied on the Court of Appeal's reasoning in Alfred McAlpine Construction Ltd v Unex Corporation Ltd 1994) 24 Con LR 63 and Roche Products Ltd. Freeman Process Systems Ltd (1996) 80 Build LR 102. In Alfred McAlpine, the Court of Appeal found that ample discretionary grounds exist for ordering a stay of Court proceedings against a guarantor which would duplicate a pending reference to arbitration, "unless the circumstances justify both sets of proceedings in a particular case". However, in that case the Court of Appeal refused the guarantor's application for a stay pending an arbitration against the principal debtor, a subsidiary of the guarantor, because the arbitration would not have been binding on the guarantor. The High Court followed this approach in Roche, but granted the stay because the guarantor had agreed to be bound by the results of the arbitration. The Court emphasised that, in this case, the Defendants had agreed to be bound by any findings made in the arbitration, which was a significant factor in Alfred and Roche. This benefitted Stemcor because, if successful in arbitration, Stemcor would not need to pursue a claim against the guarantors by way of English court proceedings, but if unsuccessful then Stemcor would still retain the right to pursue its claim in court.

The Court refused to have regard to the fact that GIKIL caused the potential duplication of proceedings by commencing the arbitration after the court proceedings had been initiated and, on a group basis, refused an offer of a stay or consolidation made by the Defendants. GIKIL was only a 52% subsidiary of GHSL and Stemcor had chosen to enter into the arbitration agreement with GIKIL pursuant to which GIKIL was entitled to have its rights enforced.

Stemcor submitted that regard should be had to the fact that the parties had agreed in the guarantees an exclusive jurisdiction clause and that the guarantees were a primary obligation, with no requirement to first sue the principal debtor. The Court was not persuaded: Stemcor would retain the right to pursue its claims in court if the outcome of the arbitration was unfavourable, though it is notable that in practice a court would be unlikely to come to a different decision to an eminent tribunal with full access to relevant documents and witnesses.

Stemcor also submitted that any delay could be prejudicial to it and the court proceedings could be concluded in advance of the arbitration.   However, the Court found that there was no reason why the court trial direction should be different from, and so allow an earlier determination than, the procedure agreed in the arbitration (although the court noted that court proceedings may be subject to appeal which might result in significant delay).

The other factors which the Court considered to be in favour of the stay were:

1. the risk of conflicting decisions (as to the validity of the Cross-Claims, the quantum of damages and the amount of debt owed to Stemcor by GIKIL);
2. parallel proceedings would be wasteful of court time and resources;
3. the arbitration proceedings were more advanced than the court proceedings and Stemcor was responsible for the delayed progression of the court action; and
4. liability depended on the resolution of GIKIL's Cross-Claims and as a matter of principle and practicality these would be better resolved in the arbitration proceedings between Stemcor and GIKIL, with access to the relevant documents and witnesses.

The factors in favour of a stay far outweighed those against it and the circumstances of the case were sufficiently rare and compelling to justify the grant of a stay. Therefore, there was no useful purpose in requiring a joinder of GIKIL to the court action (which Stemcor had submitted should be a condition for reliance on the Cross-Claims). The Court noted that even if no stay had been granted there would have been a strong argument that GIKIL should not be required to join proceedings just to enter into a race to judgment with the arbitration proceedings which it was contractually entitled to bring. Whether or not GIKIL was joined, there would be two sets of proceedings running in parallel and a race to judgment.

Comment

The case highlights risks for parties seeking to ensure that they can enforce payment of debts simply and expediently. It is not uncommon for the terms of a guarantee to refer disputes to the jurisdiction of the courts, or to afford a lender a unilateral option to litigate, while the underlying contract with the principal debtor contains a reference to arbitration. Either option is intended to allow swift recourse against the guarantor by summary judgment on a straightforward debt claim. However, as this case demonstrates, this objective may be undermined where a guarantor seeks to rely on a defence of set off against a principal debtor's pending cross claims in related arbitration proceedings. While parties might have acted under the assumption that they can proceed in one forum against a guarantor without reference to the substantive agreement underlying that guarantee, they may not in all circumstances be able to do so.  

Claimants under such guarantees may take some comfort from the fact that a guarantor's willingness (or otherwise) to be bound by the arbitration award to which it is not a party may be a persuasive factor – a stay may be granted where a claimant has the security that the guarantor will be bound by the result of the arbitration proceedings. In such circumstances, although the claimant may lose its ability to quickly recover the debts owed to it from a guarantor, it should at least maintain the ability to recover those sums in the event of non-compliance with the award by the principal debtor.

However, parties should also be aware in particular that commencing proceedings in Court prior to the commencement of arbitration proceedings is not conclusive, as it is often assumed to be. The Court may look not to the forum in which proceedings were first commenced but to the one in which proceedings have been most expeditiously progressed.

Parties should also be aware that, when entering into a guarantee agreement with an entity which is not closely connected with the principal debtor, a guarantor may be more likely to be treated as a separate entity and granted the benefit of the separate dispute resolution procedure which it has independently agreed. Where the guarantor is a wholly owned subsidiary of the principal debtor (or vice versa), a court is more likely to refuse a stay on the basis that the two entities are acting together as a group.

For further information, please contact Craig Tevendale, Partner, Susan Field, Associate or your usual Herbert Smith Freehills contact.