English court adjourns enforcement of ECT award whilst annulment proceedings are pending in Sweden

The potential to enforce an award which is being challenged, or has been annulled, in the courts of the seat is a question which often interests users of arbitration, whether derived from a commercial agreement or from a treaty. In its recent decision in Anatolie Stati, Gabriel Stati, Ascom Group S.A. and Terra Raf Trans Traiding Ltd v Republic of Kazakhstan [2015] EWHC 2542 (Comm), the English High Court (the Court) adjourned of its own motion an application by the claimants to enforce an Energy Charter Treaty (ECT) award issued by a tribunal seated in Sweden against Kazakhstan. It decided that it would be in the interests of comity and the efficient administration of justice to hear the enforcement application after determination of a pending challenge to the award in the Svea Court of Appeal. The Court also refused to order Kazakhstan to pay security for the amount of the award, because the challenge to the award in the Swedish proceedings had a "real chance of success", and the adjournment was not ordered pursuant to an application by Kazakhstan but on the Court's own motion.

Background

In late 2013, a Stockholm Chamber of Commerce ("SCC") tribunal found Kazakhstan to have breached its fair and equitable treatment obligations under the ECT, on the basis of a series of measures culminating in the eventual seizure of the claimants' oil and gas operations within Kazakhstan. The tribunal awarded the claimants US$506 million in damages.

Following the award, Kazakhstan commenced proceedings in the Svea Court of Appeal in Stockholm to seek its annulment or variation, objecting to the appointment of Professor Sergei Lebedev to the tribunal by the SCC Arbitration Institute and arguing that a US$199 million valuation of a liquefied petroleum gas plant operated by the claimants was obtained by fraud, in circumstances where the plant should have been found to carry scrap value only. This latter argument is said to be supported by documents obtained by Kazakhstan in June 2015, following an order for discovery against the law firm Clyde & Co in separate proceedings in New York, brought under 28 U.S.C. §1782, which provides that US district courts may order parties to produce documents or give testimony for use in a “proceeding in a foreign or international tribunal”.

The Adjournment Decision

The claimants applied to the English Court for enforcement of the SCC award, with the annulment proceedings still pending in Sweden. Kazakhstan did not seek an adjournment of the application, but the Court made an order to that effect of its own motion, for five reasons:

1. If the Swedish court was to vary or set aside the award, there was a "substantial likelihood" that its decision would render the hearing of the enforcement application unnecessary. Further, based on the material before the court, the challenge in Sweden could not be regarded as being "made in bad faith" or having "fanciful, as opposed to real, prospects of success". As such, the hearing of the enforcement application prior to the resolution of the Swedish challenge could result in "considerable wasted time and costs".
2. There was considerable overlap between the issues to be considered by the Svea Court of Appeal and those arising on the enforcement application, particularly in relation to the appointment of Professor Lebedev. It was noted that the Court "may very well be assisted by what the Swedish court has to say on those issues", and that it "may treat what is said as of persuasive effect". Accordingly, an adjournment would "reduce the risk of inconsistent judgments", and be in the interests of comity.
3. Given the complexity of some of the arguments relied upon by Kazakhstan to resist enforcement, there was a risk that the application could not be disposed of fully within the hearing window allocated to it even if it were to go ahead.
4. Similarly, the interests of other court users and the efficient use of court resources had to be taken into account. In circumstances where the application could be rendered unnecessary by the Swedish proceedings and it was not clear that it could in any event be resolved within the allocated window, it was concluded that the limited resources of the court would be "better used to service the needs of other court users".
5. There was no compelling urgency in determining the application at this stage, given that there could be "no finality in the claimants' favour until after resolution of the challenge in Sweden", and that any risk of prejudice to the claimant arising out of the adjournment could be addressed in considering whether to order that security should be given.

Accordingly, it was ordered that the hearing be adjourned and re-fixed for a time after the Svea Court of Appeal was expected to have given its judgment on the annulment application, which was anticipated to be within the next four to six months.

The Security Decision

Having determined that the hearing should be adjourned, and following from point (5) above, the Court proceeded to consider whether Kazakhstan should be ordered to provide security in the interim for some or all of the amount of the award. In holding that it should not, the Court placed reliance on the judgment of the English Court of Appeal in Soleh Boneh International Limited v The Government of the Republic of Uganda [1993] 2 Lloyd's Reports 208, to the effect that both the prima facie merits of the argument that the award is invalid, and the ease or difficulty involved in enforcing the award, should be taken into account in determining whether to grant security.

The Court considered that the Swedish annulment proceedings appeared to have a "real chance of success". Beyond that, the Court felt unable to place the merits of the annulment case more accurately on a "sliding scale" between "arguable and manifestly valid", and appeared to regard it as unnecessary to do so. Further, the Court found that the adjournment would cause little risk of prejudice to the enforcement of the award, insofar as there was "no basis for inferring" that Kazakhstan would seek to dissipate its assets in England during the adjournment.

Interestingly, the Court had granted the adjournment against the wishes of both parties: Kazakhstan had urged the Court to consider its defence to enforcement under New York Convention grounds.

Comment

This decision is a rare example of the court exercising discretionary case management powers of its own motion, where neither party has applied for (and, indeed, both opposed), the order made. It indicates that the English courts are prepared to take a pragmatic approach to enforcement proceedings where awards are subject to challenge abroad, although the relatively low threshold applied to the merits of the annulment application in determining whether the enforcement hearing should be adjourned is perhaps surprising. However, the reasoning applied by the Court demonstrates that the outcome of such cases will very much turn on their facts.

The Court showed considerable deference to the Svea Court of Appeal, suggesting that the findings of the Swedish court, although not determinative, may be persuasive in relation to its decision on the application to enforce the award. However, this degree of deference to the courts of the seat is perhaps unusual. Only last year the English court determined that enforcement of arbitral awards set aside by the courts of the seat is not precluded by common law.

For further information, please contact Nicholas Peacock, Partner, or your usual Herbert Smith Freehills contact.