COMMERCIAL COURT OVERTURNS INJUNCTION TO PRESERVE ASSETS GRANTED UNDER SECTION 44(3) OF THE ENGLISH ARBITRATION ACT 1996

In the recent decision of Daelim Corporation v Bonita Company Ltd and Others [2020] EWHC 697, the Commercial Court overturned an injunction previously granted under s44(3) of the English Arbitration Act 1996 (the Act). The injunction had amounted to an anti-arbitration injunction which, the Court held, was not necessary for the statutory purpose of preserving assets.

Background

The facts

Daelim Corporation (Daelim), Bonita Company Limited (Bonita) and two other parties (collectively known as EMIC) were party to several bareboat charters under which Daelim chartered  a vessel to Bonita, and Bonita sub-chartered the vessel to EMIC. The parties entered into a Termination and Settlement Agreement (TSA) by which they settled terms for the early termination of the bareboat charters.

Under the TSA, EMIC promised to pay:

• US$6 million directly to Daelim; and
• US$0.5 million to Bonita.

The charterparties all provided for arbitration of disputes in London under LMAA Terms, whilst the TSA provided for arbitration in Hong Kong under the HKIAC rules.

At the time of entering into the TSA, Bonita owed Daelim approximately US$1 million in respect of unpaid hire. Daelim therefore asserted that, in relation to the payment due from EMIC to Bonita under the TSA (the Disputed Sum), EMIC should instead make this payment to Daelim, on the basis that Bonita had assigned its rights to the sums to Daelim. Bonita rejected this, and asserted its right to be paid the Disputed Sum.

Daelim considered that any funds paid by EMIC to Bonita would disappear before any final determination of whether EMIC should in fact have paid Daelim. As such, Daelim applied to the Court for relief under s44(3) of the Act, asking the Court to exercise its powers in support of arbitral proceedings to preserve assets.

The June and July Orders

On 18 June 2019, Daelim sought and obtained an ex parte injunction in respect of the Disputed Sum (the June Order). The June Order:

• restrained EMIC from paying the Disputed Sum to Bonita without a further court order (Paragraph 5.1);
• required EMIC to pay the Disputed Sum by 21 June 2019 either into an agreed account under the joint control of Daelim’s and EMIC’s solicitors or, failing the necessary agreement, into court (Paragraph 5.2);
• restrained Bonita, until further court order, from demanding or taking any steps to demand or recover the Disputed Sum from EMIC (Paragraph 5.3).

Following the June Order, EMIC paid the disputed sums into the client account of its solicitors. The parties and the judge then entered into lengthy correspondence regarding what further order should be made, considering that it might now be possible for an undertaking as to the Disputed Sum to replace the injunctions against EMIC.

By order dated 17 July 2019 (the July Order), the Court discharged the relief granted under Paragraphs 5.1 and 5.2 upon certain undertakings from EMIC and its solicitors as to the Disputed Sum in the client account. However, the relief granted in Paragraph 5.3 remained in place.

Following the July Order, Bonita applied to discharge Paragraph 5.3 on the alternative grounds that (1) it should never have been granted, because it was not necessary or appropriate, and had been obtained by an ex parte presentation of the case that was misleading and unfair; and (2) even if the relief was properly granted, it no longer served any useful purpose.

Daelim argued that Paragraph 5.3 was a necessary and appropriate quid pro quo for EMIC’s payment undertakings and that there was no unfairness in the ex parte presentation of the case. EMIC made submissions supporting the original granting, and continuation now, of the relief.

The Commercial Court Decision

In March 2020, the Commercial Court upheld Bonita’s application on the grounds that the relief was not necessary for preserving an asset in support of arbitral proceedings. The Court emphasised that the court’s powers under s44(3) of the Act were of a limited nature. As such, there must be as little interference with the arbitral process as possible, and an order can only be made under s44(3) where the order is judged to be necessary for the preservation of evidence or assets.

Relief not a necessary quid pro quo

The Court rejected Daelim’s argument that the relief provided by Paragraph 5.3 was the necessary “quid pro quo” for EMIC being required to pay the Disputed Sum into court (under Paragraph 5.1 of the June Order), and for the undertakings given by EMIC and its solicitors in respect of the Disputed Sum in the client account (under the July Order). Daelim submitted that, as EMIC was a debtor under the TSA and was facing competing claims to the debt from both Daelim and Bonita, its position was analogous to that of an interpleader seeking injunctive relief to protect the interpleader from its creditors.

The Court rejected this analogy and decided that the English court was not the proper place for determining the status of the Disputed Sum in this case. Any claim against EMIC, the debtor facing competing demands for sums payable under the TSA, had to be a claim in HKIAC arbitration under the TSA.

Difficulties regarding the asset Paragraph 5.3 sought to preserve

The Court noted that “no proper attempt” had been made at identifying an asset to be preserved by the relief. The Court further observed that Daelim had not sought the relief for the purposes of preserving any particular asset, but rather sought the relief to protect the debt owed by EMIC to Bonita under the TSA. The Court therefore turned to consider precisely what “asset” the Paragraph 5.3 relief sought to preserve, and whether that relief was necessary in support of arbitral proceedings.

If the relief granted in Paragraph 5.3 was perceived to be in support of Daelim’s intended London arbitration claim against Bonita under the head charter, then the odd situation would arise where the relief was purporting to preserve an “asset” that Daelim would then argue did not, in fact, exist. Further, the relief granted in the June and July Orders would also have been granted against EMIC, a third party which was not a signatory to the London arbitration agreement.

If the relief granted in Paragraph 5.3 was instead perceived as preserving an asset in support of an intended Hong Kong arbitration under the TSA, then prohibiting Bonita from bringing a claim against EMIC would prevent Bonita from pursuing the very arbitration that the relief granted in the June Order purported to support.

In neither scenario would the prohibition imposed upon Bonita by Paragraph 5.3 be appropriate. It was not necessary once EMIC had been restrained from paying Bonita, pending a determination in arbitration of whether EMIC was indebted to Bonita or to Daelim. The prohibition was “in substance  an anti-arbitration provision preventing Bonita from pursuing EMIC” under the arbitration agreement in the TSA, and it deprived Bonita of the opportunity to have an arbitrator in Hong Kong consider the question of who was entitled to be paid by EMIC.

Risk of incorrect payment lay with EMIC

The Court stated that if EMIC chose to pay Bonita, it would do so at its own risk. Such payment would not prejudice any claim Daelim may wish to make against EMIC in future if the payment was incorrect, and it would not prejudice any claim for payment against Bonita under the head charter in London arbitration.

Taking this context into account, the Court concluded that the relief provided by Paragraph 5.3 was not within the scope of s44(3) of the Act as it was not necessary to preserve an asset in support of arbitral proceedings. Daelim’s application for the relief was “the wrong application by the wrong applicant in the wrong forum”. Rather, a Hong Kong arbitration under the TSA (whether brought by Daelim or Bonita) was “the proper, natural and contractual means” for determining whether EMIC owed the TSA debt to Daelim or Bonita, and should not have been prevented by an anti-arbitration order. Consequently, the Court determined that this relief should never have been granted, and should be discharged.

As the Court accepted Bonita’s primary argument, it considered it unnecessary to deal with Bonita’s other arguments. The Court did, however, observe that it would not have been persuaded by them – there was no unfair presentation of the ex parte application; and, if otherwise properly granted, Paragraph 5.3 would still serve a useful purpose.

Comment

This decision is a useful reminder of the narrow jurisdiction of the English court to issue relief to preserve assets in support of domestic and foreign seated arbitrations and one which demonstrates the courts’ reluctance to interfere in the arbitral process. In particular, the decision highlights the narrow scope of s44(3), and that relief will not be granted if it is not strictly necessary. While the reasoning of the judgment is based on the particular facts of the relevant case, parties seeking relief under s44(3) should be careful to identify any complexities in relation to the nature of the asset they wish to preserve before making their application.

The decision also highlights the risks of inconsistent arbitration clauses in related agreements, which can lead to parallel and potentially inconsistent proceedings involving the same disputed sums.

For more information, please contact Craig Tevendale, Partner, Caitlin Eaton, Associate, or your usual Herbert Smith Freehills contact.