ENGLISH COURT DETERMINES THAT AN APPLICATION TO STAY LEGAL PROCEEDINGS IN FAVOUR OF ARBITRATION SHOULD BE HEARD BEFORE A SUMMARY JUDGMENT APPLICATION

In the recent case of Deposit Guarantee Fund for Individuals v Bank Frick & Co AG [2021] EWHC 3226 (Ch), the English High Court has held that a defendant's application to stay court proceedings in favour of arbitration pursuant to s9 of the Arbitration Act 1996 (Act) should be heard before its alternative summary judgment application.

The Court also held that the defendant had not, in seeking for the summary judgment application to be heard prior to the stay application, taken a "step in the proceedings to answer the substantive claim", within the meaning of s9(3) of the Act, such that its conduct did not constitute a submission by the defendant to the court's jurisdiction so as to deprive it of the right to apply for a stay under the Act.

Background

PJSC National Credit Bank (PJSC Bank), a Ukrainian company, signed six pledge agreements with the defendant, Bank Frick & Co A.G. (Frick) in 2013, through which PJSC Bank pledged funds as security for various loans Frick made to three UK incorporated entities (Debtors). Each of the pledge agreements contained arbitration clauses.

The Debtors failed to repay the loans, and in 2015, Frick enforced the pledge agreements, which reduced PJSC Bank's assets resulting in insolvency proceedings against PJSC Bank. The claimant, Deposit Guarantee Fund for Individuals, was appointed as PJSC Bank's liquidator in Ukraine, and the liquidation was recognised by the English courts for cross-border insolvency purposes (for further discussion on cross-border insolvencies, see our recent blog here).

The liquidator alleged that the pledge agreements were fraudulent, and the Debtors did not carry out any legitimate business as they had been incorporated shortly before obtaining the loans and their shareholders were offshore entities. Consequently, in 2021, the liquidator brought a claim in the English courts against one of the Debtors and Frick, claiming that the pledge agreements were part of a dishonest money laundering scheme aimed at defrauding PJSC Bank's creditors.

Frick disputed the Court's jurisdiction to hear the claims and filed an application to stay the claim in favour of arbitration under s9 of the Act, on the ground that the pledge agreements provided for arbitration (Stay Application). In the alternative, and "only in the event that the Stay Application is unsuccessful", Frick applied for a summary judgment in its favour on the basis that the claimant did not have any reasonable grounds for its claim (SJ Application).

In correspondence, Frick contended that (i) the determination of the SJ Application would not constitute "a step in the proceedings" for the purposes of s9(3) of the Act, and accordingly, was not a submission by Frick to the Court's jurisdiction; and that (ii) on that basis, the SJ Application should be listed before the Stay Application. The claimant disagreed with both contentions.

The Court was accordingly tasked with determining the following two issues:

1. Whether by pursuing the determination of the SJ Application before the determination of the Stay Application, Frick was taking a "step in the proceedings" to answer the substantive claim; and
2. If the answer to the above question was in the negative, whether the SJ Application should be listed to be heard before the Stay Application.

Decision

Was Frick's conditional SJ Application a "step in the proceedings"?

On the first issue, it was common ground between the parties that an application for summary judgment made "expressly conditionally on a Stay Application not succeeding" would not constitute a "step in the proceedings" for the purposes of s9 of the Act; nor would seeking a hearing and making submissions at the hearing given the conditional nature of the SJ Application. This was based on the Court of Appeal decision in Capital Trust Investments Ltd v Radio Design TJ AB [2002] EWCA Civ 135.

The claimant, however, submitted that Frick's position that the SJ Application should be heard before the Stay Application meant that Frick had taken a step in the substantive proceedings, and was accordingly precluded from objecting to the Court's jurisdiction to hear the claim.

The Court disagreed. The SJ Application was made on an expressly conditional basis i.e. on the understanding that it would have taken effect "only in the event" that the Stay Application was unsuccessful. This would be the case regardless of the order in which the applications were heard. The Court accordingly concluded that Frick had not taken any "step in the proceedings" and had not waived its right to seek a stay on legal proceeding in favour of arbitration for the purposes of s9 of the Act.

Should the SJ Application be heard before the Stay Application?

On the second issue, the Court remarked that irrespective of the order in which the SJ Application and Stay Application were heard, there was a risk of incurring unnecessary costs.

Frick had submitted that the SJ Application be heard first as it was less complicated than the Stay Application, and it would, therefore, save time and resources to decide that application first. However, the Court determined that without a full consideration of the merits of the Stay Application, it was unknown whether the Stay Application would be more complex and time-consuming than the SJ Application. It was also clear that there were no overlapping issues which would militate in favour of the two applications being heard together. In fact, as the SJ Application was expressly predicated on the outcome of the Stay Application, the Court determined that it was a "matter of logic" that the Stay Application should be heard before the SJ Application and that there were no clear countervailing case management considerations to the contrary.

Comment

This judgment provides helpful guidance to defendants looking to contest the jurisdiction of courts in favour of arbitration. It illustrates that a defendant who is seeking a stay of court proceedings in favour of arbitration may also make an application for summary judgment which is expressly stated to be conditional on the outcome of the stay application.

The decision also confirms that in such situations, the most logical course is for the court to hear the stay application before the summary judgment application unless there are clear countervailing case management considerations to the contrary.

For more information, please contact Chris Parker, Partner, Liz Kantor, Professional Support Lawyer, Arushie Marwah, Associate or your usual Herbert Smith Freehills contact.