Parallel proceedings in English and non-EU courts: To stay or not to stay?

There have been two recent English High Court decisions (both in the Chancery Division) which considered the question whether English proceedings could and should be stayed where competing proceedings are brought in another non-EU jurisdiction. Catalyst Investment Group Ltd v Lewinsohn and others [2009] EWHC 1964 (Ch) and Pacific International Sports Clubs Ltd v Soccer Marketing International Ltd and others [2009] EWHC 1839 (Ch). These decisions provide further evidence of a rise in such jurisdiction battles, often involving US courts, where parties are jostling for what they perceive to be the most beneficial forum.

English courts in appropriate cases are required to apply the jurisdiction rules contained in the Council Regulation (EC) No 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the "Judgments Regulation"), and in particular the rule that defendants domiciled in an EU member state must be sued in the courts of their country of domicile. Based on that rule, the ECJ established in Owusu v Jackson (C-281/02) [2005] ECR I-1383 that English courts had no discretion to stay English proceedings if a defendant was domiciled in England even if a non-EU jurisdiction (in that case Jamaica) was clearly the more appropriate forum (see post). There has since been much discussion whether this principle also applies to cases where competing (earlier) proceedings have in fact been brought in a non-EU jurisdiction or whether an analogous application of the lis alibi pendens rule should allow English courts to stay proceedings in favour of the (earlier) non-EU proceedings. The lis alibi pendens rule which is incorporated in Articles 27 and 28 of the Judgments Regulation aims to avoid concurrent proceedings potentially resulting in inconsistent judgments and provides that where identical (ie between the same parties relating to the same action) or similar disputes are brought before the courts of two EU states, the earlier proceedings prevail and the later proceedings must or (where related rather than identical) may be stayed.

Catalyst v Lewinsohn is the first post-Owusu case in which this question has been tackled head-on, and Barling J decided that he was bound by Owusu and declined to stay English proceedings in favour of (earlier) proceedings brought in the US (Utah). However, in Pacific v SMI which predates Catalyst by only one week, Blackburne J indicated obiter that despite Owusu English courts are still able to stay proceedings against an English defendant on case management grounds.

The facts in Catalyst v Lewinsohn

The dispute related to a secured loan transaction involving the issue of promissory notes secured against the borrower’s IP rights. The key parties, Catalyst (a financial services provider) and Mr Lewinsohn (an investor and collateral agent) were domiciled in England. The only non-EU entity involved in the dispute was a BVI company owned and utilised by Mr Lewinsohn to hold the IP rights on behalf of the note holders.

The secured loan agreements and the notes which governed the relationship between the borrower and the note holders contained choice of law and jurisdiction clauses in favour of Utah law and Utah courts. However, the agreement which related to the giving of the security (the "Security Agreement"), and the agreement governing the relationship between the collateral agent and the note holders and the note holders themselves (the "Intercreditor Agreement"), although also governed by Utah law, did not include a jurisdiction clause.

Proceedings were brought in relation to different aspects of the dispute. In relation to one aspect of the dispute Mr Lewinsohn brought proceedings against Catalyst in Utah based upon allegations of fraud or alternatively negligent misrepresentation. Catalyst subsequently brought proceedings against Mr Lewinsohn before the English courts seeking negative declarations (the "Declaratory Proceedings"). In relation to another aspect of the dispute, Catalyst was first off the mark and brought proceedings in England against Mr Lewinsohn based upon allegations of breaches of contract and fiduciary and trust duties owed as collateral agent (the "Noteholder Proceedings"). Mr Lewinsohn reciprocated by bringing declaratory proceedings in Utah. It appears to have been accepted by all parties that both sets of proceedings were largely mirror images of one another and involved the same parties, the same claims and the same subject-matter.

Mr Lewinsohn asked the English court in relation to both sets of proceedings to stay the English proceedings based on forum non conveniens grounds in light of the competing proceedings which were pending in Utah. An initial attempt to rely on the exclusive jurisdiction clauses in the secured loan agreements and notes at least in relation to the Noteholder Proceedings was subsequently dropped by Mr Lewinsohn’s counsel as he accepted that they could not be transported into the Security Agreement or Intercreditor Agreement which were at the heart of the claim. The claim subject of the Declaratory Proceedings was not covered by any of the agreements mentioned above.

The judgment in Catalyst v Lewinsohn

There was no doubt that the English courts had jurisdiction under Article 2 of the Judgments Regulation in relation to the key defendants who were all domiciled in England. However, Counsel for the defendants argued that the court could and should give the lis alibi pendens rule "reflexive" effect either by exercising a discretion and staying its proceedings on forum non conveniens grounds (regardless of which proceedings had been started first) or, alternatively, by applying it strictly and ordering a stay in any event where the US proceedings were first in time (ie, in relation to the Declaratory Proceedings). Counsel submitted that Owusu was no bar to such an approach.

Barling J considered the views expressed in two leading English textbooks (Dicey, Morris and Collins on The Conflict of Laws, and Civil Jurisdiction and Judgments by Briggs) which advocated for a "reflexive" application of the exceptions to the domicile rule provided for in the Judgments Regulation. These rules provide that the domicile rule may be departed from where there are earlier proceedings in the court of another EU member state (Article 27 – lis alibi pendens), or where the parties have agreed to the jurisdiction of another EU member state (Article 23), or where certain subject matters of the dispute  (eg, land) are situated in another EU member state (Article 22). The argument advanced is that similar considerations must apply in relation to non-EU jurisdictions.

However, Barling J considered that the lis pendens rule was of a different quality compared to the rules relating to jurisdiction agreements and the location of specific subject matters. Whereas he conceded that there were "compelling" reasons for allowing a stay where parties had agreed to the jurisdiction of another (non-EU) jurisdiction or where a specific subject matter was situated in another (non-EU) jurisdiction, he found that the lis pendens rule was a pure "mechanistic (time-based)" rule for establishing the hierarchy of different courts all bound by the Judgments Regulation and was not transferable to non-EU courts. Applying the lis pendens rule to non-EU court proceedings would detract from the "principles of legal certainty and uniform application" of the jurisdiction rules which underpinned the Judgments Regulation.

It is noteworthy however that Barling J indicated that neither the Judgments Regulation nor Owusu affected the English courts’ "discretion which has long existed at common law to stay proceedings which are vexatious or oppressive or otherwise an abuse of process". He gives as an example a case where "a person submitted or participated in foreign proceedings and then sought to re-litigate the dispute [in England]"; although he emphasises that "the mere fact of a lis alibi pendens would not normally be sufficient to found such an application". As the stay applications did not rely upon an allegation of abuse this statement was obiter. It is noteworthy in this context that the fraud proceedings brought in Utah were not very far advanced at the time that Catalyst brought the Declaratory Proceedings.

Barling J also found that even if he had accepted that the lis pendens rule had some form of reflexive effect he would have found that England and not Utah was the proper forum as all key parties were domiciled in England and the dispute had significant connections with England.

The facts in Pacific v SMI

This was a dispute over the ownership of shares in the Ukranian football club Dynamo Kiev. Pacific claims that due to steps taken by Mr Surkis and other parties, its shareholding was diluted and eventually extinguished. Pacific issued proceedings against Mr Surkis and nine other defendants most of which were companies controlled by Mr Surkis. Only one of the defendant companies, ie, SMI, was incorporated in England. SMI had played a marginal role and had in fact been dissolved and removed from the Companies Register prior to the proceedings and was only restored on Pacific’s application for the purpose of the proceedings. All other defendants were either domiciled in Ukraine or BVI. The case had no other connection with England. All relevant events occurred in Ukraine and Ukranian law applied to the claims advanced by Pacific. Also, Pacific had already engaged in a string of proceedings in Ukraine connected with the dispute.

Pacific issued proceedings in England and served SMI in England and also managed to serve Mr Surkis in England during a "flying visit" to watch a football match. The BVI defendants were served in their jurisdiction based upon permissions to serve the proceedings out of the jurisdiction, whereas the Ukranian defendants had not yet been served.

Mr Surkis and the BVI defendants applied amongst other things for a stay or dismissal of the proceedings brought against them based upon forum non conveniens grounds, whereas SMI applied for a stay based on case management grounds, alternatively on the basis that there were related proceeding pending in Ukraine.

Mr Surkis and the BVI defendants argued that Ukraine was clearly the proper forum, whereas Pacific countered that even if Ukraine was the proper forum a stay should not be granted as it would not be able to obtain justice before the Ukranian courts.

The judgment in Pacific v SMI

Most of the judgment focused on whether substantial justice was available in Ukraine, a question which Blackburne J considered to be the principal issue and the "least straightforward to decide". He pointed out that the question was "peculiarly fact-sensitive" and eventually came to the conclusion, "not without considerable hesitation", that Pacific had not made out a sufficient case to show that it would not be able to achieve justice in Ukraine. Blackburne J considered the recent cases in Cherney v Deripaska [2008] EWHC 1530 (Comm) (upheld by the Court of Appeal in Cherney v Deripaska [2009] EWCA Civ 849 ) and Yugraneft v Abramovich [2008] EWHC 2613 (Comm) which dealt with similar concerns relating to the Russian courts and which had come to differing conclusions based upon the circumstances of the claimants and the facts of the case.

In relation to SMI Blackburne J accepted that English jurisdiction was firmly established under Article 2 of the Judgments Regulation and that Owusu prohibited any forum non conveniens considerations in relation to this defendant. He accepted that this could mean that there might be parallel proceedings against SMI in England and the other defendants in Ukraine, with a risk of inconsistent decisions and that this was far from satisfactory. However, he was not persuaded that this should compel him to allow the proceedings against the other defendants to go ahead in England as this would allow "the tail to wag the dog". He briefly considered whether Articles 27 and 28 of the Judgments Regulation should be given reflexive effect but did not need to decide the question as he found that there were no identical or related proceedings pending in Ukraine.

However, he indicated that should Pacific decide to bring parallel proceedings against the key defendants in Ukraine, it was open to him to exercise his general case management powers and to order a temporary stay against SMI. He pointed out that these case management powers were "unaffected by the Judgments Regulation and [were] not founded on grounds relevant to forum non conveniens". For guidance on the exercise of this inherent jurisdiction he referred to Reichhold Norway ASA v Goldman Sachs International [2000] 1WLR 173 which emphasised that these powers should only be exercised "in exceptional and compelling circumstances".

Comment

The judgments deal with a very controversial topic, namely whether the lis pendens principle contained in the Judgments Regulation should be extended to non-EU proceedings. They also deal with two very different scenarios and their outcome was clearly informed by the facts. In one (Catalyst) the key defendants were domiciled in England and there was a real connection with England and in the other (Pacific) most defendants were domiciled abroad and there was a very tenuous connection with England through a re-instated company which was clearly being used as an "anchor defendant".

Those advocating for an extension of the lis pendens rule seek to avoid parallel proceedings with the inherent risk of inconsistent judgments. Also, allowing parallel proceedings to proceed in EU and non-EU courts may result in a race to obtain an earlier non-EU judgment which, if enforceable in accordance with the private international law rules of the relevant EU country in which enforcement is sought, could result in the non-recognition of a later EU judgment (Article 34(4) Judgments Regulation) in that country.

Barling J himself emphasises that he was saying "nothing about what the law ought to be", but that he felt that he was bound by Owusu. Applied strictly and broadly the Judgments Regulation and Owusu appear to be saying that where a party is domiciled in an EU member state, proceedings can always be brought against that party in the courts of that member state regardless of whether earlier proceedings have been brought before non-EU courts based on alternative grounds of jurisdiction.

However, both judgments indicate that there are still potential get-outs, although these only appear to be available in extreme cases. Barling J refers to the court’s discretion at common law to "stay proceedings which are vexatious or oppressive or otherwise an abuse of process", and Blackburne J refers to the court’s inherent case management power to stay proceedings. The judgments suggest that both these powers are available even where the proceedings subject of the requested stay are founded on Article 2 of the Judgments Regulation and despite Owusu.

There is most certainly a question mark as to whether the ECJ would agree with this approach should the question be referred to the ECJ. This approach may be considered as re-introducing forum non conveniens and other discretionary considerations by the back door. After all, the fact pattern in Pacific v SMI is very similar to the Owusu fact pattern in which proceedings were brought in England on the back of one English defendant, and the other defendants were domiciled in Jamaica and the matter had no other connection with England. The only (perhaps decisive) difference was that the English defendant was not marginal in a sense that SMI was in the proceedings brought by Pacific. Also, the authority relied upon by Blackburne J (Reichhold Norway ASA v Goldman Sachs International [2000] 1WLR 173) to support the existence of a general case management power pre-dates Owusu.

This is unlikely to be the last word on the matter. It would not be surprising if this question was soon to be considered by the Court of Appeal and may possibly even be referred to the ECJ. In Owusu the ECJ refused to decide the lis pendens question. Soon it may need to.

Meanwhile, it still appears to be open to parties to argue for or against a stay of English proceedings brought in parallel with proceedings in another non-EU jurisdiction, although a stay would only be achievable in extreme circumstances. However, if parties wish to ensure that proceedings can be brought in a specific jurisdiction other than the potential defendant’s domicile and, indeed wish to trump the defendant’s domicile, it is advisable that they include a jurisdiction clause in their agreement. Although not expressly sanctioned by the ECJ, there are indications that the ECJ would allow parties to derogate from the defendant’s domicile (see Coreck Maritime GmbH v Handelsveem BV (C-387/98) [2000] ECR I-19337 ECJ) and English courts have in the past given effect to such jurisdiction clauses in favour of courts in non-EU countries (see for example Arkwright Mutual Insurance Co v Bryanston Insurance Co Ltd [1990] 2 QB 649; Konkola Copper Mines plc v Coromin [2005] EWHC 858 (Comm); and Winnetka Trading Corporation v Julius Baer International Limited and another [2008] EWHC 3146 (Ch)).

It should be mentioned in this context that the Judgments Regulation and its operation in the international legal order is currently under review. Although the question of "reflexive" effect has not been raised specifically in the Commission’s Green Paper it has been raised in responses to the consultation, amongst others in the response submitted by Herbert Smith LLP.