Commercial Court stays proceedings in favour of Ukrainian courts in landmark decision

The Commercial Court has stayed proceedings against an English domiciled defendant on the basis that the object of the proceedings was the validity of resolutions made by a Ukrainian company. In so doing, the court decided that the exclusive jurisdiction rules contained in Article 22 of the Brussels Regulation (EC No 44/2001) should be given "reflexive effect" in favour of non-EU state courts where the subject matter of the dispute falls within one of the grounds for exclusive jurisdiction provided for in Article 22: Ferrexpo AG v Gilson Investments Limited and ors [2012] EWHC 721 (Comm).

This is the first case in which an English court has ruled that it has the power to stay English proceedings brought against an English domiciled defendant where the dispute relates to the validity of decisions of the organs of a company situated in a non-EU state, in this case Ukraine.  Although obiter, the Commercial Court also indicated that it would have a similar power to stay proceedings where the other party has commenced earlier proceedings in the non-EU state which are sufficiently related to give rise to a risk of conflicting judgments.  The court expressly disapproved the earlier decision in Catalyst Investment v Lewinsohn [2009] EWHC 1964 (Ch), in which the court decided that it did not have the power to stay its proceedings in favour of earlier competing proceedings commenced in the US (see post).

If this decision is followed by other courts (and subject to any appeal) this will mean a greater risk that parties may not be able to avoid "unfavourable" jurisdictions by suing an English "anchor" defendant if the foreign proceedings are commenced first or the subject matter of the dispute falls within one of the categories which justifies the foreign court exercising an exclusive jurisdiction. Murray Rosen QC, Simon Bushell and Pamela Kiesselbach comment.

The debate

There has been considerable doubt as to whether an EU member state court which has jurisdiction based upon the domicile of a defendant may decline to exercise its jurisdiction or stay proceedings in favour of a foreign (non-EU) court where the subject matter of the dispute relates (for example) to rights in a property or to company law issues regarding a company situated in a non-EU state. Similar doubts exist as to whether an EU member state court may stay its proceedings if one of the parties has brought earlier identical proceedings (between the same parties regarding the same cause of action) or related proceedings in the courts of a non-EU member state.

This is as a result of the ECJ's decision in Owusu v Jackson (Case C-281/02) in which the European Court of Justice (ECJ) held that an EU member state court which had jurisdiction based upon a defendant's domicile did not have a discretion to stay proceedings on the basis that the courts of another state had a closer connection to the dispute and were therefore a more appropriate forum. Although there are provisions in the Brussels Regulation which require or allow a court to stay proceedings in the case of competing exclusive jurisdiction of another EU member state court based upon the subject-matter of the dispute (Article 22) or competing earlier proceedings commenced in another EU member state court (Articles 27 and 28), there is some controversy as to whether these rules should be given "reflexive effect", that is whether they should also be applied in favour of non-EU courts.

It is noteworthy in this context that as part of the on-going reforms of the Brussels Regulation there have been suggestions that all of these provisions should be amended to provide for a reflexive effect, but that the EU Commission's proposal only provides for a stay in the case of competing identical proceedings, but not in the other cases.

The facts of the case

The case relates to a long standing battle over the ownership of a Ukrainian mine fought between Mr Zhevago (a Ukrainian national acting through Swiss companies) and Mr Babakov (a Russian national acting through English companies).  Mr Babakov had brought proceedings in the Ukrainian courts seeking declarations that certain shareholders' resolutions of the Ukrainian mining company were invalid and that as a result his ownership of shares in the company should be reinstated.  Mr Zhevago countered with the English proceedings (suing Mr Babakov's English companies) in which he sought a declaration that his company was the lawful owner of the disputed shares.

Mr Babakov challenged the English court's jurisdiction on the basis that (i) the Ukrainian courts had exclusive jurisdiction and/or (ii) preference should be given to the earlier related Ukrainian proceedings as the relevant provisions in the Brussels Regulation should be applied reflexively. Mr Zhevago argued that the English court should exercise its jurisdiction based on (i) the English domicile of the defendant companies and (ii) the assertion that he would not get a fair trial in the Ukrainian courts.

The Court's decision

The judgment, which runs to over 58 pages, contains a detailed analysis of the issues and the case law relevant to two topics which are of increasing importance in jurisdiction battles involving courts which face issues such as corruption and political interference:

• Should the Brussels Regulation rules which provide for a stay in case of certain subject matters with a closer connection to another jurisdiction or earlier competing proceedings be given reflexive effect in favour of non-EU member state courts?
• How specific and detailed must evidence be to show that there is "cogent" evidence that a party faces a "real risk" of injustice in a foreign court?

In relation to the first issue the court decided that Owusu did not prevent the "reflexive" application of Article 22 Brussels Regulation as the principles underlying Article 22 were widely recognised across EU and non-EU legal systems. In doing so the court followed the majority view expressed by leading English private international law text books.

The court then had to decide whether the subject-matter of the dispute fell within Article 22(2), i.e. was "principally concerned" with the validity of shareholders' resolutions.  Whether the validity of a company's decision is the principal object of, or only incidental to, a dispute has been subject of a number of recent English court decisions and the ECJ decision in Berliner Verkehrsbetriebe (BVG), Anstalt des oeffentlichen Rechts v JPMorgan Chase Bank NA (Case C-144/10).  For a summary of these decisions click here.

The court took the view that when deciding whether a dispute is principally concerned with matters falling within Article 22(2) one should "not have regard only to what is pleaded in the particulars of claim or the form of relief sought by the claimants" but "must look realistically at what is the real nature of the dispute that is to be litigated" and that this nature may be determined by matters raised subsequently in the defence. Applying these considerations the court came to the conclusion that the dispute was principally concerned with the validity of the Ukrainian company's shareholders' resolutions and that therefore the Ukrainian courts should have exclusive jurisdiction.

The court went one step further and held, obiter, that it would also have stayed the English proceedings in light of the earlier related proceedings brought in the Ukrainian courts, i.e. that Articles 27 and 28 Brussels Regulation should also be given "reflexive" effect. This finding was however subject to the interesting wrinkle that the court found that after the joinder of the English claimant in the Ukrainian proceedings there were in fact identical proceedings (involving the same parties and the same cause of action) on foot and that in this respect the English proceedings had been commenced first.

In relation to the second issue, the court undertook a detailed analysis of the evidence provided by the claimant but came to the conclusion that the evidence was not sufficiently detailed or cogent to show that the claimant faced a real risk of injustice in the Ukrainian courts. For example the court found that expert evidence was unsubstantiated by independent evidence and that examples of flawed past decisions regarding Mr Zhevago's companies lacked relevant detail. Although the court observed that there were "grounds for some general concern about the independence of the judicial system in Ukraine" there was a lack of cogent evidence of a real risk that the claimant would not receive justice. The court found that "looking at the material as a whole, it is too fragmentary, too vague and often too unreliable in its nature to justify such a conclusion".

Comment

This is an important decision for parties involved in disputes connected with "unfavourable" jurisdictions. It will have to be seen whether this decision is appealed and, if so, whether there will be a reference to the ECJ on the issue of whether an English court may stay proceedings (involving an English defendant) in favour of the courts of a non-EU state.

Meanwhile, however, the decision provides evidence of a willingness of the English courts to stay proceedings where a matter falls within one of the exclusive jurisdiction categories listed in Article 22 (eg where a dispute relates to issues regarding the internal administration or decision making process of a foreign company) or where there are parallel foreign proceedings on foot which give rise to the risk of inconsistent judgments.

Put differently, it may not be enough to find an English "anchor" defendant in order to establish the unassailable jurisdiction of the English courts vis a vis the courts of a non-EU jurisdiction. A party who wishes to avoid the "unfavourable" jurisdiction will want to ensure that the English proceedings are commenced first, and that the subject matter of the dispute does not fall within one of the Article 22 categories, bearing in mind that these categories are to be given a restrictive interpretation.

The decision also provides important guidance on the strict standards applied to evidence required to show that a party is likely to suffer injustice in the foreign court. One of the very few examples in which a party was able to persuade the Court of Appeal that he would not get a fair trial in the otherwise appropriate forum is the case of Cherney v Deripaska [2009] EWCA Civ 849 in which evidence was adduced of the strong links between Mr Deripaska and the Russian government (and hence the risk of interference in the judicial process) and that Mr Cherney had received death threats and could provide evidence that he would be prosecuted based upon "trumped up" charges if he returned to Russia (see post).