ENGLISH HIGH COURT INJUNCTS PARTY FROM PROVIDING FUNDING FOR ICSID ARBITRATION

In the recent case of Koza Limited, Mr Ipek v Koza Altin Isletmeleri AS [2020] EWHC 654 (Ch) (subscription required) the English High Court granted an injunction against a UK-based company, Koza Limited, restraining it from providing funding for an ICSID arbitration brought by another UK corporation, Ipek Investment Limited (IIL), against Turkey.

Background Facts

This application related to the ongoing ICSID arbitration between UK-incorporated IIL and Turkey (the ICSID Proceedings). The ICSID Proceedings arose out of Turkey’s 2015 seizure of 22 companies which were previously part of the Koza Group, a multi-billion dollar corporation owned by Turkish businessman, Mr Akin Ipek.

Prior to and alongside the ICSID Proceedings, there has been a protracted dispute before the English courts concerning control of Koza Limited (Koza) which was contested between Mr Ipek and Koza Altin (Koza Altin) – a member of the Koza Group which had been placed under the control of Trustees by the Turkish government. In both the litigation and the ICSID Proceedings, Koza Altin and Turkey contend that the SPA, which placed IIL as the parent company of the Koza Group, was a forgery.

High Court Decision     

This case is the latest development in that protracted dispute before the English courts. Mr Ipek had unsuccessfully sought a declaration (before both the High Court and Court of Appeal) that the provision of funds from Koza to IIL to finance the ICSID Proceedings would be permissible in the ordinary course of Koza’s business. Following on from those unsuccessful actions by Mr Ipek, Koza Altin applied to the High Court for an injunction restraining (i) Koza from incurring, or committing itself to, expenditure upon the funding of the ICSID Proceedings, and (ii) Mr Ipek from causing Koza to take such steps.

The case presented two issues (i) whether the application represented an abuse of process in light of the Court of Appeal’s determination not to declare the provision of funding to be permissible, and (ii) the application of the American Cyanamid guidelines in determining whether the court should exercise its discretion to grant an injunction.

Abuse of process

The Court held that the application by Koza Altin did not represent an abuse of process. First, the application was an understandable response to the realisation that, despite Koza and and Mr Ipek failing to achieve the court’s blessing for the proposed conduct, they could nonetheless press on with that course unless restrained from doing so. Second, the Court of Appeal had declined to make either a positive declaration or a negative declaration in respect of whether funding would be in the ordinary course of business and had not had to consider the possibility of alternative funding sources in considering whether to make a positive declaration. As such there was no issue estoppel arising as the Court of Appeal had not finally determined whether Koza was free to fund and whether IIL would be able to rely upon alternative funding sources.

The Court further rejected Koza’s submission that an injunction cannot be granted because it would amount to an injunction on an injunction. The grant of an injunction is to be determined based on whether it is justified by the circumstances of the case.

American Cyanamid Principles

The well-known considerations for a court exercising its discretion to grant an injunction are set out in the American Cyanamid case [1975] AC 396: (1) whether there is a serious issue to be tried; (2) where the balance of convenience lies; and (3) whether damages would be an adequate remedy.

• The Court considered, in light of the fact that “there still remain reasons for very serious doubt as to the SPA’s authenticity”, that there existed a serious issue to be tried.
• When reflecting upon the balance of convenience, the judgment highlighted the clear prejudice from refusal of the application. There was a very high degree of likelihood that there would be, at the least, a significant depletion of Koza’s assets by the funding of the ICSID Proceedings with a consequent diminution of the value of Koza Altin’s subsidiary. By contrast, it would be significantly more likely than not that IIL would be able, through resources inferred to be available to Mr Ipek, to continue with the ICSID Proceedings. Accordingly, the Court considered it unlikely that there would be any prejudice to Koza if the injunction were granted.
• As to the adequacy of a remedy in damages for Koza Altin, the Court determined that there could be little confidence that financial compensation would be available - Koza’s own resources would be depleted by expenditure upon the ICSID Proceedings, and Koza Altin’s prospect of recovery would therefore depend in large part upon Koza being able to recoup money from other quarters via derivative claims against Mr Ipek and IIL (and it was part of Koza’s case that other sources of funding were not available).

Finally, the Court examined the cross-undertaking in damages from Koza Altin and found that whilst not of equivalent value with the ICSID Proceedings, the value of the claim made in those ICSID Proceedings was also not reflective of the loss from Koza in alternative funding. The Court therefore determined the cross-undertaking to be adequate, noting in so doing the “high degree of assurance that … at trial it will appear that the injunction was rightly granted”.

Comment

This was an unusual case based on very specific facts. As such, while the discussions regarding the American Cyanamid principles and whether or not the application constituted an abuse of process may be of general interest to arbitration practitioners, its wider implications may be limited.

However, the case does present an interesting illustration of how national courts may still have a role to play alongside ICSID proceedings.  While ICSID proceedings are, by their very nature, ‘non-national’, Mr Ipek’s decision to seek a ruling from the English court nevertheless indirectly gave a role to the English courts in those proceedings, ultimately enabling Koza Altin (and Turkey) to frustrate Mr Ipek’s attempt to fund the arbitration via the UK-incorporated Koza.

For more information, please contact Andrew Cannon, Partner, Jake Savile-Tucker, Associate, or your usual Herbert Smith Freehills contact.