Euroafrica Shipping Lines Co Ltd v Zegluga Polska SA & Anor

This is an application by the Defendants in 2001 Claim number 783 who are also the Claimants in 2003, Claim Number 101 (whom I shall refer to as ZP) for a stay of both actions pending the determination of various issues of Polish law by the Regional Court of Szczecin, Poland.

The dispute between the parties arises out of a Shareholders’ Agreement dated 31^st December 1996. The parties to that agreement were ZP, Fairlakes (Guernsey) Limited (a Guernsey subsidiary of ZP), Euroafrica Shipping Lines Co Ltd (to whom I shall refer as Euroafrica) and Pol Fin (a Cypriot subsidiary of Euroafrica), together with Polonia Lines Limited which was the joint venture company in which the other four parties were shareholders. The object of the joint venture was to run a liner service which was to be managed by Unity Line SP. ZOO.

ZP and Euroafrica each maintain that the other has committed an Event of Default (as defined in clause 10.1 of the Shareholders’ Agreement) entitling the innocent party to purchase the breaching party’s shares in Polonia Lines for 80% of the fair market value of those shares. ZP relies upon a change of control of Pol Fin, contending that Euroafrica owned Pol Fin at the date of the Shareholders’ Agreement but subsequently divested itself of that ownership, whilst Euroafrica relies upon a breach of confidentiality by ZP. The two sets of proceedings reflect those two claims with the party alleging breach in each case as the Claimant. The Shareholders’ Agreement is governed by English law and exclusive jurisdiction was given to the English Courts.

On 20^th October 2000, ZP served a Notice of Default alleging breach of clause 10.1(f) of the Shareholders’ Agreement in relation to Pol Fin. Euroafrica served a Notice of Default on 18^th December 2000 alleging breach of clauses 11.3 and 10.1(a). Further Notices of Default were served by ZP on 4^th January 2001 and by Euroafrica on 7^th August 2001.

On 16^th May 2001, ZP launched a pre-action disclosure application in the Chancery Division against Euroafrica and Pol Fin but prior to the return date of that application, Euroafrica commenced proceedings in the Commercial Court on 16^th July 2001. Disclosure of various documents was given by Euroafrica and in due course ZP commenced English proceedings on 26^th July 2002. The Chancery proceedings were transferred to the Commercial Court and a Trial date is fixed for both sets of proceedings to be heard together on 7^th July 2004 with an estimate length of 12 days.

The application as formulated by ZP was that:-

“1.

Euroafrica’s proceedings 2001 Claim No. 783 and its defence to proceedings 2003 Claim No 101 be stayed, alternatively that the court makes such other order as it thinks fit, together with such declarations and directions as are appropriate ….

because …

Resolutions purportedly passed by the shareholders of Euroafrica on 31 October 2002 and 30 December 2002 were and are complete nullities (and/or otherwise invalid and/or ineffective), and changes in the membership of the Supervisory Board and Management Board of Euroafrica on and after 31 October 2002 and subsequent issues of new share capital were and are ineffective, because they arose from the null (and or otherwise invalid and/or ineffective) resolutions.”

Towards the end of its Skeleton Argument, ZP indicated that one possibility for the Court was to order a limited stay of the proceedings until such time as proceedings brought by ZP against Euroafrica in Szczecin (the Polish Proceedings) were determined.

The basis upon which ZP’s application in these two actions is made is that Euroafrica has, since 31^st October 2002 or alternatively 4^th November 2002, been unable to take any material steps in the action or instruct any lawyers to take such steps because its Management Board and Supervisory Board are not properly constituted in accordance with its constitution, nor in accordance with the law of Poland. It is common ground that the self same issues arise in the Polish proceedings. ZP contends that on 31^st October 2002, resolutions were improperly passed by Euroafrica at its Extraordinary General Meeting because, contrary to the provisions of Polish Law, two companies which were indirect subsidiaries of Euroafrica voted at those meetings as shareholders. There is certainly evidence to suggest that APEAR (which owns 25.8%) and OFR (which owns 62% of the total shareholding in Euroafrica) are each indirectly owned by Euroafrica itself and there are admissions (for the purpose of the want of authority application) by Euroafrica that they are subsidiaries within the meaning of Polish law.

It is common ground that since 1^st January 2001 under the Commercial Companies Code of Poland, although this was not the statutory position beforehand, a company’s subsidiaries are not allowed to hold shares in it. There was no evidence before me to suggest that the shareholdings had changed after that date and the effect of such a continuation of the position after January 2001 is in dispute.

i) Prior to 31 October 2002 Euroafrica’s Supervisory Board consisted of Messrs Badnarski, Gora, Salamonowicz, Oziewicx and Wasniewski, and the Management Board consisted of Messrs Matuszewski, Wysocki, Ligierko and Szreder.

If the Supervisory Board was not properly constituted at the EGM of 31^st October 2002, because of the voting powers exercised by APEAR and OFR, the changes in the share capital and the changes in the Management Board thereafter, effected by the Supervisory Board would be invalid. Equally further resolutions at the EGM on 30^th December effecting changes to the Supervisory Board where APEAR and OFR voted would be subject to the same objection as the resolution of 31 October 2002. If such were the case, there would only be two currently extant valid members of the Management Board. It is disputed whether those two could authorise Polish lawyers and through them English lawyers to conduct proceedings.

It is accepted by both parties that substantial issues arise in Polish law in relation to the question of the authority of the Management Board and Supervisory Board. It is also accepted that these self same issues arise in the context of the claim in the Polish proceedings which, it appears, is likely to be heard in the next two to three months, although no date is fixed. It is said that a decision by the Court might be given within a month of the conclusion of the hearing and that an appeal from any decision by that Court could be heard within two to three months thereafter. Should there be a stay of the conjoined English proceedings pending determination of the Polish proceedings and a likely appeal, it is inevitable that the trial date, fixed for 7^th July 2004, would be lost.

Although the matter was framed much more widely in the Application Notice, on the first day of the hearing, at the outset when I raised the issue, it became apparent that the Claimant’s application was limited to seeking a stay pending determination of the Polish proceedings on the basis that there were significant issues of Polish law to be determined, rather than requiring those issues to be determined by this Court as the basis of a permanent stay. There was some suggestion that this Court should make a ruling that there was, under Polish law, a prima facie case of lack of authority on the part of the current management to act for Euroafrica and then stay the matter for the Polish Court to make a definitive decision thereon. Since it was accepted by all that there were substantial issues of Polish law in relation to the invalidity or “non- existence” in Polish law of these shareholder resolutions, the presence of the Polish experts to give evidence thereon in this application proved to be unnecessary. Both parties agreed that the application could proceed on the basis that there were issues of Polish law on those matters which had to be determined somewhere, and that these would fall to be determined by the Szczecin Court in due course. The substantial nature of these Polish law points was, it was said a factor to be taken into account in deciding whether or not a stay was appropriate.

Other factors arose for consideration including the issue raised by Euroafrica, which it maintained was the real point which mattered, namely the nature of the retainer given to Richards Butler who were their Solicitors, through Wybranowski Nowicki Law Office, Euroafrica’s Polish Attorneys-at-Law. Euroafrica maintained that there was a discrete and decisive issue here which could be resolved in their favour based upon the decision of the Court of Appeal in Donsland Limited v Van Hoogstraten [2002] EWCA Civ. 253 and the nature of the general retainer of Richards Butler in the context of the English proceedings.

Evidence of Richards Butler’s engagement as lawyers by Euroafrica was put forward in the form of statements from Mr East of Richards Butler and Mr Nowicki of Wybranowski Nowicki Law Office (WNLO), the Polish lawyers through whom Richards Butler received instructions. I also heard evidence from Professor Soltysinski and Dr Wiercinski who gave expert evidence of Polish law. In addition, because many of the points arose late, I allowed ZP to adduce evidence in the form of a further statement from another Polish lawyer, Mr Zakrzewski. ZP did not wish to cross-examine Mr East and Mr Nowicki’s evidence, although the subject of some cross-examination, was in one respect at least unchallenged.

The effect of Mr East’s evidence and the unchallenged evidence of Mr Nowicki was that, before 31^st October 2002, when it is alleged that Euroafrica’s constitution was breached, Richards Butler had been instructed by Euroafrica, via Mr Nowicki to act for Euroafrica in relation to the application for pre-action disclosure commenced in the Chancery Division by ZP, to prosecute the action in the Commercial Court in respect of ZP’s breach and to defend the subsequent action begun by ZP. In each case, Richards Butler was instructed under the terms of a general retainer in respect of the application or the actions in question. No limit was placed on the scope of Richards Butler’s instructions in any respect in handling these matters on behalf of Euroafrica.

Mr Nowicki’s undisputed evidence was that since 15^th April 1999, WNLO had been retained to provide Euroafrica with all of the legal services which they required both advisory work and litigation. Euroafrica were a major client of WNLO, representing about 50% of the work which they conducted and, as with many shipping lines, there was a wide range of legal advice required and a great variety of litigation to be conducted, ranging from ordinary debt collection to major disputes. WNLO rented office space from Euroafrica and was in the same building with the result that both Mr Nowicki and his partner were in day-to-day contact with members of the Board and instructions were given informally.

Both before and following the execution of an agreement dated 15^th April 1999 to which I will refer in a moment, Mr Nowicki’s evidence was that the invariable pattern of working was that he or his partner would be handed a dispute to deal with and would be expected to see the dispute through to the end, taking whatever steps WNLO considered necessary to protect Euroafrica’s interest. The scope of WNLO’s retainer was not limited in any way. A wide power of attorney was granted in respect of all claims connected with the activities of the company on 12^th October 1999 which related to the conduct of Polish litigation. New powers of attorney were given in November 2002 and February 2004 because of new employees or partners in WNLO.

The agreement of 15^th April 1999 which was signed by the President and Vice President of the Management Board of Euroafrica provided for WNLO to provide legal services to Euroafrica. Among the duties of WNLO was “ensuring representation before Courts” which, it was common ground between the experts, included foreign Courts. Paragraph 2 of that agreement provided that the services should be rendered by WNLO to Euroafrica “by the oral or written order of the ….. Management Board or its individual members or on the grounds of the power of attorney granted ….. to WNLO” (in translation – so far as relevant).

Mr Nowicki testified that, following the ZP service of a Notice of Default on 20^th October 2000, he was retained to deal with all aspects of the disputes between ZP and Euroafrica under the Shareholders’ Agreement without any limit to his instructions. He was expected to take whatever steps were necessary to protect Euroafrica’s interests until the conclusion of the dispute. In practice he would inform the President or Vice President or both of the steps being taken in the course of his daily contact with them. The litigation in England was only one part of a complicated, long-running and acrimonious series of disputes between Euroafrica and ZP and its parent company. Following service of the Notice of Default by ZP he spoke to the President and Vice-President who were happy to follow his advice that Richards Butler should be retained. He accordingly retained Richards Butler in relation to the dispute without limitation on their role. His evidence was the same in relation to the application for pre-action disclosure, the commencement of proceedings against ZP in England and the defence of the ZP proceedings in England. In each case he discussed with the President and Vice President the need to instruct Richards Butler, following which they so instructed him and he instructed Richards Butler to do all that was necessary in the context of each piece of litigation.

It is clear from the recent amendment to Euroafrica’s points of claim namely paragraphs 33A, 33B and 33D that the primary case advanced by Euroafrica is that this retention of Richards Butler by Euroafrica originated before any of the events which are said to give rise to a constitutional problem at Euroafrica and that this retainer continues regardless of any such constitutional issues. The retainers have never been terminated which means, on Euroafrica’s case, that Richards Butler is authorised to conduct the proceedings until they are terminated.

Paragraph 33C of the amendment relied also on the power of attorney to which I have made reference and which was put forward as the basis upon which permission to amend was sought. When the matter came to the hearing however Euroafrica eschewed any reliance upon this paragraph and upon the power of attorney as constituting a separate ground for authority. Reliance was based fairly and squarely upon the retention of Richards Butler through WNLO in the manner I have already outlined. Complaint was made by ZP that the pleading of Euroafrica’s case on this aspect does not comply with CPR 16 PD 7.3 and 7.4 because the Agreement of 15 April 1999 was not attached to the pleading and no details were given of the oral instructions and acceptance of them. ZP maintained that the pleaded case was wholly dependent on the compass of the power of attorney as sufficient authority to instruct foreign lawyers. Although the pleading is deficient, as non compliant with the Practice Direction, it is clear from the use of the word “further” in paragraph 33C that reliance on the power of attorney was only part of the case being put, even though the emphasis was on it. Nonetheless the essential facts were set out clearly in Mr Nowicki’s first statement and his second statement, which I allowed to be introduced in evidence, exhibited the written Agreement. The facts involving an earlier retainer upon which Euroafrica relied were clearly set forth.

There was evidence from Professor Soltysinski and Mr Zakrzewski that it was customary in Poland for a Polish lawyer to obtain a power of attorney specifically authorising him to retain a foreign lawyer. Mr Nowicki and Dr Wiercinski had never heard of any such custom. That this is a practice which is common and well established with some firms, I have little doubt. It was accepted by all that it would constitute good practice. Nonetheless the evidence fell far short of showing that there was any custom which was universally applicable so as to invalidate any instructions given to a Polish lawyer to instruct foreign lawyers without such a power of attorney. Dr Wiercinski drew the distinction between matters of prudent practice and “customs” which could influence the construction of an agreement such as that of 15^th April 1999.

Professor Soltysinski was specifically asked about this in cross-examination and accepted that an oral instruction, accepted by WNLO to instruct a foreign lawyer, would be a valid “commission” under that Agreement, although there might be evidential problems in establishing that authority had been given to WNLO to do this in the absence of a power of attorney. A commission, which was required under paragraph 2 of the Agreement of 15^th April 1999 to instruct a foreign lawyer, could be given and accepted orally or in writing. I am entirely satisfied on the evidence that oral instructions were given and agreement reached that Richards Butler should be instructed by WNLO and that they were instructed without any limitation on their authority in relation to the proceedings in which the current applications arise.

As WNLO’s Counsel, Mr Luke Parsons Q.C. pointed out, the question of Richards Butler’s retainer is a question of English law, provided that WNLO had authority to conclude it for Euroafrica. There can be no doubt that the engagement of Richards Butler by Euroafrica is a contract governed by English law and it was not argued to the contrary. In such circumstances the contract of engagement is clearly established on the evidence as Mr Nowicki was expressly authorised to create such a contract between Euroafrica and Richards Butler and there is no provision of Polish law which negates that authority. The fee notes which have been rendered and upon which appear written comments from the members of the Management Board authorising payment reinforce this conclusion.

In Donsland Ltd v Van Hoogstraten [2002] EWCA Civ 253, the Court of Appeal had cause to consider the nature of a Solicitor’s retainer. In that case Solicitors were instructed to act on behalf of a company whose sole director died, leaving them in a position where there was no-one from whom they could take instructions until such time as Letters of Administration had been granted and an administrator appointed who could give instructions for the company. As Sir Anthony Evans made plain at paragraph 29, there is a basic and elementary distinction to be drawn between a Solicitor’s authority to conduct proceedings on behalf of a company and the Solicitor’s ability or inability to obtain instructions from a person acting on behalf of the company. The position here is that it is the ability to obtain instructions from a person acting on behalf of the company since 31^st October 2002 which is in question.

The effect of the Court of Appeal’s decision is clear and appears from paragraphs 16 to 27 of the Judgment of Lord Justice Tuckey.

It is clear therefore that as a matter of principle, a Solicitor who is employed on a general retainer in a piece of litigation has the necessary authority to do all that which is necessary to bring the litigation to a conclusion. Whatever difficulties there may be in obtaining instructions at any particular point, that authority persists and acts done by the Solicitor will be done as agents for the client in such a way as to bind the client. ZP maintained that, regardless of the scope of the authority originally given to Richards Butler, their authority to act came to an end when it was, or should have been, appreciated that there was a substantial dispute as to the validity of the instructions being received from those purporting to represent Euroafrica. This argument confuses the very distinction drawn in Donsland.

It follows from this that whatever difficulties Richards Butler may have in obtaining instructions from persons who are properly to be regarded as validly constituted members of the Management Board of Euroafrica, they currently have, as they have always had since the commencement of the proceedings, authority to act for Euroafrica. This is so, regardless of the make-up of the Supervisory Board, the Management Board or the identity of the shareholders, questions about which all arose after the general retainer in these pieces of litigation had come into existence.

ZP, through their Counsel Mr Michael Lyndon-Stanford, Q.C., maintained that even if Richards Butler originally had authorisation, there were good reasons for granting a stay. He pointed to the difficulties facing Richards Butler in obtaining instructions which they could be sure had properly emanated from Euroafrica. He maintains that the conduct of the litigation might be different if persons other than those currently giving instructions to Richards Butler were those to whom Richards Butler had to look for decisions. In an acrimonious dispute where parties think ill of the individuals running the dispute on behalf of the other side, it was suggested that discovery might not be effected properly, that evidence might be marshalled differently, that decisions as to who might be called as a witness could be affected and that it would not be the same trial, whatever the management. To this, in my judgment, there are two answers:

For the purpose therefore of the conduct of the main litigation, the issues which arise in the Polish proceedings as to the proper constitution of Euroafrica’s Supervisory Board, Management Board and shareholders are wholly irrelevant. Whether other management might have different ideas about settling the actions is nothing to the point.

ZP contended that if a Judgment was given by this Court in July and the Polish Court decided, either in the meantime, or thereafter, that the Management Board was improperly constituted and could therefore not give proper instructions to Richards Butler, the Judgment of the English Court could be set aside on the basis that it was reached in the absence of Euroafrica. That would result in the need for re-litigation of the whole proceedings. It was contended also that, in such circumstances Richards Butler could then be held liable for all the costs incurred in the trial.

The fallacy in this argument is plain when regard is had to the Donsland decision. If Richards Butler have continuing authority for Euroafrica until the conclusion of the trial in this country, they cannot be liable to ZP for breach of warranty of authority and their conduct of the proceedings on behalf of Euroafrica binds Euroafrica so that it can have no sensible argument, regardless of the proper constitution of its Management Board or Supervisory Board, that it could re-open the litigation after Judgment. If Euroafrica succeed, then absent the judgment being induced by fraud, ZP cannot complain. If ZP succeed, Euroafrica could not succeed under CPR 39.3(5) without showing that they had a reasonable prospect of success in circumstances where, absent negligence on the part of their lawyers, the matter would have been fully fought and determined on what are relatively narrow issues. Thus the only issue which arises, so far as Richards Butler’s position is concerned is, it appears to me, the possibility that they could be open to a claim from Euroafrica, if they negligently conducted the proceedings on the basis of instructions from those who were not authorised to give them. None of this would, in any event, be of any concern to ZP.

For the same reason, the Law Society Guide to Professional Conduct of Solicitors is of no assistance to ZP. Paragraph 12.08 provides that it is essential for a Solicitor to refer any matter of doubt to the client and it is not good practice to rely on implied authority for non-routine matters. Equally, paragraph 12.12 provides that a Solicitor cannot terminate his retainer without good reason but an example of good reason is the situation where the Solicitor is unable to obtain clear instructions from a client or where he cannot act without being in breach of the rules. All of this goes to the relationship of Richards Butler to their client Euroafrica, but does not impinge upon the position of ZP and enable it to say that Richards Butler should not continue to act.

The current position so far as the English proceedings is concerned is as follows. Following a period in 2003 when very little action was taken by either side, Mr Justice Simon, on 10^th October 2003 adjourned the hearing which had been fixed for February 2004 to July 2004. It was at that hearing that the question of absence of authority to conduct the proceedings was first raised as a possibility, although it was not launched until 4th November 2003 ZP had in their possession an Opinion from their expert Professor Soltysinski since 20^th March 2003 and in translation since 22^nd April 2003. This suggested that consideration be given to whether the resolutions of 31^st October 2002 should be regarded as non-existent. When launched, the report of Professor Soltysinski suggested that (on the material then available to him) there was no problem in Euroafrica fighting the English proceedings if authority was given by the two remaining Board members whose appointment predated 31^st October 2002. Richards Butler and WNLO promptly obtained a letter of authority from those directors, but it is now an issue whether that, in itself, is enough.

Criminal proceedings had been instituted in April 2002 leading to an Indictment on 20^th May 2003 and a Judgment on 4^th December 2003. ZP itself started civil proceedings in Poland (the Polish proceedings) on 24^th July 2003 although service had to be effected by the Court and was not achieved until October 2003. There is therefore some force made in the point made by Euroafrica, that this application could have been made some time before it was. If ZP had produced a prima facie case on affidavit or witness statement to show that there were serious issues of Polish law on the question of the authority of the Board to give instructions to WNLO and Richards Butler, in the context of an application for a stay pending the determination of those issues in Poland, there would have been no need for the volume of Polish law evidence produced, (which was done so that the Court here could make a determination of the Polish law issues), the hearing would have been shorter and a date in December might have been obtained for it.

The trial is fixed for July 2004 and a certain amount of preparation has already been done for it. Euroafrica says that its witness statements are in an advanced state of preparation, having listed 11 witnesses in its case management information sheet. ZP says that it has not got very far in relation to its statements for the 12 witnesses it names in its information sheet. Disclosure has been completed and witness statements are due for exchange on 22^nd March 2004, following an agreement to put back that date from 8^th March because of the current application. Experts’ reports have yet to be exchanged and, whilst the build-up for the trial has some way to go, it is plain that much work has already been done. Not all of this would be lost however should a stay be imposed. What is plain, however, from the way in which this litigation has been conducted and from the other litigation in being and from the very nature of the dispute is that there is a continuing war between the individuals involved on each side. There is a need for finality so that the parties do not continue to indulge their currently insatiable appetite for litigation. If there is to be any settlement at all, the focus that an early trial date gives will be of assistance.

It is also worth reflecting upon the nature of the exercise on which ZP have embarked. It is hard to see the point of the challenge to authority here, when there must be a mechanism for rectifying this, however difficult that mechanism may be to operate. There can be no doubt that it is in Euroafrica’s interests to fight the litigation, unless it can be settled so that the identity of the management and shareholders is of no consequence. The issue as to which party, if either, is entitled to purchase the other’s shares in Polonia Line for a discounted price is one of importance to the parties which will have to be litigated at some stage unless there is a settlement. There is nothing in the arguments as to the authority of the current management or as to the identity of the proper shareholders which impacts upon the determination of the central issues in the action. There is therefore no reason why the matter should not be heard in July rather than further down the line, whether it be in seven or eight months (ZP’s estimate) or nearer two years (Euroafrica’s estimate). It is hard to see therefore why ZP are raising this matter unless it be simply as a source of aggravation to Euroafrica or as a means of obtaining the postponement of the trial date.

There would therefore be prejudice to both parties in imposing a stay because the matter will be delayed with all the opportunities for further acrimony between them whereas I can see no prejudice in the matter proceeding in July, if there is no realistic possibility that the matter would ever have to be re-litigated, (as I have found there is not), in the light of the decisions of the Court in Szczecin.

The fact that the Szczecin Court has stayed proceedings relating to the Unity Line dispute (over actions taken in the management of that company) pending the decision of the same Court in the Polish proceedings is therefore neither here nor there. If the trial of the conjoined litigation in this country in July will bind ZP and Euroafrica and Richards Butler have authority to conduct the proceedings on behalf of Euroafrica, regardless of the issues raised in the Polish proceedings, in the Unity Line proceedings and by the Polish lawyers’ expert evidence produced for this application, there is no reason why a stay should be granted.

In these circumstances, ZP’s application must fail.

In addressing me upon the substance of the application, both Counsel made points which appeared to me to be addressed to the question of costs as much as to the stay application. Whilst I make no final decision on costs, I give the following indications in order that any argument on costs may be more focused:

Given the relative success and failure of the parties, subject to being addressed as to any further peculiarities, it appears to me that the only question for the Court to determine is the extent and basis upon which any costs order should be made in Euroafrica’s favour.