The Republic of Kazakhstan v Istil Group Inc

I have before me an application by the defendants, Istil Group Inc., for further security in the sum of £133,539 under Civil Procedure Rules 25.13.2(a) and 25.13.2(g).

Istil, as I will call them, are steel traders whose predecessor in 1995 bought steel from SJC Karaganda Metallurgical Combine (“Karmet”), a Kazak state enterprise, which owned a very large steel mill in Kazakhstan. Karmet was or became in grave financial difficulty. The Republic of Kazakhstan, which is the claimant, which owned Karmet, insisted on Istil’s predecessor, Metalsrussia Corp. Limited, of the British Virgin Islands (“BVI Metalsrussia”), making advance delivery of raw materials to the value of steel to be delivered to Istil.

Proceedings were commenced by BVI Metalsrussia in the Commercial Court in Paris against the Republic in respect of a number of contracts for the purchase of steel from factories belonging to the Republic. The Republic contested jurisdiction on the ground that it was not a party to those contracts but that if it was then there was a binding LCIA Arbitration clause and that, alternatively, it was entitled to sovereign immunity. BVI Metalsrussia contended that there was no claim against the Republic under the contracts themselves, together with their arbitration clauses, but only under separate undertakings given during the procedures relating to the insolvency of Karmet. The Commercial Court in Paris, and subsequently the Court of Appeal, rejected the contention that the Republic was party to any arbitration agreement, but declined jurisdiction on the grounds of sovereign immunity.

BVI Metalsrussia then commenced LCIA arbitration proceedings under three contracts for the sale of rolled steel, dated 1994 and 1995, seeking to recover the advance payments that had been made and damages. The first contract was expressed to be between an entity named Kazakhstan Sauda as sellers and Metalsrussia Corp. as buyers. The second and third contracts were between Oltex Trading Corporation as sellers and Metalsrussia Corp. as buyers. The Republic contested the jurisdiction of the arbitrators. In the course of the arbitration it appears that BVI Metalsrussia had merged with its parent company which in turn had merged with Istil, the claimants. By a final award of 1^st June 2004 in the sum of about $6 million, the arbitrators found that Karmet was, as principal of the named parties, the seller and that it had made no delivery under two of the contracts and short delivery under the third.

At issue in the arbitration were, firstly, whether BVI Metalsrussia were the buyers, or whether the true buyers were a Metalsrussia company which became known as HK (for Hong Kong) Metalsrussia; and, secondly, whether the Republic had become a party to the contracts and the arbitration clauses therein as successor to Karmet by virtue of certain provisions of the agreement by which the Republic had sold the mill to a company in the Mittal Group. On both of those issues Istil succeeded. The tribunal also held that Istil had succeeded to BVI Metalsrussia’s claims as a result of the two mergers to which I have referred.

On 13^th July 2004 the Republic issued applications in this court under s.67 and s.68 of the Arbitration Act 1996. The application under s.67 contends that neither Istil nor the Republic was a party to the arbitration agreements contained in the contracts in respect of which Istil was claiming in the arbitration; secondly, that Istil is bound by the decision of the Paris Commercial Court to the effect that it was not bound by those agreements; and, thirdly, that it repudiated any arbitration agreement by its contentions made before the Paris Commercial Court and the Paris Court of Appeal. The application under s.68 contends that the arbitration tribunal failed to give the claimant an adequate opportunity to deal with one particular allegation and that the tribunal, having held that the question of limitation was to be determined as a matter of Kazak law, wrongly applied French or Belgian law to the question of whether the limitation period had been interrupted.

Thereafter, communications took place between Penningtons, Istil’s solicitors, and Messrs. Richards Butler, the solicitors for the Republic, in relation to security for costs. On 13^th July 2004 Richards Butler had advised Penningtons of the issue of proceedings, and those proceedings had been supported by the second witness statement of Mr. McKenzie-Smith of Richards Butler of 9^th July 2004. That witness statement had as one of its exhibits a statement on Kazak law to which I will hereafter refer.

On 15^th July Penningtons told Richards Butler by fax that they had instructions to accept service and suggested that the Republic should provide security for costs in the sum of £10,000 for a leave application, which they then thought to be necessary, and £40,000 in respect of the appeal. On 22^nd July Richards Butler enclosed by way of service the claim form and other necessary documents. In the course of that letter they noted the comments made by Penningtons about security for costs and expressed the initial view that: “Given the nature of the application, it is by no means clear that there is an entitlement to security”, and also expressed the view that any application for security at that stage would be premature.

On 5^th August 2004 a without prejudice conversation took place between Mr. David Warne of Richards Butler and Mr. Henry Page of Penningtons in which Mr. Warne, according to his attendance note, indicated that he did not accept that there was any right to security but that he would be prepared to recommend to the Republic that security be provided in the amount of £30,000 within 42 days. His note records that he thought that the £40,000 proposed was excessive and that this was a one and half- to two day-hearing case, and that on that basis it was clear that the Commercial Court could not accommodate the hearing before January 2005, which gave a relatively relaxed timetable for the provision of security.

On 10^th August Penningtons faxed to Richards Butler a one-line fax which read: “We would accept securities(sic) for costs in the sum of £30,000”. On 14^th September Richards Butler wrote to Penningtons confirming that their clients were agreeable to providing security for costs in that amount, that is to say £30,000, within 42 days of final agreement being reached, in respect of the entirety of the proceedings. Mr. Henry Page faxed a copy of that letter to

The letter of 14^th September to which I have referred may either be regarded as an acceptance of the offer from Penningtons of 10^th August to accept security in the sum of £30,000 for the entirety of the proceedings, or alternatively if the reference to the entirety of the proceedings introduces a new element, as a counter-offer. The letter of 23^rd September in which Penningtons reserved their position should their estimate of costs prove to be insufficient was either a counter-offer or a new offer because the purport of the letter was to the effect that £30,000 would not necessarily be the sum for the entirety of the proceedings.

On 5^th October Richards Butler faxed to Penningtons thanking them for their fax of the 23^rd and saying this:

“It has been apparent from our earlier discussions regarding security that your clients’ request was for security for costs in respect of the Commercial Court proceedings as a whole. It was not a request for security to any particular stage in the proceedings. Additionally our fax of 14^th September makes it plain that the agreement in respect of the provision of security for costs is in respect of the entirety of the proceedings; and in a matter of this nature one would not expect otherwise. Accordingly we cannot accept that it is now open to your clients to reserve their position ‘should our estimate of costs prove to be insufficient.’ Agreement has been reached on the terms set out in our fax of 14^th September.”

Then on the next page of the fax is the last paragraph which reads:

“Please let us have your confirmation forthwith that this is accepted. When that is received we will come back to you with proposals as to how the security is to be provided.”

On the same day Mr. Henry Page wrote in manuscript on the first page of the letter the following words:

“We agree to the amount of costs as security for your application to the Commercial Court. Not any appeal therefrom – Penningtons, 5.10.04.”

He faxed the letter with that manuscript to Richards Butler.

It seems to me that in their letter of 5^th October 2004 Richards Butler were inviting Penningtons to accept that it was not open to Istil to reserve its position and claim for more than £30,000 should the estimate of costs turn out to be insufficient, and that the security was to be provided on the terms set out in the fax of 14^th September, namely that it covered the entirety of the Commercial Court proceedings.

When Mr. Henry Page wrote the words that he did on the first page of that letter, it seems to me that he was giving the confirmation sought, namely that the £30,000, and not some other sum, would cover the proceedings and the whole of the proceedings and that it would not be open to his clients to seek further sums should the estimate of costs prove to be insufficient. I do not accept that by reason of the positioning of the manuscript on the first page of the letter he was confining his assent to a reconfirmation of the terms of the 14^th September letter, but leaving open the question of whether it was open to Istil to claim some larger sum if the estimate should prove to be insufficient. In my judgment he should be taken as giving the confirmation that was sought in the last paragraph of the letter of 5^th October.

On 14^th October Richards Butler faxed to Penningtons saying:

“Thank you for returning to us a copy of our fax to you of 5^th October confirming, in manuscript, that the security of £30,000 is to cover the entirety of the Commercial Court proceedings. For our part we confirm that the security is not intended to extend to any proceedings by way of appeal from the Commercial Court decision. This is not to be taken as any acknowledgement that your clients would be entitled to security in respect of any such appeal. We look forward to receipt of your clients’ evidence.”

Against that, Mr. Henry Page wrote in manuscript:

“Thank you. This will be served tomorrow. Please confirm method proposed for security.”

Accordingly, the fact that the £30,000 was to cover the entirety of the Commercial Court proceedings but not any appeal was thereby confirmed.

On 23^rd November Richards Butler gave an undertaking limited to £30,000 by way of security. On 18^th February 2005 a case management conference took place before Morrison J., who ordered a trial of these proceedings with a provisional time estimate of three to four days, and gave permission to both parties to adduce expert evidence of Kazak law. On 28^th May the claimant applied for permission to adduce expert evidence of French law, and I gave that permission on 16^th September.

The upshot of that, as it seems to me, is that by 14^th October 2004 Richards Butler had agreed with Penningtons, each of them acting for their respective clients, by way of compromise of a disputed question as to whether security should be provided and, if so, in what amount; that the Republic would provide security in the sum of £30,000 to cover the entirety of the Republic’s application to the Commercial Court but not any appeal therefrom; and that the purported reservation of Istil’s position should that estimate prove insufficient was inoperative.

In the way in which things have turned out, the security is far below what is appropriate in the light of what is now known to be likely to be involved in the hearing. The defendants contend that it is open to the court to order enhanced security because the circumstances have changed since the agreement in October, and that if the agreement is a bar it can be treated as of no effect on the basis that it was entered into under a common mistake.

The power of the court to order security for costs is contained in CPR 25.12 and 13, amongst other places. Under those rules, the court has a discretionary power to order a claimant resident outside the jurisdiction but not in a Brussels, Lugano or Regulation State to provide security for costs. I entertain some doubt as to whether a State is to be treated as having a residence for the purposes of this rule, but the question is academic in view of the provisions of s.70(6) of the Arbitration Act 1996 to which Mr. Quest drew my attention this morning. That provides as follows:

“The court may order the applicant or appellant [that includes an applicant or appellant under s.67 and s.68] to provide security for the costs of the application or appeal and may direct that the application or appeal be dismissed if the order is not complied with.”

Then there is a following paragraph not separately numbered:

“The power to order security for costs shall not be exercised on the ground that the applicant or appellant is-

“(a)

an individual ordinarily resident outside the United Kingdom, or

“(b)

a corporation or association incorporated or formed under the law of a country outside the United Kingdom, or whose central management and control is exercised outside the United Kingdom.”

That jurisdiction is not dependent on the applicant or appellant being resident anywhere. Further, the restriction in the second half of the subsection does not appear to me to apply, since the Republic, although a legal person, is neither an individual nor a corporation nor an association. Even if it was, I would not, if I made an order, do so only on the ground that the Republic was not within the jurisdiction.

If security is ordered by the court up to a certain point, the court can make a further order for security after that point has been reached if it appears that the security ordered for costs up to that point is markedly less than turns out to be appropriate. The court may, in an appropriate case, order an increase in the security awarded, although it will not normally do so unless circumstances have changed since it made its original order since, were it otherwise, the party seeking security would in practice acquire a right of review of any order made. Similarly, if the court refuses initially to order security, that is not a complete bar to a further application for security which may be granted if there has been a significant and relevant change of circumstances since the original refusal: Kristjanson v. R. Verney & Co. Ltd. in the Court of Appeal 18^th June 1998.

There appears, however, to be no authority as to the position if the parties have agreed a figure for security for costs either up to a certain point or for the entirety of an action or application and, for whatever reason, the amount turns out to be inadequate. The agreement between the parties may in terms permit or rule out a further application or it may be silent on the topic. In the present case each side has urged upon me the inconvenience of holding or declining to hold that if an agreement is made a party may not go back to the court and ask for further security. On the one hand, it is said that if that is the position parties will be reluctant to reach sensible agreements for fear of being shut out from obtaining any more. On the other hand, it is said that it is always open to a party to reserve his position, that agreements once made should be kept, and that if those who make them are not held to them there will be a disincentive to make them because they can be reopened. That latter disincentive seems to me likely to be tempered by the fact that parties will wish, and will be encouraged, to make agreements even if they can be reviewed if circumstances change, and the Court will not in practice increase the security agreed unless there has been a significant change of circumstances.

The discretion of the court is, subject to the provisions of the second half of s.70(6) of the Arbitration Act 1996, in terms unfettered. But, in my view, when the parties have, through their solicitors, agreed that a particular figure shall be the security to be provided in respect of the application, it is wrong in principle for the Court, save perhaps in wholly exceptional circumstances, to make an order for further security unless the agreement that they have made is void or voidable for mistake or misrepresentation or is not applicable in the circumstances that have developed.

Here the parties have made an agreement for £30,000 to be the security to be provided for the costs of the application on the footing, as I find, that it was not open to Istil to reserve its position should the estimate prove insufficient. In those circumstances, they should in my judgment if the agreement is valid, be held to their bargain. That is particularly so given that the agreement was made after Istil had sought to make the reservation that they did. But I think the position would be the same if the parties had simply agreed that the security for the entirety of the proceedings would be £30,000 without further qualification. Mr. Hugo Page observed that the parties did not use the expression “£30,000 and no more”, but the ordinary meaning of £30,000 is £30,000. He also submitted that Istil should not be put in a worse position than they would have been in if the court had ordered security of £30,000. But Mr. Quest was, I think, right to observe that that ignores the effect of the bargain, for such it is, that has been made between the parties.

I do not accept that the agreement was void or voidable on the ground of common mistake. The test for common mistake is now a narrow one. As applied to present circumstances, it would not, as it seems to me, avoid the contract. The fact that the estimated length of the hearing has increased from either 1.5/2 or 1/1.5 days to 3/4 days does not mean that the contract of October 2004, if enforced, will be something essentially different from that which the parties originally agreed. Any agreement as to security for costs involves the risk that the security ordered may be too small or, although this is perhaps less likely, too great. That risk has here materialised, but a difference in the scale of the shortfall as between what may have been contemplated and what has occurred does not, in my view, avoid the contract.

Further, if mistake were successfully to be invoked, such mistake would have to be common. Istil contend that the common mistake was a mistake by Mr. Henry Page and Mr. Warne to the effect, firstly, that the s.67 hearing was to be a review; secondly that Kazak law evidence would not be relied upon in respect of the relationship between Karmet and the Republic; thirdly, that there would be no further expert evidence; fourthly, that there would be no new evidence, no oral evidence, and the hearing would last only one to one and a half days; and, fifthly, that £30,000 represented a reasonable estimate of the costs.

As to that, whilst Mr. Page may have understood that the hearing would be by way of review, that understanding was not based on any experience of s.67 and s.68 and was not shared by Mr. Warne. Further, as at October 2004, it was unclear whether s.67 and s.68 hearings would be by way of review or rehearing.

As to the second point, by 5^th October 2004 the Republic had already put in the report of Professor William Butler on Kazak law, which has subsequently been expanded. It is true that in his long second witness statement Mr. McKenzie-Smith refers to Professor Butler’s report but does not refer to it otherwise than in respect of the question as to whether Karmet was the principal under the contracts and in relation to a small point on limitation. But I do not think it right to infer that there was a common assumption that Kazak law would only at any hearing be relied on for those limited purposes.

So far as the third point is concerned, permission has now been given for the claimants to adduce French law evidence in support of a submission not previously supported by evidence that the proceedings against the Republic in France give rise to a res judicata. It was foreseeable that the Republic would seek to repair this omission. Again, I decline to infer a common assumption that there would be no further expert evidence or indeed an assumption that there would be no new evidence.

Mr. Warne did think, to quote his attendance note, that this was a one and a half- to two day-hearing, and said so, and put forward £30,000 as the figure that he would recommend that the Republic should provide on the basis that the £40,000 was excessive. It can, I think, fairly be said that Mr. Warne and Mr. Page were assuming that there would not be so large a difference between the figure put forward and the appropriate figure for a 100 per cent estimate of the costs as there has now turned out to be. but I do not regard the fact of that assumption as vitiating the agreement that was made.

The reality of the matter, as it seems to me, is that Mr. Page made a bargain with Mr. Warne in relation to security for costs for the entirety of the application at a time when the scope of the application had not been mapped out at any case management conference, which has turned out, from Istil’s point of view, to be a poor one.

I have considerable sympathy, therefore, with the position in which Istil find themselves, particularly since, but for that agreement, I would have taken the view that there had been a significant and relevant change of circumstances since October 2004 justifying the further provision of security. Since then, it has become apparent that the sort of figures that were then in play are quite inadequate in the light of the form that the hearing of the applications is now to take, involving a full rehearing of the issues with expert evidence of Kazak and French law and with the hearing likely to take twice as long as then anticipated. I do not regard the fact that it was foreseeable that the Republic and indeed Istil might rely on further factual and expert evidence, the latter to be given orally, as meaning that there was no relevant change in circumstances when they came to indicate that they would do so. The shape and format of this application has grown over the months that followed the agreement in 2004. The CMC hearing made it clear that there was to be a rehearing, not a review. The issues have appeared more clearly from the experts’ reports, and even though the overall issues have not changed, the formulation and presentation of the case has significantly altered. That seems to me to constitute a sufficient change of circumstances to justify an order, absent the agreement to which I have referred.

I would also have thought it appropriate to make such an order as a matter of discretion. It seems to me that Istil is likely to have very serious difficulties in enforcing any order for costs in Kazakhstan. Kazakhstan has a troubled financial history. In view of the history of these proceedings and similar proceedings brought by MNR Metals in Sweden, where judgment has been granted and upheld on appeal without a stay, and a substantial sum of money has been unpaid for a considerable period of time (albeit that in November an application was made to the Supreme Court for a review which has still not been addressed) I have grave doubts whether or not Istil will be able to recover costs awarded to them in the absence of security being provided. It seems to me reasonable to anticipate that every possible argument of immunity, jurisdiction, state decree, and the like, is likely to be put in their way, and indeed that they could spend as much as they have incurred in costs in chasing those costs in Kazakhstan, particularly in the absence of any reciprocal enforcement treaty.

Nor would I have refused relief on the ground of lateness. The application was made on 4^th August after Istil had received the Republic’s expert report and after the full breadth of the proceedings had become increasingly apparent. It seems to me that it would have been wrong to refuse relief on grounds of delay alone. Had I been minded to order the provision of security for costs, I would probably have ordered it in the sum of £120,000. That would have been something of a discount from the sum sought to reflect the fact that the full sum might well not be obtained upon any determination of the appropriate amount for costs.