Deutsche Bank Ag v Tongkah Harbour Public Company Ltd

The parties to the Facility Agreement were Tungkum as Borrower and Deutsche Bank, the role of the bank being defined by reference to a number of its branches—it acted as Lender (by its Bangkok branch), as Arranger (by its Singapore branch), and as Agent and Security Trustee (by its Amsterdam branch).

The defendants rely on a number of provisions as showing that the underlying agreements are all part of one transaction, the close inter-relationship between them being apparent from their terms. In particular, in the Facility Agreement the Borrower warrants by clause 18.6(c) that refined gold will be supplied by the Borrower to the Offtaker (defined as Deutsche Bank, London branch) in accordance with the Export Contract, and by clause 18.21.4 that the Export Contract contains, amongst other obligations, an obligation on the Borrower to sell and deliver and an obligation on the Offtaker to purchase and receive from the Borrower sufficient quantities of refined gold to ensure that the Loan was repaid by the Borrower on or before the Final Repayment Date. Clause 20.20 (“Export Contract Proceeds”) provides that the Borrower shall ensure that the Offtaker “pays in full all proceeds payable by it under any Export Contract directly to the Collection Account ...”. Clauses 7.3 and 7.4 provide indirectly that monies in the Collection Account shall be used to pay the monthly repayments due under clause 6.1 and to maintain a Debt Service Reserve equal to one such instalment.

The dispute resolution provisions under the Facility Agreement give jurisdiction to the English court, whilst giving Deutsche Bank the option to refer disputes to LCIA arbitration. The provisions (so far as presently relevant) are as follows:

The Export Contract was between Tungkum as Supplier and Deutsche Bank (London branch) as Offtaker. The Facility Agreement is a defined term. Clause 6.1 provides that the Supplier shall sell and the Offtaker shall purchase gold in minimum monthly quantities, and clause 10.1 provides how the price is to be calculated. Clause 10.2 provides that the Offtaker shall remit the amount payable for each monthly delivery obligation to the Collection Account.

Clause 14.5 is the basis of the claim made in the arbitration, providing for “Payments on Early Termination”. Broadly, it provides that any Early Termination Amount shall be calculated by reference to the amount of losses or gains that would be incurred or realised by the Offtaker in replacing the economic equivalent of the delivery obligations remaining after the Early Termination Date. Clause 14.5.2 provides that any such amount due from the Supplier to the Offtaker or vice versa in the event of early termination shall be paid into the Collection Account.

The dispute resolution provisions in the Export Contract are in very similar terms to those of the Facility Agreement being (so far as presently relevant) as follows:

The Guarantee is between Tongkah as Guarantor and Deutsche Bank, Amsterdam branch, as Security Trustee. Clause 3 provides that the Guarantor guarantees punctual performance by Tungkum as Principal Debtor of its liabilities under or pursuant to the Finance Documents, and undertakes to pay amounts due from Tungkum under or in connection with the Finance Documents as if it were the principal debtor. The term “Finance Document” has the meaning given to it in the Facility Agreement, which meaning includes the Facility Agreement and the Export Contract.

Unlike these two contracts however, the Guarantee does not give Deutsche Bank (or for that matter the Guarantor) the option of arbitration. Clause 16 provides as follows:

As I have indicated, there are three sets of proceedings presently extant. All were commenced on 17 February 2011. The first are the two sets of proceedings brought by Deutsche Bank in this court against:

The second are the LCIA arbitration proceedings which Deutsche Bank has brought against Tungkum for payment of the Early Termination Amount allegedly due to it under the Export Contract. The Request for Arbitration is considerably briefer that the pleadings in the two actions. Again, the facts as to the waivers and the “Holiday Period” are referred to, with the allegation that the failure to deliver gold was an Event of Default under the Export Contract. As indicated above, the claim is for US$27.6m with continuing interest.

The parties’ respective contentions are as follows. The defendants’ starting point is their submission that the Facility Agreement and the Export Contract constitute one transaction. The Export Contract was the means by which Tungkum repaid the Facility Agreement. Reliance is placed on the words that appear in the dispute resolution clause: “Disputes submitted to arbitration shall be resolved in accordance with the Rules of Conciliation and Arbitration of the London Court of International Arbitration…”. The effect of this provision (clause 37.3 of the Facility Agreement and clause 23.3 of the Export Contract) is that once a dispute has been referred to arbitration, it must be determined in the arbitration, and cannot be litigated in parallel court proceedings. This follows, it is submitted, from the words “shall be resolved”. The provision permits Deutsche Bank to bring court proceedings in England and any other court, but does not purport to give it the right to bring court proceedings in England in relation to disputes referred to arbitration. A rational business man would not expect disputes sent to arbitration to be subject to parallel court proceedings. If a dispute is referred to arbitration, Tungkum is entitled to a stay of proceedings under s.9 Arbitration Act 1996 of proceedings in so far as they concern the same matter.

The defendants’ second point goes to the nature of the claims in the arbitration and court proceedings respectively. The fact that the dispute is said to give rise to a different remedy is no answer. In its Request for Arbitration, Deutsche Bank pleads events, which Tungkum says were events of force majeure, that took place in May, June and July 2010 and which led to the waivers and to the 27 August 2010 “Holiday Period” letter agreement. Its claim is that Tungkum was in breach of the terms of that agreement, and there was thereby an Event of Default under the Export Contract entitling it to demand payment of the Early Termination Amount under that contract. Tungkum denies this, asserting that the proposed financial package was in breach of Thai law.

The particulars of claim in the English action against Tungkum are (it is submitted by Mr Jeffrey Chapman QC counsel for the defendants) similar. The same events of May, June, and July 2010, the waivers, and the Holiday Period letter agreement are pleaded. These events are alleged as breaches of that agreement resulting in alleged Events of Default under the Facility Agreement entitling Deutsche Bank to demand repayment of the sums outstanding under the agreement. The claims in both the arbitration and the English action are, it is submitted, premised on a breach of the Holiday Period letter agreement—this is the “predecessor event” that is said to trigger Events of Default under the Facility Agreement and the Export Contract respectively. Deutsche Bank’s entitlement to recover sums under the Facility Agreement in the action depends, therefore, on it succeeding on matters to be determined in the arbitration. The substance of the matter has been referred to arbitration, and it follows that Tungkum is entitled to a stay under s.9 of the English action. Alternatively, the court should stay the proceedings in the exercise of its case management powers. There is such an overlap between the disputes referred to the LCIA Arbitration and the pleaded facts and matters in the English action that a stay is the most sensible course, in that the dispute will be dealt with by a single tribunal.

As regards the claim against Tongkah under the Guarantee, since Tongkah’s liability depends on Tungkum’s liability, the logic, it is submitted, is to allow that claim also to proceed in the arbitration. There is a substantial degree of overlap with the dispute referred to arbitration (albeit the claim under the Guarantee does not extend to Tungkum’s alleged liabilities under the Export Contract). Given that overlap, Tongkah proposes that if Tungkum’s stay application succeeds, the claims in the action against Tongkah should be resolved in the LCIA Arbitration. Tongkah would, it says, be prepared to enter into a further written agreement to enable that reference to be made. Such an outcome would be consistent with the LCIA Arbitration being a ‘one-stop shop’ and would be a practical and proportionate way to resolve the disputes between the parties. It accepts that if Tungkum does not succeed on its stay application, Tongkah cannot succeed either.

For its part, Deutsche Bank points to the different parts of the bank concerned in the dispute. It says that the Export Contract was the province of Global Commodities, whereas the Facility Agreement was the province of Structured Commodity Trade Finance, which is part of a separate division. The fact that the bank (through its Global Commodities team) has chosen to commence the LCIA Arbitration, and (through its Structured Commodity Trade Finance team) has chosen to pursue the Commercial Court claims is unexceptional. It argues that its Structured Commodity Trade Finance team was entitled to take the view that the English Court provided a swifter method of enforcing its rights under the Facility Agreement and Guarantee, whereas the Offtaker (the bank’s London branch) decided to go down the arbitration route.

More generally, the claim under the Facility Agreement is concerned with Events of Default under that agreement. The claim in the arbitration is concerned with Events of Default under the Export Contract. The common issues as to the waivers and the Holiday Period letter agreement have to be, as Mr Edmund Cullen counsel for Deutsche Bank put it, weaved in, but cannot be determinative of jurisdiction. The bank accepts that it cannot pursue the same claim at the same time in different tribunals, but it is not doing so. The dispute referred to arbitration is whether Tungkum is liable to make payment of the Early Termination Amount under the Exchange Contract. No dispute under the Facility Agreement has been referred to arbitration. The parties cannot have contemplated that referring a dispute under one contract to arbitration could bar a different dispute under a different contract from being the subject of court proceedings. The term “Finance Documents” as used in the contracts covered various other agreements between the parties, with differing dispute resolution provisions, and this is inconsistent with an interpretation which requires all disputes to be determined in the same tribunal. The sole question, Deutsche Bank submitted, was whether the dispute against Tungkum under the Facility Agreement had already been referred to arbitration. The fact that there may be overlapping between the claims in the English actions and in the arbitration is not decisive if the parties have contemplated this in the express provisions they agreed as to jurisdiction. So far as the argument based on case management is concerned, Deutsche Bank submits that it is impossible to contemplate staying the claim now on case management grounds, when it is unclear what defence of illegality or otherwise will be raised. In summary, Deutsche Bank bargained for the right of access to this court, and should not be deprived of it. As regards Tongkah, the simple point is taken that the arbitral tribunal has no jurisdiction, and the claim under the Guarantee can only be resolved in the English court.

There is no dispute as to the applicable principles. Where it applies, s. 9 Arbitration Act 1996 imposes a mandatory stay as follows:

In construing an arbitration clause, the assumption is that the parties, as rational business people, are likely to have intended any dispute arising out of the relationship into which they entered to be decided by the same tribunal (Fiona Trust & Holding Corp v. Privalov [2007] UKHL 40, Norscot Rig Management PVT Ltd v Essar Oilfields Services Ltd [2010] EWHC 195 (Comm); [2010] 2 Lloyd’s Rep 209 at [16(iv)], Burton J). Similarly, where the question arises (as here) in the context of dispute resolution provisions in multiple related agreements, the assumption is that the parties do not generally intend a dispute to be litigated in two different tribunals. Where the provisions in one agreement give jurisdiction to the court, and in another refer disputes to arbitration, the allocation of jurisdiction is fundamentally one of construction (UBS AG v HSH NordBank AG [2009] 2 Lloyd's Rep 272 at [83], Lord Collins, Sebastian Holdings Inc v. Deutsche Bank AG [2011] 1 Lloyd's Rep 106 at [41] – [42] and [49], Thomas LJ).

In the course of argument, the issues between the parties narrowed to some extent. The defendants submit that the dispute resolution provisions of the Facility Agreement and the Export Contract do not permit Deutsche Bank to refer disputes between itself and Tungkum to arbitration (by way of Request for Arbitration) and also to bring separate proceedings in the Commercial Court in respect of the same disputes. Deutsche Bank accepts that this submission is correct. This is clearly right, because whilst a jurisdiction clause (like those in the Facility Agreement and Export Contract) that gives one party only the option to arbitrate is perfectly valid, once the option has been exercised in favour of arbitration, litigation of the same matter is subject to the statutory stay in s.9 Arbitration Act 1996 (NBThree Shipping Ltd v Harebell Shipping Ltd [2005] 1 All ER (Comm) 200 at [12]. Morison J; and see as regards duplication of proceedings Royal Bank of Canada v Cooperative Centrale Raiffeisen-Boerenleenbank BA [2004] EWCA Civ 07; [2004] 1 Lloyds Rep 471 at [35], Mance LJ).

The issue for decision so far as the Commercial Court proceedings against Tungkum are concerned is therefore essentially as to the scope of what was referred to arbitration by Deutsche Bank on 17 February 2011. The parties put the issue slightly differently. Deutsche Bank says that the question is whether it has referred the dispute under the Facility Agreement to arbitration already. The defendants say (following the wording in s. 9(1)) that the question is what matter has been referred to arbitration. I consider that the latter way of putting it is the correct one, with the focus being on the substance of the controversy, rather than the formal nature of the proceedings (see PT Thiess Contractors Indonesia v PT Kaltim Prima Coal [2011] EWHC 1842 (Comm) at [35]).

I deal first with Deutsche Bank’s argument based on the fact that different divisions of the bank are concerned in the dispute. The factual basis is that the Export Contract was dealt with by its global commodities division, and the Facility Agreement was dealt with by its structured commodity trade finance division. It submits that one team was entitled to take the view that the English Court provided a swifter method of enforcing its rights under the Facility Agreement and Guarantee, whereas the other was entitled to go down the arbitration route. It seems to me however that the fact that different divisions of the bank are concerned adds nothing to the legal analysis. Deutsche Bank is a single contracting party. Nor does it matter that different branches of the bank are concerned, this not being a situation analogous (for example) to a bank’s liability to repay deposits, where for some purposes its branches are treated as separate entities. In any case, on the facts the point has limited force, because the Export Contract (the province of global commodities) provided the mechanism by which the loans extended under the Facility Agreement (the province of structured commodity trade finance) were to be repaid. It is the connection between the contracts which is at issue.

The defendants submit that the key disputes raised by Deutsche Bank in its Particulars of Claim in the Commercial Court action are precisely those which it has referred to the LCIA arbitration by its Request for Arbitration. Deutsche Bank responds that its claim in the Commercial Court against Tungkum is for repayment of the sum due under the Facility Agreement and that is the agreement out of which it arises. The claim in the LCIA arbitration is for a different sum under a different agreement. The Request for Arbitration made in the LCIA arbitration will not and cannot lead to a determination of the claim under the Facility Agreement. It cannot be said that the substance of what has been referred to arbitration under the Export Contract somehow encompasses or incorporates the claim under the Facility Agreement. Fundamentally, Deutsche Bank says, the LCIA arbitration and the Commercial Court will be concerned with different claims. The former will be concerned with what is claimed under the Export Contract; the latter with what is claimed under the Facility Agreement. Even if there were to be overlap in some of the underlying issues (and that is unknown because one does not know what defences will be raised or how they will operate under the different agreements), that does not detract from the fact that the Facility Agreement raises a discrete claim.

In my view, there can be no doubt that the claims are closely connected. The pleadings in the Commercial Court action make it clear that the relevant provisions in the two contracts are interconnected. This follows from the fact (which I do not understand to be in contention) that the Export Contract was the means by which Tungkum repaid the Facility Agreement. (This is a point of distinction from a case in which such arrangement is by way of security only.) Furthermore, both claims are based on the same Events of Default. Whilst there is some force in Deutsche Bank’s point that at this stage the precise nature of the defences are not clear, there is no suggestion that they will be different in the two sets of proceedings. Nor is it suggested that the bank is in any way precluded from making the claim under the Facility Agreement in the arbitration. What it comes to is that whereas in the Commercial Court action, the bank claims the outstanding loan amount, in the arbitration it claims the early termination amount. It is correct that these are different claims, but they arise out of the same breach of the same contractual arrangements. They are (in my judgment) aspects of the same matter. I fully agree that Deutsche Bank bargained for the right of access to this court, and should not be deprived of it. But it is not being deprived of it. It could have referred the matter to the court, or it could have referred it to arbitration. The bank had the option in that regard. But having referred it to arbitration, the statutory stay applies as regards the court proceedings, and it makes no difference that as presently constituted, the claim in the arbitration is restricted to a claim for the early termination amount under the Export Contract. It follows that on this point I find in favour of Tungkum.

As regards the action against Tongkah under the Guarantee, my conclusions are as follows. The difference between this action and the Tungkum action is that in the case of the Guarantee, there is no arbitration agreement. Under the terms of the Guarantee, the parties agreed that the court should have jurisdiction. Tongkah says that it would be prepared to enter into a further written agreement to enable a reference to arbitration to be made. However, as Deutsche Bank submits, this can carry no weight since the question must be decided by reference to the bargain which the parties actually entered into. The more substantial point argued by Tongkah is that since its liability under the Guarantee is of a secondary nature, the court should stay the proceedings under its inherent jurisdiction, and/or under its case management powers, pending the arbitration. I reject that submission also. A claim under a guarantee may raise similar or even the same issues as the claim against the principal debtor, but the covenant to pay is given by a different party, here the parent company. Deutsche Bank is entitled to enforce the Guarantee if it can make good its claim, regardless of the claim against the principal debtor. The fact that there may be (as the defendants say) substantial overlap between the claims does not affect this conclusion. In the language of the case law, it is possible and commercially rational to allow the claim to proceed even though this may result in a degree of fragmentation in the resolution of the overall dispute (see Sebastian Holdings, ibid, at [49] citing the 2010 supplement to Dicey, Morris and Collins, The Conflict of Laws, 14th edn, at paragraph 12–094).

In the light of these conclusions, the application succeeds to the extent that the proceedings against Tungkum in 2011 Folio 190 are stayed under s. 9 Arbitration Act 1996. I am grateful to the parties for their assistance, and will hear submissions as to the form of the order to be made.