X v Y

This is an application in connection with an arbitration application concerning a dispute which has engaged the attention not only of London arbitrators but also of the courts of India, Australia and England. The application is brought by Y for an order (pursuant to section 70 of the Arbitration Act 1996) that X provide security for Y’s costs of resisting X’s challenges (pursuant to sections 67 and 68 of the Arbitration Act 1996) to an award of London arbitrators and make a payment into court of the sum awarded by the arbitrators. The application requires the court to have regard to the course of the arbitration and of the multi-jurisdictional litigation in which the parties have engaged since 2010.

On 16 October 2007 the parties entered into a contract of affreightment under which X agreed to ship and Y agreed to provide tonnage to carry, six cargoes of coal for the years 2008-2012. Only the first five shipments in 2008 were performed. The freight market crashed in late 2008 and there were no further shipments. In 2009 Y became insolvent and was placed under judicial management in Singapore. The parties have been in dispute ever since. The contract of affreightment provided for disputes to be resolved by arbitration in London.

On 15 March 2010 Y referred to arbitration “their claim for damages (and all disputes arising out of or under this COA)”. Since then the London arbitration tribunal have issued four awards. The first was issued on 28 January 2011 and concerned jurisdiction and proper law. The second was issued on 31 October 2011 and held that X had acted in breach of contract by refusing to perform during 2009 and 2010.

On 28 November 2011 X sought leave to appeal from the second award pursuant to section 69 of the Arbitration Act 1996. On 27 February 2012 X applied for and obtained an order from the Indian court restraining Y from taking any steps to enforce the second award “in India”. On 28 February 2012 X abandoned its application for leave to appeal from the second award.

On 5 April 2012 the tribunal issued its third award in which it awarded Y damages in the sum of US$7.8m. in respect of the 2009 and 2010 shipments. On 31 July 2012 X procured the extension of the Indian court injunction to cover the third award.

In May 2012 Y obtained a freezing order and anti-suit injunction against X in Australia, where X owns coal mines and subsidiary companies.

In August 2012 X alleged in India that Y and its judicial managers were in contempt of court by seeking to enforce the tribunal’s awards in Australia. In December 2012 X was ordered to remove this allegation from its pleading.

An arbitration hearing to assess Y’s claim for damages in respect of the 2011 shipments was fixed for 10 and 11 October 2012. On 5 October 2012 X informed Y that it had issued an application in India seeking an order restraining Y and the tribunal from participating in the hearing. On 6 October 2012 Y obtained an anti-anti-suit injunction from the English court. Fresh proceedings were commenced by X in India and so on 9 October 2012 Y obtained a further anti-anti-suit injunction against X. This was continued by Hamblen J. on the return date, 26 October 2012.

On 30 November 2012 the tribunal made its fourth award. It held, contrary to the submissions made on behalf of X, that it had jurisdiction in respect of the 2011 shipments. It further held that X was in breach of contract by not performing in 2011 and awarded Y further damages and costs totalling over US$6m.

Thus the present position is that in respect of the 2009 and 2010 shipments X has been adjudged liable to pay several millions of dollars to Y but has paid nothing. The time for any challenge has long since expired. In respect of the 2011 shipments X has been adjudged liable to pay several more millions of dollars. It has paid nothing but has sought to challenge the fourth award pursuant to section 67 of the Arbitration Act 1996 (a jurisdictional challenge) and pursuant to section 68 of the Act (a challenge based upon an alleged serious irregularity). It is in relation to those challenges that Y seeks an order that security in the sum of £120,000 be provided in respect of Y’s costs of resisting such challenges and that X pay into court the sum of £3,814,673.43, being the total of the sums awarded to Y under the fourth award.

Pursuant to section 70(6) of the Arbitration Act 1996 the court may order an applicant to provided security for the costs of its application under sections 67 or 68 of the Act.

The court’s jurisdiction in this regard was considered by Longmore J. (as he then was) in Azov v Baltic [1999] 2 Lloyd’s Reports 39. He held that there was no formal fetter on the court’s discretion to order security for costs but that regard must be had to section 1(a) of the 1996 Act which provides that

“The object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense.”

He therefore held that that cases will be rare in which security for costs would be ordered if the applicant has sufficient assets to meet any order as to costs and if those assets are available for satisfaction of any such order for costs. I infer that the reason for that proposition is that if the applicant has sufficient assets to meet any order as to costs and if those assets are available for satisfaction of any such order for costs then an order for security for costs would be an unnecessary expense.

Mr. Kimmins QC, on behalf of Y, submitted that a second subsidiary point of relevance was whether or not an applicant, by challenging the jurisdiction, was seeking to have a second bite at the cherry by re-arguing the question of jurisdiction on which it had lost. Longmore J. described this as “a potentially relevant matter” whilst adding that it is relevant where “there is no cogent reason” for saying that the tribunal had reached the wrong conclusion. However, he did not consider it right to give “excessive weight” to the factor because it was not nearly as important as the question whether the applicant had sufficient assets which are available for the purposes of execution. It would only “tip the scale” if the court was uncertain on that question.

I consider it appropriate to follow the guidance of Longmore J. which has stood for some time. I must therefore consider the question whether X has assets which are available for the purposes of execution.

Mr. Kimmins submitted that “given the history of this dispute, it is obvious that that there are no assets readily available to satisfy any court order.” However, Mr. Gruder QC, on behalf of X, has drawn attention to affidavit evidence filed in Australia by X in response to the freezing order to the effect that X has an unencumbered holding of 76m. shares in a subsidiary worth AUS$42,217,489. He submitted that it is “clear” that X has substantial unencumbered assets in Australia against which any order for costs in the region of £120,000 could be enforced and that therefore “there is simply no reason” for an order for security for costs.

It appears to be the case, and the contrary is not suggested, that X is a substantial concern in India with considerable assets in Australia. However, X has plainly set its mind against honouring any of the awards made against it, including the orders for costs made against it. The substantial sums due under the now unappealable third award remain unpaid. That award was issued over a year ago. The costs payable by X pursuant to the second award, issued about 18 months ago, also remain unpaid. Had X any intention to pay the sums awarded against it under those awards they would have been paid some time ago. In those circumstances it is to be expected that X will seek to resist any attempts to enforce the awards which have been issued against it. Moreover, since the major asset relied upon by X is a shareholding in a subsidiary company there must be doubt as to whether such asset is liquid, that is, readily realisable. Whilst X could probably be made to pay in the end, it probably could not be made to pay with any high degree of promptness; see the approach of Park J. in Longstaff International Limited v Baker & McKenzie [2004] 1 WLR 2917 at paragraphs 17-19. There is no witness statement on behalf of X expressing either a willingness to pay such costs as may be ordered against it or explaining how such a liability could readily be enforced by Y.

In those circumstances I have reached the conclusion that there is a real risk that the assets of X are not readily available for the satisfaction of any order for costs which may be made by the court against X. It follows, in my judgment, that the expense of complying with an order for security for costs is an expense which is necessary to ensure the fair resolution of the dispute between X and Y regarding the former’s challenges to the fourth award. In the absence of security there is a very real risk that any costs order made in favour of Y would not be enforced without considerable delay and further expense. I have therefore concluded that X should provide security for Y’s costs resisting X’s challenges to the award. There was no dispute that £120,000 was an appropriate sum in this regard.

Pursuant to section 70(7) of the Arbitration Act 1996 the court may order that money payable under an award shall be brought into court pending the determination of an application challenging the award.

As with section 70(6) the court’s discretion is formally unfettered. However, the manner in which such discretion should be exercised where there is a challenge to the jurisdiction pursuant to section 67 of the 1996 Act has been considered by Flaux J. in A v B [2011] 1 Lloyd’s Reports 363 following an earlier disagreement amongst judges of this court as to the correct approach to follow. It was not suggested that the guidance given by Flaux J. should not be followed. I consider that I should follow that guidance.

Flaux J. held that there is a threshold requirement, namely, that the party making the section 70(7) application must demonstrate that the challenge to the jurisdiction is flimsy or otherwise lacking in substance; see paragraph 32 of the judgment. If that threshold requirement is satisfied then the court should not order security unless the applicant can demonstrate that the challenge to the award will prejudice its ability to enforce the award. This will often entail demonstrating some risk of dissipation of assets, although there may other ways in which enforcement could be prejudiced; see paragraph 50 of the judgment.

I must therefore consider whether X’s challenge to the jurisdiction of the arbitrators in relation to the 2011 shipments is flimsy or otherwise lacking in substance. The tribunal in its fourth award considered the question of jurisdiction between paragraphs 23 and 51 of its Reasons. It held that the notice of arbitration sent on 15 March 2010 conferred jurisdiction on the tribunal and was not to be regarded as limited to claims and disputes which had accrued as at 15 March 2010. The tribunal further held that there had been an ad hoc submission in relation to the 2011 shipments arising out of X’s conduct in not objecting to Y’s amendment to its claim which included the 2011 shipments and in putting in issue the performance of the entire COA period. Finally, the tribunal held that the dispute in relation to the 2011 shipments necessarily arose consequent upon X’s failure to perform the COA which gave rise to the 15 March 2010 notice of arbitration.

Having considered the submissions of Mr. Gruder and the authorities upon which he relies (see paragraphs 28, 29, 32 and 33 of his written submissions) I am unable to say that X’s challenge to the tribunal’s construction of the notice of arbitration is flimsy or otherwise lacking in substance. However, I am unable to see any answer to the argument, upheld by the tribunal, that there was an ad hoc submission. X by its defence dated 16 August 2010 sought an indemnity in relation to future losses under the COA. Thus the future shipments were put in issue by X. Moreover, when Y introduced its claim in relation to the 2011 shipments by an amendment dated 15 June 2011, there was no challenge to the jurisdiction of the tribunal in respect of that claim. The amended claim was debated but held to be premature; hence the need for the fourth award.

I have considered, but am unable to accept, Mr. Gruder’s submission that in circumstances where, as held by the tribunal, there could be no breach in respect of 2011 until 22 November 2011 X should not be taken to have submitted the question of whether or not it was in breach in respect of 2011. The question of breach in respect of 2011 was debated and Y’s claim was held to be premature. That seems to me to evince a clear ad hoc submission. In any event, X had by its own request for an indemnity in respect of future losses made an ad hoc submission in respect of the 2011 shipments. Mr. Gruder had no answer to that point.

I have therefore concluded that X’s challenge to the jurisdiction based upon an ad hoc submission is both flimsy and lacking in substance. That is sufficient to enable Y to satisfy the threshold requirement.

It is accepted by Mr. Gruder that there is no threshold requirement with regard to the section 68 challenge.

The further question, which arises in relation to both the section 67 challenge and the section 68 challenge, is whether Y can demonstrate that the challenge to the award will prejudice its ability to enforce the award.

Mr. Perrott, of Y’s solicitors, in his witness statement dated 1 February 2013, recounted the steps which have been taken by X in the past to challenge the second award, to seek a stay of the arbitration pending the determination of that challenge, to obtain anti-suit injunctions in India restraining enforcement of the first, second and third awards and to allege in India that Y and its judicial managers were in contempt of court by seeking to enforce the tribunal’s awards in Australia. Mr. Perrott concluded that the delay caused by the sections 67 and 68 applications will disadvantage Y. He said that it is to be inferred that X will take whatever steps it can to resist enforcement of the fourth award. There has been no witness statement from or on behalf of X seeking to explain why such inference should not be drawn.

Mr. Kimmins submitted that it was likely that X would use the section 67 and section 68 applications as a reason for asking the Indian court to extend the injunction it had granted against enforcement of the first, second and third awards to the fourth award. Against that Mr. Gruder pointed out that although the section 67 and section 68 applications were issued on 27 December 2012 no such action has yet been taken. However, there was a three month delay between the issue of the challenge to the second award and the obtaining of an injunction from the Indian Court. Moreover, on obtaining the injunction the challenge to the second award was abandoned. I agree that the vigorous steps taken by X in the past to prevent enforcement of the tribunal’s awards give rise to a risk that it might act as suggested by Mr. Kimmins. It might be thought that the existence of the anti-suit injunction granted by the Australian court would prevent such conduct but I note that the Indian injunction was extended to cover the third award on 31 July 2012, after the anti-suit injunction had been granted in Australia on 8 May 2012.

Mr. Gruder submitted that in circumstances where Y has obtained a freezing order in Australia there can be no risk that X’s substantial assets in that country will be dissipated though Mr. Gruder accepts that the interest and costs elements of the fourth award are not protected by the freezing order.

Mr. Gruder further submitted that the court should not use the jurisdiction conferred by section 70 to improve the ability of a party to enforce an award as opposed to taking steps designed to put it out of the power of the other party to diminish its own ability to honour the award; see Peterson Farms v C&M Farming Limited [2003] EWHC 2298 (QB) per Tomlinson J. (as he then was) at paragraph 19. He submitted that with the Australian freezing order and anti-suit injunctions in place (and also the anti-anti-suit injunctions granted by this court) there is no reason to believe permitting the sections 67 and 68 challenges to go ahead unsecured will diminish X’s ability to honour the award.

I accept that the jurisdiction conferred on the court by section 70 should not be used a means of assisting a party to enforce an award which has been made in its favour. Ordering payment in by X would certainly assist Y to enforce the fourth award. Such an order can only be justified (following the guidance in the authorities to which I have referred) if the existence of the sections 67 and 68 challenges to the award in some way prejudices the ability of Y to enforce the award or diminishes X’s ability to honour the award. If such prejudice or diminution is shown then an order for payment in may be an appropriate means of removing the prejudice to Y’s ability to enforce the award or of restoring X’s ability to honour the award.

The existence of the challenges has two possible effects. First, the challenges will delay enforcement because until they are determined enforcement will not be possible. But any such delay will come to an end as when the challenges are dismissed, as Mr. Kimmins says they will be. Second, the challenges may enable X to procure an extension of the Indian court injunction to include the fourth award. Such an extension may impede enforcement in India. But Y’s attempts at enforcement appear to be concentrated on Australia, where X has substantial, albeit illiquid, assets.

The conduct of X in refusing to honour the arbitration awards does not attract any sympathy. However, that is not a legitimate reason for ordering that it pay the amount of the fourth award into court. Y has sought to enforce the award in Australia where X has substantial assets. The challenges to the fourth award in this jurisdiction will delay enforcement there but such delay will be brought to an end if and when Y defeats those challenges. An order for payment in is not required to bring that delay to an end. In the meantime Y has the protection of the Australian freezing order. If X persuades the Indian court to add the fourth award to the scope of the injunction already granted by that court, such injunction is unlikely to have any effect on enforcement in Australia because it restrains enforcement “in India”.

I have therefore come to the conclusion that an order for payment in of the sum adjudged due to Y under the fourth award would be wrong in principle because the challenges to the award do not materially prejudice Y’s ability to enforce the award. By contrast the making of an order for payment in would assist Y to enforce the award. Whilst that may be said to be desirable it is not, on the authorities, a good reason for making an order for payment in pursuant to section 70 of the Arbitration Act 1996.

The application for security for costs succeeds. The application for a payment in fails.