Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Before :
MR JUSTICE PHILLIPS
Between:
(1) AB INTERNATIONAL (HK) HOLDINGS PLC LTD (2) AB (AUSTRALIA) PTY LTD | Claimants |
- and - | |
(1) AB CLEARING CORPORATION LTD (2) CD (3) AB FINANCE LTD (4) AB GROUP LTD (5) AB ATLANTIC LTD (6) EF FINANCIAL SERVICES CORPORATION LTD (7) AB EUROPE LTD (8) AB GLOBAL HOLDINGS CO LLC | Defendants |
Mr Steven Gee QC, Mr Paul Downes QC, Mr Stuart Benzie & Ms Sarah Tulip (instructed by Edwin & Co) for the Claimants
Mr Nicholas Peacock QC & Mr Jonathan Allcock (instructed by Barker Gillette) for the First, Second, Fourth, Fifth, Sixth & Eighth Defendants
Ms Rebecca Stubbs QC (instructed by Baker & McKenzie LLP) for the Third & Seventh Defendants
Hearing dates: 3 & 4 June 2015
Judgment
Mr Justice Phillips:
At the hearing of this arbitration claim on 3 and 4 June 2015 the claimants sought urgent interim relief under s44 of the Arbitration Act 1996 (“s44”) in support of an LCIA arbitration which they had commenced against the defendants the previous day. At the end of the hearing I refused to grant the relief sought and stated that I would give my reasons at a later date. This is my judgment setting out those reasons. In order to preserve confidentiality in the arbitration, and at the request of the parties, I will not name the parties and will attempt to describe their business and dealings in a way which will not identify them.
The background facts
The first claimant is a joint venture company (“the JVC”), indirectly owned in equal shares by CD (the second defendant) and GH. The relationship between those principal shareholders and the conduct of the joint venture was governed by a joint venture agreement executed in December 2012 (“the JVA”), subsequently varied by three addenda, the last dated 28 March 2014. Clause 26.7 of the JVA provides that if either CD or GH asserts that the JVC or any other joint venture company has a claim against the other principal shareholder, such claim may be brought in the name of the JVC. GH seeks to rely on that provision in bringing this claim in the name of the JVC and its Australian subsidiary (the second claimant) against CD and companies owned by him.
Pursuant to the joint venture the second claimant entered trades with clients, matching those trades with transactions with the third defendant by way of hedging the second claimant’s risk and providing the second claimant with liquidity. The second claimant traded with its clients on a platform provided by CD’s companies and utilised a pricing feed from the third defendant.
Client monies deposited with the second claimant by way of margin were transferred to the third defendant as margin for the matching trades, the third defendant confirming that those monies are held on a segregated basis pursuant to FCA rules. As a result, any profits from the trading were made by the defendant companies (deducted from the client monies held as margin), subject to an obligation to account to the JVC for those profits. Clause 11.18 of the JVA provided that the obligation to pay such profits “shall be absolute and unconditional, free standing and autonomous of all other rights and obligations whatsoever …”. In support of that obligation, the first defendant provided a Standby Letter of Credit in favour of the JVC, GH and one of his companies (“the Standby”), undertaking to pay the amount of unpaid trading profits stipulated in a Letter of Demand, accompanied by a letter from a Certified Public Accountant verifying that, in his opinion, the sum demanded has been correctly determined.
The relationship has proved fractious and unstable. In 2014 GH commenced proceedings in his own name and that of the JVC in the Chancery Division against CD and various of his companies, making wide-ranging allegations of fraud, breach of contract and breach of fiduciary duty (“the 2014 claim”). The 2014 claim was dismissed by consent and an order was made that the statements of case are not to be made available to non-parties without permission of the court. Thereafter the third addendum was signed, recording that, at that time, there were no outstanding legal issues between the parties. The third addendum, no doubt in the hope of avoiding a repetition of the 2014 claim and the attendant risk of damaging publicity for the JVC, introduced dispute resolution provisions, setting out a mediation process to be followed, if unsuccessful, by arbitration under the LCIA rules. However, the third addendum provided that the provisions in the JVA relating to payment of trading profit (which include the Standby) were to remain autonomous and were not subject to the dispute resolution procedure.
That rapprochement did not last long. CD now claims that GH has failed to pay his share of trading losses and that GH has seized control of the JVC and of the second claimant and its bank accounts and is attempting to set up a separate trading platform. CD has purported to accept a repudiation of the JVA by GH so as to terminate the JVA. GH, for his part, has demanded that the third defendant return client monies to the second claimant and contends that CD’s companies have failed to account for substantial profits made from trading for the benefit of the JVC.
CD was the first to commence proceedings, on 12 May 2015, claiming relief on his own behalf and on behalf of the JVC against GH and, amongst others, the second claimant, under s44. Those proceedings were discontinued with the permission of Popplewell J on 15 May 2015. The costs of the proceedings were reserved to the judge determining the current application.
The present arbitration claim was commenced on 13 May 2015. On the same date the JVC, GH and one of his companies commenced separate Commercial Court proceedings claiming US$17,177,800 from the first defendant under the Standby, although the Particulars of Claim served on 2 June claimed only US$8,131,101. Also on 2 June the claimants commenced the LCIA arbitration against the defendants.
The relief sought by the claimants
In the Claim Form, in their Application Notice dated 13 May 2015 and in their skeleton argument dated 29 May 2015 the claimants sought the following orders pursuant to s44(3) of the Act:
that the defendants provide the claimants with full access to the trading platform software used in relation to their customers;
that CD and third defendant pay to the second claimant $10.44m (or such other sum as it shows to be outstanding), said to be the total of unauthorised transfers from the second claimant to the third defendant between 20 August 2014 and 1 April 2015.
that CD reinstate (or procure the reinstatement of) a $3 million revolving credit facility provided to the first claimant under clause 4 of the first addendum.
that the defendants comply with clause 5.8 of the JVA, which provides that they shall not accept customers who primarily reside in or trade from China;
that the defendants disclose and provide within 7 days the information and documents requested in a letter from Innoinvest (advisers engaged by the second claimant) to the third defendant dated 3 March 2015.
At the outset of the hearing on 3 June Mr Gee QC, leading counsel for the claimants, informed me that the claimants were not pursuing the order referred to in paragraph 9(iii) above.
In the course of his reply submissions on 4 June Mr Gee also accepted, after being pressed on the point, that the claimants could not pursue the order referred to in paragraph 9(iv) above. GH and the JVC had asserted a breach of clause 5.8 of the JVA by reference to the same matters in the 2014 claim (and had consented to the dismissal of that claim in April 2014, over a year ago), rendering it hopeless to contend that the claimants were now entitled to urgent relief in that regard pursuant to s44(3), even if any such claim is maintainable in view of the dismissal of the claim and the terms of the third addendum.
Also in his reply submissions, Mr Gee accepted that the claimants could not currently pursue the order referred to in paragraph 9(i) above, concerning the trading platform, inviting me to adjourn generally the application in that regard. I refused to grant an adjournment. The basis on which the claimants sought relief pursuant to s44(3) was, necessarily, that it was required urgently. In those circumstances there is no scope for seeking to postpone the application to an unspecified future date.
As regards the order referred to in paragraph 9(ii) above:
the third defendant disputed that any client monies were obtained by way of unauthorised transfers (and that allegation was not seriously pursued by the claimants at the hearing).
it was, however, common ground that, if the second claimant terminated outstanding transactions, the third defendant would be obliged to return all remaining client monies to the second claimant. The third defendant confirmed that, as at the date of the hearing, those sums had fallen to about US$1,946,000, the reduction being due to losses incurred by the second claimant’s clients as a result of their trading.
the third defendant expressed its wish to terminate its relationship with the second claimant and its willingness to transfer all remaining client funds to the second claimant in such circumstances, but also expressed concern that it might later be alleged that it was on notice of a risk that the second claimant would misappropriate those monies for its own use. The third defendant therefore issued an application dated 26 May 2015 seeking directions as to the return of the client monies, that application being listed with the claimants’ application on 3 and 4 June.
at the hearing the third defendant, through its counsel, Ms Rebecca Stubbs QC, pointed out that, on the termination of the outstanding client trades, the third defendant would stop supplying its pricing feed to the second claimant. As the claimants still required that feed for the second claimant’s ongoing business, Mr Gee withdrew the claimants’ demand for the return of the client monies, again requesting me to adjourn the claimants’ application in that regard. I refused that application for the same reasons I refused to adjourn the claim for the order referred to in paragraph 9(i) above. I did, however, adjourn the third defendants’ application for directions with liberty to restore, taking the view that the third defendant was entitled to seek such directions if and when the claimants renewed their demand.
It follows that the only aspect of the s44 application ultimately pursued by the claimants was the application for an order for disclosure referred to in paragraph 9(v) above. The disclosure sought relates to the profits (if any) made by the CD companies from the JVC trades. The claimants contend that the CD companies have made substantial profits for which they have not accounted to the JVC (demonstrated, they say, by the diminution in the client monies held by the third defendant by over US$8m) and seek disclosure, effectively by way of an account, of documents evidencing the profits made and, in particular, trade tickets evidencing hedging with third parties. Mr Gee emphasised that the simple disclosure of such trade tickets, which should be readily available, would disclose whether there had been a failure to account for profits made.
The relevant test
S44 provides, so far as is relevant, as follows:
“(1) Unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about the matters listed below as it has for the purposes of and in relation to legal proceedings.
(2) Those matters are—
(a) the taking of the evidence of witnesses;
(b) the preservation of evidence;
(c) making orders relating to property which is the subject of the proceedings or as to which any question arises in the proceedings—
(i) for the inspection, photographing, preservation, custody or detention of the property, or
(ii) ordering that samples be taken from, or any observation be made of or experiment conducted upon, the property;
and for that purpose authorising any person to enter any premises in the possession or control of a party to the arbitration;
(d) the sale of any goods the subject of the proceedings;
(e) the granting of an interim injunction or the appointment of a receiver.
(3) If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets.
(4) If the case is not one of urgency, the court shall act only on the application of a party to the arbitral proceedings (upon notice to the other parties and to the tribunal) made with the permission of the tribunal or the agreement in writing of the other parties.
(5) In any case the court shall act only if or to the extent that the arbitral tribunal, and any arbitral or other institution or person vested by the parties with power in that regard, has no power or is unable for the time being to act effectively.”
In Cetelem SA v Roust Holdings Ltd [2005] 1 WLR 3568 the Court of Appeal considered the jurisdiction of the court in urgent cases under s44(3), holding as follows:
The jurisdiction is limited to making orders necessary for the preservation of evidence or assets (paragraph 47 of the judgment of Clarke LJ);
However, whilst the purpose of the orders must be the preservation of evidence or assets, the court has powers to make any order it might make under s44(1) (in other words, any order the court may make in its general jurisdiction) which it thinks is necessary for that purpose (paragraph 47).
Further, the term “assets” in s44 should not be construed narrowly, but should be read as extending beyond property and goods to include choses of action, including contractual rights (paragraph 57). Thus, in Cetelem, the Court of Appeal upheld a mandatory order requiring the defendant to deliver an application for approval to the Russian Central Bank as being necessary to preserve the claimant’s contractual right to acquire an interest in a Russian bank.
The application for disclosure
The basis on which Mr Gee put the claimant’s application was as follows:
The asset which requires preservation is the business of the JVC and its subsidiaries, that business being placed in jeopardy because it was continuing to incur expenses of running the front-office of the joint venture, but was not receiving the corresponding profits from the resulting trading because CD’s companies were failing to account for those profits.
An order for disclosure from the court, in particular of trade tickets evidencing any hedging, is necessary to preserve the business of the JVC because it will “speed up” the arbitration process, enabling the claimants to mount interim applications in the arbitration as soon as possible.
The urgency is that, unless the claimants are able to obtain speedy relief and an award from the arbitrators, the JVC’s business will collapse and the asset will be lost.
The above contention was tenuous at best. It amounted, in the end, to a request that the court provide a degree of expedition in the arbitration process by ordering advance disclosure of a category of documents, it being entirely unclear how that would impact on the ultimate timetable, let alone whether it would make any significant difference to the ability of the JVC’s business to survive. In my judgment Mr Gee failed to establish that there was any real urgency, nor any necessity for the order he seeks. In particular, once the arbitrators are appointed and are in a position to act they can, if appropriate, order the disclosure the claimants seek. If Mr Gee is right, such disclosure can be provided rapidly so there will be little or no delay. The need for an earlier order is therefore quite unclear. What is clear is that it would be an interference by the court in the arbitration process where there seems to be no reason why the arbitrators will not be able to act effectively.
There is, however, a further and more fundamental objection to the application. The claimants are not pursuing their claim for trading profits in the arbitration (such claim being expressly excluded from the dispute resolution processes), but by way of Commercial Court proceedings on the Standby. It was Mr Gee’s contention that those proceedings should proceed expeditiously to a summary judgment hearing and, indeed, in a separate without notice hearing, I granted permission to serve out of the jurisdiction and gave directions for a shortened timetable for a summary judgment application to be heard this term if possible, on the understanding that the proceedings would be served overnight or shortly thereafter. In the event, I was subsequently informed that the proceedings and the summary judgment application were not served until 23 June.
It follows that the claimants are not relying on the arbitration to produce an award of the trading profits which will fund the JVC business, but hope and expect to obtain a judgment on the Standby. In those circumstances it is quite unclear why advance disclosure in the arbitration is necessary to preserve the JVC business, even if that was otherwise a tenable argument.
Mr Gee accepted that the claim for trading profits was being pursued in the Commercial Court proceedings, explaining that the claim in the arbitration would be for further profits made by the defendants from dealing with those trading profits, sums which he anticipated the claimants might need to trace into the hands of third parties. The s44(3) application was, he insisted, necessary to advance applications which would be made in the arbitration (or with the consent of the arbitrators) to trace and freeze such assets.
By that point, in my judgment, the application for disclosure had strayed far from the concepts of urgency and necessity and was founded upon pure speculation. It did not come close to satisfying the requirements of s44(3). Even if it did, I would have refused any relief as a matter of my discretion. I am satisfied that, having been forced to abandon the first four limbs of the application (at least for the purposes of the hearing), the claimants were pursuing a hopeless application for disclosure, which had always been something of an afterthought, in an attempt to salvage something from the exercise. That attempt was entirely unsuccessful.