Royal Courts of Justice
Rolls Building, Fetter Lane, London, EC4A 1NL
Before:
MR JUSTICE HAMBLEN
Between:
Stemcor UK Ltd | Claimant |
- and - | |
(1) Global Steel Holdings Ltd (2) Pramod Mittal | Defendants |
Conall Patton (instructed by Clyde & Co LLP) for the Claimant
Simon Browne-Wilkinson QC and Alexander Milner (instructed by Harold Benjamin) for the Defendants
Hearing dates: 3 and 4 February 2015
Judgment
Mr Justice Hamblen:
Introduction
The Claimant (“Stemcor”) applies for summary judgment against the Defendants (“GSHL” and “Mr Mittal”) in respect of sums allegedly due pursuant to two guarantees provided by them in relation to the liabilities to Stemcor of Global Ispat Koksna Industrija Lukavac (“GIKIL”). The Defendants make a cross-application for a stay of proceedings pending the outcome of the LCIA arbitration between Stemcor and GIKIL.
Factual Background
Stemcor is an English company and is one of the world’s largest traders in steel products. GIKIL is a Bosnian company which produces metallurgical coke for steel production. GSHL is a 51% shareholder in GIKIL and Mr Mittal is a director of GSHL.
Between 2004 and 2013, GIKIL and Stemcor traded with one another in accordance with contractual arrangements including a Prepayment Agreement dated 11 October 2004 and a Coke Sales Contract dated 15 October 2004 (both of which were amended on 7 May 2005).
The trading between Stemcor and GIKIL involved, in overview:
GIKIL and Stemcor agreeing a Coal Supply Contract for the sale by Stemcor to GIKIL of a consignment of coal (which is the main raw ingredient for the manufacture of coke);
Stemcor and GIKIL agreeing a “Delivery Protocol” setting out terms for the sale by GIKIL to Stemcor of a particular consignment of coke;
Stemcor making a prepayment to GIKIL (an Advance Payment) in respect of the price for the coke specified in the Delivery Protocol pursuant to the Prepayment Agreement;
GIKIL using the Advance Payment to buy coal from Stemcor; and
GIKIL manufacturing and delivering the coke to Stemcor (for on-sale to an end buyer) pursuant to the Coke Sales Contract.
The Coke Sales Contract provided (in clause 2.1) that Stemcor had the exclusive right to purchase coke from GIKIL. The price of the coke would be determined by reference to the price Stemcor agreed with the final buyers, less Stemcor’s costs and a commission of 2.5%. The price clause provided that:
“The Buyer will pay the Seller a price equivalent to the gross sales price to any other customer, less a deduction made up of all costs incurred by the Buyer in effecting the sale (including freight, interest, handling, bank and any other charges or costs incurred) and a fixed commission equal to 2.5% of the net Ex-Works Lukavac Sale Price.”
Over time, GIKIL accumulated debts towards Stemcor largely as a result of two factors. First, the Advance Payments made by Stemcor were not sufficient to enable GIKIL to purchase sufficient coal to manufacture the coke that it had contracted to produce. Secondly, the prices at which Stemcor sold coke (which in turn determined the prices that it paid GIKIL for the coke) were too low to discharge the Advance Payments in full. Stemcor terms the debts that resulted from these factors the “Coal Debt” and the “Coke Debt” respectively.
In May 2013 Stemcor notified GIKIL that it was not in a position to provide further funding to GIKIL in accordance with the Prepayment Agreement. GIKIL contends that this was a renunciation of the Prepayment Agreement and the Coke Sales Contract for which it claims substantial damages.
Stemcor claims that GIKIL owes it approximately US$160 million and that the Defendants are liable to pay this debt under the guarantees provided by the Defendants.
The Defendants each gave guarantees and indemnities in respect of GIKIL’s obligation to Stemcor. GSHL’s obligations are as set out in a Deed of Guarantee and Indemnity for Obligations under a Facility Agreement dated 13 July 2006 and a Deed of Guarantee and Indemnity of the same date as amended on 31 December 2008. Mr Mittal’s obligations are as set out in a Deed of Guarantee and Indemnity dated 24 January 2006 as amended on 14 January 2009.
Procedural Background
Stemcor issued these proceedings on 6 August 2013. Its case is that, at that time, GIKIL was indebted to Stemcor in the total sum of around US$150 million, and that the Defendants were liable to pay this debt under the guarantees.
The Defendants served defences on 21 October 2013.
On 4 November 2013 GIKIL started LCIA arbitration proceedings against Stemcor. In the arbitration, GIKIL asserts three cross-claims against Stemcor, as follows:
First, GIKIL alleges that Stemcor was under an obligation under the Coke Sales Contract to sell coke produced by GIKIL at the best price reasonably obtainable, and that Stemcor consistently failed to do this. The value of this claim has been estimated at US$153 million (Cross-Claim 1).
Secondly, GIKIL claims damages for what it says was Stemcor’s wrongful renunciation of the Prepayment Agreement and the Coke Sales Contract in May 2013. It is GIKIL’s case that Stemcor was not entitled simply to walk away from the arrangements, by refusing to make any further prepayments in respect of coke sales, without giving reasonable notice to GIKIL. GIKIL claims that Stemcor’s conduct in this regard has caused it damage of around US$134 million (Cross-Claim 2).
Thirdly, GIKIL claims damages of US$13 million in respect of a delivery of coal in May 2011 which was of unsatisfactory quality. (This claim was previously compromised for US$3 million but GIKIL contends that the settlement agreement is voidable for duress.)(Cross-Claim 3).
The arbitral tribunal, which was appointed in early 2014, consists of Mr Gary Born, Lord Hoffmann and Dr Julian Lew QC. On 21 November 2014 the tribunal made its Procedural Order No.3 which lays down directions leading to a final hearing in August 2016.
On 17 December 2014 Stemcor issued its application for summary judgment on that part of the alleged debt referable to purchases of coal by GIKIL (the Coal Debt), amounting to US$74,995,691.86 (before interest).
On 19 December 2014 the Defendants issued their application to stay the action pending the outcome of the arbitration. They contend that they are entitled to the benefit of GIKIL’s cross-claims and that they will give rise to a defence of equitable set off which will extinguish or reduce the Defendants’ liability to Stemcor under the guarantees.
The Defendants submitted that the stay application should be considered before that for summary judgment because the main purpose of the stay application is to ensure that the court does not determine GIKIL’s cross-claims (summarily or otherwise) before the arbitral tribunal has had an opportunity to consider them, thereby avoiding the riskof inconsistent decisions. However, whether or not this is an appropriate case for summary judgment is highly relevant to the Defendants’ application for a stay. If the court concludes that there is no real prospect of Cross-Claims 1 and 2 succeeding then duplicative proceedings in respect of the same issues may be considered unlikely. Conversely, if there is no such judgment then duplicative proceedings on the merits are likely and the application for a stay becomes much stronger. I therefore propose to consider the summary judgment application first.
The Summary Judgment application
The relevant principles in relation to applications for summary judgment are helpfully summarised by Lewison J in Easyair Ltd v Opal Telecom Ltd[2009] EWHC 339 (Ch) at [15]:
i) The court must consider whether the claimant has a “realistic” as opposed to a “fanciful” prospect of success: Swain v Hillman [2001] 2 All ER 91 ;
ii) A “realistic” claim is one that carries some degree of conviction. This means a claim that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8]
iii) In reaching its conclusion the court must not conduct a “mini-trial”: Swain v Hillman
iv) This does not mean that the court must take at face value and without analysis everything that a claimant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10]
v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550 ;
vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63 ;
vii) On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it. The reason is quite simple: if the respondent's case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant's case is bad in law, the sooner that is determined, the better. If it is possible to show by evidence that although material in the form of documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful, prospect of success. However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725.
I propose to address first the question of whether Stemcor can show that there is no real prospect of a successful defence to its claim for the Coal Debt.
Stemcor’s application, as originally issued, relied on a “no set-off” clause in the guarantees as well as a “no-set off” clause in the principal contracts. However, in the light of the Defendants’ evidence that Stemcor was precluded from invoking these provisions by reason of alleged oral assurances or a course of conduct, Stemcor accepted that it could not rely on these provisions on its application as factual allegations of this kind are generally unsuited to a summary determination. It contended, however, that this does not affect its entitlement to summary judgment because (1) there is no real prospect of GIKIL’s cross-claims succeeding and/or (2) set off cannot be relied upon by the Defendants without joinder of GIKIL to the action.
The first of the cross-claims relied upon depends upon there being an implied term of the Coke Sales Contract that “Stemcor would sell the coal purchased from GIKIL at the best price reasonably obtainable”.
In support of the implication of such a term the Defendants rely “in particular” on the following facts as set out in its Amended Defence:
“(1) GIKIL was permitted to sell coke only to Stemcor;
(2) Stemcor otherwise had complete freedom to dispose of the coke as it wished;
(3) GIKIL was wholly dependent on the revenue generated by Stemcor’s sales of coke to fund the purchase of coal which was required to produce additional coke;
(4) a failure to achieve a proper price would therefore have the effect of reducing the quantity of coal that GIKIL was able to purchase and the amount of coke that it was subsequently able to produce; and
(5) a continuous decline in production capacity would ultimately lead to the cessation of production, the stoppage of the battery and potentially catastrophic damage to GIKIL’s plant and to the wider community of Lukavac and environment.”
Some of these facts are explained in more detail at paragraph 7 of the Amended Defence as follows:
“GIKIL manufactures coke and coke by-products by the pyrolysis of suitable grades of coal. This process involves broadly the following stages: (a) bituminous coal is processed to control the grain size and quality of the material; (b) the coal is fed into a series of ovens and heated at high temperatures in the absence of oxygen for between 14 and 24 hours; (c) the volatile compounds driven from the coal are collected and processed to recover combustible gases and other by-products, leaving behind solid carbon in the form of coke; (d) the coke is removed from the ovens and cooled with water or inert gas, screened to the desired grain size and shipped to a storage yard or directly to a blast furnace.
Production of coke by this method is a continuous, 24-hour process which cannot be interrupted for the lifetime of the coke battery (typically 20-30 years) without catastrophic damage occurring. It is therefore essential for GIKIL to ensure a constant supply of coal in sufficient quantities to keep the battery operational. Stemcor would have been aware of this at all times, from its extensive experience of the coke business, and because of the repeated reminders given by GIKIL in correspondence.”
For the purpose of the present application Stemcor was prepared to assume that all these facts are true. Even if that be so it contended that the strict requirements for the implication of the alleged term are not satisfied.
Stemcor submitted that it remains the case that “it must be necessary” to imply the proposed term, and it is “never sufficient” that the implication would be reasonable: Mediterranean Salvage & Towage v Seamar Trading & Commerce [2009] EWCA Civ 531, [2010] 1 All ER (Comm) 1 at [15]. The implied term must represent the “only meaning” that the agreement could have: Chantry Estates (Southeast) v Anderson[2010] EWCA Civ 316, 130 ConLR 13 at [16].
Stemcor submitted that these requirements are not satisfied here having regard in particular to the following:
Where a party has an express contractual right to set the price, this is not in general subject to “some unstated obligation to sell … for the best price reasonably obtainable” – see Hamsard 3147 Ltd v Boots UK Ltd[2013] EWHC 3251 (Pat) at [90].
Stemcor had its own commercial incentive to achieve a good price, since it stood to earn more from its commission, and there is therefore no necessity to imply an obligation to maximise the price.
GIKIL retained significant power to influence the price, in that it could veto a sale by declining to enter into a Delivery Protocol for the relevant quantity of coke.
Where a contract confers a decision-making power on one party, the Court may be prepared to imply that this power is subject to requirements of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality: Socimer v Standard Bank[2006] EWCA Civ 116, [2008] 1 Lloyd's Rep 558 at [66] and [106] perRix LJ. Such an implication will be made on grounds of necessity: Mid-Essex Hospital Services NHS Trust v Compass Group [2013] EWCA Civ 200 at [82] and [136]. Constraints of good faith and rationality are different in kind from a duty to obtain the market price: Socimer at [66] and [112]. Even if they are implied into the Coke Sales Contract, they do not assist the Defendants, since it is not alleged that Stemcor breached them.
Any analogy with agency would be inapposite. It is not suggested that Stemcor actually was an agent, a status that would import fiduciary duties entirely inconsistent with the commercial relationship of buyer and seller embodied in the Coke Sales Contract.
I have given careful consideration to Stemcor’s written and oral arguments on this issue and the authorities upon which it relies. However, my conclusion is that it has not been established that the Defendants have no real prospect of succeeding on this issue. That being my conclusion it would not be appropriate to address the merits of the issue in detail, but my reasons for so concluding include the following:
This is a case in which the factual background to the parties’ interlocking agreements is likely to be of considerable importance. At any trial the facts which are “in particular” relied upon in the Amended Defence will be explained and supplemented by witness and documentary evidence. That evidence will enable a much fuller understanding to be obtained, for example, of “the relevant background”, “the practical consequences” of each side’s case and the “apparent business purposes of the parties” – see the Belize case at [21] and [22] per Lord Hoffman.
Even on the bare facts alleged it is apparent that the sale price achieved for the sale of the coke was critical to the working of the parties’ agreements and, in turn, to the continued operation of GIKIL’s coke battery. It was Stemcor’s own case that the relative price of coal against the price it obtained on sales of the coke resulted in the Advance Payments being too small to cover the full cost of the coal needed to manufacture the coke, giving rise to the Coal Debt. Further, on GIKIL’s case, it was the reduced level of the Advance Payments which meant that it was unable to purchase sufficient coal to manufacture the coke it had contracted to produce, giving rise to the Coke Debt. On GIKIL’s case the failure to obtain the best price reasonably obtainable resulted in a loss of US$148 million, including US$115 million in 2008 alone. Building up debt of this order led Stemcor to conclude that no further Advance Payments could be made and, in effect, that the agreements could not continue.
Despite the critical role of the coke sale price it is Stemcor’s case that it owed no duty of any kind in relation to the price it obtained.
The earning of a 2.5% commission is not a sufficient safeguard and would not, for example, mean that a sales agent owed no duty in relation to the price it obtained. Given, in particular, the need to keep the coke battery running, for GIKIL to decline to enter into a Delivery Protocol, as Stemcor suggested, was not a practical option, although this raises factual issues.
Although there was no contract of agency, Stemcor’s role in selling the coke was analogous to that of an exclusive sales agent. The coke could only be sold to Stemcor, but the price payable was the price obtained by Stemcor less expenses and commission. A sales agent would arguably owe a duty to obtain the best price reasonably obtainable, or a duty to exercise reasonable skill and care to do so – see Bowstead and Reynolds (20th ed.) at para. 6-017.
The Socimer line of cases are not directly in point as this is not a case involving a contractual discretion or decision making power. The alleged duty relates to what Stemcor was obliged to do, namely achieve the best obtainable price. In any event, the Socimer line of cases support the implication of some term, albeit not as extensive a term as that here alleged.
There is an ambiguity in the wording of clause 2.1 which on any view is not clearly expressed. In particular it refers not to the price obtained by Stemcor from its own customer but to “a price equivalent to the gross sales price to any other customer”.
Although Stemcor was critical of the quantum of Cross-Claim 1, it did not contend that there was no real prospect of it being established. It follows that there is a real prospect of a cross-claim being established which would exceed the claim for which summary judgment is sought. In those circumstances it is not necessary to decide whether or not there is a real prospect of Cross-Claim 2 being established or the quantum of the Coal Debt and I do not propose to be drawn into the merits of the case any further than is required.
Even if Cross-Claim 1 does have real prospects of success Stemcor argued that, as an unliquidated damages claim, it could not be relied upon by the Defendants without joinder of GIKIL.
For the purpose of the present application Stemcor accepted that a guarantor can rely on a set off in respect of an unliquidated cross-claim belonging to principal debtor. Although the decisions of Finlay LJ in Wilson v. Mitchell[1939] 2 KB 869 and Isaacs J in the Australian case of Cellulose Products v. Truda [1970] 92 WN (NSW) 561 suggest otherwise, there is a strong body of more modern English authority that such rights of set off may be relied upon. In particular:
In Hyundai v. Pournaras [1978] 2 Lloyd’s Rep 502, 508 the Court of Appeal endorsed a statement in Halsbury’s Laws of England (4th ed.) that:
“On being sued by the creditor for payment of the debt guaranteed, a surety may avail himself of any right to set off or counterclaim which the principal debtor possesses against the creditor, and any division of the High Court can give effect to it or to any equitable defence raised”
In Barclays Bank plc v. Gruffydd (30 October 1992) Scott LJ said that he had “difficulty accepting that the statements of principle to be found in Wilson v. Mitchell and the Cellulose case are correct statements of the law”; Purchas LJ stated that they “were in the first instance wrongly decided and, in the second, if rightly decided, do not represent English law” andNolan LJ agreed with both Scott and Purchas LJJ on this point.
In BOC Group Ltd v Centeon [1993] 1 All ER (Comm) 53 Rix J stated (at p67) that if the principal has an arguable set off “it seems to me that the guarantor is entitled to rely on the alleged set off as well”.
More recently in Carey Value Added v. Grupo Urvasco[2010] EWHC 1905 (Comm) Blair J stated at [17]:
“It is not in dispute that unless the right is expressly excluded, a guarantor can prima facie avail himself of any right of set-off possessed by the primary debtor against the creditor”.
Stemcor contended, however, that a set off for an unliquidated damages claim cannot be relied upon by the guarantor unless he joined the principal debtor to the action. In this connection it relied in particular on the decision of Mr Anthony Colman QC (as he then was) in Sun Alliance Pensions Life v RJL [1991] 2 Lloyd’s Rep 410 at 417-8:
“Where, however, the principal debtor had no more than a cross-claim against the creditor for unliquidated damages, as distinct from a claim for a liquidated sum arising out of the same transaction, the guarantor could not rely on that cross-claim to extinguish or reduce his liability on the guarantee unless he joined the principal debtor as a party to the action.”
Although Mr Colman QC recorded that this was common ground he also stated that it accurately reflected what was to be drawn from the authorities, including Wilson v. Mitchell and the Cellulose case
The Defendants disputed this on the grounds that a set off reduces or extinguishes the claim and thereby provides a defence regardless of joinder. In the Gruffydd case Scott LJ stated as follows:
“The law is stated in Halsbury’s Laws, 4th Edition, Volume 20, paragraph 29 as follows:
“On being sued by the creditor for payment of the debt guaranteed, a surety may avail himself of any right to set-off or counterclaim which the principal debtor possesses against the creditor… Whenever the set-off or counterclaim relied on does not operate directly to reduce the debt guaranteed, the principal debtor should be made a party, so as to bind him and prevent him from afterwards claiming payment from the creditor”.
This passage is, in my view, a correct statement of the law. A set-off, whether legal or equitable, available to the principal debtor extinguishes, or reduces pro tanto, the amount of the creditor’s claim. It is a true defence, as opposed to being merely a cross-claim (see Hanak v Green [1958] 2 Q.B.9andHalsbury’s Laws, 4th edition, volume 42, paragraph 425). A surety who has guaranteed payment of the principal debtor’s indebtedness cannot, in the absence of something special in the guarantee, be required to pay a sum that the principal debtor does not owe...”
It is to be noted, however, that Scott LJ observed that in that case the law was no longer in dispute between the parties, that he was not expressing a final conclusion and that had he considered that the set off claim had sufficient substance for leave to defend purposes the defendant “should be put on terms that, unless the liquidator of the company agrees that the company will regard itself as bound by an adjudication on the claim in the company’s absence, the necessary applications will be made for the company to be joined as a party”.
In so far as the reasoning of Scott LJ was based on the proposition that a right of set off automatically reduces or extinguishes the claim, this has been doubted in relation to rights of equitable set off – see Derham on The Law of Set Off at 18-25. Further, in Fearns v Anglo Dutch Paint & Chemical Co Ltd [2011] 1 WLR George Leggatt QC (as he then was) decided that a right of equitable set off does not extinguish liability until agreement or judgment that the cross-claims be netted off. This conclusion followed an extensive review of the authorities and of considerations of principle. Males J expressed his agreement with that conclusion in Equitas Ltd v Walsham Brothers & Co Ltd [2013] EWHC (Comm) 3264; [2014] Lloyd’s IRLR 398. It does not appear that Gruffydd was cited in either of those decisions. However, Scott LJ’s comments were obiter views expressed in an extempore unreported judgment and did not involve any final conclusion. I respectfully agree with the analysis and decision of Mr Leggatt QC on this issue for the detailed reasons given by him.
As has been frequently stated, equitable set off is nevertheless a “substantive defence”. What this means is explained by Derham as follows at 18.25:
“…by ‘substantive defence’ it is meant that, where circumstances exist which give rise to the set-off, the creditor is not permitted in equity to assert that any moneys are due to it, or to proceed on the basis that the debtor has defaulted in payment, to the extent of the set-off. Because of the substantive nature of the defence its effect in equity is similar to a discharge of the debt pro tanto, but it does not bring about a reduction in or an extinguishment of the cross-demands at law until judgment for a set-off.”
As Mr Leggatt QC stated in the Fearns case at [26] its effect is “to prevent each party from enforcing or relying on its claim to the extent of the other claim where the connection between the claims would make this manifestly unjust”.
The Defendants submitted that whether or not a right of equitable set off extinguishes the claim it is a “substantive defence” for the principal debtor and, as such, a defendant guarantor to a summary judgment application should have leave to defend without conditions being imposed, such as joinder of the principal debtor. The main reason that such joinder is generally required is the obvious desirability of having all interested parties joined to the action so that they are all bound by its outcome and in particular to ensure that the creditor is protected against any subsequent claim by the principal debtor. As Derham explains at 18.24:
“…the attitude of the courts of equity usually is that all parties materially interested in the subject of a suit should be made parties to the suit. The debtor should be present so that he or she may be bound by a determination as to a set-off. The creditor would then be protected against a subsequent claim by the debtor. On that basis, the debtor should be a party in these cases. The surety should be entitled to have the debtor joined as a defendant, since the debtor’s presence would be necessary to enable the surety to set up a defence to the creditor’s action. Further, when a creditor is applying for summary judgment against the surety, it would be consistent with that view to impose a condition upon the grant of leave to defend that the debtor be joined.”
As Stemcor accepted, however, there is no rule of law requiring joinder. Thus, for example, Chitty on Contracts Vol 2 (31st ed.) states at para. 44-097 that the guarantor can “normally” only avail himself of the right of set off if the principal debtor is joined. O’Donovan and Phillips on The Law of Guarantee at 11.63 state that this “should” be a condition of leave to defend, whilst observing that “the guarantor should be allowed to resist an application for summary judgment on the basis of this defence without joining the principal as a party to the proceedings at all. It should be sufficient that the principal is joined before the ultimate determination of the validity of the claim, so that the principal is bound by the final orders”.
Further, in Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co Ltd [1996] 1 AC 199 the House of Lords held that a guarantor was entitled to leave to defend on the basis of the principal’s right to equitable set off, without imposing a condition that the principal be joined, although there does not appear to have been argument on the issue.
In summary, whilst joinder will generally be required it is ultimately a matter for the discretion of the court to be exercised according to the particular facts and circumstances of the case before it and I accordingly propose to defer determination of this issue until the question of stay has been addressed.
The application for a stay
Whilst Stemcor accepted that the court has jurisdiction to stay one set of proceedings pending the outcome of another, even where the parties are different, it submitted that such a stay should only be granted in “rare and compelling circumstances” – see Reichhold Norway ASA v Goldman Sachs International [2000] 1 WLR 173; Konkola Copper Mines plc v Coromin[2006] EWCA Civ 5, [2006] 1 All ER (Comm) 437 at [63].
Stemcor further submitted that this test is all the more difficult to meet where (as in the present case but unlike the Reichhold case) the proceedings in England are brought pursuant to an exclusive jurisdiction clause. In such cases, the argument for a stay must be compelling enough to justify depriving the claimant of the full benefit of the agreed jurisdiction clause: Amlin Corporate Member Ltd and others v Oriental Assurance Corporation [2012] EWCA Civ 1341, [2013] 1 All ER (Comm) 495 at [22] per Longmore LJ.
The Defendants submitted that there were sufficiently rare and compelling circumstances in this case having regard in particular to the following matters:
The risk of conflicting decisions which applies not only to the validity of GIKIL’s cross-claims but also to the quantum of any damages and also the amount of the debt which GIKIL owes Stemcor.
The fact that the determination of the issues in parallel would be extraordinarily wasteful of court time and the parties’ resources.
The Defendants agreement to be bound by any findings made in the arbitration and that they are liable to pay Stemcor any amount that GIKIL is adjudged liable to pay it.
The relative progress of the arbitration and the court proceedings and Stemcor’s delay in progressing the latter.
The fact that liability depends on the resolution of the cross-claims made by GIKIL against Stemcor, which claims would be more satisfactorily resolved in the arbitration between the parties being conducted pursuant to the arbitration agreement made between them.
The approach taken in the cases of Alfred McAlpine Construction Ltd v. Unex Corporation Ltd (1994) 38 Con LR 63 and Roche Products Ltd v. Freeman Process Systems Ltd (1996) 80 Build LR 102.
As to (1), Stemcor’s solicitor, Mr Swangard, acknowledged that as matters stand “there is a real risk of inconsistent outcomes as between the Commercial Court proceedings and the arbitration in relation to the cross-claims.” This would self-evidently be most unsatisfactory. If, on the other hand, there was a stay of the proceedings in court then there is likely to be no such real risk given the Defendants’ agreement to be bound by the outcome of the arbitration.
As to (2), Mr Swangard acknowledged that for the issues to be determined in two separate sets of proceedings will involve “wasteful duplication of evidence and submissions”. It will also involve duplication of cost and of tribunal time which, as far as the court is concerned, affects other court users. Again, in the light of the agreement to be bound, such duplication is unlikely if a stay is granted.
As to (3), this was regarded as a significant factor in the cases relied upon by the Defendants. Stemcor objected that this might have the effect of avoiding the effect of the exclusive jurisdiction clause of which it is entitled to take advantage. However, Stemcor’s stated position is that it is not willing to provide a similar agreement to be bound. It follows that if it is successful in the arbitration it will not need to pursue its right to pursue the claim in court in the light of the Defendants’ agreement to be bound. However, if it is unsuccessful in the arbitration then it retains the right to do so, if it so chooses.
It might be said that Stemcor’s position means that duplicative proceedings remain a possibility even if a stay is granted, but I regard this as unlikely, particularly given the eminence of the arbitration tribunal. Realistically Stemcor is unlikely to wish to re-litigate issues determined by such a tribunal.
As to (4), the chronology of the court and arbitration proceedings is as follows:
Date Commercial Court Arbitration
Claim Form and Particulars of Claim
Mr Mittal’s Defence
GSHL’s Defence
4.11.13 GIKIL’s Request for Arbitration
Defendants propose stay/consolidation
23.12.13 GIKIL refuses consolidation (letter received by Claimants on 14.1)
18.03.14 Stemcor’s response to the
Request
Stemcor’s serves draft
Amended PoC
GIKIL’s Statement of Case
Consent Order
Stemcor’s Amended PoC and Stemcor’s Defence and
Further Information Counterclaim
GIKIL’s Reply and Defence
to Counterclaim
Defendants’ Amended Defence
Stemcor’s Rejoinder and Reply
to Defence to Counterclaim
Stemcor’s Reply
CMC application issued with
short time estimate
GIKIL’s Rejoinder
Defendants’ Further Information
12.11.14 Procedural Order No. 3
Stemcor’s application for summary judgment
19.12.14 Defendants’ application for a stay
Although the court proceedings commenced first it is apparent that they have not been progressed with any expedition. Particulars of Claim were served in August 2013 and Defences were served in October 2013. There was then a delay whilst the possibility of an agreed stay or consolidation was considered. This was suggested on behalf of the Defendants in November 2013 but did not proceed once GIKIL had made it clear in early January 2014 that it was not prepared to agree to it. There was then a delay in the light of Stemcor’s decision to amend its claim. It was not until June 2014 that this was finally served pursuant to a consent order. There was then a further round of pleadings. An application for a CMC with a short time estimate was finally issued in September 2013 (even though under PD58 10.2 the claimant “must” apply for a CMC within 14 days of service of the Defence). That was then overtaken by the application for summary judgment issued in December 2014. Whilst Stemcor sought to blame the Defendants and indeed the court for periods of delay, there is no doubt that primary responsibility for the fact that the action has only proceeded to close of pleadings 18 months after it was commenced lies with Stemcor.
Despite being commenced later the arbitration proceedings are more advanced than the court proceedings. Directions up to and including the final hearing have been made. These include a detailed timetable for disclosure and factual and expert evidence. The hearing date has been fixed. Some disclosure has been provided and the main disclosure process is due to start shortly.
As to (5), as a matter of principle and practicality it is more satisfactory for the issue of liability on the cross-claims to be determined in proceedings between the parties to the relevant contract, which parties will have the relevant documents and factual witnesses. Whilst there is clearly a shareholding connection between GIKIL and GSHL, they are separate entities and the Bosnian government has a 49% interest in GIKIL. It cannot be assumed that all relevant material and witnesses will be made available without difficulty to the Defendants for the purpose of the court proceedings.
As to (6), in the Alfred McAlpine case a guarantor (Unex) applied for a stay pending an arbitration between the claimant, Alfred McAlpine, and Unex’s subsidiary, Panatown. The Court of Appeal did not grant a stay because the result of the arbitration would not have been binding on the guarantor. However, it made clear that it would otherwise have ordered a stay. Evans LJ (with whom Glidewell and Waite LJJ agreed), said that:
“This is a case where the guarantor is the parent company of the employer. Presumably, the same legal representatives will act for both. There is no suggestion that the contract of guarantee is not binding upon Unex in accordance with its terms, whatever the legal effect of those terms may be.
In these circumstances, if Unex as defendants in these proceedings were formally to admit their liability under the guarantee for the amount of any award made against Panatown, then they would be in a position to raise the question whether the Court should, in the exercise of its discretion, permit the same issues to be raised and decided in these proceedings as in arbitration references between what are in substance the same parties. It is clearly undesirable that there would be such a duplication of proceedings, to say nothing of the risk of inconsistent results, unless special reasons are shown in the circumstances of a particular case. The costs of adapting and reproducing what would essentially be the same pleadings, lists of documents and other formal documents would be wholly unnecessary, and there could well be a risk that, by seeking to fight or defend themselves on two fronts, the parties would not be able to concentrate on either front, as they should be able to do.
In short, ample discretionary grounds appear to exist for ordering a stay of Court proceedings against a guarantor or surety which would duplicate a pending reference to arbitration between the contractor and the employer or principal debtor, unless the circumstances justify both sets of proceedings in a particular case.”
Alfred McAlpine was followed by Judge Hicks QC (sitting as a High Court Judge) in Roche Products Ltd v. Freeman Process Systems Ltd (1996) 80 Build LR 102, another case where a parent company had guaranteed the liabilities of its subsidiary to the claimant. In that case a stay was granted as the guarantor had agreed to be bound by the result of the arbitration. In arriving at that conclusion Judge Hicks QC stated as follows:
“In balancing these considerations I find that what weighs most heavily with me is that the primary contract is that between the Plaintiffs and the First Defendant. It is their respective rights and obligations which will be in issue in whatever proceedings ensue. The obligations of the guarantor are derivative and secondary. Moreover, were the guarantor independent the situation might be different, but the Second Defendant is the First Defendant’s holding company and they are jointly represented in the action, so the former’s absence from arbitration is more apparent than real.”
In summary, I consider that there is force in all the factors relied upon by the Defendants and that they can derive support from the Court of Appeal’s approach and reasoning in Alfred McAlpine.
Stemcor relied on the decision of Cooke J in Classic Maritime v Lion Diversified Holdings[2009] EWHC 1142 (Comm), [2010] 1 Lloyd’s Rep 59, where a stay of proceedings under a guarantee pending an arbitration to be brought by the principal debtor against the creditor was refused. Cooke J said at [23] that a stay would achieve “the very opposite of what was envisaged by the terms of the guarantee”, which provided for the obligations of the guarantor to be tried separately from those of the principal debtor. He also pointed out at [24] that the arbitral award would not be binding on the guarantor. There are a number of grounds of distinction between that case and the present. In particular:
The guarantee in that case expressly provided that the creditor “may bring and prosecute separate actions against (the guarantor) and (the principal debtor) or may join (them) in one action”. It is apparent that Cooke J placed considerable reliance on this clause – see, in particular at [23] and [26].
Arbitration proceedings had yet to be instituted.
The principal debtor was a subsidiary of the guarantor and the Judge took the view that they were acting together so as to seek to avoid the effect of the bargain which had been made.
Stemcor has exercised its right to apply to the court for summary judgment and retains its right to have the court determine its main claim on the merits should it not succeed in the arbitration as well as the right to pursue any independent claims it may have.
Neither Alfred McAlpine nor the Roche case were apparently cited to the court. They attached far more significance to an offer to be bound by the arbitration award than did Cooke J.
Stemcor submitted that a stay should be refused having regard in particular to (1) what the parties agreed; (2) the party responsible for duplication; (3) the available solutions and that the requisite rare and compelling circumstances had not been made out.
As to (1), Stemcor stressed the fact that the guarantees contained an exclusive jurisdiction clause expressed in wide terms which precluded forum conveniens arguments. They also stressed that the guarantees were undertaken as a “primary obligation”; that an indemnity was provided as an “independent and primary obligation”, and that they made it clear that there was no requirement to sue the principal debtor first. I accept that these are important considerations. However, as already observed, Stemcor would retain the right to pursue its claims in court if the outcome of the arbitration was unfavourable. Further, it has already exercised its right to seek summary judgment in court and it remains entitled to pursue any of its claims under the guarantee which are independent of the issues to be determined in the arbitration.
As to (2), Stemcor submitted that the potential duplication has been created by GIKIL’s decision to commence arbitration proceedings after the court proceedings had been initiated and not to take up the offer of stay/consolidation made by the Defendants in November 2013 and that this should be regarded as a “group” decision. However, GIKIL is only a 51% owned subsidiary and it has a contractual right to have its disputes with Stemcor decided in arbitration. Stemcor chose to enter into that arbitration agreement and can hardly complain if it is sought to be enforced.
Nor do I accept Stemcor’s submission that there has been undue delay by the Defendants in the issue of the present stay application. The making of such an application is closely linked to the issues in the action being defined. That has taken some time, largely due to Stemcor itself. Moreover, the likelihood of such an application being made has been apparent since at least June 2014 when the right to do so was expressly reserved in a Consent Order.
As to (3), Stemcor submitted that the court proceedings could be concluded in advance of the arbitration proceedings and that delay would be prejudicial to them. However, there is no good reason to suppose that the court trial directions should be different to those agreed in the arbitration. Those envisage exchange of expert evidence being completed at the end of February 2016 and a final hearing in August 2016. A similar directions timetable in court is unlikely to result in a trial significantly earlier than August 2016. It is then said that there may be delays in completing final submissions and in the production of the award but if Stemcor can satisfy the arbitral tribunal that urgency is required then that can be addressed. Further, unlike LCIA arbitration proceedings, court proceedings may be subject to appeal, which may result in significant delay.
If GIKIL is joined then Stemcor’s “solution” involves two sets of duplicative proceedings and effectively a race to judgment. If GIKIL is not joined then it involves two sets of proceedings binding only the parties to them that are likely to be progressed and to conclude on a similar timetable. Neither “solution” is at all satisfactory.
In summary, aside from point (1), I do not consider that there is much force in the main points relied upon by Stemcor. Even point (1) has less force in this case than it may have in others, for the reasons given above.
In my judgment, having had careful regard to the parties’ submissions and evidence, for the reasons outlined above this is a case in which the factors in favour of a stay far outweigh those against it. I consider that the particular circumstances of this case are sufficiently rare and compelling to justify the grant of a stay and that it is appropriate for the court to grant such a stay in the exercise of its discretion.
In the light of that determination I return to the issue of joinder of GIKIL. In circumstances where the proceedings are being stayed pending the determination of the arbitration with GIKIL there can be no useful purpose in requiring such joinder. Even if no stay had been granted there would have been a strong argument that GIKIL should not be required to join proceedings to partake in a race to judgment with arbitration proceedings which it was contractually entitled to bring.
Conclusion
For the reasons outlined above I refuse Stemcor’s application for summary judgment and grant the Defendants’ application for a stay. The extent and terms of such a stay will require further consideration.