DTEK Trading S.A. v Morozov & Anor

This is an application made by the Claimant (“DTEK”) for permission to serve the Arbitration Claim Form of 8th November 2016 on the Defendants out of the jurisdiction in Ukraine. It arises in the context of an ongoing arbitration between Steel Mont Trading S.A. (“Steel Mont”) qua claimant and DTEK qua respondent (“the Arbitration”). The Defendants are not parties to the arbitration.

The relevant background is set out in some detail in the statement of Mr Choo in support of the application. For present purposes it suffices to say that the arbitration concerns a question of whether a cargo of coal was or was not on specification, in particular as regards calorific value. It is DTEK’s case that a report numbered No.1411501UA Yu produced by the Second Defendant at point of sale (“the Discharge Certificate”), which stated that the calorific value was within contractual parameters, erred on this issue.

It relies (and relied in refusing to make a final payment to sellers for the coal) on a number of other tests of the same cargo which produced rather different (non-contractual) results. Those tests include further tests by the Second Defendant under certificate numbers No. 1412194UA and 1412195UA.

DTEK has also deployed in the arbitration a settlement agreement concluded between it and the Second Defendant (“the DTEK Settlement Agreement”). That document states inter alia:

In the arbitration the claimant sellers have served a witness statement from the First Defendant defending the accuracy of the original testing. He also comments on the DTEK Settlement Agreement and says that the agreement related to inaccuracies in the subsequent testing, and not to the Discharge Certificate. In support of that evidence he appends to his statement a document which purports to be a settlement agreement between DTEK and the Second Defendant (“the Morozov Settlement Agreement”). The section quoted above however differs from the DTEK Settlement Agreement in that it does not refer to the Discharge Certificate at all, but instead states:

There is therefore obviously an issue as to the integrity of one of these documents. The First Defendant will be cross examined on the copies of the documents in the arbitration; however it is unsurprising that DTEK in this application wishes to ensure that the original of the Morozov Settlement Agreement is preserved, and indeed produced for examination by them. The issue, of course, is that the Defendants are not parties to the arbitration and are resident in the Ukraine.

In the Arbitration Claim Form, DTEK is therefore seeking relief against the Defendants pursuant to section 44 of the Arbitration Act 1996 (“the Act”). Specifically, DTEK is asking the Court for an order that the Defendants be required to preserve and allow DTEK to inspect the original version of the Morozov Settlement Agreement.

This application is made with the consent of the arbitration Tribunal and was not opposed by the arbitration claimants. The question is purely a matter of the Court’s power and discretion to order service of proceedings against third parties outside the jurisdiction pursuant to section 44 of the Arbitration Act.

Section 44 of the Act provides as follows:

The powers of the Court to serve proceedings out of the jurisdiction in support of this section are set out in CPR 62.5. This provides as follows:

In the present instance, the Claimant is seeking the permission of the Court to serve the Claim Form on the Defendants out of the jurisdiction pursuant to CPR 62.5(1)(b), i.e. on the basis that the present claim is for an order under section 44 of the Act.

This is a controversial question which has been touched on over the years in a number of decisions without being addressed head on. The Court of Appeal in declining to consider the issue in one case have reportedly described the issue as “not straightforward” (see Cruz City paragraph 41). But the principal hurdle faced by DTEK is that Males J held (albeit obiter) only recently, and following full argument, that orders under section 44 of the Act cannot be made against non-parties to the arbitration agreement, and hence that permission to serve out cannot be given against non-parties pursuant to CPR 62.5(1)(b): Cruz City 1 Mauritius Holdings v Unitech Ltd [2014] EWHC 3704 (Comm) [2015] 1 Lloyd's Rep. 191 - to which I shall return below.

DTEK in this application has submitted that I should hold either that the decision in Cruz City is wrong; or at the very least, that DTEK has a good arguable case that it is entitled to serve the Claim Form out of the jurisdiction pursuant to CPR 62.5(1)(b) and that is all that it is required to show for present purposes.

It is fair to say that DTEK principally urged me to pursue the second course. They acknowledged that, as Males J noted at [14] in Cruz City following Altimo Holdings & Investment Ltd v Krgyz Mobil Tel Ltd [2011] UKPC7, [2012] 1 WLR 1804 at [81], when a question of law goes to the court’s jurisdiction, the court will normally decide that question. However they submitted that this was a case where it was appropriate to take a different course, since the Defendants were unrepresented, and if I made the order it would be open to the Defendants to challenge that decision and have the point decided with full argument on the application to set aside. In Cruz City, it should be noted, Males J had the benefit of three sets of leading and junior counsel.

Tempting as it is to follow this course, it seems to me that the authorities, including Altimo and the recent restatement of the principles applicable in AK Investment CJSC v Kyrgyz Mobile Tel Ltd [2011] UKPC 7; [2011] 1 CLC 205 at paragraphs 71, 81 and 88 indicate that the preferred approach is for a determination to be made on points of law.

Further, while this is an application where only one party was represented, it cannot be said, in the context of Cruz City, that the view opposed to that of the applicant might not be fully put.

Another point which inclines me to this course is that while Mr Smith sought to persuade me that the appropriate hurdle for service out was “an argument” (by reference to the Tedcom case with which I deal below) I am satisfied that in the context of CPR 62.5, as in the context of CPR 6, the relevant test is that of “good arguable case”. This is the test which appears to have been applied in the other decisions and there is no rational reason for a different hurdle to be set. That being so, as was noted in the AK Investment case, it remains the case that “good arguable case” is taken to mean that one side has a much better argument on the material available. There therefore ought not to be an appreciable difference between the good arguable case exercise and a determination on the point.

That itself reflects the fact (noted in the authorities which follow from Seaconsar) that the exercise in which the court is engaged is to ascertain if it is satisfied or as satisfied as it can be (having regard to the limitations which an interlocutory process imposes) that factors exist which allow the court to take jurisdiction, while bearing in mind what Males J referred to as one of the “cardinal points” applicable to service out, namely that any doubt as to the correct construction of the jurisdictional gateways ought to be resolved in favour of the foreign defendant. See Cruz City [15] citing Dicey Morris & Collins Conflict of Laws 15^th ed paragraph 11-142.

It is therefore appropriate to review the relevant authorities.

There are two principal authorities predating the current Act. The first is that of Clarke J in The Cienvik [1996] 2 Lloyd's Rep. 395 where Clarke J (as he then was) held in the context of an application for an urgent inspection/survey of a vessel that the old section 12(6) of the 1950 Act allowed the court to make orders against a non-party but that RSC Order 73 rule 7 did not permit service of such applications out of the jurisdiction. In so doing he considered that:

He also considered that the rule, viewed in context, was “properly to be regarded as being concerned only with applications by and against parties to an arbitration which relate to the arbitration to which they are parties”. He noted the absence of a “necessary and proper party” provision within the rule which would be the natural route, as it is in litigation, for the joinder of third parties. It is also notable that he flagged up the possibility that this issue should be considered in any future redrafting of the rules. It is not suggested that this issue was considered or addressed when the rules were redrafted for the purposes of CPR and the Arbitration Act 1996.

The second authority is the judgment of Thomas J (as he then was) in Vale do Rio Doce Navegacao SA v Shanghai Bao Steel Ocean Shipping Co Ltd [2000] 2 Lloyd's Rep. 1. Again, as with The Cienvik, it concerned a different version of the rules to those which are in force today. In a detailed judgment he held in terms that the relevant provisions referred solely to an application by one party to an arbitration agreement against another party to that agreement. In doing so he specifically endorsed the reasoning of Clarke J in The Cienvik as applicable to the 1996 Arbitration Act and to the new rules following the 1996 Act. While the application concerned the predecessor to CPR 62.5(1)(c), he did specifically consider the position under the equivalent to CPR 62.5(1)(b). and he stated:

As Males J noted in Cruz City at [35]-[36] these cases demonstrate a line of positive decision that service out against third parties is not permissible, at least as regards CPR 62.5(1)(c). That line of authority is reflected in leading textbooks on the subject.

There is then a series of more recent authorities, relied on by DTEK as they were by the applicants in Cruz City, that express the view that CPR 62.5(b), and hence section 44 of the Act, does cover claims against non-parties to the arbitration agreement.

The first of these is Tedcom Finance Ltd v Vetabet Holdings Ltd [2011] EWCA Civ 191. In this case Teare J had refused permission to serve out because of the line of authority referred to above. On appeal (which was an ex parte hearing), the Court of Appeal held that “the claimants at this stage only have to show an arguable case for jurisdiction”. On that basis they held that “there is at least an argument that jurisdiction does exist” for service on a non-party under CPR 62.5(1)(b). The Court took into account two factors. The first (at [14]) was that a different view might be reached because of the interaction between sections 44 and 2(3) of the Act. (S. 2(3) is the section which states that the powers under ss. 43 and 44 may be exercised in support of arbitrations whose seats are not in England and Wales). The second was that Vale do Rio Doce was an application relating to subsection (c) rather than subsection (b) of the rule [17].

It is plain that the Court of Appeal was not purporting to decide anything in this ruling. They were extremely clear that their decision should not prejudice the decision when the case returned to the Commercial Court – a plain indication that they considered the arguments had not been fully explored. The section 2(3) argument has not apparently been revived before today. Males J in Cruz City described it as “a case which could usefully be forgotten” and I similarly do not find it of assistance.

The next case is BNP Paribas S.A. v OJSC Russian Machines [2011] EWHC 308 [2011] 2 CLC 942. Here, in the context of an anti suit injunction to restrain proceedings in Russia brought by a party to an arbitration agreement and by a company associated with that party, Blair J decided that there was a good arguable case that section 44 did apply to claims against non-parties. This is the most substantial of the authorities in support of the argument that there is jurisdiction to serve out under CPR 62.5(1)(b), being a decision reached over two days inter partes argument. However two things should be noted. The first is that there was a substantial portfolio of complex issues for decision (set out at [28] of the judgment) of which the present issue formed only a part – as can also be seen from the judgment. The second is that it is clear (see the statement at [37] as well as [28]) that Blair J was only purporting to decide that there was a good arguable case on the issue.

It appears that the learned judge was influenced by two factors. The first was the apparent unattractiveness of the position which would result if there were no jurisdiction to serve out against third parties under this provision in cases such as the one he was considering. It is plain from [41] that he was troubled by the possibility that if section 44 did not apply against non-parties, then that would mean that where company A is party to the arbitration agreement, and company B, which is not a party but is under the same ownership and control, seeks to frustrate the agreement by bringing proceedings in court, an injunction pursuant to section 44 of the Act would not be available against company B unless (which might not always be the case) the “necessary and proper party” gateway in CPR PD6B was available. I will return to the “lacuna” argument below.

The second point which appears to have influenced the learned judge was the existence of cases where the gateway had been used, such as Tedcom and Niagara Maritime SA v Tianjin Iron and Steel Group Co Ltd [2011] EWHC 3035 (Comm); [2011] Arb. L.R. 54. As I have indicated above I do not regard Tedcom as of material assistance. Having looked at the judgment in Niagara (which was not available to Blair J – see [43]) it is plain that that case did not involve consideration of the jurisdictional point. Further the jurisdictional point was essentially illusory in that case. The insurer would have been subrogated to the party to the arbitration agreement and hence within section 82(2) of the Act: see London Steam Ship Owners Mutual Insurance Assoc. Ltd. v Kingdom of Spain [2013] EWHC 3188 (Comm) at [127]-[138].

The next case is another relatively insubstantial one in terms of argument and consequent analysis. In Western Bulk Shipowning III A/S v Carbofer Maritime Trading ApS [2012] EWHC 1224, Christopher Clarke J, refusing to grant a worldwide freezing order against a third party (following argument on this and other points) stated [114] that he did “incline to the view” that service out was permissible.

The last relevant case before Cruz City , is PJSC Vseukrainskyi Aktsionernyi Bank v Maksimov [2013] EWHC 3203 (Comm). In that case Blair J was dealing with a Chabra case – ie. a freezing order against a non-party whose assets are alleged to be in reality the assets of an arbitration party. He reviewed the decisions and held that there was power to order service out against a non-party to the arbitration agreement pursuant to CPR 62.5(1)(b), in these terms:

Finally I turn to Males J’s decision in Cruz City. In that case the claimant was trying to enforce a London arbitration award and, in aid of its enforcement efforts, was seeking a freezing order against various subsidiaries of the award debtor.

The question arising for determination was whether or not the claimant could establish that the court had jurisdiction over the subsidiaries so as to permit it to make a freezing order against them. The claimant sought to argue that the court had jurisdiction pursuant to, inter alia, CPR 62.5(1)(c).

The Court rejected this argument (see paragraphs 44-45 & 53 of the judgment). In the course of his judgment Males J considered all of the above decisions relied upon now by DTEK, but held that he was not bound to follow them as their conclusions on this point were either obiter or simply to the effect that the claimant had a good arguable case as to the scope of CPR 62.5(b). At [44] he endorsed the submissions of the Chabra defendants (summarised at [25]) that the rationale of CPR 62.5 applies only to parties to an arbitration agreement, that the Cienvik and Vale do Rio Doce cases provide a line of authority indicating that CPR 62.5 does not apply to non parties and that changes had not been made to the rules to deal with this point since.

Further, as the claimant had advanced its arguments in relation to CPR 62.5(1)(c) by drawing a comparison with the position under CPR 62.5(1)(b) and arguing if relief were possible under the latter, it should equally be so under the former, the Court went on, obiter, to specifically consider the position under the latter provision. In this context the question was whether there is any power under section 44 to make orders against non-parties.

Males J expressed the view that section 44 of the Act did not permit the Court to make orders against a non-party and that CPR 62(1)(b) did not allow service out against third parties. Since his decision on this point is effectively the target of this application, I reproduce the relevant passage below in full:

DTEK, as they logically must, submit that this decision is wrong and the learned judge’s reasoning is faulty. In this connection they make seven points which I shall deal with individually below.

First they say that the learned judge has effectively read too much into the wording of the section and attack his various points at [48] of the judgment. They say that the terms of section 44 itself simply reflect the fact that in most cases applications pursuant to section 44 will be made against parties to the arbitration agreement; it is unsurprising to find the wording reflecting the “default setting”, but does not mean that there was an intention to positively exclude applications against non-parties.

So, for example, they reject the significance which he sees (at [48(a)]) in the “contrary agreement” provision in sub-paragraph 44(1) and suggest that this just reflects party autonomy, rather than an intention to limit the exercise of the section 44 powers to the parties to the arbitration agreement. Similarly they submit that there is actually no oddity in the provision at 44(4) for permission of the tribunal in the context of third party applications; it does not reflect a power in arbitrators over third parties, but simply an indication of the tribunal’s attitude to the significance of the application from the point of view of the arbitration, or of their willingness to accommodate the delay necessarily inherent in the reference of an interlocutory matter to the court.

The provision at s.44(5) that the court shall act only if the arbitrators have not power or cannot act effectively is, they suggest, entirely neutral, and was wrongly given weight by the learned judge.

As to section 44(6) they suggest that it is wrong to say (as the judge does at [48(d)]) that this section can have no application to an order made against a non party. They give the current case as an example; once the order is made (if it is made) the use of the material gained will be one for the tribunal.

So far as these submissions are concerned while I see that some points can be made against the individual textual arguments relied on by Males J, for example regarding subsections 44(4) and (6), I do not accept that this much impacts on the conclusion to which he came, which was based on a reading of the entire section in context. While some of the provisions may be not unsuited to third party orders, there is nothing in the wording which indicates that the sections are designed with applications against third parties in mind. On the contrary however, when reading them together and not separately I concur with Males J’s conclusion that the wording is more suggestive of applications confined to the arbitration parties than otherwise.

Secondly, DTEK submits that a powerful indication to the effect that section 44 applications can be made against non-parties to the arbitration agreement can be found in section 44(1) which states that the Court is to have “the same power of making orders about the matters listed below [i.e. in section 44(2)] as it has for the purposes of and in relation to legal proceedings…”. In legal proceedings, they say, the court obviously has the power to grant injunctions against non-parties, to order disclosure against non-parties, and to make orders in relation to property held by non-parties. Thus, according to section 44(1), the Court should be entitled to exercise the powers listed in section 44(2) as against non-parties to the arbitration agreement.

This argument, though superficially attractive, I consider to be slightly misplaced. In the first place it has an element of "bootstraps" analysis about it; it assumes the point which is in issue. More significantly, however, it ignores the fact that it is established that under section 44 the court does not have the same jurisdiction in relation to disclosure against non-parties that it has in legal proceedings. This was established in BNP Paribas v Deloitte & Touche [2003] EWHC 2874 (Comm); [2004] 1 Lloyd's Rep. 233 (a case followed in The Tasman Spirit [2004] EWHC 3005 (Comm); [2005] 1 Lloyd's Rep. 525, which was touched on in argument before me). In that case the court held that the scheme of sections 43 and 44 indicated that as regards third parties there was no power akin to CPR 31.17, relying in particular on the provisions which give the court the power to grant witness summonses (section 43(1)) and letters of request in aid of arbitration (section 44(2)(a)), and the section (section 43(4)) which states in terms that ... ‘but no person shall be compelled under any such writ to produce any document which he could not be compelled to produce on the trial of an action’.

Indeed it seems to me that the fact that the Act removed the old power under s.12(6) of the 1950 Act to order disclosure and limited the power to order document production against non-parties to the old subpoena test militates in favour of a view that section 44 is not intended to cover applications against third parties.

Thirdly DTEK says that certain of the powers listed in section 44(2) necessarily involve the imposition of Court orders on third parties, for instance section 44(2)(a) which states that the Court has the power to make orders for the taking of evidence of witnesses. In most cases, the very need for an application pursuant to section 44(2)(a) will arise because the relevant witness will not be a party to the arbitration (as otherwise the tribunal would have jurisdiction over the witness in question). This indicates that such orders can be made against non-parties to the arbitration agreement.

On this point I again consider that the argument advanced by DTEK argues in advance of the facts. It certainly is generally understood to be the case that the court has pursuant to section 43(1) and 44(2) powers to issue (respectively) witness summonses and letters of request. However while a witness summons is an order directly against a third party, the issuance of a letter of request is not. It is an order made in proceedings between the parties issuing a letter for transmission to a foreign court seeking assistance; if the letter of request is sanctioned by the foreign court there will be an order issued by that court, but the English Court will never exercise jurisdiction over the witness. What is more the witness will be entitled to make such challenges to the order as are permitted under his local laws.

Fourthly DTEK says that section 44(2)(c) itself limits the power to authorise any person to enter premises for the purposes of inspecting property to “any premises in the possession or control of a party to the arbitration”. The very fact that one of the powers listed in section 44(2) have been circumscribed so as to only be exercisable in relation to parties to the arbitration agreement, suggests that the remaining powers were not intended to be so limited. Again, as with the attack on [48] of the Cruz City judgment, this seems to hang too much on isolated points as against the overall textual effect.

Fifthly they suggest that the decision in Cruz City fails to address the fact that if section 44 applications cannot be made against non-parties to the arbitration agreement, this creates a lacuna whereby a non-party can take steps to seek to thwart the arbitration agreement, with there seemingly being no right to obtain injunctive relief against that non-party pursuant to section 44.

This is, of course, the scenario which particularly troubled Blair J in the BNP Paribas case. And it has been picked up by Steven Gee QC in the 6^th edition of Commercial Injunctions as a basis for critiquing the Cruz City judgment at pp 176-178. It is fair to say that the absence of a remedy in Chabra type and other acute cases is of concern. This point was flagged up as early as The Cienvik by Clarke J (as he then was) as a reason for considering amendment to the rules. However the fact that there would be a lacuna is not a reason to find a jurisdiction which is not justified on the wording of the relevant sections against the relevant background. In this connection it is noteworthy that although Gee quotes the DAC report as considering Mareva (freezing) relief as being available under s.44 and its effects on third parties, there is nothing in the report which touches on relief against third parties or even the Chabra jurisdiction specifically. Mr Gee argues that it is implausible that the DAC would not have considered this issue. However I do not consider it as implausible as he suggests; although the jurisdiction had been established before the DAC report (in 1992), it was not much to the fore until far more recently.

Sixthly DTEK revive the s. 2(3) argument from Tedcom, arguing that section 2(3) of the Act indicates that section 44 can be used in support of arbitral proceedings generally, and the Court’s powers no longer depend on any consensual agreement that there be an arbitration and that the arbitration should take place in England or be governed by English law. Consistent with this, section 44 should be interpreted as permitting orders to be made against non-parties to the arbitration agreement.

In my view this is an argument which does not gain traction. S. 2(3)states:

It will be noted that the section does not say that the court’s powers no longer depend on any consensual agreement that there be an arbitration; it is directed to consensual arbitration with a seat other than England – ie. to the Court’s abilities to assist arbitrations based (for example) in New York, as in Commerce and Industry Insurance Co of Canada v Lloyds Underwriters [2002] 1 Lloyd's Rep. 219.

Finally they submit that ultimately, whether or not the Court should be making orders against non-parties to arbitrations, particularly where the seat of the arbitration is not in England and Wales, is a matter going to the Court’s discretion as to whether or not to grant the particular order sought. It is not a reason for holding that the Court has no such power at all.

This is not, in my view an argument in favour of finding a jurisdiction. Indeed it would be an error to derogate from the jurisdictional stage of the argument and place all the emphasis on discretion. The consideration of jurisdictional thresholds in service out places an important check on the jurisdiction of the court which if not exorbitant (pace Lord Sumption in Abdela v Bandarani) should not lightly be used to intrude on parties who are not within the court’s natural territorial jurisdiction.

Having therefore carefully considered the Cruz City judgment and the line of authorities which precedes it in the light of Mr Smith's detailed and helpful submissions, I consider that while there is plainly an argument as to this issue, I am clear in my own mind that the right answer is that which Males J reached.

It may be that the result is that there is a lacuna in some cases – most notably Chabra and anti-suit injunctions. However it is worth noting that in the majority of the cases where this type of relief was sought jurisdiction was ultimately enabled to be established under the necessary and proper party head under CPR 6.

Having decided this application on the question of jurisdiction there is strictly speaking no need for me to consider discretion. This point was not the subject of substantial submissions before me, DTEK focussing very much on the jurisdictional issue. To the extent that it arises, had I considered that there was jurisdiction to grant permission to serve out in this case I would on consideration have declined to grant the order on discretionary grounds. There are essentially three factors which weigh with me on this.

The first is that whether or not there is a jurisdiction it is clear that section 44 is designed primarily to cover applications between the parties to an arbitration agreement. Applications against a third party would be the exception, not the rule. This is reflected in Blair J’s indication in the Maksimov case that the power (if it exists) is not one to be exercised lightly. It seems to me that this must plainly be right when what is contemplated is bringing a foreign person or company who is not a party into proceedings in this jurisdiction.

Secondly there is the parallel with service out under CPR 6. In that context the applicant must establish not just the jurisdictional gateway (to the good arguable case standard) but also a reasonable prospect of success on the substantive claim. I would note here that the absence of any similar provision in CPR 62.5 might be said to provide further reinforcement to the conclusion I have reached above, on the basis that if non-parties are to be targeted by section 44/CPR 62.5 one would expect an equivalent hurdle to be set up at the service out stage. But in any event, such considerations should in my view be considered at the discretion stage, rather than forcing a third party to bring an application to set aside.

In this case, while I appreciate that such an order has been granted against a domestically domiciled third party to an arbitration proceeding before - in The Tasman Spirit), that was in the context of an application parcelled with witness summonses against the relevant person. It was also an application made ex parte. In this case the application stands by itself, and I am unsure on what basis it could be said that even in court proceedings there would be jurisdiction to make a foreign third party a party to proceedings here merely to preserve documents when there is no substantive cause of action apparently asserted against him.

The third point relates to the availability of an alternative route for this relief. It seems to me clear that a letter of request for this very specific document could be granted under s.44. It might be said that this indicates that there is no reason not to grant what is, in effect, equivalent relief. However as I have indicated above, a letter of request is not a true equivalent. It would not subject the Defendants to the inconvenience (and likely expense, despite costs orders) of having to be represented in England. It would not potentially expose them to contempt of court sanctions. It would also only be available to the extent that such an order would be acceptable in the Ukraine; the third parties would therefore have the protections of their local laws and procedures. In the absence of any substantive claim against them, it seems to me that this would be the right course.

Accordingly, I must dismiss this application.