Sodzawiczny v Ruhan & Ors

On 22 May 2018, on a without notice application by Mr Sodzawiczny, I granted a worldwide freezing order against the Second to Fifth Defendants, Dr Smith, Ms Stickler, Mr Cooper and Mr McNally respectively. On the resumed return date there are the following applications before the Court:

Dr Smith and Ms Stickler did not appear before me and were not represented. However they each sent letters to the Court in which, amongst other things, they supported the stay application and submitted that the appropriate place for the claim against them as well as Mr Cooper and Mr McNally was in arbitration.

Mr Sodzawiczny’s claim in these proceedings arises against the background of events stretching back to 2003 which have given rise to extensive and complex litigation in this court. The main litigation was initially between those associated with Dr Smith on the one hand, and on the other Mr Ruhan and those associated with him. In the Ruhan camp, apart from Mr Ruhan himself who is a businessman with wide ranging business interests, there are (or were) Mr Cooper and Mr McNally, solicitors practising in the Isle of Man and at the time close personal friends of Mr Ruhan, who through various vehicles were responsible for managing assets on behalf of Mr Ruhan in a complex group of companies (“the Arena Group”) held within an Isle of Man trust structure known as the Arena Settlement. The Arena Group assets within the Arena Settlement were transferred by Messrs Cooper and McNally to those in Dr Smith’s camp in 2013 and 2014 during the course of the main litigation in what has been called “the Isle of Man Agreement”, together with other assets which were outside the Arena Settlement.

In the other camp are Dr Smith himself, who was convicted of fraud, sentenced to eight years imprisonment and subjected to a confiscation order in favour of the Serious Fraud Office; although not a party to the main proceedings he was the driving force behind them; his former wife, Dr Cochrane, a GP practising in Jersey; Orb a.r.l, a Jersey company used as a vehicle to hold Dr Smith’s family’s financial interests; Pro Vinci

The events prior to the settlement of the main litigation are set out in a little detail in one of my judgments in those proceedings at [2016] EWHC 850 (Comm) at paragraphs [7] to [19]. It is sufficient for the purposes of this application merely to record that the transfer of assets by Messrs Cooper and McNally to Dr Smith’s camp pursuant to the Isle of Man Agreement appeared to be a betrayal of trust towards Mr Ruhan with whom Dr Smith was locked in very hard fought litigation, in what was a form of self-help for Dr Smith to redress what he asserted were the wrongs done to him by Mr Ruhan. It has been described as “extraordinary” by Cooke J and as an “appropriation by Dr Smith” by Mostyn J. It involved Messrs Cooper and McNally purporting to deal with the assets – worth hundreds of millions of pounds – as if they were their own, and, it appears, being promised a reward for doing so.

Following the settlement of the main litigation there have emerged numerous further claims, both in relation to the settlement and in relation to assets of those in the Dr Smith camp including the Arena and non-Arena assets. Amongst the claimants are the SFO; the Viscount of Jersey who has succeeded to the title of Dr Cochrane who is in

“en désastre” (a form of bankruptcy in Jersey); liquidators of various BVI companies which sat at the head of structures within the Arena Settlement below SMA, including Glen Moar Properties Ltd (“Glen Moar”); beneficiaries of the settlement of the main action; various litigation funders; Stewarts Law, Orb’s former solicitors in the main litigation; and a number of others. I have been managing those various actions together, which were described before me as “the Popplewell proceedings”, and have ordered a trial of a number of issues in relation to proprietary claims to certain of the assets, which is not due to be heard until 2020. One of the many issues in those proceedings is the validity of the Isle of Man Agreement and its effect on prior proprietary claims.

Mr Sodzawiczny is an engineer by trade, with a particular expertise in developing, building and running digital data centres. In 2005, Mr Sodzawiczny began working with Mr Ruhan to develop a group of digital data centres which were held within the Arena Group in companies bearing the brand Sentrum (“the Sentrum Group”).

Mr Sodzawiczny’s case in these proceedings is as follows. He and Mr Ruhan entered into an oral agreement pursuant to which Mr Sodzawiczny would assist the Arena Group in creating data centres in return for a 15% profit. Mr Sodzawiczny was not aware of the details of the Arena Group but understood that it was a complex corporate structure through which Mr Ruhan managed his affairs and assets with the assistance of Messrs Cooper and McNally. Mr Sodzawiczny was instrumental in the success of the Sentrum Group. From 2005-2012, he dedicated his whole professional life to it. In 2012 parts of it were sold to Digital Stout Holding, LLC (“Digital Realty”) for over

Mr Ruhan said at this meeting that Mr Sodzawiczny’s share of the Digital Realty sale profits were £21.75m, and that of that sum, £1.75m would be dealt with by way of a transfer of a property to Mr Sodzawiczny and £20m would be paid into a “structure”.

Mr Sodzawiczny, who had worked with Mr McNally closely for many years by this point, trusted what he said in relation to the structure and was content to go along with it. And, although Mr Sodzawiczny did not actually know that the Ruefikopf Structure had been set up, he believed that it had, and, on one occasion, received what he believed was financing from it in a manner which was consistent with what Mr McNally had told him.

Mr Sodzawiczny first became aware of the effect of the Isle of Man Agreement (but not its terms) on 9 April 2014. It caused him considerable confusion and shock. There then followed a series of meetings and communications with Dr Smith and Ms Stickler, now ostensibly in control of the Arena Group and any “structure” for Mr Sodzawiczny within it, at which Mr Sodzawiczny tried to find out what had happened to, and ultimately secure, the money which he had believed had been set aside for him. In summary, Mr Sodzawiczny’s evidence is that:

It is common ground that whatever the content of discussions, they led to three written agreements:

The Deed, to which Dr Cochrane, SMA, Pro Vinci, Glen Moar, and Messrs Cooper, McNally and Sodzawiczny were parties (but not Dr Smith or Ms Stickler) contained an arbitration clause providing for LCIA arbitration in London and widely worded release and settlement provisions. The scope of each is substantially in dispute on these applications.

Part payment was made of the first tranche payment under the Deed, totalling just under £5m, but nothing else. This led to an arbitration between Pro Vinci and Mr Sodzawiczny which resulted in an award in Mr Sodzawiczny’s favour of £6.6m plus interest and costs. The award was registered as a judgment of the High Court on 15 June 2016, but Pro Vinci had by that time entered administration. It has since gone into liquidation. Glen Moar is also in liquidation. Mr Sodzawiczny regards the prospects of any further recovery under the Deed or side letters as remote.

Mr Sodzawiczny’s evidence is that subsequent investigations have revealed the following. The Ruefikopf Structure, and parallel Madloch structure (“the Structures”), were in fact set up, but every entity within them (with one exception) has been dissolved. The exception, Ruefikopf Investments Limited, is now owned by a company which is owned by Messrs Cooper and McNally. Pursuant to a Norwich Pharmacal

The causes of action advanced by Mr Sodzawiczny have been characterised as First Tier Claims and Second Tier Claims. Messrs Cooper and McNally submit that the First Tier Claims have been settled by the Deed. Mr Sodzawiczny’s Second Tier Claims are advanced on that alternative hypothesis, that is to say if but only if the First Tier Claims are held to have been settled by the Deed.

The First Tier Claims are:

As to the value of the First Tier Claims, Mr Sodzawiczny relies on the information from Mr Wilcox that £20-26m was paid into the Structures. He argues that in addition, significant sums were earned during the Earn-Out Period and that his 20% share of those sums may have been paid into the Structures, but in any event they should have been (or to him); and that significant sums should also have been paid into the Structures or to him in relation to the Escrow Account. Accordingly giving credit for sums received by or for the benefit of Mr Sodzawiczny in respect of the first tranche of the payments he was due under the Deed (just under £5m), it is submitted that the value of his First Tier Claims comfortably exceeds £20m.

The Second Tier Claims are advanced against Dr Smith, Ms Stickler, Mr Cooper and Mr McNally. The claims against Dr Smith and Ms Stickler are primarily framed in deceit. Mr Sodzawiczny alleges that he was induced to enter into the Deed and side letters by fraudulent misrepresentations by Dr Smith and Ms Stickler. The representations are pleaded as being:

On the hypothesis that the Deed settled some or all of the First Tier Claims, Mr Sodzawiczny avers he has suffered damage by entering into it, the recoverable measure of loss being the value of the rights and assets lost as a result of entering into the Deed less the value of the rights conferred on him by the Deed; and that the latter can be measured by reference to the value actually received under the Deed to date (i.e. just under £5m), as the chance of any further recoveries from either Pro Vinci or Glen Moar, both of which are in liquidation, are remote.

Mr Sodzawiczny’s Second Tier claims against Messrs Cooper and McNally are put on three bases. First, Messrs Cooper and McNally are said to be liable for the deceit of Dr Smith and Ms Stickler on agency principles - Dr Smith and Mr Stickler were the ones negotiating with, and making representations to, Mr Sodzawiczny throughout; Dr Smith and Ms Stickler, either in their personal capacities or in their capacities as representatives of Pro Vinci, were negotiating with Mr Sodzawiczny for all of the other parties to the Deed, including Messrs Cooper and McNally; Messrs Cooper and McNally must have been aware of that fact, and allowed them to fulfil that role; accordingly, Dr Smith and Ms Stickler had actual or ostensible authority to make representations relating to the Deed to Mr Sodzawiczny on behalf of (amongst others) Messrs Cooper and McNally. Secondly, Messrs Cooper and McNally are said to be liable as conspirators with Dr Smith and Ms Stickler. The same factual basis is relied on as giving rise to the inference of an agreement to injure Mr Sodzawiczny by the unlawful means of the deceits practised on him by Dr Smith and Ms Stickler. Thirdly, it is said that in seeking a release for themselves without giving full and frank disclosure of either the true facts or their own wrongdoing, Messrs Cooper and McNally preferred their own interests over those of Mr Sodzawiczny and failed to act loyally and in good faith (see Item Software v Fassihi [2004] BCC 994 per Arden LJ at paragraphs [41][44]); and are therefore liable to compensate Mr Sodzawiczny in equity for any loss he has suffered as a result of entering into the Deed.

In addition to these claims, Mr Sodzawiczny asserts a proprietary claim to the monies and/or assets held within the Structures and/or their traceable proceeds. Mr Sodzawiczny did not, however, apply for a proprietary freezing order.

Dr Smith, Ms Stickler, Mr Cooper and Mr McNally were served with the freezing order and have given disclosure in purported compliance with it. On 5 June 2018, Messrs Cooper and McNally issued the stay and discharge Applications. On 6 June 2018, in response, Mr Sodzawiczny issued the contingent continuation application relying on section 44 of the Act. Messrs Cooper and McNally also issued an application on 21 June 2018 to discharge the freezing order on additional grounds namely that there was no good arguable case; and/or there was no sufficient evidence of a risk of dissipation; and/or that there had been material non-disclosure at the ex parte hearing.

On 8 June 2018, the initial return date, there was insufficient time to address all the issues; accordingly Phillips J adjourned the applications and return date, and gave directions.

Meanwhile on 6 June 2018, Messrs Cooper and McNally initiated an LCIA arbitration against Mr Sodzawiczny under the arbitration clause in the Deed. In their Request for Arbitration, Messrs Cooper and McNally claim that both these proceedings and indeed the proceedings which formed part of Mr Sodzawiczny’s investigations into the alleged wrongdoing against him, constitute breaches of the Deed. On 12 June 2018, Messrs Cooper and McNally applied to the LCIA Court for the expedited formation of a tribunal pursuant to Article 9A of the LCIA Rules, which allows for such a procedure in cases of “exceptional urgency”. On 13 June 2018, Mr Sodzawiczny responded to that request for expedition alleging that Messrs Cooper and McNally’s application appeared to be tactical, and explaining that Mr Sodzawiczny could not make any application to a tribunal for relief given his position that the Court (and not a tribunal) had jurisdiction; and that even if a tribunal were to be put in place on an expedited basis, that would not obviate the need for the freezing order to be continued by the Court, because (a) the risk of dissipation in this case was very high and (b) in order for relief to be effective it had to bite immediately, be binding on third parties who were notified of it, and be backed up with a potential sanction for contempt. On 13 June 2018, the LCIA Court granted Messrs Cooper and McNally’s application. On 20 June 2018, Mr Stuart Isaacs QC was appointed as sole arbitrator. An initial procedural conference in the arbitration took place on 13 July 2018.

On 20 June 2018, Mr Sodzawiczny issued a disclosure application seeking further asset disclosure, which was subsequently ordered to be heard at the resumed return date only if time permitted. In the event there was no time for it to be argued.

The relevant parties to the Deed were Dr Cochrane, SMA, Pro Vinci, Glen Moar, Mr Cooper, Mr McNally and Mr Sodzawiczny. Paragraph 2 recorded the background and included the following statements:

“(b)

Following the success of Camberley Sentrum, [Mr Ruhan] and [Mr Sodzawiczny] entered into an oral agreement (“the Oral Agreement”) pursuant to which [Mr Sodzawiczny] would assist the Arena Group in creating a group of further data-warehouses business operations located in Croydon, Woking and Hayes (collectively the “Sentrum Group”) in return for which [Mr Sodzawiczny] would receive an equity stake in the Sentrum Group and share in its profits. The Oral Agreement was accepted by both [Mr Sodzawiczny] and [Mr Ruhan] as being binding upon each of them.

(g)

[Mr Ruhan] failed to honour the terms of the Oral Agreement, denying that [Mr Sodzawiczny] has any entitlement to a share in the profits derived from the sale of the Sentrum Group or its sale.

(i)

In a number of meetings between Pro Vinci and [Mr Sodzawiczny], [Mr Sodzawiczny] has threatened to issue legal proceedings against [Dr Cochrane], SMA, Glen Moar, [Mr Cooper] and [Mr McNally], alleging that (i) pursuant to the Oral Agreement, [Mr Sodzawiczny] has at all times been entitled to a profit share and/or equity interest in the Sentrum Group and future profits arising from the Sentrum Group; (ii) consequently Glen Moar, SMA and [Dr Cochrane] hold certain assets on trust for [Mr Sodzawiczny] and/or fiduciary duties to [Mr Sodzawiczny]; and (iii) [Dr Cochrane], SMA and/or Glen Moar are liable to [Mr Sodzawiczny] for compensation and/or damages as a result of the [Isle of Man Agreement] (collectively the “Dispute”).

(j)

The Parties have agreed to terms for the full and final settlement of the Dispute and wish to record those terms of settlement, on a binding basis, in this Agreement.”

Clause 5 of the Deed provided that Pro Vinci was to procure a payment to Mr Sodzawiczny in the total sum of £12m in three tranches, the first within 30 days of execution and the last within 240 days. The settlement provisions were contained in Clause 6 and Clause 7 in the following terms:

“6.

RELEASE

6.1

The Agreement will constitute full and final settlement of, and the Parties will thereby have released and forever discharged, all and/or any actions, claims, rights, demands and set-offs, whether in this jurisdiction or any other, whether or not presently known to the Parties or to the law, and whether in law or equity, that they, their Affiliates or any of them ever had, may have or hereafter, can, shall or may have against any other Party or any of their Affiliates or [the present or former trustee of the Arena Settlement] arising out of or connected with the Dispute and/or the underlying facts relating to the Dispute.

6.2

For the avoidance of doubt, [Mr Sodzawiczny] hereby waives any interest in or rights or claims over the Arena Assets (whether direct or indirect, legal or beneficial and howsoever arising) or in connection with the transfer of these assets pursuant to the [Isle of Man Agreement], and waives as against the Parties or any of them or any third party any claims he has in respect of the Oral Agreement, the Sentrum Group or anything else connected thereto.

6.3.

The above waived claims in Clauses 6.1 and 6.2 are referred to below collectively as the “Released Claims”.

7.

AGREEMENT NOT TO SUE

Each Party agrees, on behalf of itself and on behalf of its Affiliates not to sue, commence, voluntarily aid in any way, prosecute or cause to be commenced or prosecuted against any other Party or their Affiliates [or the present or former trustee of the Arena Settlement] any action, suit or other proceeding of any kind concerning the Released Claims, in this jurisdiction or any other.”

Clause 13 contained an entire agreement clause in the following terms:

“13.1

This agreement constitutes the entire agreement between the Parties and supersedes and extinguishes all previous agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter.

13.2

Each Party agrees that it shall have no remedies in respect of any statement, representation, assurance or warranty (whether made innocently or negligently) that is not set out in this Agreement. Each party agrees that it shall have no claim for innocent or negligent representation or negligent misstatement based on any statement in this agreement.”

Clause 15.1 contained a confidentiality clause requiring the terms of the agreement and the substance of all negotiations in connection with it to be kept confidential to the parties and not to be disclosed other than in limited identified circumstances. Clause 15.2 contained a widely drawn non-disparagement clause.

Governing law and jurisdiction were dealt with in Clauses 16 and 17 in the following terms:

“16.

GOVERNING LAW

This Agreement and any dispute or claim arising out of or in connection with it or its subject matter or formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with the law of England and Wales.

17.

JURISDICTION

17.1

The Parties agree that any dispute arising out of or in connection with the performance or non-performance of this Agreement shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed incorporated by reference into this clause, on the following terms:

17.1.1

The number of arbitrators shall be one

17.1.2

The seat, or legal place, of arbitration shall be London

17.1.3

The language to be used in arbitral proceedings shall be English

17.1.14

The governing law of the contract shall be the substantive law of England”

On behalf of Messsrs Cooper and McNally, Mr Edey QC submitted that the claims by Mr Sodzawiczny in these proceedings all fell within the arbitration clause in the Deed, alternatively the majority of them did so; insofar as they fell within the clause a stay was mandatory under section 9(4) of the Act; insofar as there were any which fell outside the clause the court should stay them pending the outcome of the arbitration under its inherent jurisdiction to impose a case management stay; so far as concerns the freezing order, there was no good arguable case against Messrs Cooper and McNally because the First Tier Claims had been settled by the Deed and there was no good arguable case on the Second Tier Claims against them; that there was no solid evidence of a risk of dissipation; that there had been a failure to make full and frank disclosure at the without notice application; and that if the stay application was successful, there was no jurisdiction to grant a freezing order under section 44 of the Act, even if otherwise appropriate in the context of court proceedings, because the Claimant could not satisfy the jurisdictional hurdles of urgency under section 44(3) of the Act or that the arbitrator was unable to act effectively under section 44(5) of the Act.

Mr Caplan argued that none of the claims fell within the arbitration clause in the Deed; that if any of them did, there should be no case management stay in relation to the remainder; that the freezing order was properly maintainable on the basis of a good arguable case on both the First and Second Tier Claims; that there was solid evidence of a risk of dissipation which was enhanced by the subsequent asset disclosure made by Mr McNally and Mr Cooper; that there was no failure to make full and frank disclosure, alternatively none which would justify discharge of the freezing order; and that the jurisdictional requirements of section 44 were fulfilled such that the court could continue the injunction under its section 44 jurisdiction if all the arguable claims were to be subjected to a mandatory stay in favour of arbitration under section 9 (and did not need to be if there survived any good arguable claims which were not arbitrable, even if subjected to a case management stay, because the court would retain and should exercise its jurisdiction to grant a freezing order in support of those claims).

It is convenient to consider the stay application first. Section 9 of the Act provides in relevant part as follows:

“9.

(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings had been brought to stay the proceedings so far as they concern that matter.

…

(4)

On an application under this section the court shall grant a stay unless satisfied that the arbitration is null and void, inoperative, or incapable of being performed.”

Section 9 of the Act is modelled on Article II of the Convention on the Recognition and

There are two stages to the inquiry which the court is required to make under section 9(1). The court must first determine what the matter or matters are in respect of which the court proceedings have been brought. Secondly the court must then determine in respect of each such matter whether it falls within the scope of the arbitration agreement upon its true construction.

So much was common ground. However the parties’ submissions differed on the approach to determining what the “matters” were for the purposes of the first question. Mr Caplan submitted that “matter” in section 9(1) is to be equated with a claim or cause of action; and that the fact that a defence is raised which falls within the scope of an arbitration agreement does not mean that section 9 is engaged if the claim itself does not fall within the scope of the agreement. On behalf of Mr McNally and Mr Cooper, Mr Edey argued that what was meant by a “matter” was an issue; and that the search was for issues which were the subject matter of the arbitration agreement. If correct, this raises a question of the degree of granularity which is to be adopted in characterising the issues in the case.

I was referred to a number of authorities which do not all speak with one voice, including T & N Ltd v Royal & Sun Alliance Plc [2002] CLC 1342 (Lloyd J); Lombard North Central PLC v GATX Corporation [2012] 1 Lloyd’s Rep 662 (Andrew

In addressing what the Singapore Court of Appeal in Tomolugen described as the “methodological” question of how narrowly or broadly one should characterise a “matter”, which determines the answer to the first question, I start with an examination of the general approach to what falls within the scope of arbitration agreements. This might appear to be starting with the subject matter of the second question, but I regard it as the right starting point for two reasons. First, the two questions are intertwined. It is necessary to approach the first question in a way which enables the second question to be meaningfully addressed. Where the matter in respect of which proceedings are brought involves issues A and B, only one of which falls within the scope of an arbitration agreement, it is not possible to approach the categorisation of the matter as A plus B, because then to ask whether A plus B falls within the scope of the arbitration clause is a question which is incapable of being answered yes or no. Secondly, the imperative of upholding party autonomy so as to enforce arbitration agreements, which underpins both the 1996 Act (see section 1(b)) and the New York Convention (see Article II.1 and II.3), means that where the parties have agreed to refer something to arbitration, their bargain must be upheld, and that that “something” must be removed from the ambit of court proceedings. It is therefore appropriate to ask for the purposes of interpreting section 9: what is the nature of that “something”?

The answer is a dispute or difference, which for these purposes can be treated as synonymous. Article II of the New York Convention treats an arbitration agreement as one in which “the parties undertake to submit to arbitration all or any differences which have arisen or may arise between them”. Arbitration clauses are usually framed by reference to disputes or differences: see Mustill & Boyd on Commercial Arbitration 2^nd edn at page 122. Although other wording is sometimes used (including “claims”), the paradigm arbitration agreement contemplated by the Act is one which bites on disputes.

For these purposes, a dispute can be constituted in the most general terms. If a party claims a sum of money, it is enough to constitute a dispute if the other party simply fails to pay. The existence of a dispute does not depend upon the disputing party advancing any reasons for disputing the claim. If it does advance reasons, a dispute exists irrespective of whether the grounds are bona fide or reach any merits threshold: see Halki Shipping Corporation v Sopex Oils Ltd [1998] 1 Lloyd’s Rep 465. It is commonplace in maritime arbitrations, for example, for the dispute to be identifiable only at a very high level of generality at the time of appointment of arbitrators. Short time limits in certain cases make it essential that a dispute can be referred at an early and potentially undeveloped stage.

On the other hand, the dispute between the parties may be well defined before any proceedings are commenced, with clear identification of issues and sub issues by reference to different causes of action and different defences. Commercial disputes often involve more than one cause of action and a number of alternative or cumulative defences in relation to each. It is trite to observe that the problem being considered arises in the context of what will often be a dispute involving multiple issues. Even a

The approach to what constitutes a “matter” in section 9 “in respect of which” the proceedings are brought should be capable of application in all these different circumstances and many in between, all of which are contemplated by the section. As a matter of principle the approach should therefore be as follows:

The objection that this approach leads to fragmentation of proceedings is not a sufficient reason for departing from these principles. The desideratum of unification of process

Nothing I have said is intended to apply where the arbitration agreement is in a contract with third parties. The courts sometimes have to determine in a dispute between A and B what rights and obligations exist under a contract between C and D, or between C and A or B, and will do so irrespective of any arbitration agreement in that contract. Different considerations apply in such cases because of the lack of identity of parties.

Mr Caplan’s argument that section 9 is not concerned with a defence, but only with the claim, is for these reasons unsound in principle. It would mean that where there was an arbitration agreement which was wide enough to cover the dispute comprised by the defence, the parties’ agreement that it should be decided in arbitration would be frustrated. Nor is it supported by the authorities relied on, namely Aectra Refining and Manufacturing Inc. v Exmar NV [1994] 1 WLR 1634 per Hoffman LJ at pages 1648G1650C; Prekons Insaat Sanayi AS v Rowlands Castle Contracting Group Ltd [2007]

I recognise that these conclusions are out of line with what was said by Lloyd J at paragraph [18] of the T & N case, and the reliance which Sir Richard Field indirectly placed upon it in the China Export case at paragraph [60]. However in T & N the facts

Mr Edey characterised the issues in respect of which the proceedings are brought against Messrs Cooper and McNally in the following way. The First Tier Claims raised two issues: (i) the causes of action in breach of trust/fiduciary duty; and (ii) the issue whether such claims were settled by the Deed. The Second Tier Claims raised four issues, namely (iii) whether the First Tier Claims were settled by the Deed (i.e. the same as issue (ii)), because the Second Tier Claims were premised on the proposition that First Tier Claims were so settled; (iv) whether the Deed was procured by the alleged wrongdoing by Messrs Cooper & McNally; (v) whether the Second Tier Claims have been settled by the terms of the Deed or are precluded by clause 13; and (vi) the validity of the First Tier Claims (i.e. the same as issue (i)), because the claim is for the value of the First Tier Claims which were on this hypothesis lost by reason of the settlement provisions of the Deed.

Mr Caplan was content to address the issues on the basis of this analysis, subject to his argument, which I have rejected, that section 9 requires a focus only on claims, not defences or issues.

The leading modern authority on the construction of dispute resolution clauses is the decision of the House of Lords in Fiona Trust & Holdings v Privalov & others [2008] 1 Lloyd’s Rep 254, in which it was held that arbitration clauses in a series of time charters governed claims for rescission of the charters on the ground of bribery. In the leading speech Lord Hoffmann emphasised that the construction of an arbitration clause should start from the assumption that the parties as rational businessmen intended any dispute arising out of their relationship to be determined in the same forum; and that the presumption is a strong one, and requires clear words to the contrary if it is to be displaced: see paragraphs [6], [7] and [13]. This is what, as Hoffmann LJ in Harbour Assurance Co (U.K.) Ltd v Kansa General International Assurance Co [1993] QB 701 at page 726B, he had characterised as the “presumption in favour of one-stop adjudication”. Lord Hope endorsed the same approach at paragraph [26], where he also observed that a dispute resolution clause is not one on which parties tend to focus during contractual negotiations, and so the court should be wary of placing too much weight on particular forms of words, so as to exclude certain disputes from its scope.

The presumption in favour of one-stop adjudication has particular potency where there is an agreement which is entered into for the purpose of settling disputes. Where parties to a dispute enter into a settlement agreement, the disputes which it can be envisaged may subsequently arise will often give rise to issues which relate both to the settlement agreement itself and to the previous circumstances which gave rise to the dispute. It is not uncommon for one party to wish to impeach the settlement agreement or challenge its scope and to advance a claim based on his alleged pre-existing rights. In such circumstances rational businessmen would intend that all aspects of such a dispute should be resolved in a single forum. This is especially so because in considering any dispute about the scope or efficacy of a settlement agreement, the tribunal is likely to have to consider the background, of which an important element will often be the circumstances in which the pre-existing dispute arose and the alleged rights of the parties which preceded the settlement agreement. There will therefore often arise a risk of inconsistent findings if the tribunal addressing the validity or efficacy of the settlement is not seised of jurisdiction to address the pre-existing disputes and the latter fall to be determined by a different tribunal. This is no less true when a settlement agreement is in terms alleged to be wide enough to cover unknown or unidentified disputes: it will be envisaged that the settlement agreement will be invoked in the context of claims allegedly within its scope, which will often require adjudication on the validity of the claims as well as the effect of the settlement agreement.

The court must of course pay attention to the language of the arbitration clause, as it must in its approach to any exercise of construction; but these are important considerations which inform that approach and are consistent with the general principles on construction reiterated in the recent cases of high authority culminating in Wood v Capita Insurance Services Ltd [2017] AC 1173.

Applying these considerations, the wording of the arbitration clause in the Deed is in my view apt to cover all the issues in the current proceedings. Mr Caplan draws attention to the difference in wording between the governing law clause (clause 16) and the narrower language in the arbitration clause (clause 17). This distinction may bear less weight than he sought to put on it in the light of Lord Hope’s observations, and the possibility that each clause may simply have been adopted from different standard form agreements in circumstances where the parties had been involved in numerous previous contracts with other parties. Even taking the distinction as one of significance, it remains the case that the arbitration clause is in fairly wide terms - “arising out of or in connection with” performance or non-performance of the Deed.

As to the First Tier Claims, performance of the Deed involves compliance with the promises in clause 7 not to sue or prosecute any action suit or proceeding of any kind “concerning” the claims which are released and settled by clause 6. That is wide enough to cover the causes of action advanced in the First Tier Claims as issue (i), because they involve a dispute arising out of and in connection with whether Mr Sodzawiczny has failed to perform that promise. The same is true of issue (ii) which is concerned with the scope and effect of the settlement provisions in the Deed.

Mr Caplan submitted that the scope of the arbitration clause was confined to the performance or non-performance of the payment obligations in clause 5. I can see no justification for such a narrow reading. “Performance” of the Deed encompasses performance of all its terms, and the release and non-suit provisions are amongst those terms. Indeed they are central provisions which are the quid pro quo for the payment obligation in clause 5. It would be anomalous for the arbitration clause to extend to the one and not the other, and so to confine it is inconsistent with its plain language.

The fact that the existence and effect of the settlement provisions in the Deed are at the heart of all the First Tier Claims is apparent from the way in which they are pleaded in the Particulars of Claim. Paragraph 45 avers that the breaches of trust/fiduciary duties were deliberate and dishonest, giving particulars of the grounds relied on. That averment is superfluous and unnecessary for the establishment of the causes of action, but is advanced in order to defeat reliance on the settlement provisions in the Deed. Paragraph 47 contains the positive averment that none of the First Tier Claims are barred by the Deed because (1) it does not extend to cover fraud or dishonesty and (2)

There is a further reason why the validity of the causes of action in relation to the First Tier Claims (issue (i)) are within the scope of the arbitration agreement. The Particulars of Claim do not identify when the breaches of duty are alleged to have taken place; it may be before or after the date of the Deed, and it is reasonably foreseeable that the latter may be the case. If they were after the date of the Deed, the effect of the settlement provisions goes directly to the question whether there was any breach of duty at all, not merely as to a defence that such breach has been released or such claim settled. If Messrs McNally and Cooper were released by the Deed from any liabilities thereafter in relation to the claims by Mr Sodzawiczny to a pot of money under the alleged Oral Agreement with Mr Ruhan, then any trust arrangement would cease and any subsequent conduct in relation to any such pot would not amount to a breach of any fiduciary duties owed to Mr Sodzawiczny (or at the very lowest arguably so).

As to the Second Tier Claims, what I have said about issue (ii) applies equally to issue (iii), because it is the same issue whether the First Tier Claims have been settled, and the logic applies with equal force to issue (v). Issue (vi) is the same as issue (i) and covered by the clause for the same reason.

That leaves issue (iv) which concerns the enforceability of the Deed and concerns the alleged wrongdoing by which it is sought to be impeached. That issue is also within the scope of the arbitration clause for several reasons: first because the enforceability of the terms of clauses 6 and 7 are issues which arise “in connection with” their performance; secondly because Messrs Cooper and McNally rely upon clause 13 of the Deed as a defence to the claims which are dependent upon misrepresentations or nondisclosure, and the applicability and enforceability of clause 13 is an issue which arises

“in connection with” the performance of that aspect of the Deed; and thirdly because it is an issue which is itself premised on the assertion which pervades the whole of the Second Tier Claims that the Deed is effective to settle the First Tier Claims. This is an essential ingredient which Mr Sodzawiczny has to prove in order to advance the Second Tier Claims at all, because the claims are brought in tort and damage is a necessary ingredient of the cause of action, the damage alleged in this case being the loss of the First Tier Claims by operation of the provisions of clauses 6 and 7 of the Deed.

This last point provides an additional reason why the validity of the causes of action in relation to the First Tier Claims (issue (i)) is within the scope of the arbitration clause: it is an essential ingredient of loss (and therefore the cause of action) in the Second Tier Claims and forms the alleged measure of loss for those Second Tier Claims; and the latter are within the scope of the arbitration clause because they are all premised on the Deed being effective to settle the First Tier Claims.

Accordingly I conclude that all the proceedings against Mr McNally and Mr Cooper are in respect of matters within the scope of the arbitration agreement in the Deed, and they are entitled to a mandatory stay under section 9 of the Act.

It follows from this conclusion that the continuation of the freezing order falls to be considered solely under the contingent continuation application and by reference to the court’s jurisdiction under section 44 of the Act.

During the course of the hearing Mr Edey submitted that in that eventuality the court was invited not to consider the arguments in relation to the freezing order; his clients were content for it to remain in place until the arbitrator had had an opportunity to consider the arguments, on the understanding that Mr Sodzawiczny would proceed expeditiously to seek equivalent relief from the arbitrator. The arbitrator would then be able to allow the freezing order to continue or not, pursuant to section 44(6). He submitted that this was the correct course to follow because arguments on whether there was a good arguable case that the First Tier or Second Tier Claims escaped the operation of the settlement provisions in clauses 6 and 7 of the Deed was a matter which the parties had agreed to submit to arbitration and should be determined by the arbitrator. Mr Caplan accepted that this was a course open to the court, but submitted that since the court had heard argument on the issues of good arguable case and risk of dissipation, procedural efficiency and the desideratum of saving costs justified the court dealing with them.

Having heard full argument on these issues it is tempting to address them, but in my view it would be wrong in principle to do so. It would put case management considerations ahead of the parties’ bargain in their arbitration agreement, which confers on the arbitrator the jurisdiction to consider the merits of substantive issues and jurisdiction to decide upon ancillary relief, subject only to the court’s residual jurisdiction to intervene under section 44 in cases of urgency where the tribunal is unable to act effectively. If the freezing order remains in place until the arbitrator can consider the exercise of that jurisdiction, there is no proper role for the court to address issues which only arise in the context of the exercise of a section 44 jurisdiction which is no longer justifiable on the gateway criteria of urgency and efficacy required by sections 44(3) and 44(5) of the Act. Mr Caplan did not pursue a free-standing argument that the arbitrator would never have the power to act effectively because of the absence of contempt sanctions applicable to third parties notified of the order, it being possible, of course, to make any order of the arbitrator an order of the court under section 42 of the Act. His concern, ultimately, was that there should be no gap in the operation of a freezing order in the time necessary for the arbitrator to consider the exercise of his jurisdiction to grant ancillary relief. That concern is met by Mr Edey’s concession that the freezing order should remain in place for that purpose. I will therefore take the course urged on me by Mr Edey.

As I have said, Dr Smith and Ms Stickler were not present or represented at the hearing, and had not issued any section 9 application, but had nevertheless intimated in letters that the claim against them should go to arbitration if that was the fate of the claims against Messrs McNally and Cooper. At the hearing Mr Caplan proceeded on the basis

On Mr Sodzawicny’s behalf it is not disputed that Dr Smith and Ms Stickler come within the definition of Affiliates of Pro Vinci. As such there can be no doubt from the language of clauses 6, 7 and 15 that those were provisions intended to confer benefits on them; and clause 7 involves express promises by Mr Sodzawiczny not to sue them in respect of matters within the scope of the settlement and release provisions. Section 1 of CRTPA provides that a third party may enforce a term of the contract when the contract expressly so provides (section 1(a)), or the term purports to confer a benefit on it (section 1(b)). Section 1(6) makes clear that “enforcing” a term includes availing oneself of any term purporting to exclude or limit liability. In my view clause 18 expressly purports to confer rights under the Act on Affiliates. Accordingly Dr Smith and Ms Stickler are entitled under both section 1(a) and 1(b) of CRTPA to invoke the benefit of, and rely upon, the settlement and release provisions in clauses 6 and 7 of the Deed, and in doing so are, in the terminology of CRTPA enforcing terms for their benefit. Can they insist on doing so in arbitration?

The application of CRPTA to arbitration agreements is governed by section 8 of

The Explanatory Notes which accompany the CRTPA provide:

At first sight it might be thought that if and to the extent that the arbitration agreement covers the matters in respect of which claims are brought against Dr Smith and Ms Stickler, this is a case which falls within section 8(1): the conditional benefit rationale applies as with any assignee of a right which he is seeking to enforce: they are seeking to enforce a term against Mr Sodzawiczny, albeit by way of defence and in accordance with the language of section 1(6), which is for their benefit and is subject to arbitration; if they do so they are both entitled and bound to do so in arbitration in accordance with the arbitration agreement. This approach would however be mistaken. A similar argument was rejected in the Fortress case, on the grounds that the effect of section 8(1) would be that the third party would be treated as party to the arbitration agreement and subject to its burdens irrespective of any invocation of the arbitration clause, such that the claimant party to the contract could arbitrate against the third party and require the arbitrator to determine that the exclusion clause which the third party was relying on afforded no defence in circumstances where the third party had not invoked and not agreed to be subject to the burden of the arbitration agreement. Section 8(1) is concerned with the situation where the third party seeks to enforce substantive rights under the contract, not where the contract gives him a defence; see per Tomlinson LJ at paragraphs [29] and [36] and Toulson LJ at paragraphs [42] to [43].

In these circumstance section 8(2) is available and not open to the same objection because it only applies if the third party invokes the right to arbitrate: see Fortress per Tomlinson LJ at paragraph [31] and paragraph Toulson LJ at [44]-[45]. As that case makes clear, however, section 8(2) can only apply if the arbitration clause upon its true construction gives the third party a right to arbitrate.

It may be that Fortress is distinguishable from the present case, because the rights which Dr Smith and Ms Stickler are seeking to enforce include a positive promise not

In Fortress the arbitration clause in question was held not to confer rights under section 8(2) as a matter of construction because it only applied to disputes which “the parties hereto” were unable to resolve: see paragraphs [31] and [47]. In this case, by contrast, the arbitration clause covers “any dispute arising out of or in connection with the performance or non-performance” of the Deed, and performance includes the express promises made to Affiliates and the exclusions of liability in their favour under clause 6 and 7 of the Deed. Again the presumption in favour of one stop adjudication and the approach to dispute resolution provisions in a settlement deed make it improbable that the parties should have intended disputes between parties to be resolved in one forum and the very same issues between parties and Affiliates who are intended to be entitled to take the benefit of the terms in another. The reasons I have identified for construing the arbitration clause as wide enough to cover all the issues in the First and Second Tier Claims against Mr McNally and Mr Cooper apply with equal force to the First and Second Tier Claims against Dr Smith and Ms Stickler. In other words, this is a case, unlike Fortress, in which the parties have agreed to confer on the Affiliates the right to arbitrate the First and Second Tier Claims against them (cf Fortress at paragraph [47]), and section 8(2) enables them to take the benefit of that agreement, which is what they have sought to do by the terms of their letters. Accordingly they too are entitled to a stay under section 9 of the Act, and given that they are without representation, I would not regard the absence of a formal application notice as a bar to granting such relief; indeed I did not understand Mr Caplan’s objections to extend to such a technical procedural point.

I will therefore stay the proceedings against them, but leave the freezing order in place against them pending application to the arbitrator for relief, on the same terms as apply to Messrs McNally and Cooper.