Service of arbitration claim form out of jurisdiction on related company (Commercial Court)

Practical Law UK Legal Update 4-513-9113 (Approx. 9 pages)

Service of arbitration claim form out of jurisdiction on related company (Commercial Court)

by PLC Arbitration

Background

Anti-suit injunctions restraining breach of arbitration agreements

The English court has jurisdiction to grant interim and final injunctive relief restraining proceedings abroad that are brought in breach of an arbitration agreement, under:

Section 44 of the Arbitration Act 1996 (AA 1996) (interim injunctions only).
Section 37 of the Senior Courts Act 1981 (interim and final injunctions).

The court will grant injunctive relief where:

It is established that the foreign proceedings infringe the claimant's contractual rights under the arbitration clause.
Less frequently, the foreign proceedings are vexatious and oppressive.

For further discussion of the principles applied by the English court and the circumstances in which injunctive relief may be available, see Practice note, Remedies for breach of the arbitration agreement: anti-suit injunctions in the English courts.

Service out of the jurisdiction

An arbitration claim form seeking an anti-suit injunction may be served out of the jurisdiction with the permission of the court under CPR 62.5(1), which provides:

"(1) The court may give permission to serve an arbitration claim form out of the jurisdiction if -...

(b) the claim is for an order under section 44 of the 1996 Act; or

(c) the claimant -

(i) seeks some other remedy or requires a question to be decided by the court affecting an arbitration (whether started or not), an arbitration agreement or an arbitration award; and

(ii) the seat of the arbitration is or will be within the jurisdiction."

In Vale do Rio Doce Navegacao SA v Shanghai Bao Steel Ocean Shipping Co Ltd [2000] 2 Lloyd's Rep 1, Thomas J held that the provisions governing the service of an arbitration claim form out of the jurisdiction applied only to applications made between the parties to the arbitration agreement. However, subsequent authority has recognised that the court may make orders against third parties under section 44 of the AA 1996. In Tedcom Finance Ltd v Vetabet Holdings Ltd [2011] EWCA Civ 191, the Court of Appeal held that it was arguable that permission to serve section 44 proceedings on a third party could be granted under CPR 62.5(1)(b).

Alternatively, permission to serve an arbitration claim form out of the jurisdiction may be granted under CPR 6.36 if:

The claim falls within one of a number of "gateways" listed in Practice Direction (PD) 6B.3.1.
The claim has a reasonable prospect of success (CPR 6.37(1)(b)).
England is the proper place to bring the claim (CPR 6.37(3)).

The PD 6B.3.1 gateways include the following:

"(3) A claim is made against a person ("the defendant") on whom the claim form has been or will be served (otherwise than in reliance on this paragraph) and –

(a) there is between the claimant and the defendant a real issue which it is reasonable for the court to try; and

(b) the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim...

(6) A claim is made in respect of a contract where the contract –...

(c) is governed by English law."

In the context of arbitration claims concerning arbitrations that are seated within the jurisdiction, it is common practice for the court to permit service on a party's solicitor who has acted for that party in the arbitration (see PD 62.4.3.1 and the obiter comments of Tomlinson J in Kyrgyz Republic v Finrep GmbH [2006] 2 CLC 402).

For further information about service out of the jurisdiction, see Practice notes, Service of the claim form and other documents: outside the jurisdiction and Arbitration claims: applications to the English court: How to serve out of the jurisdiction.

Alternative service

CPR 6.15 provides:

"(1) Where it appears to the court that there is a good reason to authorise service by a method or at a place not otherwise permitted by this Part, the court may make an order permitting service by an alternative method or at an alternative place.

(2) On an application under this rule, the court may order that steps already taken to bring the claim form to the attention of the defendant by an alternative method or at an alternative place is good service."

In Bayat Telephone Systems International Inc and others v Cecil and others [2011] EWCA Civ 135, the Court of Appeal indicated that CPR 6.15 empowered the court to order service out of the jurisdiction by alternative methods, though this should be regarded as exceptional, to be permitted in special circumstances only. For example, convenience or a desire to avoid delays will not generally justify such an order. For further discussion, see Legal update, Significance of limitation defence when extension of time to serve claim form sought (Court of Appeal).

Methods of service overseas

CPR 6.40(3) governs the method of serving a claim form overseas. It provides:

"(3) Where a party wishes to serve a claim form or other document on a party out of the United Kingdom, it may be served –

(b) by any method permitted by a Civil Procedure Convention or Treaty; or

(c) by any other method permitted by the law of the country in which it is to be served.

(4) Nothing in paragraph (3) or in any court order authorises or requires any person to do anything which is contrary to the law of the country where the claim form or other document is to be served."

Facts

The dispute between the parties arose in connection with a guarantee provided by the first defendant (D1) to the claimant bank in connection with the subsidiary's liabilities under a loan agreement. The guarantee was governed by English law and provided for disputes to be referred to LCIA arbitration, with the claimant having the option to refer disputes to the English court. The arbitration clause required the arbitrator to be an English QC. If the option to refer to court was exercised, the guarantee stipulated that D1's English solicitors, BC, were appointed as its agents for service.

Disputes arose under the loan agreement and the claimant sought to enforce the guarantee. It commenced arbitration in London against D1. In the arbitration, D1 was represented by a different firm of English solicitors, SJ. After the commencement of arbitral proceedings, the parties agreed to vary the arbitration agreement by:

Providing for the appointment of X (not an English QC) as arbitrator.
"Repealing" the provisions of the guarantee that dealt with the option to litigate, including the stipulation that BC was appointed as agent for service of process.

The second defendant (D2) is the trust manager of shares in D1. Shortly after the commencement of the London arbitration, D2 commenced proceedings before the Moscow Arbitrazh Court, seeking an order invalidating the guarantee under Russian companies legislation, on the basis that it had not been properly approved by shareholders.

The claimant issued a motion in the Arbitrazh Court to dismiss the proceedings, but this was rejected. Subsequently, the Arbitrazh Court dismissed D2's claims on the grounds that they were barred by limitation. D2 appealed.

In the meantime, the claimant issued proceedings in the English Commercial Court against both defendants, seeking an anti-suit injunction restraining the Russian proceedings. The claimant overlooked the fact that the service of process clause in the guarantee had been terminated and it mistakenly served the claim form on D1 by delivering it to BC's offices in London. BC then provided it to SJ, the solicitors representing D1 in the London arbitration.

Permission to serve the claim form on D2 in Moscow was granted on various bases, including the erroneous assumption that D1 had been validly served (via its solicitors) within the jurisdiction and that D2 was a "necessary and proper party" for the purposes of PD 6B.3.1(3).

The order granting permission to serve out of the jurisdiction allowed service:

In Russia, in accordance with the Hague Service Convention.
By alternative means, namely by serving D2's Russian solicitors by hand and by post.

In the event, the claim form was served on D2 by these alternative methods.

Both defendants challenged the court's jurisdiction and the service of proceedings. On the service by post in Russia, D2 submitted that Russia had entered a reservation against the application of the Hague Convention with the result that process originating in another Hague Convention signatory country (including the UK) was permitted only through official channels and could not be effected by post or by hand.

The applications raised a number of issues, including:

Was a jurisdictional gateway established against each defendant?
Could the service of the claim form on BC's offices in London be retrospectively validated?
Should permission have been granted to serve in Russia by alternative methods?

Decision

Blair J held that the court had jurisdiction and that the arbitration claim form had been validly served on D1 and D2. On the evidence before him, he concluded that it was arguable that the defendants had engaged in unconscionable conduct. They had colluded in the Russian proceedings with a view to frustrating the arbitration or impeding the enforcement of any award. Against that background, his reasoning was as follows:

Jurisdictional gateways

CPR 62.5(1)(b) (claim under section 44)

Blair J held that a jurisdictional gateway was established against both defendants under CPR 62.5(1)(b). Although D2 was not a party to the arbitration agreement, the authorities (in particular the Court of Appeal decision in Tedcom) established that section 44 of the AA 1996 relief was not necessarily so limited and might be granted against third parties. Furthermore, the defendants' contention that injunctive relief should be refused because it was for the arbitrator to decide whether the arbitration agreement had been breached was incorrect. Applying Cetelem SA v Roust Holdings Ltd [2005] EWCA Civ 618, this was a matter that might go to discretion, but which could not affect the court's jurisdiction.

CPR 62.5(1)(c) (remedy affecting an arbitration)

Furthermore, the jurisdictional gateway under CPR 62.5(1)(c) (remedy affecting an arbitration) was established against both defendants. The defendants argued that, as the Russian proceedings could not give rise to any issue estoppel that would bind the arbitrators on the issues they were called on to decide, the claimant's concern was limited to enforcement of any award. However, Blair J held that the fact that the claimant's concerns related to enforcement did not imply that the question was not one affecting an arbitration, an arbitration agreement or an arbitration award for the purposes of CPR 62.5(1)(c).

PD 6B (necessary or proper party)

This gateway affected only D2. D2's argument that it was for the arbitrator (not the court) to decide the issues relating to breach of the arbitration agreement was rejected. As under CPR 62.5(1)(b), this would not prevent the court from assuming jurisdiction.

Blair J commented that, where a claimant alleges that a non-party has been engaged in the unconscionable pursuit of litigation intended to prejudice the arbitration agreement, "in most circumstances" that non-party will be amenable to service out of the jurisdiction as a necessary or proper party.

Turning to the wording of this ground, as a matter of fact, at the time of the application D1 was a party who "has been or will be served". Blair J rejected the contention that the applications needed to be made sequentially with permission being (validly) given to D1 before the "necessary or proper party" gateway could be considered.

PD 6B (in respect of a contract)

This jurisdictional gateway was conceded by D1. Blair J noted that the fact that D2 was not a party to the guarantee or the arbitration agreement was not fatal to an application under this ground, if the claim was otherwise a contractual one. However, he preferred to approach the case on the basis of an unconscionable conduct analysis, rather than a contractual analysis. Therefore, he did not uphold the grant of permission under this head against D2.

Serious issue to be tried

Having established jurisdictional gateways against both defendants, the next issue was whether there was a serious issue to be tried.

Blair J noted that anti-suit injunctive relief was available in two principal situations:

Where there was a legal right not to be sued in the foreign court (for example, because the proceedings were a breach of contract).
Where there is no such legal right, but an equitable right not to be sued because the foreign proceedings are vexatious and oppressive.

In the present case, the factual allegations relied on as amounting to a breach of the arbitration agreement were the same as those said to amount to unconscionable conduct (namely the collusion in the Russian proceedings, with a view to frustrating the arbitration agreement or hindering enforcement of any award).

The first question was whether it could be shown that the Russian proceedings amounted to a breach of contract. That was a complex issue as far as D2 was concerned. It was not at all clear that D2's right to seek relief in the Russian court under Russian companies legislation was subject to any contractual obligation to arbitrate.

However, it was unnecessary to reach a final view on that point because, in any event, both defendants had acted vexatiously and oppressively in their pursuit of the Russian litigation. Blair J observed that where (as here) companies are in the same ownership and control, it is arguably unconscionable for them to work together to the extent of one bringing court proceedings with a view to impeding the outcome of an arbitration to which the other is a party. The evidence before the court justified the inference that the Russian proceedings were brought with a view to impeding the outcome of the arbitration. Therefore, a sufficiently arguable case of vexatious and oppressive proceedings had been established.

Delay

Although the claimant was guilty of some delay in applying for anti-suit relief, on the facts, this was understandable (as the grounds for the application were tied up with the jurisdictional challenge and needed to be explored properly). With some hesitation, Blair J concluded that the delay should not itself preclude the bringing of the claim.

Alternative service

Blair J granted an order retrospectively validating the service on D1 by delivery to BC's London offices.

Having considered the authorities, he noted that mere convenience or pragmatism was not a sufficient justification for an order under CPR 6.15. Furthermore, it was clear from Bayat that service on a party to the Hague Convention by an alternative method under CPR 6.15 should be regarded as exceptional. However, this was an unusual case. The parties had originally agreed to a service of process clause. Furthermore, had the claimant noticed that the service of process clause had been terminated and brought this to the court's attention, it was difficult to see why the court would not have granted permission to serve on D1's solicitors in London, in accordance with the usual practice. Validating the service retrospectively would cause no prejudice to D1 and refusing to do so would cause unnecessary delay and expense.

Had the application for retrospective validation failed, Blair J indicated that he would have granted an order extending the validity of the claim form and permitting it to be served on D1's solicitors within the jurisdiction.

Validity of method of service in Russia

Having considered the evidence of Russian law and practice, Blair J concluded that service by post or in person of legal proceedings commenced in the UK was not "permitted", but was not illegal either. Therefore, the court was entitled to order alternative service by post under CPR 6.15, provided the principles outlined in Bayat were satisfied. The evidence suggested that serving under the Hague Convention channels would take between three to six months. However, waiting this long could defeat the purpose of the application. Therefore, the situation was sufficiently urgent for the purposes of the Bayat principles to justify alternative service by post.

In any event, Blair J indicated that, even if service had not been effected on D2 validly, he would have extended the validity of the claim form and permitted service in accordance with the Hague Convention.

Comment

A number of points arise from Blair J's judgment.

First, the case lends weight to the view that relief under section 44 of the AA 1996 is not limited to parties to the arbitration agreement. It follows that permission to serve out of the jurisdiction may be granted against third parties under CPR 62.5.

Furthermore, the case is a good example of the "vexatious and oppressive" grounds of anti-suit injunctive relief being used to "catch" third parties. The court adopted a robust approach to prevent the arbitration agreement from being side-stepped by means of court proceedings brought by a related third party.

On the alternative service issues, the judgment adds to the weight of authority in favour of permitting alternative service in service out cases (albeit only in exceptional circumstances). The judgment also addresses the relationship between CPR 6.40(3) and (4), and suggests that the statement of methods in CPR 6.40(3) is not exhaustive. Even if a method falls outside those indicated in CPR 6.40(3), the court may make an order for alternative service, provided that the proposed method is not unlawful (as stipulated by CPR 6.40(4)). This means that methods of service that are not expressly "permitted" by the destination state, but are not illegal, may be ordered by the court.

Case

BNP Paribas SA v Open Joint Stock Company Russian Machines and another [2011] EWHC 308 (Comm).

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