That’s A Relief (Interim): The English Court’s Approach In Arbitrations - Court Procedure

Arbitral tribunals (similarly to national courts) often have the power to grant interim or provisional measures pending final determination of the dispute before them. However, arbitrators cannot act until they have been duly appointed. In cases of urgency, the courts of the seat (the country where the arbitration takes place) may be empowered to support a nascent arbitration by ordering interim measures where the tribunal is not yet able to act. In such cases, the national courts 'hold the ring' until such time as the tribunal has been constituted. They may also assist a tribunal where it lacks the power to make a necessary order.

A classic kind of interim relief is an order 'preserving assets' that are in dispute. In a straightforward scenario, such assets may be physical property which one party claims belongs to it. A court or tribunal might restrain a sale or disposal of the property in question – for instance an irreplaceable painting. In international commercial disputes, matters are rarely so straightforward. The asset in question may be a contractual right – a chose in action.

An interim measure requested for the preservation of an asset might, upon closer inspection, resemble an order that one party should not act in a manner that is inconsistent with the other party's alleged contractual rights. Where is the line to be drawn, considering that the other party will be hotly contesting the contractual rights? This article looks at a number of recent decisions of the English courts on what amounts to an 'asset'.

Overview – interim measures in international arbitration

International arbitral tribunals will usually have been granted wide powers to grant interim relief. Generally, interim measures are aimed at preserving the position between the parties (the 'status quo'), or preventing the destruction of evidence or the loss or dissipation of key assets that are the subject of the dispute. Sometimes, international arbitral tribunals will grant interim relief to prevent conduct that would cause one party to suffer irreparable harm, that is to say loss that could not be made good by an award of damages, or where it is appropriate that a party should provide security for the claim.

Interim measures are often said to be 'conservatory' in nature, since they are intended to facilitate and preserve the effectiveness of the arbitral process, rather than giving one party an early taste of the relief it ultimately seeks in the arbitration. Measures that would materially prejudice or disadvantage the party against which they would take effect are unlikely to be granted.

The powers of any tribunal to grant interim relief will usually depend on three things:

The agreement between the parties set out in the arbitration clause. The parties might have conferred specific powers on their arbitrators;
The provisions of any institutional rules of arbitration that the parties may have adopted;
The law of the seat of the arbitration proceedings, which might limit or prescribe the powers of the tribunal regardless of the agreement between the parties. In many jurisdictions, national arbitration laws will not prevent the parties from giving their tribunals wide powers to order interim measures.

The ICC Rules 2012 allow the arbitrators to "order any interim or conservatory measure it deems appropriate", and to request appropriate security from the requesting party (Article 28.1). The new ICC Rules also contain provisions for the appointment of an emergency arbitrator, who can grant interim relief expeditiously before the full tribunal has been appointed. However, the ICC's emergency procedure is not available where the parties entered into their arbitration agreement before 1 January 2012.

The LCIA Rules contain a little more detail, and refer to the provision of security for claims or counterclaims, the "preservation, storage, sale or other disposal of any property or thing under the control of any party and relating to the subject matter of the arbitration", and granting any relief that might be the subject of a final award on a provisional basis, including the payment of money or the disposition of property.

Both the ICC and the LCIA Rules permit a party to apply to a competent national court for interim measures where the tribunal has not yet been appointed, or in exceptional cases where the tribunal cannot act (see LCIA Rules, Article 25.3, and ICC Rules, Article 28.2). The powers of a competent national court will naturally be determined by the arbitration laws of the relevant jurisdiction.

The powers of the High Court to act in support of arbitration proceedings

The powers of the English Court to order provisional measures in support of arbitration proceedings are set out in the Arbitration Act 1996. A central objective of the 1996 Act was to limit the circumstances in which the court would intervene in arbitration proceedings, given that the parties chose to refer their disputes to an arbitral tribunal and not to the court. Nonetheless, as the report of the Departmental Advisory Committee on the bill that became the 1996 Act notes, in appropriate circumstances the court can intervene "... to support rather than displace the arbitral process" (see paragraph 22, February 1996 DAC Report). The court may properly act, for instance, where the tribunal has not yet been appointed, or where the arbitrators do not have the power to make the relevant order through statute or the applicable arbitration rules. For instance, the High Court may step in where relief is sought against a third party, who has not accepted the jurisdiction of the tribunal, and who therefore cannot be ordered to do anything by the arbitrators.

The supportive powers of the English Court are set out in Sections 42 to 44 of the 1996 Act. They were commented on by the High Court in Econet Wireless Ltd v Vee Networks Ltd [2006] EWHC 1568 (Comm). In that case, the claimant had asked for a freezing injunction pursuant to Section 44 of the Act, a remedy that the High Court can, in principle, grant in support of arbitral proceedings. Refusing to uphold the injunction in that particular case, Morison J noted that:

"Section 44 of the Act gives the court power to hold the ring until arbitrators become seised of the dispute."

The Judge considered that the legislative purpose underlying Section 44 was to "cover over the crack between the moment of the application and the time when the arbitral tribunal can be formed". Instead of coming to Court, the Judge was of the view that the claimants should have availed themselves of the expedited procedures in the LCIA Rules of Arbitration to form a tribunal as soon as possible, and they should then have requested security and such other provisional relief as the LCIA arbitrators deemed appropriate.

Parties who apply to the High Court for any order that an arbitral tribunal could also grant may therefore be left disappointed, particularly if they have not taken all steps open to them and acted expeditiously in bringing about the constitution of the tribunal.

The High Court's specific powers to make order 'for the preservation of assets'

The power of the English Court to make an order relating to an asset that is in dispute appears in Sections 44(2) to (4) of the 1996 Act.

Section 44(2) lists the matters in respect of which the High Court can make orders (subject always to the parties being able to widen this in their arbitration agreement):

"Those matters are -

(a) the taking of the evidence of witnesses;

(b) the preservation of evidence;

(c) making orders relating to property which is the subject of the proceedings or as to which any question arises in the proceedings—

(i) for the inspection, photographing, preservation, custody or detention of the property, or

(ii) ordering that samples be taken from, or any observation be made of or experiment conducted upon, the property;

and for that purpose authorising any person to enter any premises in the possession or control of a party to the arbitration;

(d) the sale of any goods the subject of the proceedings;

(e) the granting of an interim injunction or the appointment of a receiver."

Section 44(3) stresses that whatever order is sought, there must be 'urgency':

"If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets."

Section 44(4) then goes on to provide that in non-urgent cases, the court "shall act" only if the application is made on notice to the parties and the tribunal, and if the parties have agreed or the tribunal has given permission.

How these sections operated together was the subject of debate, until the Court of Appeal settled the matter in Cetelem SA v Roust Holdings Ltd [2005] EWCA Civ 618. It is now clear that the High Court can only make orders without notice, without the agreement of the parties or without the tribunal's permission where (i) the matter is urgent and (ii) the Court deems it is 'necessary' to make the order sought for the preservation of evidence or assets.

In Cetelem, the Court of Appeal took a wide view of what could amount to an asset for the purpose of Section 44(3):

"Thus section 44(3) only gives jurisdiction to the court to make orders which are necessary for the purpose of preserving evidence or assets (my emphasis). It is evident that the purpose of the order must be to facilitate the arbitration or the enforcement of an award and not to usurp the functions of the arbitral process. However, as I observed earlier, there is nothing in the subsection to limit the power of the court to orders which do not involve a preliminary determination of a contractual right of the parties. I see nothing in the subsection or the Act which provides that the court has no power to make an order which it thinks necessary for the purpose of preserving evidence or assets because it will also involve forming a view on the merits of the dispute which the parties have agreed to submit to arbitration or because it involves directing a party to take a step which the contract provides that it must take. Whether it is right in principle to make such an order in any given case is an entirely different question but I cannot see that there is anything in the subsection or the Act which deprives the court of the power to make an order which it thinks is necessary for the purpose of preserving evidence or assets. It is that power which is expressly conferred by the subsection."

According to the Court of Appeal, an asset could therefore include a (contested) contractual right. Making an order preserving such an asset might require the court to take a view on the merits, and could amount to requiring a party to take (or refrain from taking) a step under a contract.

A narrowing of the definition of an 'asset'? – Zim Shipping

In November 2013, the Commercial Court revisited the question of what might constitute an asset for the purpose of Section 44, in Zim Integrated Shipping Services Ltd v European Container Ks [2013] EWHC 3581 (Comm). Males J refused to make an order that would have prevented one party from exercising certain contractual rights under charterparties.

In 2004, Zim, an Israeli shipping company, had sold four vessels to four special purpose companies owned by financiers, and had then leased them back under bareboat charters. The purchase of the vessels by the SPVs had been partly financed by a loan from Zim, but the majority of the consideration had been raised by bank loans. Zim had to pay hire to the SPVs under the charterparties. At the same time, the SPVs owed Zim under the loan by Zim which Zim had part-financed the SPV's purchase of the four vessels (to be repaid towards the end of the arrangement). Zim came into financial difficulties, and fell behind with the hire payments. A rescheduling was agreed but this did not solve the problems. In September 2009, Zim unilaterally reduced the amount of hire that it was paying to the SPVs under the bareboat charters. The SPVs argued that Zim thereby forfeited its right to be repaid the loan that Zim had made to the SPVs.

After further (and drawn out) negotiations, Zim commenced arbitration proceedings to claim back the loan. As of 6 November 2013, when the application to the High Court was made, two out of three members of the tribunal had been appointed. From the judgment, it appears that a hearing on the merits during January 2014 might nonetheless have been feasible. Zim applied to the High Court because, on the balance of payments between the parties, Zim was getting to the point where Zim would owe less to the SPVs than the SPVs did to Zim. As Zim saw it, from the moment that the balance due from Zim to the SPVs would exceed monies repayable the other way, Zim was exposed because the SPVs appeared to be asset-less.

The precise interim remedy that Zim sought was expressed as follows:

An order that Zim did not have to pay hire under the charterparties.
A further order that the SPVs could not rely on Zim's failure to pay hire as a reason for terminating the charterparties. Under the contractual matrix between the parties, termination of the charterparties would have been a further reason for forfeiting repayment of Zim's loan, and would have triggered cross-default clauses in Zim's other finance agreements.

Zim offered security for any counterclaim that the SPVs might have in the arbitration. Zim was also prepared to pay the hire under the charterparties into an escrow account. The Judge referred to this as an offer to pay into escrow "the amount of hire which falls due month by month", although it is not entirely clear whether that was the amount which Zim said fell due, or the amount that the SPVs contended was payable.

Males J considered whether the above orders would amount to the 'preservation of assets' within the meaning of Section 44 of the 1996 Act. Zim's argument was that it had contractual rights, firstly a right to be repaid the loan there and then, and secondly a right to deduct hire under the charterparty if there was an event of default as regards the loan. The Judge took the view that this was, however, precisely the question that the arbitrators had to decide:

"It seems to me that treating these contractual rights as assets within section 44(3) is stretching that term, if not to breaking point, at all events very nearly to that point. If the subsection does indeed extend so far, then it is difficult to see what real limitation is provided by the limitation that the subsection is only there for the purpose of preserving evidence or assets. That wide interpretation would enable the court, as a matter of jurisdiction, to grant an injunction in a very wide range of cases."

Even though these contested 'assets' just about managed to scrape into the scope of Section 44(3), Males J thought that their precarious and disputed nature was a factor to be taken into account against granting the injunction:

"The closer any injunction comes to determining a matter which it is for the arbitrators to decide, the more wary the court should be as a matter of discretion."

The Court found that Section 44 was not primarily concerned with possible or alleged assets. An alternative way of describing the Judge's conclusion was to say that it was not "necessary" (a condition under Section 44(3)) for the Court to decide whether the asset existed, and then to preserve it, because the existence of the asset would be determined by the arbitrators. In considering whether preserving a contested asset might be necessary, the Judge made reference to how urgent the matter was, or how dire the consequences for the applicant might be if the order were not made.

In declining the grant of the injunction, the Judge did not expressly refer to the usual test for determining whether an interim injunction is appropriate, being the 'balance of convenience'. This test, set out in the oft-cited case of American Cyanamid Co v Ethicon Ltd [1975] AC 396, also applies to interim injunctions sought under the Arbitration Act 1996 (see AB v CD [2014] EWCA Civ 229). In Zim, the Judge seems to have exercised a discretion that arose only under Section 44(3) of the 1996 Act, and where the prime consideration was the nature of the asset. In refusing the injunction, the Judge seemed to accept that Zim had 'a good arguable case' on the merits, but he put no store in Zim's submission that the respondents were taking "a proclivity of bad points". According to Males J, assessing the merits was solely a matter for the arbitrators.

Can a 'sole representation right' under a JOA be an 'asset'?

Males J got the opportunity of citing his own judgment in Zim with approval in the next case that considered Section 44 of the 1996 Act. In Euroil Ltd v Cameroon Offshore Petroleum SARL [2014] EWHC 52 (Comm), both Euroil and CAMOP had interests in the Etinde field offshore Cameroon, and were parties to a JOA which contained an arbitration clause. Euroil was the operator. Euroil sought to restrain Cameroon Offshore Petroleum ("CAMOP"), from attending meetings and engaging in discussions with Cameroon's national oil and gas company, or the countries' regulatory authorities, concerning the Etinde Permit.

Euroil argued that under the JOA, it had a right to be the sole representative of the consortium in any meetings with the government or the authorities. As Counsel for Euroil put it:

"EurOil shall, as Operator, lead the discussions with the government in any meetings means that it is up to EurOil to decide what matters should be discussed in any meeting; that EurOil will respond to any questions or concerns that may be raised by the government; that it is for EurOil to decide the nature and extent of any contribution from the other party (that is to say from CAMOP); and that the effect of that is that if, for example, the government were to ask a question of CAMOP representatives present at the meeting, those representatives would only be able to respond to that question with EurOil's permission. The contractual structure, he says, is that it is for the Operator to determine who shall answer."

Males J again noted that whether the JOA really did have this effect was a contested matter that the arbitrators would need to decide. There was considerable need for caution before any injunction should be granted as the asset in question was a disputed right:

"... it is a factor to be taken into account as a matter of discretion that s.44(3) is more readily to be invoked in the typical case where preservation of assets is being used in a more conventional way, such as in the case of a freezing order, for example, and that, the closer any injunction comes to determining a matter which it is for the arbitrators to decide, the more wary the court should be as a matter of discretion ..."

The Judge repeated his warning in Zim that it is not generally necessary for the Court to preserve assets that consist of disputed contractual rights, and exercised his discretion to set aside the injunction previously granted on a without notice application. Besides the nature of the asset, there were further difficulties with Euroil's case. After the grant of the injunction following the initial without notice hearing, Euroil's representatives had attended a meeting with the government and had made certain comments about what the injunction meant. On the second hearing before Males J, with both parties present, the Judge noted that Euroil had misrepresented the effect and scope of the injunction that had been granted. Males J also saw practical difficulties with precisely how an injunction to limit the extent to which parties could engage in meetings and discussions ought to be phrased, when it was common ground that CAMOP was not completely prohibited from communicating with the government. For these reasons, the injunction was discharged.

Euroil did clarify one point. CAMOP had asked the Court to read a further restriction into Section 44(3), based on a Singapore authority considering the equivalent provision in Singapore's international arbitration statute. This would have restricted orders for the preservation of assets at the interim stage only to situations where damages would not have been an adequate remedy in the final analysis. Put differently, under the laws of Singapore, it seems that the court can only intervene at the interim stage by preserving an asset where the loss of the asset could not be compensated by an award of damages. In the commercial world, most loss can be made good through damages, provided that there are assets to enforce against (and this is where a freezing injunction might come in, to guard against a real risk of those assets being dissipated). Exceptions where damages are not appropriate are intangible matters such as a party's commercial reputation, or perhaps highly confidential information or a trade secret, or cases where very great harm would be suffered that the defendant could never make good because it lacks the resources. Further, difficulties in quantifying damages may be such as to make damages an inadequate remedy, though the English Court usually takes a robust approach to the assessment of financial loss. Faced with this argument, Males J concluded that, at least in principle, Section 44(3) was not limited in the same way as the Singaporean provision – so that the English court could in principle still grant an interim injunction to preserve an asset where the loss of that asset can ultimately be compensated in monetary terms. However, these recent decisions suggest that such an order might only be made in exceptional cases.

A contrasting view from the Construction Court?

As against the Commercial Court's apparent reluctance to investigate the merits where the asset that is to be preserved is a disputed contractual right, the Technology and Construction Court might seem a little less reticent to step in at the interim stage.

In Doosan Babcock Ltd v Comercializadora de Equipos y Materiales Mabe Limitada [2013] EWHC 3010 (TCC) (11 October 2013), Edwards-Stuart J was presented with a dispute arising under a contract on FIDIC terms (possibly the Red Book), which provided for disputes to be resolved by arbitration (in the absence of a disputes board having been constituted). The works in question were the supply by the contractor of two boilers for a power plant in Brazil. The contractor had given two performance bonds, one for each boiler. The bonds would have expired upon the employer issuing a taking-over certificate. Such certificates are often to be issued by the engineer, but in this case the employer (somewhat unusually) had also been appointed as the engineer for the purpose of issuing the certificates. That appears to be somewhat like acting as a judge in one's own case, and may be worth bearing in mind when considering the approach that the Judge took.

In July 2013, the contractor, being of the opinion that the works were complete, invited the employer to issue a certificate for the boiler. The employer responded that it had taken over the boilers, and had put both of them into operation as of May 2013, but that this was merely a temporary measure which was permitted under the contract. The employer then presented the contractor with a claim for US$ 58 million, by a letter from its solicitors of 28 August 2013. The contractor responded on 20 September 2013, expressing concern that the employer's continuing refusal to issue a certificate was a tactical measure that would ultimately lead to the employer making (unwarranted) calls under the bonds. No undertaking to refrain from calling on the bonds was forthcoming, and so the contractor applied to the Technology and Construction Court on 4 October 2013 for an interim injunction to that effect.

The Judge first considered whether a contractual right to a taking over certificate, which would lead to the expiry of the bonds, was an asset that could be preserved for the purpose of Section 44(3) of the 1996 Act. He followed Cetelem v Roust (discussed above) without hesitation, and put no great emphasis on the fact that there was a dispute as to the effect of the contractual documents. The Judge did, however, note that an order could be made if it was aimed at preserving the value of the right - which in this case would have been to have guarantees expire before they could be called upon. The employer had relied on the fact that the FIDIC form had been amended to remove some of the usual restrictions on the circumstances in which the employer could call on the bonds. Nonetheless, the Judge could not see how that could help the employer in circumstances where it seemed that the only reason the bonds remained in force was the employer's breach of contract. English law does not allow a party to receive a significant benefit by virtue of that party's own breach of contract.

Edward-Stuart J then turned to consider the threshold for the grant of interim relief. In doing so, he applied the usual test for an interim injunction in English law, and followed an earlier decision of the Technology and Construction Court (Simon Carves v Ensus UK [2011] BLR 340):

"In American Cyanamid Lord Diplock used the expression "a serious question to be tried" in contrast to claims that were frivolous or vexatious: he indicated also that the case should have a real prospect of success in order to justify the grant of interim relief. In doing so he rejected the submission that a claimant had to show a prima facie case. However, having regard to the commercial importance of bonds and letters of credit I agree, as Akenhead J said, that a claimant who wishes to restrain a beneficiary from making a demand under a bond must show that it has a strong case. That is to say, a strong case that under the terms of the underlying contract for the performance of which the bond has been provided the beneficiary is not entitled to make a demand on the bond. However, it must be emphasised that in concluding that a claimant has a strong case at the application stage the court is not making any determination in relation to the ultimate outcome of the dispute."

It may not come as a surprise that the Judge did not think much of the employer's approach in this case. The contractor had made out a strong case, as the employer's position that the boilers had been taken over as a temporary measure was not supported by any clause in the contract. The only wording in the contract that might have assisted the employer was a general reference in the provision governing the issuance of taking-over certificates which stated that a temporary take-over might be permissible where the contract so provided. The problem for the employer was that nowhere else in the contract actually did provide for a temporary take-over of the boiler – the wording was superfluous, and may have been left in the clause by mistake while other relevant FIDIC provisions had been deleted by the parties. The Judge trenchantly remarked that the employer's position was "little short of ludicrous".

Conclusion

Even though the decision in Doosan Babcock dealt with a particularly unmeritorious employer, the case illustrates that the Technology and Construction Court is prepared to take a robust view when assessing the underlying strength of the parties' cases where one of them has applied to preserve a contested asset, in the form of a contested contractual right. There is at least a suggestion that the Commercial Court (as personified by Males J) may perhaps need to be firmly invited to have a look at the underlying claims in appropriate cases. In Zim, there was no investigation of whether one or other party had the better argument. The Commercial Court seemed to take the view that one simply could not tell without trespassing on territory reserved for the arbitral tribunal:

"If, however, the claimants are wrong in what they say, then the effect of granting the injunction which the claimants seek would be to interfere with the respondents' contractual rights. If the respondents' position in the arbitration is correct, then the hire is due and payable on 1 December and the claimants do not have any right to deduct or withhold it. In that event, if they choose to do so, the respondents would be entitled to take steps to recover hire which is due to them, including by arresting Zim vessels where they are able to do so. So if I were to grant this injunction in order to preserve what may be the claimant's contractual rights, I would inevitably be interfering with what may be the respondents' contractual rights."

When compared that with Edwards-Stuart J's pronouncement that the argument deployed by one side was ludicrous, one can see an interesting divergence – and perhaps an indication where best to take one's application? Watch this space.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

UK: That’s A Relief (Interim): The English Court’s Approach In Arbitrations