Disputes Briefcase

The dispute related to an unpaid term loan under a facility agreement containing a widely drafted arbitration agreement, which provided that: “any claim, dispute or difference of whatever nature arising under, out of or in connection with this Agreement” shall be referred to LCIA arbitration. The respondent creditor applied to appoint liquidators over the appellant debtor. The debtor disputed that the debt was due and payable based on a cross claim and/or set-off.

The test: a genuine dispute on substantial grounds

The Privy Council held that the correct test to be applied when deciding whether to dismiss or stay a winding-up petition (or liquidation application in the BVI) in favour of an arbitration agreement is whether the debt is subject to a “genuine dispute on substantial grounds”. The Privy Council considered that a winding-up petition does not trigger the statutory mandatory stay provided for in arbitration laws (e.g. s9 English Arbitration Act 1996). This is because a winding-up petition is not a type of claim that is caught by those provisions. Arbitration agreements relate to the resolution of disputes, and provide for them to be resolved by arbitration, not litigation. Insolvency is of a different nature to dispute resolution and a winding-up petition does not seek to resolve disputes. Further, the Privy Council held that pro-arbitration policies are not offended by one party seeking liquidation of another which fails to pay a debt. The Privy Council also held that its findings apply to exclusive jurisdiction clauses.

Application to English law

Following the leading English case of Salford Estates, and reflective of the English courts’ pro-arbitration policy, the English courts apply a low threshold to the question of whether a debt is disputed. The English courts may order a discretionary stay of creditors’ winding-up petitions where an insubstantial dispute about the creditors’ debt is raised between parties to an arbitration agreement.  

Significantly, the Privy Council (which comprised a bench of UK Supreme Court judges) found that the test in Salford Estates was wrongly decided. The Privy Council directed (under the Willers v Joyce principle) that the English courts should no longer follow Salford Estates and instead treat its decision in this case as representing English law. As a result, the English courts will no longer exercise a discretion to stay or dismiss winding-up petitions where the debt arises out of a contract subject to a generally worded arbitration agreement or exclusive jurisdiction clause, unless the debtor can show the debt is genuinely disputed on substantial grounds. The Supreme Court noted, however, that different considerations may arise if the arbitration clause was drafted to apply to a creditor’s winding up petition.

The Privy Council’s decision highlights the interplay in public policy considerations underlying arbitration and insolvency. The decision is likely to be of wider interest in other jurisdictions, such as Hong Kong which has considered similar issues in the cases of Re Guy Kwok-Hung Lam and Re Simplicity & Vogue.

Magomedov and others v Transneft and others is a rare example of an anti-anti-suit injunction (AASI): in other words, an order of the English court to restrain a party from pursuing an anti-suit injunction in a foreign court that was itself aimed at preventing the pursuit of a claim in England. The factual context of the case gives it a broader market relevance: the AASI application was precipitated by the defendants’ recourse to new Russian laws which purport to prevent foreign courts hearing disputes involving Russian companies targeted by Western sanctions.

Mr Magmedov, a Russian citizen, sued Transneft, a Russian state-controlled company, in the English courts, alleging it and other defendants had conspired to injure him and fellow claimants by unlawful means. The claimants were given permission to serve the defendants in Russia and the defendants indicated they would seek to challenge the jurisdiction of the English court to hear the case. But before the English court could reach a verdict on that question, Transneft persuaded a Moscow court to injunct the claimants from continuing their claim in England. They relied on new Russian procedural laws which grant the Russian courts the exclusive right to hear disputes involving Russian entities subject to sanctions imposed in the wake of Russia’s full-scale invasion of Ukraine. They are backed up by heavy financial penalties for companies that continue litigation outside Russia.

The claimants asked the English court to grant injunctions preventing Transneft from enforcing the Russian anti-suit injunctions until the English court had reached a view on whether it had jurisdiction. In a judgment handed down in May, the Commercial Court agreed.

In a measured decision that sought to balance respect for different countries’ legal systems and the rights of litigants to access justice, Bright J summarised the test for AASIs. He noted that, as a general rule, the English court would only grant relief where England was the proper forum for the dispute and the pursuit of foreign proceedings would be vexatious and oppressive or unconscionable. The issue in this case was that the effect of the Russian court’s anti-suit injunction would be to deprive the English court of the opportunity of deciding for itself whether it was the proper forum. The judge decided that this would be unconscionable: the proper course was to make injunctions that effectively paused the defendants’ enforcement of the Russian injunction until the English court had decided whether it should hear the substantive claim.

In Aercap Ireland and others v PJSC Insurance Company Universalna and others, the Commercial Court stayed claims brought in England against the reinsurers of aircraft leased to Ukrainian airlines seeking recovery of losses incurred by the grounding of the aircraft following Russia’s invasion. Some of the relevant leases were governed by English law but all contained exclusive jurisdiction clauses in favour of the Ukrainian courts.

In a detailed judgment that considered competing expert evidence on the current status and functioning of the Ukrainian court system, Henshaw J concluded that there were not sufficiently strong reasons for the English court to disregard the parties’ agreement to bring claims only in Ukraine. The decision is a useful reminder of the English court’s strong support for exclusive jurisdiction clauses, regardless of which court the parties may have nominated.

Similar issues have been considered in the context of arbitration agreements, including by the UK Supreme Court in UniCredit v RusChemAlliance and more recently in the High Court in Barclays v VEB. In both cases, the English courts granted injunctions to restrain Russian court proceedings brought by sanctioned Russian entities in breach of arbitration clauses.

A new law that gives the higher courts greater scope to depart from pre-Brexit case law related to EU law will come into effect this October. Since the end of the Brexit transition period on 1 January 2021, when the bulk of EU law was transposed into domestic law subject to necessary amendments, UK courts have generally been required to construe that law in accordance with pre-Brexit CJEU and domestic case law. In England, only the Supreme Court and the Court of Appeal can depart from retained (now renamed “assimilated”) CJEU case law, but only in the circumstances where the Supreme Court would depart from its own precedent. Historically that power has been used sparingly. So it is perhaps not surprising that, since it was extended to assimilated EU case law, it has hardly been used.

s6 Retained EU Law (Revocation and Reform) Act 2023 amends the existing position by loosening the test for overruling assimilated EU case law. (Competition law cases are outside the scope of s6; a test for departing from assimilated case law in that area is already set out in s60A Competition Act 1998.) In May it was announced that s6 will come into effect on 1 October 2024 and will not apply to appeals arising before that date. The Supreme Court and Court of Appeal will be directed to have regard to, among other things, the fact that decisions of a foreign court are not binding; any change of circumstances which is relevant to the assimilated EU case law; and the extent to which the assimilated EU case law restricts the proper development of domestic law. That is significantly more permissive than the current test, and the very recent decision of the Supreme Court in Lipton v BA Cityflyer confirms it applies no matter when the alleged breach of assimilated EU law occurred. But to what extent will judges accept what amounts to an invitation to make policy from the bench? The major reason for the Supreme Court’s historic caution in overturning its own precedents has been the desire to preserve legal certainty and to avoid upsetting pre-existing legal relations. It remains to be seen how and in what degree the new law will affect this calculation.

The Supreme Court has held in Manchester Ship Canal Company v United Utilities that owners of private watercourses can bring claims in private nuisance or trespass against water companies for discharges of untreated sewage from sewer overflows, even where there has been no negligence or deliberate misconduct. The Supreme Court found that sewerage companies do not have statutory authority to cause a nuisance by discharging untreated sewage into watercourses and that, in principle, owners of watercourses are not prevented by the relevant statutory regime from bringing common law private nuisance or trespass claims, notwithstanding the existence of statutory enforcement mechanisms.

The Grantham Research Institute on Climate Change and the Environment has published its 2024 annual snapshot report on global trends in climate change litigation. The report observes that climate litigation has continued to spread and diversify over 2023, with 230 new climate cases filed in 2023 and cases now having been recorded in at least 55 countries since 2015. Outside the US, the UK had the highest number of recorded cases filed (24) over the year (although most cases were brought against government bodies). Strategic climate cases continue to be filed against companies across the world with around 230 such cases recorded since 2015. Among those cases, ‘climate-washing’ claims are gaining traction with over 70% of completed cases have decided in favour of the claimants.  

The report notes that the number of new cases filed each year may be stabilising, which the authors suggest could be due to “a consolidation and concentration of strategic litigation efforts in areas anticipated to have high impact”. However, the report cautions that any slowdown may be “temporary” as case strategies continue to evolve and while many pending novel claims against companies await determination. Read more in our blog post.

The Court of Appeal in Eternity Sky v Zhang has dismissed an appeal by an individual, Zhang, who sought to resist enforcement of a Hong Kong arbitral award arguing it would infringe her rights under the Consumer Rights Act 2015. The underlying dispute related to a personal guarantee given by Zhang to secure a HK$500m bond issue for a company in which Zhang’s husband was majority shareholder. The CRA provides that unfair terms in consumer contracts are not binding on consumers. Whilst reaching the same decision as the High Court, the Court of Appeal did so on different grounds, including finding that Zhang was not a consumer within the meaning of the CRA. Whilst the High Court found that Zhang had “acted for purposes of a private nature – fundamentally, her marriage,” the Court of Appeal distinguished between Zhang’s private motives and her business purpose, the latter of which was to be assessed by an objective test. Objectively, the personal guarantee was a contract of a business nature entered to facilitate the bond issue. Further, as “one half of the ‘majority shareholder couple’” and because Zhang had a beneficial interest in her husband’s shares, there was a “functional link” between Zhang and the company.

Businesses entering business-to-consumer contracts should pay close attention to the drafting of their arbitration agreements to ensure they do not fall foul of the consumer protection laws applicable to the arbitration or in the place(s) of likely enforcement.

The Hong Kong International Arbitration Centre has published its new 2024 administered arbitration rules which took effect on 1 June. The new rules are largely a refinement of the 2018 rules, but include new provisions relating to: diversity in arbitrator appointments; information security; the environmental impact of arbitrations; and additional tools to ensure the efficiency and integrity of HKIAC arbitrations such as enhanced tribunal powers to determine preliminary issues and stricter time limits on tribunals when rendering awards.

In Lifestyle Equities v Ahmed, the Supreme Court has clarified what claimants need to prove for directors to be held personally liable as an accessory to a tort committed by a company. Although companies can be held liable for certain torts on a ‘strict liability’ basis, when it comes to holding a director liable as an accessory, some mental element - namely, knowledge of the essential facts which make the act unlawful - is required. For these purposes, knowledge includes turning a blind eye.

The Supreme Court also indicated (obiter) that when a director is found liable as an accessory and ordered to account for profits, they will only need to return those profits that they made because of the infringement. Directors will not be required to account for profits made by the company, nor will salaries or loans typically count unless it can be shown that they were a way of extracting profits. Read more in our briefing.

The Civil Procedure Rule Committee has “temporarily paused” work on proposals to give non-parties/members of the public an automatic entitlement to obtain a wider range of court documents (including witness statements/affidavits, expert reports and skeleton arguments). The CPRC has said that its proposals have generated a significant response which requires detailed consideration. The CPRC’s planned roll-out of the new rules in October therefore looks set to be pushed back to a later date. See the April edition of Briefcase for more details.