MALAYSIA: HIGH COURT REFUSES INDEMNITY COSTS ON SUCCESSFUL APPLICATION FOR REFERRAL TO ARBITRATION AND DETERMINES THE EFFECT OF TIME BARS ON A TRIBUNAL’S JURISDICTION

In Lineclear Motion Pictures Sdn Bhd v Measat Broadcast Network Systems Sdn Bhd (High Court Civil Appeal No.: WA-12ANCC-45-04/2021), the High Court refused to award indemnity costs to a party who successfully obtained a stay of court proceedings under section 10 of the Arbitration Act 2005 (“Act“), on the basis of the conduct of the successful party and the party acting in breach of the arbitration agreement. Following this decision, a party seeking indemnity costs upon successfully obtaining a stay bears the burden to demonstrate unreasonable conduct by the breaching party, and reasonable conduct on its own part, to obtain indemnity costs.

Background

Measat Broadcast Network Systems Sdn Bhd (“Measat“) commenced proceedings against Lineclear Motion Pictures Sdn Bhd (“Lineclear) in the Sessions Court for breach of contract. Prior to the commencement of the proceedings, Measat issued a pre-action letter to Lineclear but was met with no response. As Lineclear did not formally enter its appearance under the rules of the court, nor respond to the claim, Measat obtained a default judgment against Lineclear. Subsequently, Lineclear applied to set aside the default judgment and to stay the proceedings in the Sessions Court pursuant to section 10 of the Act in light of a valid arbitration agreement between the parties. Measat did not object to the application, instead offering to record a consent order to stay the court proceedings pending arbitration. Lineclear rejected this offer and insisted Measat discontinue its claim.  The Sessions Court judge refused to stay the proceedings and refused to grant indemnity costs to Lineclear.

On appeal to the High Court, the key issues were:

  • in the event a stay is allowed, whether Measat is entitled to seek an order to preclude Lineclear from pleading the defence of limitation at arbitration; and
  • whether Measat is liable to pay indemnity costs to Lineclear given that (a) the proceedings were in breach of the arbitration agreement and (b) Measat unreasonably declined Lineclear’s offer to discontinue the claim.

First, the High Court judge granted a stay on the condition that Lineclear be precluded from raising the defence of limitation at arbitration, in accordance with established precedent for imposing similar conditions. The judge reasoned that the stay would be rendered futile without the condition, as Measat’s claim – while within the limitation period when first commenced in the Sessions Court – would be time-barred when referred to arbitration.

Second, the High Court judge refused to award Lineclear’s costs on an indemnity basis. The established test requires “some conduct or some circumstance which takes the case out of the norm“. In particular, a judge is required to review the unreasonableness of unsuccessful party’s conduct during the proceedings, including: (i) whether it was reasonable for the party to raise and pursue particular allegations and the manner in which the party pursued its case and allegations; and (ii) whether a claim was speculative, weak, opportunistic or thin. Examples of such unreasonable conduct are where a case was brought with an ulterior motive or an improper agenda, or where a party had conducted its case in “bad faith, or as a personal vendetta, or in an improper or oppressive manner, or who caused costs to be incurred irrationally or out of all proportion as to what is at stake”. However, these examples are not meant to be exhaustive. In this regard, the High Court found that Lineclear’s conduct throughout the proceedings, including its indifference to the pre-action letter and the proceedings leading to the default judgment, as well as its refusal to accept Measat’s offer to record a consent order, was unreasonable and did not justify an award of indemnity costs. The High Court judge also found it unreasonable for Lineclear to insist that Measat discontinue the proceedings, given that a successful application under section 10 of the Act would only stay – and not discontinue – an action.

Lineclear relied on  the Western Australian Supreme Court’s decision in Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10 (see our blog post here) and the English court’s decision in A v B and others (No. 2) [2007] EWHC 54 (Comm) for the proposition that as a general rule, costs should be recoverable on an indemnity basis upon a successful application for a stay as a remedy for breach of an arbitration clause. The High Court did not appear to accept this proposition, and distinguished these cases on the basis that Measat had acted reasonably throughout the proceedings, whereas Lineclear’s conduct justified it being deprived of an order for indemnity costs.

Comment

In practice, Malaysian courts have on rare occasions awarded costs on an indemnity basis upon a successful application to stay court proceedings in favour of arbitration. However, this is the first known written judgment from the Malaysian courts which addressed the principles of awarding costs on an indemnity basis in the context of a breach of an arbitration agreement.

An award of indemnity costs is attractive to parties seeking to uphold an arbitration agreement which has been breached by its counterparty. The advantages include a presumption of reasonableness on the part of the receiving party, and a shift in burden to the paying party to establish that the costs were not reasonably incurred. This achieves indirect compensation for most – if not all – of the legal costs incurred by the innocent party following a breach of an arbitration agreement.

Jurisdictions such as England, Hong Kong (see our blog post here), Singapore and Western Australia take the position that as a general rule, a party who unsuccessfully challenges an arbitration agreement before the court should expect to pay costs on an indemnity basis, unless there was unreasonable conduct by the successful party or special circumstances. By contrast, the current Malaysian position is that a party seeking indemnity costs upon successfully obtaining a stay bears the burden to demonstrate unreasonable conduct by the breaching party, and reasonable conduct on its own part, to obtain indemnity costs. The fact of a breach of an arbitration agreement alone is not necessarily sufficient to justify indemnity costs. Where indemnity costs are not awarded, parties should consider seeking damages for breach of an arbitration agreement which, though untested in Malaysia, is an accepted cause of action in various common law jurisdictions.

Further, in precluding Lineclear from raising the defence of limitation in the arbitration, the court did not appear to give any consideration as to whether limitation was an issue of admissibility or jurisdiction. The distinction holds practical importance: an issue of admissibility is a matter for the arbitral tribunal to decide, and not a question of jurisdiction to be reviewed by the courts. As described by the English courts, “[i]ssues of jurisdiction go to the existence or otherwise of a tribunal’s power to judge the merits of a dispute; issues of admissibility go to whether the tribunal will exercise that power in relation to the claims submitted to it.” (see our blog posts here and here). It should also be noted that the Singapore Court of Appeal in BBA v BAZ [2020] 2 SLR 453, recognising the distinction between jurisdiction and admissibility, held that whether a claim was time barred was a question of admissibility, not a question of jurisdiction.

Although the Malaysian court did not characterise the limitation defence as an issue of admissibility or jurisdiction, its upholding of the arbitration agreement may imply that limitation is a question of admissibility as it does not affect the Tribunal’s jurisdiction. The net result of the decision provides some measure of welcome certainty that arbitration agreements will be upheld by the Malaysian courts, even where there are questions regarding the limitation period for commencing claims. However, this approach appears to remove a tribunal’s ability to determine issues of admissibility for itself where a Malaysian court is first seised of the matter.

For further information, please contact Peter Godwin, Partner, Daniel Chua, Associate, Michele Yee, Associate or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Partner
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate
+60 3-2777 5101
Michele Yee
Michele Yee
Associate
+60 3-2777 5159

U.S. SUPREME COURT PAVES THE WAY FOR NON-SIGNATORIES TO ENFORCE ARBITRATION AGREEMENTS UNDER DOMESTIC EQUITABLE ESTOPPEL PRINCIPLES

On 1 June 2020, the U.S. Supreme Court unanimously held in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC[1] that the New York Convention does not preclude non-signatories from enforcing arbitration agreements based on the application of domestic equitable estoppel doctrines.

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ENGLISH COURT UPHOLDS SCC AWARD DESPITE RESPONDENT’S ARGUMENT THAT ARBITRATION AGREEMENT WAS SIGNED BY DEFUNCT PREDECESSOR

In Carpatsky Petroleum Corp v PJSC Ukrnafta [2020] EWHC 769 (Comm), the Commercial Court has upheld the enforcement of a US$147 million Stockholm Chamber of Commerce (the “SCC”) award issued in 2010 in favour of Carpatsky Petroleum Corporation, incorporated in Delaware (“Carpatsky”), against PJSC Ukrnafta (“Ukrnafta”), Ukraine’s oil and gas producer (the “Award”). Enforcement was allowed despite an argument from Ukrnafta that the arbitration agreement was signed by Carpatsky’s predecessor, which had ceased to exist in 1996. Given that the parties had already fought this issue on the enforcement front in a number of jurisdictions, including Ukraine and Sweden (the seat of arbitration), the Court had to consider whether an issue estoppel arose as a result of the foreign courts’ findings, noting that there was a public interest in sustaining the finality of supervisory courts’ decisions on properly referred procedural issues arising from the arbitration.

Background

The parties and the Agreements

In 1995, Carpatsky Texas (“CT”) and Ukrnafta’s subsidiary SE Poltavanaftogaz (“PNG”) entered into a joint activity agreement to develop and exploit a gas field in Ukraine (the “JAA”). In June 1996, CT was merged into Carpatsky: CT ceased to exist, Carpatsky assuming CT’s rights and obligations. In October 1996, PNG and “Carpatsky Petroleum Corporation, registered in Texas” entered into a restated JAA, which contained an arbitration clause. In 1998, the parties executed an addendum to the restated JAA (the “JAA Addendum”, and together with the JAA and the restated JAA, the “Agreements”).The JAA Addendum (i) replaced PNG with Ukrnafta; and (ii) amended the arbitration clause such that it referred disputes to SCC arbitration. All the Agreements were signed by the President of “Carpatsky Petroleum Corporation” and stamped with CT’s seal.

Arbitration proceedings

In 2007, Carpatsky filed a request for arbitration with the SCC. Ukrnafta submitted an answer without a reservation as to jurisdiction. Following two rounds of submissions by each party, Ukrnafta served objections to the tribunal’s jurisdiction alleging that there was no valid arbitration agreement under Swedish law because the Agreements were made with CT, which had ceased to exist. The tribunal determined that it had jurisdiction, at the very least because the parties had entered into an arbitration agreement by engaging in the arbitration without raising an objection to jurisdiction. The arbitration proceeded on the merits, and the tribunal issued the Award in favour of Carpatsky.

Ukrainian proceedings

In early 2009, upon the application of the Ukrainian Deputy Public Prosecutor, the Kyiv Commercial Court held that the Agreements had not been executed as they were signed by CT, which had ceased to exist as at the date of the Agreements (the “Kyiv Court Decision”).

After the tribunal issued the Award, Carpatsky commenced enforcement proceedings in Ukraine. In 2013, the application was dismissed with reference to the Kyiv Court Decision on the ground that there was no written arbitration agreement (the “Kyiv Enforcement Decision”, and together with the Kyiv Court Decision, the “Kyiv Decisions”).

Swedish proceedings

In 2009, Ukrnafta brought proceedings before the Stockholm District Court arguing, with reference to Swedish law, that the tribunal lacked jurisdiction. The proceedings were stayed pending the arbitration. In 2011, the District Court rejected Ukrnafta’s argument, confirming that the tribunal had jurisdiction.

In addition, Ukrnafta sought to set aside the Award on the basis that the tribunal had exceeded its mandate and had made errors which affected the outcome of the arbitration (the “Swedish Challenge Proceedings”). In 2015, the Svea Court of Appeal rejected all Ukrnafta’s challenges to the Award (the “Swedish Challenge Proceedings Decision”).

US proceedings

In February 2009, Ukrnafta sued Carpatsky in the 190th District Court of Harris County, Texas asserting a number of causes of action, including negligent misrepresentation, fraud and misappropriation of trade secrets, and contending that all amendments to the JAA after the date of the merger were void ab initio. The case was removed to federal court, and the US District Court for the Southern District of Texas (“SDT”) stayed the litigation pending the arbitration proceedings. The stay was lifted following the termination of the Swedish Challenge Proceedings. In October 2017, the SDT granted Carpatsky’s motion to confirm the Award. Ukrnafta appealed.

In April 2020, several days after the Commercial Court in London upheld enforcement of the Award, the US Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) dismissed Ukrnafta’s challenges to the District Court’s order confirming the award. In its ruling, the Fifth Circuit found that under Delaware law, the President of “Carpatsky Petroleum Corporation” had authority to enter into the JAA Addendum on behalf of Carpatsky and the use of CT’s seal was irrelevant. The Fifth Circuit also noted that Ukrnafta waived its right to challenge the tribunal’s jurisdiction by submitting to arbitration proceedings, and, in any event, an arbitration agreement was created during the arbitration. The Fifth Circuit dismissed the due process violations pleaded by Ukrnafta, noting, in particular, that the merits hearing looked “like a full-blown federal trial”. Finally, the Fifth Circuit held that allowing the Kyiv Decisions to prevent enforcement would “gut international arbitration and interfere with the global commerce it promotes.”

English proceedings

Carpatsky successfully applied to the English court to enforce the Award. Ukrnafta sought to set aside the order granting permission to enforce before the Commercial Court. Ukrnafta argued that under Ukrainian law there was no valid arbitration agreement given that the JAA Addendum was executed on behalf of CT. Ukrnafta also contended there was a serious procedural irregularity in that the tribunal (i) dealt with an issue concerning a limitation of liability clause on a basis which had not been pleaded; and (ii) took a procedurally irregular approach to the agreed methodology for assessing damages, which resulted in a serious mathematical error.

Overview of the Commercial Court decision

There was a valid arbitration agreement

The Court held that Ukraine was estopped by conduct from arguing that Ukrainian law governed the arbitration agreement given that it had argued that Swedish law was applicable in the arbitration and Swedish proceedings. It concluded that under Swedish law there was a valid arbitration agreement in the JAA Addendum between Ukrnafta and Carpatsky, noting, in particular, that the parties intended both objectively and subjectively, to enter into the JAA Addendum with each other. It further noted that both (i) the conduct of the parties’ representatives in the arbitration under the SCC Rules and (ii) the parties’ participation in the arbitration and exchange of pleadings gave rise to an arbitration agreement even if there had not been one before.

No issue estoppel on the validity of the arbitration agreement

The Court reminded the parties that an issue estoppel can arise from foreign court decisions in relation to enforcement, referring to Diag Human SE v Czech Republic (discussed in one of our previous blog posts). However, given that the Ukrainian courts did not address the existence of an arbitration agreement as a matter of Swedish law, an issue estoppel did not arise. The Court noted that to the extent its determinations related to the validity of the JAA Addendum under Ukrainian law it would be unjust to recognise an issue estoppel as precluding Carpatsky from successfully contending that the JAA Addendum was valid.

Issue estoppel on limitation of liability and on damages methodology

The Court held that there was a public interest in sustaining the finality of decisions of the supervisory courts (the Swedish courts in this instance) on properly referred procedural issues arising from the arbitration. It also noted that, in assessing whether there was an issue estoppel arising from a decision of the supervisory courts in respect of an arbitration-related procedural issue, English courts should not adopt an overly-narrow approach to whether the same issue has been decided by the supervisory court. The Court considered the arguments raised by Ukrnafta in the Swedish proceedings, concluding that Ukrnafta’s procedural irregularity complaints were either substantially the same (in the case of the limitation of liability point) or the same (in the case of the damages methodology) to those pursued before the Court. These arguments had been considered (and rejected) in the Swedish Challenge Proceedings Decision, which gave rise to an issue estoppel.

Comment

The Commercial Court’s decision in this case is another clear example of the English courts’ pro-enforcement stance. The judgment is also an important reminder to commercial parties that their participation in the arbitration proceedings may in itself be capable of constituting an agreement to arbitrate, even if the arbitration agreement in the relevant contract is in some way defective. In addition, the decision reiterates that the principle of issue estoppel may affect the parties’ ability either to enforce an award or resist enforcement in the English courts where there have already been attempts to enforce or challenge the award in foreign courts, especially before the courts of the seat of arbitration.

For more information, please contact Brenda Horrigan, Partner, Chiara Cilento, Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
Partner
+61 2 9225 5536

Chiara Cilento
Chiara Cilento
Associate
+1 917 542 7842

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644
 

RUSSIAN SUPREME COURT REQUIRES UNIFORM APPROACH IN ARBITRATION CASES AND CLARIFIES MEANING OF PUBLIC POLICY

On 10 December 2019, almost four years after the Russian arbitration reform of 2016 and one year since the Russian Supreme Court (the “SC“) published its guidance in relation to various issues concerning international commercial arbitration, the SC issued an important resolution relating to arbitration. Resolution No 53 On the fulfilment by the Russian state courts of the assistance and control functions in relation to domestic and international commercial arbitration (the “Resolution“, available in Russian here), is a detailed and long-awaited document requiring Russian state courts to adopt a uniform approach when dealing with arbitration-related cases. In particular, the Resolution attempts to define the meaning of “public policy”, helpfully reminding the Russian courts that they should refuse recognition or enforcement of an arbitral award on public policy grounds only in exceptional circumstances.

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HONG KONG: COURT GRANTS ANTI-SUIT INJUNCTION TO RESTRAIN FOREIGN PROCEEDINGS IN BREACH OF AN ARBITRATION AGREEMENT UNDER AN INSURANCE POLICY

In the recent case of AIG Insurance Hong Kong Ltd v Lynn McCullough and William McCullough [2019] HKCFI 1649, the Hong Kong Court of First Instance (CFI) considered the effect of an arbitration agreement under an insurance policy and, in particular, the circumstances in which an anti-suit injunction may be granted to restrain a party from pursuing foreign proceedings.

The CFI held that, as a matter of Hong Kong law, a party is not entitled to found a claim on rights arising out of an insurance policy without also being bound by the dispute resolution provisions in the policy. The CFI went on to hold that an anti-suit injunction will ordinarily be granted to restrain such a claimant from pursuing proceedings in a non-contractual forum unless there are strong reasons to the contrary.

The full judgment is available here.

BACKGROUND

The underlying facts of the case relate to an accident which took place whilst Mrs Lynn McCullough and Mr William McCullough were on holiday in the Caribbean in 2015. During that holiday, Mrs McCullough suffered a fall from a zip line, owned and operated by Rain Forest Adventures (Holdings) Ltd, Rain Forest Sky Rides Ltd and Rain Forest Tram Ltd (together, Rain Forest), and was rendered permanently quadriplegic.

AIG Insurance Hong Kong Ltd (AIG) had previously issued a Directors’ and Officers’ Liability Insurance Policy to Rain Forest (the Policy). The Policy covered Rain Forest (as the policyholder) and its directors, including a Mr Harald Joachim von der Goltz. The Policy referred any disputes arising under the Policy to arbitration in Hong Kong under the rules of the Hong Kong International Arbitration Centre (HKIAC).

On 15 January 2016, the McCulloughs commenced a claim in the Florida courts against several defendants, including Rain Forest, alleging negligence in the operation of the zip line excursion. They sought damages for the injuries that Mrs McCullough sustained.

On 14 July 2016, the McCulloughs filed a Second Amended Complaint adding Mr von der Goltz as a defendant, who subsequently gave notice to AIG that he was seeking an indemnity under the Policy as a director of the policy holder. The claim was rejected by AIG on the basis that claims resulting from a bodily injury were excluded under the Policy.

On 24 April 2018, a dispute resolution agreement was entered into by the McCulloughs and the Rain Forest defendants now including Mr von der Goltz. This agreement was approved by the Florida court which referred the matter to arbitration. The arbitration award was subsequently issued on 28 May 2018 and judgment was entered into on 12 July 2018 in favour of the McCulloughs against, among others, Mr von der Goltz, in the sum of US$ 65.5 million.

On 20 August 2018, the McCulloughs filed the Third Amended Complaint adding AIG as a defendant. The Third Amended Complaint contained a “common law tort claim available under Florida law against [AIG] for having failed to act in good faith in handling, litigating, and settling the US Proceedings, resulting in an excess judgment (i.e. judgment in excess of Policy limits) being entered into against the insured, Mr. von der Goltz” (the Bad Faith Claim). The nature of the Bad Faith Claim was that if AIG had honoured the Policy and provided Mr von der Goltz with US$ 5 million in coverage (i.e. the Policy limit), it would have been possible for him to have settled the McCulloughs’ claim. It was submitted that this failure by AIG exposed Mr von der Goltz to a liability of US$ 65.5 million and as a result, he had a claim against AIG for this amount. The right to claim directly against AIG for the US$ 65.5 million was said to be based on the McCulloughs being judgment creditors of Mr von der Goltz.

In the instant case, there were two applications before the CFI:

  1. An application from AIG for a continuation of an ex parte injunction originally issued on 18 December 2018 by DHCJ Simon Leung restraining the McCulloughs from pursuing proceedings in the Florida courts against AIG on the basis that the Policy provides that all disputes regarding coverage under the Policy should be settled by arbitration in Hong Kong under the HKIAC Rules; and
  2. An application from the McCulloughs for, amongst other things, (1) a declaration that the CFI should not exercise any jurisdiction that it may have; and (2) an order staying the action in the Hong Kong courts in favour of the proceedings in the Florida courts.

AIG’s position was that the underlying issue of coverage under the Policy should be determined by arbitration in Hong Kong under the HKIAC rules, irrespective of whether or not the McCulloughs were the insured under the Policy.

The McCullough’s position was that their cause of action against AIG was a freestanding tortious claim and that, as non-parties to the Policy, they cannot be compelled to arbitrate it.

Accordingly, the principal question for the CFI to decide was whether the proceedings commenced by the McCulloughs in the Florida courts, despite the McCulloughs not being parties to the Policy, amounted in substance to a claim to enforce the Policy such that the McCulloughs were bound by the agreement to arbitrate as set out in the Policy.

DECISION

The CFI accepted the position of AIG that the dispute was to be resolved in accordance with the dispute resolution procedure provided for in the Policy, namely by arbitration in Hong Kong under the HKIAC rules, and exercised its equitable jurisdiction to grant an anti-suit injunction restraining the McCulloughs from pursuing proceedings in the Florida courts.

The CFI held that the relevant issue for the purposes of determining whether the anti-suit injunction should be granted was whether there was coverage under the Policy: “Such issue is clearly contractual, since it determines the liability of the insurer to the insured under the terms of the policy“. The CFI went on to hold that the establishment of coverage is a pre-condition to the Bad Faith Claim against AIG and, as a matter of Hong Kong law, the governing law of the Policy, AIG is entitled to have it determined in accordance with the contractual procedure.

In this regard, the CFI followed the principle applied in Qingdao Huiquan Shipping Company v Shanghai Dong He Xin Industry Group Co Ltd [2018] EWHC 3009 (Comm) that a party “is not entitled to found a claim on rights arising out of a contract without also being bound by the forum provisions of that contract“.

The CFI concluded that an anti-suit injunction will ordinarily be granted to restrain a claimant from pursuing proceedings in a non-contractual forum unless there are strong reasons to the contrary, whether the claimant is a party to the policy or not. The basis of the CFI’s decision was that a dispute resolution provision is an essential part of the contractual basis upon which coverage arises under an insurance policy, and a party seeking to enforce a policy cannot do so free of its contractual dispute resolution mechanism.

COMMENTS

This case serves as a useful reminder of the Hong Kong courts’ desire to give effect to an arbitration agreement wherever appropriate, albeit on this occasion in somewhat unusual circumstances. In so doing, the CFI has further reinforced Hong Kong’s reputation as a pro-arbitration jurisdiction.

In making its decision, the CFI has helpfully confirmed that an anti-suit injunction to restrain a party from pursuing proceedings in a non-contractual forum will ordinarily only be denied if there are strong reasons not to grant it. Accordingly, the Court has emphasised the high bar that the counter-party has to meet in order to resist such an injunction.

An article in which Simon Chapman and Naomi Lisney examined this decision, which was published on Lexis®PSL Arbitration on 15 August 2019, can be found here.

May Tai
May Tai
Managing Partner, Greater China
+852 2101 4031
Simon Chapman
Simon Chapman
Partner, Hong Kong
+852 2101 4217
Kathryn Sanger
Kathryn Sanger
Partner, Hong Kong
+852 2101 4029
Madhu Krishnan
Madhu Krishnan
Registered Foreign Lawyer (England & Wales)
+852 2101 4207