A MATTER OF TRUST: AUSTRALIAN COURT ENFORCES INTERIM MEASURES TO SECURE THE AMOUNT IN DISPUTE

A recent judgment of the Supreme Court of Western Australia, Dalian Huarui Heavy Industry International Company Ltd v Clyde & Co Australia [2020] WASC 132 (available here), demonstrates that the use of interim measures to provide security for an amount in dispute can be a very powerful remedy when structured through the creation of a trust.

In a Singapore-seated arbitration between Dalian and Duro, the tribunal had ordered interim measures to secure (part of) the amount in dispute in the form of orders requiring an amount of money ($AUD27 million) to be placed in a solicitor’s controlled money trust account maintained by Duro’s solicitors, Clyde & Co. Duro subsequently entered voluntary administration, leaving Dalian with little recourse other than to pursue the trust money.

Justice Kenneth Martin of the Supreme Court of Western Australia found that Dalian was entitled to the trust money, thereby removing those funds from the resources available to the voluntary administrators.

Background

The interim measures were made in the course of a Singapore seated arbitration between Dalian (an export company) and Duro (a mining and construction company) regarding an iron ore mine project in Western Australia. An interim procedural order made by the tribunal granted Dalian’s application seeking security for part of its claims in the arbitration and ordered Duro to pay $AUD27 million (‘trust amount’) into its solicitor’s trust account. This order was implemented through the execution of a Trust Agreement, with Clyde & Co holding the money as trustee.

Dalian was subsequently successful in the arbitration, securing a monetary award of $AUD53 million against Duro. Dalian commenced proceedings in the Western Australian Supreme Court seeking an order to compel Clyde & Co as trustee to pay the trust amount to Dalian. Duro entered voluntary administration three days later.

Dalian sought the release of the funds on the basis that it held an absolute beneficial entitlement to the trust money, whereas the voluntary administrators of Duro instructed Clyde & Co to maintain the status quo. The trust amount was the only significant asset held by Duro and the voluntary administrators were concerned that if Duro could not trade out of administration and Dalian were paid the trust amount, it would be impossible to recover the funds which were likely to be remitted by Dalian to a parent company in the People’s Republic of China. The effect would be to frustrate recovery steps by future liquidators against Duro’s assets on behalf of creditors. Conversely, if Dalian was not entitled to recover the trust amount, it faced the prospect of relying solely on enforcing its monetary award as an unsecured creditor.

The key issue was whether the trust amount belonged to Dalian or Duro.

Decision

The power to order security over a disputed amount in an arbitration

Dalian’s key argument was that Clyde & Co had express contractual and fiduciary obligations to pay the trust money to Dalian. Dalian argued that the funds comprising the trust amount were no longer the ‘property’ of Duro (within the broad meaning of Australia’s Personal Property Securities Act 2009 (Cth) (‘PPSA’) and Corporations Act 2001 (Cth) (‘Corporations Act’)). Rather, Dalian argued that, upon the making of the monetary award in Dalian’s favour, full beneficial ownership of the funds held by Clyde & Co vested in Dalian.

Duro’s argument was that, in seeking to implement the interim measures, all the Trust Agreement had achieved was to provide a fund held on trust exclusively and always for Duro (not for Dalian). In effect, (on Duro’s argument) the Trust Agreement was simply a means by which Duro’s assets were ‘frozen’ pending the outcome of the arbitration.

In this context, the Court made instructive comments on the power of arbitral institutions in Singapore to make orders or give directions to any party for ‘securing the amount in dispute’ under s 12(1)(g) of the Singapore International Arbitration Act (‘SIAA’). It rejected Duro’s argument and noted that the tribunal specifically chose to adopt relief by way of ‘security’ instead of lesser relief, such as freezing or asset preservation orders, that were also available under s 12(1) subparagraphs (h) or (i) of the SIAA. The Court considered that the reference to ‘security’ in the tribunal’s orders was a specific reference to the legislative wording ‘securing the amount in dispute’ in s 12(1)(g) of the SIAA.

The Court observed that the power under s 12(1)(g) of the SIAA extends further than to order security for a party’s costs (a more limited power that is a feature of the rules of Court in many jurisdictions). The Court found that the power under s 12(1)(g) of the SIAA was capable of being exercised in such a way as to create equitable rights over an amount of money placed in a trust amount.

What was the nature of the interests held?

Determining who was entitled to the trust amount after its creation depended on how the trust arrangements were construed and the nature of the equitable interests held by Duro and Dalian.

The nature of Dalian’s interest in the trust amount was (initially) a contingent equitable interest which had matured (upon Dalian obtaining the monetary award in its favour) into an absolute and unqualified beneficial entitlement in equity to receive the trust amount. The Court distinguished the holding of ‘security’ over a dedicated fund of money from a creditor’s claim against assets the subject of a freezing injunction. Crucially, the creditors claim against the assets the subject of a freezing injunction is a bare in personam claim whereas the security provided by way of the interim measures created (initially) a proprietary security interested and (after the monetary award) a perfected proprietary right vested to Dalian.

Did the appointment of voluntary administrators change anything?

Duro had a residual equitable interest in the trust money pursuant to the interim measures orders (i.e. the money would have been returned to Duro had Dalian been unsuccessful in the arbitration). Those circumstances gave rise to complex arguments as to whether the trust moneys constituted ‘property’ of Duro and/or a ‘security interest’ for the purposes of the PPSA and the Corporations Act.

The Court concluded that the trust amount was indeed a ‘security interest’ for the purposes of the PPSA (as it was a transaction that in substance secured payment or performance of an obligation). Dalian had not registered that security interest under Australia’s personal property security register. As a result, Dalian’s unregistered security interest under the PPSA was exposed to the potential vitiating effects of s 267 of the PPSA which vests unperfected security interests in the grantor (i.e. Duro) upon the grantor entering administration or an insolvency.

Fortunately for Dalian, Martin J held that Dalian’s security had ‘perfected’ upon the issuance of the monetary award which occurred before Duro went into voluntary administration. This was because the monetary award, supported by an order from the tribunal directing Clyde & Co to ‘immediately’ release the trust amount, transformed Dalian’s contingent equitable interest into a fully vested equitable entitlement to the trust amount. The circumstances satisfied the extended concept of possession in s 21(2)(b) and s 24(2) of the PPSA because Clyde & Co held the trust money (and actually possessed it in an bank account) from that point on exclusively for the benefit of Dalian. Duro’s residual equitable interest had been extinguished. On that basis, the Court rejected other arguments by Duro that the funds were captured by s 440B of the Corporations Act which would prohibit a transfer of any property in which Duro had an interest following the commencement of the voluntary administration without the consent of the administrator or the leave of the Court.

Comment

The case highlights that, in a subsequent administration or insolvency, a freezing injunction does not confer any superior interest in favour of the party which obtained those orders above that of any other unsecured creditor, whereas a security may create proprietary rights that would more effectively place the Award-creditor ahead of other creditors.

Much credit needs to go to the Singapore seated arbitral tribunal (comprised of Sir Vivian Ramsay QC as a Chair, with Dr Michael Hwang SC and Dr Robert Gaitskell QC) for, in the first instance, crafting the interim measures in the form of a security interest rather than the more traditional freezing order and then, subsequently, making orders requiring the ‘immediate’ release of the trust money (perfecting the equitable transfer of the property to Dalian).

Dalian was ultimately fortunate that the monetary award (and order for the ‘immediate’ release of the trust money) occurred prior to Duro entering voluntary administration. Dalian had a security interest under the PPSA which remained unregistered. Dalian therefore faced the risk that it’s secured interest over the trust money would be relegated to no more than an unsecured claim (pursuant to 267 of the PPSA) upon Duro entering administration. It was only a fortunate sequence of timing which had the result that Dalian’s interest had transformed from a contingent equitable right in the form of a security interest into an equitably owned proprietary right before Duro entered administration.

The case therefore serves as a cautionary tale to parties who obtain interim measures of protection from an arbitral tribunal providing security over assets to which Australia’s PPSA applies that they should take steps to register their security interest to best preserve the protection they have obtained in the event of a voluntary administration or insolvency.

For further information, please contact Brenda Horrigan, Head of International Arbitration (Australia), Chad Catterwell, Partner, Harry Thompson, graduate, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
+61 2 9225 5536

Chad Catterwell
Chad Catterwell
Partner
+61 3 9288 1498

Harry Thompson
Harry Thompson
Graduate
+61 2 9322 4951

 

 

ENGLISH COURT PROVIDES GUIDANCE TO PARTIES CHALLENGING OR SEEKING ENFORCEMENT WHERE THE AWARD DEBTOR IS IN ADMINISTRATION

In BSG Resources Ltd v Vale SA and others [2019] EWHC 2456 (Comm), the English Commercial Court (the Court) considered five applications concerning an arbitration award dated 4 April 2019 (the Award) which had resulted in an order of the English court for BSGR to pay damages of US$1.247 billion to Vale (the Enforcement Order). BSGR’s challenge of the award (the Challenge Application) under the Arbitration Act 1996 (the Act) is due to be heard in November 2019.

Moulder J’s decision in this case provides helpful guidance to parties which are either challenging or seeking to enforce an English award, in circumstances where the unsuccessful party in the arbitration has gone into administration.

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Security for costs granted by English Court in investment treaty award challenge in which claimants are receiving third-party funding

In its recent judgment in Progas Energy Limited and ors v Pakistan [2018], the English High Court (the Court) granted Pakistan’s request for security for their costs in defending a challenge to an investment treaty award. The Court declined Pakistan’s application for security for its unpaid costs in the arbitration awarded to them by the tribunal. The case is of particular interest because the Court considered the relevance to the applications of the fact that the Claimants were funded by a third-party funder.

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ICSID tribunal rules that it is neither necessary nor urgent to grant security for costs from a claimant with the benefit of third-party funding

An ICSID tribunal has rejected a State's application for security for costs in circumstances in which the other party had third-party funding in the form of ATE insurance which specifically provided for cover of the State's costs.

Italy's request for security for costs

The application formed part of arbitral proceedings brought by Eskosol S.p.A. in liquidazione ("Eskosol") under the Energy Charter Treaty and the ICSID Convention against the Italian Republic ("Italy"). Italy sought security for costs in support of its ICSID Arbitration Rule 41(5) application for summary dismissal of Eskosol's claims on the basis that they are manifestly without legal merit. 

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Inside Arbitration: Issue #3 of the publication from Herbert Smith Freehills’ Global Arbitration Practice

We are delighted to share with you the latest issue of the publication from Herbert Smith Freehills' Global Arbitration Practice, Inside Arbitration.

In addition to sharing knowledge and insights about the markets and industries in which our clients operate, the publication offers personal perspectives of our international arbitration partners from across the globe.

In this issue:

  • Paula Hodges QC, Peter Leon, Craig Tevendale and Chris Parker share their insights into the development of commercial arbitration on the African continent and consider dispute resolution choices for parties negotiating Africa-related contracts.
  • We consider the development of arbitration in Rwanda and the Kigali International Arbitration Centre "in conversation" with KIAC's secretary general, Dr Fidèle Masengo.
  • Peter Godwin, Regional Head of Disputes Asia, reflects on his 16 years in Asia and the changes in attitudes towards dispute resolution amongst Japanese parties.
  • Dr Patricia Nacimiento, Thomas Weimann and Dr Mathias Wittinghofer give their view on whether Germany is on its way to becoming a true arbitration powerhouse.
  • Chris Parker, Elaine Wong, Gitta Satryani and Elizabeth Kantor provide a global perspective on the availability of security for costs and claim in international arbitration.
  • Dr Larry Shore discusses his path into public international law and the development of his interest in treaty disputes, as well as the differences in arbitration practice in the US and the UK and trends in US arbitration.
  • We highlight a number of key considerations for parties negotiating contracts with state and state-owned entities across the globe and provide comparative into state immunity in five key jurisdictions.

We are pleased to present our clients with an infographic providing a snapshot of our global arbitration practice in the two years 2014-2016.

The infographic details the successes of our growing practice and our huge geographical reach. The infographic is available at this link and at page 25 of Inside Arbitration.

The full digital edition can be downloaded in PDF by clicking on this link.

We hope that you enjoy reading Issue #3 of Inside Arbitration. We would welcome your feedback.

English Commercial Court rejects application by U&M Mining Zambia Ltd for security for sums due under award pending challenge

In Konkola Copper Mines Plc v U&M Mining Zambia Ltd [2014] EWHC 2146 (Comm), the English Commercial Court considered two related applications on behalf of U&M Mining Zambia Ltd (U&M) for security for costs and a payment into court, under sections 70(6) and 70(7) of the Arbitration Act 1996 (the Act), in relation to challenges made by Konkola Copper Mines Plc (KCM) under sections 67 and/or 68 of the Arbitration Act 1996 to an arbitration award dated 6 January 2014.

Eder J upheld U&M’s application for security for costs under section 70(6) of the Act; however, he rejected U&M’s application for a payment into court of US$41,259,274.47 under section 70(7) of the Act.

The case highlights the need for an applicant under section 70(7) in particular to put before the Court not only evidence that there is a real risk of dissipation of assets that could be used to satisfy the award, but also evidence that the challenges to the award would prevent, hinder or prejudice enforcement of the award.

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The English Commercial Court considers whether a party’s failure to pay its share of the advance on costs is a repudiatory breach of the arbitration agreement

In BDMS Limited v Rafael Advanced Defence Systems [2014] EWHC 451 (Comm), the English Commercial Court considered whether the Respondent’s failure to pay its share of the advance on costs in an ICC arbitration amounted to a repudiatory breach of the arbitration agreement entitling the Claimant to pursue its claim in court. In the particular circumstances, the judge considered that whilst a failure to pay constituted a breach of the arbitration agreement, such a breach was not repudiatory. Accordingly, the court granted a mandatory stay of the court proceedings.

This case provides useful clarification as to the repercussions of a party’s failure to pay an advance of costs and the avenues available to Claimants in such circumstances.

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Court allows a security for costs application against recalcitrant Respondent seeking to challenge arbitral award, but refuses to require payment in of value of Award

In the case of X v Y Queen’s Bench Division (Commercial Court), 07 May 2013 the court has grappled with the options available to a claimant against a respondent seeking to challenge an award. In this case, the Respondent, X, had taken every step possible to avoid payment of damages and costs awarded against them in previous awards by an English seated arbitral tribunal. X now sought to challenge a fourth award in the English courts under s67 and s68 of the Arbitration Act (the Act). Y asked the court for: (i) security for its costs in resisting such applications; and (ii) for payment into court of the sums awarded to it under the fourth award.

Clearly sympathising with Y’s plight, the court ordered that security for costs should be granted given the illiquidity of assets against which costs could be enforced and the absence of any assurance by X that costs would be paid. However, payment into court was found to be a step too far. It was not for the court to require payment into court to assist one party to enforce an award. In this case, whilst the s67 and s68 challenges might delay enforcement, Y had a freezing injunction in place over assets in Australia which should enable it to enforce the awards eventually.

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