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Hitting where it hurts most: in the wallet – the English courts’ toolbox in support of arbitration

Several recent judgments provide guidance on the powerful tools available to parties seeking enforcement of arbitral awards in England and Wales, including worldwide freezing orders (WFOs) and third party debt orders (TPDOs). Recent decisions bolster the traditional pro-arbitration approach of the English courts and illustrate the advantages of seeking orders from them, whether or not the defendant’s assets are located within the jurisdiction.

Unlike courts in many other jurisdictions, the English courts do not shy away from granting effective and sometimes extra-territorial relief, provided there is a connection with the jurisdiction and the threshold requirements for an order are met. The effectiveness of the relief granted by the English courts is enhanced by the contempt of court sanctions that may be attached to their orders. Those sanctions can be rather effective, as illustrated by the Alfa-Bank v Reznik judgment. In that case, Mr Reznik was sentenced to an 18-month prison sentence for contempt of court for “deliberate and wilful” failure to comply with the asset disclosure provisions of a WFO issued in connection with a London Court of International Arbitration (LCIA) arbitration (which prompted Mr Reznik belatedly to comply with the asset disclosure order).

Freezing orders

Freezing orders are interim injunctions which preclude the defendant from disposing or otherwise dealing with its assets in a manner that would undermine enforcement of an arbitral award (or a judgment). Freezing orders often impose an asset disclosure obligation on the defendant. They can be issued before and after an arbitral award is rendered. They can also operate both in respect of assets located within the jurisdiction and outside England and Wales. The latter are known as worldwide freezing orders (WFOs).

Recent cases shed some light on two of the key requirements for obtaining a WFO. The following must be demonstrated:

  • The existence of the defendant’s assets on which the order will bite.
  • The risk of dissipation of the defendant’s assets if the order is not granted.

First, the threshold requirement to be met by the applicant in respect of the existence of defendant’s assets is that of either a “good arguable case” or “grounds for belief” that the defendant holds assets (Ras Al Khaimah Investment Authority and others v Bestfort Development LLP and others). While there is some ambiguity in the specific threshold cited by the Court of Appeal, the test is somewhere below the showing of “likelihood” but above the simple assertion that the defendant is “an apparently wealthy person who must have assets somewhere”.

Second, and often the most difficult requirement to satisfy when the claimant has limited knowledge of the defendant’s asset position, is the risk of dissipation requirement. The test is that of “a real risk, judged objectively, that a future judgment would not be met because of unjustifiable dissipation of assets.” (Candy and others v Holyoake and another.)

The High Court judgment in a recent oligarch joint venture dispute (Great Station Properties S.A. and another v UMS Holding Ltd and others) illustrates the factors taken into account by the English courts when assessing the likelihood of dissipation of the defendant’s assets. In this case, the applicants sought and obtained a WFO to aid enforcement of an arbitral award against their former joint venture partners. The court found that the risk of dissipation of the assets by the defendants was established by the arbitral tribunal’s findings on “illicit schemes” used by the defendants and wrongful diversion of profits to intermediary companies controlled by them. The court found that there was a real risk that the defendants would use companies within their control to ensure that assets were “beyond the reach” of the applicants, which risk was found to be amplified by “solid evidence” of the defendant’s “lack of probity”.

Great Station Properties S.A. demonstrates that a WFO can be obtained even where none of the defendant’s assets are located in England and where there are foreign enforcement proceedings on foot (in this case, in Cypriot courts). This is consistent with previous decisions of the English courts (see U&M Mining Zambia v Konkola Copper Mines). The underlying rationale is that, where the arbitration is seated in London, the English courts have jurisdiction to make orders in support of arbitration (even where enforcement is sought abroad).

Most recently, the High Court reportedly granted a WFO against Ukraine’s Privatbank (the order is not yet publicly available). According to press reports, in late December 2017 a WFO was issued against the assets of two Ukrainian billionaires, former owners of Privatbank, pending the outcome of the dispute following the nationalisation of Privatbank. The order was apparently granted following a finding by the judge that there was a good arguable case that the oligarchs defrauded Privatbank (nationalised in 2016) and that there was a real risk of dissipation of assets.

It is important to note that the English courts also have the authority to appoint receivers which may be an effective way of identifying and preserving the defendant’s assets located both within and outside the jurisdiction. The English courts are also able to grant freezing orders against non-parties in support of enforcement of awards, as opposed to pre-award freezing orders (which the English court has held cannot be made against non-parties under section 44 of the Arbitration Act 1996 – see DTEK Trading SA v Mr Sergey Morozov and another), if that non-party holds assets on behalf of the respondent (see TSB Private Bank International SA v Chabra). However, this power is limited to third parties with presence or assets in the jurisdiction (see Cruz City 1 Mauritius Holdings v Unitech Ltd and others [2014] EWHC 3704 (Comm)).

Third party debt orders (TPDOs)

Not only are the English courts willing to hit the relevant party’s wallet (by targeting its assets held directly or by a third party on their behalf), but there is also a mechanism for enforcing awards against amounts owed by a third party to the defendant. This mechanism is the third party debt order (TPDO) (formerly known as garnishee order). The key points to note are that:

  • The third party and the debt must be within the jurisdiction.
  • A TPDO cannot be made in respect of property which does not belong exclusively to the award debtor.

The recent UK Supreme Court judgment in Taurus v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (SOMO) has significantly expanded the scope of possible TPDOs to include funds due under letters of credit issued by a bank located in England. Taurus sought a TPDO in aid of enforcement of an arbitral award in its favour rendered in a Baghdad-seated arbitration. The TPDO application targeted the amounts payable by the London branch of Credit Agricole under letters of credit issued in respect of two crude oil parcels, purchased by Shell from SOMO.

The Supreme Court found that the situs of the debt owed under the letters of credit was the place of residence of the issuing bank (in this case London, the Credit Agricole branch being treated as a separate bank). This ruling overturned prior Court of Appeal case law which stood for over 30 years, under which the situs of debt under letters of credit was the place of payment (which in this case would have been New York).

This judgment brings debts due under unconfirmed letters of credit payable elsewhere within the ambit of the English court jurisdiction, provided the issuing bank is located in England (in other words, where the debt is recoverable). This substantially expands the geographic scope of the potential TPDOs of the English courts to capture all banks with branches within the jurisdiction.

Practical considerations

The above cases highlight the importance of advising clients on the powerful tools available to English courts in aid of enforcement, both before and after the arbitral award is rendered. Some issues to consider when advising clients on enforcement-related issues include:

  • Location of the assets, in particular, identifying the  defendant’s assets (if any) within the jurisdiction.
  • Who holds the relevant assets (the defendant itself or a third party on behalf of the defendant), and whether any other party has a proprietary interest in those assets.
  • Whether the counterparty is owed money by third parties (for example, whether there any actionable letters of credit issued by a London-based bank).

While orders available from the English courts are effective and helpful, some limitations should be borne in mind. In particular, parties seeking measures in aid of enforcement of arbitral awards should remember that:

  • The English courts will refrain from granting orders where there is no sufficient connection with the jurisdiction. (In Taurus v SOMO, the Supreme Court approached this requirement rather liberally, finding the connection was established because the letters of credit were issued “out of London and subject to English law”.)
  • As with all equitable relief, delay on the part of the party seeking a freezing order may have a preclusive effect.
  • As with other ex parte (without notice) applications, the applicants are bound by a stringent requirement of full and frank disclosure. Several law firms have been reprimanded in recent years for failing to give full and frank disclosure in respect of ex parte applications in aid of arbitration.
  • The English courts are less permissive than courts in other jurisdictions (for example, in France) when matters come to enforcing arbitral awards set aside by the courts of the seat of the arbitration (see Maximov v OJSC NMLK, refusing enforcement of an International Commercial Arbitration Court (ICAC) award set aside by the Russian courts absent evidence of clear bias of the latter).
Allen & Overy Valeriya Kirsey

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