REUTERS | Maxim Shemetov

The arbitrability of avoidance claims: English Commercial Court continues pro-arbitration trend

In Riverrock Securities Ltd v International Bank of St Petersburg,  the English Commercial Court granted an interim anti-suit injunction (ASI) restraining proceedings brought in Russia by the liquidator of an insolvent company in breach of an arbitration agreement. The judgment addresses interesting issues regarding the arbitrability under English law of claims brought by liquidators pursuant to foreign insolvency laws and related public policy considerations.

The underlying dispute concerned nine substantially similar contracts under which Riverrock Securities Ltd (RSL) sold credit-linked notes to the International Bank of St Petersburg (IBSP). The contracts were expressly governed by English law and contained identical LCIA arbitration agreements with a London seat.

IBSP was subsequently declared insolvent and the Deposit Insurance Agency of the Russian Federation (DIA) was appointed as IBSP’s official receiver in bankruptcy. The DIA, on behalf of IBSP, commenced proceedings against RSL before the Arbitrazh Court in St Petersburg (Russian proceedings). IBSP sought the invalidation and unwinding of the contracts under the Bankruptcy Law of the Russian Federation (Bankruptcy Law) on the basis that the underlying transactions were a scheme intended to siphon off IBSP’s assets.

RSL applied to the English Commercial Court for an ASI to restrain the Russian proceedings on the basis that they were brought in breach of the arbitration agreements. IBSP opposed the application on grounds of:

  • The Russian proceedings were being pursued by the DIA, who was not a party to the contract and therefore not bound by the arbitration agreements.
  • The claims under the bankruptcy law did not fall within the scope of the arbitration agreements as a matter of construction.
  • In any event, the claims under the bankruptcy law were not arbitrable as a matter of law or public policy.

The “privity” argument

The court rejected this argument based on an analysis of the claims advanced in the Russian proceedings. The claims were “avoidance” claims brought under provisions of the Bankruptcy Law similar to the provisions of the English Insolvency Act 1986 (IA 1986) relating to setting aside transactions at an undervalue.

In support of the “privity” argument, IBSP relied on English authorities confirming that the right to bring avoidance claims vests in the administrator or liquidator, rather than in the company. By contrast, the court found that although in Russia such claims can only be commenced by a temporary administrator, they remain open to a company to continue after the administration ceases and vest in the company. The court held that the claims were, therefore, brought by the DIA on behalf of IBSP and not the DIA in its own right.

The question remains whether an avoidance claim by an administrator or liquidator would meet the privity requirement in jurisdictions (such as England) where the cause of action vests in the administrator or liquidator. Foxton J expressly stated that such a question would be left to a case in which it arises. However, he made the following interesting observations:

  • Where the substance of an avoidance claim is the same, it would not be wholly satisfactoryif the answer was dependent on the particular legal mechanism adopted in the relevant insolvency legislation.
  • In Larsen Oil and Gas Pte Ltd v Petroprod Ltd, the Singapore Court of Appeal treated avoidance claims vested in the liquidator (as opposed to the company) under national insolvency legislation as those of a party to the arbitration agreement.

It will be interesting to see whether the privity argument will be advanced by an administrator or liquidator in a similar case concerning an avoidance claim under the IA 1986 and, if so, whether the court will look favourably on the views advanced by Foxton J.

The “construction” argument

Two issues arose in relation to this argument.

First, IBSP argued, in reliance on the decision in Larsen Oil, that (absent express language) there is a presumption that arbitration agreements do not ordinarily extend to avoidance claims. The court rejected this in reliance on the decision in Nori Holdings Ltd v Public Joint-Stock Co Bank Otkritie Financial Corporation and held, to the contrary, that since the judgment in Fiona Trust & Holding Corporation v Privalov, English law has adopted a generous approach to the construction of arbitration agreements and that it would not be appropriate to imply such a limitation into an arbitration agreement.

The court also cited the broad terms of the arbitration agreements, which referred any disputes “under or in connections with” the contracts to LCIA arbitration. This is standard drafting and parties should therefore take care when drafting arbitration agreements to expressly carve out any anticipated disputes that are not intended to be referred to arbitration.

The second issue concerned whether, as a matter of construction, an arbitration agreement extends to particular causes of action or forms of relief available in a foreign court that would not be available in the arbitration. While the court acknowledged that this could be a relevant factor, it did not consider this to be a bar to the grant of an ASI.

Foxton J applied the approach of Males J (as he then was) in Nori Holdings, who held that the issue of whether the dispute fell within an arbitration agreement involved looking at the substance of the dispute rather than the form in which it was being advanced before the foreign court. Foxton J found that, as a matter of substance, the claims being advanced under the Bankruptcy Law were contractual in nature; one party was seeking to invalidate the contracts and recover the amounts paid from its counterparty.

The “arbitrabilty” argument

The court also rejected this argument. Foxton J found that, as a matter of both Russian and English law, the claims brought under the Bankruptcy Law were insolvency claims and this did not render them non-arbitrable under English law.

The court held that the arbitration tribunal would be able to grant the relief sought by IBSP and that IBSP’s claims did not impact on the interests of third parties in a relevant sense. The court then considered whether the claims involved a matter of public interest which should not be determined through a private contractual process.

Foxton J noted that the case involved public policy conflicts between:

  • English arbitration law and the underlying Russian legislation, but that this would not generally form part of the applicable law for the purpose of determining the validity of the contracts.
  • Favouring party autonomy and the underlying principle of the insolvency process, which seeks to ensure that creditors receive a fair allocation of a debtor’s assets.

The court referred to the somewhat conflicting case law on this. On one hand, Fulham Football Club (1987) Ltd v Richards supports the conclusion that avoidance claims exist for the benefit of creditors generally and as such, engage a public rather than private interest. However, in contrast, Males J in Nori Holding was clearly influenced by the strong pro-arbitration policy of English law.

Ultimately, the court held that there was no sufficient countervailing public policy arising from the fact that the claims were avoidance claims in a foreign bankruptcy to override the clear English law policy of upholding arbitration agreements.

Although leaving the position in relation to avoidance claims under English law an ambiguous one, Foxton J did go a step further than Males J in Nori Holdings by finding that the claims under the Bankruptcy Law were properly characterised as insolvency claims under English law. This may indicate that the position could extend to English proceedings in the future.

Commentary

This judgment follows a number of recent English court decisions that seek to protect the parties’ choice to arbitrate. It shows that where a party is in substance seeking to enforce contractual rights against another party, the courts will carefully scrutinise any claim that a dispute raises issues which are non-arbitrable. In the absence of express language, avoidance claims under foreign insolvency legislation will not automatically fall outside the scope of an arbitration agreement. Instead, the court will evaluate the nature of the claims and consider public policy issues in determining whether the arbitration agreement applies and, if so, whether to uphold it.

It remains to be seen how the English courts will determine cases relating to avoidance claims under English law in light of Foxton J’s views relating to the privity and arbitrability arguments. As a practical matter, parties may want to consider expressly providing for or against the arbitrability of insolvency-related claims when drafting their arbitration agreements.

 

 

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