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28 August 2014
This update looks at two important aspects of offshore litigation: the impact of arbitration agreements and default judgments.
In Anzen Ltd v Hermes One Ltd: On Paper(1) the Court of Appeal reaffirmed that parties seeking to rely on an arbitration clause must ensure that the language of the clause makes the resolution of disputes by arbitration mandatory rather than optional. If the language of an arbitration clause is merely optional, a disputing party may proceed to issue court proceedings and the court will not stay those proceedings unless arbitration proceedings have been initiated. On the other hand, Conocophillips China Inc v Green Dragon Gas, Ltd(2) illustrates that BVI courts will honour the finality of arbitration awards once satisfied that they have followed due process. Where a party seeks to set aside an arbitration award by applying to the supervisory court at the seat of arbitration, if such an award is upheld as valid the BVI court is unlikely to postpone enforcement of the award to await any appeals challenging the validity of the award. Concept Oil Services Limited v Kontsevoy(3) is a simple reminder to a party seeking to register an English judgment in the British Virgin Islands that it must ensure that the defendant was subject to the jurisdiction of the court when the award was granted.
The Court of Appeal's decision in Sylmord Trade Inc v Inteco Beteiligungs AG,(4) followed in Strategy Success Limited v Dorsey Group Limited,(5) highlights that if a party fails to take steps in BVI proceedings after being served with process, if default judgment is entered against that party it will be required to satisfy some strict conditions before the court will set aside the default judgment. The decisions make clear that if a defendant merely disregards the BVI claim because it does not believe that the BVI court has jurisdiction, the court will not regard this as a good explanation for failing to take the required initial steps as a defendant, being to file an acknowledgement of service or a defence.
Applications to enforce arbitration awards or to stay proceedings in favour of arbitration are regularly entertained by the BVI courts. The Court of Appeal's decision in Anzen affirmed that the language of an arbitration clause must make arbitration mandatory rather than optional.
The Court of Appeal had to construe whether an arbitration clause merely gave the parties an option to arbitrate or was mandatory in nature, therefore preventing a party from resorting to the court to have a dispute resolved. The appellants contended that the trial judge was wrong to refuse their application to stay the proceedings, holding that the arbitration clause did not make arbitration mandatory but merely optional. The Court of Appeal upheld the decision of the High Court finding that an arbitration clause which gives an option to arbitrate does not create an immediately binding contract to arbitrate. The Court of Appeal ruled that with arbitration clauses of this nature, there is a binding agreement to arbitrate only when one party refers any dispute arising to arbitration. If a party bypasses the arbitration clause and files a claim in court, the other party still has the option to invoke the arbitration clause by referring the matter to arbitration and apply for a stay of the court proceedings. However, if the party against which court proceedings were initiated does not refer the dispute to arbitration and does not submit to the court's jurisdiction, the dispute will continue under the court's jurisdiction.
The Court of Appeal dismissed the application, finding that there was no binding agreement between the parties to arbitrate as the appellants had failed to refer the dispute to arbitration. Therefore, the remedy of a stay given by Section 6(2) of the Arbitration Act was not available to them. Costs were awarded to the respondent.
Enforcing arbitration awards
The BVI courts respect the finality of arbitration awards and once satisfied that an award has been properly granted, they will not deprive the recipient from being able to enforce the award. This was demonstrated in Conocophillips.
Conocophillips China Inc (CCI), a Liberian company, obtained an arbitration award against Green Dragon Gas Ltd, a Cayman-incorporated company, and Greka Energy International BV for breaches by Greka of contractual representations, warranties and undertakings contained in a mineral exploration agreement and guaranteed by Green Dragon to the limit of $20 million plus interest and costs. The arbitration agreement was governed by the Rules of Arbitration of the Singapore International Arbitration Centre (SIAC).
CCI applied to both the BVI and Cayman courts to enforce its award against Green Dragom, while Green Dragon applied to the Singapore High Court to have the award set aside on the basis that there was a breach of natural justice and/or that it was unable to present its case before the tribunal. Both the BVI and Cayman courts adjourned the applications seeking to enforce the award pending determination by the Singapore High Court of whether to set aside the award. The Singapore High Court dismissed the application and found that the award was properly granted and did not breach natural justice principles. Green Gas and Greka appealed the decision of the Singapore High Court, and CCI proceeded to apply for enforcement of the award in the British Virgin Islands and the Cayman Islands, together with the payment of security in the sum of the award in the event that the court was minded to stay enforcement pending the appeal. Green Gas opposed the enforcement application seeking a stay pending the appeal.
The BVI court had to determine whether it should stay the enforcement of the arbitration award pending Green Gas's appeal to the Singapore Court of Appeal. The BVI court considered the discretion given to it under Sections 36(1), 36(2)(f) and 36(5) of the Arbitration Act, which provide as follows:
"36 (1) Enforcement of a Convention award shall not be refused except in cases mentioned in this section (2) Enforcement of a Convention award may be refused if the person against whom it is invoked proves...(f) that the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made... (5) Where an application for the setting aside or suspension of a Convention award has been made to such a competent authority as is mentioned in subsection (2)(f), the court before which enforcement of the award is sought may, on the application of the party seeking to enforce the award, order the other party to give security."
The defendant argued that the BVI court should not enforce the award where it was not enforceable in the seat of arbitration, as the language of the Singapore order indicated that enforcement should be postponed "until after the application is finally disposed of".
The BVI court concluded that once an award has been upheld by the supervisory court, it should treat the question of enforceability as concluded, no matter whether that decision is presently under appeal. The court noted that an award under the SIAC rules was not like a foreign judgment where an appeal on the merits will decide the substance of the claimant's case. With a SIAC award, the merits will have been conclusively pronounced on by the arbitral tribunal itself and the parties will have become bound by that decision, and have agreed not to appeal the award on the merits, have no available avenue of appeal from the tribunal's decision on the merits, or both. Therefore, provided that there has been no failure of due process, a court enforcing such an award need have no concern that enforcement will cause injustice. Once the supervisory court has removed any doubts about the question of due process, the court could see no reason in principle why the recipient of the award should be further prevented from enforcing it worldwide because a different result might be obtained on appeal. The court further highlighted that the Arbitration Act did not encourage the court, in the exercise of its enforcement jurisdiction, to refuse or delay enforcement in such circumstances. The court doubted whether it was open to it to defer enforcement in a case where a challenge to the supervisory court has failed. The judge concluded that there appeared to be no discretion under Section 36(5) of the Arbitration Act to delay enforcement in such circumstances unless words can be read into that section. The court held that it was unable to find any principles of construction requiring words to be read into Section 36(5) of the Arbitration Act, which follows the wording of Article IV of the New York Convention.
Concept Oil showed that while a party can easily apply to register a judgment from the courts of a jurisdiction recognised by the BVI Reciprocal Enforcement of Judgments Act (Cap 65),(6) it must ensure that it has complied with the basic requirements for registration, such as whether the court had jurisdiction over the defendant.
The claimant made an ex parte application pursuant to the BVI Reciprocal Enforcement of Judgments Act to register a money judgment obtained from the High Court of England and Wales on July 5 2013 against the defendants, two of whom were residents of Kazakhstan, while the third was a BVI company.
The court was satisfied that only one requirement needed to be resolved as outlined in the act: whether the defendants, who were neither resident nor carrying on business in England when the proceedings were commenced, voluntarily appeared in the English proceedings or otherwise submitted to the jurisdiction of the English court. If they did not, then Section 3(2)(b) of the act provides that the court could not register the judgment in the territory.
The court had to determine:
The court examined the defendants' conduct in the English proceedings and observed that letters from the defendants' legal representatives expressly reserved their rights to challenge the English court's jurisdiction, while indicating their willingness to provide information pursuant to the discovery orders in the event that the jurisdiction challenge failed. Therefore, the defendants initiated an application – which they eventually abandoned before it was heard – to:
The applicant argued that the defendants voluntarily appeared or otherwise submitted to the jurisdiction of the English court by either:
The court found that there was no authority supporting the applicant's propositions regarding voluntary appearance and/or submission, and concluded that this did not represent the law. In order to become subject to the court's (territorial) jurisdiction, a foreign party must voluntarily appear or (voluntarily) otherwise submit. The court defined 'appear' to mean no more than that the foreign party overtly engages the court's processes on the merits. A useful test is whether the foreign party takes steps which are necessary or useful only if no objection to jurisdiction is being taken or if a prior objection is being waived. On the facts of the case at hand, the defendants did not appear or otherwise submit to the court's territorial jurisdiction. Thus they did not engage with or indicate any intention to engage with the merits of the claim before the English court. What is required from a submission is an indication that a defendant assents to the issues going to trial. Participating in steps concerned merely with conservatory relief is not sufficient.
In dealing with the further submission that when the defendants failed in their jurisdictional challenge they became subject to the territorial jurisdiction of the English court, the court reiterated its decision in Star Reefers Pool Inc v JFC Group Co Ltd,(7) which held that a foreign party which argues that the court does not have territorial or exorbitant jurisdiction over it cannot be said to have voluntarily appeared in the proceedings or to have otherwise voluntarily submitted to the jurisdiction. The position cannot change if the argument is rejected, unless it is possible to identify an act subsequent to the rejection capable of amounting to a voluntary submission.
The applicant relied on Smay investments Ltd v Sachdev(8) to maintain that the abandonment by the defendants of the jurisdictional challenge was to be treated as submission to the jurisdiction. The court distinguished Smay on its facts from the English proceedings, and found that abandoning a jurisdictional challenge as the defendants did could not amount to a voluntary appearance or submission.
The applicants argued that by agreeing to comply with the discovery orders if the jurisdictional challenge failed, they made an unequivocal submission to the English court's jurisdiction. They argued that this amounted to a conditional intention to engage in the future with the merits of the claim before the English court. The court disagreed with this proposition, finding that by agreeing to comply with the disclosure obligation the defendants were not agreeing to submit to the jurisdiction. A submission to the jurisdiction requires conduct evidencing an acceptance that the court has jurisdiction to determine the claim. The foreign defendant must have assented to trial. The court was unable to infer from the material an agreement from the defendants to go to trial.
As the court was unable to find evidence that the defendants voluntarily appeared or otherwise submitted to the territorial jurisdiction of the English court, and it was established that none of the defendants carried on business in England or were ordinarily resident there when the proceedings were commenced, the judgment could not be registered in the territory. The application was dismissed.
Setting aside default judgments
A party served with a BVI claim which fails to take any steps in the proceedings faces the risk of having a default judgment entered against it. Setting aside a default judgment requires that a party meet stringent conditions so care must be taken to ensure proper representation from the outset. The Court of Appeal's decision in Sylmord provides a useful analysis of the conditions given under Part 13.3 of the Civil Procedure Rules for setting aside a default judgment.
Inteco Beteilingungs AG issued a claim against Sylmord Trade Inc for the repayment of loans of more than €74 million which were to be repaid within a specified period at an interest rate of 7.7% a year. Inteco issued proceedings because the appellant declined to have the dispute referred to arbitration. The appellant failed to file an acknowledgement of service or a defence, so judgment in default was entered against it. Within one month of the judgment in default, the appellant applied to set it aside arguing that it had satisfied the grounds given in Rule 13.3 of the Civil Procedure Rules. Rule 13.3 provides that the court may set aside a default judgment only if the defendant:
The default judgment may also be set aside if the defendant can show that there are exceptional circumstances.
The Court of Appeal had to determine whether the High Court had erred in its decision to dismiss the application to set aside the default judgment entered against the appellant. The appellant contended that the trial judge erred in finding that:
The Court of Appeal found that the appellant's apparent indifference to the legal proceedings instituted in the BVI court connoted real or substantial fault on its part, and the trial judge was therefore correct to hold that the appellant did not proffer a good explanation for its failure to file an acknowledgement of service. The Court of Appeal cited the Privy Council decision in Attorney General v Universal Projects Limited,(9) where the court defined what would not be a 'good explanation': "if the explanation for the breach… connotes real or substantial fault on the part of the defendant, then it does not have a good explanation for the breach." The Privy Council was also cited as noting that it was difficult to see how inexcusable oversight or administrative inefficiency could ever amount to a good explanation.
In considering whether the trial judge was wrong to find that the appellant did not have good prospects for successfully defending the claim, the Court of Appeal found that a court must consider the context of the pleadings and the evidence to determine whether a defence has a real (as opposed to a fanciful) prospect of success. If the court arrives at the view that it would be difficult to see how the defendant could establish its case, it is open to the court to enter judgment against the defendant. On its own assessment of the defence the Court of Appeal agreed with the finding that it did not have a real prospect of success.
Addressing whether a binding agreement to arbitrate amounted to an exceptional circumstance for setting aside a default judgment, the Court of Appeal relied on the English Court of Appeal decision in Vann v Awford,(10) which rejected the submission that the existence of an arbitration clause provided any arguable defence which could lead to the setting aside of a default judgment. The Court of Appeal therefore noted that if instituting proceedings in breach of an arbitration agreement did not constitute an arguable defence to setting aside a default judgment, it could hardly constitute an exceptional circumstance to justify, on its own, setting aside a default judgment.
The Court of Appeal dismissed the application with costs to the respondent.
Subsequent to Sylmord, Strategy Success Limited (SSL) successfully opposed an application made by Dorsey Group Limited to set aside a default judgment obtained against it by SSL for repayment of a $700,000 loan.
Dorsey had failed to discharge its contractual obligations to SSL, thereby causing SSL to rescind the contract and initiate a claim in the BVI courts against Dorsey. SSL claimed for the return of the loan, and alternatively for damages for loss suffered due to Dorsey's breach of contract. Judgment was entered against Dorsey when it failed to acknowledge service or to file a defence. Dorsey applied to set aside the default judgment two months after it was served.
Dorsey contended that the default judgment should be set aside because it was irregular; alternatively, the court should exercise its discretion and grant Dorsey leave to defend. Dorsey contended that the judgment was irregular because it was a claim partly for a specified sum and partly for an unspecified sum (being damages for breach of contract, claimed in addition or in the alternative money claim). It was therefore not open to SSL to enter judgment for the $700,000 plus costs and interest unless it abandoned the unliquidated claim in compliance with Rule 12.8(3) of the Civil Procedure Rules. In the alternative, Dorsey contended that default judgment should be set aside pursuant to Rule 13.3 of the Civil Procedure Rules because it satisfied the conditions given in that provision.
SSL argued that it had impliedly abandoned its claim for unliquidated damages when it applied for judgment to be entered on the liquidated claim. This was derived from the rule that causes of action merge in judgments.
The court therefore had to determine whether:
The court confirmed that there are three separate routes for obtaining a default judgment:
The court considered whether SSL needed to abandon its claim in order to have judgment in default entered. The judge contextualised the meaning of the word 'abandon' used in the Civil Procedure Rules and indicated that the use of the word is a confusing way of indicating that a clamant with a money claim can 'park' the unspecified sum claimed and go ahead to obtain default judgment on the money claim without waiting to have damages on the other claim assessed under Rule 16 of the Civil Procedure Rules or to have the whole claim tried out. He confirmed that it could not mean that by entering judgment for money lent, a claim for damages for breach of contract was automatically extinguished. This, the judge said, would conflict with the rules governing the merger of causes of action in judgments. Determining whether a default judgment extinguished one or more claims for unspecified sums of money would require an analysis of the cause of action underlying each claim. He concluded that the rules were meant to facilitate pursuing default judgment even where there are claims for unspecified sums and there was no need to take any formal steps to declare that all claims in the prayer other than the claim for which default judgment is sought are abandoned. Therefore, the court found that the default judgment was not wrongly entered.
According to Rule 13.3 of the Civil Procedure Rules, the court may set aside a default judgment only if the defendant shows that it:
In this case the defendant had allowed two months to lapse before it applied to set aside the default judgment. The court considered that this time lapse was not as soon as practicable. Further, in considering whether Dorsey gave a good explanation for why it failed to file an acknowledgement of service (ie, because it believed that the BVI court had no jurisdiction in the matter), the court rejected this argument with reliance on Sylmord. Finally, the court assessed the draft defence, confining itself only to an assessment of prospects, and found that Dorsey had no real prospects of defending the claim.
Therefore, the application to set aside the default judgment was dismissed.
For further information on this topic please contact Marcia McFarlane or Andrew Thorp at Harney Westwood & Riegels by telephone (+1 284 494 2233), fax (+1 284 494 3547) or email (firstname.lastname@example.org or email@example.com). The Harney Westwood & Riegels website can be accessed at www.harneys.com.
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