Fortior Law has successfully obtained a worldwide freezing order from the UK High Court. This article will briefly outline the facts of the case and explain how the judge was satisfied on each of the four main criteria for the granting of the injunction, before turning to the matter of the Scott v Avery clause. It will then explain what such a clause is before elucidating the novel way in which our case was presented so as to prevent the clause from operating to the detriment of our client.
The parties concluded a sale contract in terms of which C would sell corn to D, which contract provided for GAFTA arbitration which contained a Scott v Avery clause. Title in the goods would pass to D upon payment. The vessel arrived at the load port and loading was completed. C proceeded to send draft shipping documents to D for approval, but no reply was forthcoming.
C therefore issued the shipping instructions in accordance with the instructions D had issued earlier and sent them to D. Payment was due two days from such date, but no payment was received. D’s representative later implied that the shipping documents did not conform to the instructions given, but asked for the documents to be sent to D’s bank in Bulgaria, providing contact details for the person who was to receive them.
D then confirmed that the documents had been received, providing a DHL receipt purportedly signed by the bank representative, and said it had instructed its bank to effect payment. C however never received payment. C was then contacted by a third party company in Turkey, saying that D was offering to sell the cargo to it and enquiring whether D had title to the cargo.
C therefore contacted D requesting clarification, with D responding that it believed payment had been made, so it had the right to sell the cargo. C therefore contacted D’s bank, and received a troubling reply. The bank said that D was not and had never been its client, and that the bank representative to whom D instructed the shipping documents be addressed had never received the documents, nor signed for them. The bank therefore referred the case to the Bulgarian police on suspicion of fraud on the part of D. C also considered its options and decided to apply ex parte (i.e. without notice) to the UK High Court for a worldwide freezing injunction against D.
The application was brought pursuant to Sections 44(2)(e) and 43 of the Arbitration Act 1996 in support of an intended GAFTA arbitration between the parties to resolve D’s breach of contract. In order to obtain the injunction sought, C had to convince the court, presided over by Mrs Justice Moulder, that the relevant requirements were met. C had a duty of full and frank disclosure to the Court, meaning it had to disclose any adverse facts and raise any possible defences on behalf of D, who would not be present at the hearing given that the application was made ex parte. C also had one other obstacle to surmount: the Scott v Avery clause in its contract with D.
C had to first convince the Court that:
i. there was a need for the application to be made without notice;
ii. the application should be determined on an urgent basis;
iii. the Court was required to determine the application in the absence of a GAFTA Tribunal.
The Court accepted C’s arguments as to the need for a without notice application and its determination on an urgent basis, given the evidence of fraudulent conduct and clear dishonesty on D’s part. D had nominated a bank that was not its bank to receive the shipping documents and to pay for the cargo and had apparently forged the signature of the bank’s representative on the DHL receipt. It appeared that D had provided false telephone numbers which facilitated the interception of the documents before they reached the bank. D also tried to sell the cargo to a Turkish company without having paid for it, knowing full well that the bank would never have paid D for the cargo since D was not its client. Given the circumstances, it was clear that D, if given notice of the application, may have attempted to dissipate its assets in order to render itself judgment-proof.
While it was true that in accordance with the GAFTA Arbitration clause in the contract, the Tribunal, once formed, could have granted an injunction itself (under GAFTA Rule 125), in this case it was not prudent to wait for the formation of the Tribunal, since such a process could take weeks and it was not known whether D would co-operate in its formation. There was therefore no competent Tribunal to grant such relief. Further, even if the Tribunal had been composed, it could not grant an injunction without notice to D, meaning there would have been the risk of D dissipating its assets.
For the issuance of the freezing injunction, the Court had to agree that:
- C and a good and arguable case against D;
- absent the freezing injunction, there was a real risk that an arbitral award in C’s favour would remain unsatisfied;
- there were grounds for belief that D had assets that could be caught by the injunction;
- that it was just and convenient to grant the injunction.
As to these, there was clearly a good and arguable case against D, which was in breach of contract owing to its failure to pay against presentation of the shipping documents, which gave rise to damages. In complying with the duty of full and frank disclosure, C submitted that D may argue that the shipping documents had not been issued in accordance with its instructions. That defence failed however, because i) the documents were so issued and ii) even if they were not so issued D had waived its right to raise such a defence by accepting the documents and asking them to be sent to its supposed bank in Bulgaria.
The risk that the award would go unsatisfied if the injunction was not granted was also clear. C relied on three main points: i) clear evidence of fraud and dishonesty on the part of D, ii) D’s evasive conduct in paying for the cargo and iii) D’s default in failing to pay both C and the owners of the vessel which D had chartered to carry the cargo. Moreover, D had not filed accounts since 2016 so there was no way of determining its financial situation. Again for the purposes of full and frank disclosure, it was submitted that D may argue that this was down to a simple cash flow problem at the relevant time, but the Court was compelled by D’s dishonest conduct to accept that D would attempt to dissipate its assets if an injunction were not granted.
As to potential assets to be seized by the injunction, C knew of a bank account in D’s name courtesy of the Turkish company which D had offered to sell the cargo to (notwithstanding that D did not have title to do so). The Turkish company had provided C with documents indicating the details of the bank account to which D requested payment be made. It was true that there may be no or negligible funds in that bank account, as C had no way of knowing until it was seized, but C was only required to show that accounts that could be subject to the injunction existed, and the existence of the bank account was therefore sufficient.
It was also just and convenient to grant the injunction taking into account the interests of both parties, and the injunction would not cause prejudice to D because the injunction sought contained the usual Angel Bell exception for transactions of up to US$10,000 and did not affect D’s normal course of business.
Scott v Avery clause
Finally, C had the task of convincing the Court that the granting of the injunction would not be in breach of the Scott v Avery clause contained in the parties’ contract. A Scott v Avery clause states that an arbitral award is a condition precedent to the right to bring legal proceedings in local courts. The standard form of such clause, following the parties’ agreement to refer the dispute to arbitration, would be:
“Neither party hereto, nor any persons claiming under either of them, shall bring any action or other legal proceedings against the other of them in respect of any such dispute until such dispute shall first have been heard and determined by the arbitrators, umpire or Board of Appeal (as the case may be) in accordance with the Rules of Arbitration and Appeal of the Federation, and it is hereby expressly agreed and declared that the obtaining of an Award from the arbitrators, umpire or Board of Appeal (as the case may be), shall be a condition precedent to the right of either party hereto or of any person claiming under either of them to bring any action or other legal proceedings against the other of them in respect of any such dispute.”
In B v S  EWHC 691, Flaux J held that the standard form Scott v Avery clause excludes the right of a party to apply to the English courts for injunctive relief under Section 44 of the Arbitration Act.
In normal circumstances, the clause would have provided a total defence to C’s application for a freezing injunction. However, the particular clause in the contract between C and D contained a carve-out provision, providing that there was no bar to the parties seeking to obtain security in respect of their claim or counterclaim via legal proceedings, provided such legal proceedings shall be limited to applying for and/or obtaining security for a claim or counterclaim. C relied on this provision in order to persuade the Court that the parties had clearly intended that the right to apply for an injunction under Section 44(3) of the Arbitration Act insofar as the provision of security for a claim was concerned was to be open to them.
Having considered the clause and the circumstances in detail, the Court noted that the contract considered by Flaux J in B v S did not contain such a caveat. On this basis, Moulder J held that the present case was capable of being distinguished from B v S, and that the freezing injunction could, and in this case should, be granted for the amount sought, because the injunction was effectively being sought to provide security for C’s claim against D, and this fell within the ambit of the carve-out provision of the Scott v Avery clause found in the relevant sale contract.
C was represented in these proceedings by Vitaliy Kozachenko (Fortior Law) and Turlough Stone (Quadrant Chambers).
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Fortior Law (www.fortiorlaw.com) is a boutique practice in Geneva, Switzerland, specialising in international dispute resolution in the fields of international trade, shipping and finance.