WFO: limitations on extending relief against third parties to the arbitration agreement

WFO: limitations on extending relief against third parties to the arbitration agreement

This article addresses the decision of the High Court in Trans-Oil International SA v Savoy Trading LP, Ivan Melnykov [2020] EWHC 57 (Comm). The case describes restrictive guidelines for obtaining interim injunctive relief against third parties to the arbitration agreements.

In this case an application was considered ex parte.

Background and facts

Savoy Trading LP is a Scottish limited partnership with 2 corporate partners. Trans-Oil asserted that Mr Melnykov was a de facto partner and beneficial owner of Savoy.

Savoy entered into a contract for the sale of wheat to Trans-Oil International SA (the Applicant). The contract was signed by Mr Melnykov. The contract provided for English law to apply and incorporated the Gafta 125 arbitration clause.

Savoy defaulted on the contract shortly after it was concluded and Trans-Oil filed a notice of arbitration, inter alia, against Savoy and Mr Melnykov.

Later an order for the sequestration of Savoy’s estate has been granted and the trustee has been appointed.

Trans-Oil then applied for a worldwide freezing order (WFO) against Savoy Trading LP and for an accompanying disclosure order. The relief was ultimately granted following hearings before Knowles J and Teare J. Teare J also made an order against Savoy Trading AG, which Trans-Oil said was associated with Savoy Trading LP, requiring disclosure of all assets exceeding £5,000 in value. Mr Melnykov swore an affidavit in response, statingamong other things, that he did not consent to the jurisdiction of the court.

Trans-Oil then applied to extend the WFO by adding to it Mr Melnykov personally, or, alternatively, to have him named in the penal notice. The consequence of this would be that Mr Melnykov’s assets would be frozen, and he would be personally liable in case of non-compliance with the WFO. The consequences of non-compliance with the WFO may be severe and include imprisonment for up to two years.

Trans-Oil also applied for permission to serve the application out of the jurisdiction upon Mr Melnykov. By granting such permission, a court exercises and confirms its jurisdiction over a defendant, subject to any later challenge to the order.

Jurisdiction matters

Trans-Oil relied on 2 jurisdictional gateways: CPR 6.36 and PD6 3.1(6) (c) or CPR 62.5.

Trans-Oil argued that there is jurisdiction over Mr Melnykov since the contract was governed by English law and he is “arguably personally liable” for the performance of the contract.

Trans-Oil stated that pursuant to Scottish law, Mr Melnykov had no authority to conclude the contract requiring credit unless he had previously obtained the trustee’s permission. Otherwise, the agent would be acting beyond the scope of its agency.

In this context, Mrs Justice Moulder held that there was no evidence that the contract involved obtaining credit, and thus the trustee’s permission was not required. Moreover, had the Contract involved credit, it was unlikely that the Court would pierce the corporate veil to make Mr Melnykov personally liable, and only Savoy would likely be liable.

Alternatively, Trans-Oil submitted that Mr Melnykov was a party to the contract since he was the “real principal” of Savoy Trading LP. Trans-Oil relied on a Nominee Declaration, by virtue of which it followed that one of Savoy’s partners held an interest in trust for Mr Melnykov.

Although this was so, personal liability would only arise if Mr Melnykov contracted as an agent for an undisclosed principal. Considering that the Contract was entered into by Savoy, whilst Mr Melnykov was simply signing on its behalf, Mrs Justice Moulder found the principle to be non-applicable in this case. It was noted that neither the Nominee Declaration nor the Power of Attorney itself “amount to evidence of a good arguable case that he was contracting as an agent for an undisclosed principal”.

To summarize, Mrs Justice Moulder also held as follows:

“…in order for the court to have jurisdiction under CPR 6.36 , it is not enough for the applicant to serve a purported notice of arbitration on a person in circumstances where he is not a party to the contract containing the arbitration agreement.”

Alternatively, Trans-Oil was also seeking to establish jurisdiction according to CPR 62.5.

Dealing with the issue, Mrs Justice Moulder followed DTEK Trading SA v Morozov [2014] EWHC 94 (Comm) and Cruz City 1 Mauritius Holdings v Unitech Ltd [2014] EWHC 3704 (Comm),  which the learned Judge thought stood as authority for the proposition that services out of the jurisdiction is only permission against parties to the arbitration agreement.

Since Mr Melnykov had not been a party to the arbitration agreement, the Court did not have jurisdiction under the CPR 62.5.

Substantive issues for relief

Trans-Oil submitted that there existed a real risk of dissipation of assets by Mr Melnykov. To support its case Trans-Oil said:

  • [Savoy’s] complex structure” indicated a “low commercial morality” and should be taken into account.
  • Mr Melnykov failed to disclose some bank accounts in Latvia.
  • When negotiating the Contract, Mr Melnykov failed to disclose that Savoy was subject to sequestration.

Having considered all the arguments, Mrs Justice Moulder observed that under Scottish law Mr Melnykov had no obligation to inform Trans-Oil of Savoy being in sequestration. Nor was he under obligation to disclose Latvian bank accounts since there were no assets which would be caught by the WFO. Lastly, there was no evidence of dishonesty or low standards of commercial morality in using the partnership structure as the one Savoy used.

Mrs Justice Moulder concluded:

“In my view a failure to engage with the applicant and the Trustee does not establish a risk of dissipation; rather I note that even though he disputed the jurisdiction, Mr Melnykov has given the affidavit as required by the court order…

….

The evidence in this matter as to the assets of Mr Melnykov and a real risk of dissipation by Mr Melnykov is in my view weak. The position in relation to Savoy Trading was different as to assets and the risk of dissipation and does not mean that there is a good arguable case in relation to Mr Melnykov).”

Penal notice

The court also refused to name Mr Melnykov in the Penal Notice pursuant to CPR 81.4. It was held that the provisions of CPR 81.4 apply to the directors and to the officers of the company only, but not to partners or to de facto partners themselves. Besides, there was no good arguable case that Mr Melnykov did act as the de facto partner.

In view of the above, Trans-Oil’s application was refused in full.

Danil Hristich, Senior Associate, and Sergey Platonov, Associate, advised Mr Melnykov in this case.

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Team members
Danil Hristich
Sergey Platonov
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