Injunctions and imprisonment: how the English courts support London arbitration

Injunctions and imprisonment: how the English courts support London arbitration

43748920_lJames Clanchy considers recent Commercial Court decisions which have confirmed the lengths to which the court will go to support London seated arbitrations.

The message from the three cases discussed below is that while its powers may appear drastic, the Commercial Court will exercise them with considerable care.  These features of the court’s role and conduct contribute to London’s attractiveness as a seat for international arbitrations and they can be expected to continue to do so.

Freedom of contract and freedom to injunct

In the wake of the UK referendum vote in favour of “Brexit”, there has been speculation in the legal press as to whether the English courts might become free again to issue anti suit injunctions against EU based parties, thereby boosting London’s attractiveness to arbitration users.  It has been suggested that the courts could escape the restrictions imposed by the Brussels Regulation and the European Court of Justice’s decision in the West Tankers (Front Comor) case.

It is too early to know what Brexit will mean in this regard but there can be no doubt that the English  courts know what an arbitration agreement means.  To the dismay of some international arbitration practitioners, the English courts are not afraid to use their powers to enforce such an agreement where they have jurisdiction to do so.

In Mace (Russia) Limited v Retansel Enterprises and SPB Renovation, Mr Justice Phillips granted an application for an anti-suit injunction against two parties.  One was a respondent in a London Court of International Arbitration (LCIA) arbitration. The other was a parent company which had commenced court proceedings in St Petersburg seeking a declaration that a contract in dispute in the LCIA arbitration was invalid.

The judge found that the two companies were taking a unified approach to the arbitration and to the St Petersburg proceedings.  The validity of the agreement at issue in the St Petersburg proceedings was plainly a matter which could be determined in the arbitration.  The proceedings in the St Petersburg court were an improper and unconscionable attempt to subvert that process and render an arbitration award unenforceable in Russia.   Phillips J's finding that the same person or persons were making decisions for both companies led him to hold that the respondent in the LCIA arbitration was acting in breach of its arbitration agreements and that its conduct should be injuncted.

The judge also held that the court’s jurisdiction to grant anti-suit injunctions lay under section 37 of the Senior Courts Act 1981, not under section 44 of the Arbitration Act 1996 (AA 1996), and that it could not be fettered by a requirement in Article 25.3 of the LCIA Arbitration Rules to obtain the arbitral tribunal’s consent before making an application to court.

The Commercial Court’s power to imprison uncooperative respondents

Injunctions from the English courts must be accompanied by a “penal notice” warning the party injuncted of the consequences of non-compliance.  It is rare for such a notice to be followed up with committal proceedings but this is what happened in Alfa-Bank v Reznik.

In a judgment rendered on 3 August 2016, Mr Justice Popplewell granted an application for the committal of the defendant and sentenced him to 18 months’ imprisonment for contempt of court. The judge held that Mr Ilya Arkhajavic Reznik’s failure to comply with his asset disclosure obligations in a worldwide freezing order (WFO) was deliberate and wilful and that his contempts must be punished. Mr Reznik, a Russian businessman, is the respondent in an LCIA arbitration. The claimant, Alfa-Bank, had obtained a WFO from the Commercial Court in support of its arbitration under s44 AA 1996.

The case is a reminder of the potential penal consequences of non-compliance. If a respondent in a London arbitration fails to provide information about assets as required by a WFO obtained from the court in advance of the arbitration, the claimant can expect to see the court follow through with penal remedies on an application for committal. Of course, such an order may have no immediate practical effect if the respondent is outside the jurisdiction but it would bite if he was contemplating travelling to the UK.

What was the background to the committal hearing?

Mr Reznik is a Russian businessman. Alfa-Bank advanced lending facilities to a Russian company which he was believed to own. He provided a personal guarantee governed by English law and subject to arbitration under the rules of the LCIA.

On 22 April 2016, Alfa-Bank served a demand on Mr Reznik pursuant to the guarantee.  On 25 April 2016, Mr Justice Knowles heard and granted Alfa-Bank's without notice application for a WFO under AA 1996, s 44 in support of an LCIA arbitration which it subsequently commenced on 6 May 2016, pursuant to an undertaking given to the court.

The WFO was in standard Commercial Court form and bore a penal notice. It contained a freezing injunction restraining any dealing with or disposal of Mr Reznik's assets up to aggregate values of US$15,462,228 and €2,270,847. Within 72 hours of service, he was required to inform Alfa-Bank's solicitors of all his assets worldwide exceeding US$10,000. Within five working days, he was to swear and serve an affidavit setting out that information. The applicant was permitted to serve the WFO and the arbitration claim form out of the jurisdiction by personal service.

The WFO was personally served on Mr Reznik at an address in Moscow on 29 April 2016. He did not provide any of the information about his assets within the time limits set out in the WFO.  On 9 May 2016, Knowles J continued the WFO.  On 10 June 2016, Alfa-Bank issued the committal application, which was personally served on Mr Reznik in a parking lot in Russia on 22 June 2016.

The application was due to be heard on 8 July 2016 and came before Mr Justice Blair on that day. Mr Reznik did not attend. Blair J adjourned the application so that Mr Reznik could be served with a letter explaining that his imprisonment was being sought and that a videolink facility could be provided for him to attend the hearing from Moscow.

The application, the evidence, and the letter were served on Mr Reznik on 22 July 2016 by leaving them on a table at which he was sitting. That was a little less than the prescribed 14 days before the hearing but Popplewell J held that it was clear that Mr Reznik was well aware of the hearing and insofar as necessary, he ordered an abridgement. Videolink facilities were in place but Mr Reznik did not attend to give evidence.

What did the court decide?

Popplewell J noted that Mr Reznik was subject to a restriction imposed by a Russian court but he also noted that the videolink facility was available and that Mr Reznik had taken no steps to instruct solicitors or counsel in the jurisdiction. He concluded that his absence and non-involvement could properly be said to be deliberate. His stance had been one of defiance. It was in accordance with the public interest that the hearing should proceed.

The judge found the contempts proved. He was sure that Mr Reznik was aware of and understood the relevant provisions of the WFO, was aware that he was failing to comply and intended such non-compliance. He formally declared that Alf-Bank had proved to the criminal standard that Mr Reznik was in contempt in two respects. First, by failing to provide information within the 72 hours and second, by failing to provide an affidavit within five working days.

The judge then considered whether he should proceed to sentence and concluded that an immediate custodial sentence was the one thing most likely to bring Mr Reznik to a realisation of the seriousness with which the court took the matter and to provide the best prospect of belated engagement and compliance with the order.

The principles applicable to sentencing in these circumstances were summarised in Popplewell J's own judgment in Asia Islamic Finance Fund Ltd v Drum Risk Management Ltd and others. The most important factors were prejudice to the claimant and whether the breach was deliberate. The judge found that Mr Reznik's lack of disclosure had been calculated to enable him to move his assets with impunity, to the detriment of the bank, and that all of his conduct was a deliberate and wilful disobedience to the order of the court.

The degree of culpability was high. In order to punish the contempts and encourage compliance with the WFO, he decided to impose a sentence of 18 months' imprisonment. If there were full and prompt compliance, he would expect a very significant proportion of the sentence would be remitted

The other side of the coin: a non-participating respondent overturns an award

Claimants in London arbitrations will not always have the support of the court against respondents who they might consider uncooperative.

It is a feature of the judgment in Alfa-Bank v Reznik that Popplewell J was concerned to check that the respondent was notified of the hearings and of the consequences of non-compliance.

The court will not take a failure to notify lightly.  In Sino Channel Asia v Dana Shipping and Trading Pte Singapore, the Commercial Court granted a declaration pursuant to AA 1996, s72(1) that an arbitral tribunal had not been properly constituted and had made an award without jurisdiction. It followed that the award should be set aside (after an attempt had been made to enforce it in Hong Kong).

The notice of arbitration had been sent by email to an individual at a company different from the respondent, who, the court found, did not have authority to receive it, whether by way of implied actual authority, ostensible authority or ratification. The decision is a reminder that while service is less formalistic in arbitration than in court, it nevertheless has to be effective.

Further Guidance

Lexis®PSL Arbitration subscribers enjoy a wealth of expert analysis. For further full analyses of these three judgments, click below:

  1. Commercial Court judge sentences arbitration respondent to 18 months' imprisonment for contempt (Alfa-Bank v Reznik)
  2. Award set aside under AA 1996, s 72 for ineffective notice of arbitration (Sino Channel Asia v Dana Shipping and Trading Pte Singapore)
  3. Court grants anti-suit injunction in support of arbitration under LCIA 2014 Rules (Mace (Russia) v Retansel Enterprises and SPB Renovation)

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About the author:

James is an arbitration specialist. He has more than 25 years’ experience of ad hoc, trade association, institutional and investment arbitrations as a solicitor in London and Paris, as a former Registrar of the London Court of International Arbitration (LCIA), and as a case assessor for legal costs insurers and third party funders. His background as a lawyer is in international trade, commodities, shipping and insurance.

He trained at Withers in London and then spent four years in the firm’s Paris office. He was admitted as an avocat at the Paris bar (1994 – 2008). Returning to London, he spent more than 13 years at Holman Fenwick Willan in its Trade & Energy group. As Registrar and Deputy Director General of the LCIA in 2008 – 2012, he oversaw the administration of more than a thousand commercial arbitrations and assisted with a review of its Arbitration Rules. He subsequently spent two years at Thomas Miller Legal, assessing and managing a wide range of commercial and investment claims on behalf of insurers and funders. Returning to private practice in 2015, he spent a year in Stephenson Harwood’s International Arbitration group where he assisted on ICC and LCIA arbitrations, principally oil and gas disputes.

James is a Fellow of the Chartered Institute of Arbitrators. At LexisNexis, James works on the Lexis®PSL Arbitration module.