England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE CHRISTOPHER CLARKE
[2008] EWHC 2155 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		09/07/2009

Lord Justice Longmore:

Introduction

1. This is an appeal from the judgment of Christopher Clarke J sitting in the Commercial Court [2008] EWHC 2155(Comm) now reported at [2008] 2 Lloyd's Rep 636 and it raises the following question: where an arbitration is proceeding in one Member State of the European Union and one of the parties to the reference becomes insolvent in another Member State, are the consequences of that insolvency, in so far as they affect the arbitration, to be determined by the law of the Member State where the insolvency proceedings have been instituted or the law of the Member State in which the reference is taking place?
2. Since 31^st May 2002 that question has to be answered by reference to Council Regulation (EU) No. 1346/2000 of 29^th May 2000 on Insolvency Proceedings ("the Regulation"). Article 4 of the Regulation provides:-

"1. Save as otherwise provided in this Regulation, the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened, hereafter referred to as the "State of the opening of proceedings".

2. The law of the State of the opening of proceedings shall determine the conditions for the opening of those proceedings, their conduct and their closure……"

Article 4.2 then gives a non-exclusive list of examples of matters which the law of the state of the opening of proceedings is to determine. Two of those examples are:-

"(e) the effects of insolvency proceedings on current contracts to which the debtor is party;

(f) the effects of insolvency proceedings on proceedings brought by individual creditors, with the exception of lawsuits pending."

3. Articles 5 to 15 of the Regulation then identify the cases which come within the words "save as otherwise provided" at the beginning of Article 4.1. They include

i) Third parties' rights in rem (Article 5);

ii) Set-off (Article 6);

iii) Reservations of title (Article 7);

iv) Contracts relating to immovable property (Article 8); and

most relevantly

v) Effects of insolvency proceedings on lawsuits pending (Article 15).

The judge has held (and the appellants do not for the purposes of this appeal dispute) that a pending reference to arbitration is included in the phrase "lawsuits pending." Article 15 itself provides:-

"Effects of insolvency proceedings on lawsuits pending

The effects of insolvency proceedings on a lawsuit pending concerning an asset or right of which the debtor has been divested shall be governed solely by the law of the Member State in which that lawsuit is pending."

4. Once insolvency proceedings had been opened in Poland, the arbitrators had to determine whether the arbitration against the insolvent respondent should proceed. They applied the law of England and Wales to determine that question and decided that the arbitration should proceed. They then made an Award. The Polish Administrator of the insolvent company has submitted that the arbitrators have exceeded their jurisdiction because Article 142 of the Polish Bankruptcy and Reorganisation Law provides:-

"Any arbitration clause concluded by the bankrupt shall lose its legal effect as at the date bankruptcy is declared and any pending arbitration proceedings shall be discontinued."

The Administrator accordingly initiated proceedings under section 67 of the Arbitration Act 1996 for a declaration that the arbitrators had exceeded their jurisdiction but the judge held that the arbitrators were correct to apply English law to the question whether the arbitration should be continued or discontinued; he gave the Administrator permission to appeal to this court.

Background facts

5. Elektrim S.A., the second claimant and appellant ("Elektrim") is a Polish company. It at one time owned a substantial shareholding in PTC, a Polish mobile telephone company. On 3^rd September 2001 Elektrim entered into an agreement known as the Third Investment Agreement ("TIA") with Vivendi Universal S.A. and Vivendi Telecom International S.A., the first and second defendants and respondents, (together "Vivendi"). This was one of a series of agreements by which Vivendi was intended to acquire an interest in PTC.
6. Article 5.11(c) of the TIA contained an agreement to arbitrate ("the arbitration agreement"), which provided for arbitration in London under LCIA rules. It is common ground that the arbitration agreement is governed by English Law (although the rest of the TIA is governed by Polish Law).
7. Disputes arose and on 22^nd August 2003 Vivendi commenced an arbitration pursuant to the arbitration agreement. In the arbitration Vivendi advanced claims that Elektrim had breached its obligations under the TIA by interfering with, or failing to secure, the interest that Vivendi was supposed to obtain in PTC. In early 2007, the LCIA arbitral tribunal (Dr Wolfgang Peter, Professor Jerzy Rajski and Mr Alan Redfern, hereafter ("the Tribunal")) fixed a hearing on liability issues for 15-19 October 2007. The claims made are of the order of €1.9 billion.
8. On 21^st August 2007, Elektrim was declared bankrupt by an order of the Warsaw District Court pursuant to its own petition of 9^th August 2007. As a result of that order, Elektrim became "a bankrupt" for the purposes of Polish Law.
9. The order of 21^st August 2007 of the Warsaw District Court (a) declared Elektrim bankrupt; (b) appointed Jozef Syska, the first claimant, as Court Supervisor; and (c) provided for Elektrim's own management to retain control of all of Elektrim's assets and to take any actions within the ordinary scope of its business. On 5^th February 2008, the Warsaw Court revoked Elektrim's self-administration, and appointed Mr Syska as the administrator over Elektrim's assets.
10. On 22^nd August 2007, Elektrim wrote to the Tribunal and Vivendi saying that, as a result of the Bankruptcy, the arbitration agreement had been annulled.
11. On 15^th October 2007, the scheduled arbitration hearing began in London. At that hearing, the Tribunal heard argument from both parties as to whether the arbitration agreement had been annulled and from Vivendi on the liability issues. On 20^th March 2008, the Tribunal issued its Interim Partial Award ("the Award") on these issues. The Tribunal by a majority (Dr Wolfgang Peter and Mr Alan Redfern, Professor Rajski dissenting) rejected Elektrim's objections to their jurisdiction and declared that Elektrim had breached the terms of the TIA. Questions relating to remedy were left for later consideration.
12. Since the judge's judgment, the Tribunal has rendered a final award dated 12^th February 2009 (also by majority) by which it has awarded (1) damages to the first respondent in amounts of €1,670,180,000 and €38,971,000 and (2) damages to the second respondent in amounts of €166,871,000 and €600,000 (the "Final Award").

The Judgment and submissions of the appellant

13. The judge held that there was a conflict between the general provision of Article 4 declaring that the law of the state of the opening of the proceedings (sometimes called by private international lawyers "the lex concursus") was the law applicable to insolvency proceedings and their effects on the one hand and the particular or 'special' provision that the effects of insolvency proceedings on pending lawsuits or references to arbitration should be governed solely by the law of the Member State in which that lawsuit or reference was pending on the other hand. He then held that the particular provision should prevail over the general provision so that English law was to determine the effect of the Polish insolvency on the arbitration. There was no provision of English law annulling the arbitration agreement or the reference and the arbitrators were right to decide that the arbitration could and should proceed. The fact that Article 4(2)(e) would apply Polish law to "current contracts" (including the agreement to arbitrate) made no difference because it was only an example of the general provision and had to yield to the specific provision of Article 15 applying to pending lawsuits.
14. Mr Gabriel Moss QC contended that the judge was wrong to say that Article 4 and Article 15 were in conflict and submitted

i) Article 4 was the primary article both chronologically and as a matter of construction of the Regulation;

ii) it particularly applied to current contracts and that must include current agreements to arbitrate;

iii) the lex concursus therefore determined the effects of the insolvency proceedings on the agreement to arbitrate;

iv) the agreement to arbitrate must, therefore, be regarded as annulled (or void) from the date of the bankruptcy;

v) the pending reference could not have any independent existence once the agreement to arbitrate ceased to have effect;

vi) the arbitrators had, therefore, no jurisdiction to proceed.

15. Mr Moss accepted that if Elektrim had been a party to an English action, it would be English law (and, no doubt, an English judge) who would determine whether the action should be continued or discontinued or stayed by reason of the provision of Article 15. But he submitted that a pending arbitration was different because it must depend on the continuing validity of the agreement to arbitrate. Once that agreement had been annulled, however, by virtue of the provisions of the lex concursus, the reference could not have any independent existence and had to be regarded as also annulled.

Discussion

16. It is helpful first to consider the rationale between the choices of law provided for by the Regulation. It is not difficult to see that it must in the first instance be the law of the state, in which insolvency proceedings are opened, which must govern

"the opening of those proceedings, their conduct and their closure."

in the words of Article 4.2. It is self-evidently the law of that state which must determine matters such as the amount of the debtor's estate which is available to satisfy creditors and the priority of competing claims on that estate. Likewise it is not difficult to see why pending lawsuits should be excluded from the general application of the lex concursus; a lawsuit (including a reference to arbitration) becomes necessary when there is a need to determine the existence or validity of a particular claim which (if valid) will then be permitted to participate in the insolvency proceedings. Until the validity of that particular claim is ascertained, it has no status in or relevance to the insolvency proceedings at all. If, moreover, a legal action has been begun or a reference to arbitration has been constituted in a Member State other than that in which the insolvency proceedings have been opened, it is natural and understandable that it should be the law of that Member State where the legal action has begun or the reference to arbitration is taking place which should determine whether that action or that reference should be continued or discontinued. Of course if no claim has been initiated before insolvency proceedings are opened, it is entirely appropriate that the lex concursus should determine how any subsequent litigation or arbitration should proceed. But if litigation or arbitration has begun before insolvency occurs the natural expectation of businesses would be that it should be that law that should determine whether the proceedings should continue or come to a shuddering halt.

17. These considerations are reflected in recitals 23 and 24 of the Regulation:-

"23. This regulation should set out, for the matters covered by it, uniform rules on conflict of laws which replace, within their scope of application, national rules of private international law. Unless otherwise stated, the law of the Member State of the opening of the proceedings should be applicable (lex concursus). This rule on conflict of laws should be valid both for the main proceedings and for local proceedings; the lex concursus determines all the effects of the insolvency proceedings, both procedural and substantive, on the persons and legal relations concerned. It governs all the conditions for the opening, conduct and closure of the insolvency proceedings.

24. Automatic recognition of insolvency proceedings to which the law of the opening State normally applies may interfere with the rules under which transactions are carried out in other Member States. To protect legitimate expectations and the certainty of transactions in Member States other than that in which proceedings are opened, provisions should be made for a number of exceptions to the general rule."

The phrase "to protect legitimate expectations and certainty of transactions" is, in my view, apt to include the expectation of businessmen that lawsuits (in which considerable sums of money may have been invested) should come to an appropriate conclusion.

18. It follows from this that Mr Moss is entitled to submit that Article 4 and 15 are not really in conflict and to the extent that the judge regarded the concept of conflict as critical to his reasoning that reasoning is probably not appropriate. That, however, does not get Mr Moss very far. One still has to decide whether the question of discontinuance or no is to be decided by reference to Article 4 or Article 15. In my view it is Article 15 that is the relevant and appropriate Article; once it is accepted that "lawsuit pending" includes pending references to arbitration it must be the Article that deals with lawsuits pending which decides that question. That is consonant with the considerations set out in the previous two paragraphs. It seems to me, therefore, that it is the first step of Mr Moss's argument that is wrong because one cannot say that Article 4 is "primary" to Article 15. Each article has its own sphere of operation and once it is clear that there is a "lawsuit pending" the question whether that lawsuit should continue or be discontinued by reason of the insolvency is to be determined "solely" by English law as "the law of the Member State in which that lawsuit is pending".
19. It is, moreover, a fair criticism of Mr Moss's argument that, while he accepts that Article 15 applies to pending arbitrations in theory, the Article can, if his argument is right, hardly ever apply in practice because the lex concursus will invariably prevail. That would mean that pending lawsuits and pending arbitrations will, in effect, be treated differently which cannot be right.
20. The judge, in his third footnote, points out that the Virgos-Schmit report was to have been the Official Report of the bankruptcy Convention, if one had ever been agreed. The fact that the Convention was never agreed and the Regulation was put in place instead have not detracted from the authority of that Report which is generally regarded as an aid to the interpretation of the Regulation. It is, therefore, worthy of note that paragraph 91 of the report describes Article 4(2)(f) as applying to "executions" brought by individual creditors and "their suspensions or prohibition", before adding

"the effects of the proceedings on lawsuits pending remain subject to the law of the Contracting State, where the lawsuit is pending, ex Article 15 (see point 142)."

21. Paragraph 142 then reads:-

"Article 15

Effects of the insolvency procedure on lawsuits pending.

142. The Convention distinguishes between the effects of insolvency on individual enforcement proceedings and those on lawsuits pending.

The effects on individual enforcement actions are governed by the law of the State of the opening (see Article 4(2)(f)) so that the collective insolvency proceedings may stay or prevent any individual enforcement action brought by creditors against the debtor's assets.

Effects of the insolvency proceedings on other legal proceedings concerning the assets or rights of the estate are governed (ex Article 15) by the law of the Contracting State where these proceedings are under way. The procedural law of this State shall decide whether or not the proceedings are to be suspended, how they are to be continued and whether any appropriate procedural modifications are needed in order to reflect the loss or the restriction of the powers of disposal and administration of the debtor and the intervention of the liquidator in his place."

22. These paragraphs draw a distinction between proceedings by way of execution and proceedings (lawsuits) to establish liability. This is further explained in the textbook by Professor Virgos and Professor Garcimartin "The European Insolvency Regulations: Law and Practice". In the authors' discussion of Article 4.2(f) at para 121(g) on page 76 they say:-

"To understand this provision and its exception (Article 15 IR), a distinction must be made between individual enforcement actions and lawsuits. Examples of the former are measures such as the realisation of an asset or the foreclosure of a security right. Examples of the latter are actions which seek to determine the existence, validity, content or amount of a claim. Accordingly:

(i) The effects on individual enforcement actions, both pending and future, are always determined by the lex fori concursus, including preservation measures. A stay on the normal methods of enforcement against the debtor and his assets is common to all Member States. …….

(ii) The effects of the continuation of lawsuits pending at the moment of the opening of the insolvency proceedings, are, by way of exception, determined by the law of the State where the lawsuit is pending (Article 15).

(iii) The effects on the commencement, after the opening of insolvency proceedings, of new lawsuits are governed by the lex fori concursus,…….."

23. This is further explained in the authors' discussion of the exception contained in Article 15 of the Regulation. They say in paras 255 and 256:-

"255. …This exception to the application of the law governing the insolvency proceedings has a twofold explanation: the fact that, as no enforcement action is involved, the principle of collective action inherent in the insolvency proceedings is not impaired; and the close link with the procedural laws of each State resulting from the fact that the lawsuit is already in course.

Further explanation. The difference between subjecting individual enforcements to the lex fori concursus and subjecting ordinary processes to the lex fori processus is sufficiently explained if we consider the different consequences of each on the insolvent debtor's estate. In the first case, the creditor satisfies his interest directly. In the second case, he obtains a decision on the merits which does no more than allow him to join the body of creditors with an established claim.

256. The use of the term "solely" is aimed at preventing the cumulative application of different national laws. The meaning of this provision is to refer all questions concerning the possible effect of the opening of insolvency proceedings on lawsuits to the procedural law of the State where litigation is pending (or lex fori processus). This law will decide whether the proceedings are to be suspended or may continue subject to any procedural modification necessary in order to reflect the loss or the restriction of the powers of disposal and administration of the debtor, and the intervention of the liquidator in his place, which all Member States must recognise under Article 16."

24. Thus, when one is able to draw breath, it is apparent that both the Official Report and the leading text book on the Regulation support the view that, for good reason, the question whether pending lawsuits should be continued or discontinued in the light of insolvency is to be determined by the law of the State in which those proceedings are pending.
25. To my mind it is clear that the majority of the arbitrators came to the correct conclusion and the judge was correct to decline to set aside their Award. I would dismiss this appeal.

Lord Justice Patten:

26. I agree that the appeal should be dismissed for the reasons given by Longmore LJ.
27. Regulation No. 1346/2000 ("the Regulation") seeks to co-ordinate the operation of cross-border insolvency proceedings within the EC not only by restricting the opening of secondary insolvency proceedings but also by regulating which system of law should govern the main insolvency proceedings.
28. Article 4(1) establishes the general rule that the law applicable to insolvency proceedings and their effect shall be that of the Member State in which such proceedings are first opened. Specific examples are contained in Article 4(2) of aspects of such insolvency proceedings which fall within this general rule. But these examples are not exhaustive and are not therefore intended to circumscribe the application of Article 4 which remains the default position in relation to choice of law. It will therefore apply to all cases where it is necessary for the national courts to consider the effects of the main insolvency proceedings on matters within their jurisdiction unless the particular case falls within one or other of the specific Articles in the Regulation which dictate the application of a different system of law to the question in issue.
29. As Longmore LJ has explained, the only contender for this role in the present case is Article 15. This is limited in terms to lawsuits that are pending at the date on which the relevant insolvency process takes effect. It does not apply to new lawsuits commenced after that date. They remain within the general rule contained in Article 4(1) and Article 4(2)(f) reflects this position.
30. It is accepted for the purposes of this appeal that an existing arbitration is a pending lawsuit within the meaning of Article 15 and Article 4(2)(f). In most cases this is likely to be decisive of the issue as to which system of law should govern the arbitration proceedings because the law of the State of the opening of the proceedings (lex concursus) will itself be purely procedural. An example of this would be a provision of domestic insolvency law similar to s.130(2) or Schedule B1, paragraph 43 of the Insolvency Act 1986, both of which impose an automatic stay on the continuation of legal proceedings except with the permission of the court. Assuming that the relevant provision of the lex concursus does apply to arbitration proceedings, there will be nothing in a law of that kind which would take the case outside Article 4(2)(f). In the case of pending proceedings Article 15 would therefore apply.
31. What makes this case potentially different is the scope of Article 142 of the Polish Bankruptcy and Reorganisation Law which is set out in paragraph 4 of Longmore LJ's judgment. Unusually (and perhaps uniquely) this has the effect of invalidating the arbitration agreement itself and not merely of staying the pending reference. This has therefore led to the argument that it moves the case from the choice of law rule specified in Article 15 into the territory covered by the general rule under Article 4(1). Support for this is said to be found in Article 4(2)(e) which confirms that the general rule applies to "current contracts" to which the debtor is party.
32. Like Longmore LJ, I accept Mr Moss's submission that the judge was wrong to characterise the dispute in terms of a conflict between the provisions of Article 4 and Article 15 of the Regulation. The better view is that the case is within one or the other but not both. But the boundaries of a general rule are necessarily set by the scope of the exceptions to it, the relevant one of which in this case is Article 15.
33. Where I part company with Mr Moss's argument is in its assumption that, in a case which otherwise falls within Article 15, the draftsman of the Regulation intended to prescribe a different system of law to govern the effect of the insolvency proceedings on the arbitration agreement from that which governs the proceedings themselves. Once it is accepted that an existing reference to arbitration constitutes a pending lawsuit within the meaning of Article 15 then the choice of national law to determine "the effects of insolvency proceeding on a lawsuit pending" would appear to comprehend any issues about the validity of the arbitration agreement which would affect the continuation of the arbitration itself. The only distinction made by Article 15 itself is between current and future proceedings. It seems to me unrealistic to assume that the Regulation was also intended to discriminate in its application of the choice of law rule between the types of lawsuit covered by Article 15 simply according to the jurisdictional basis (contractual as opposed to statutory) of the different types of possible proceeding. The present case is within the express terms of Article 15 and, in my judgment, one need look no further.

Lord Justice Mummery:

34. I will simply say, I agree with both judgments.