England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice
		Friday, 30th July 2004

MR. JUSTICE EADY:

1. The background to this claim is complex and it is not necessary to explore the allegations in any detail for the limited purposes of the present applications.
2. Three corporate claimants are suing four individuals and two corporations, following the collapse of a business venture. There are allegations of fraud and mismanagement. The claims are partly for financial compensation and partly proprietary in character. There is a complicated contractual history but it is not now disputed that the action should be stayed to arbitration, in accordance with one or more of the various arbitration clauses. No arbitrator has yet been appointed; there is, at this juncture, only an agreement in draft.
3. There are before the court applications by the first and sixth defendants for the discharge of certain freezing, disclosure and disk-imaging orders granted originally by Holland J. on 4th March of this year and subsequently varied. Late in the day, during the hearing itself, there was a further application made to set aside also some associated Norwich Pharmacal orders against third parties.
4. The first defendant, Mr. John Thompson, has proffered undertakings to preserve assets and evidence pending the decision of an arbitrator as to their continuance. Those are not, however, acceptable to the claimants. An order is also sought by the first and sixth defendants that the claimants should return all documents and copies obtained from the defendants and third parties pursuant to the orders, save for any documents of their own, so as to restore the status quo ante as far as possible. It is said that they should not be permitted to retain or profit from the fruits of court orders improperly obtained. Moreover, the first defendant also seeks a full indemnity in respect of the cost of complying with the orders, measured, it is said, in hundreds of thousands of pounds.
5. In the alternative, in so far as it may seem to the court inappropriate to set aside the freezing and disclosure orders, the first and sixth defendants ask for an order under s.44(6) of the Arbitration Act 1996, conferring jurisdiction on the arbitrator to make any appropriate orders at a later stage in connection with the subject matter of those orders.
6. In order to summarise the contractual and commercial background briefly, I gratefully turn to the convenient summary in the skeleton argument of the first and sixth defendants, dated 16th July, at para.54.
7. The first to fourth defendants (Mr. John Thompson, Mr. Steven Biddlecombe, Mr. Mark Merrick and Mr. Nicholas Anderson) worked for Spherion Technology (UK) Limited ("Spherion"), a division of which provided data management services to major commercial clients. Spherion's United States parent decided to close down the European operation and to dispose of that division. The first to fourth defendants sought funding from investors to set up a new company to develop a data management services business. The business venture had been in the contemplation of Spherion prior to its United States parent company's decision to close down the European operation. Spherion had arranged to acquire hardware and software to support the business venture and proposed to purchase another data management business in France and Germany, called Exodus, from the liquidators of that business.
8. Salford Continental Inc., a fund management company, was held out as managing the funds of the New World Value Fund, itself described as an exclusive club of "high net worth individuals". Salford represented to Mr. Thompson and the management team that the funds for the new company, which was (then) called Newco, would be supplied by the New World Value Fund through Salford. The terms upon which it agreed to do so were set out in what was called the term sheet agreement of 3rd April 2002. The parties to that agreement were, among others, Mr. Thompson and Salford. It contains an ICC London arbitration clause.
9. From 3rd April 2002, Salford and, subsequently, Glidepath Holding set about implementing the business plan with the first to fourth defendants. It was exhibited to the term sheet agreement, which permitted Salford to be replaced as a contractual party by another entity which would own Newco. In the event, that right was exercised by Salford, and the other entity was the second claimant in these proceedings, Jeimon Holdings NV.
10. On 6th June 2002, Mr. Thompson became the sole director of the vehicle chosen as Newco, which was a Dutch company called Ruud Koopman, which, on 18th June of that year, changed its name to Glidepath Holding BV. Glidepath Holding was wholly owned by Jeimon Holdings NV at that time. On 19th September of the same year, Glidepath, Jeimon and the first and sixth defendants - i.e. Mr. Thompson and Earlyred Corporation NV - entered into a shareholders' agreement, pursuant to which Earlyred, a company which was associated with Mr. Thompson, became a ten percent shareholder in Glidepath Holding, and the parties set out the terms of their relations as shareholders in that company. The shareholders' agreement contains an arbitration clause to the effect that any dispute under, or arising out of, this agreement shall be referred to a single arbitrator in accordance with the provisions of the Arbitration Act 1996.
11. Also on 19th September 2002, Glidepath Holding and Mr. Thompson entered into a service agreement which set out Mr. Thompson's duties as managing director of the company. That, too, is governed by an arbitration clause which reads as follows:

"Any dispute under, or arising out of, this agreement shall be referred to a single arbitrator in accordance with the provisions of [DUTCH LAW]."

Clause 18 provides that the Thompson service agreement was to be in substitution for any previous arrangement or contract of service between Mr. Thompson and the company or any group company.

12. The parties to the shareholders' agreement entered into an amendment agreement on 29th October 2002, which contains its own arbitration clause corresponding to that contained in the shareholders' agreement (see Clause 8). After the venture had failed, on or about 22nd July 2003, some of the parties entered into a number of agreements terminating their relationships. These consisted of a cash escrow agreement, a share purchase and call option agreement. Those contained clauses conferring jurisdiction on the English courts but, more importantly, the first defendant was a party to none of those agreements.
13. On 22nd July 2003, Mr. Thompson, Glidepath Holding and Jeimon entered into a deed of variation which amended some of the clauses in the Thompson service agreement. The arbitration clause was not itself amended. Mr. Thompson later entered into a deed of termination, which purported to affect the parties' obligations under the earlier agreements. It preserved the right of the parties to the shareholders' agreement to make claims against each other for breaches of that agreement relating to any fraud or for misconduct or wilful concealment.
14. The grounds upon which the court is invited to set aside the orders are (1) that they were made without jurisdiction and (2) that there was a lack of full and frank disclosure.

Put at its simplest, the argument of the first and sixth defendants is that, since the claimants have now, after initial reluctance, conceded a stay to arbitration, it follows that they should have anticipated from the outset that a stay would be granted and recognised that the court has no jurisdiction over the dispute for that reason. To this, the claimants' response is "Non sequitur". Their case is that the court had jurisdiction at all material times.

15. It is necessary to refer to the distinction between the court's inherent powers now reflected in s.37 of the Supreme Court Act 1981 and those under s.44 of the Arbitration Act 1996. Under the latter regime, it is common ground, there is no power to order disclosure of documents going to the substantive issues between the parties but only for the purpose of preserving assets or evidence. The position is to be contrasted with the situation as it stood under the Arbitration Act 1950, which contemplated orders by the court for disclosure and/or interrogatories; that was revoked by s.103 of the Courts & Legal Services Act 1990.
16. Effectively, the court is now confined in such cases to granting relief in support of the relevant arbitration proceedings. The original order of Holland J. was thus wider than would have been permitted on an application under s.44, in so far as he ordered disclosure of defined categories of documents. I am satisfied, however, that the application before him in March was founded upon the court's inherent jurisdiction; that was how it was framed and presented. In any event, an application under the 1996 Act would, technically, be required to be made to the Commercial Court.
17. On 5th May of this year, Andrew Smith J. varied the order and suspended compliance with the disclosure obligations. That suspension remains in force until seven days from the determination of the application to set aside, now before me. It is the claimants' case that, between the time when Holland J.'s order became effective and the suspension of 5th May by Andrew Smith J., the defendants did not in fact give any disclosure beyond what would have been appropriate for preservation of assets or evidence, in any event, or for the purpose of returning the claimants' own documents. Thus, even if the order of 4th March was made without jurisdiction, the claimants submit, it would follow that no prejudice was suffered in consequence.
18. The claimants also submit that their recent concession of a stay on 16th June of this year does not entail, retrospectively, that the court lacked the necessary jurisdiction in March. They argue that the defendants' proposition in this respect is inconsistent with the speech of Lord Mustill in Channel Tunnel Group v. Balfour Beatty Construction Limited [1993] A.C. 334, 362 and 365.
19. The court does have inherent jurisdiction to grant interlocutory relief where there is a need to do so: for example, for the purpose of protecting a party against the anticipated dissipation of assets, even though there is an arbitration clause which may at a later stage lead to a stay. Moreover, the inherent jurisdiction would not be so limited as that under the Arbitration Act, since the court's powers are not confined to preservation of assets but would extend to granting any injunction where it appears to be "just and convenient to do so".
20. The defendants argue that the claimants have been put in the position where, by reason of their conceding a stay on 16th June, they are forced to try to rewrite history by seeking to persuade the court that the court was being asked in March to exercise the narrower s.44 jurisdiction. In my judgment, that is not the tenor of their submissions; nor do they need to rewrite history. Their case is that they applied under the inherent, or Supreme Court Act, jurisdiction and that they obtained relief which the court was entitled to give at that time.
21. Nevertheless, they do not seek to enforce the order to the extent that it embraced disclosure of documents relevant only to substantive issues rather than protection and preservation. They are content to leave matters where they have stood since the order was suspended by Andrew Smith J. on 5th May, but not in the sense that they intend to lift the suspension at some stage in the future, whether seven days after my ruling or at all. That is a concession made without in any way acknowledging that the order of 4th March was wrongly made or that they were confined by the limitations of s.44 of the Arbitration Act.
22. There was, on the evidence before me, an arguable case on the claimants' part at the time of the hearing before Holland J. in March and, indeed, there still is such a case based both upon fraud and mismanagement. There had also been disclosed evidence to justify a reasonable apprehension of dissipation of assets. In those circumstances, I cannot accept that the orders were made without jurisdiction.
23. The defendants' case on non-disclosure is relied upon as an alternative route to setting aside the 4th March order (as varied) altogether, thus enabling them to revert to the status quo ante, recover documents handed over in accordance with the orders under challenge, and, more importantly, to recover the large sums of money (amounting to nearly £½m) so far expended in that exercise. They say that the claimants misled the court and should not be allowed to profit from that wrongdoing.
24. On the subject of wrongdoing, I am invited by the claimants not to lose sight of the wood as I burrow among the trees, and to have in mind that, as to the principal allegations against the first defendant, no substantive answer has been forthcoming, even in the barest outline. Those allegations, for present purposes, can be shortly stated. There are cogently pleaded allegations of secret profits at the claimants' expense and the rendering of forged invoices. Despite the outlay of several hundred thousand pounds on legal costs, no attempt has been made to outline the nature of any proposed defence or to indicate how the case was, in those fundamental respects, wrongly summarised in the evidence before the court or as to why the claimants were dishonest or misguided in their apprehension of dissipation. The defendants' charges of non-disclosure relate to other matters, which I shall address shortly. Meanwhile, however, it is perhaps worth noting the current state of play regarding the defendants' response to these grave charges.
25. In their solicitor's second witness statement of 15th July, there is a section (g), headed "Mr. Thompson's Defences to the Substantive Claims". It is a short section consisting of paras.81 to 86. Two reasons are given for Mr. Thompson's playing his cards close to his chest. First, it is said that if he were to identify the nature of his defence he might be thought to have taken a step in these current proceedings "to answer the substantive claim" for the purposes of s.9 of the Arbitration Act 1996 and, thus, to have forfeited his chance of a stay to arbitration. Secondly, it is said that there has been no sufficient time, having regard to the facts that (a) the claimants' affidavit evidence adduced in support of their claim for the freezing order and other relief extended to 260 pages and six boxes of exhibits and (b) the points of claim run to 210 pages plus schedules.
26. It was further explained that if the solicitor had spent significant amounts of time focusing on the merits, that fact might be relied upon as a reason why the court should not order the claimants to repay Mr. Thompson's costs so far incurred. Nonetheless, despite the bulk of the documentation particularising the claimants' case and despite spending no "significant time" on the merits, the solicitor has pronounced himself "satisfied that there are clear defences to these claims and that Mr. Thompson has a good case for showing that the case against him is substantially misconceived". Yet none of this apparently features in the present application supporting his case that the court was misled by the claimants in March. I am asked to bear this in mind as background, although it may also be relevant to such issues as whether there is a real risk of dissipation and whether further monies should be permitted to be spent on costs, and of course also on matters of discretion generally.
27. As I said, the charge of non-disclosure against the claimants relates to distinct matters and is thus unrelated, apparently, to the underlying merits. First, reliance is placed upon a statement in the supporting affidavit that the claimants' case did not concern the contract known as the shareholders' agreement of 19th September 2002. Yet, some two months later, on 13th May, the particulars of claim included nine claims based on alleged breaches of that agreement. This factor was not apparently mentioned, either, to Andrew Smith J. on 5th May.
28. Secondly, it is said that, although the existence of the arbitration clauses under the various agreements was drawn to the court's attention as part of the claimants' purported "full and frank disclosure", spurious reasons were advanced as to why nonetheless it would be submitted that the proceedings should not be stayed. It later transpired that no such arguments were in fact put forward and, as I have already recorded, consent was given to a stay on 16th June. It is now submitted that:

"if the claimants had properly disclosed the existence and significance of the arbitration clauses between the parties and had not relied upon spurious reasons (now abandoned) why those clauses did not apply, the court would not have made the freezing and disclosure orders at all".

Alternatively, it is suggested that they would not have been made in the same terms.

29. I need to remember two principles in particular. It is not necessary for a party, such as these defendants seeking to set aside orders for non-disclosure, to go so far as to demonstrate that those orders would have been different but for the alleged non-disclosure; nor, secondly, is it necessary to show that the non-disclosure was attributable to bad faith. I would also accept that, in a complex case, it would not necessarily be enough for an applicant for a freezing order merely to mention arbitration clauses which might be relevant and leave it up to the judge on a without notice hearing to spot all the implications and potential problems.
30. I am reminded, on the claimants' behalf, of the considerations identified by the Court of Appeal in Memory Corporation v. Sidhu [2000] 1 WLR 1443:

"In deciding on the consequences of any breach ... the courts should consider all relevant circumstances, including the gravity and remediability of the breach, any excuse or explanation offered by the applicant or his lawyers and any prejudice to the respondent, bearing in mind the overriding objective and the need for proportionality; that the judge-made rule that a without notice order would be discharged if it was obtained without full disclosure could not be permitted to become an instrument of injustice."

31. On the detail, it seems to me important to recognise that the claims made in the particulars of claim under the shareholders' agreement were by way of supplementing the case summarised before the judge. There is, in general terms, no reason why, on a freezing order application, a claimant has to tie himself definitively to each and every claim or cause of action which will ultimately be relied upon. Nor can it be said that any assurance was given that, in this instance, no claim would be made under that agreement. Such an assurance would not in the context have given the claimants, or, I assume, have been perceived by them as giving, an advantage on the applications then before the court.
32. A separate complaint of misrepresentation relates to the Term Sheet Agreement. I have been shown a copy of the freezing application skeleton argument which refers to this at para.50. It was there suggested that the arbitration clause was of no effect as giving rise to any relevant arbitration obligations because, for example, (a) none of the applicants was a party; (b) because an entity called The Red Hot Partnership did not exist at the time it was entered into; and (c) because it would in any event have been superseded by the shareholders' agreement, and the arbitration clause would thus have become inoperative.
33. It is now argued by the defendants that those submissions were wrong or, alternatively, spurious, for one reason or another; in particular, it is said, that it was wrong to give the impression that no applicant was a party, since in fact Jeimon (the second claimant) had been substituted as a party into the agreement at a later stage. It was nonetheless true that Glidepath was not bound as such.
34. It is not necessary for me to rehearse, still less resolve, all the arguments canvassed as to the strengths or weaknesses of the legal contentions put forward by the claimants on 3rd or 4th March. It is not of itself a material misrepresentation on an interim application to advance a legal argument which subsequently fails; nor, alternatively, is there any reason for me to conclude that any of the legal team at that time were putting forward arguments which they knew to be bogus and were thus intending to mislead the court.
35. It is also necessary to remember that, whatever the validity of the arguments arising out of the Term Sheet Agreement, there were still the arbitration clauses in the service agreement and the shareholders' agreements which the claimants had separately drawn to the court's attention and made submissions upon.
36. Turning specifically to the service agreement of Mr. Thompson on 19th September, it is the claimants' contention that this was varied by deed later and that the terms of the deed provide that it was itself to be governed by English law and subject to the English court's jurisdiction. They still argue that this entails that the same applies to the relevant employees' obligations, including those of Mr. Thompson. That is a matter of construction. I am rather doubtful about it but that makes no difference. Again, even if the claimants did misconstrue the effect of the variations, that does not constitute in itself a material non-disclosure.
37. Further arguments of law advanced by the claimants were that the back-to-back agreements of 22nd July 2003 demonstrated a clear intention on the part of all concerned, including those who were not themselves parties to those July agreements, to abandon arbitration and that they themselves were free to sue before the English court in respect of any fraud pre-dating the shareholders' agreement of 19th September 2002; this included what have been labelled for convenience the Spherion fraud and the ETS fraud. The claimants do not resile from those arguments, despite having now conceded that there should be a stay to arbitration. Whether or not they are correct in what are essentially matters of contractual interpretation, I do not recognise the terms of their submissions before the learned judge in March as misrepresentations which would justify the orders sought.
38. I have come to the conclusion that none of the criticisms levelled at the conduct of the claimants in March of this year can be categorised as material non-disclosure; alternatively, if I were to set aside the order, that would be disproportionate and such as to convert, in this instance, the judge-made rule into "an instrument of injustice".
39. I turn to the subject of the Norwich Pharmacal orders. Although Mr. Flint decided not to object to the late introduction of the defendants' application to set these aside, he submitted that they were, in law, misconceived. As is well known, the jurisdiction is to require third parties to provide information and documents on the basis that they have become involved or "mixed up" in wrongdoing. The purpose is to assist the ex hypothesi innocent party to obtain effective redress.
40. Here the relevant third parties were Mr. Thompson's wife, Jolana Dolesjova; James Bloomer, a solicitor said to have been closely connected with Mr. Thompson but who also had acted for Glidepath; Rel Q Europe, who possess documentation relating to the so-called "Rel Q fraud"; and Howell-Jones, a firm of solicitors used by Mr. Thompson (so it is said) to assist in the Rel Q secret profit. Mr. Flint argued that the appropriate persons to apply to set aside such orders would be the third parties themselves.
41. It is obvious that there was no arbitration clause governing the rights, for example, of Mr. Bloomer or Mrs. Thompson. It is difficult to see, therefore, how the submissions on non-disclosure, to which I have referred, could justify setting aside the Norwich Pharmacal orders in any event. Nor do they impinge upon the capacity of the arbitrator, if one is ever appointed, to determine the merits of the issues before him. It is not obvious, therefore, how there has been any infringement of the policy underlying the Arbitration Act 1996. As to the question of legal professional privilege in any of the documents disclosed by Mr. Bloomer, it is to be noted that para.6 of the relevant disclosure order made express provision for the protection of any such rights.
42. Mr. Hunter argued that a coach and horses would be driven through the scheme of the 1996 Act because, as s.43 makes clear, the use of court procedures to procure documents or other material evidence may only be used with the permission of the arbitral tribunal or the agreement of the other parties. What is more, those procedures may only be used if the arbitral proceedings are being conducted in the United Kingdom.
43. In my judgment, however, where no arbitrator has been appointed and no arbitration proceedings have yet begun, the court must have the jurisdiction to make appropriate orders in circumstances where there is evidence of fraud and an apprehension of further dissipation. Just as the freezing order is available for that purpose, for the reasons I have briefly discussed, so, too, the court can assist with Norwich Pharmacal relief; it was to assist to a large extent with protecting the claimants' tracing remedy. The Norwich Pharmacal orders were made within the court's jurisdiction, therefore, and I can see no reasonable basis for me now to set them aside or to seek artificially to restore the status quo ante.
44. I was invited by Mr. Flint at the outset of the hearing to order that the defendants should no longer be permitted to draw on two specified accounts (one Euro and the other sterling) for purposes of funding this litigation; alternatively, I was asked to make the availability of any further such funds conditional upon the defendants agreeing to the speedy resolution of a preliminary issue relating to the ownership of those funds. This seemed to me to be impractical, since the tracing and proprietary claims are at the heart of the litigation and I could see no realistic scope for hiving them off for speedy determination.
45. In the event, however, this was no longer pursued. The claimants are, understandably, concerned that if further drawings are made, the funds will be exhausted in legal costs, leaving nothing to recover if their claims are ultimately successful. Since no application was made by the defendants to me for the release of further monies, I need say no more about it.
46. Mr. Flint also invited me to resolve the impasse over the appointment of an arbitrator by appointing one under s.18 of the Arbitration Act 1996. It is the defendants' contention that Dutch law governs at least the service agreement and that an arbitrator should be appointed with knowledge of Dutch law. The claimants argue that this would be inappropriate.
47. Mr. Neill, however, resisted the suggestion vigorously, as a matter of principle. He submitted that the necessary preconditions for the exercise of that statutory jurisdiction have not been fulfilled. For one thing, there are no arbitral proceedings yet in being; for another, the claimants' contention was founded on the proposition that a fresh agreement had been entered into on 1st July 2004 to the effect that the court should indeed appoint an arbitrator. This is what Mr. Neill described as "the 1st July nonsense". This required consideration of exchanges between the parties' advisers between May and July.
48. I am satisfied that none of these communications led to a concluded agreement for submission to arbitration, which replaced the existing arrangements. What the parties were contemplating was that an ad hoc arbitration agreement would be reached but it never came to fruition. Although the 1st July letter expressly contemplates an application to the court under s.18 of the Act, that was on the hypothesis that the ad hoc agreement had been reached and that the only issue outstanding was that of the arbitrator's identity; at least that is my construction of the letter.
49. Mr. Neill made clear that his clients wished to stand on the existing arbitration arrangements and saw no reason to consent to those rights being diminished or qualified. The court's powers under s.18 could only come into play if there has been some failure in the procedure for appointment; indeed that is the introductory rubric to the section: "Failure of appointment procedure". It is premature to conclude that this has happened. In any event, the statutory requirements for a s.18 appointment have not been fulfilled either. My attention was drawn to CPR Part 62. There has been no relevant notice. In any event, any such application would have to be made in the Commercial Court.
50. I am therefore, as I see it, bound to stay the proceedings under s.9 of the Act in accordance with the parties' agreement, but I have no power to break the current impasse between the parties by making an appointment under s.18. It seems to me to follow that I should order that the first and sixth defendants' application to set aside the orders of March 2004 (as varied) should be dismissed and that I should also dismiss the claimants' application for relief under s.18 of the Arbitration Act.

LATER:

51. So far as 25th March is concerned, costs in the arbitration; 1st July, costs in the arbitration; 5th May it seems to me that the defendants are entitled to their costs of obtaining that significant variation in the order from Andrew Smith J.