Jersey Unreported Judgments

Arbitration - reasons for convening a third party and decision concerning payment into court

[2020]JRC117

Royal Court

(Samedi)

18 June 2020

Before     :

Advocate Matthew John Thompson, Master of the Royal Court.

 

Advocate M. St. J. O'Connell for the Representor.

Advocate E. B. Drummond for the Respondent.

CONTENTS

		Paras
1.	Introduction	1
2.	Background	2-17
3.	Convening the third party and service out	18-21
4.	A payment into court	22-37
5.	The exercise of discretion	38-55

judgment

the MASTER:

Introduction

1.        This judgment contains my written reasons for permitting the respondent to convene Mr Petro Parfenyuk ("Mr Parfenyuk") as a third party to these proceedings and to serve him out of the jurisdiction; and my decision on whether the respondent is required to make a payment into court of the amount of the representor's claim.

Background

2.        The background to the present proceedings is recorded in the judgment of Commissioner Clyde-Smith in this matter dated 10^th March 2020 reported at Kinstellar LLC v Eagle Properties (No 14) Limited [2020] JRC 044A.  The present proceedings concern the representor's desire to enforce a costs award made in Mr Parfenyuk's favour.  I therefore gratefully adopt paragraphs 3 to 18 of Commissioner Clyde-Smith's decision for the purposes of this judgment.  The history of this claim leading to the present proceedings was summarised at paragraphs 20 to 27 which I also adopt.

3.        It is also central to this dispute, as noted by Commissioner Clyde-Smith at paragraph 40 (ii) of his judgment, that the defence relied upon by the respondent is not covered by any of the grounds set out in Article 44 of the Arbitration (Jersey) Law 2003 (as amended).  Rather the respondent had raised two other  defences:-

(i)        Whether the representor is entitled to sue the respondent by virtue of the assignment the representor claimed that  Mr Parfenyuk had made to it (see paragraphs 41 to 43).

(ii)       The second defence raised was summarised at paragraph 44 as follows:-

"44.    Turning to the second ground of defence, if the Assignment is valid, should the Court permit enforcement when Eagle claims a right of set-off against its much larger claim under the Pledge?"

4.        The claim under the pledge referred to was summarised at paragraph 5 of the same judgment as follows:-

"5.      A Deed of Pledge dated 5th September 2011 ("Pledge") was also entered into by Eagle as pledgee and the three Cypriot companies (R1, R2 and R3) and the three Ukrainian individuals listed in paragraph 3(i), (ii) and (iii) above (and one other) as pledgors.  The Pledge contains a covenant to pay such that each of the individuals is arguably liable (as principal obligor and not only as surety) for the liabilities of all three Cypriot companies arising under (inter alia) the Subscription Agreement and SHA.  The Pledge is governed by the laws of Cyprus, and contains a non-exclusive jurisdiction clause in favour of the Cypriot courts."

5.        This led Commissioner Clyde-Smith to state at follows at paragraph 46:-

"46.    I note in this respect that in the context of ordinary civil proceedings in this jurisdiction, if an original claim is not disputed, the Court may give judgment, but order a stay of execution pending the trial of a disputed counter-claim - see Jersey Steel v Regal Construction [1971] JJ 1965.  In that case, two conditions were imposed by the Court, firstly, that it was a bona fide counter-claim in an equivalent amount and secondly, that it must be pursued with diligence and promptness.  If the Court can stay execution of a judgment pending the trial of a counterclaim, then I can see no reason why it cannot do so in the case of a Convention award."

6.        He then summarised the issues in this case at paragraph 47 as follows:-

"47.    In this case, Eagle maintains it has  a counter-claim in a liquidated amount against Mr Parfenyuk under the Pledge, and two questions arise:-

(i)        Does Eagle have a right of set-off as against Mr Parfenyuk in relation to this counter-claim, and if so,

(ii)       Does Kinstellar, as assignee, take that assignment subject to that right of set-off?"

7.        Finally, in response to an argument raised by Advocate O'Connell during the hearing before Commissioner Clyde-Smith that a payment into Court should be made of the costs award in Mr Parfenyuk's favour, Commissioner Clyde-Smith stated the following at paragraphs 55 and 56:-

"55.    Turning to Advocate O'Connell's submission that Eagle should provide disclosure and make a payment into Court, I have taken into account a number of factors which might be considered supportive of such orders:-

(i)        Mr Parfenyuk's conduct during the arbitration and exoneration from involvement in any wrong doing and from any liability to Eagle (other than in relation to the Pledge).

(ii)       Mr Parfenyuk's apparent lack of understanding of the English language, in which many of the key documents are drawn, including the Pledge, and his apparent state of health.

(iii)      Kinstellar would appear to have successfully represented Mr Parfenyuk in the arbitration, but have not been paid their fees.

(iv)      The status of the Costs Award as a Convention award, akin to a judgment.

(v)       The Assignment of the Costs Award being valid on its face, as a matter of English law.

As against that Eagle has lost $37.4 million on this venture and claims a right of set-off against Mr Parfenyuk and his assignee in that sum. 

56.      I have no information as to the ability of Eagle to meet the Costs Award and in my view, it would be unjust if the defences raised by Eagle do not ultimately succeed, and Kinstellar then has difficulty in enforcing the Costs Award against Eagle in this jurisdiction.  Kinstellar is in the position, effectively, of a judgment creditor and the policy of the Court is to "satisfy" and enforce Convention awards.  The balance comes down, therefore, in favour of Kinstellar.  Eagle must satisfy the Court that it can meet the Costs Award by making disclosure of its assets and liabilities.  That disclosure may obviate any need for a payment into Court."

8.        He then delegated the case management of the matter to me (see paragraph 58 (iii) of his judgment) and required the respondent within 14 days to provide an affidavit disclosing details of its assets and its liabilities.

9.        Subsequent to Commissioner Clyde-Smith's judgment, an answer was filed on 6^th April, 2020.  That answer at paragraph 9(11); 15 and 16 to 23 described the defence claim in relation to the pledge as a set-off.

10.      The answer also denied the validity of the assignment and pleaded a claim against Mr Parfenyuk as a third party by way of contribution and indemnity based on the pledge.  In respect of this third party claim damages are sought against Mr Parfenyuk in the sum of $37.4 million.

11.      On 24^th March 2020, in compliance with the order of Commissioner Clyde-Smith, Mr Philip Maletroit, a director of the respondent, filed his second affidavit exhibiting the accounts of the respondent.

12.      Those accounts show the following:-

(i)        A cash balance of £22,027;

(ii)       A recoverable of £48,543,722

(iii)      loans due to the parent company/ultimate owner of the respondent in the sum of £31,811,526.

13.      The accounts also record the costs award made in favour of Mr Parfenyuk as a contingent liability because the award was claimed to be subject to a right of set-off.

14.      The notes to the accounts record that the receivable is the arbitration award together with accrued interest. 

15.      At this stage the respondent is solvent on a balance sheet basis because its assets exceed its liabilities.  Whether it will become insolvent at some time in the future if it cannot enforce the arbitration award in its favour, or because its defence of set-off fails is a matter for another day.

16.      It is also right to record that the representor's application was supported by the third affidavit of Kostiantyn Likarchuk sworn on 14^th May 2020 and the affidavit of Mykyta Nota also sworn on 14^th May 2020.  The Respondent filed the third affidavit of Philip Maletroit sworn on 13^th May 2020.

17.      The application to convene and serve Mr Parfenyuk out of the jurisdiction was made by an affidavit sworn by Carter Young of Bedell Cristin on 7^th April 2020, which was supported by a skeleton argument.

Convening the third party and service out

18.      I decided to deal with this application on the papers which the parties accepted.  The threshold to join Mr Parfenyuk as a third party was clearly met.  I have also concluded that permission should be given to serve Mr Parfenyuk out of the jurisdiction on the grounds that Mr Parfenyuk is both a proper party and on the alternative ground that the claim relates to an alleged breach of contract arguably committed by Mr Parfenyuk in this jurisdiction.

19.      Ordinarily I would not produce a judgment in dealing with an application to serve a party out of the jurisdiction.  The general test and the approach to be followed is that set out in Maywal Ltd v Nautech Services [2014] (2) JLR 527 which is the test I have applied.

20.      The only issue that emerges in relation to this decision is that Advocate Drummond quite properly raised whether ground 1(3) of the schedule to the Service of Process Rules 2019 (the "2019 Rules") covered claims against third parties.  Prior to the 2019 Rules, such claims were clearly covered by Rule 7(c) of the 1994 Rules as considered in Rothmer & Ors v Hill Samuel & Ors [1991] JLR 74.

21.      In my judgment the 2019 Rules were not intended to narrow or restrict this gateway.  I therefore construe sub-paragraph 1(3)(b) and the reference to the plaintiff in that sub-paragraph as referring to a plaintiff wishing to bring a third party claim.  I accept this construction sits a little awkwardly with sub-paragraph 1(3)(a) and the use of plaintiff in that sub-paragraph but to construe otherwise would prevent third parties being served out of the jurisdiction at all which is contrary to Rothmer v Hill Samuel and which is an absurd construction.  However, I consider that the 2019 Rules should be amended to make it clear on their face that they extend to third party claims.

A payment into court

22.      In respect of the argument before me there were fundamentally two issues:-

(i)        Whether I or the Royal Court have jurisdiction to order a payment into court; and

(ii)       If I did have jurisdiction whether I should, as a matter of discretion, make such an order.

Jurisdiction

23.      It was common ground between counsel that Commissioner Clyde-Smith was not asked to consider the question of jurisdiction, i.e. whether or not he had the power to require the respondent to make a payment into court of the amount of the costs award in favour of Mr Parfenyuk.  This is because the question of a payment into court arose during the course of submission by Advocate O'Connell as an alternative position to his primary argument that the respondent should not be permitted at all to resist enforcement of the costs award.  Given the focus of the parties at that time on the primary argument before Commissioner Clyde-Smith, it is not surprising that consideration was not given to any jurisdiction to require a payment into court.

24.      Advocate Drummond's primary position was that the court including the Master of the Royal Court did not possess such jurisdiction.  In support of his argument he relied on IPCO (Nigeria) Ltd v Nigerian National Petroleum Corpn [2017] 1 WLR 970, a decision of the Supreme Court of the United Kingdom.

25.      The head note to the decision states as follows:-

"Held, allowing the appeal, that in contrast with section 103(5) of the Arbitration Act 1996, which specifically provided that security might be ordered where there was an adjournment within its terms, there was nothing in section 103(3) which provided that an enforcing court could make the decision of an issue raised under that subsection conditional on the provision of security in respect of the award; that while a court making a decision under section 103(3) would inevitably require some time to make its decision, a delay was only in the nature of "an adjournment" for the purposes of section 103(5) where a court adjourned its decision on enforcement while an application for setting aside or suspension of the award was pending in a foreign court; that once the Court of Appeal had held that the issue whether fraud was an answer to enforcement should no longer await the outcome of the Nigerian proceedings, but should be decided by the English courts, there ceased to be an "adjournment" for the purposes of section 103(5); that, therefore, the order for security was not within the scope of any jurisdiction or power conferred by section 103; that the requirement to provide security could not be justified by reference to general English procedural rules, since the conditions for recognition and enforcement set out in the New York Convention, to which sections 103(2)(3) and (5) gave effect, constituted a code relating to security for an award when the issue was enforcement or adjournment, and the code excluded requiring security for an award in the face of a properly arguable challenge; and that, accordingly, the Court of Appeal's order attaching conditions in relation to the defendant's challenges would be set aside (paras 24-26, 30, 34, 41, 47)."

26.      The Supreme Court also explored whether the general procedural powers under the Civil Procedure Rules could be used to require a payment into court. On this question the Supreme Court observed at paragraphs 44 and 45:-

"44. Finally, I turn to CPR r 3.1(3). In my opinion, this takes IPCO nowhere. It is a power, expressed in general terms, to impose conditions on orders. It cannot authorise the imposition, on a person exercising its right to raise a properly arguable challenge to recognition or enforcement, of a condition requiring security for all or any part of the amount of the award in issue. Its obvious subject matter is the imposition of a condition as the price of relief sought as a matter of discretion or concession, not the imposition of a fetter on a person exercising an entirely properly arguable right. The Court of Appeal was right to underline in Huscroft v P & O Ferries Ltd (Practice Note) [2011] 1 WLR 939 , paras 18-19 that "rule 3.1(3) does not give the court a general power to impose conditions on one or other party whenever it happens to be making an order", and that its purpose is "to enable the court to grant relief on terms" and that the court should "focus attention on whether the condition (and any supporting sanction) is a proper price for the party to pay for the relief being granted", satisfying itself also that "the condition it has in mind represents a proportionate and effective means of achieving that purpose". CPR r 3.1(3) may be relevant where the court only permits the pursuit on terms of a claim or defence which in some respect is problematic: see Deutsche Bank AG v Unitech Global Ltd (No 3) [2016] 1 WLR 3598, paras 72-81 (to which the defendant's solicitors very properly drew the Supreme Court's attention after the handing down in draft of this judgment). But it is entirely clear that CPR r 3.1(3) has no relevance on this appeal.

45.  That is not to say that CPR r 3.1(3) or the court's other general procedural powers may never become relevant in the context of an issue being decided under section 103(2) or (3). I have noted that the court's power to make disclosure and freezing orders is one means by which an award may indirectly be secured, without impinging on a defendant's right to raise challenges under section 103. The court may in the course of such a challenge make all sorts of other procedural orders, and back them where necessary with sanctions. But none of this has anything to do with this appeal. NNPC here had not misconducted themselves or given any sort of cause for the exercise of any procedural discretion to make an order against them or to condition it in any way. Some of the factors to which the Court of Appeal alluded in paras 19 to 23 of its supplementary judgment might have had some possible relevance had NNPC in some way defaulted in the pursuit of a challenge under section 103. As it is, paras 19-21 amount to no more than concern that the award might be difficult to enforce in practice, while para 23 links this to a perception that the previously ordered security now appears insufficient. These were not admissible bases for attaching a condition to the future exercise in this jurisdiction of a right of challenge under section 103(3). The wish in para 22 to provide a "goad to progress" was also an inadmissible basis for securing the award, particularly in the absence of any finding of any relevant prior default by NNPC from which it needed relief, and is (one might add, if it had had any potential relevance) difficult to understand as a matter of fact in circumstances where the fraud issue will from now be case-managed by the Commercial Court."

27.      The relevance of the IPCO case is that there is no material difference between Section 103 of the Arbitration Act 1966 which the Supreme Court was considering and Article 44 of the Arbitration (Jersey) Law 1998.

28.      However, as Advocate O'Connell reminded me, this is not a case where any of the grounds in Article 44 apply.  If the respondent had invoked one or more of those grounds, there would be no reason not to follow IPCO and to take a different approach in Jersey. In such a case, I would have ruled that there was no power in the Arbitration (Jersey) Law 1998 to require a payment into court where one of the grounds contained in Article 44 had properly been invoked.  The existence of a ground properly invoked under Article 44 to challenge enforcement of an arbitral award also means, following IPCO, that the general powers in the Royal Court Rules may not be used to require a payment into court, just as the general powers in the Civil Procedure Rules cannot be used to require such a payment.

29.      However, the basis upon which Commissioner Clyde-Smith has allowed the respondent to defend the claim is not one of the grounds contained within Article 44.  Rather, firstly the respondent has challenged the representor's right to enforce the award because it has challenged the validity of the assignment from Mr Parfenyuk to the representor. The second defence advanced is that the representor, if the assignment is valid, takes the benefit of the costs award subject to the respondent's counterclaim against Mr Parfenyuk.  Commissioner Clyde-Smith classified the claim against Mr Parfenyuk as a counterclaim and reached the conclusion that, because a court facing an undisputed claim and a bona fide counterclaim, could stay execution of a judgment pending trial of the counterclaim, he saw no reason why the same approach could not be taken in the case of a convention award (see paragraph 46 of his judgment). He cited Jersey Steel Co. Ltd v Regal Construction Co. Ltd [1971] JJ 1965 in support of this approach.

30.      I took an analogous approach in Hard Rock Ltd & Anor v HRCKY Ltd [2013] JRC 244B in the context of an argument as to whether or not I should grant summary judgment where there was a bona fide counterclaim worth more than the claim.  The judgment stated the following which I applied at paragraphs 14 and 15:-

"14.    Advocate Sanders in his submission referred me to the Supreme Court 1999 Edition ("the White Book") and the approach I should take in relation to counterclaims under an application for summary judgment.  At paragraph 14/4/14, page 178, the White Book states:-

"Moreover, where the defendant sets up a bona fide counterclaim arising out of the same subject-matter of the action, and connected with the grounds of defence, the order should not be for judgment on the claim subject to a stay of execution pending the trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim (Morgan & Son Ltd v S Martin Johnson & Co [1949] 1 K.B. 107, CA (whole claim admitted)".

15.      Advocate Pallot in response referred me to the next paragraph which provides as follows:-

"On the other hand, the mere fact that the defendant has a counterclaim does not necessarily entitle him to leave to defend (Anglo-Italian Bank v Wells & Davies (1878) 38 L.T. 197; Rotherham v Priest (1879) 49 L.J.Q.B. 104; 41 L.T. 558).  Where therefore there is clearly no defence to the plaintiff's claim, so that the plaintiff should not be put to the trouble and expense of proving it, but the defendant sets up a plausible counterclaim for an amount not less than the plaintiff's claim, the order should not be for leave to defend but should be for judgment for the plaintiff on the claim with costs, with a stay of execution until the trial of the counterclaim or pending further order (Sheppards & Co. v. Wilkinson & Jarvis (1889) 6 T.L.R. 13, CA).  In a proper case e.g. claim by solicitors for costs with a counterclaim for damages for negligence, the Court may order payment into Court of part of the claim with a stay of execution pending the counterclaim (Slater v. Cathcart (1891) 8 T.L.R. 92).""

31.      At paragraph 15 the extract cited also notes the possibility in a proper case requiring a payment into court of part of the claim pending determination of the counterclaim.

32.      Like Commissioner Clyde-Smith at paragraph 46 of his judgment, I analyse the present position as being equivalent to a claim where there is no defence to the claim itself but where the defendant seeks to advance a counterclaim operating as a set-off.  The fact that the claim is to enforce an arbitration award does not make any difference to the above analysis.  Whatever the undisputed claim, where a counterclaim is raised which exceeds the amount of the claim so a set off may apply, the court may require a payment into court of the claim as a condition of permitting the counterclaim to continue.  That power is exercisable under the current summary judgment rules where the court in permitting a counterclaim to be pursued can as a condition require a payment into court.

33.      The case of IPCO therefore only applies to challenges to enforce arbitration awards which fall within Article 44 itself.  It does not apply to other challenges where a party is permitted to resist enforcement of an arbitration award on a ground falling outside Article 44.

34.      The fact that there is no counterclaim against the representor does not affect this analysis. The set off arises from a counterclaim against Mr Parfenyuk.  The effect of the assignment means that the respondent is limited to arguing that it has a much larger counterclaim against Mr Parfenyuk and so the representor cannot be in any better position as assignee than Mr Parfenyuk as assignor.  The nature of the set off however flows from the counterclaim the respondent asserts against Mr Parfenyuk.

35.      For these reasons I conclude that a discretion exists as to whether or not to require a payment into court. 

36.      Finally, in respect of this part of the judgment I should for the sake of completeness add that I consider that I have power to consider the exercise of this discretion.  Firstly, Commissioner Clyde-Smith has delegated the future case management of this action to me.  I consider that such delegation includes the power to make a payment into court because Commissioner Clyde-Smith was alive to that possibility as he expressly ordered the production of the respondent's accounts to see whether a payment into court was necessary.

37.      Secondly, the overriding objective requires me to deal with cases justly and at proportionate cost.  This includes ensuring that cases are dealt with expeditiously and fairly.  Given that arbitration awards falling within the Arbitration Act should generally be enforced, if enforcement is to be delayed, the court must have power to ensure that is at a price of a payment into court if it is appropriate to do so.

The exercise of discretion

38.      I now consider whether I should exercise the discretion that I consider exists.

39.      Firstly, it is clear that the respondent, although solvent, does not have any assets readily available against which the representor can enforce the award, if the defence of set-off fails.  Although the respondent is solvent by reference to its accounts, the three corporate respondents to the arbitration have been struck off from the Companies Registry in Cyprus (see the third affidavit of Philip Maletroit).  While I do not know the present financial position of those companies, if they have been dissolved, putting it at its lowest, experience tells me it is not likely to be easy to recover any assets or ascertain where any assets that belonged to those companies are now held and under whose control.  While therefore the respondent's accounts record the face value of the award plus accrued interest, there must be serious questions about the ability to enforce that award to recover anything at all if the set-off argument (and the under-pinning counterclaim and the third party action to enforce the same) relied upon by the respondent does not succeed against Mr Parfenyuk.

40.      One argument against a payment into court would be that it might be said to improve the position of the representor because it would obtain security in respect of its claim whereas at present it is an unsecured creditor and may face challenges in enforcing its award against the respondent due to the latter's limited cash reserves.  However, Advocate O'Connell was clear that all he sought was a payment into court and he expressly confirmed that the court would act as stakeholder. Any payment into court would not therefore alter the representor's status as an unsecured creditor.  It would therefore be a matter for another day, if the set-off defence did not succeed, whether the monies paid into court could be the subject of any enforcement action by his client or whether they would form part of the assets of the respondent, should at that stage the respondent be placed into liquidation or declared en desastre.  Advocate Drummond accepted these were matters for another day.

41.      Significant time was spent in oral argument about whether or not the respondent was "the victim of a fraud" as referred to in paragraph 12 of the third affidavit of Philip Maletroit and the respondent's skeleton.  The impression those documents created when I read them was that they were inferring that Mr Parfenyuk was involved in the fraud through his company Copenform Investments Limited, the second respondent to the arbitration.  In submission Mr Drummond clarified that his client was not victim of a fraud by Mr Parfenyuk and that no claims in fraudulent misrepresentation had been made out against Mr Parfenyuk or his company.  Based on the extracts of the arbitration award I refer to below he was right to provide this clarification.

42.      In the Commissioner's judgment, Advocate O'Connell's recorded submissions referred to paragraph 117 of the arbitral award. R4 is Mr Parfenyuk and R2 the company he owned.  Paragraph 117 stated:-

""117  R4 gave evidence, and indeed the Claimant relies upon parts of his evidence in support of its case against R5.  In short R4 confirmed that over the years of his association with R5 he had been very much a junior partner.  The Tribunal was impressed by R4's evidence and much of what he said about the management style of R5 was consistent with the evidence from the documents and the other witnesses.  The deterioration in his eyesight and his increasing illness nearly resulting in his becoming blind, the advent of R5's sister, Ms Dubina, who assumed the position of General Director, his diminished shareholding (reducing from 25% to 15%) after the falling out with R5 over a business scandal and his refusal to submit to R5's demands that he give a personal guarantee to support bank lending, meant that his influence over the management of Loture was marginalised.  The Tribunal found his evidence in paragraphs 16-19, and 22-25 of his first witness statement credible and unshaken by cross-examination from R5 and R6 and the Claimant. Moreover, there is evidence from Mr Dobrovolskyi, who joined the management of Loture in September 2011 after the Transaction had been completed, to the effect that even before he arrived a system of reporting had been established which excluded R4.  Similar evidence came from Mr Woodcock that R4 was not involved in the preparation of the Transaction documents."" (underlining added)

43.      This has led Commissioner Clyde-Smith at paragraph 50 to state:-

"It needs to be borne in mind that it has lost through fraud (though not on the part of Mr Parfenyuk) some US$37.4 million on this venture."

44.      The respondent's skeleton argument at paragraph 38.(1) stated:-

"Eagle is the victim of a fraud.  It is taking steps to recover against the fraudsters, which has included taking steps to restore the Cyprus companies used as a vehicle for the fraud, one of which was a company owned and controlled by Mr Parfenyuk, and is seeking to enforce the Pledge against Mr Parfenyuk."

45.      This is an inference that Mr Parfenyuk through the second respondent to the arbitration proceedings was involved in a fraud.

46.      To consider the findings of the arbitration panel, it is therefore necessary to set out certain additional paragraphs of the award as follows:-

"118.   R4's evidence in chief as to the 'patriarchal' style of management by R5 was consistent with the documentary evidence to the same effect and supports the Claimant's case that all the false information in the representations came from or were cleared by R5. R4's evidence to the Tribunal was to the same effect and the Tribunal accepts it.

143.    The Warranty Claims are claims made against the Corporate Respondents for the breach of a number of warranties in the Subscription Agreement that relate to the accuracy of accounting information in Loture Ukraine's accounting books and records. The Warranty Claims are only brought against the Corporate Respondents under the Subscription Agreement. As such, it is common ground that the Individual Respondents are not liable for the Warranty Claims.

249.    Pursuant to Clause 2.1 of the Relationship Agreement, the Individual Respondents undertook not to take actions that could interfere with the rights of the Purchaser (Claimant) under the Subscription Agreement or the Shareholders' Agreement.

253.      R4 submits that he had no involvement in the management and decision-making process of Loture Ukraine in the post-investment period.  The Tribunal accepts this submission.  It is consistent with the documentary record which shows that R4 was not involved in the decisions of senior management and was not copied on management e-mails.  It is also consistent with the evidence of Ms Tymoshenko.

"[Mr Likarchuk] Q. (Interpreted): During your involvement in the affairs of Loture did you have or do you have any grounds to believe that Mr. Parfenyuk was in any way involved in the management of that company?

[Ms Tymoshenko] A. (Interpreted): No, I don't."

254.    Finally, it is supported by the evidence of Mr Woodcock who stated that "during the time of our investment, Mr. Petro Parfenyuk has not been involved in the management."

255.    The Claimant submits that it is unlikely that R4, as a long-term business partner of R5 and a substantial shareholder of Loture Ukraine, did not have access to financial documents of Loture Ukraine other than those that were publicly available.  However, the Claimant is unable to point to contemporaneous evidence that supports this inference. On the contrary, R4 was not copied in on senior management reports and Mr Dobrovolskyi confirms that R4 did not have access to Loture Ukraine's detailed financial records.

392.    The Tribunal is not satisfied that the evidence establishes R4's involvement or participation in any aspect of the Scheme. In this regard the Tribunal refers to its findings in the Contractual Claims Section that R4 had no involvement in the management and decision-making process of Loture Ukraine post-investment and that the documentary record shows that R4 was not involved in the decisions of Senior Management and was not copied on Management e-mails. This is also consistent with the evidence of Ms Tymoshenko.

 

393.    R4 was 100% shareholder in and controlled R2. In circumstances where R4 was not involved in any wrongdoing in respect of the Scheme Claims, there is no wrongdoing to be attributed to R2 in that regard.  Neither is there any other evidence to establish any wrongdoing on the part of R2 in that regard. However R2's complete lack of involvement in relation to Loture Ukraine, as with the case of R3 constituted a failure to use reasonable efforts to promote and develop the business to the best advantage of the Group and it failed to use its rights and powers as required by Clause 5.2(e) contrary to Clauses 5.l(c) and 5.2(e) respectively of the Shareholders' Agreement.  R2 also failed to comply with its obligations pursuant to Clause 3 of Additional Agreement No. 1.

407.    In that regard, it is not necessary for the Tribunal to repeat its findings in respect of the liability of each of R4, R5 and R6 in respect of the specific claims for misrepresentation, breach of contract and participation in the Scheme.  It is clear from the Tribunal's findings in respect of each of those matters that the Tribunal has found that R5 was responsible for the relevant misrepresentation, breach of contract and the Scheme.  The evidence does not establish that either R4 or R6 were party to a conspiracy with R5 in that regard. In particular, given the Tribunal's findings with regard to R4's lack of involvement in Loture Ukraine at the relevant time and the evident animus between R4 and R5 there is no basis for finding that there was even a tacit understanding between R4 and R5 (or indeed R6) or that R4 was involved in even a passive way in any combination or understanding with R5 (or indeed R6) to engage in an unlawful means conspiracy. (underlining's added)

47.      In my judgment it is not possible for the respondent based on the conclusions set out above in particular the parts I have emphasised in the substantive arbitration award to draw the inference that the second respondent and Mr Parfenyuk were actively involved in the fraud.  Yet as noted at paragraph 41 above this is the inference set out in Mr Maletroit's third affidavit and the respondent's skeleton argument.  While Mr Drummond clarified the position, the affidavit and his skeleton should not have created a different impression

48.      That is not to say that the respondent has not been defrauded.  However, there is no evidence at present either in the substantive award or in any affidavits filed before me that Mr Parfenyuk was party to the respondent being defrauded.  The respondent was wrong therefore to imply that I should take this into account as a matter of discretion.  If allegations of fraud are going to be made against Mr Parfenyuk or the company he owned, then such allegations must be set out specifically with the level of detail required for allegations of fraud which are well-known.  Such an inference should not have been made or referred to in the proceedings before me.

49.      Nor do I regard it as relevant to take into account the refusal of the ultimate shareholder to make any payment into court if one is ordered.  That is a matter between the respondent and its shareholder.  It is not however relevant to the exercise of discretion.  If such an order is made and the shareholder does not want to pay then such a decision is likely to lead to the consequence of enforcement being permitted.  The identity of the ultimate owner means that no question of stifling arises.

50.      In respect of the merits of the set-off, it is difficult to form a view about what was intended by Mr Parfenyuk when he and his company became involved in the transaction that led to the arbitration.  However, there is force to the argument that if Mr Parfenyuk only had a limited interest why he would guarantee the liabilities of all the parties involved.  How much force I cannot evaluate.  Such an argument may also not be relevant to the construction of the pledge which is a matter of expert evidence. 

51.      The part of the award that I consider is relevant to my discretion is paragraph 143 which contains the following statement:-

"As such it is common ground that individual respondents are not liable for the warranty claims". 

52.      It is only in respect of the warranty claim that the second respondent was found liable.  The position now adopted by the respondent is therefore contrary to the position it adopted during the arbitration claim. This different position was only adopted by the respondent during the argument on costs.  The costs award dealing with this argument at paragraph 62 was quoted at paragraph 48 of Commissioner Clyde-Smith's judgment.  What is clear to me is that to the extent that the respondent has not advanced earlier the arguments it now seeks to raise in respect of the pledge issue and to the extent that the respondent has changed its position since the arbitration proceedings, these are relevant factors in favour of the representor's application.

53.      In respect of the discretion argument, Commissioner Clyde-Smith at paragraph 55 listed relevant factors leading to his conclusion at paragraph 56.  In his judgment the balance came down in favour of the representor.  Nothing advanced by the respondent before me has persuaded me that I should reach a different conclusion.  Indeed the position if anything is stronger in favour of the representor because of the change of position to which I have referred and because of the acceptance that the court is simply acting as stakeholder should a payment into court be ordered. It is therefore appropriate to require the respondent to make a payment into court.

54.      The amount of that payment into court is the costs award of €800,228.40 plus interest at a rate of 7% per annum from 29^th September 2019 to 10^th March 2020 being the date the respondent was permitted to defend the enforcement proceedings.

55.      To the extent that the representor sought security for costs in addition to a payment in of the costs award and interest described as the costs of enforcement, I am not as a matter of discretion willing to order a payment into court of such costs.  To do so would effectively be granting the representor security for costs.  If the representor wishes to seek security for costs, then it must make a separate application supported by affidavit and must also address whether or not it is entitled to security for costs against the respondent.

Costs and a stay

56.      Subsequent to the main judgment being handed down, Advocate O'Connell applied for costs on an indemnity basis.  He advanced a number of grounds in support of his application but in particular emphasised that the respondent had pursued an insinuation of fraud which was wholly improper.  Advocate Drummond in response made certain criticisms of the approach of the representor including the filing of lengthy affidavits which were not necessary and the failure to provide a schedule of costs.  Both counsel referred me to Brazil v Durant International Corporation [2013] 1 JLR 103 which I have considered in deciding whether there is something in the conduct of the proceedings by the respondent all the circumstances of the case which takes it out of the norm and justifies indemnity costs.  Both also referred me to the Note in MacFirbhisigh  v C I Trustees and Executors Limited [2016] 1 JLR Note 1.  That Note emphasises the importance of standing back and looking at the case as a whole.  In particular, the head note includes the following factors as guidance:-

"(c) The court must decide whether there is something in the conduct of the action or the circumstances of the case in general which takes it out of the norm in a way which justifies indemnity costs.

(d) The discretion to award indemnity costs is wide and must be exercised taking into account all the circumstances and the matters complained of in the context of the overall litigation...

(e) The test requires unreasonable or inappropriate conduct overall, which may not be satisfied by examples that may constitute such conduct. The essential question is whether the conduct makes it just to remove from the paying party the twofold benefit of an order on the standard basis rather than the indemnity basis...

(f) The pursuit of a weak yet arguable claim will not usually, on its own, justify indemnity costs..."  (underlining added)

57.      The conclusion I have reached was that standard costs rather than indemnity costs was justified looking at matters in the round.  While I have criticised the respondent for the contents of its affidavit and skeleton argument insofar as they insinuated fraud, this was not the central issue before me.  There is also some force to the defendant's criticism about the relevance of the affidavits fled and that the representor did not succeed in persuading me to order a payment into court in respect of its costs.  The overall impression I have formed of this dispute is that it is a bitter and hard fought dispute and where the central issue I had to determine was arguable.  Notwithstanding my criticisms of the respondent in relation to the insinuation of fraud, in the round I therefore concluded that standard costs best the justice of the case on this occasion.

58.      Advocate Drummond applied for a stay pending a possible appeal.  He sought a stay of the order sought by the representor until 7 days after determination of any appeal provided that the respondent appealed within the next 10 days.  He argued that the appeal would be rendered nugatory if a stay was not granted because the respondent could not afford to comply with my judgment.  He reminded me of the well-known test on an appeal most recently summarised in In the matter of saisies judiciaires in respect of the realisable property of Robert Tantular [2019] JRC 222dated 11^th November, 2019 at paragraphs 7 and 8.

59.      The decision I reached was that I was not satisfied that the appeal would be rendered nugatory.  Firstly, if the monies paid into court and the appeal was successful then they could be returned to the respondent.  Secondly, insofar as Advocate Drummond contended that his client could not afford to make the payment into court, while this is true by reference to its accounts, the respondent cannot afford either to pursue this litigation and its defence of the present proceedings or enquiries to enforce the arbitration elsewhere.  Indeed as a special purpose vehicle established for the venture in Ukraine it has always been dependent on shareholder support including for the arbitration proceedings.  As the respondent is and always has been wholly dependent on support from its ultimate owner, I do not think it just for the owner to pick and choose in this way to provide funds to resist enforcement of the costs award on the one hand (and enforce the benefit of the arbitration award elsewhere) but to refuse to provide funds for a payment into court as the price for resisting enforcement.  There is no question that the owner cannot meet the cost of a payment in.  As was made clear in the evidence filed, it does not want to.  That is not a basis to conclude that an appeal would be rendered nugatory.

Authorities

Kinstellar LLC v Eagle Properties (No 14) Limited [2020] JRC 044A. 

Arbitration (Jersey) Law 2003 (as amended). 

Maywal Ltd v Nautech Services [2014] (2) JLR 527. 

Service of Process Rules 2019

Rothmer & Ors v Hill Samuel & Ors [1991] JLR 74. 

IPCO (Nigeria) Ltd v Nigerian National Petroleum Corpn [2017] 1 WLR 970. 

Civil Procedure Rules. 

Arbitration Act 1966. 

Arbitration (Jersey) Law 1998

Jersey Steel Co. Ltd v Regal Construction Co. Ltd [1971] JJ 1965. 

Hard Rock Ltd & Anor v HRCKY Ltd [2013] JRC 244B. 

Brazil v Durant International Corporation [2013] 1 JLR 103. 

MacFirbhisigh v C I Trustees and Executors Limited [2016] 1 JLR Note 1. 

In the matter of saisies judiciaires in respect of the realisable property of Robert Tantular [2019] JRC 222