Oil & Gas and Shipping: When may local courts intervene?

In Aquavita International SA v Indagro SA [2022] EWHC 892 (Comm) the Commercial Court upheld an anti-suit injunction restraining a party from circumventing an arbitration clause by seeking ‘interim’ relief from the local Brazil courts requiring a cargo to be unloaded.

Facts

The Applicant, Aquavita, owned a vessel (AQUAVITA ETERNITY) chartered by Indagro under a charterparty dated 25 November 2021 (the “CharterpartyYantaiBills of Lading”) to carry a cargo of ammonium sulphate from Qinhuangdao in China to three ports in Brazil. Some of the ammonium sulphate was shipped under bills of lading issued to a shipper, Yantai Jiahe Agriculture Means of Production Co (“”) (the “”). Yantai was also the seller of a portion of the cargo of ammonium sulphate to Indagro under a sales contract.

In late January 2022 Aquavita received a notice from Yantai claiming that Indagro had failed to make payments due for the sale of Yantai’s portion of the cargo of ammonium sulphate, with the result that the Bills of Lading had not been released to Indagro. As a result, Yantai instructed Aquavita, as the vessel owner, not to discharge the cargo unless presented with the Bills of Lading.

Indagro obtained an order from the civil court in the city where the first portion of the cargo of ammonium sulphur was to be discharged, Sao Francisco do Sul, Brazil, which required Aquavita to discharge the cargo notwithstanding Yantai’s instruction, or face a daily fine of about US$100,000 as well as possible criminal sanctions (the “Sao Francisco do Sul Civil Court Order”).

The Charterparty was governed by English law, with disputes, including those relating to any Bill of Lading issued under the Charterparty, to be “referred to the arbitration of three persons in London.” Aquavita argued that Indagro’s application for the Sao Francisco do Sul Civil Court Order was a breach of the Charterparty’s arbitration agreement and applied without notice for an anti-suit injunction requiring Indagro to withdraw the proceedings in Brazil, to set aside the Sao Francisco do Sul Civil Court Order and to refrain from commencing similar proceedings in relation to the remainder of the cargo.

Mr Justice Fraser refrained from granting an anti-suit injunction in respect of the discharge of cargo at Sao Francisco do Sul or those proceedings, as the discharge was almost complete, but did grant an anti-suit injunction, on a without notice basis, in relation to the balance of the cargo to be discharged at a different Brazilian port.As the anti-suit injunction was issued on a without notice basis, it was reheard at the appropriate ‘return date’.

The Issues

The Parties agreed on the principles to be applied in determining whether to grant an anti-suit injunction. These are:

1. The Court has power to grant such an injunction to restrain proceedings brought in breach of an arbitration agreement under s.37 of the Senior Courts Act 1981, even if no arbitral proceedings are on foot or in prospect.
2. The applicant must show a “high probability of success” that the pursuit of the foreign proceedings involves a breach of the arbitration agreement.
3. If the applicant makes out such a case, it is for the respondent to show a “strong reason” why relief should not be granted.
4. Finally, it must be just and convenient for an anti-suit injunction to be granted.

The issue in this instance was whether or not Aquavita had established a high probability of success that further proceedings in Brazil forcing Aquavita to discharge the cargo would be a breach of the arbitration agreement. Indagro argued that the proceedings relating to the discharge of cargo were interim in nature and as such were not in breach of the arbitration agreement.

Decision

In deciding upon the application, Mr Justice Foxton emphasised that the fact that the Brazilian court, as a non-contractual forum, had granted an order for the interim performance of a substantive obligation was not of itself sufficient to render those proceedings a breach of an arbitration provision, stating that “it has long been established that proceedings which are brought elsewhere than the agreed forum (a "non-contractual forum") for the purposes of security for a claim to be advanced in the agreed forum will not generally be made the subject of anti-suit injunctive relief by the English Court.”

This principle is applied where proceedings are commenced in a non-contractual forum to obtain security for a claim. There are three features of these proceedings in non-contractual forums, namely:

1. The non-contractual forum is not generally concerned with reaching a final decision on the merits of the claim, merely an interim decision that the merits are sufficiently arguable.
2. The relief sought does not involve (even on an interim basis) the granting of the relief which would follow from the final enforcement of the parties’ substantive rights and obligations: for example the payment of a debt to the putative creditor or the provision of disputed contractual performance.
3. The relief can be said to be in aid of the substantive proceedings in the agreed forum, with limited value if no such proceedings are prosecuted to settlement, judgment or award.

Considering these three features, and whether the Sao Francisco do Sul Civil Court Order was capable of being granted without breach of the arbitration provision, Mr Justice Foxton determined that the Sao Francisco do Sul Civil Court Order was, in practical terms, a final determination of Indagro’s position that Aquavita must discharge the relevant portion of the cargo. As such he was satisfied both that it was an attempt to outflank the arbitration agreement, and, as a matter of substance, to obtain relief which would effectively be final from the civil court in Brazil rather than the arbitration tribunal. Furthermore, the order had not been made in support of the arbitration agreement, as the only relief that could be sought in a subsequent arbitration was a determination that the order should not have been made.

As such, applying the principles for determining whether to grant an anti-suit injunction, Mr Justice Foxton was satisfied that the Applicant, Aquavita, had shown a high probability of success that the Brazilian court proceedings involved a breach of the arbitration agreement, and that there was no strong reason not to grant such relief. In making his determination, Mr Justice Foxton stated that “If the public policy of minimal curial intervention reflected in s.1(c) of the 1996 Act has the effect that the English supervisory court will not or cannot act in matters which trespass too closely onto the arbitral tribunal's jurisdiction, that same public policy strongly supports holding the parties to the arbitration agreement, and restraining proceedings before a foreign court which would not be similarly inhibited.”

Ultimately Mr Justice Foxton was of the view that Indagro could seek relief from the arbitration tribunal or English (supervisory) court under section 44 of the Arbitration Act 1996. As such the application for an anti-suit injunction was upheld.

Comment

The risk of a party seeking relief from their local court to seek to gain some strategic benefit (whether perceived or otherwise) where arbitration provisions have already been agreed is an inherent risk with international arbitration. In particular, in the international shipping and commodities arena, given the international identities of the parties involved as well as the changing location of the tangible product (and consequent movable jurisdictional considerations), this is a scenario that occurs frequently.

Where commodities are concerned, it is important that parties choose a procedural seat of arbitration that robustly deals with attempts to circumvent the stipulations of the arbitration agreement, and instead strives to uphold the parties’ original intentions. As Mr Justice Foxton stated, English courts will strive, for reasons of public policy, to uphold not only the jurisdiction of the tribunal but also parties’ common intentions to arbitrate, restraining foreign proceedings in breach of this where necessary.

In this respect, importantly, the decision of Mr Justice Foxton, draws a clear distinction between (i) seeking an injunction from a local court that has the effect of finally resolving the issue in dispute and (ii) seeking an interim measure to ‘hold the ring’ pending the determination of the issues in dispute in arbitration. Mr Justice Foxton’s decision is reassuring that the English courts will not permit the former.

Judge:

Mr Justice Foxton

Reference:

Aquavita International SA v Indagro SA [2022] EWHC 892 (Comm)