Posts Tagged Ferrexpo

Sabbagh v Khoury. The Court of Appeal struggles on merits review for anchor defendants.

Update 7 June 2018 on 31 May the High Court [2018] EWHC 1330 (Comm)] backed up the CA’s finding with an interim anti-suit (in arbitration) injunction.

Sabbagh v Khoury at the High Court was the subject of a lengthy review in an earlier post. The Court of Appeal has now considered the issues at stake, in no lesser detail.

In line with my previous post (readers unfamiliar with it may want to refer to it; and to very good Hill Dickinson summary of the case), of particular consideration here is the jurisdictional test under (old) Article 6(1) Brussels I, now Article 8(1) in the Recast, in particular the extent of merits review; and whether the subject matter of the claim comes within the succession exception of Article 1(2)(a) of the Brussels I Regulation.

As for the latter, the Court, after reviewing relevant precedent and counsel argument (but not, surprisingly, the very language on this issue in the Jenard report, as I mention in my previous post) holds in my view justifiably that ‘(t)he source of the ownership is irrelevant to the nature of the claim. ..The subject matter of the dispute is not whether Sana is an heir, but whether the defendants have misappropriated her property.‘ (at 161).

With respect to the application of Article 6(1) – now 8(1), the majority held in favour of a far-reaching merits review. Lady Justice Gloster (at 166 ff) has a minority opinion on the issue and I am minded to agree with her. As she notes (at 178) the operation of a merits test within Article 6(1) does give rise to risk of irreconcilable judgments, which can be demonstrated by reference to the present facts. She successfully, in my view, distinguishes the CJEU’s findings in Kolassa and in CDC, and the discussion at any rate one would have thought, merits CJEU review.

Geert.

(Handbook of) EU Private International Law, 2nd ed. 2016, Chapter 2, Heading 2.2.12.1

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Sabbagh v Khoury. The High Court considers the ‘wills and succession’ exception, (reflexive application of) the exclusive jurisdictional rule for company matters, and anchor defendants under the Jurisdiction Regulation.

Sabbagh v Khoury is great for oral exam purposes. Hand the student a copy of the case and ipso presto, there is plenty to talk about for at least half an hour.

Sana Sabbagh, who lives in New York, claims that the Defendants have variously, since her father’s stroke, conspired against both him and her to misappropriate his assets (“the asset misappropriation claim”) and, since her father’s death, to work together to deprive her of her entitlement to shares in the group of companies which her father ran (“the share deprivation claim”). Wael, first defendant, is the anchor defendant for jurisdictional purposes. He resides and has at all material times resided in London. The other Defendants live or are based abroad.

Defendants contend in essence  (at 83):

a) that the claims against Wael (as noted, the anchor defendant) are so weak that there is no risk of irreconcilable judgments from separate proceedings and so no basis for joinder under Article 6(1) of the Brussels I Regulation (“the merits issue”);

b) that the claims fall outside the Brussels Regulation because the Regulation does not apply to “wills and succession” within the scope of Article 1(2)(a) (“the succession issue”), or challenges to the validity of CCG’s organs within the scope of Article 22(2) (“the Article 22 issue”), and the natural and appropriate forum for determining them is Lebanon (“the forum issue”);

c) that the claims are subject to an arbitration clause (or several arbitration clauses) such that a stay is required by s. 9(4) of the Arbitration Act 1996 (“the stay issue”). Any disputes against parties not bound by the arbitration clause should be stayed as a matter of discretion.

(Point c falls outside the scope of current posting).

Logically looking at point b) first (the exclusion of ‘wills and succession’, the High Court first of all considered the proposition that exceptions to the scope of application need to be applied restrictively.

To my knowledge this has not as such been held by the ECJ. Carr J expresses sympathy with the view that the findings of the ECJ in C-292/08 German Graphics in particular (that the insolvency exception not be given an interpretation broader than is required by its objective), could be given broader application, for all exceptions. I am more convinced by defendants’ argument that one needs to be careful to extend the reasoning of German Graphics outside the insolvency context, given that its ruling is inevitably influenced by the existence of the Insolvency Regulation.

However Mrs Justice Carr suggested that whether or not restrictive interpretation ought to be followed, is not quite the determinant issue: rather, that the exceptions should be applied in similar fashion as the exclusive jurisdictional rules of Article 22 (Article 24 in the recast).  Those jurisidictional rules, which are an exception to the general rule of Article 2 (4 in the recast), Carr J notes, only apply where the action is ‘principally concerned with’ the legal issue identified in the Article. ‘Have as their object’ is the term used in the Regulation, for 3 out of 5 of the Article 22 exceptions. (For the other two, including those with respect to intellectual property, the term is ‘concerned with’. In fact in other language versions the term is ‘concerned with’ throughout – which has not helped interpretation). ‘Have as their object’ was indeed applied by the ECJ as meaning ‘whose principal subject-matter comprises’ in BVG, viz the Article 22(2) exception. (Not in fact as Carr J notes, ‘principally concerned with’ , which the ECJ only referred to because it is the language used in Article 25’s rule on examination of jurisdiction).

The stronger argument for siding with the High Court’s conclusion lies in my view not in the perceived symmetry between Article 22 (exclusive jurisdictional rules) and Article 1 (scope), but rather in the High Court’s reference in passing to the Jenard report. At C/59/10: ‘matters falling outside the scope of the Convention do so only if they constitute the principal subject-matter of the proceedings. They are thus not excluded when they come before the court as a subsidiary matter either in the main proceedings or in preliminary proceedings.’ Granted, the result is the same, however the interpretative route is neater. Like other things in life (it’s single Malt, not so much general tidiness I am referring to), I like my statutory interpretation neat.

Eventually Carr J held that Ms Sabbagh’s action is principally concerned with assets and share misappropriation, in short, with conspiracy to defraud. If successful, the action will of course impact on Ms Sabbagh’s inheritance. However that does not justify the exclusion of Brussels I to her claim.

[The court was also taken on a short comparative tour of the Succession Regulation, with a view to interpreting the succession exception in Brussels I. Interestingly, Carr J noted that indeed that Regulation may serve as a supplementary means of interpretation of the Jurisdiction Regulation, even though the UK is not bound by the Succession Regulation.]

 

Next came the potential application of Article 22(2). This issue not only raised the question of whether the action would at all fall within the Article 22(2) remit; but also, whether in that case that Article needs to be applied reflexively, given that the companies concerned are incorporated in Lebanon. Here inevitably reference was made to Ferrexpo. The High Court however held that no question of reflexive application arises, under the same reasoning as above, with respect to the succession exception: the challenge to the corporate decisions was not one of ultra vires or other ‘corporate’ validity: rather, one of their proper characterisation or correctness. They are not therefore substantially concerned with the Article 22(2) exceptions.

 

The High Court preceded its application of Article 6(1) (joinders /use of an anchor defendant: first defendant is domiciled in London) with a very thorough review of the merits of each of the cases. (At 5, the Court notes that the other defendants live ‘abroad’, most of them seemingly in Greece. However the relevant companies at least seem to be domiciled in Lebanon. Article 6 can only be used against defendants already domiciled in another Member State. For those outside, national conflicts law decides the possibility of joinder).

Article 6 requires that “the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.”  ECJ Case-law (in particular Roche Nederland, C-539/03) has it that it is not sufficient that there be a divergence in the outcome of the dispute: that divergence must also arise in the context of the same situation of law and fact (Case C‑539/03 Roche Nederland and Others [2006] ECR I‑6535, paragraph 26). In Freeport, Case C-98/09, the ECJ added that It is for the national court to assess whether there is a connection between the different claims brought before it, that is to say, a risk of irreconcilable judgments if those claims were determined separately and, in that regard, to take account of all the necessary factors in the case-file, which may, if appropriate yet without its being necessary for the assessment, lead it to take into consideration the legal bases of the actions brought before that court. (at 41). It added that where claims brought against different defendants are connected when the proceedings are instituted, (which implies that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings), there is no further need to establish separately that the claims were not brought with the sole object of ousting the jurisdiction of the courts of the Member State where one of the defendants is domiciled (Freeport, at 54).

Whether the likelihood of success of an action against a party before the courts of the State where he is domiciled is relevant in the determination of whether there is a risk of irreconcilable judgments for the purposes of Article 6(1), was raised in Freeport but not answered by the ECJ for such answer was eventually not necessary for the preliminary review at issue. In Sabbagh, with reference to precedent in the English courts, the High Court does carry out a rather thorough merits review, effectively to review whether the claim against Wael might not be abusive: ie invented simply to allow him to be used as anchor defendant. Carr J’s extensive merits review hinges on ‘to take account of all the necessary factors in the case-file‘ per Freeport. Whether such detailed review might exceed what is required under Article 6(1) is simply not easily ascertained. (The High Court eventually did decide that Article 6(1) applied on account of one of the pursued claims).

Did I say ‘half an hour’ in the opening line of this posting? An exam using this judgment might take a bit longer…

Geert.

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Reflexive application of exclusive jurisdictional rules: The High Court in Ferrexpo

In Ferrexpo, the High Court applied a so-called ‘reflexive’ or ‘mirror’ application of the exclusive jurisdictional rules of Article 22 of the Brussels I Regulation. The case was held in April 2012 – it has only recently come to my attention.

Mr Babakov, a Russian, trading through a variety of companies with registered office in England (collectively known as ‘Gilson’), has a long-running litigation against Mr Zhevago, of Ukrainian nationality, equally trading through a variety of companies, with registered office in Switserland (collectively known as ‘Ferrexpo’). At the core of the dispute lies the control over a Ukrainian mining company named OJSC.

In 2005, Babakov files in the Ukraine, with a view to having a number of shareholder resolutions declared void. These were taken in 2002 and had decided that Gilson’s shares in OJSC were invalid and had to be transferred to Ferrexpo. In 2010 a Ukrainian court held that the shareholder resolutions were indeed invalid. Babakov subsequently initiated new proceedings in the Ukraine, with a view to having the Gilson shares in OJSC restored. On 23 November 2011 the Ukrainian court ordered for Ferrexpo to be joined to this proceeding.

Ferrexpo started a procedure against Gilson in England on 22 November 2011, with a view to declaring that the Ferrexpo shares in OJSC were valid. Gilson argued that the English court had no jurisdiction, for a reflexive application of Articles 22(2) and 28 (part of the lis alibi pendens rule) of the Brussels I Regulation required it to desist. Article 22(2) reads

‘The following courts shall have exclusive jurisdiction, regardless of domicile: (…)

2. in proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs, the courts of the Member State in which the company, legal person or association has its seat. In order to determine that seat, the court shall apply its rules of private international law;’

Ferrexpo argued that 1) the English Courts had jurisdiction on the basis of Article 2 of the Brussels I Regulation, and Gilson’s domicile in the UK; 2) it would not receive a fair trial in the Ukraine, the issue would be resolved fast in an English court, and the English courts enjoy “trust and confidence“.

In Owusu, the Court of Justice famously held that where the (in that case also English) national court had jurisdiction by reason of Article 2 of the Jurisdiction Regulation, it could not decline such jurisdiction on the basis that a Court of another state was a more appropriate forum: forum non conveniens has no place in the Brussels regime. However what Owusu did not resolve, was whether this also applies where the European court wishing to decline jurisdiction, does so because the issue at stake is one of the interests listed in Article 22 of the Regulation (exclusive jurisdictional rules), which just so happens to be located outside of the EU (in the case at issue: shareholder resolutions of a Ukrainian company are the core of the dispute).

The High Court held that Article 22 should so apply: jurisdiction was denied. The decision is problematic, for preparatory works of the Brussels I Regulation indicate quite clearly that the interests that are being protected, are only those located inside the EU (or Lugano States if the application of the Lugano Convention is at stake). The Court could not have been clearer as to the application of Article 2 in Owuso. Granted and as noted, Owusu did not entertain the reflexive application of Article 22, however direction in Owuso is clear. Reference to the ECJ in Ferrexpo would have been merited – although the English courts are reluctant to do so, having burnt their fingers so badly in Owusu.

Geert.

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