What's In A Name? A Salutary Tale Of Financial Instruments, Fraud And Jurisdictional Wrangling

Exclusive jurisdiction clauses or arbitration agreements are meant to ensure that disputes are heard in a single forum that is acceptable to both parties. The tribunal is selected so as to be neutral, independent and experienced in dealing with the issues. When differences do arise, however, not all parties are willing to stand by their agreement. Some deliberately seek to undermine the contractual dispute resolution mechanism, by commencing proceedings in a jurisdiction believed to offer an advantage to the rogue party. Parallel proceedings and a 'race to judgment' may ensue.

In Spliethoff's Bevrachtingskantoor BV v Bank of China Ltd [2015] EWHC 999, the Commercial Court was recently asked to enforce a judgment of the Chinese Courts obtained in blatant breach of an arbitration clause and in contravention of injunctions meant to restrain the Chinese proceedings. The case serves as a useful reminder of the issues, both legal and tactical, that arise where there is a clash of competing courts or tribunals. It also shows that having a foreign judgment recognised in England may not always be the end of the story.

Background: a multiplicity of proceedings

Spliethoff's Bevrachtingskantoor BV ("SBV"), one of the largest Dutch ship operating companies, had entered into two shipbuilding contracts with a Chinese shipyard and a related entity. Both contracts contained London arbitration clauses, and were governed by English law.

Bank of China had provided two guarantees in support of some of the shipbuilder's obligations under those agreements. SBV paid almost US$ 27 million by way of advance instalments to the yard. The contracts provided that, in the event of termination, these advance payments were to be refunded to SBV. Bank of China's guarantees secured that obligation to repay SBV. The guarantees were also subject to English law.

The vessels were so late that SBV exercised its termination rights under the contracts. SBV asked for a refund of the advance instalments. The yard refused. SBV then made written demands under both guarantees, requiring Bank of China to pay it the US$ 27 million. Proceedings in London and in China ensued, and ultimately formed the background to SBV's claims against Bank of China under the guarantees that were decided by the Commercial Court in April 2015.

Arbitration and court proceedings in England:

Two arbitral tribunals, appointed under each of the shipbuilding contracts, both found that SBV was entitled to terminate by reason of the yard's delay, and that SBV was, therefore, entitled to recover the advance payments. Following litigation commenced by the yard in China, SBV obtained anti-suit injunctions to restrain the yard from continuing with the Chinese proceedings in breach of the arbitration clause. SBV was granted an interim injunction by the Commercial Court, and final injunctions from two further arbitral tribunals. The arbitrators also found that SBV was, in principle, entitled to damages for any loss suffered by SBV as a result of the Chinese proceedings - so damages that might amount to the exact same sums that the yard might be awarded by the Chinese Courts, which would in effect cancel out the oppressive foreign proceedings. The yard did not comply with any of the awards or court orders made in England.

Litigation in China:

While the arbitration proceedings were ongoing, the yard sought interim relief from the Qingdao Maritime Court. The Chinese Court made ex parte, interim orders requiring SBV to pay the sum of US$ 16.3 million, or put up a guarantee in that amount, and prohibiting Bank of China, or any of its overseas branches, from making payments to SBV under the guarantees. The yard also advanced substantive claims for damages against SBV in the Chinese litigation. It alleged that SBV had fraudulently conspired with the manufacturers of the engines for the two ships, such that refurbished, and defective, engines had been supplied unbeknownst to the yard, and had been passed off as new. SBV challenged the jurisdiction of the Chinese Court. When the jurisdictional objections were dismissed at first instance, SBV appealed all the way to the Supreme People's Court. This appeal did not operate as a stay of the yard's substantive proceedings, and so SBV decided to participate fully in a number of hearings concerning the substantive claims whilst waiting for the ultimate decision on jurisdiction. The Supreme People's Court dismissed SBV's jurisdictional challenge. Thereafter, following further hearings in which SBV defended the claims on the merits, the Qingdao Maritime Court upheld the yard's fraud claims. It held SBV liable for substantial damages. While SBV...