UDP Holdings Pty Ltd (rec and mgr appted) v Ironshore Corporate Capital Ltd
[2016] VSC 400
•19 July 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2016 0027
| UDP HOLDINGS PTY LTD ACN 167 100 692 (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) | Plaintiff |
| v | |
| IRONSHORE CORPORATE CAPITAL LTD ON ITS OWN BEHALF AND ON BEHALF OF THE UNDERWRITING MEMBERS OF SYNDICATE 4000 FOR THE 2013 UNDERWRITING YEAR (and another according to the schedule) | Defendants |
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JUDGE: | HARGRAVE J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 June 2016 |
DATE OF JUDGMENT: | 19 July 2016 |
CASE MAY BE CITED AS: | UDP Holdings Pty Ltd (rec and mgr appted) v Ironshore Corporate Capital Ltd & Anor |
MEDIUM NEUTRAL CITATION: | [2016] VSC 400 |
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PRACTICE AND PROCEDURE – Stay of proceeding – Concurrent arbitration involving similar issues – Whether stay of proceeding pending outcome of arbitration or further order appropriate – Sterling Pharmaceuticals Pty Ltd v Boots Company (Australia) Pty Ltd (1992) 34 FCR 287, Reichhold Norway ASA & Anor v Goldman Sachs International [2000] 2 All ER 679 and Danone Asia Pacific Holdings Pte Ltd v Fonterra Co-operative Group Ltd [2014] NZCA 536 applied – Stay ordered.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff/Respondent | Mr P D Crutchfield QC with Dr O Bigos | Ashurst Australia |
| For the Defendants/Applicants | Ms W A Harris QC with Mr W Thomas | Norton Rose Fulbright Australia |
TABLE OF CONTENTS
Background facts................................................................................................................................ 1
Applicable law.................................................................................................................................... 9
Should there be temporary stay?................................................................................................... 16
Conclusion and orders.................................................................................................................... 25
HIS HONOUR:
Background facts
By a share sale agreement dated 11 December 2013 (and other related agreements), Esposito Holdings Pty Ltd (the ‘Seller’) agreed to sell and the plaintiff, UDP Holdings Pty Ltd (the ‘Buyer’), agreed to buy all of the shares in 5 Star Foods Pty Ltd (the ‘Company’) for a total price of about $70 million. The sale agreement was completed on 31 January 2014, but part of the purchase price was payable later. The Seller also had continuing obligations under the sale agreement. The Buyer’s obligations were guaranteed by William Yan Sui Hui, one of its directors. The Seller’s obligations were guaranteed by Antonio Patrick Esposito, its sole shareholder, who also gave personal undertakings in the nature of restrictive covenants.
By clause 15.1 of the sale agreement, the Seller gave certain ‘Seller’s Warranties’ to the Buyer.
By clauses 15.5 and 16.3, the Seller indemnified the Buyer against any Loss (as defined) suffered or incurred by the Buyer in connection with or arising out of the breach of any Seller’s Warranty, and agreed to pay to the Buyer damages for any such breach, unless clause 16 limited or qualified the Seller’s obligations. By clause 16.7 of the sale agreement, the maximum total amount that the Buyer could recover from the Seller for breach of the Seller’s Warranties was limited to $25 million. Clause 16 is not otherwise relevant for present purposes.
By clause 7.6(b) the Seller agreed that, if it knew that a Seller Warranty was or was likely to be incorrect or untrue at or before completion of the sale agreement, it would inform the Buyer of the incorrect or untrue Warranty and why it was incorrect or untrue. By clause 7.6(c) the parties agreed that the Buyer could terminate the sale agreement at or before completion if the incorrect or untrue Warranty had or was likely to have a specified negative effect on the Company’s earnings ($1 million or more) or a negative effect on the value of the Company’s assets ($3 million or more).
By clause 17.1 of the sale agreement, the Seller agreed to pay the costs of the Buyer obtaining a ‘Warranty and Indemnity Insurance Policy’ acceptable to it. The Buyer obtained such a policy from the defendant Underwriters (the ‘policy’).
Clause 17.1(b) of the sale agreement also provided that the policy must include an acknowledgment by the Insurer (as defined) that it was issued to the Buyer ‘despite the limitations of liability contained in this clause 17’, and include ‘a waiver of the Insurer’s rights of subrogation, contribution and rights acquired by assignment against the Seller (except in the case of fraud).’
Clause 17.1(b) further provided that the policy must be in respect of defined ’Warranty Claims’ under defined ‘Insured Warranties’, which did not include all of the warranties and indemnities given by the Seller under the sale agreement and, in respect of some warranties, altered the wording of those warranties in the respects set out in Appendix A to the policy.
Clause 17.2 of the sale agreement provided in effect that, subject to an exception for fraud by the Seller, the Buyer released the Seller from any liability in respect of breaches by the Seller of Insured Warranties and agreed that its ‘sole recourse’ for breach of any Insured Warranty was against the Underwriters under the policy.
Clause 17.5 provides that ‘fraud’ by the Seller means the Seller ‘wilfully concealing any matter or knowingly and deliberately making a false Seller’s Warranty for the purpose of obtaining a financial benefit.’
Clause 17.6 provides that clause 17 prevails if there is any conflict or inconsistency with any other provisions of the sale agreement.
The policy commenced on 17 December 2013, and relevantly provided as follows:
(1) Clause 3.1. The Underwriters agreed to indemnify the Buyer for all ‘Loss’ notified during the policy period (limited to $25 million in the Policy Schedule). There is no issue that the relevant claim was made during the policy period.
(2) Clause 1.1. ‘Sale Agreement’ is defined as the sale agreement ‘as … amended from time to time in accordance with this [p]olicy’.
(3) Clause 4.1. Loss is defined as meaning:
(a) that part of the amount to which the Buyer is ‘contractually…entitled to recover against the Seller under the Sale Agreement for a Breach’,[1] or ‘would have been entitled’ to recover but for the releases in clauses 17.2 of the sale agreement and other limitation provisions; plus
[1]Emphasis added.
(b) any ‘Defence Costs’ (as defined);[2] less
[2]Defence Costs are not relevant for present purposes.
(c) any ‘Recovered Amounts’ (as defined),
in each case disregarding the releases in clause 17.2 of the sale agreement and other limitation provisions.
(4) Clause 1.1. ‘Breach’ was defined to include a breach of clause 15.1 of the sale agreement in respect of the ‘General Warranties’, which form part of the defined ‘Insured Warranties and Indemnities’. As I have said, those warranties were amended in certain respects for the purposes of the policy, but nothing turns on that for present purposes.
(5) Clause 1.1. ‘Recovered Amounts’ means ‘the amount actually paid to or recovered by’ the Buyer plus ‘the value of benefits actually obtained by the [Buyer] as a direct consequence of the matter which gives rise to such Loss, such as a refund, credit or other reduction granted to the [Buyer]’.[3] The reference to ‘credit or other reduction’ obviously includes a set-off which actually reduces an amount for which the Buyer would otherwise be liable to the Seller — such as for any unpaid purchase price.
[3]Emphasis added.
(6) Clauses 9.1 and 9.4. Where a circumstance gives rise to a claim under the policy for a Breach of the sale agreement, the Buyer is required thereafter to ‘act at all times as if uninsured and to take all reasonable steps to mitigate any Loss’; to take all reasonable steps to preserve its rights in respect of any Loss; and ‘not to do anything or omit to do anything which is likely to prejudice the position of the Underwriters.’ However, a breach of these requirements does not relieve the Underwriters of their obligation to indemnify the Buyer ‘except to the extent’ that the Underwriters are adversely affected by that breach.
(7) Clause 9.5. If the Underwriters pay any amount for Loss under the policy, the Buyer must reimburse to the Underwriters amounts including:
(a) any amount which did not in fact constitute Loss under the policy, as mutually agreed or finally determined by an arbitrator or court; or
(b) any Recovered Amounts not already taken into account in calculating the Loss paid by the Underwriters,
and, on reimbursement, the unexhausted $25 million policy limit is ‘restored accordingly’.
(8) Clauses 3.2 and 4.1. The Buyer was not required or obliged ‘to seek recovery of any amounts from [the Seller] prior to making any Policy Claim in respect of any Insured Warranty …’
(9) Clause 10.2. The Underwriters’ rights of subrogation against the Seller for a Breach of the sale agreement are limited to Breaches arising out of fraud by the Seller, but only ‘where the commission of that fraud has been accepted in writing by [the Seller] or is finally determined by a [judgment] of a court of competent jurisdiction’.[4] The defendant Underwriters otherwise waived their rights of subrogation, contribution and like rights against the Seller in the absence of such proven fraud.
(10) Clause 11.1 provides that the Buyer shall not amend the sale agreement without first obtaining the consent of the Underwriters. The Underwriters are entitled to withhold consent to a proposed amendment ‘which could reasonably be expected to prejudice the Underwriters’ rights or liability under [the policy].’
[4]Emphasis added.
The sale agreement was amended by a supplemental deed dated 31 December 2013 and signed by the parties. The Underwriters have not pleaded that this amendment was made without their consent. Nor have they adduced any evidence on this application to that effect. In the circumstances, for the purposes of this application, I infer that the Underwriters agreed to the amendments. Relevantly for present purposes, the supplemental deed inserted a further dispute resolution clause, clause 21A, which requires a dispute ‘concerning [the sale agreement] or its performance’ to be referred to arbitration in accordance with the UNCITRAL Arbitration Rules if it could not be resolved following service of a notice of dispute.
Following the completion of the sale agreement, the Buyer and the Company were soon in financial difficulty. The Buyer contends that this is because of breaches by the Seller of Seller’s Warranties, including Insured Warranties. As a result of these financial difficulties, receivers and managers were appointed to the Buyer and the Company and they commenced the process of selling the Company’s business.
In this context, the Seller referred, among other claims, a claim for payment of the unpaid balance of the purchase price ($9 million) to arbitration under clause 21A of the sale agreement. The amount was claimed from the Buyer and from Mr Hui as its guarantor. The Seller’s initial statement of claim in the arbitration was filed on 30 October 2014.
At the first directions hearing in the arbitration on 18 December 2014, a counterclaim was foreshadowed by counsel for the Buyer and its guarantor Mr Hui, pending the completion of investigations. There was delay in the delivery of a defence of set-off, and a counterclaim, based on alleged breaches of the Seller’s Warranties, including Insured Warranties. It appears that this delay was, at least in part, caused by the fact that the Buyer and the Company were placed in receivership during November 2014, and the receivers needed to make all necessary enquiries.
On 2 March 2015, the Buyer notified the Underwriters of circumstances giving rise to a claim under the policy.
In April 2015, some 5 months after the statement of claim, the Buyer and Mr Hui each filed defences in the arbitration, alleging breaches of the Seller’s Warranties in the sale agreement. In summary, by an amended statement of defence and counterclaim dated 1 July 2015, the Buyer alleges in the arbitration that, through its wholly-owned subsidiary, the Company had been overcharging a major customer for some years, thus giving rise to inaccuracies in the Company’s accounts, and that the Seller’s earnings forecast for the 2014 financial year was overstated as a result. It is unnecessary to set out the detail of the Buyer’s pleading in the arbitration and its pleadings in this proceeding alleging breaches of the Seller’s Warranties, as it is plain that there is a very substantial overlap between the allegations in the two proceedings. The likelihood of overlap was effectively conceded by counsel for the Buyer on the hearing of this application.
It is, however, necessary to consider one particular aspect of the Buyer’s pleadings in the arbitration. In an endeavour to defeat the release given by it to the Seller in clause 17.2 of the sale agreement, the Buyer alleges that the Seller breached clause 7.6(b) because:
(1) it was aware of the overcharging and consequent inaccuracy of the Company’s accounts and earnings forecast before completion of the sale agreement;
(2) those inaccuracies were in breach of the Seller’s Warranties;
(3) notwithstanding its knowledge of the inaccuracies, the Seller failed to inform the Buyer of them; and
(4) as a result, the Buyer lost the opportunity to terminate the agreement under clause 7.6(c) before completion, which it would have done had it been informed of the inaccuracies.
On this basis, the Buyer claims damages of $47.5 million, being the difference between the purchase price ($70 million) and the amount for which the Company’s business was sold by the receivers ($22.5 million). The Buyer seeks to set-off so much of those damages as are necessary to extinguish the Seller’s claim for the balance of the purchase price, and other claims, and to recover the balance as damages. The Buyer alleges that these circumstances prevent the Seller from relying upon the maximum damage limitations in clause 16.7 and the releases contained in clause 17.2. The Buyer does not, however, allege that these results follow because the Seller acted fraudulently within the meaning of clause 17.5 of the sale agreement, such that the release in clause 17.2 does not apply by force of clause 17.2(b)(i).
During the course of the arbitration, the arbitrator has been at times critical of the Buyer for its delay in complying with directions. The receivership of the Buyer may, however, explain some or all of that delay. Moreover, substantial delay in the arbitration has also been caused by the need for the arbitrator to withdraw aspects of his reasons for decision published on 25 September 2015. In further reasons for decision given by the arbitrator on 15 April 2016, the arbitrator reversed his previous decision that no set-off was available against the Seller’s claims. In the course of those reasons and a draft partial award, the arbitrator made it plain that the defences and counterclaims based on the alleged breaches of the Seller’s Warranties formed part of the continuing arbitration. Under version 2 of the arbitrator’s draft partial award the arbitrator proposes to:
(1) declare that the sum of $9 million was due by the Buyer and Mr Hui to the Seller for the unpaid purchase price, with the question of interest reserved, but subject to the Buyer’s defences and counterclaims for breach of the Seller’s Warranties;
(2) adjourn the further hearing of the Buyer’s defences and counterclaims to ‘a further hearing, whether the final hearing or otherwise’; and
(3) declare that the Buyer, Mr Hui and the Company were liable to the Seller for tax refunds of $3,663,847, with the question of interest reserved, subject to another set-off claim which is unrelated to the Buyer’s claims for breaches of the Seller’s Warranties.
Version 2 of the draft partial award has not been made as a binding award, and the arbitration has not otherwise progressed since 15 April 2016, for a combination of reasons, including that:
(1) the arbitrator and senior counsel for the Seller have been on extended leave at different times. The period of delay is, however, only a few months, and the arbitrator was due to return from leave on 15 June 2016;
(2) there has been delay in payment of invoices for the arbitrator’s fees; and
(3) there is an unresolved application by the Buyer and Mr Hui for the arbitrator to recuse himself.
Subject to the recusal application being resolved, and payment of the arbitrator’s fees, it appears that the arbitration has reached the stage where version 2 of the draft partial award can be issued as a binding partial award, pleadings in respect of the alleged breaches of the Seller’s Warranties are complete, and the arbitrator is in a position to make procedural orders for the filing of evidence and submissions in advance of a contested hearing on those issues.
In the meantime, this proceeding was commenced in February 2016. The Buyer claims the sum of $25 million under the policy on the basis of the same alleged breaches of the Seller’s Warranties as are pleaded by it and Mr Hui in the arbitration. In their defence, the Underwriters admit some of the alleged breaches, challenge the amount of the Buyer’s alleged loss in respect of those breaches, challenge the alleged amount of the other breaches which they do not admit, and contend that one of the alleged breaches is not covered by the policy. As I have already noted, there is a clear and very substantial overlap with the issues raised in the arbitration.
This proceeding and the arbitration appear to have reached about the same stage in relation to the alleged breaches of Seller’s Warranties. Pleadings are complete and both are ready for the making of pre-hearing orders for evidence and submissions.
In these circumstances, the Underwriters have applied to the Court in its inherent jurisdiction for a temporary stay of this proceeding, pending the finalisation of the arbitration or further order. They contend that this is the preferred course for a number of discretionary reasons, including that their rights under the policy will be prejudiced if this proceeding is determined in advance of the arbitration. The Buyer opposes the stay. Before considering the rival submissions, it is necessary to summarise the applicable law concerning the approach to the exercise of the Court’s discretion in a case such as the present.
Applicable law
To begin with, I will set out the relevant principles which apply in circumstances where there are proceedings pending in two courts which raise parallel claims, or where there is a substantial overlap of issues.
It is first necessary to note that there is a substantial difference between an application for a permanent stay, and an application for a temporary stay or adjournment pending the completion of other proceedings which are likely to impact the outcome of the proceeding in question. In Sterling Pharmaceuticals Pty Ltd v Boots Company (Australia) Pty Ltd, Lockhart J pointed to the difference between the two forms of stay:[5]
There is obviously a substantial difference between a motion for a permanent stay or dismissal of a proceeding and a notice of motion for a temporary stay or lengthy adjournment of a case. … The court remains in full control of the proceeding before it when it is stayed only temporarily …
[5](1992) 34 FCR 287, 294 (‘Sterling Pharmaceuticals’).
Earlier, Lockhart J stated:[6]
The court has a general power to control its own proceedings, and that power extends to enable it to order a temporary stay of proceedings in various circumstances, including the case where proceedings are pending in another court and it is desirable that those proceedings should proceed to their conclusion first …
[6]Ibid 290–1.
Lockhart J then proceeded to list a catalogue of factors to be taken into account by a court in considering whether to grant a temporary stay pending the determination of proceedings in another court involving the same or substantially similar issues:[7]
[7]Ibid 291.
In my opinion, relevant considerations to be taken into account in the present case include the following:
[1]Which proceeding was commenced first.
[2]Whether the [de]termination of one proceeding is likely to have a material effect on the other.
[3]The public interest.
[4]The undesirability of two courts competing to see which of them determines common facts first.
[5]Consideration of circumstances relating to witnesses.
[6]Whether work done on pleadings, particulars, discovery, interrogatories and preparation might be wasted [if the stay is not granted].
[7]The undesirability of substantial waste of time and effort if it becomes a common practice to bring actions in two courts involving substantially the same issues.
[8]How advanced the proceedings are in each court.
[9]The [application of the principle that the] law should strive against permitting multiplicity of proceedings in relation to similar issues.
[10]Generally balancing the advantages and disadvantages to each party.
In Commonwealth Bank v White (No. 3),[8] Warren J (as she then was) expressly approved this list of relevant factors, and described factor [10] as involving ‘weighing up issues of justice and convenience’.[9] Moreover, as Warren J noted, the approach in Sterling Pharmaceuticals[10] was referred to with approval by the High Court of Australia in Henry v Henry,[11] and also in CSR Ltd v Signa Insurance Australia Ltd.[12]
[8][2000] VSC 259.
[9]Ibid [29].
[10](1992) 34 FCR 287.
[11](1996) 185 CLR 571, 590.
[12](1997) 189 CLR 345, 390, footnote 98.
The Sterling Pharmaceuticals[13] case involved parallel proceedings in Australia and New Zealand. The plaintiff in each case was a subsidiary of a United States company and the defendant was a subsidiary of a United Kingdom company. Although the subsidiaries were separate legal entities, they operated to a degree through common management and control and had other links. Lockhart J considered the above list of factors and determined that, on the facts of the case, the proceeding in Australia should effectively be stayed on a temporary basis, although not in those words. His Honour ordered that the Australian proceeding be ‘stood out of the list’ to a date about eight months later, with liberty being reserved to either party to restore the matter to the list on reasonable notice in the event that circumstances changed.[14]
[13](1992) 34 FCR 287.
[14]Ibid 294.
In reaching his discretionary decision, Lockhart J noted that the parties in the two proceedings were different and said that no issue estoppel would arise in either country as a result. However, the result in the proceeding which was determined first would likely, ‘as a practical matter’, affect the conduct of the proceeding in the other country involving similar issues.[15]
[15]Ibid 291.
The factors which affected the exercise of his Honour’s discretion included:
(1) the substantial identity of issues in the two proceedings, although the issues in the New Zealand proceeding were wider;[16]
[16]Ibid 292.
(2) the likelihood that the result in the New Zealand proceeding would either ‘determine the result of those issues in the Australian proceeding’ or affect the court’s management of the Australian proceeding ‘by giving directions with the benefit of the findings in New Zealand’;[17]
[17]Ibid.
(3) the fact that the New Zealand proceeding was more advanced, and a trial in New Zealand could take place before the end of year;[18]
[18]Ibid 290, 293.
(4) the ‘substantial measure of duplication in the preparation for and the conduct of the final hearing of the two proceedings’;[19]
[19]Ibid 292.
(5) the fact that duplication of that kind would be ‘especially burdensome to both parties and their expert witnesses’, especially in circumstances where there were a large number of expert witnesses.[20] The resulting inconvenience to expert witnesses was obvious;[21]
[20]Ibid.
[21]Ibid.
(6) that ‘it cannot be right that necessary calls are made upon the resources of this Court or the High Court of New Zealand in relation to the final hearing of the issues substantially common to both proceedings’;[22]
[22]Ibid 292–3.
(7) the burdens and duplications which would be placed on the officers of the two parent companies in the United Kingdom and the United States;[23]
[23]Ibid 293.
(8) both proceedings were public interest proceedings;[24]
(9) the proceedings in New Zealand were commenced before those in Australia;[25] and
(10) that ‘in all the circumstances, having balanced the advantages and disadvantages to each party in the Australian proceeding, [his Honour was] satisfied that the interests of justice [were] best served by acceding to [the respondent’s application]’. However, as indicated above, the Australian proceeding was not stayed but merely taken out of the list for eight months with liberty to apply on reasonable notice if circumstances changed.
[24]Ibid.
[25]Ibid.
As emphasised above, the Sterling Pharmaceuticals principles concern proceedings pending in two courts. This case concerns proceedings pending in this Court and in an arbitration. In Reichhold Norway ASA & Anor v Goldman Sachs International,[26] the Court of Appeal in England dismissed an appeal from a decision of a High Court judge to grant a temporary stay of a court proceeding until the conclusion of an arbitration which raised like issues. Lord Bingham CJ (Otton and Robert Walker LJJ agreeing) found no error in the exercise of the judge’s discretion.
[26][2000] 2 All ER 679 (‘Reichhold Norway’).
The trial judge weighed a number of relevant factors, including the interrelationship between the two proceedings and the fact that the outcome of one set of proceedings might have an important commercial effect on the conduct of the other.[27] Lord Bingham carefully considered all the factors taken into account by the trial judge and, finding no error, upheld the discretionary decision. In answer to a submission that upholding the judge’s order ‘would open the door to a flood of applications’ of like kind,[28] Lord Bingham stated that he recognised this and other risks but had:[29]
no doubt that judges (not least commercial judges) will be live to these risks. It will very soon become clear that stays are only granted in cases of this kind in rare and compelling circumstances.
[27]Ibid 684–5.
[28]Ibid 690.
[29]Ibid (emphasis added).
In Danone Asia Pacific Holdings Pte Ltd v Fonterra Co-operative Group Ltd,[30] the Court of Appeal in New Zealand considered a case involving proceedings in the High Court at Auckland and an arbitration being conducted in Singapore. In the High Court proceedings, Danone sued Fonterra and two of its wholly-owned subsidiaries. Simultaneously, Danone issued a notice of arbitration to the subsidiaries. The two cases sought similar relief and involved parallel issues. A High Court judge temporarily stayed Danone’s proceeding pending resolution of the Singapore arbitration.[31] That stay was made until further order and was conditional on Fonterra pursuing the arbitration expeditiously. In the judge’s view, as expressed by the Court of Appeal, the case was ‘rare and compelling’, because the continuation of the High Court proceeding was ‘oppressive to [Fonterra], unnecessarily duplicative and contrary to the interests of justice’.[32]
[30][2014] NZCA 536 (‘Danone v Fonterra’).
[31]Ibid [5].
[32]Ibid [6].
The Court of Appeal determined the case on the basis that the onus was on Fonterra to establish that there would be a real risk of injustice if it was required to take procedural steps in the High Court proceeding while the Singapore arbitration continued.[33] The Court of Appeal was satisfied that Fonterra had discharged that onus, on the basis of the following factors:
[33]Ibid [15].
(1) the Singapore arbitration would inevitably be resolved before the High Court proceeding;[34]
[34]Ibid [13].
(2) the arbitration would ‘probably determine the scope of’ the relevant agreement. That would ‘inevitably’ require amendment to Danone’s statement of claim in the High Court proceeding and, in those circumstances, there was no compelling reason to require Fonterra to file a defence at that stage;[35]
[35]Ibid [16(a)].
(3) further, in those circumstances it was ‘premature and potentially onerous’ to order discovery in the High Court proceeding at that stage;[36]
[36]Ibid [16(b)].
(4) if a case management conference were held, ‘the door would be open to Danone to raise further interlocutory issues’;[37]
[37]Ibid [16(c)].
(5) Fonterra and its subsidiaries were:
entitled to avoid having to face and defend two overlapping cases simultaneously, especially when there [were] reasonable prospects that the first in time (the Singapore arbitration) may well resolve all the issues between the parties, including critical issues relating to the interpretation and application of the Supply Agreement which will have implications for the High Court proceeding. The obligations proposed in respect of pleadings and discovery in the High Court proceeding [were] consequently of no evident benefit at this stage and may prove unnecessary;[38]
[38]Ibid [16(d)] (emphasis added).
(6) the timetable for the Singapore arbitration was ‘tight’ and running simultaneous cases would be burdensome for Fonterra’s employees. Orders for costs would not compensate Fonterra for the unnecessary time and effort expended by its employees;[39]
(7) the general principle that a party and its privies should not be twice vexed in the same matter;[40] and
(8) the proceeding would only be stayed on a temporary basis and that, if necessary, the High Court proceeding could proceed after resolution of the arbitration.[41]
[39]Ibid [16(e)].
[40]Ibid [18].
[41]Ibid [19].
Based on the cumulative effect of these factors, the Court of Appeal determined that there was ‘a real risk of injustice to [Fonterra] and its subsidiaries if they were required to be diverted from the Singapore arbitration by taking further steps’ in the High Court proceeding.[42]
[42]Ibid [17].
Based on Sterling Pharmaceuticals, Reichhold Norway and Danone v Fonterra, I conclude that the Court has the power to grant a temporary stay of a court proceeding pending the resolution of an arbitral proceeding concerning parallel or substantially overlapping issues. Such an order is properly characterised as a temporary stay made for case management purposes and in the interests of justice. Such a stay should be until further order, so as to allow any affected party to apply for the stay to be lifted where circumstances change.
Temporary stays of this kind should only be made following consideration of all relevant factors or circumstances affecting the justice of the particular case. The factors mentioned in the three cases are not exhaustive, and it is not necessary to consider each factor in each case. The factors mentioned are, however, a useful guide to the kinds of circumstances which will be relevant in considering such applications.
As to the statement in Reichhold Norway that temporary stays of this kind will only be made in ‘rare and compelling’ circumstances, I interpret that as requiring a convincing case; so that where the relevant factors in the particular case, including the interests of justice, are evenly balanced the discretion should be exercised against granting a stay.
Should there be temporary stay?
The Underwriters contend that this proceeding should be stayed until the determination of the arbitration or further order. In other words, they propose a temporary stay, reserving to the Buyer the right to apply to the Court to lift the stay if circumstances change — for example, if the Buyer, having acted with reasonable diligence, is unable to have its set-off defences and its counterclaims determined in the arbitration within a reasonable time. On the basis of the principles set out in Sterling Pharmaceuticals, and the extension in Reichhold Norway and Danone v Fonterra of similar principles to circumstances such as the present, where there are court and arbitral proceedings involving parallel or substantially overlapping issues, the Underwriters contend that this is a compelling case for a stay. The Buyer resists that course. The Underwriters’ principal contentions are as follows.
The Buyer’s principal contention is that the principles stated in Sterling Pharmaceuticals[43] are not engaged, because the Court should give primacy to the commercial arrangement agreed to by the Underwriters under the interrelated sale agreement and policy, to the following effect:
[43](1992) 34 FCR 287.
(1) the Buyer released the Seller from breaches of the Seller’s Warranties except in cases of fraud as defined (sale agreement, clause 17.2);
(2) in return for that release, the Seller agreed to pay the policy premium. The policy expressly limits the Underwriters’ subrogation rights to fraudulent breaches of warranty found by a court (policy, clause 10.2);
(3) the policy provided cover for Loss up to a limit of $25 million on the express basis that the Buyer was not required to seek recovery from the Seller before making a claim under the policy (policy, clauses 3.2 and 4.1);
(4) the policy expressly provides that where the Underwriters pay any amount under the policy that amount must be reimbursed to the Underwriters to the extent that:
(a) it is later ‘finally determined by an arbitrator or court’ that the Buyer was not contractually entitled to recover that amount against the Seller (disregarding the releases in clause 17.2); or
(b) the Buyer later receives any Recovered Amount in reduction of that amount (policy, clause 9.5); and
(5) upon such reimbursement, the ‘unexhausted’ policy limit of $25 million is restored (policy, clause 9.5(c)).
On this basis, the Buyer contends that the obvious commercial intention of the parties to the policy was to permit the Buyer to recover Loss from the Underwriters before determination of any claim which the Buyer may make against the Seller in compliance with its obligations under clause 9.1 of the policy to act as if uninsured and take all reasonable steps to mitigate loss.[44] On this basis, the fact that the Buyer has been ‘dragged into the arbitration’ by the Seller, and has defended itself and brought a counterclaim, does not deprive it of its contractual right to pursue a claim under the policy. The policy was intended to provide for payment by the Underwriters when a claim was made and then for the Underwriters to have the subrogation rights they bargained for in the policy, including the right to take over the counterclaim and rely on the Buyer’s attempt to meet the releases in clause 17.2 of the sale agreement by reliance on clause 7.6(b). If the amendment to the sale agreement to allow arbitration prejudices their subrogation rights, they had the right to object to that amendment so ‘that’s their bad luck’.
[44]Counsel for the Buyer sought to characterise the Underwriters’ stay application as involving, or depending upon, a contention that the policy required the Buyer to exhaust its rights against the Seller before claiming under the policy. Counsel for the Underwriters disavowed any such contention.
I do not accept that this broad submission, assuming but not deciding it is correct, determines this application. For the following reasons, the principles in Sterling Pharmaceuticals[45] and Reichhold Norway[46] are engaged:
[45](1992) 34 FCR 287.
[46][2000] 2 All ER 679.
(1) While I accept that the Buyer did not initiate the arbitration, the fact remains that it faces a claim for the unpaid purchase price which it wants to defend. It has done so by claiming a set-off based on alleged breaches of the Seller’s Warranties and clause 7.6(b) of the sale agreement.
(2) The Buyer has also made a counterclaim for $47.5 million on the same basis.
(3) On the basis of the evidence given by the Buyer’s solicitor, that the receivers are continuing in office to pursue ‘recovery of the [Buyer’s] claims relating to breaches of warranties given by [the Seller]’, I infer that, absent the Seller’s referral to arbitration, the Buyer would itself have sought to raise its breach of warranty claims under clause 7.6(b) by its own referral to arbitration.
(4) But, whether or not that is so, the fact is that those claims have been made and fully pleaded in the arbitration. The position has been reached where there are currently pending two proceedings involving parallel or substantially overlapping issues.
(5) Moreover, for the reasons given below, the interests of the Underwriters on the threshold issue raised by the Buyer’s set-off defence and counterclaim, that the Seller’s Warranties were incorrect or untrue, differ from the Buyer’s interests. So there are difficulties with the contention that the Underwriters should pay under the policy and exercise their rights of subrogation in the arbitration.
The Buyer contends that, applying the principles in Sterling Pharmaceuticals and Reichhold Norway, no stay should be granted. Its principal contentions may be summarised as follows.
First, although it was ultimately acknowledged in oral argument that there is a substantial overlap of issues in this proceeding and the arbitration concerning the alleged breaches of the Seller’s Warranties and the Buyer’s claims under clause 7.6(b), the Buyer points to the fact that, as presently pleaded in this proceeding, the Underwriters admit two of the three alleged breaches concerning overcharging while simultaneously refusing to undertake to be bound by the result in the arbitration.
Second, whatever overlap of issues there may be, the Buyer contends that there is ‘no identity or even proximity of parties’ in the two proceedings, and that this application is therefore distinguishable from Sterling Pharmaceuticals because in that case there was a closer connection between the parties as members of the same international groups of companies.
Third, the Buyer contends that the arbitration has ‘stalled’ and that there is uncertainty as to whether it will ever be finalised. The Buyer relies upon the following circumstances in support of this contention:
(1) A considerable amount of time has elapsed since the arbitration was commenced in October 2014. It may be inferred that this proceeding will proceed with greater expedition, even accepting that the two proceedings are presently at about the same stage with respect to the Buyer’s claims for breach of the Seller’s Warranties.
(2) The recusal application is unresolved and there is a ‘possibility’ that the Buyer or Mr Hui will apply to this Court for removal of the arbitrator if he does not agree to withdraw.
(3) There is an unresolved issue concerning unpaid arbitrator’s fees.
(4) There is no certainty that the Buyer will wish to proceed with its counterclaim, given the apparent lack of assets currently held by the Seller, notwithstanding that it received $63 million of the purchase price in January 2014.
(5) While the arbitration remains stalled, version 2 of the draft partial award remains unfinalised.
I do not accept the Buyer’s contentions. In my view, the circumstances as a whole favour granting a temporary stay of this proceeding.
First, I infer that the arbitration will likely proceed.
For the Seller’s part, it has the benefit of version 2 of the draft partial award. It is in its commercial interests to proceed with the arbitration for the purposes of defeating the Buyer’s set-off defences and counterclaim and obtaining a final award for amounts totalling $12,663,847 plus interest and costs. Whether or not it has its own funds to pursue the arbitration, it has done so to date and been represented by senior counsel. Given the size of the amounts for which the Seller has established the Buyer’s prima facie liability under version 2 of the draft partial award, I infer that Mr Esposito will likely ensure that the Seller has sufficient funds to prosecute the remainder of the arbitration in an endeavour to secure a final award in the Seller’s favour.
The Buyer is under the control of receivers, whose solicitor has deposed that ‘the predominant reason for the continuation of the receivership … is the recovery of the claims relating to breaches of warranties given by [the Seller].’ That can only be done by pursuing the set-off defence and the counterclaim in the arbitration. Moreover, the counterclaim exceeds the limit of liability under the policy by $22.5 million. There are accordingly good commercial reasons for the Buyer to proceed with the arbitration. This will involve payment of the arbitrator’s fees or, if he is removed, those of the replacement arbitrator.
As to the Buyer’s contention that it may not be worthwhile for it to proceed with its counterclaim in the arbitration because the Seller has no assets, the evidence establishes that it has adopted inconsistent positions. In correspondence with the Underwriters, it has endeavoured to encourage the Underwriters to take over the conduct of the arbitration on its part, on the basis that there is a real prospect of recovery on any award against the Seller by means of tracing the sale proceeds, paid by the Buyer to the Seller to the hands of Mr Esposito, the sole shareholder in the Seller, who apparently has very substantial assets. Accordingly, I reject this contention.
Second, the Underwriters’ admissions in this proceeding combined with their refusal to undertake to be bound by the result in the arbitration are, while relevant, not strong discretionary factors. As to whether the Underwriters will be bound, I note that, as between the Buyer and the Underwriters, clause 9.5 of the policy expressly provides that the Buyer is bound by the result in any arbitration between the Buyer and the Seller as to the elements of Loss (as defined). For example, if an arbitrator were to determine that there was no breach of an Insured Warranty, and thus no contractual entitlement to recover any amount from the Seller disregarding the releases in clause 17.2 of the sale agreement. Moreover, although the issue was not argued, if the Buyer is contractually bound under the policy by such arbitral determinations, it is logical that the parties to the policy intended that the Underwriters would also be bound. For example, by a determination that the Seller breached one or more Insured Warranties but that the releases in clause 17.2 of the sale agreement apply. While the issue may need to be determined following the result in the arbitration, it may be unnecessary to do so depending on the result and, in any event, would involve a straightforward question of interpretation of the policy. If the Underwriters are not bound by the result in the arbitration in some respect, that result will, for the reasons given below, nevertheless be likely to affect the future conduct of this proceeding, for example by reducing its scope, and may affect the outcome of the proceeding.
Third, by clause 21A of the sale agreement, the Buyer and the Seller agreed that the kind of disputes which are the subject of the arbitration would be determined by arbitration. The arbitration is therefore the contractually agreed forum to determine the Buyer’s contractual entitlements, if any, under the sale agreement and whether or not there will or may be any Recovered Amounts to be taken into account in the computation of any Loss under the policy. Clause 9.5(a) of the policy supports this approach, as it requires reimbursement of Loss paid following a contrary arbitral determination.
Fourth, although the Underwriters are not parties to the arbitration, I do not accept that there is no identity of interests of, or proximity between, the Underwriters and the parties in the arbitration.
On the one hand, given the terms of the sale agreement and the policy, the Underwriters are effectively placed in the shoes of the Seller for the purpose of indemnifying the Buyer for any breach of the Seller’s Warranties. So, it is in the interests of both the Underwriters and the Seller that the Buyer’s breach of warranty claims fail at the first hurdle — in whole or in part — before the issues concerning the clause 17.2 releases and the Buyer’s clause 7.6(b) claim arise for determination. In that event, the Buyer would either have no contractual entitlement against the Seller under clause 4.1(a) of the definition of Loss in the policy or a reduced entitlement. This may be so despite the Underwriters’ present admissions as to some of the alleged breaches in this proceeding. I say ‘may be’ because the Underwriters would need to apply to withdraw those admissions in such circumstances.[47]
[47]Lexis Nexis, Williams Civil Procedure Victoria at [36.01.260] and the cases there referred to.
On the other hand, if the alleged breaches of the Seller’s Warranties are established in the arbitration, the Underwriters’ position regarding the clause 7.6(b) claim may coincide with the Buyer’s interests. Success on that claim may reduce, or possibly extinguish, any Loss under the policy, and give the Buyer the opportunity to recover more than the $25 million policy limit.
In my opinion, this contractual structure provides a sufficient identity of interests or proximity between the Underwriters and the parties to the arbitration because, as a practical matter, the result in the arbitration will have a material effect on the future conduct of this proceeding.
Moreover, as appears above, the Buyer is bound under clause 9.5 of the policy by any arbitral determination as to the elements of Loss under the policy; and it is arguable that the Underwriters will also be bound by an arbitral determination as to those elements. If so, the result in the arbitration has the scope to determine the first element of Loss under the policy in the Buyer’s favour, or the Seller’s (and thus the Underwriters’) favour, or partly in favour of each.
Fifth, the Buyer’s claim under the policy depends upon it establishing a Loss (as defined). The Buyer has alleged and must prove that it is ‘contractually…entitled to recover against the Seller under the Sale Agreement for Breach of the Sale Agreement’ (disregarding the releases in clause 17.2 of the sale agreement). Although some alleged Breaches are presently admitted, others are not and the amount of Loss is in dispute. By its amended statement of claim, the Buyer also relies in this proceeding on the Seller’s breach of clause 7.6(b) of the sale agreement, and the Buyer’s consequent loss of opportunity under clause 7.6(c) to refuse to complete, as an alternative basis to contend that it is contractually entitled to recover $47.5 million in damages against the Seller for breach of the sale agreement within the meaning of clause 4.1(a) of the policy.[48]
[48]Amended statement of claim, [20(h)], [20(i)], [21], [26], and the particulars of those paragraphs. The Underwriters allege in their defence that this alternative basis of entitlement does not fall within clause 4.1(a) of the policy: amended defence [21], [26] and particulars to those paragraphs.
Sixth, the issues described in the fifth reason above are also raised in the arbitration. It is therefore highly likely that the result in the arbitration, whichever way it may be decided, will affect the future conduct of this proceeding, and may reduce its scope or affect its outcome.
Seventh, there may be significant prejudice to the Underwriters if this proceeding is not stayed, as follows:
(1) If the Underwriters are ordered by the Court to pay out under the policy, their subrogation rights will be limited by clauses 17.1 and 17.2 of the sale agreement, and clause 10 of the policy, to fraudulent breaches of warranty by the Seller. The Buyer has not pleaded fraud in the arbitration. Even if it had, a finding of fraud by the arbitrator would not constitute fraud under clause 10.2 of the policy, as that clause requires such a finding be ‘finally determined’ by a court of competent jurisdiction, and the Underwriters are in no position to allege fraud in this proceeding based on matters within their knowledge.
(2) The Underwriters will be forced to expend monies in defending this proceeding, in circumstances where the Buyer might:
(a) disregarding the releases in clause 17.2, in any event lose all of its breach of warranty claims against the Seller, in which case the Buyer would not be ‘contractually entitled’ to recover any amount from the Seller under clause 4.1(a) of the definition of Loss in the policy. Such an outcome would, subject to the Underwriters obtaining leave to withdraw their admissions, make this proceeding unsustainable and unnecessary, as the lack of contractual entitlement would have been finally determined by the method chosen by the parties;
(b) prove its breach of warranty claims but nevertheless lose its set-off defences and counterclaims where its claims under clause 7.6(b) of the sale agreement fail and it remains bound by the releases in clause 17.2, in which case it will be limited to its claim under the policy up to the $25 million limit; or
(c) succeed in the arbitration and, as a result, actually recover a set-off meeting the definition of a ‘Recovered Amount’ in clause 4.1(c) of the policy. Moreover, the Buyer may receive other Recovered Amounts from the Seller or, if the Seller is unable to pay, by tracing the sale proceeds paid to the Seller ($63 million) to persons or entities associated with it — for example Mr Esposito, who owns the whole of the shares in the Seller and apparently has substantial assets. It is thus possible that the result in the arbitration will have the effect of substantially reducing or even extinguishing any Loss under the policy.
Eighth, in circumstances where it is possible that there will be no need for this proceeding at all, or the proceeding will at least be substantially reduced in scope, it would be an unnecessary use of Court resources to allow this proceeding to continue until the result of the arbitration is known.
Ninth, the Buyer has not demonstrated any relevant prejudice. It has issued this proceeding, and interest pursuant to statute is running should it be successful. It is no longer trading, which means it is not being deprived of working capital.
Tenth, if the arbitration becomes unduly protracted for some reason, especially if other than by reason of the Buyer’s conduct in failing to prosecute its set-off defences and counterclaims with reasonable expedition,[49] the Court will retain control of the proceeding and can lift the stay if just and convenient to do so.
[49]See for example Reichhold Norway [2000] 2 All ER 679, 686.
Weighing all these factors, it is in my opinion just and convenient that a temporary stay be granted.
Conclusion and orders
For the above reasons, the proceeding should be stayed until the conclusion of the arbitration or until further order. I will hear the parties as to the precise form of orders, and as to costs.
SCHEDULE OF PARTIES
| S ECI 2016 0027 | |
| BETWEEN: | |
| UDP HOLDINGS PTY LTD ACN 167 100 692 (RECEIVERS AND MANAGERS APPOINTED)(SUBJECT TO DEED OF COMPANY ARRANGEMENT) | Plaintiff |
| - and - | |
| IRONSHORE CORPORATE CAPITAL LTD ON ITS OWN BEHALF AND ON BEHALF OF THE UNDERWRITING MEMBERS OF SYNDICATE 4000 FOR THE 2013 UNDERWRITING YEAR | First Defendant |
| INTERNATIONAL INSURANCE COMPANY OF HANNOVER SE | Second Defendant |
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