Arbitration: Temporary stay of related court proceedings

In exceptional circumstances, a court exercising its inherent jurisdiction will temporarily stay its proceedings pending the hearing and determination of a related arbitration between one of the parties to the court proceedings and a third party (say, an insurer) if there are compelling case management considerations justifying that course.

UDP Holdings Pty Ltd (rec and mgr appted) v Ironshore Corporate Capital Ltd & Anor [2016] VSC 400

Facts

Esposito Holdings Pty Ltd (the Vendor) sold its shares in a company to UDP Holdings Pty Ltd (the Buyer) for $70 million. Under the agreement, the Buyer’s director, Mr Hui, guaranteed the Buyer’s obligations. The agreement contained an arbitration clause referring disputes to arbitration according to the UNCITRAL Arbitration Rules. Part of the purchase price ($9 million) was to be paid post settlement and transfer of the shares. The Vendor provided “seller’s warranties”. The liability under those warranties was capped at $25 million. The Vendor agreed to pay the Buyer’s costs of obtaining an insurance policy to cover the risk of breach of the seller’s warranties. Clause 17.2 of the agreement provided that subject to any fraud by the Vendor, the Buyer released the Vendor from liability in respect of any breach of the seller’s warranties and agreed that its sole recourse for breach of the warranties was against the insurer under the proposed policy.

Following settlement, the Buyer fell into financial difficulty, resulting in the appointment of a receiver and manager. The Vendor commenced an arbitration against both the Buyer and Mr Hui to recover the shortfall of the purchase price. They in turn brought a set-off and a counter-claim for $47.5 million alleging breach of the seller’s warranties (arguing that they were entitled to circumvent the cap of $25 million).[1] The arbitrator issued a draft partial award[2] in which he proposed to declare that $9 million was due by the Buyer and Mr Hui to the Vendor for the unpaid purchase price, subject to the defence and counterclaim, the hearing of which would proceed on a date to be determined. The arbitration proceedings stalled, in part due to the conduct of the Buyer.[3]

Meanwhile, the Buyer commenced Supreme Court proceedings against the insurer under the policy (the Insurer) seeking a declaration that it was entitled to indemnity of $25 million for breach of the seller’s warranties (i.e. the insured risk).

The Insurer applied for a temporary stay of the court proceedings pending the hearing and determination of the arbitration.

Decision

Hargrave J began by noting that there was a substantial difference between an application for a permanent stay and an application for a temporary stay, pending the completion of parallel proceedings involving a substantial overlap of issues: [27]. Relying on Sterling Pharmaceuticals Pty Ltd v The Boots Company (Australia) Pty Ltd[4], his Honour considered that the court had general power to control its own proceedings and that this extended to the grant of a temporary stay in various circumstances. Sterling involved parallel court proceedings in Australia and New Zealand. However, His Honour noted that temporary stays had been granted where the other proceeding was an arbitration: [34].[5]

In Sterling and the other cases, the courts considered a catalogue of factors to be taken into account in deciding whether they should, in the exercise of their discretion, grant a temporary stay. Such factors included:

• whether there was a substantial identity of parties and issues in the two proceedings;
• the likelihood that the result in the parallel proceeding would materially affect the court’s management of its proceeding;
• whether the parallel proceeding was more advanced than the court’s proceeding; and
• the burden and inconvenience to the parties of having to pursue two proceedings at the same time involving overlapping issues.

Hargrave J noted that the factors mentioned in the three cases were not exhaustive ([40]), and that a temporary stay would only be granted in a convincing case: [41].[6]

Turning to the case before him, his Honour considered the following factors tipped the balance in favour of the grant of a temporary stay of the court proceeding between the Buyer and the Insurer pending the hearing and determination of the arbitration between the Vendor and the Buyer, or until further order:

• the arbitration and the court proceeding involved substantially overlapping issues: [45(4)];
• while the Buyer had not commenced the arbitration, the reasonable inference was that it would have commenced an arbitration to raise the breach of warranty claims had the Seller not started an arbitration first: [45(2)];
• notwithstanding that the arbitration had stalled, both the Buyer and Seller had good commercial reasons for pursuing it – the Seller to get the benefit of the imminent partial award and the Buyer to agitate its substantial counterclaim: [49], [52]-[54];
• if the arbitration became unduly protracted (other than by reason of the Buyer’s dilatory conduct), the court could always revoke the temporary stay if it was just and convenient to do so: [67];
• as a practical matter, the result in the arbitration was likely to have a material effect on the future conduct of the court proceeding: [60];
• the Insurer may suffer significant prejudice if the court proceeding were not stayed: [64];
• conversely, the Buyer had not demonstrated any relevant prejudice that it would suffer if a temporary stay was granted: [66];
• while the Insurer refused to be bound by the result in the arbitration (a factor relied on by the Buyer to oppose the grant of a stay), the court noted that there was an issue of interpretation of the policy as to whether the Insurer was bound by the arbitral determination in any event: [55].[7]

Comment

The court, considering all the factors as a whole, was prepared to grant a temporary stay of the court proceedings notwithstanding two powerful arguments advanced by the Buyer:

(a) the commercial arrangement between the parties was that the Buyer could seek resort to the insurance policy for breach of the seller’s warranties without first seeking recovery from the Seller. The fact that the Buyer brought a counterclaim upon “being dragged into the arbitration” did not deprive it of its contractual right to pursue a claim under the policy: [43]-[45]; and

(b) the Insurer refused to be bound by the result in the arbitration, which fact derogated from the utility of proceeding with the arbitration first: [47].

Ultimately, the court’s decision has the salutary effect of incentivising the Buyer to proceed with the arbitration, in circumstances where its conduct appears to have been one of the reasons why the arbitration had stalled.

[1] The Buyer and Mr Hui argued that had they known the true facts they would have terminated the agreement before completion. Accordingly, they argued that they were entitled to damages equal to the difference between the contract price and the true value of the shares, as reflected in the sale price of the business when sold by the receivers (i.e. $70 million less $22.5 million): [18] – [19].

[2] The draft award appears to have been published for the purposes of obtaining the comments of the parties.

[3] The Buyer took 5 months to file a defence to the statement of claim: [15] and [17].

[4] (1992) 34 FCR 287

[5] Referencing 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.

[6] Contrast Reichhold which spoke of “rare and compelling” circumstances.

[7] The court noted that while the point was not argued, in circumstances where the policy expressly provided that the Buyer was bound by the arbitral determination, it was logical on the proper interpretation of the policy that the parties objectively intended that the Insurer was also so bound.