KUFPEC Singapore Holding Ltd v Sanderson Capital Resources Ltd & Anor [2017] EWHC 2816 (Comm)

Case No CL-2017-000574[2017] EWHC 2816 (Comm)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 09/11/2017
Before
SIR ROSS CRANSTON
Between
KUFPEC SINGAPORE HOLDING LTDClaimant(1) SANDERSON CAPITAL RESOURCES LIMITED1 st Defendant(2) CITIBANK, N.A., LONDON BRANCH2 nd Defendant
Jern-Fei Ng (instructed by Norton Rose Fulbright LLP) for ClaimantAndrew Fletcher QC (instructed by Jones Day) for 1 st Defendant for The 2 nd Defendant was not represented and did not attendHearing Hearing dates: 3 rd November 2017
JudgmentSir Ross Cranston :Introduction
[1]This is an application by the claimant, KUFPEC Singapore Holding Ltd, a Cayman Islands company, for an interim injunction pursuant to CPR, r.25.1(1)(a) and/or r.25.1.1(c)(i). If granted, the interim injunction would prevent the release to the first defendant, Sanderson Capital Resources Limited, a BVI company, of sums in an escrow account held by the second defendant, Citibank, N.A., London Branch (“Citibank”), unless the credit balance exceeds US$12 million and/or for those sums to be preserved on an interim basis until judgment or further order. Background The SPAs

Background

[2]The escrow account was created as a result of an escrow agreement between the claimant, the first defendant and Citibank as parties. It was to facilitate payments under two share sale and purchase agreements dated 17 January 2013.[3]The first sale purchase agreement (“SPA1”) was between the claimant as purchaser and First Pacific (Asia) Pte Ltd (“First Pacific”), a Samoan company, as seller. The shares were in a company Risco Energy Pte Ltd. The definition of “Relevant Claim” is a claim “by the [claimant] under or in connection with this Agreement, in respect of any of the Warranties (including, subject to Clauses 5.4.4 and 5.4.5, any Tax Claims) or indemnities or any other agreement entered into pursuant to this Agreement but not any claim or liability arising due to the Post Closing Adjustment.” Clause 5.9 reads:
“No breach of this Agreement or any circumstances which may give rise to a Relevant Claim, which in either case is capable of remedy, shall entitle the [claimant] to damages or payment of any other amounts unless [First Pacific] is given thirty (30) Business Days in which to remedy such breach or circumstances.”
[4]The second agreement (“SPA2”) was between the claimant as purchaser and the first defendant as seller. The shares were in a company Summerhill Capital Resources Ltd. The first defendant is an affiliate of First Pacific. The definition of “Relevant Claim” in SPA2 is a claim “under or in connection with this Agreement, including in respect of any of the Warranties (including, subject to Clauses 5.4.4 and 5.4.5, any Tax Claims) or indemnities or any other agreement entered into pursuant to this Agreement but not any claim or liability arising due to the Post Closing Adjustment (as defined in [SPA1])”.[5]The transfer of shares provided for under both SPAs involved indirect transfers of participating interests in Indonesian oil and gas, which give rise to liability for Indonesian transfer tax, Indonesian branch profit tax and penalties if the taxes are overdue.[6]Disputes arising out of both SPAs were subject to arbitration in Singapore under the ICC Rules of Arbitration.[7]There was a side letter of the same date as the SPAs, 17 January 2013, in which First Pacific and the first defendant agreed that they had joint and several liability in relation to any Relevant Claim under either SPA.

The escrow agreement

[8]The following month after the SPAs were agreed, on 19 February 2013, the first defendant, the claimant, and Citibank entered into the escrow agreement. (First Pacific is not a party to the escrow agreement.) Under it US$46 million was deposited in the escrow account as the retention amount. The recitals record entry of the two SPAs (recitals A&B); that First Pacific had authorised payment of the sums owed to it into the escrow account for the first defendant, for release in accordance with the terms of the escrow agreement (recital C); that in order to facilitate payment mechanics under both SPAs, the first defendant and claimant had requested the escrow agent to open and operate an escrow agreement in accordance with its terms (recital D); and that under SPA2, the first defendant and claimant had agreed certain arrangements relating to the release of the retention sum from the escrow account, which arrangements were set out in Schedule 4 of the escrow agreement “for the Escrow Agent’s reference only” (recital E).[9]The definitions in clause 1 include “Underlying Agreements”, meaning SPA1 and SPA2. There is no definition of “Relevant Claim”.[10]Clause 2 provides that the first defendant and the claimant designate and appoint Citibank to act as their escrow agent, and that Citibank accepts that designation and appointment “in accordance with and limited to the terms and conditions of this Agreement”. Under clause 3.5, the first defendant and the claimant undertake that any instructions - defined as any payment instruction or other instruction which Citibank is entitled to rely on for the purposes of the agreement – will be given “only in accordance with the terms of this Agreement…”[11]Clause 5 of the agreement governs the obligations of Citibank as to the operation of the account and the release of this amount to the seller. Clause 5.1(a) obliges Citibank to make payments under payment instructions when both parties agree. Clause 5.1(b) obliges Citibank to make payment pursuant to “an order, judgement, award, decision or decree determining the entitlement of the [claimant], the [first defendant], or any other person to the Escrow Amount or any portion thereof”. Clause 5.1(b) goes on to provide that in Citibank’s sole discretion, the order etc. is to be accompanied by a legal opinion satisfactory to it confirming the effect of the order etc., and that it represents “a final adjudication of the rights of the parties by a court or tribunal of competent jurisdiction” and that there has been no appeal. Clause 5.1(c) is “subject to paragraphs (a) and (b)”, and provides for the automatic release of the sums in the escrow account according to the table set out in the paragraph. Clause 5.1(c)(ii) contains a proviso, that automatic payments are suspended where the claimant “serves a ‘stop notice’ (a Stop Notice) substantially in the form set out in Schedule 1 Part B (Form of Stop Notice) that a “Relevant Claim” has been brought under the Underlying Agreements…until [Citibank] receives a Payment Instruction requesting [it] to continue with such automatic payments.”[12]Clause 6 states that the agreement sets forth all Citibank’s duties, and Citibank shall not be bound by and be deemed not to have notice of the provisions of the SPAs or any other agreement the first defendant and claimant enter into, and no duties or obligations are to be implied. Clause 11.4 is an entire agreement clause, under which the first defendant and claimant acknowledge the existence of the SPAs and agree that as between them, but not Citibank, they continue to apply.[13]The escrow agreement is governed by English law and disputes arising out of it are subject to the exclusive jurisdiction of the English courts.[14]Schedule 1 sets out the form of payment instruction and form of stop notice. The form of stop notice states:
“You are instructed to [cease/reduce] automatic payments of portions of the Retention Amount pursuant to clause [5.1(c)(ii)] of the Escrow Agreement as a “Relevant Claim” has been brought under the Underlying Agreement …”
[15]Schedule 4, which reproduces Schedule 7 to SPA2, is headed “Arrangements relating to the retention sum”. Its opening words are that the provisions are for information purposes only, and that capitalised terms not otherwise defined in it have the meaning given to them in SPA2. Paragraph 5 reads:
“If before the end of a Suspension Period, the [claimant] notifies [the first defendant] of any further claim(s) under the provisions of this Agreement and/or [SPA 1], the Suspension Period will continue until such further claim(s) is either Settled or Resolved provided that there remains an Insufficiency.”
[16]On 25 February 2015, the claimant sent a stop notice to Citibank under clause 5.1(c)(ii) of the escrow agreement instructing it to cease automatic payments “as a Relevant Claim has been brought under the Underlying Agreement” in respect of Indonesian taxes, penalties and interest arising out of the SPAs. The arbitration award[17]Meanwhile, in early August 2015, First Pacific had initiated arbitration proceedings against the claimant under SPA1. Essentially the issue was whether certain indemnity provisions in SPA1 had been engaged in respect of certain Indonesian taxes and whether First Pacific had an obligation to file tax returns with the Indonesian tax authorities. The arbitration was bifurcated with the first phase relating to liability, the second to damages.[18]There was a hearing. In December 2016 the parties were informed that the Tribunal had extended the time limit for rendering the award until 3 March 2016 and had submitted its draft award to the ICC for approval.[19]On 9 March this year, the Tribunal published a partial award on Phase 1. The Tribunal found that First Pacific had no liability to indemnify the claimant under SPA1 (para. 432(a)-(b)). The claimant was ordered at paragraph 432(c) of the Award to “withdraw its Stop Notice dated 24th February 2015 and procure that its Authorised Representative … signs a Payment Instruction … directing [Citibank] to release the entire balance of the Escrow Account to [the first defendant]”.[20]The Tribunal also found that First Pacific had breached paragraph 2(a)(i)(y) of Schedule 13 to SPA1 in failing to report to the Indonesian tax authorities on the value of the participating interests being transferred to the claimant (paras. 376/432(d)). (The Tribunal accepted the claimant’s submission that its damages claim in this regard was not a Relevant Claim under the agreement (para. 367)). However, the Tribunal found that the claimant had failed to give First Pacific notice under clause 5.9 of SPA1 of 30 business days to remedy that breach. “The consequence, if any, of failing thus to act as required by clause 5.9 will be addressed in the Second Phase” (paras. 391/432(d)).[21]There was no application to set aside the partial award.

The December 2016 stop notice, Citibank and the Tribunal’s rulings

[22]On 28 December 2016, the claimant had sent Citibank a further stop notice. This was said to be provided “pursuant to clause 5.1(b) and/or clause 5.1 (c)(ii) of the Escrow Agreement”. It instructed the bank to cease automatic payments under clause 5.1(b) “as further claims have been brought by [the claimant] against [First Pacific] under SPA1 in addition to the ‘Relevant Claim’ made by [the claimant] against First Pacific under SPA1 as described in the stop notice dated 24 February 2015.” The stop notice described the further claims against First Pacific as a claim for damages arising from First Pacific’s breach of its obligations under paragraph 2(a)(i)(y) of Schedule 13 to SPA1 (“the claimant’s damages claims”) and a claim under a tax indemnity given in Clause 9 of SPA 1 in respect of certain penalty interest (“the tax indemnity claim”). There was no claim against the first defendant.[23]On 13 April 2017 Citibank informed the parties that it proposed to take legal advice in respect of the conflicting instructions it had received. Both the claimant and first defendant made submissions through their legal advisers to Citibank. On 11 September 2017 counsel appointed by the bank, Mr Lenon QC, gave his opinion that the Tribunal had made a final adjudication on the matter.[24]On 10 July 2017 the Tribunal ruled on the claimant’s application for an interpretation of the March award as regards its finding on clause 5.9 of SPA1. The claimant had submitted that it had sent a letter dated 8 July 2015, which was an express written request that the claimant remedy breach of paragraph 2(a)(i)(y) of Schedule 13 of SPA1. The Tribunal concluded that to interpret the award in such a way as to rely on the letter to prove that the claimant had complied with clause 5.9 would be equivalent to requesting the Tribunal to reconsider a finding because of a new argument. That was impermissible. The Tribunal noted that it “has not issued its final award” and there would be a second phase in which additional issues could be addressed, provided that they complied with the rules of the arbitration.[25]On 14 July 2017 the Tribunal issued Procedural Note No 10 regarding applications by First Pacific to amend the terms of reference of the arbitration to include whether the Tribunal’s ruling on clause 5.9 of SPA1 precluded the claimant’s damages claim, whether the claimant should be ordered forthwith to withdraw the December stop notice, and whether the claimant should be ordered to sigh a payment instruction directing Citibank to release the entire balance in the escrow account to the first defendant. The Tribunal ruled that these matters should be dealt with within the second phase of the arbitration. They raised complex legal and jurisdictional issues involving both new facts not brought to light until after the partial award and issues falling within the second phase.[26]On 13 September 2017 Citibank said that it would release the balance of the escrow account to the defendant on 19 September 2017. The parties sensibly agreed to amend that until 6 November 2017, given the date of the present hearing.[27]The parties have compromised the tax indemnity claim contained in the December 2016 stop notice.[28]Phase 2 of the arbitration, the claimant’s damages claim, is to be heard in March next year.

The claimant’s case

[29]The claimant advanced its case for the interim order to preserve the status quo pending trial. In the underlying proceedings in this case the claimant seeks a declaration that under clause 5 of the escrow agreement Citibank must not pay the sums in the escrow account to the first defendant until its damages claim, which forms the subject of the December 2016 stop notice, is settled or resolved. Without an interim order, the claimant contended, the underlying action will effectively be over. The approximately US$12m in the account is effectively security for the second, the damages phase, of the arbitration. First Pacific would benefit from its own wrongdoing in failing to report to the Indonesian tax authorities, and would effectively be allowed to walk away without paying, even if the Tribunal were to assess damages against it.[30]The claimant submitted that in line with American Cyanamid v Ethicon Ltd [1975] AC 396 there is a serious issue to be tried and the balance of convenience was in its favour. Damages would not be an adequate remedy since the first defendant is a BVI company and is unlikely to have any significant assets against which any claims for damages would bite. Phase 2 of the arbitration would become academic since First Pacific is a US$2 Samoan company that is unlikely to have any significant assets. By contrast, the first defendant would be adequately compensated by the interest accruing in the escrow account, and the claimant was prepared to give an undertaking to pay damages to the Defendants if its claims are dismissed and the injunction is found to have caused loss to the defendants. The balance of convenience was firmly in favour of the claimant’s application.[31]As to the serious issue to be tried, the claimant contended first, that there was a serious issue to be tried as to whether its damages claim is a “Relevant Claim” under the escrow agreement. The Tribunal’s decision to the contrary was under SPA1, but under SPA2 “Relevant Claim” is defined more widely given the clauses in SPA2. The claimant’s damages claim is therefore caught.[32]Alternatively, the claimant submitted, the reference to “Relevant Claim” in clause 5.1(c)(ii), when construed against the relevant factual matrix and commercial context, is to be given a broader interpretation than its definition in SPA1 to encompass other claims under that agreement. The meaning is informed by, and takes its context from, Schedule 4 to the escrow agreement, which uses language which is couched in broader terms, referring in paragraph 5 as it does to “any further claim” under the SPAs. “Further claim” is of sufficiently broad import to cover “any” claims under SPA1, including the damages claim. There would have been no need specifically to exclude a claim or liability arising due to the Post Closing Adjustment, as defined in SPA1, if all SPA1 claims were excluded. The Relevant Claim issue forms part of the serious questions to be tried.[33]As a secondary argument, the claimant’s case was that clause 5.1(b) is subject to clause 5.1(c)(ii), notwithstanding the opening words of clause 5.1(c). In its submission, the phrase “subject to” is similar in purpose and meaning to “provided that” appearing before paragraphs (i) to (iii) of that clause. In other words they establish exceptions to the automatic scheduled payments in the table in clause 5.1(c). Clauses 5.1(b) and 5.1(c), construed holistically, establish an order of precedence, by reference to which payments out of the escrow account are made. Thus until there is a final adjudication on its damages claim the automatic payments continue to be suspended. On the claimant’s case its approach derives force from paragraph 5 of Schedule 4 to the escrow agreement, which as a result of clause 1.2(g) is part of the agreement. The deeming provision in clause 6.1(b) cannot apply to it since Citibank actually has notice of it. The schedule thus forms part of the relevant factual matrix available to the parties against which, under Arnold v Britton [2015] AC 1619, [2015] UKSC 36, clause 5.1 is to be construed.[34]Thirdly, the claimant submitted, there has not yet been a final adjudication within the meaning of clause 5.1(b) of the escrow agreement of the rights of the parties submitted for arbitration. When considered holistically, a final adjudication is required by the first part of the clause, since that is what any legal opinion obtained under its second part must attest to. As indicated by the Tribunal’s interpretation decision of 10 July 2017 and its Procedural Order No 10 there are still substantive issues for the Tribunal to decide.

Discussion

[35]In my view it is clear that a precondition to a stop notice under the escrow agreement is a Relevant Claim. That is what Clause 5.1(c)(ii) of the escrow agreement provides - that a “Relevant Claim” has been brought “under the Underlying Agreements”. That is also the wording in the contractual stop notice in Schedule 1 to the agreement; Citibank is instructed to cease or reduce automatic payments “as a ‘Relevant Claim’ has been brought under the Underlying Agreement …” There is no way that so unambiguous a precondition, a Relevant Claim, can be interpreted to mean any further claims under the agreements such as the claimant’s damages claim. No reasonable reader of the escrow agreement at the time it was executed would understand Relevant Claim to mean any claim under SPA1 and that claims other than Relevant Claims as defined in the Underlying Agreement can form the basis of a Stop Notice under the escrow agreement.[36]Reference to the factual matrix, or invoking a notion of a holistic reading of the escrow agreement, cannot confer transformative power on Schedule 4 over such very clear words. As Lord Neuberger said in Arnold v Britton [2015] AC 1619, [2015] UKSC 36, “the meaning is most obviously to be gleaned from the language of the provision”, and “the clearer the natural meaning the more difficult it is to justify departing from” [17]-[18]. Not unexpectedly with agreements for banks performing the limited role of escrow agent, time and again this escrow agreement makes clear that Citibank’s obligations are limited to the terms and conditions of the agreement (recitals C-E, clauses 2. 3.5, 6, 11.4), not to any agreement to which it was not a party such as Schedule 4, which as Schedule 7 to SPA2 was an agreement before its involvement. Although Schedule 4 is part of the agreement, recital E makes clear that it is for the bank’s reference only, and that is also the clear message of Schedule 4’s opening words. In short I simply cannot see any basis for the wider words of Schedule 4 having any role in interpreting the clear phrase, “Relevant Claim”, in clause 5.1(c)(ii).[37]“Relevant Claim” is not defined in the escrow agreement, but since its context in clause 5.1(c)(ii) is a Relevant Claim “under the Underlying Agreements”, that directs reference to the term as used in the relevant underlying agreement, in this case SPA1. That gains support from the form of contractual stop notice in Schedule 1, “as a relevant claim has been brought under the Underlying Agreement...” Quite simply the claimant’s damages claim is “under or in connection with” this SPA1, not SPA2. The latter, with its definition of Relevant Claim, has no relevance. The 2016 stop notice is founded on a claim under SPA1 alone and its definition of Relevant Claim is what counts. The argument based on the exclusion of liability arising from Post Closing Adjustment does not help when this, under the agreements, is tax related.[38]In my respectful view, the Tribunal was correct in accepting the claimant’s submission, at the time, that its damages claim was not a Relevant Claim under SPA1. Indeed, the claimant’s own December 2016 stop notice did not assert that a Relevant Claim had been issued under the underlying agreement - by contrast with its February 2015 stop notice - and simply referred to further claims. (One of these claims was a Relevant Claim, the tax indemnity claim, but that has been compromised.) In sum, I fail to see how the damages claim can be a Relevant Claim within the definition of that term in SPA1. There is no serious issue to be tried.[39]So, too, with the claimant's secondary argument, which to my mind goes nowhere. Clause 5.1(b) obliges Citibank to make payment pursuant to an order, judgement, award, decision or decree determining the entitlement of the parties to sums in the account. Here there is the Tribunal’s order. Citibank’s obligation to make payments automatically set out in the table in Clause 5.1(c) is subject to any such order in clause 5.1(b). In no way can clause 5.1(b) be regarded as an exception to the automatic payments provided for in Clause 5.1(c). Rather, it is clear from its introductory words that Clause 5.1(c) is subject to the previous sub-clauses of Clause 5.1. In other words, the automatic payments schedule is overridden by an agreed payment order (Clause 5 (a)) and by any order, judgement, award, decision or decree as to the entitlement of the parties, or others, to the amount (Clause 5 (b)). In no way can it be said that Clause 5 (b) is a proviso to Clause 5 (c). There is no serious issue to be tried.[40]In my view the Tribunal’s has made a final adjudication. There is no serious issue to be tried in this regard as well. The fact is that in the award in March this year the Tribunal ordered that the claimant withdraw its February 2015 stop notice and authorised Citibank to release the balance in the escrow account to the first defendant. In accordance with the procedure laid down in clause 5.1(b) of the escrow agreement, there is counsel’s opinion, following his consideration of submissions by the parties, that there is a final adjudication. Admittedly there is the claimant’s December 2016 Stop Notice, based on claims which originated well before that date, and the Tribunal’s Procedural Order No 10. But the award still stands and I cannot see how the December 2016 stop notice, and the claimant’s damages claim, can deprive it of its final, determinative character.[41]As a footnote to the judgment I record that the first defendant submitted that it was an abuse of process for the claimant to advance its damages claim as a basis for interim relief when it did not refer the December stop notice to the Tribunal, even though at that time it was in a position to do so under the ICC rules. There is no need for me to consider the argument given my earlier conclusions. There were also submissions before me as to whether the Tribunal’s findings as to Clause 5.9 could defeat the claimant’s damages claim in Phase 2 of the arbitration. In its reply the claimant disclosed the arguments in its Memorial for Phase 2 which, it contends, will achieve this goal. None of this is for me; these issues are for the Tribunal. Nor do I need to consider the submissions on how any amount retained in the escrow account is to be calculated, given different US dollar/Indonesian Rupiah exchange rates, in light of my decision that no interim injunction is to be granted.[42]This application for an interim injunction is dismissed.