Dispute Resolution

October 2012 DISPUTE RESOLUTION BULLETIN

Freezing orders: once more unto the basis that they did not conflict with the purpose breach? of the WFO, namely to prevent any judgment eventually obtained by the Bank going unsatisfied In the latest judgment in the long running litigation due to MA dissipating his assets. According to between Kazakhstan’s JSC BTA Bank (the Bank) MA, the transactions were not made to make any and its former Chairman, Mukhtar Ablyazov (MA), of his assets “judgment proof”. the English Commercial Court has given useful guidance on what it will consider when deciding In his judgment on 21 September 2012, Mr Justice whether a freezing order has been breached and Teare had little difficulty in concluding that the where there has been a breach what, if anything, transactions were a breach of the WFO. However, can be done about it. if the reasons for making the pledges did not conflict with the purposes of the WFO, the breach The Bank sought two declarations from the Court: would be a technical one and would not justify an first that MA had once again acted in breach of a order to try and reverse them. worldwide freezing order (WFO) originally obtained in 2009; and second, that he had not disclosed all The Court’s discretion in these circumstances of his assets. The Bank also asked the Court to is wide. In particular, the Court should look not order MA to try to reverse certain pledges he had only at whether the purpose of the transactions made to third party Russian banks involving the was at odds with the WFO, but also at all the undisclosed assets. circumstances of the case in an effort to do justice to both parties. MA is currently in hiding after being committed to 22 months’ imprisonment for previous breaches of The Court granted the declarations of breach the WFO. He argued that the Court should grant sought by the Bank. This was so that the Bank permission for the pledges retrospectively on the could, if it wished, inform the third party banks that the pledges were made in breach of the they should provide that it of the Arbitration Act 1996 (the Act) English Court’s WFO. In light of what it was made with the intention of evading which allows the Court to appoint saw as gaps in MA’s evidence as to the the order. arbitrators where the appointment purpose of the pledges (not to mention procedure has failed. The Court held his previous conduct in the litigation For more information, please contact that in the circumstances, section and current “fugitive” status), the Court Luke Zadkovich, Associate, on 15(3) of the Act applied. This provides refused MA’s application to grant the +44 (0)20 7264 8157, or that where there is no agreement transactions retrospective permission. [email protected], or Ian between the parties as to the number Mathew, Associate, on +44 (0)20 7264 of arbitrators, the Tribunal shall consist However, the Bank had advanced 8035, or [email protected], or your of a sole arbitrator. no evidence that the pledges were usual contact at HFW. in fact made with the objective of The Court duly granted an order circumventing the WFO. Neither had it appointing a sole arbitrator and refused identified any step that MA could take Specifying the number of Itochu permission to appeal. Itochu to try to unwind them. In addition, the arbitrators in a tribunal applied to the Court of Appeal for Court must consider the interests of the permission to appeal, arguing that the third parties to the transactions. Taking What happens when an arbitration Court at first instance was wrong to all this into account, the Court declined clause does not specify clearly the conclude that section 15(3) of the Act to order that MA try to undo the exact number of arbitrators to be applied. Before considering whether pledges, but only that he use his best appointed? The English Court of Appeal the Court at first instance was wrong, endeavours, should any enforcement recently handed down a judgment the Court of Appeal had first to decide proceedings be brought by the third confirming the position under English whether it had jurisdiction to hear the party banks (one of which is now in law. The decision in Itochu Corporation appeal at all. administration), to inform the Russian v Johann M.K Blumenthal GMBH & Co court that the pledges were made in KG & Anr (24 July 2012) is also a useful Since the Court at first instance had breach of the WFO. reminder of the principle that leave of made its decision under section 18 of the first instance court is required to the Act, the Court of Appeal held that The pledges remain in place. Should appeal against judgments on arbitration section 18(5) applied. This provides that the third party banks seek to enforce claims. the permission of the Court is required them, it will be a Russian court that for any appeal from a decision made decides whether they can do so. The The agreement between the parties under section 18. Permission had been Russian court is not bound by the contained an in the refused by the Court at first instance WFO, nor the fact that the pledges were following terms: and therefore the Court of Appeal did made in breach of it. not have jurisdiction to hear the appeal. “Any dispute … shall be submitted This is a clear demonstration of the well For parties contemplating or involved in to arbitration held in London in established approach of the English freezing order applications, this decision accordance with , and the Courts that the grounds for giving shows the Court’s willingness to take award given by the arbitrators shall be permission to appeal will be interpreted account of the interests of unconnected final and binding on both parties” narrowly. third parties in transactions made under such an order – even in the The parties disagreed as to whether That should have been the end of the face of previous contempt of court by the clause required the appointment of matter. However, the Court of Appeal the defendant. It is also important to one or three arbitrators. Itochu argued commented that in any event, it agreed remember that the purpose of freezing that the Tribunal should be composed with the conclusion reached by the orders is not to obtain security but to of three arbitrators given the reference Court at first instance. Section 15(3) prevent judgments going unsatisfied to “arbitrators” in the plural. Blumenthal had been included in the Act with a because of dissipated assets. Should a argued that the clause provided for a view to reducing the costs imposed party seek the Court’s help to reverse a sole arbitrator and applied to the Court on parties to arbitration. The Court of transaction made under a freezing order for an order under Section 18(3)(d) Appeal characterised this as a “support

02 Dispute Resolution Bulletin for arbitration, not an unwanted new one, under which the third party The various promises between the infringement on party autonomy”. assumes rights and obligations on parties to a novation agreement are the same terms as those of one of the often regarded as being sufficient For parties who have English law parties to the original . for the new contract. arbitration clauses in their agreements, By way of example, where a seller (S) this case is instructive. Without an The formalities and requirements of with a buyer (B) for the sale express, clear stipulation of the number a novation of goods, if S and B agree that a third of arbitrators they wish to appoint party (T) will buy the goods instead of to resolve their disputes, a reluctant Consent B, then: opponent can seize on any lack of clarity as an opportunity to delay Since a novation creates a new • T provides consideration by proceedings and increase costs with contract, it is essential that the consent agreeing to buy the goods from expensive court applications. of all parties is obtained, including the S. incoming party and all parties to the For more information, please contact original contract, whether outgoing or • S provides consideration for T’s Alex Young, Associate, on continuing. promise to buy the goods by +44 (0)20 7264 8021 or agreeing to release B from the [email protected], or your A novation does not necessarily need original contract. usual contact at HFW. to be in writing. In the absence of a signed novation agreement, it is • B provides consideration for possible that consent to a novation S’s promise to release him by Practical considerations in can be inferred from the conduct of providing the new buyer, T. novation of contracts (1) the parties, provided that the original contract does not impose conditions In order to avoid any potential disputes In the current economic climate, it is prohibiting this (for example, a term about the adequacy of consideration, increasingly important for the parties to providing that novations are subject to the parties may decide to: a contract to be aware of how they can the prior written consent of the existing effectively restructure their agreements. parties). • Novate the contract under a One is to substitute one party to deed. the agreement for a third party through In some circumstances, for example a novation of the contract. In the first where the incoming party is unknown • Include some nominal monetary of two articles, Damian Honey and to the continuing party or appears consideration for the promise. Michael Buffham offer a practical guide to have fewer financial resources or to novation. assets against which to enforce a Conditions on novation judgment in the event of a breach of What is a novation? contract, a continuing party will object If the original contract contains a to a novation. In order to avoid any risk non- provision and it A novation is used to transfer one that their consent may be inferred, it is drafted to all purported party’s rights and obligations under a is advisable to record the objection in transfers of the contract, then it will contract to a third party. An assignment writing and to expressly refuse to deal apply to novations. Such clauses of contract can only be used to transfer with the incoming party. often impose certain formalities, for rights, not obligations. The only example a requirement to obtain way a contractual obligation can be Consideration prior written consent. In those transferred is if all the parties agree to a circumstances, novation will be novation. Since the original contract is effective so long as it fulfils any extinguished and replaced with another relevant conditions. (As contractual A novation is not strictly a transfer. in a novation, consideration for the new terms, conditions can be waived In a novation, the original contract contract must be provided. either through agreement or by is extinguished and replaced with a conduct.)

Dispute Resolution Bulletin 03 The effect of a novation If the outgoing party retains any pre- • Have the parties clearly novation liabilities, the incoming party documented who is to be Unless agreed otherwise, a novation should consider seeking an responsible for pre-novation releases the outgoing party from all from the outgoing party for breaches liabilities? future liabilities under the contract. of contract occurring before novation The parties should therefore took place. Likewise, the outgoing • Have the parties sought make clear provision for who is to party should consider seeking an in respect of liabilities be responsible for pre-novation indemnity from the incoming party accepted by another party? obligations. In the event that no such for any liabilities the incoming party provision is made in the novation agrees to adopt. Next month’s article will consider in agreement, the outgoing party more detail whether partial novation is is usually held to retain any pre- Key points to consider when possible under English law. novation liabilities. Ultimately, this drafting a novation agreement depends upon the intention of the For further information, please contact parties. It is therefore advisable to The key considerations in drafting a Damian Honey (pictured below), record the division of liabilities clearly novation agreement are as follows: Partner, on +44 (0)20 7264 8354, or in the novation agreement. [email protected], or your usual • Has the consent of all the parties, contact at HFW. Assisted by trainee whether continuing or outgoing, Michael Buffham. been obtained and documented?

• Has sufficent consideration been Conferences & Events provided for the new contract? Would it be advisable for the HFW Seminar: The Eurozone crisis and contract to be executed as a the impact of state bankruptcy deed? HFW Geneva (22 October 2012) • Does the novation agreement Matthew Parish comply with all relevant conditions on novation in the original C5 Fraud, Asset Tracing & Recovery contract? Have such conditions Conference been waived through agreement or Eden Roc Hotel, Miami conduct? (22-23 October 2012) Noel Campbell

Anti-Corruption Compliance Seminar “Have the parties sought indemnities in Serbia (8 November 2012) respect of liabilities accepted by another Alexis Kyriakoulis party?”

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