Deutsche Bank Ag v. Tongkah Harbour Public Co Ltd and another [2011] EWHC 2251 (QB)
Deutsche Bank entered into a financing transaction for a gold mine, part of which involved a gold export contract and a parent company guarantee. Following political unrest in Thailand, the defendants were unable to honour the various contracts, which contained an option to resolve disputes in LCIA arbitration or in the London High Court. The two branches of Deutsche Bank involved each exercised the option, the financing arm opting for High Court litigation and the commodities arm opting for LCIA arbitration. The defendants challenged this under section 9 of the Arbitration Act 1996 and/or under the court's inherent jurisdiction or case management powers to stay two actions brought against them concerning the same subject matter in different forums. The court held that the main action arose from the same circumstances and therefore stayed the court proceedings in favour of arbitration. However, the proceedings under an associated parent company guarantee were allowed to continue in court as they did not involve the same defendants.
The background facts
In 2006, against a background of rising gold prices, Deutsche Bank (Bangkok) ("DB") entered into an unusual financing structure with Tungkum Ltd ("Tungkum"), a company licensed to carry out gold exploration and mining in northeast Thailand, and its parent company, Tongkah Harbour Public Co Ltd ("Tongkah"), a long established Thai company. The structure was such that Tungkum entered into a facility agreement dated 18 April 2008 by which DB agreed to advance it US$35 million. Tungkum simultaneously entered into an export contract. There was also a parent company guarantee dated 18 April 2008 under which Tongkah agreed to guarantee Tungkum's liability.
The key agreements in this matter were therefore as follows:
- The facility agreement. The parties to this agreement were Tungkum as the borrower, DB Bangkok as the lender, DB Singapore as the arranger and DB Amsterdam as the agent and security trustee. The agreement was for a loan facility of US$35 million and gave the English courts non-exclusive jurisdiction over disputes, whilst giving the DB parties alone the option to refer disputes to LCIA arbitration.
- The export contract. This contract was between Tungkum as supplier and DB London as off-taker. The commercial purpose of the export contract was to allow Tungkum to repay the facility agreement in monthly instalments by selling gold to DB London at a formula-calculated price. The dispute resolution clause was materially similar to that of the facility agreement.
- The guarantee. This agreement was between Tongkah as guarantor and DB Amsterdam as security trustee. Unlike the above agreements, jurisdiction over disputes was granted to the English courts and there was no option to arbitrate.
In May 2010, a state of emergency rule was declared in Thailand and Tungkum was unable to meet its obligations under the export contract. DB initially granted Tungkum a series of written waivers, whereby it agreed to temporarily waive its right to rely on the failure as an event of default. A "holiday period" letter agreement followed in August of that year, which provided for a suspension on payments and deliveries until November 2010, when revised documents were intended to be executed.
Around the end of 2010, Tungkum concluded that the above structure was in breach of Thai law and banking regulations and it refused to execute the revised documents. DB treated this as an event of default under the principal agreements and issued the requisite notice of cancellation of the loan, including a call for the outstanding sums. On the same day, DB also sent a termination letter under the export contract to Tungkum, followed later by a notice of early termination amount under the same contract, calling for payment of the early termination amount.
In February 2011, DB commenced proceedings in the Commercial Court in London seeking payment of the outstanding balance under the facility agreement and, from Tongkah, of the sums allegedly due under the guarantee. Later the same day, DB commenced LCIA arbitration proceedings against Tungkum for payment of the early termination amount allegedly due under the export contract. Tongkah applied for a stay of the proceedings before the court in favour of the arbitration proceedings.
The Commercial Court decision
The court summarised the issue for decision as, essentially, the scope of what was referred to arbitration by DB in February 2011.
Mr Justice Blair commented that, in construing an arbitration clause, the assumption is that the parties are likely to have intended any dispute arising out of the relationship into which they entered to be decided by the same tribunal. Similarly, where there are multiple related agreements, the assumption is that the parties do not generally intend a dispute to be heard in two different forums. Where the dispute resolution provisions differ, the allocation of jurisdiction is fundamentally one of construction.
As a starting point, the court disagreed with DB's argument that the different divisions of the bank were entitled to choose their own methods of dispute resolution. DB was held to be a single contracting party and this situation was held not to be analogous to one where branches of banks are treated as separate entities.
The court also disagreed with DB's argument that the three claims were each discrete issues which were likely to require discrete defences. It held that not only were the facility agreement and export contract closely connected, but also that the claims under both these agreements were based on the same events of default. It followed that it was unlikely that the defence to either claim would be different. Whilst the claims in court and before the tribunal were for different sums of money, both claims arose out of the same breach of the same contractual arrangements and, as such, were aspects of the same matter. The court also rejected the implication that a stay would interfere with DB's right of access to the court. The bank had the option to choose between the court and arbitration and, having referred essentially the same claim to two different forums, it would not be depriving DB of a right to stay the proceedings in one forum. It was also held to be of little significance that, as presently constituted, the claim in arbitration was restricted to a claim for the early termination amount under the export contract.
With regard to the claim under the guarantee, Tongkah argued that, as its liability under the guarantee was of a secondary nature, the court should stay the proceedings pending resolution of liability issues in relation to the claims under the other agreements. The court rejected this submission, holding that, whilst a claim under a guarantee may raise similar or even identical issues as the claim against the principal debtor, regardless of a substantial overlap between the claims, the covenant to pay is given by a different party. As such, in this matter, DB was entitled to enforce the guarantee if it could establish its claim, regardless of the claim against the principal debtor. In reaching this conclusion, the court referenced Dicey and Morris on The Conflict of Laws, stating that it is possible and commercially rational to allow the claim to proceed even though this may result in a degree of fragmentation in the resolution of the overall dispute.
Accordingly, a stay of the court proceedings against Tongkah was granted.
Comment
Parties will often seek the flexibility of a floating choice of forum in their documents, particularly banks involved in ship finance and/or trade finance transactions. Where they seek that flexibility, however, they need to make sure that the various internal departments or individuals involved keep in close contact with each other when a dispute arises. A tactical decision about which forum is best for each department involved needs to be taken at an early stage and the various departments and individuals involved need to stand by that decision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
