Businessman not bound by English arbitration clause because he was not 'party' to the agreement, High Court rules

Out-Law News | 23 Sep 2014 | 12:00 pm | 2 min. read

A wealthy businessman was entitled to bring a claim against his former associates in New York despite the contract containing an English arbitration clause because he was not named as a 'party' on the relevant agreement, the High Court has ruled.

Viktor Vekselberg, Leonard Blavatnik and their company, Rochester Resources Ltd, were refused an anti-suit injunction by the court, which would have prevented Leonid Lebedev from suing them in New York. Although the dispute related to the sale of Lebedev's beneficial interest in an oil company, the contract in dispute was between Rochester and another company, Coral Petroleum Ltd, the court said.

Litigation expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com, said that UK courts tended to be cautious about granting anti-suit injunctions.

"Although the injunction is binding only on the relevant party, it can also potentially be seen as interference in the process of a foreign court," he said. "The court will therefore need to be satisfied that the claimant in the foreign proceedings has agreed to submit his claims to arbitration or the English courts, as the case may be, before restraining him from pursuing those foreign proceedings."

"In this case, the court was not satisfied that Lebedev was bound by the relevant arbitration agreement, and so could not grant the injunction sought," he said.

The case stemmed from the Russian government's decision to sell its share of the Tyumen Oil Company (TNK) in 1997. At the time, Lebedev was the ultimate beneficiary of a minority interest in the company and in one of its subsidiaries. He agreed to transfer his shares to entities owned by Vekselberg and Blavatnik, along with an additional payment. There was disagreement over what, if anything, Lebedev would receive in return, with Vekselberg and Blavatnik arguing that this would be decided "at some point in the future".

In 2001, the three businessmen orally agreed that Lebedev was entitled to a 15% share of the new company to reflect his contributions. The new company issued a promissory note to Coral, a company controlled by a "trusted friend" of Lebedev's, for $200 million. In 2003 Rochester, which was a subsidiary of the new company, and Coral agreed that Rochester would buy the promissory note and pay $600m indirectly to Lebedev. When the joint venture was later sold, Lebedev sued in New York for 15% of the proceeds. He argued that as the 2003 agreement was between Coral and Rochester, he was not bound by an English arbitration clause contained in it.

In his judgment, Jonathan Hirst QC said that the High Court could grant the anti-suit injunction sought by Vekselberg and Blavatnik only if there was a "high degree of probability" that Lebedev was bound by the arbitration clause. He said that he was "not persuaded that it is clearly established that Coral is owned by [Lebedev]", who was at the time facing criminal proceedings in Italy. He said that it was "perfectly possible" that Lebedev had "parked" the promissory note with Coral "so as to conceal it from the Italian authorities should matters go badly for him".

The terms of the 2003 agreement made it clear that Coral was contracting as principal and was a 'party' to the agreement in its own right, the judge said. He said that although it was "certainly arguable" that Lebedev was also a party, it was "more likely that [Lebedev] was intended to be treated as an affiliate of Coral".

"The issue here is not as to the scope of the arbitration clause – i.e. as to what disputes it covers – but as to who is bound by it," he said. "The parties have made it clear that the arbitration clause covers disputes 'arising between the parties'. Had they not included these words, it might have been easier to conclude that the arbitration clause was intended to apply also to affiliates ... there are limits to what a court can properly do to improve a carefully drafted and (at least in this respect) reasonably clear written agreement," he said.

The same reasoning also applied to Vekselberg and Blavatnik, who were also not parties to the contract between Coral and Rochester, he said.