There are severe penalties and even potential jail time for companies that do not honour their obligations under a failed arbitration
Failure to adhere to a London arbitration award or English court judgment can, if certain steps are taken, lead to criminal implications for the defendant and the defendant’s directors.
In Bunge SA v Huaya Maritime Corp1 HFW assisted with the enforcement of a LMAA arbitration award. The defendant, a Marshall Islands entity called Huaya Maritime Corp (Huaya), had participated in the arbitration and lost. Despite numerous demands, Huaya failed to pay the fairly modest award due to the claimant, Bunge SA (Bunge).
After investigation, HFW found that Huaya had a Chinese parent company which had opened up a number of subsidiary companies in various jurisdictions with limited or no reporting requirements, subsequently ceased using them, and had potentially dissipated assets once a liability (such as an arbitration award against them) had accrued.
Using this evidence, HFW secured a worldwide freezing order (WFO) from the English High Court. Importantly, a WFO has two key aspects:
- Disclosure obligations which require the respondent, within 24 hours of service of the WFO, to disclose its assets up to a certain value and subsequently to include that information in an affidavit and serve this on the applicant within 48 hours of service of the WFO.
- A penal notice which states: “If you [the respondent] disobey this order you may be held to be in contempt of court and may be imprisoned, fined or have your assets seized. Any other person who knows of this order and does anything which helps or permits the Respondent to breach the terms of this order may also be held to be in contempt of court and may be imprisoned, fined or have their assets seized.”
Upon Huaya’s failure to comply with the disclosure obligations under the WFO, HFW pursued Huaya and Huaya’s director for contempt of court.
As a result, HFW secured a committal order against the director on the basis that he was the “directing mind” of Huaya and so must have known about its obligations under the WFO. The director was sentenced to 18 months’ imprisonment in his absence. The implication of this is that if the director ever travels to the UK, he will be arrested and imprisoned.
“These types of freezing orders, and consequent contempt orders, although potentially last-resort remedies for enforcement, can be effective”
Commodities clients regularly opt for English law, London arbitration clauses in their contracts and many standard form contracts, including GAFTA and FOSFA, do so.
These types of freezing orders, and consequent contempt orders, although potentially last-resort remedies for enforcement, can be effective.
In the present case, after service of the freezing order and committal order, Bunge received payment in full of the award, interest and costs from Huaya – possibly as Huaya and the director became aware of true and severe ramifications of the committal order.
A further interesting part of the proceedings was that throughout, the English court was keen to support Bunge in its application on the basis that Huaya took the benefit of participating in arbitration in London (supervised by the English courts) and then when the award was not its favour, refused to comply. The court took a dim view of this.
When negotiating dispute resolution clauses in their contracts, commodities clients should keep in mind the supportive approach of the English courts to arbitration and the enforcement options available to them once an award has been secured.
Brian Perrott is a partner with HFW in its London office, while Prashant Kukadia is an associate. They can be contacted on email@example.com, or firstname.lastname@example.org respectively.