February 2008

Bloomberg® European Law Journal | Vol. 2, No. 232

products under Directive 89/104/EEC to determine the appropriate level of trade mark protection.

LitigationArbitration

Anti-Suit Injunctions in Defence of Arbitration: Protecting the Right to Arbitrate in Common and Civil Law Jurisdictions

Article contributed by:Philippa Charles, Sharon Gerbi, Alex Lakatos and Daniela Caleff, Mayer Brown LLP

Introduction

Parties typically enter into arbitration agreements in order to avoid the perceived cost, uncertainty and bias associated with domestic litigation. However, parties do not always honour their contractual obligation to arbitrate. Instead, some breach that obligation and choose to bring suit either in their home forum or in the court of some other distant shore where they believe they will enjoy favourable treatment, greater convenience, or both.

Years ago, English courts developed a powerful common law tool to address this problem: the anti-suit injunction. The anti-suit injunction is a court order from one forum, directed to a party before it, instructing that party to cease the prosecution of litigation in another forum. If the party fails to obey the anti-suit injunction, that party risks contempt sanctions. Historically, English courts granted such anti-suit injunctions liberally, provided that there was a sound basis in contract for requiring the parties to arbitrate.

By contrast, civil law countries, such as Germany and Switzerland, have not embraced anti-suit injunctions. From a civil law perspective, the anti-suit injunction is inconsistent with international comity because such injunctions allow courts in one nation effectively to strip the courts of another nation of jurisdiction to adjudicate a case. Instead of issuing anti-suit injunctions, civil law nations protect the right to arbitrate by refusing to recognise judgments obtained through foreign litigation in contravention of an agreement to arbitrate, and by dismissing any such suits filed within their own borders.

The U.S. has adopted a middle course. Like English courts, U.S. courts will issue anti-suit injunctions, but in so doing will consider international comity, among other factors, in determining whether an anti-suit injunction is appropriate.

This article is part one of a two-part examination of the status of the anti-suit injunction. Part one explores the common law-based English and U.S. approaches to anti-suit injunctions, and explains why England soon may be required to abandon

the anti-suit injunction, at least where such an injunction would affect proceedings before the courts of another EU Member State. Part two, to be published in the next issue, will examine the position in Germany, Switzerland, and Brazil, three civil law-based legal systems. Part two, in next month’s Journal, will also present strategies that parties may wish to consider to protect their right to arbitrate against the danger of circumvention through competing litigation, in light of diverse perspectives on anti-suit injunctions among leading arbitral venues.

The Common Law Approach

England and Wales

Historically, the English courts granted anti-suit injunctions where a litigant had a right not to be sued in a foreign court: most commonly either where there was an agreement conferring exclusive jurisdiction on the English courts or where there was an enforceable arbitration clause. While liberally granted, anti-suit injunctions are not granted indiscriminately. Rather, the courts take into account special factors that point to the case being more suited to a determination by the court, particularly the validity of the agreement to arbitrate, including the agreement’s operability and capability of being performed. International comity has not historically been a factor in the English courts’ determination whether to issue an anti-suit injunction, but, in a 2007 decision, issues of comity were expressly considered by Toulson LJ in dealing with an application for an anti-suit injunction in respect of proceedings brought in a U.S. court out of a disputed arbitration award (Noble Assurance Co. v Gerling-Konzern General Insurance Co.)1

The European Court of Justice ruling in Turner v Grovit2 in 2004 curtailed the English courts’ use of anti-suit injunctions against parties pursuing litigation in the courts of EU Member States. Importantly, the case did not involve an anti-suit injunction to protect an arbitration agreement. Instead, the case concerned an English court’s anti-suit injunction to prevent proceedings in Spain that one of the parties maliciously had brought in violation of a jurisdictional exclusivity agreement in order to pressure a settlement in English judicial proceedings. However, the ECJ held generally that the anti-suit injunction was incompatible with EU law and the doctrine of comity.

The ECJ’s determination in Turner v Grovit was based upon Regulation 44/2001 on the jurisdiction of courts and the recognition and enforcement of judgments (Regulation). The Regulation contains a provision requiring a court first seized of proceedings to consider whether it has jurisdiction and, if not, to decline jurisdiction in favour of the appropriate court. If a party feels that proceedings have been commenced in breach of an exclusive jurisdiction agreement, the party should make such arguments to that court. Under this approach, the court first seized is trusted to apply the Regulation correctly, and decline jurisdiction if appropriate.

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Following the ECJ’s determination in Turner v Grovit, English courts no longer may issue an anti-suit injunction in support of an exclusive jurisdiction clause where the court of another Member State is the first seized. However, the ability of English courts to issue an anti-suit injunction in relation to proceedings outside the EU is unaffected.

It is unclear whether the ruling extends to anti-suit injunctions issued in support of agreements to arbitrate. Proceedings relating to arbitration generally are excluded from the Regulation by Article 1(2)(d); however, the Regulation fails to specify which aspects of arbitration are excluded. In the wake of the ECJ’s determination in Turner v Grovit, the question that remains is whether the arbitration exclusion in the Regulation extends to cover proceedings for an anti-suit injunction to restrain litigation brought in breach of an agreement to arbitrate.

This question was considered by the Court of Appeal in Through Transport.3 The Court of Appeal concluded that the exclusion of arbitration from the Regulation meant that it remained open to a party to seek an anti-suit injunction in England in support of an arbitration clause, even though another Member State’s court was first seized of the substantive action.

The issue arose again in the recent case of West Tankers Inc v RAS Riunione Adriatica di Sicurta SpA4 where the House of Lords referred to the ECJ the question of whether or not anti-suit injunctions are still available to restrain court proceedings brought in breach of an arbitration agreement following the ruling in Turner v Grovit. In the West Tankers case, West Tankers commenced arbitration against an insurance company in England, which responded by commencing litigation against West Tankers in Italy. West Tankers sought an injunction in the English court, arguing that the insurers were bound by the arbitration clause. The English court at first instance, and the House of Lords on appeal, agreed with West Tankers and granted an injunction restraining the insurers from continuing the Italian proceedings.

Although the House of Lords referred the matter to the ECJ, it signalled its own view that restrictions should not apply to anti-suit injunctions granted to protect arbitration agreements. The House of Lords identified two key matters relevant to the interpretation and application of EU law. First, it was noted that the Regulation expressly excludes proceedings related to arbitration from its ambit. As a result, the principle that the courts of Member States should hesitate before intervening in matters properly within the jurisdiction of the court first seized does not apply in the arbitration context.

Second, the House of Lords commented on public policy considerations: that subjecting arbitration agreements to the Regulation’s provisions on jurisdiction would be contrary to the purpose and rationale of such agreements, which is to ensure that disputes remain outside the scope of national

courts so far as possible. Principles such as the priority of the defendant’s domicile would be incompatible with an agreement to arbitrate. The House of Lords also commented that such a determination would make all Member States less attractive as venues for arbitration by comparison with non-EU jurisdictions.

The difficulty with the House of Lords’ approach is that the anti-suit injunction is a common law creation alien to other European Member States. Despite the House of Lords’ reasoning described above, there are differing views in Europe on the appropriateness of anti-suit injunctions. In those states that regard anti-suit injunctions as repugnant to the concept of comity and the right of courts to determine their own jurisdiction, the views of the English House of Lords may not carry the weight that might be hoped for by common law lawyers.

The House of Lords currently is awaiting the determination of the ECJ on this important issue. Notably, in the months since the reference to the ECJ, English courts have continued to grant relief to parties seeking injunctions to restrain proceedings brought in breach of agreements to arbitrate. By doing so, the English courts have demonstrated their confidence that this is the appropriate response of the courts.

The United States

Under U.S. law, federal courts have inherent authority to grant anti-suit injunctions to restrain foreign proceedings in support of arbitration. U.S. courts grant such anti-suit injunctions in certain cases in which the foreign proceedings would undermine either the arbitration itself or an order of a U.S. court compelling the parties to submit to arbitration. U.S. courts generally are cautious when considering whether to grant an anti-suit injunction, and recognise the importance, as a matter of comity, of respecting the interests of foreign sovereign states. The fact that the injunction operates only against the parties, and not directly against the foreign court, does not eliminate the need for due regard to principles of international comity. U.S. courts therefore accept that anti-foreign suit injunctions should be used sparingly, and with great care.

A broadly accepted formulation (although not the only U.S. approach) for determining when to grant an anti-suit injunction is set forth in the leading China Trade5 decision. China Trade held that an anti-suit injunction is appropriate only if two threshold requirements are met: (1) that the parties are the same in both matters, and (2) that the resolution of the case before the enjoining court must be dispositive of the action to be enjoined. The China Trade court then sets forth five additional equitable factors for courts to consider when determining whether the non-U.S. proceedings should be restrained: (1) frustration of a policy in the U.S. forum; (2) the non-U.S. action would be vexatious; (3) a threat to the U.S. court’s in rem or quasi in

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rem jurisdiction; (4) the proceedings in the non-U.S. forum prejudice other equitable considerations; or (5) adjudication of the same issue in separate actions would result in delay, inconvenience, expense, inconsistency, or a race to judgment. In applying these factors, courts must be mindful of comity concerns.

The recent decision in Ibeto v M/T Beffen6 is illustrative of the U.S. approach. There, the claimant, Ibeto, bought contaminated oil and (1) sued the M/T Beffen, the ship that transported the oil, in the Nigerian Courts; (2) sued the M/T Beffen in New York; and (3) commenced arbitration against the M/T Beffen in London. Ibeto subsequently decided to discontinue the New York proceeding and the London arbitration and to proceed only with the court action in Nigeria. The M/T Beffen sought an order from the New York court (District Court) compelling arbitration in London and enjoining the Ibeto from litigating in Nigeria. The District Court granted the M/T Beffen’s motion and issued an order compelling Ibeto to arbitrate and an anti-suit injunction restraining the Nigerian action.

On Appeal, the United States Court of Appeals for the Second Circuit (Second Circuit) affirmed the District Court’s order that arbitration proceed in London, concluding that an injunction was “fully justified.” The Second Circuit held that the two threshold requirements were satisfied: “the parties are the same in this matter and in the Nigerian proceeding and the resolution by arbitration of the case before the District Court is dispositive of the Nigerian proceeding.” The Second Circuit agreed with the District Court’s analysis of most of the five China Trade prudential factors, noting that allowing the Nigerian proceedings to go forward would frustrate the strong U.S. federal policy in favour of arbitration and risk inconsistent results, inefficiency, inconvenience, and a possible race to judgment. The Second Circuit (disagreeing with the District Court) held that the Nigerian proceedings were not an effort to evade arbitration because the Nigerian suit was first filed.

The Second Circuit held, however, that as a matter of comity, the District Court should have issued a more narrow injunction that made clear that only the parties, and not the Nigerian Courts, were subject to the injunction and that the injunction was not permanent, but rather was a temporary injunction that would last only until the conclusion of the London arbitration. These are minor, technical modifications that have no practical impact on the effect of the anti-suit injunction, but exemplify the U.S. courts’ sensitivity to concerns of comity.

In LAIF X v Axtel,7 the U.S. court refused to grant an anti-suit injunction, in large part due to comity concerns. There, LAIF X, a minority shareholder in a Mexican company (Axtel), commenced arbitration against Telinor, the majority shareholder of Axtel, claiming that Telinor had unlawfully diluted LAIF X’s interest in Axtel. Telinor submitted to the

arbitration initiated by LAIF X, but Telinor also commenced a Mexican action against LAIF X seeking a declaration that LAIF X did not have a legitimate right to its shares in the first instance. LAIF X sought an order compelling Telinor to arbitrate the entire dispute and an anti-suit injunction barring Telinor from pursuing the Mexican action. The District Court denied the motion and the Second Circuit affirmed this decision, holding that there was no basis to compel arbitration because Telinor was already participating in the arbitration. The Second Circuit reasoned that, to the extent that the Mexican litigation interfered with the arbitration, it was incumbent upon the arbitrators to direct the parties to discontinue the Mexican suit, noting: “It may be another story . . . if Telinor ignores an arbitral order to suspend or discontinue the suit in Mexico. . . .”

Affirming the decision not to issue an anti-suit injunction, the Second Circuit emphasised the strong principles of comity weighing against the granting of such injunctions. The Second Circuit also noted Mexico’s strong interest in determining the legitimacy of LAIF X’s investment in a Mexican company, compared with the United States, which had no interest in the relationship between LAIF X, a Belgian investor, and Axtel, a Mexican company. The Second Circuit further stressed that Telinor had not tried to “sidestep” arbitration. The Second Circuit left open the door to revisit the issue of an anti-suit injunction in the future, if Telinor tried to thwart arbitration at a later date.

In sum, U.S. courts will use anti-suit injunctions to protect arbitration agreements from competing lawsuits, even if the arbitration to be protected is occurring outside of the U.S. In so doing, however, U.S. courts will consider all of the competing interests, including, as a matter of comity, the interest of the nation before which the action to be enjoined is pending.

Conclusion

Both U.S. and UK courts are comfortable granting anti-suit injunctions restraining parties from pursuing foreign proceedings where doing so will further the parties’ contractual agreement to arbitrate, although U.S. courts are at least somewhat more mindful of international comity concerns in so doing. The continued ability of the English courts to issue such injunctions, however, is an open question soon to be decided – at least when the competing proceedings are based in another EU Member State.

Philippa Charles, a partner in the London office of Mayer Brown International LLP, focuses on international arbitration, with an emphasis on client representation in disputes arising out of cross-border contracts. E-mail: pcharles@mayerbrown.com.

Alex C. Lakatos, a partner in the Washington, D.C. office of Mayer Brown LLP, focuses on complex international litigation, particularly on behalf non-U.S. financial institutions. E-mail: alakotos@mayerbrown.com.

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Sharon Gerbi is a solicitor in Mayer Brown’s London office. E-mail: sgerbi@mayerbrown.com.

Daniela Caleff is a foreign associate in Mayer Brown’s Washington, D.C. office. E-mail: dcaleff@mayerbrown.com.

Mayer Brown is a leading international law firm with twenty-one offices in key business centres across the Americas, Europe and Asia.

1 Noble Assurance Co. v Gerling-Konzern General Insurance Co [2007] EWHC 253 (Comm).2 C-159/02 Turner v Grovit [2004] ECR I-3565.3 Through Transport Mutual Insurance Association (Eurasia) Ltd v New India Assurance Co Ltd [2005] 1 Lloyd’s Rep 67.4 West Tankers Inc v RAS Riunione Adriatica di Sicurta SpA [2007] UKHL 4 [2007] 1 All E.R.5 China Trade & Dev. Corp. v M.V. Choong Yong, 837 F.2d 33 (2d Cir. 1987).6 Ibetov Petrochemical Industries Ltd. v M/T Beffen, 475 F.3d 56 (2d Cir. 2007).7