London Maritime Arbitration

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Security for claims in arbitration

A. Introduction

18.1 The decision to refer a dispute to arbitration will inevitably be influenced by the prospects of enforcing any award which may ultimately be obtained. Unless security has been obtained in advance, the process of issuing enforcement proceedings, whether in England or abroad, may be disproportionately expensive or time-consuming, particularly where it is difficult to locate assets. In practical terms it may be pointless to arbitrate if there is no machinery for securing claims. 18.2 This chapter considers security for claims (or counterclaims) advanced in London maritime arbitrations. It will focus in particular on two main areas: freezing injunctions1 and ship arrests. These have generally been the most commonly adopted methods of obtaining security in the context of London maritime arbitrations (although a freezing injunction does not strictly secure the claim; it merely prevents dissipation of assets). Other methods of securing claims are considered in section D of this chapter. In practice, of course, security is often dealt with by agreement by the insurer or Club funding the arbitration proceedings, often against the background of the threat of arrest of vessels. Nevertheless, it may become necessary to apply to court in order to properly secure a claim. 18.3 It should be noted that the LMAA Terms do not make provision for interim orders by emergency arbitrators, and any application for a freezing injunction must, therefore, be made to court. By contrast, the provision for emergency arbitrators in Article 9B of the 2014 LCIA Arbitration Rules has been held to limit the power of the English court to intervene.2 18.4 The relevant principles are quite distinct from those governing the grant of security for the costs of defending a claim or counterclaim, which are discussed in . In recent years many parties have secured funds by means of a Rule B3 attachment obtained in the US courts but this remedy is a matter of US law and not dealt with here.

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Power of tribunal and of court

18.5 One of the general principles underlying the 1996 Act is the vesting of procedural powers in the arbitral tribunal, with the court fulfilling a supportive “fall-back” role. However, the impact of this general principle on the area of security has been relatively limited. The parties to arbitration may, of course, agree to confer on the tribunal the power to make orders securing claims,4 but English courts have doubted whether the 1996 Act permits parties to confer on a tribunal the power to grant freezing injunctions. More generally, there are obvious issues concerning the enforceability of orders where they are granted on a without notice basis, or against third parties. As a result, LMAA arbitrators would generally refuse to grant a freezing order, even if such power were conferred by agreement. 18.6 In default of agreement, the 1996 Act confers upon the tribunal a limited statutory power to make orders preserving the subject matter of the dispute (section 38(4)), and further confers upon the court powers to make orders which have the effect of securing claims (section 44). The powers conferred under sections 38 and 44 of the 1996 Act apply “unless otherwise agreed”. In the context of London maritime arbitration, the usual methods of securing claims are to apply to court under section 44 for a freezing injunction, or to arrest a vessel, or to obtain an attachment order in a foreign court.

Court’s powers to make orders against third parties

18.7 Where a tribunal has the power to make an order securing a claim, this is necessarily limited to the making of orders addressed to the parties to the arbitral proceedings. The court’s powers under section 44 are not expressly so limited and in theory would extend to making orders against third parties, (e.g., banks or companies associated with the parties). However, in DTEK Trading SA v Morozov and anor,5 it was held (following obiter dicta in Cruz City 1 Mauritius Holdings v Unitech Ltd 6) that section 44 is limited to the parties to the arbitration, and does not confer power to make orders against third parties.

B. Freezing injunctions

18.8 A freezing injunction is an order restraining a party from removing or dealing (or causing other parties to remove or to deal) with assets. A freezing injunction is one of the most important and potent remedies available to a claimant who fears that his opponent will attempt to evade enforcement by hiding his assets.7 The substantive principles governing the grant of freezing injunctions are considered in more detail below: this section first addresses the situations in which the court has power to intervene.

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The tribunal

18.9 The question of whether the parties may confer jurisdiction on the tribunal to make a freezing injunction remains uncertain. It is arguable that the parties are able to do so pursuant either to section 48 of the Act (which provides that the parties may agree on the powers exercisable by the tribunal as regards remedies; unless otherwise agreed, the tribunal may “order a party to do or refrain from doing anything”) or section 39 (which entitles the parties “to agree that the tribunal shall have power to order on a provisional basis any relief which it would have power to grant in a final award”). In Kastner v Jason,8 Rix LJ noted that most commentators took the view that section 48 was concerned with final remedies (and therefore could not be relied upon in connection with freezing injunctions).9 He noted, however, that views were divided on the question of whether section 39 might be relied upon. Some take the view that section 39 applies only to remedies which could be granted in a final award (which would not therefore encompass freezing injunctions).10 The issue remains undecided, though in Econet Wireless Ltd v Vee Networks Ltd 11 Morison J apparently assumed that the LCIA Rules conferred on the tribunal the power to grant a freezing injunction. 18.10 This issue is unlikely to be of practical significance in LMAA arbitration. The LMAA Terms do not contain any provision conferring on the tribunal the power to grant “provisional relief”, and the invariable practice is to apply to the court, not the tribunal, for a freezing injunction. The position is different under the LCIA Rules 2014. Article 25.1 confers on the tribunal a general power to order the provision of security for a claim or counterclaim. In many cases, by the time the tribunal is appointed, it will be too late to take steps to obtain security. Article 9B therefore provides for the appointment of “emergency arbitrators” who can deal with urgent applications, analogous to freezing injunctions. As discussed further below, the existence of the Article 9B emergency arbitrator mechanism has been held to affect the scope of the court’s jurisdiction to grant freezing injunctions in support of arbitration, and in many cases a claimant in an LCIA arbitration will need to apply for the appointment of an emergency arbitrator rather than applying to court for a freezing injunction. Furthermore, once a tribunal has been appointed, Article 25.1 of the LCIA Rules 2014 provides that an application may be made to court only in exceptional circumstances and with the permission of the tribunal. It has been held that this provision would be fatal to an application under section 44 of the 1996 Act, but not necessarily to an application under section 37.12

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The court

18.11 Section 44(2)(e) of the 1996 Act (which is based upon Articles 9 and 31 of the Model Law) gives the court the same power to grant an interim injunction (including a freezing injunction), or the appointment of a receiver as it would have in court proceedings. Section 44 provides as follows:
  • (1) Unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about the matters listed below as it has for the purposes of and in relation to legal proceedings.
  • (2) Those matters are –

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