Deposit Guarantee Fund for Individuals v Bank Frick & Co AG & Anor.

The judgment concerns what amount to a ‘step in the proceedings’ which precludes a party from applying for a stay in favour of arbitration under s.9 of the Arbitration Act 1996, and is of potential significance to all parties that are served with court proceedings but who wish to argue that the subject matter should instead be dealt with in arbitration.

The claim is brought by the Deposit Guarantee Fund for Individuals (“DGF”), purported liquidator of a Ukrainian Bank named PJSC National Credit Bank (“the Bank”). In 2013-2014, the Bank entered into a series of pledge agreements with the First Defendant (“Frick”), a Lichtenstein Bank. Under those agreements, the Bank pledged funds as security for various loans made under agreements between 3 entities incorporated in the UK ("the debtors"), including the Second Defendant, Eastmond Sales LLP. The pledge agreements included a clause in favour of arbitration.

The debtors failed to repay the loans, such that Frick was entitled to (and did) call on the Bank to pay the securities that they had pledged. It is now alleged by DGF that this was part of a complex fraud committed by directors of the Bank, who incorporated the debtor entities in order effectively to take money from Frick which would then be repaid by the Bank, leaving the Bank out of pocket. DGF brings its claim under s.423 Insolvency Act 1986, alleging that the pledge agreements (and transfers made under them) amounted to a transaction defrauding the Bank’s creditors.

On 26 July 2021, Frick applied for a stay in favour of arbitration (pursuant to the arbitration agreements) and, in the alternative, for the claim to be struck out on the grounds that it discloses no proper grounds for having been brought (or for summary judgment). Frick considered that the strike out application should be heard first since it would be a simpler, shorter application and thus sought, for case management reasons, for that application to be listed, heard and determined first (on a conditional basis), without prejudice to its right subsequently to pursue its primary application for a stay of proceedings.

The Court was therefore required to consider two questions:

1. As a matter of principle, did Frick take a “step in proceedings”, such that it would lose its right to seek a stay in favour of arbitration, by seeking directions for the listing of the strike out application first?

2. If not, should the Court exercise its discretion to direct that the strike out application be heard first, for reasons of efficient case management?

The first question engages a complex, but important, point of law: what conduct, in the scope of litigation, amounts to a “step in the proceedings” that prevents a party from pursuing an application for a stay in favour of arbitration.

At paragraph 28, Master Clark considered the key principles to be derived from the earlier Court of Appeal case of Capital Trust Investments v Radio Design [2002] EWCA Civ 135:

“(1) In order to deprive a defendant of his recourse to arbitration a "step in the proceedings" must be one which impliedly affirms the correctness of the proceedings and the willingness of the defendant to go along with a determination by the Courts of law instead of arbitration: Eagle Star Insurance Co Ltd v Yuval Insurance Co Ltd [l9781 1 Lloyd's Rep 357: [56];

(2) Two requirements must be satisfied. First, the conduct of the applicant [for a stay] must be such as to demonstrate an election to abandon his right to stay, in favour of allowing the action to proceed. Second, the act in question must have the effect of invoking the jurisdiction of the court: Mustill & Boyd, Commercial Arbitration (2nd edn, 1989): [57];

(3) An act which would otherwise be regarded as a step in the proceedings will not be treated as such if the applicant has specifically stated that they intend to seek a stay: Merkin, Arbitration Law: [57].”

At paragraph 30, Master Clark went on to summarise the essential principle as follows:

“The inexorable conclusion which follows from this decision (and which was ultimately common ground between the parties in this claim) is that the following are not a "step in the proceedings":

(1) an application for strike out or summary judgment which is made expressly conditionally on a Stay Application not succeeding;

(2) seeking a hearing and making of submissions at the hearing of such an application.

It is critical that Frick expressed its strike out application to be on a conditional basis: as a result of this, and Frick’s clear statement that this application was in the alternative to the primary application and therefore without prejudice to it, Frick had not waived its rights to seek a stay of arbitration under s.9 of the Arbitration Act 1996. See paragraphs 31-35.

However, on case management grounds, Master Clark declined to list the strike out application first, concluding that it could not safely be determined that this application would be determined more quickly and efficiently than the application for a stay in favour of arbitration.

This decision importantly confirms that a defendant to court proceedings is entitled to apply for a stay in favour of arbitration, and to seek strike out (or summary judgment) in the alternative, and then to seek directions regarding the case management of those applications without being taken to have submitted to the court proceedings. Crucially, the judgment confirms that a party can seek directions from the Court (including, for example, potential disclosure applications) without prejudice to its s.9 rights, provided that it does so whilst expressing its intention to preserve its rights, and does not seek dispositive and/or substantive orders on an unconditional basis.

The judgment can be viewed here.