No security for arbitral award despite "flimsy" challenge

Summary

In the case of Konkola Copper Mines PLC v U&M Mining Zambia Ltd [2014] EWHC 2146 (Comm), two applications were made by the defendant (“U&M”) for:

(1) security for costs pursuant to s.70(6) of the Arbitration Act 1996 (the “1996 Act”) in relation to challenges brought by the claimant (“KCM”) to an arbitral award dated 6 January 2014 (the “Second Award”); and

(2) security for certain sums due under the Second Award pursuant to s.70(7) of the 1996 Act.

The first application for security for costs was granted. In respect of the second application for security for sums due under the Second Award, the court agreed with the analysis and approach outlined in the previous cases of A v B [2011] 1 Lloyd’s Rep 363 and X v Y [2013] EWHC 1104 (Comm), and the application was rejected on account of there being no evidence before the court that KCM’s challenges to the Second Award would prevent, hinder, or otherwise prejudice the enforcement of the Second Award. This was despite the court characterising KCM’s challenges as “flimsy” and its acknowledgment that there was “a real risk of dissipation of assets”.

Background

KCM and U&M (both companies incorporated under the laws of the Republic of Zambia) entered into a number of contracts for the provision of open pit mining and related services at one of KCM’s copper mines in Zambia. Disputes arose between the parties which culminated in a Settlement Agreement and a Memorandum of Understanding both dated 26 October 2012. KCM subsequently purported to terminate one of the mining contracts between the parties and to rescind the Settlement Agreement. KCM and U&M both made applications for interim relief in the Zambian and English Courts respectively, and U&M commenced four arbitral proceedings (pursuant to the LCIA rules) which were subsequently consolidated.

Three hearings and three arbitral awards followed, the second of which (the Second Award) included a conditional award such that in the event KCM failed to file a response evidencing why U&M’s invoices were not immediately payable within 14 days, KCM was ordered to pay those invoices, which totalled US$40,205,995.31. KCM failed to file its response and the tribunal confirmed that its conditional award had therefore become final.

On 3 February 2014, KCM issued an arbitration claim form in the English courts challenging the Second Award under sections 67 and/or 68 of the 1996 Act. On 5 March 2014, and in response to KCM’s challenges to the Second Award, U&M issued its applications for security for costs (totalling £643,514.50) and security for the sums due under the Second Award (totalling US$41,259,274.47 and £1,096,876.01).

Decision

Security for costs pursuant to s.70(6) of the 1996 Act

The court granted the application on the basis that the requirements of CPR 25.13(2)(c) had been met and, in particular, there was a real risk that KCM’s assets would not be readily available for the satisfaction of an order of costs against it. The court went onto state that security for costs would have been granted even in the absence of the evidence put before the court in relation to KCM’s assets as it appeared that KCM had no assets in the jurisdiction such that any order for costs against KCM would have to be enforced in Zambia. The court did, however, give weight to KCM’s objections in respect of the level of security for costs sought being far too high given the hearing was only three weeks away at the time, and ordered a lower sum by way of security.

Security for the sums due under the Second Award pursuant to s.70(7) of the 1996 Act

There was a dispute as to whether the Second Award constituted a final award due to the interim/conditional nature of the award. However, for the purpose of the application for security, the court assumed the award was final within the meaning of s.70(7) of the 1996 Act. The court therefore proceeded to apply a two stage test to its decision regarding granting security:

(1) could KCM’s challenges to Second Award be characterised as “flimsy”?

(2) was there evidence that KCM’s challenges to the Second Award would prejudice U&M’s ability to enforce the award?

With regard to the first stage of the test, the court concluded that KCM’s challenges to the Second Award were “flimsy” on the basis that it appeared KCM had not advanced any substantive reason for refusing to pay the outstanding invoices relevant to the Second Award, and its strongest argument seemed to be that the Second Award was provisional rather than final.

However, in relation to the second stage of the test, and on the basis that there was no evidence before the court that KCM’s challenges to the Second Award would prevent, hinder, or otherwise prejudice the enforcement of the Second Award in Zambia, the court rejected U&M’s application for security. It was for the Zambian courts to adjourn the decision on enforcement of the Second Award, or order that KCM provide security. The court accepted that if U&M applied to the Zambian courts for security and that security was not granted, there would be strong grounds for arguing that KCM’s challenges to the Second Award were prejudicing U&M, but in the circumstances there was no evidence as to what the court in Zambia may or may not do as U&M had not taken steps to enforce the Second Award in Zambia. The court also noted that a freezing injunction had previously been granted (and continued) in favour of U&M against KCM on account of the “real risk of dissipation of assets”.

Comment

Given the court’s acknowledgment that there was “real risk of dissipation of assets”, it is unsurprising that strong criticism of the English courts’ approach to the issue of granting security for sums due under an arbitral award subject to challenge exists, with some arguing there should be a presumption that security is ordered where challenges are found to be “flimsy”. The court’s decision to reject the application for security for sums due under the Second Award demonstrates once again the weight given to the second limb of the two stage test for granting such security. In circumstances where it is apparent the party challenging an award has no proper complaint and is simply resisting enforcement of the award, parties seeking to enforce the award subject to challenge should take all necessary steps to enforce the award in the relevant jurisdiction such that if enforcement proceedings cannot be progressed due to the challenge, it can be evidenced (when seeking security for the award in the English courts) that the challenge to the award is preventing enforcement.