Devonshires were recently instructed to apply to strike out a service out application in the case of Al-Otaibi and Others v Sloane International Developments 1 Ltd and Others.
The Claimants are private individuals based outside of the jurisdiction who had invested in what they allege were failed property transactions in the jurisdiction. The Defendants included companies based in the British Virgin Islands concerned with the property transactions.
The Claimants were initially successful in their application to serve out of the jurisdiction, which was determined on a without notice basis. Throughout the proceedings it became apparent that during the service out application the Claimants had failed to disclose to the court a number of material facts, not least the existence of an arbitration clause in the contract. They had also incorrectly stated that the contract was governed by English law when in fact it was governed by BVI law.
Without Notice Applications
Where an application is made without notice, the applicant must disclose all matters that are material to the court in deciding whether to grant the order and, if so, on what terms. Non‑disclosure of material facts on a without notice application could lead to an order being set aside. An applicant in breach of their duty of full and frank disclosure should be deprived of any advantage gained as a result.
In the recent case of Solland v Watkins (December 2021) Deputy Master Bowles set out a helpful summary of the authorities to date on the issue of full and frank disclosure. At para 93 he noted that “the duty of frank disclosure, arising in respect of applications made unilaterally and without notice, is a judge made duty of very long standing.” He also noted that it has been described in Knauf GMBH v British Gypsum Limited at para 65 and by Burton J in Masri v Consolidated Contractors International Company SAL at para 58 as constituting a “golden rule” whereby an applicant for relief without notice must disclose to the court all matters relevant to exercise the courts discretion as giving rise to a “heavy duty candour and care”.
This requires the applicant “to bring to the attention of the court, the matter which, if the other party were represented, the party would wish the court to be aware of” (ABCI v Banque Franco-Tunisienne). A court must determine whether the fact(s) not disclosed are of sufficient materiality to justify immediate discharge of the order without examination of merits. The innocence or deliberateness of the non-disclosure is relevant, though not materially decisive.
Requirements
To obtain the court’s permission, the claimant must demonstrate that:
- It has a good arguable case that the claim falls within one of the statutory jurisdictional “gateways” in paragraph 3.1 of Practice Direction 6B;
- There is a serious issue to be tried for each cause of action; and
- England is the proper place in which to bring the claim.
Although historically seen as the exercise of an “exorbitant jurisdiction”, in recent years the courts have taken a much more tolerant approach to service out applications and overcoming the evidential gateways has tended to be far less onerous on applicants.
In the present case the fact that the property was located in the jurisdiction, as was at least one of the directors, coupled with the issues raised in respect of the contract, was sufficient to meet the evidential gateways. But for the existence of an arbitration clause, the applicant’s failure to give full and frank disclosure may not have been fatal.
Arbitration Clause
The contract contained the following wording:
“…all disputes, controversies or differences which may arise between the Parties out of or in connection with this Agreement… shall be finally settled by binding arbitration…”
Under section 9 of the Arbitration Act 1996, section 9 materially provides as follows:
“(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.
…
(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.”
The mere existence of an arbitration clause should have been enough to raise concerns with any experienced legal practitioner that this was material to the court’s decision to grant the application for service out and must be disclosed to the court.
Judgement
Master Pester stated that, “…there is a duty of full and frank disclosure and the court expects that to be complied with and court will be prepared to investigate that there has been a breach of that.”
Master Pester in reaching his decision, gave due consideration to the breadth of the arbitration clause, and attention was drawn to Fiona Trust and Holding Corporation and others v Privalov and others, as to the types of claims that would be covered. The wording was sufficiently wide to cover all the claims raised by the claimants, both contractual and non‑contractual (among the latter being conspiracy, restitution, breach of trust), which was not helped by the woefully drafted particulars, and ordered that the application for service out should be struck out.
Costs
It fell to be decided, therefore, what costs order should be made, the Defendants’ solicitors seeking a wasted costs order against the Claimants’ solicitors. The Master did not wish to make a wasted costs order at the hearing, instead indicating that it should be subject to a formal application, to be considered a later hearing. However, the Master considered the Claimants’ conduct sufficiently serious as to fall within the boundaries of a costs award on an indemnity basis. In deciding, Master Pester considered the conduct of the Claimants’ solicitors after the Defendants’ solicitors brought to their attention that the Claimants had breached their disclosure obligations. Instead of admitting their error and agreeing to set aside the service out order at that stage, the Claimants’ solicitors entrenched their position, insisting that they had complied with their duty. Master Pester did not accept this position, “one cannot say that one has complied with the duty of full and frank disclosure without sharing major documents [with the court].” This was more than a “shortcoming” (as alleged by the Claimants), as significant costs would have been saved if the Claimants’ solicitors had just come clean. Costs were awarded on an indemnity basis, payable within 21 days.
Comments
The duty of full and frank disclosure is sacrosanct to without notice applications. It is the golden rule of litigation, and any legal practitioner that fails in that duty risks the ire of the courts. Where one falls foul of their duty, whether deliberately or by mistake, it is advisable to come clean at the earliest opportunity and not seek to entrench one’s position. It may mean the difference between a costs award on a standard basis as opposed to on an indemnity basis.
Practitioners must take care when agreeing to arbitration clauses in commercial contracts particularly as to the breadth and form of such a clause. It would be advisable in certain situations to expressly exclude what is not covered by the arbitration clause such as non‑contractual disputes, including misrepresentation and fraud.
The hearing was held before Master Pester sitting in the High Court, Chancery Division. Devonshires instructed Daria Gleyze of 3 Stone Buildings.
The Devonshires team was led by Partner David Pack, from our Litigation & Dispute Resolution Team.
