Brockton Capital LLP v Atlantic-Pacific Capital, Inc.
| Jurisdiction | England & Wales |
| Judge | Mr Justice Field |
| Judgment Date | 07 May 2014 |
| Neutral Citation | [2014] EWHC 1459 (Comm) |
| Docket Number | Claim Nos 2013 Folio 1484 and 2014 Folio 283 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 07 May 2014 |
[2014] EWHC 1459 (Comm)
Mr Justice Field
Claim Nos 2013 Folio 1484 and 2014 Folio 283
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
IN AN ARBITRATION CLAIM
The Rolls Building
Fetter Lane
London, EC4A 1NL
Andrew Stafford QC and Robin Rathmell (instructed by Kobre & Kim (UK) LLP) for the Claimant/Applicant
Joe Smouha QC and Iain Quirk (instructed by Squire Sanders (UK) LLP) for the Defendant/Respondent
Hearing dates: 6 May 2014
Introduction
This is an application under s. 68 (2) of the Arbitration Act 1996 ("the Act") to set aside a Partial Final arbitral Award dated 16 October 2013 and a Final arbitral Award dated 14 February 2014. Put shortly, the applicant ("Brockton") contends: (1) that in breach of the duty arising under s. 33 of the Act, the tribunal acted unfairly in deciding that a contractual provision was unenforceable as a penalty under New York law when Brockton had had no opportunity to make submissions on this issue; and (2) ignored an important and obviously relevant part of the evidence in deciding a further issue of contractual construction.
The background
Brockton is a limited liability partnership based in London that manages private equity real estate investments, principally in London. The respondent ("APC") is a Delaware corporation based in Connecticut, USA, from where it carries on business as an independent placement agent assisting fund managers to raise capital for investment vehicles.
On 22 July 2008, APC and Brockton entered into an agreement (the "Placement Agreement") appointing APC as the exclusive global placement agent with the role of raising capital for a Brockton real estate fund, Brockton Capital Fund II ("the Fund"). The Placement Agreement provided that Brockton should pay APC placement fees and that if a certain level of placement was achieved, APC would be appointed the exclusive placement agent for a subsequent fund and should be paid fees in respect of placements in that fund.
The largest investor in the Fund was the Teacher Retirement System of Texas ("TRS"). On 31 March 2010 TRS, Brockton and APC entered into an agreement (the "Tripartite Agreement") which was principally intended to ensure that Brockton and APC did not engage in any objectionable practices, including the making of bribes and/or payments to political parties designed to induce the managers of state funds to make investments in funds managed by Brockton. Thus, in paragraph 2 (d) of the Tripartite Agreement, APC warranted to Brockton and TRS that it had not taken any actions prohibited by Rules to be implemented by the SEC to curtail "pay to play" activities "which could influence or could be deemed to have influenced any third party's decision to invest in the Fund and/or any other investment vehicle whether managed or advised by [Brockton ] or otherwise."
The Tripartite Agreement also provided that it was effective as an amendment to the Placement Agreement and that if any of its provisions was in conflict with any provisions of the Placement Agreement, those provisions would prevail as between the parties.
The Placement Agreement and Tripartite Agreement were each expressly governed by the law of New York. Each agreement also contained a clause by which the parties agreed that all disputes arising thereunder should be determined by binding arbitration in London in accordance with the Rules of the ICC.
By letter dated 12 May 2011, Brockton purported to terminate its relationship with APC on the ground that APC had breached the obligation under paragraph 2 (e) (ii) of the Tripartite Agreement to provide notification of APC personnel changes. In the ensuing arbitration Brockton also alleged that APC had breached the obligation contained in paragraph 2 (f) of the Tripartite Agreement to provide certificates on or before 31 December each year confirming that there had been no breaches of the disclosure obligations owed under the Tripartite Agreement. Paragraph 2 (g) of the Tripartite Agreement provides:
(g) Without prejudice to any rights or remedies of TRS in this Deed or any other document relating to TRS's investment in the Fund, if APC breaches any of the provisions of this Deed including, but not limited to, if there is any breach of paragraph 2(e)(ii) or if any of the warranties referred to in paragraph 2(d) either ceases to be true or accurate or becomes misleading in any way either at the date hereof or as repeated at any time in the future:
(i) [Brockton] shall be released from any obligation to make any further payment to APC of any amounts due or which may thereafter become due pursuant to the Engagement Letter with respect to the investment in the Fund or any other fund managed or advised by [Brockton] as the case may be of TRS and/or the relevant Investor if any in respect of whom such breach occurred; and
(ii) [Brockton] shall be entitled to terminate the Engagement Letter for Cause and the provisions of paragraph 5(b) of the Engagement Letter shall apply.
APC denied that Brockton had lawful cause to terminate the agreements and disputed Brockton's right to withhold payment of placement fees. On 17 November 2011, it commenced ICC arbitration proceedings which to be determined by a tribunal consisting of 3 eminent US lawyers. Between 25 February and 4 March 2013 there was a hearing in London before the tribunal to determine a number of issues including whether APC was indeed in breach of paragraph 2 (f) of the Tripartite Agreement and, if so, whether Brockton was entitled by virtue of paragraph 2 (g) of the Tripartite Agreement to terminate the Placement Agreement.
Section 5 of the Placement Agreement provided that the agreement could be terminated "for Cause" and "Cause" was defined in terms of wilful or criminal misconduct or material or persistent breach resulting in a material adverse effect upon Brockton or the Fund.
At the conclusion of the hearing in London there was discussion between the tribunal and the parties' counsel as to the service of post-hearing submissions. The tribunal said they had in mind simultaneous submissions limited to 25 pages in which the parties should not feel the need to repeat what they had already communicated in prior submissions. What was being looked for were '"take away" points, the evidence that ought to be looked at now as a result of the hearing'. Notice would be given by the tribunal of questions they had but the submissions did not have to be limited to these matters. Counsel for APC, Mr Gold, raised the question of ground rules for potential subsequent evidentiary submissions, to which the tribunal's response was that there would be no new evidence except by leave for good cause. Following these discussions, the tribunal issued Procedural Order No 3 by which it set a date for the simultaneous service of Post-Hearing Memorials and Cost Submissions with no evidence to be submitted without leave, the hearing to remain open pending the filing of the Memorials and Cost Submissions.
APC served its Post-Hearing Memorial on 12 April 2013. The submissions made therein were presented under 5 main headings. Heading II was Brockton Had No Grounds To Terminate APC, under which there were three sub-headings: A. There Was No Breach Regarding The Personnel Disclosures that Prompted the Putative Separation Letter. B. There Was No Breach After the Putative Separation Letter, and Any Such Breach Would Be of No Consequence; C. Paragraph 2 (g) Does Not Permit Brockton to Avoid Payment. It is necessary to set out paragraphs 28, 29 and 30 pleaded under sub-heading C.
28. Brockton argues that, separate and apart from its purported termination effort, any other purported technical deficiencies that Brockton can think of should allow Brockton to suspend payment (in part) under ¶ 2(g)(i) of the Amendment to Agreement, which refers to breaches of "any of" that instrument's provisions. Brockton is wrong. Interpreting ¶ 2(g) (i) in the manner claimed by Brockton renders that provision an unenforceable penalty.
29. A provision requiring a payment "grossly disproportionate to the amount of actual damages" is a penalty and is unenforceable. Truck Rent-A-Ctr., Inc. v. Puritan Farms 2nd, Inc., 361 N.E. 2d 1015, 1018 (N.Y. 1977). "[T]o permit parties, in their unbridled discretion, to utilize penalties as damages, would lead to the most terrible oppression in pecuniary dealings." Id. (citation omitted). Indeed, if there is any doubt as to whether a clause imposes a penalty, New York courts construe the provision as a penalty. See, e.g., Howard Johnson Int'l Inc. v HBS Family, Inc., 96-cv-7687 (SJ), 1998 WL 411334 at*5 (S.D.N.Y. July 22, 1998) (citing cases).
30. In the circumstances of this case, enforcement of ¶ 2(g)(i) can be viewed only as a penalty. It does not provide just compensation for loss, as Brockton has experienced no injury. And viewed from the parties' perspective when the Amendment to Agreement was executed, the damages set out in ¶ 2(g)(i) are plainly disproportionate to any estimate of the potential harm that Brockton might experience in the absence of TRS claiming a breach. The provision is thus unenforceable. SeeHoward Johnson, 1998 WL 411334 at*7 (refusing to enforce damages provision because it was not a reasonable estimate of potential loss).
Whilst it was open to the Tribunal to take them into account, 1 these submissions were new. The tribunal in its Procedural Order No 1 had ordered, inter alia, that the parties' respective Statements of Claim and Defense should contain their respective cases in chief setting out in numbered paragraphs all arguments of fact and law on which they relied. Nowhere in APC's Statement of Claim is there any suggestion of a contention that...
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