Fortress Value Recovery Fund I Llc and Others v Blue Skye Special Opportunities Fund Lp and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Tomlinson,Lord Justice Toulson,Lord Justice Pill |
| Judgment Date | 17 April 2013 |
| Neutral Citation | [2013] EWCA Civ 367 |
| Docket Number | Case No: A3/2012/1512 |
| Court | Court of Appeal (Civil Division) |
| Date | 17 April 2013 |
[2013] EWCA Civ 367
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
COMMERCIAL COURT
Mr Justice Blair
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Pill
Lord Justice Toulsonand
Lord Justice Tomlinson
Case No: A3/2012/1512
Mark Hapgood QC and Craig Morrison (instructed by Signature Litigation LLP) for the Appellants
Ewan McQuater QC and David Quest (instructed by Slaughter and May) for the Respondents
Hearing date : 31 January 2013
Approved Judgment
Introduction
Section 8 of the Contracts (Rights of Third Parties) Act 1999 , hereinafter "the 1999 Act", concerns the circumstances in which a third party shall be treated as a party to an arbitration agreement contained in a contract to which the third party is not a party. It has an unusual legislative history. When in 1996 the Law Commission proposed a reform to the rule of privity of contract, it recommended that arbitration agreements and jurisdiction agreements should fall outside the scope of the proposed reform. It pointed out that its proposed reform was concerned only with the conferring of rights and benefits on third parties and not with the imposition of duties, whereas an arbitration or jurisdiction agreement cannot operate satisfactorily unless any entitlement of the third party to submit to arbitration, or to comply with the jurisdiction agreement, carries with it also a duty on the third party to submit to arbitration or to comply with the jurisdiction agreement, as the case may be. The Commission foresaw grave difficulties in approaching an arbitration agreement on the basis that it could be regarded as conferring a procedural benefit on a third party and that it could also constitute a procedural condition on the third party's right to enforce the substantive promise contained in the contract in which the arbitration agreement appears — see Privity of Contract: Contracts for the Benefit of Third Parties, Law Com No 242 (1996), at paragraph 14.14–14.16. The text of the bill introduced to Parliament in the House of Lords contained no provision dealing expressly with arbitration. Section 8 was introduced by way of Government amendment at the Report Stage in the House of Commons — see per Colman J in Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd's Law Reports 38 at 44, who in turn derived his information from an article by Professor Andrew Burrows, a member of the Law Commission responsible for the original recommendation. This case demonstrates that the Commission's fears were not unfounded.
The dispute in outline
There are three claimants and eighteen defendants in this litigation, although this appeal is immediately concerned with only one claimant and two defendants. The circumstances of the underlying dispute are succinctly summarised in the judgment of Blair J below, [2012] EWHC 1486 (Comm), and I also borrow gratefully from the parties' summary of what is relevant for present purposes.
The Appellants, Mr Cerchione and Mr D'Avanzo, are the managers of an investment structure, the underlying assets of which are businesses in Italy which are said to have a value in the region of €200M.
The investment structure is based around an English limited partnership regulated by a Deed of Limited Partnership dated 24 December 2008. The partnership is called the Blue Skye Fund. There is one general partner, Blue Skye GP Limited, and three limited partners. The principal limited partner is Stepstone Acquisition SARL, hereinafter "Stepstone". The other two limited partners are Omega Partners and Omega Skye Partners SARL, LP. The four partners are the four parties to the Deed of Limited Partnership in respect of the Blue Skye Special Opportunities Fund Limited Partnership, to which I have already referred as the "Blue Skye Fund".
Stepstone has assigned its interest in the Blue Skye Fund, together with certain related rights, to the Respondent, Fortress Value Recovery Fund I LLC, hereinafter "Fortress", as security for a loan made to Stepstone by ZBS Capital Partners LP, hereinafter "ZBS".
The underlying claim to which this appeal relates is a claim brought by Fortress as assignee of Stepstone against the Appellants. It is the case of Fortress that in the course of 2011 the Appellants, as managers of the Blue Skye Fund, acting in concert with three other individuals and twelve corporate entities, including Blue Skye GP Limited, designed and implemented a dishonest scheme to reorganise the fund and its assets, the purpose and effect of which was to diminish or to eliminate the rights and interests of Stepstone and others in relation to the assets, to take the control and benefit of the assets themselves, and to enable them and their associated entities to extract fees and other value from the assets without reference to or oversight from Stepstone, Fortress, ZBS and another investor in Stepstone.
The claim brought by Fortress as assignee of Stepstone against the Appellants is formulated in tort, including claims in conspiracy, unlawful interference, procuring a breach of the Blue Skye Fund Partnership Deed and dishonest assistance. These are all English law claims. There is also a claim alleging the causing of damage by intentional, alternatively by negligent, conduct, or by imprudence, all of which are said to be actionable under the law of Luxembourg.
There are as I have already indicated many other claims made in the Action, including claims by Fortress in right of Stepstone against Blue Skye GP Limited, the General Partner, and the two other limited partners, Omega Partners and Omega Skye Partners. I shall call these claims brought by Fortress as assignee of Stepstone against the Appellants, Blue Skye GP Limited, Omega Partners and Omega Skye Partners "the Stepstone claims".
The Deed of Limited Partnership contains an arbitration clause in the following form:—
"17.11 Governing Law
This Agreement and the rights, obligations and relationships of the parties hereto under this Agreement shall be governed by and construed in accordance with the laws of England and Wales. Any dispute, controversy or claim arising out of or in connection with this Agreement or the formation, breach, termination of invalidity thereof, that the parties hereto are unable to resolve between themselves, shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce of Paris by three arbitrators appointed in accordance with the aforementioned rules. The place of arbitration shall be London, UK. All submissions and awards in relation to arbitration under this Agreement shall be in English, and all arbitration proceedings and pleadings shall be in English."
One of many applications which came before Blair J in April 2012 was an application by the Appellants, Blue Skye GP, Omega Partners and Omega Skye Partners to stay the Stepstone claims in reliance upon the arbitration clause.
Section 9 of the Arbitration Act 1996 provides, so far as relevant, as follows:—
" Stay of legal proceedingsE+W+N.I.
(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.
(2) An application may be made notwithstanding that the matter is to be referred to arbitration only after the exhaustion of other dispute resolution procedures.
(3) An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim.
(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 Application Notice before Blair J sought in the alternative a stay pursuant to the inherent jurisdiction of the court, but that seems not to have been considered by the judge and was not pursued before us. For reasons which will become apparent that alternative application could not in any event succeed if the primary application under the Arbitration Act 1996 fails.
Unsurprisingly it was conceded that s.9 of the Arbitration Act 1996 mandated a stay of the Stepstone claim against Blue Skye GP. The stay in favour of the limited partners was opposed on the basis that the Stepstone claim against them relates not to the Blue Skye Fund and to the participation of the limited partners in it but rather that the complaint against Omega Partners and Omega Skye Partners relates to their separate role as shareholders in Stepstone. Thus the argument on behalf of Fortress deployed before the judge was that the Stepstone claims against Omega Partners and Omega Skye Partners did not arise out of or in connection with the Partnership Deed. The limited partners for...
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