Anti-Suit Injunctions: Why they're so Hard to Get!

The Cayman Islands is a well-respected offshore jurisdiction with high-caliber professionals and judges that operate on efficient levels. I am currently working in The Cayman Islands and came across a great case on anti-suit injunctions that was decided last September. The case highlights the issues that derive from cross-border litigation and international parties.

Phoenix Meridian Equity Limited v Lyxor Asset management S.A., CICA No, 4 of 2009

The parties appealed an application to the Court of Appeal of the Cayman Islands. The issue raised by the appeal is whether the Chief Justice erred in principle in refusing an application on behalf of Lyxor for an order restraining Phoenix from continuing proceedings in the United States District Court for the Southern District of New York under Section 1782 of Title 28 of the United States Civil Procedure Code (the “section 1782 proceedings”) in the course of which it seeks to depose two individuals – Mr. Samuel Rosenberg (“Mr. Rosenberg”) and Mr. Anthony Philipponneau (“Mr. Philipponneau”) – who have given witness statements in, and are potential witnesses at the trial of the Cayman proceedings.

Phoenix was the sole investor in two funds of which Lyxor is the manager. Lyxor is a wholly owned subsidiary of a French bank, Societe Generale SA (“SG”). Phoenix sought to depose Mr. Rosenberg and Nr, Philipponneau, both managing directors of SG Americas Securities LLC (“SGAS”), a member of the SG group based in New York. On October 20, 2008, Phoenix obtained an order under section 1782 of the United States Procedure Code from the United States District Court for the Southern District of New York. The order required SGAS to produce documents at the offices of the New York counsel for Phoenix; and provided for Phoenix to serve on SGAS subpoenas for deposition testimony at a future date without the need for a further application. SGAS did not move to discharge that order. On 19 March, 2009, Phoenix gave notice – pursuant to the section 1782 order and Rule 30(b)(6) – requiring SGAS to identify and produce for deposition one or more officers or employees “who consent to testify on its behalf and are most knowledgeable as to” the eleven matters specified. Rule 30(b)(6) of the Federal Rules of Civil Procedure – which apply to deposition testimony under section 1782 in a case where the order does not prescribe otherwise – provides that a party may name a corporation as the deponent; and, where that has been done, that the corporation named must then designate one or more officers to testify on its behalf.

On the day after Phoenix had served its notice requiring deposition testimony in the section 1782 proceedings, Lyxor applied by summons in the Cayman proceedings for an order that Phoenix be restrained from continuing or seeking to enforce the section 1782 proceedings “to the extent that those proceedings seek the deposition of Mr. Rosenberg, Mr. Philipponneau (both residents of the State of New York) or any other officer, director, managing agent or employee of [SGAS] resident in the United States of America” whether by seeking to enforce the deposition notice of 19 March 2009 or otherwise. The summons sought an order directing Phoenix to withdraw or discontinue the deposition notice.

Lyxor asserted that the deposition notice was an improper and unconscionable intereference with the forthcoming trial in the Cayman proceeding for three reasons: (i) that it would be an unnecessary diversion of the parties’ legal and other resources to prepare for and attend such depositions; (ii) that the testimony sought at the depositions would be duplicative of the testimony to be given at trial; and (iii) that it would be vexatious and oppressive for Phoenix to subject Lyxor’s witnesses to double cross-examination. In response to the application, Phoenix argued that the discovery which it sought pursuant to Rule 30(b)(6) satisfied the standard for discovery under section 1782 as it would be relevant and useful. Phoenix also stated that the deposition testimony will also be useful in helping Phoenix prepare for trial, and will assist it in understanding how SG and SGAS interacted with other non-parties to the Cayman litigation, including Phoenix’s financial and legal advisors.

In the application to the Grand Court, the Chief Justice observed that the application raised an important issue of Cayman Islands Civil procedure: “whether the Cayman courts should intervene to prevent depositions in the United States ordered by the United States court to be given by deponents who are residents there and where the deponents are potential witnesses in a Cayman action in respect of which it is clear that the Cayman court is the only appropriate forum for the ultimate trial of the action.” Unlike the position in many other Commonwealth jurisdictions, including England, Cayman civil procedure allows, pursuant to GCR O.24 R. 16, oral discovery by way of depositions prior to trial. This is however limited to officers of companies which are parties to proceedings before the Court. Thus, while it may not be said that Cayman law is hostile to witnesses being cross-examined prior to trial, such a procedure remains unusual as no case has been reported concerning this procedure since the Grand Court rules allowed it.

Other than O. 24, R. 16, no power exists by which the Cayman courts on behalf of parties to actions before it can compel persons who are not parties to give a full measure of pre-trial discovery. The Chief Justice reasoned that while the Court must consider concerns of practitioners about the possibility of pitfalls, such as duplication of effort from the use of pre-trial depositions, the court should appropriately consider to what extent is it desirable or appropriate, that party to litigation before the Cayman courts, should be prevented from availing itself of a statutory right which it may have under foreign law, to apply for an order that persons resident in the foreign jurisdiction who are themselves not parties to the action before this Court, and so not amenable to its process, should give pre-trial discovery by way of deposition evidence relevant to the issues in dispute before this Court. The Chief Justice directed himself, in the light of his examination of the English authorities, that the main question which he had to decide was whether to allow the Title 28 deposition to proceed would be ‘unconscionable’. The Chief Justice found that it was not. He reasoned that the fact that witnesses had committed their positions to witness statements “is not of and in itself a bar to Title 28 depositions.” The question was whether there were proper concerns about vexation and oppression. The Chief Justice found that the courts of the United States “are shown to be alive to such concerns” and he could not proceed on the basis that those courts might fail to protect the witnesses from oppression. Furthermore, this was not a case where Mr. Rosenberg and Mr. Philipponneau could be treated as fully amenable to the jurisdiction of the Cayman Islands court, as they were not officers of Lyxor but officers of SG.

The Court of Appeal agreed with the findings and reasoning of the Chief Justice. The Court stated that the use to which the transcripts of depositions taken in New York may be put in the Cayman proceedings is, of course, a matter for the Grand Court. The Grand Court had ample powers to prevent abuse of its own process, should the need arise. The Court found that the Chief Justice was also entitled to proceed on the basis that he could leave objections as to abuse or oppression arising in the course of the deposition process to be taken on behalf of Mr Rosenberg or Mr. Philipponneau before the officer taken the depositions under the Federal Rules of Civil Procedure, and, if necessary, before the New York District Court. The Court also reasoned that the existence of a comparable, although not identical, procedure for oral discovery in the jurisdiction in which the anti-suit injunction was sought is a relevant factor. The court, by allowing the section 1782 proceedings to take their course, was not giving effect to procedure which (in its own eyes) is obviously oppressive or vexatious and was not going far beyond any process of discovery recognized by the law applicable in the Cayman Islands. Moreover, while Phoenix could obtain all the information that it needed for the pursuit of its claim by making further requests for further and better particulars, by administering interrogatories, or by seeking further and specific discovery, it was not relevant to the point of whether Phoenix should be prevented from continuing the section 1782 proceedings.

The Court quoted Lord Brandon, who explained in the South Carolina Insurance case ([1987] AC 24, 48G), prima facie a party who can invoke the jurisdiction of the United States District Court under section 1782 may choose to do so. The Court reasoned that the right to take pre-trial deposition testimony from Mr. Rosenberg and Mr. Philipponneau is a right conferred by the law of the United States: it is not a right conferred by or to be withheld under the law of the Cayman Islands. The relevant question is not whether Phoenix could achieve a similar result in the Cayman Islands; but, whether (if it could) it is acting oppressively or abusively in seeking to rely on the right which it enjoys under the law of the United States. The Court found that Phoenix was not acting oppressively or abusively by seeking to obtain pre-trial depositions under section 1782 of Mr. Rosenberg and Mr. Philipponneau.

The Court dismissed the appeal, but gave one further direction. Phoenix had previously asserted that the pre-trial depositions of Mr. Rosenberg and Mr. Philipponneau “would also be helpful in testing the credibility of key witnesses before trial.” The Court stated that the proper purpose of the pre-trial oral examination by way of discovery, in the context of a trial in this jurisdiction, is to ascertain what it is that the witnesses will say: not to seek to establish in the course of the oral examination that what they will say is not to be believed. It is for the trial court in the Cayman Islands to decide whether or not the evidence given at the trial is to be believed or not to be believed. Therefore, the Court provided that if Phoenix were to trespass, in the course of taking depositions in New York, into cross-examination as to credit – an exercise which is recognized by counsel as inherently unwise, then Lyxor should have the opportunity of applying to a judge of the Grand Court for an order redacting those parts of the transcripts.

The Bahamas Arbitration Act

The Arbitration Act, 2009

On the 31^st of December, 2009, the Bahamas enacted a new Arbitration Act, No. 42 of 2009 (“the Act”), which repeals arbitration legislation formerly governing the area which took effect in the Seventeenth Century. The Act reflects the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration, as promulgated in 1985 and revised and adopted in 2006. It also reflects the 1996 British Arbitration law. The Act adopts well-known international arbitration standards and discusses the fundamentals of an arbitration agreement; the extent of court intervention; the recognition and enforcement of arbitral awards, and the composition and jurisdiction of an arbitral tribunal.

Separability of the Arbitration Agreement

The fundamental legal principle governing international arbitration agreements is that of their autonomy, also referred to as the doctrine of “separability” The doctrine of separability ensures that the arbitration agreement will remain effective despite any allegations that the underlying or principal contract failed to come into existence. Therefore, if a contract contained a validly binding arbitration agreement, the subsequent determination that the contract is invalid will not render the arbitration agreement void. Section 7 of the Act affirms this general principle of arbitration, and provides:

“Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective and it shall for that purpose be treated as a distinct agreement.”

This section accords with Article 16 of the UNCITRAL Model Law on International Commercial Arbitration which mandates that any arbitration clause forming part of a contract shall be treated as an agreement independent of all other terms of the contract. Article 16 goes further to provide that a decision that the contract is null and void “shall not entail ipso jure the invalidity of the arbitration clause.” Therefore, the arbitration agreement, whether such agreement is concluded separately or incorporated within the contract to which it relates has full legal autonomy and is not affected by any subsequent event or fact that the related contract is invalid.

Jurisdiction of the Arbitral Tribunal

An integral aspect of the arbitral process is the ability of the tribunal to be the judge of its own jurisdiction. This ability is embraced in the well-known competence-competence principle, the most important rule of arbitration. The competence-competence principle is a rule of chronological antecedence that states that the arbitral tribunal has the first right to hear any and all challenges relating to its jurisdiction. Section 41 of the Act codifies this well-known principle:

“(1) Unless otherwise agreed by the parties, the arbitral tribunal may rule on its own substantive jurisdiction, that is, as to –

(a) whether there is a valid arbitration agreement;

(b) whether the tribunal is properly constituted, and

(c) what matters have been submitted to arbitration in accordance with the arbitration agreement.”

A Bahamian court must, therefore, abstain from hearing any substantive argument as to the arbitrators’ jurisdiction, until such time as the arbitrators themselves have had an opportunity to do so. The practical advantage of such a rule is to ensure that a party does not prevail in putting off the arbitral proceedings by their mere allegation that the arbitration agreement is invalid or non-existent, and therefore, the arbitrators have no jurisdiction. Therefore, the Act appropriately conjugates the doctrine of the autonomy of the arbitration agreement with the competence of the arbitral tribunal to rule on its own jurisdiction.

Location of Arbitral Tribunal

Arbitration clauses should always identify the place where the arbitration is to be conducted. Arbitration will be compelled in the manner and location described in the arbitration agreement. This gives the parties the ability to predetermine the place and forum in which their disputes will be resolved. A valid arbitration clause must make clear that the parties intend all disputes shall be resolved by arbitration in a specific location. All of the provisions of the Act will apply where the seat of the arbitration is in The Bahamas. The provisions of the Act relating to whether legal proceedings in the Bahamas will be stayed pending arbitral proceedings, and the recognition and enforcement of arbitral awards and interim measures will still apply even if the seat of the arbitration is outside The Bahamas or no seat has been designated or determined.

Governing Law

The parties may agree to arbitrate their claims under whatever rules they choose, irrespective of the agreed seat of the arbitration. A choice-of-law provision in an arbitration agreement would evidence the intent by the parties for arbitration to be conducted according to a chosen jurisdiction’s laws. Where the arbitral agreement names the seat of the arbitration to be a jurisdiction outside of The Bahamas, but the parties have chosen Bahamian law to govern, the provisions on the validity and separability of an arbitration agreement set forth in the Act will be the only provisions applicable to the proceedings.

Stay of Legal Proceedings

Section 9 of the Act is a mandatory provision, excluding the right of the parties to contract to the contrary and governing a court’s power to stay legal proceedings when the parties have concluded an arbitration agreement. This provision empowers the court to stay legal proceedings if satisfied that the arbitration agreement concluded between the parties was not null and void, inoperative, or incapable of being performed. Any party to an arbitration agreement against whom legal proceedings are brought may, after giving notice to the other party, apply to the court to stay the proceedings if the matter before the court is one that should have been referred to arbitration under the agreement.

Composition of Arbitral Tribunal

An arbitral tribunal usually consists of three members, who have professional experience in the area of the dispute. However, the parties are free to agree on the number of arbitrators to form the tribunal and whether there is to be a chairman or umpire. Section 26(3) of the Act provides that, in the absence of agreement by the parties, the tribunal shall consist of a sole arbitrator. Section 26(2) Act also states that, unless otherwise agreed by the parties, an agreement that the number of arbitrators shall be two or any other even number shall be understood as requiring the appointment by the parties of an additional arbitrator as chairman of the tribunal. Although the parties are permitted to name their own arbitrators, the arbitrators are expected to be neutral and to exercise their powers fairly and impartially as between the parties, giving each party a reasonable opportunity of advancing his case. The parties are free to agree on the procedure for appointing the arbitrator or arbitrators, as well as the qualifications required of the arbitrators. The parties are also free to agree in what circumstances the authority of an arbitrator may be revoked or the basis upon which an arbitrator may be removed from the tribunal.

Arbitral Proceedings

Parties are not required to be represented in the arbitral proceedings by an attorney, but may be represented by any person chosen by him. The parties also have the power to agree on the powers exercisable by the arbitral tribunal for the purposes of and in relation to the arbitral proceedings.

Right of Appeal

Practically speaking, there is no review or appeal of an award made by an arbitral tribunal, although under narrow circumstances application may be made to the court for review of an award. Sections 89 & 90 of the Act provide that a party to arbitral proceedings may, after giving notice to the other party and the tribunal, apply to the court to challenge an award made by the arbitral tribunal on the basis that the tribunal lacked substantive jurisdiction or that there was a ground of serious irregularity affecting the tribunal. Pursuant to section 91, parties may also appeal to the court from an arbitral award on the basis of a question of law so long as all parties to the proceedings consent to the appeal. The parties can agree to exclude any appeals on this basis in their arbitration agreement. It is important to state that if the arbitration agreement provides for an appeal of the arbitration tribunal’s decision, then this gives the parties the right of an appeal. An arbitration agreement will be enforced, according to its terms, manner, and operation, because it effectuates the intent of the parties.

Recognition and Enforcement of Arbitral Awards

An award made by an arbitral tribunal pursuant to an arbitration agreement may, by leave of court, be enforced in the same manner as a judgment or order of the court to the same effect. The Bahamian Parliament has also recently enacted the Arbitration (Foreign Arbitral Awards) Act, 2009 that relates to the recognition and enforcement of awards under the New York Convention, which provides for the enforcement and recognition of arbitral awards. The New York Convention was adopted by the United Nations Conference on International Commercial Arbitration on the 10^th June, 1958, and acceded to by The Bahamas and entered into force on the 20^th March, 2007. This means that an arbitral award made in The Bahamas is enforceable in any of the approximately 140 countries, which are signatories to the

The Bahamas: the Arbitral Jurisdiction of Choice

The Bahamas, with its close proximity to major financial markets, is considered a gateway into international markets. As one of the top offshore jurisdictions of choice, it is only befitting that The Bahamas could naturally evolve into an international arbitration jurisdiction as well. Along with the enactment of a new Arbitration Act, the Bahamas’ strong governance, wealth of human capital, sound legal system, and prosperous financial markets, The Bahamas is surely to be considered as an ideal arbitration facility for international businessmen, merchants, and commercial partners around the globe.

US Senate Passed Tax Extender Bill

The Tax Extender Bill previously discussed was signed into law on the 18th March, 2010.

Invictus

Out of the night that covers me, Black as the Pit from pole to pole, I thank whatever gods may be For my unconquerable soul. In the fell clutch of circumstance I have not winced nor cried aloud. Under the bludgeonings of chance My head is bloody, but unbowed. Beyond this place of wrath and tears Looms but the Horror of the shade, And yet the menace of the years Finds, and shall find, me unafraid. It matters not how strait the gate, How charged with punishments the scroll. I am the master of my fate: I am the captain of my soul. I love this poem because it is an extraordinary motivator to everyone who is going through whatever plight you may be going through - whether in your professional or personal career. Far too often we allow others to dictate our paths professionally, or we listen to other's advice as to the decisions we should make, forgetting that the Battle of Life is no one else's but ours. While the advice of others may be helpful, we must never forget that the decisions we make and the actions we take will affect in a direct way no one else but ourselves. Be prepared to fight the battle of your life knowing that it is you and only you who can be the captain of your soul.

Tax Information Exchange Agreements ("TIEAs"): The Transition to Automatic Information Exchange

The end of banking secrecy as we know it is here. With an increase in TIEAs being signed throughout the offshore region, nation states are fostering the international co-operation needed for transparency in the global financial sector. However, with the exchange of information upon request becoming the norm, the tide has become even stronger! There has been a call for greater transparency in tax information, and therefore the creation of a system of automatic information exchange. Automatic information exchange is the process by which tax information would be exchanged in an isochronous and organised fashion between the requesting country and the requested country. The Isle of Man has made a commitment to implement a system of automatic exchange of information by July 2011. Jersey has also stated that it will commit to introducing an automatic exchange of information.

Where do we go to next? Can there be anywhere to go?

The Tax Extenders Act of 2009

US proposed legislation requires foreign financial institutions to enter into agreements with the IRS to avoid 30% withholding tax on all US-sourced income and capital payments.

On December 9, 2009, the House of Representatives ( United States ) passed the “Tax Extenders Act of 2009” (“TEA”). The Senate is currently reviewing TEA, and it is likely that the Senate will approve the contents therein. The TEA reintroduces the Foreign Account Tax Compliance Act of 2009 (“FATCA”) with certain helpful amendments. Its purpose is to prevent the avoidance of tax on income and proceeds from assets held abroad by United States ’ (“ US ”) citizens or residents. The TEA was designed to provide greater disclosure to the Internal Revenue Service (“IRS”) by foreign financial institutions in respect of assets held by them by US persons. The United States Government has concluded that many U.S. individuals looking to evade their tax obligations in the United States have sought to hide income and assets from the IRS by opening secret foreign bank accounts with foreign financial institutions. Because many of the foreign financial institutions that hold accounts on behalf of U.S. persons are outside the reach of U.S. law, US legislators have determined that the appropriate solution is to impose taxes on foreign financial institutions, many of which have substantial investments in U.S. financial assets or hold substantial U.S. financial assets for the account of others.

It is an extremely important bill and will change the way trust and financial services providers in The Bahamas conduct business in the future. Under the TEA, foreign financial institutions are required to determine which of its equity and debt holders (and certain other of its counterparties and other “account holders”) are US persons and to report this information to the IRS or otherwise be subject to a 30% withholding tax on its U.S.-source income and/or the proceeds of certain sales and other dispositions. The withholding tax could be avoided only if the foreign financial institution enters into an agreement with the Treasury or the IRS to provide information relating to US persons that directly or indirectly maintain an account at such financial institution.