Cayman Court of Appeal confirms jurisdiction to grant injunctions in support of foreign-seated arbitration

• Cayman Islands courts can grant injunctions to aid foreign arbitration, even if relief could be sought elsewhere
  
  
• Getting injunctions directly in the Cayman Islands is often quicker and more effective for protecting offshore assets at risk
  
  
• This decision reassures that Cayman Islands courts are supportive of arbitration and ready to provide interim relief to ensure timely protection of assets involved in cross-border disputes

This is the first appellate decision dealing with the Grand Court's jurisdiction to grant injunctive relief in support of a foreign-seated arbitration under section 54 of Arbitration Act 2012 (the "Act").

Background

The underlying dispute concerns a series of interlocking agreements, namely:

1. A share purchase agreement ("SPA") whereby Minsheng agreed to purchase the Respondents' shares in Leed International Education Group, Inc. ("LIEG") a Cayman Islands company. The initial sale was for 51% of the shares in LIEG, with a mechanism providing for the sale of the remaining 49% at a later date (the "Remaining Shares"). The SPA was governed by Hong Kong law and provides for disputes arising from the SPA to be resolved by arbitration administered by the Hong Kong International Arbitration Centre ("HKIAC") under the HKIAC Administered Arbitration Rules;
2. Two loan agreements between the Appellant (as lender) and the Respondents (as borrower) (the "Loan Agreements") providing for the purchase price for the Remaining Shares under the SPA to be reduced by the amounts outstanding under the Loan Agreements. The Loan Agreements were governed by PRC law and contain an arbitration clause providing for arbitration administered by the China International Economic and Trade Arbitration Commission ("CIETAC") in Beijing under CIETAC’s arbitration rules.
3. Share charges entered into by each of the Respondents in favour of Minsheng over the Remaining Shares, in order to secure the borrowing under the first Loan Agreement (the "Share Charges"). The Share Charges were governed by the laws of the Cayman Islands and contain a dispute resolution clause by which the parties submit to the non-exclusive jurisdiction of the Cayman Islands courts.

A dispute arose between Minsheng and the Respondents as to whether Minsheng was required to purchase the Remaining Shares upon the exercise of an option by the Respondents. That dispute is subject to an ongoing HKIAC arbitration. A further arbitration was commenced before CIETAC to determine whether the Respondents were in breach of the Loan Agreements. The CIETAC arbitration is also ongoing and will be influenced by the determination of the HKIAC arbitration as to whether the amounts due under the Loan Agreements have been extinguished by set off against the purchase price for the Remaining Shares.

The Injunction Application before the Grand Court

The Respondents originally sought an undertaking from Minsheng that it would not seek to enforce the Share Charges until the issues in the HKIAC and CIETAC arbitrations were determined. As the undertaking was not forthcoming, the Respondents applied for injunctive relief in the Cayman Islands.

Section 54 of the Act provides that:

1. A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their seat of arbitration is in the Islands, as it has in relation to the proceedings in court.
2. The court shall exercise those powers in accordance with its own procedures and in consideration of the specific principles of international arbitration.

On 3 August 2023, Mr Justice Segal granted the Injunction Application after an inter partes hearing.

The grounds of appeal

Minsheng appealed against the injunction on a number of grounds. Whilst all were unsuccessful, it is the first which is likely to be of wider interest to arbitration practitioners.

The Appellant argued that the Respondents were obliged to seek relief in either the HKIAC or CIETAC arbitrations (including by way of emergency arbitration) or from the supervisory courts at the seats of the arbitrations, and given the availability of relief from those jurisdictions it was inappropriate for the Grand Court to have exercised its discretion to grant an injunction exercising the jurisdiction under section 54.

There was no dispute as to Mr Justice Segal's application of the common law and equitable principles which govern the grant of an interim proprietary injunction, or the grant of a quia timet injunction. Instead, the focus was on the interpretation and effect of section 54 in circumstances where it was argued that alternative interim relief was available by way of emergency arbitration or from the supervisory courts in Hong Kong and Mainland China, being the seats of the HKIAC and CIETAC arbitrations.

The approach to section 54

The Court of Appeal accepted that it was an uncontroversial proposition that section 54 is "purely ancillary to the arbitration in support of which the application is made". However, the Court's jurisdiction in relation to foreign arbitrations was broader than that applicable to local arbitrations, the latter being expressly limited by section 43 of the Act to situations where the tribunal lacked power to act or was otherwise unable to act effectively.

In this regard, it should be noted that the Cayman Islands position diverges from that under the English Arbitration Act 1996 ("EAA"), in that the provisions of section 44 EAA (the equivalent to section 43 of the Act) are expressly stated to apply to arbitrations outside of England and Wales.

The Court of Appeal went on to set out the following summary of the applicable principles of international arbitration to be considered by the Court upon an application under section 54:

1. The section 54 jurisdiction is "open textured and uncategorised in nature" based, as it is, upon Article 17J of the UNCITRAL Model Law on International Arbitration.
2. The powers under section 54 must be exercised with caution, respecting that the policy of the Act is one of limited curial intervention. Parties ought not to be allowed to bypass the arbitral tribunal to seek interim measures from the court merely because curial assistance is conceivably available. Accordingly, the powers are to be used only as needed for the purpose of assisting the foreign arbitral proceedings.
3. However, there is no hard and fast requirement that a party must first apply to the arbitral tribunal itself (or to a court at the seat of the arbitration) for an interim measure before applying under section 54.
4. Whilst a party applying for section 54 relief must explain why it did not apply to the tribunal/seat of the arbitration (if such access had been available), the section 54 powers may nonetheless be exercised in appropriate circumstances, for example in cases of urgency or where the arbitral tribunal (or local court of the seat) would not have the power to grant the interim measure sought.
5. There must be a sufficient connection between the interim measures sought and the foreign arbitration they purport to assist.
6. The need for international enforcement is accepted, as a matter of settled practice, as a justification for applying first to an appropriate foreign court. The foreign court will be appropriate if it sits in the jurisdiction in which assets are located so that its orders can readily and easily be enforced.
7. An order against a third party to the arbitration is also a matter for the exercise of discretion by the Cayman Court pursuant to section 54. However, such an order is likely to be refused where the arbitral tribunal is already duly constituted and the application has not been brought before it (or the tribunal has already refused the application).
8. Unless there are emergency arbitration rules binding the parties which require a party to first seek relief from an emergency arbitrator, it will be open to the claimant to decide whether to apply to the court or an emergency arbitrator.

The Court of Appeal concluded that the injunction in this case did not usurp or infringe upon the role of the CIETAC tribunal but instead served to "hold the ring" pending the outcome of the CIETAC arbitration. The Court of Appeal also acknowledged that as a matter of case management, granting the injunction order was likely to avoid detrimental delay to the Respondents that might arise from disputes as to whether a CIETAC tribunal had jurisdiction to grant the injunctive relief sought.

Key takeaways

The Court of Appeal’s judgment confirms the scope and utility of the Grand Court's powers to support foreign arbitrations through interim relief where necessary to ensure an effective arbitral process. Whilst parties are incentivised to comply with emergency arbitral awards so as to set the right tone in an arbitration, the judgment recognises that there are circumstances where it is clearly advantageous to seek a directly enforceable injunction from offshore courts rather than using the emergency arbitration procedure.

Although the issue is currently untested, emergency arbitral awards are likely to be capable of being enforced in the Cayman Islands (and indeed other offshore jurisdictions). However, even though an emergency arbitral award may be obtained in a matter of days or weeks, where assets are located offshore it is often more efficient to go straight to the jurisdiction where they are located, particularly where those assets may be under immediate threat, thereby avoiding the additional time and parallel proceedings that would be required to obtain recognition of the emergency arbitral award.

There are other circumstances which may make the pursuit of injunctions appropriate; for example injunctions can be obtained:

• on an ex parte basis (whereas an emergency arbitration is typically inter partes);
• against third parties (i.e. entities and individuals that are not parties to the relevant arbitration agreement, e.g. where there has already been some form of dissipation or assets are held on trust for a party to an arbitration); and
• to preserve assets offshore against which a party may wish to enforce after a favourable arbitral award has been handed down.

Given the frequency with which arbitrations concern Cayman Islands domiciled vehicles or assets, confirmation of the ability and willingness of the Cayman courts to grant interim relief in appropriate cases is an important reassurance for arbitration practitioners seeking to preserve assets. The local courts have long been at pains to emphasise their pro-arbitration policy, and this decision recognises the important reality that effective support sometimes requires the court to act rather than deferring to emergency arbitration.

Nick Dunne, John Crook, Victoria Raymond, Christina Lo and Rebecca Moseley of Walkers acted for the successful Respondents and instructed Stephen Moverley-Smith KC of XXIV Old Buildings. Weiheng Chen and Draco Ng of Wilson Sonsini Goodrich & Rosati act as Hong Kong counsel to the Respondents (the Claimants in the underlying ongoing HKIAC arbitration).