Argyle Funds Spc Incorporated (in Official Liquidation) v Bdo Cayman Ltd

• Jurisdiction: Cayman Islands
• Judge: (Field, Morrison and Moses, JJ.A.)
• Judgment Date: 08 October 2018
• Court: Court of Appeal (Cayman Islands)
• Date: 08 October 2018

ARGYLE FUNDS SPC INCORPORATED (in official liquidation)

and

BDO CAYMAN LIMITED

(Field, Morrison and Moses, JJ.A.)

Court of Appeal (Cayman Islands)

Injunctions — anti-suit injunction — injunction against foreign proceedings — appeal allowed against grant of anti-suit injunction restraining New York proceedings against affiliates of Cayman statutory auditor of Cayman fund — affiliates not party to agreement between auditor and fund to resolve disputes by arbitration in Cayman Islands

Held, allowing the appeal:

(1) The judge was in error in finding that BDO USA and Schwartz had played no part in the four audits, which was a summary finding of fact equivalent to striking out the claims against those parties in the New York proceedings. While it might have been appropriate for the judge to consider in the round the strength of Argyle’s claims against BDO USA and Schwartz when considering Argyle’s submission that even if it were contractually bound to proceed against BDO Cayman in a Cayman arbitration the New York proceedings should be allowed to proceed as a matter of discretion, it was not open to him to make the summary finding of fact that he did. Trial of an issue without the benefit of discovery and cross-examination in interlocutory proceedings was almost never appropriate and was not appropriate in the present case. An application for an anti-suit injunction should not be used as a means of obtaining a summary determination of the foreign claims, particularly where (as in the United States) material might turn up on discovery which might support a case which otherwise appeared unlikely to succeed. The significance of the court’s acceptance that the judge was in error depended on whether his finding was a direct part of his non-discretionary reasoning for granting the injunction or whether it went to the issue of discretion. BDO Cayman’s case was based on the proposition that the New York proceedings were in breach of contract. It was not submitted that an injunction should be granted on the basis that the New York proceedings were vexatious and oppressive on the ground that it was clear on the evidence that BDO USA and Schwartz did not participate in the audits. Instead, BDO Cayman’s invitation to the judge to find that BDO USA and Schwartz played no part in the audits was directed at Argyle’s argument that even if the claim against BDO Cayman were caught by the dispute resolution clause, the court should nonetheless permit the New York proceedings to continue in their entirety. This suggested that the judge’s finding of fact went only to Argyle’s discretion argument and that was how the judge’s finding was to be understood. On this basis, the judge’s error did not irredeemably vitiate his decision to grant the anti-suit injunction (paras. 32–33).

(2) The sole recourse clause was a covenant not to sue BDO Trinity, BDO USA and Schwartz as these entities were all members of the international network of BDO entities under the governance of BDOInternational and thus member firms of the international BDO network. The covenant not to sue the affiliates was subject to the carve-out. It followed that whether Argyle was contractually free to sue the affiliates in the New York proceedings raised the following issues: (i) were the New York proceedings against the affiliates a “claim or proceeding founded on an allegation of fraud or wilful misconduct or other liability that cannot be excluded under the applicable laws”? and (ii) if so, were the New York proceedings brought in breach of the exclusive jurisdiction clause? It was regrettably unclear whether the judge held that the claims against the affiliates in the New York proceedings did fall within the carve-out. If he did indeed hold that the claims of wilful misconduct and fraudulent conscious concealment were not covered by the carve-out, he was in error. It was clear that these claims were founded on an allegation of fraud or wilful misconduct within the wording of the carve-out. They might not comply with the pleading requirements in England or the Cayman Islands but they appeared to comply with New York pleading requirements (paras. 34–37).

(3) There was no sustainable basis for restraining Argyle from continuing the New York proceedings against the affiliates in respect of the 2011, 2012 and 2013 audits. The court adopted the following observations of the English High Court: (1) Whether an exclusive jurisdiction clause should be understood to oblige a contractual party to bring claims relating to the contract in the chosen forum even if the claim was one against a non-contracting party required a consideration of the contract as a whole including not only the language used in the exclusive jurisdiction clause but also all other terms in the contract that might shed light on what the parties were likely to have intended. (2) The principle that rational businessmen were likely to have intended that all disputes arising out of or connected with the relationship into which they had entered would be decided by the same court could not apply with the same force when considering claims brought by or against non-contracting third parties. Whilst it was well established that the language of an exclusive jurisdiction clause was to be interpreted in a wide and generous manner, the starting point in considering whether disputes involving a non-contracting third party might come within the scope of the clause must be that, absent plain language to the contrary, the contracting parties were likely to have intended neither to benefit nor to prejudice non-contracting third parties. (3) Where it was clear from the express terms that the contracting parties had turned their minds to the position of third parties and more particularly whether such third parties were to benefit or bear the burden of rights and obligations agreed between the contracting parties, the absence of any express language in the exclusive jurisdiction clause that provided for the application of that term in relation to claims brought by or against third parties might be an indication that the clause was not intended either to benefit or to prejudice third parties. (4) Where the exclusive jurisdiction clause was silent on the question, the fact that any provision in the contract dealing with third parties indicated an intention that third partiesshould not acquire rights as against the contracting parties by virtue of the contract might be a further indication that the clause was not intended either to benefit or to prejudice such third parties. (5) Where a particular interpretation of the exclusive jurisdiction clause produced a material contractual imbalance because, for example, it resulted in one party to a dispute relating to the contract being subjected to an obligation to bring proceedings in the chosen jurisdiction in circumstances where the other party to the dispute was not similarly obliged, or where that interpretation would require a claim against a non-contracting third party to be brought in the agreed jurisdiction even where the chosen forum might not actually have jurisdiction over such a claim against that party, that too might be an indication that the clause was not intended to so apply because such a result was unlikely to be what the contracting parties as rational businessmen would have agreed. (6) The fact that there was nothing in the contract that might indicate a rational limit in terms of the identity of non-contracting third parties whose rights and interests might be affected by the application of an exclusive jurisdiction clause might provide a further indication that the clause was only intended to affect the rights and interests of the contracting parties. (7) It followed that where contracting parties intended that any claim relating to the contract be subject to the exclusive jurisdiction clause even where it was one brought by or against a non-contracting party, clear words should be used expressly setting out that intention, the parties to be affected and, if relevant, the manner in which the submission of any non-contracting parties to the jurisdiction of the chosen court was to be ensured. In the present case, notwithstanding the breadth that resulted from the words “any claim or matter arising from this Agreement,” and the problems that arose from the same issues being litigated in two different jurisdictions, the clause did not extend to claims brought by Argyle against third parties pursuant to the carve-out in the sole recourse clause. Plainly, the intended effect of the carve-out was that Argyle should be free to bring claims that fell within the carve-out in judicial rather than arbitration proceedings, since the dispute resolution clause could only apply to claims by or against the parties to the engagement letters. If it had been the parties’ intention for the exclusive jurisdiction clause to apply to such claims, one would have expected it to be expressly provided for but there was no such provision. On the contrary, the carve-out referred to “applicable laws” which strongly suggested claims in jurisdictions other than the Cayman Islands were contemplated. Further, there was no machinery in the engagement letters that would result in a third party sued under the carve-out submitting to the jurisdiction of the Cayman courts, an omission which could render the carve-out right to sue of little, if any, value. Proceedings in New York were the only way in which Argyle could obtain enforceable judgments against the affiliates BDO USA and Schwartz. The court did not accept the argument that it was the contractual intention of the parties that Argyle, when agreeing to the exclusive jurisdiction clause, took the risk that athird party sued under carve-out would not be subject to the jurisdiction of the Cayman Islands courts (para. 48; paras. 52–54).

(4) The judge also erred in finding that the claims against the affiliates in New York in respect of the 2010...