Lyxor v Phoenix Meridian

• Jurisdiction: Cayman Islands
• Judge: (Chadwick, P., Forte and Mottley, JJ.A.)
• Judgment Date: 24 September 2009
• Court: Court of Appeal (Cayman Islands)
• Date: 24 September 2009

Court of Appeal

(Chadwick, P., Forte and Mottley, JJ.A.)

LYXOR ASSET MANAGEMENT S.A.

and

PHOENIX MERIDIAN EQUITY LIMITED

C.J.D. Style, Q.C. and C.D. McKie for the appellant;

G. Halkerston and Ms. M. Hudson for the respondent.

Cases cited:

(1) Armstrong v. Armstrong, [1892] P. 98; (1892), 61 L.J.P. 63; 66 L.T. 384; 8 T.L.R. 339, referred to.

(2) Nokia Corp. v. Interdigital Technology Corp., [2004] EWHC 2920 (Pat), referred to.

(3) South Carolina Ins. Co. v. Assurantie Maatschappij ‘De Zeven Provincien’ N.V., [1987] A.C. 24; [1986] 3 W.L.R. 398; [1986] 3 All E.R. 487; [1986] 2 Lloyd”s Rep. 317, referred to.

(4) Sternson Ltd. v. CC Chemicals Ltd., [1982] 1 F.C. 350; (1981), 124 D.L.R. (3d) 76; 58 C.P.R. (2d) 145; 36 N.R. 507, considered.

Legislation construed:

Grand Court Rules 1995, O.24, r.16: The relevant terms of this rule are set out at para. 49.

United States Code, Title 28, §1782: The relevant terms of this section are set out at para. 24.

Injunctions-anti-suit injunctions-injunction against foreign proceedings-on application to enjoin foreign proceedings, to show compelling reason to prevent other party from invoking legitimate right under foreign law (e.g. ‘unconscionable’ to allow it to proceed)-not ‘unconscionable’ to seek Title 28 depositions under US law if substantial and late amendment to defence and since US courts aware of dangers of oppression-safeguard may also be provided so that transcripts not used at trial without court order

The respondent company brought proceedings in the Grand Court to recover the full value of its investment in a group of funds administered by the appellant.

The respondent, an investor in two Cayman funds which were managed by the appellant company, a wholly-owned subsidiary of a French bank, had redeemed the units it held in both funds before their maturity date and challenged the appellant”s valuation of its investment. The appellant had only recently amended its defence, having first claimed the redemption price had to be reduced to take into account the right of its principal to be compensated for early redemption of its right to borrow units of the funds, and now clarifying it as a charge for the principal”s role as leverage financier. As part of the respondent”s trial preparations, it sought depositions from the appellant”s key witnesses-both officers of a company in the group of its principal resident in the United States-under §1782 of Title 28 of the US Civil Procedure Code. The appellant applied for an injunction restraining the respondent from continuing proceedings in the United States to compel the witnesses to give depositions.

The Grand Court (Smellie, C.J.) held (in proceedings reported at 2009 CILR 342) that the appellant”s application seeking an injunction would be refused since it had not met the threshold test that it would be ‘unconscionable’ to allow the respondent to proceed and it had therefore not overridden its legitimate right to invoke the procedure. Further, the US courts were well aware of the dangers of vexation and oppression under the procedure and there was no suggestion that Cayman law regarded double cross-examination as an abuse of process (since O.24, r.16 of the Grand Court Rules provided for pre-trial discovery by way of depositions).

On appeal against refusal to enjoin the Title 28 proceedings, the appellant submitted that the Grand Court, in considering whether the proceedings were unconscionable, had erred because (a) it relied on the US courts to protect witnesses from oppression; (b) it determined that Cayman law was not hostile to pre-trial cross-examination; (c) the respondent should have been restricted to the Cayman discovery process; and (d) it treated the principal as if it were the real party to the proceedings rather than the appellant but did not give it the status of being a participant in the action.

Held, dismissing the appeal and giving directions on the use of the depositions at trial:

(1) The decision of the Grand Court to refuse the injunction would be upheld since there was no basis to indicate that the lower court had erred in principle. The Grand Court had been correct to proceed on the basis that the US courts would provide adequate protection against potential abuse of the depositions or oppression of the witnesses. Protection was provided by the Federal Rules of Civil Procedure with the depositions taking place before a court reporter and the deponents would be accompanied by counsel, who could object to any question on the ground that it was embarrassing or oppressive. Moreover, there was no evidence that (a) the appellant would be exposed to any potential for oppression since the deponents were not its employees; (b) the employers of the witnesses had objected to the proceedings; nor that (c) it might discourage the witnesses from appearing at the trial. Further, it would be open to the Grand Court to restrict the use which could be made of the deposition transcripts, including their admissibility as evidence at trial, and this would provide further safeguards against abuse of process (paras. 43–47; para. 61).

(2) It was clear that the rules in Part II of O.24 of the Grand Court Rules made provision for discovery by oral examination and, while not identical to Cayman procedure, the proceedings under §1782 were not going far beyond the equivalent Cayman discovery process and thus it could not be said that Cayman law was hostile to pre-trial cross-examination (paras. 48–52).

(3) It was irrelevant that the respondent could have been confined to the ordinary Cayman process-through requesting better particulars or administering interrogatories-since prima facie a party who could invoke a legitimate right under foreign law would be entitled to do so and thus the relevant issue was whether it was acting oppressively by trying to rely upon it. Given the circumstances of the case-with the late and substantial amendment of the defence-it could not be said that the respondent was acting in abuse of process by seeking the depositions of the witnesses in New York rather than seeking interrogatories in the Cayman Islands (paras. 56–58).

(4) Finally, the Grand Court was entitled to recognize the commercial reality of the proceedings and that the principal”s interest in the outcome

was a factor which indicated that it was not oppressive to allow the §1782 proceedings. Nor did it matter to the exercise of the respondent”s legitimate right under US law whether the principal was treated as a participant in these proceedings. There was therefore no evidence that the Grand Court had erred in making its decision and since it was not for an appellate court to substitute its own view, the appeal would be dismissed. Further directions would be added that the transcripts of the depositions were not to be used at trial without an order of the Grand Court and that the appellant would be able to apply to have parts of the transcript redacted if they were to question the credit of the deponents (paras. 53–55; paras. 59–65).

1 CHADWICK, P., delivering the judgment of the court: This appeal is from an order made on May 22nd, 2009 by the Chief Justice in proceedings (‘the Cayman proceedings’) brought by Phoenix Meridian Equity Ltd. (‘Phoenix’), a company incorporated in the Cayman Islands, against Lyxor Asset Management S.A. (‘Lyxor’), a company incorporated under the laws of France, and Scotiabank & Trust (Cayman) Ltd. (formerly, the Bank of Nova Scotia Trust Co. (Cayman) Ltd. and, hereafter, ‘Scotiabank’). Scotiabank has taken no part in the Cayman proceedings.

2 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 §1782 of Title 28 of the US Civil Procedure Code (‘the §1782 proceedings’) in the

course of which it seeks to depose two individuals-Mr. Samuel Rosenberg and Mr. Anthony Phlipponneau-who have given witness statements in, and are potential witnesses at the trial of, the Cayman proceedings.

3 The appeal was heard, with expedition, on July 6th and 7th, 2009 at a special session of the court. At the conclusion of the oral argument we dismissed the appeal and gave directions as to the use that could be made at the trial of the action of transcripts of oral depositions that Phoenix proposed to take from the two witnesses in New York. We stated our reasons for taking that course, but indicated that we would put our formal judgment into writing and hand it down in due course. We now do so.

The underlying facts

4 Phoenix is the sole investor in two funds-Patriot I Protected Fund (‘Patriot I’) and Patriot Focus Protected Fund (‘Patriot Focus’) (together ‘the funds’)-of which Lyxor is the manager and Scotiabank is the trustee and registrar. Lyxor is a wholly-owned subsidiary of a French bank, Société Générale S.A. (‘SG’). The funds are established by supplemental deeds under the Patriot Cayman Trust, an exempted trust established under the Trusts Law of the Cayman Islands by deed (‘the trust deed’) dated March 12th, 2003.

5 The object for which the funds were established was to provide leveraged exposure to a diversified portfolio of alternative investments as well as some degree of principal protection if held to maturity. The funds are identical in structure but differ in the amounts of leverage and principal protection which each respectively provides. Each was the subject of a fund specific memorandum (‘FSM’). Each FSM provides that, on launch date, the fund would invest 100% of its assets in a corresponding leverage fund-respectively, the Patriot I Leveraged Fund and the Patriot Focus Leveraged Fund-and would simultaneously enter into swap and option agreements with SG. The swap and option transactions were described in the FSMs in these terms:

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