June 01, 2012

Recent High Court Ruling Strikes Another Blow Against Inappropriate Litigation Forum-Shopping

The recent High Court decision of Justice Andrew Smith in Citigroup Global Markets Ltd v. Amatra Leveraged Feeder Holdings Ltd has added to the ever-increasing body of transatlantic case law relating to the appropriate forum for litigation. The decision reinforces the prevailing judicial mindset against inappropriate and opportunistic forum-shopping, where one party seeks to exploit overlapping jurisdictions to the detriment of the other. In this case, the judge did not hesitate to reject the claimant's contractual "window dressing" in order to prevent inappropriate forum-shopping.

Citigroup Global Markets Inc. (US claimant) and Citigroup Global Markets Ltd (UK claimant), the claimant in this action, are part of the Citicorgroup of companies. Amatra and Ajial are corporate vehicles of family trusts belonging to the Abbar family (together "the defendants").

The defendants conducted negotiations with the U.S. claimant to structure and negotiate an investment agreement. It was agreed that the U.S. claimant would be the counter party. However, at the 11th hour the U.S. claimant proposed that the UK claimant would be the counter party.

Subsequently, on 9 May 2006, the defendants entered into agreements with the UK claimant which were governed by English law and subject to the non-exclusive jurisdiction of the English courts.

The total amount invested by the defendants was $343 million.

By 2009 all of this investment had been lost.

In August 2011, the defendants launched arbitration proceedings in the U.S. against the U.S. claimant. The proceedings were based on the allegation that the U.S. claimant had committed a pattern of "gross misconduct"; engaged in "reckless and deceitful conduct by engineering" unsuitable agreements; and "mismanaged" the investment.

The U.S. claimant was a member of the Financial Industry Regulation Authority (FINRA). FINRA imposes a mandatory regulatory regime on its members that they must arbitrate where a dispute arises "in connection with business activities".

The U.S. Claimant contested the arbitration proceedings in the U.S. District Court of the Southern District of New York (U.S. proceedings). They sought a declaration that the claims brought were "not arbitral" nd an order that the defendants were not customers in connection with the U.S. claimant's business activities.

In conjunction with this, the UK claimant issued proceedings in the English courts against the defendants (English proceedings). The basis for the English proceedings was that the agreements were governed by English law and the non-exclusive jurisdiction of the English courts. The UK claimant sought a number of declarations which protected itself and the U.S. claimant. Nevertheless, the UK claimant alleged that the issue was between them and the defendant.

The main issue in the English proceedings was: if a U.S. bank conducts negotiations and does all the work to structure and implement the deal, but documents the agreement in England, can it use contractual language and the English courts to circumvent a mandatory regulatory regime?

Justice Andrew Smith decided that there was no serious issue to be tried in respect of the English proceedings as they were merely a "creature of inappropriate forum shopping."

The court looked beyond the wording in the agreements and saw that the "real protagonists" in this dispute were the defendants and the U.S. claimant.

On the basis that the English proceedings "risked unwarranted interference with the U.S. regulatory regime," the Court exercised its discretion to stay the English proceedings pending the resolution of the FINRA arbitration.

Essentially the wording in the agreement was artificial and amounted to contractual "window dressing." The court held that the U.S. claimant was not permitted to use the English proceedings to circumvent the mandatory regulatory regime under FINRA.

Justice Andrew Smith's decision in Citigroup Global Markets Ltd v. Amatra Leveraged Feeder Holdings Ltd is consistent with the approach adopted by the U.S. Supreme Court in the 2010 decision, Morrison v National Australia Bank.

In Morrison v National Australia Bank, the main issue to be decided was whether claims brought by foreign investors (Australian) against a foreign company (National Australia Bank) based on transactions in a foreign country (Australia) could proceed in a U.S. Court (the "foreign-cubed" issue). The Supreme Court considered the issue with regard to the regulatory regime on U.S. securities and dismissed the case for "subject matter jurisdiction."

This illustrates the trend in the UK and the U.S. to strike down inappropriate forum-shopping which seeks to maximise recovery and circumvent difficult regulatory regimes.

On this basis the drafting of artificial arrangements in order to forum-shop is unlikely to find favour in the UK or U.S.

Where there is an instance of jurisdictional forum-shopping, the court will look beyond the contractual wording in the contract to the substance of the agreement.

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