Background of the dispute and the ICSID arbitration
The dispute started with a clash over the control of the first claimant, Koza Ltd., an English corporation whose sole director is the second claimant, Mr. Ipek. The respondent, Koza Altin, a Turkish company, is Koza Ltd.’s immediate parent company and its primary provider of capital for mining operations outside of Turkey. Although partly owned by Mr. Ipek and his family, Koza Altin is not controlled by Mr. Ipek but by the Turkish government. The shift in control allegedly occurred through the government’s concerted campaign of harassment and oppression against the Koza Group, which included the illegal expropriation of the group’s assets for political reasons.
An arbitration was initiated against Turkey by Ipek Investments Ltd. (ILL) under the auspices of the International Centre for Settlement of Investment Disputes (ICSID). ILL, an English investment firm, became the holding company of the Koza Group following the execution of a share purchase agreement (SPA) under which the members of the Ipek family sold their shares in the former holding company of the Koza Group to ILL. In return, ILL issued shares to the Ipek family, thus interposing an English holding company between the Ipek family and the Koza Group.
This international link gave rise to the jurisdiction of the ICSID tribunal under the UK-Turkey bilateral investment treaty. Turkey challenged the tribunal’s jurisdiction on the basis that the SPA was a sham, a backdated document fraudulently created for the purpose of establishing ICSID jurisdiction. Without the SPA, the dispute would have proceeded solely between the Turkish government and the Turkish entities. The jurisdictional challenge is due to be heard by the ICSID tribunal in September 2020.
The ICSID funding application…
Against this background, the parties have been embroiled in several proceedings in the English courts for the past four years. As part of one set of proceedings, Koza Ltd. gave an undertaking that until further order, it would not dispose of or diminish the value of its funds “other than in the ordinary and proper course of its business” (the Undertaking). Koza Ltd. was required to give advance notice of any intention to spend money on new projects or incur liability other than legal fees in the current action.
In the context of the Undertaking, Koza Ltd. sought a declaration to finance ILL’s ICSID arbitration claim with £3 million. The critical issue on which this turned was the authenticity of the SPA. On the evidence, the Court of Appeal was not able to rule whether or not the funding was a breach of the Undertaking. Thus, it could not issue a negative declaration that Koza Ltd.’s funding was not in the “proper course of business.” Yet, given the real possibility that the transaction had been a fraudulent one, the Court of Appeal could not make a positive declaration either that Koza Ltd. was free to fund the ICSID claim. As such, the court simply held that in pursuing the funding, Koza Ltd. would be doing so at its own risk that it may breach the Undertaking.
…versus the injunction application
Meanwhile, Koza Altin requested assurances from Koza Ltd. that it would not seek to fund the ICSID claim. However, no such assurance was forthcoming. In what ensued, Koza Altin separately applied for an injunction restraining Koza Ltd. and Mr. Ipek from taking steps to incur such funding. The matter ended up before the Court of Appeal once again. Lord Justice Popplewell gave the lead judgment. The judgment also reflected on the law on abuse of process and the jurisdiction to grant interim orders.
1. Was the injunction application an abuse of process?
The key legal principles on abuse arising from the court’s analysis can be summarized as follows:
- The doctrine of res judicata, or cause of action or issue estoppel, has the purpose of bringing finality to litigation and avoiding subjecting a defendant unnecessarily to oppression.
- The power to strike out a claim for abuse of process is founded on two interests: a party’s private interest not to be vexed twice for the same reason and a state’s public interest in not having issues repeatedly litigated.
- The categories of abuse are never closed – every case is fact specific, must be balanced against the least irremediable prejudice, and must be measured by the twin public and private interests that underpin the jurisdiction of the court to prevent misuse of its procedures.
- Abuse may be found where a collateral attack is mounted on a previous decision of a court in which the intending claimant had a full opportunity to contest the decision.
- These principles apply to interlocutory decisions and applications as much as they do to final hearings.
On the facts, the court discussed two critical questions:
(i) Should the injunction application have been brought at the stage of the funding application?
The court established that although Koza Altin could have brought the injunction as a cross-application to the funding application, it would be wrong to say that they should have done so. Despite the significant overlap between the two applications, this was not determinative of the abuse question.
(ii) Did the injunction application amount to an abusive collateral attack on the Court of Appeal’s previous decision on the funding application?
As part of the funding application, the Court of Appeal was only asked to make a declaration on whether the proposed funding was within the terms of the Undertaking (not whether it was permitted). Thus, the injunction application did not seek to contradict the conclusions of the funding application, but rather to build upon them. As the court could not decide the breach issue, the injunction application sought relief resulting from that inability. It was also wrong to interpret the court’s decision in such a way that Koza Ltd. should be permitted to fund at its own risk. While Koza Ltd. would be free to do so, this did not prevent an injunction if there was no final answer on whether the funding breached the Undertaking.
2. Two alternative bases of the court’s jurisdiction?
The court found jurisdiction on two separate and distinct bases:
(i) Jurisdiction to make an ancillary order to enforce an injunction or undertaking
This arose under section 37 of the Senior Courts Act 1981, which offers wide jurisdiction to the court’s powers. Where a defendant gives an undertaking and threatens to breach it, the court has jurisdiction to make ancillary orders designed to see that the undertaking is observed. Importantly, where the court is making such orders ancillary to an existing undertaking or freezing order, it does not have to revisit the criteria that justified exercise of the original jurisdiction. The existing undertaking or freezing order is taken as the starting point without searching for some original jurisdiction to make an equivalent order.
(ii) Original freezing order jurisdiction
The court also held that where there is a dispute over control of a company, it may make interim orders, including freezing orders, whose purpose is to preserve the value of the company in favor of a party that has a legitimate interest in preserving its value. A parent company has an interest in the use by its subsidiary of the latter’s assets because such use affects the value of its shareholding in the subsidiary. Koza Altin’s proprietary interest in preserving the value of Koza Ltd.’s assets, and the consequent value of its own shareholding, was a legitimate interest capable of justifying protection by a freezing order.
Key takeaways
The Koza judgment is a detailed analysis of the law on abuse of process and the court’s wide jurisdiction to grant interim injunctive relief. Importantly, it also hints that under conventional or (more) straightforward circumstances, a company’s funding of an ICSID arbitration claim brought by another group company can be said to be within that company’s ordinary and proper course of business.
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Client Alert 2020-494
