Bermuda: The Danger Of Striking Blindly: Bermuda Court Rejects Strike-Out Application And Denies Arbitral Stay In Valuation Dispute

Last Updated: 19 December 2018
Article by Kevin Taylor and Benjamin McCosker

Striking out Pleadings under the RSC

In its Summons, the Defendant Company had sought orders pursuant to Order 18, Rule 19(1) of the RSC that the entirety of the Plaintiff's claims against it should be struck out, on the basis that they allegedly (i) disclosed no reasonable cause of action; (ii) were scandalous, frivolous or vexatious; and (iii) were an abuse of process of the Court.

Attride-Stirling AJ began his analysis of the relevant legal principles by referring to the Court of Appeal's examination of the approach to be taken, both as regards evidence and the consideration of the actual merits of the action, in Broadsino Finance Company Limited v Brilliance China Automotive Holdings Ltd. 2m The general principles governing applications to strike out pleadings were recited by Stuart-Smith JA at pages 4 and 5 of that judgment, and for present purposes can be summarised as follows:

  1. if an application is made to strike out a pleading under only Order 18, Rule 19(1)(a) of the RSC (i.e. on the basis it discloses no reasonable cause of action), it is permissible only to look at the pleadings;
  2. if the application is brought under the remaining, broader provisions of Order 18, Rule 19(1), the Court can admit and examine affidavit evidence;
  3. the Court's jurisdiction to strike out a claim should only be exercised in "plain and obvious cases", particularly in circumstances where there has been no discovery or oral evidence given; and
  4. the relevant test is whether there is a "fair and reasonable probability of the defendants having a real or bona fide defence" - the approach is the same as when a plaintiff is seeking summary judgment.

While Attride-Stirling J had little difficulty finding that the Defendant Company had failed to make out the first two grounds of its strike-out application, the question of whether the claim could be struck out on the basis it was an abuse of process required more consideration. Essentially, the Court was being asked to decide whether there had been a departure from the contractually agreed basis for the valuation of the Plaintiff's shares which were to be repurchased by the Defendant Company. The evidence before the Court was conflicting, with the Plaintiff's affidavit claiming there had been a departure, and the Defendant Company's affidavits claiming there had not. Recognising that there was a serious question of fact to be tried, Attride-Stirling AJ held:

Challenging Share Valuations

At the heart of the dispute between the parties was a disagreement as to the price to be paid by the Defendant Company to the Plaintiff for the repurchase of the Plaintiff's shares in the Defendant Company. The parties had agreed that the purchase price for the shares was to be "fair market value", determined in accordance with "Canadian generally accepted valuation principles". The Plaintiff's case was that the valuation procured by the Defendant Company was not fair market value and had not been conducted in accordance with the standards of the Canadian Institute of Chartered Business Valuators (the "CICBV Standards").

Counsel for the Defendant Company relied on Campbell v Edwards3 and Jones & Ors v Sherwood Computer Services4 for the proposition that a party who agrees to be bound by a valuation is bound by it even if it is wrong, absent fraud. Counsel for the Plaintiff sought to distinguish those decisions from the case at bar. For example, unlike in Campbell, where the parties had agreed on the identity of the valuator, in this case there was a dispute as to the qualifications of the valuator chosen by the Defendant Company. Further, in Campbell there had been no agreement as to valuation methodology, whereas in this case the parties had agreed that the valuation be conducted in accordance with "Canadian generally accepted valuation principles", which the Plaintiff contended meant in accordance with the CICBV Standards.>

Attride-Stirling AJ ultimately found the Plaintiff's arguments more compelling. Overall, the judge concluded that the question of whether the Defendant Company's valuator, Mazars, had performed the valuation correctly and in accordance with the terms of the contract with the Plaintiff was a question to be resolved at trial, including possibly with the benefit of expert testimony:

The Alternative Application for an Arbitral Stay

An important question before the Court was whether the Defendant Company was debarred from relying upon what it said was a contractual agreement to arbitrate the dispute by virtue of it having already applied to strike out the Statement of Claim, which the Plaintiff argued constituted the taking of a "step" in the action.

Counsel for the Defendant Company relied heavily upon Eagle Star Insurance Co Ltd v Yuval Insurance Co Ltd, where a very strong English Court of Appeal led by Lord Denning MR opined that an application to strike out a statement of claim (on the facts of that particular case) was not to be held as taking a step in the action such as to preclude a party from applying to stay proceedings in favour of an arbitration, pursuant to an arbitration agreement5 .

Counsel for the Plaintiff also relied on Eagle Star, but sought to distinguish it from the case at bar. Specifically, it was noted that in Eagle Star the applicant had sought to strike out the claim only on the basis that the pleading itself disclosed no cause of action, and had not filed any evidence in support thereof. This was in stark contrast to the case which was before the Court, where the Defendant Company had sought to strike out the Statement of Claim based on the omnibus provisions of Order 18, Rule 19 of the RSC, and had filed multiple affidavits which addressed the perceived merits of the case.

Counsel for the Plaintiff also relied on L Capital Jones Ltd v Maniach Pte Ltd, i`n which the Singapore Court of Appeal conducted an exhaustive analysis of the various litigious manoeuvrings which could be said to constitute the taking of a "step" in an action.6 Attride-Stirling AJ found the following passage of the 1992 English decision of Blue Flame Mechanical Services Ltd v David Ford Engineering Ltd, cited in L Capital, particularly instructive:

Having considered the relevant authorities, Attride-Stirling AJ concluded that in prosecuting its strike-out application, the Defendant Company had taken a "step" in the proceedings which precluded it from subsequently seeking a stay pending arbitration:

Practice Points

Strike-out applications are an important tool in a litigator's armoury, but they should be treated as a double-edged sword. While the achievement of a technical knock-out through a procedural shortcut can seem inviting at first glance, a strike-out which is brought without due consideration is likely to only delay proceedings and lead to adverse cost consequences. The remedy can cut both ways.

As a general rule, it is only the most exceptionally deficient cases - those which could be said to have only 'fanciful' prospects of success at best - which are liable to be struck out for failure to disclose a reasonable cause of action. Strike-out applications brought on the grounds that a pleading is vexatious or an abuse of process of the Court must be carefully thought out and properly particularised - while the Court will act to prevent its machinery from being used as a means of vexation and oppression, it will do so only in the face of cogent evidence that the continuation of the proceedings would be manifestly unfair to a party to the litigation before it.

Litigants should also take care to avoid the situation where they deprive themselves of the opportunity to refer a dispute to arbitration by their engagement with the merits of the action in a strike-out application. As a general proposition, if a stay pending arbitration is the ultimate outcome sought, involvement with the litigious proceedings should be kept to a bare minimum.

Footnote

1. Randall Krebs v Meritus Trust Company Limited [2018] SC (Bda) 72 Civ (23 October 2018)

2. [2005] Bda LR 12.

3. (1976) 1 WLR 403.

4. (1992) 1 WLR 277

5. [1978] 1 Lloyd's Rep 357.

6. (2017) 1 SLR 312 at [80].

7. [1992] 8 Const LJ 266, cited at paragraph 58 of Attride-Stirling AJ's decision.

8. Paragraph 65

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