Separability and Illegality

In Beijing Jianlong Heavy Industry Group v Golden Ocean Group Ltd and Others [2013]  the Court rejected a challenge to awards that the tribunal had jurisdiction to hear the disputes and to anti-suit injunctions restraining the continuation of proceedings in China.

On the assumed facts, a Chinese company,  Jianlong, issued a guarantee to Golden Ocean,  in relation to a time charterparty under which Golden Ocean chartered a vessel to a subsidiary of Jianlong.  The guarantees were governed by English law and subject to arbitration in England.

Arbitration was commenced on each of the guarantees.  Jianlong’s main defence was that the guarantees were illegal under Chinese law: under Chinese foreign exchange regulations, guarantees issued by Chinese companies to foreign companies were not permitted without the approval of the state. That consent had not been obtained for any of the guarantees. Under Chinese law, which was mandatory irrespective of the fact that Chinese law was not the chosen applicable law, the guarantees were rendered invalid and unenforceable.

 Jianlong’s defence was, therefore, that the guarantees were unenforceable as a matter of public policy, and that the arbitration clauses – which were part of the unlawful scheme –were themselves unenforceable because they were tainted with the improper purpose of furthering an illegal scheme.

After the arbitrations had commenced, Jianlong initiated its own proceedings in China seeking a declaration that the arbitration agreements were invalid.  The arbitrators issued partial awards declaring they had jurisdiction to determine the disputes.

 Jianlong applied under section 67 of the Arbitration Act 1996, seeking to have the awards set aside on the ground that the arbitration clauses were void and that the arbitrators did not possess substantive jurisdiction.

Ralli Brothers v Compañia Naviera Sota y Aznar SA (1920) had decided that a contract governed by English law will not be enforced if it requires illegal acts in the place of performance.  In Foster v Driscoll [1929] and Regazzoni v K C Sethia (1944) Ltd [1957] theprinciple was extended to the situation in which the parties’ true intention was to commit an act unlawful in a friendly state even if the contract did not by its terms specify that performance was to take place in that state.

For the arbitration itself there was nothing unlawful to be performed in China, however, Jianlong argued that Foster v Driscoll applied because the guarantees were themselves part of the same overall transactionand the arbitration clauses were, as a matter of public policy, not to be given effect by the English courts as the arbitration clauses substantially improved the chances for the parties to achieve the enforceability of the guarantees even though they were known to be illegal under Chinese law.  Hence, the arbitration clauses were integral to the overall scheme

The response by Golden Ocean was that the arbitration agreement was a separate agreement (section 7 of the Arbitration Act 1996) and thus was unaffected by any illegality relating to the underlying agreement. Golden Ocean emphasised that the question before the arbitrators was whether as a matter of English public policy – and not as a matter of Chinese law – the guarantees should be enforced.  The question for the court was, therefore, whether the arbitration agreement formed a part of the illegal transaction or whether it was to be separated out and enforced on its own terms.

The court agreed with the arbitrators that the arbitration clauses were valid. There was nothing in Chinese law which would be undermined by allowing the arbitrators to determine whether English public policy was offended by the enforcement of the guarantees.  The court emphasised the separability of an arbitration clause from the contract to which it related, and the fact that the “nature and function” of an arbitration clause was quite different from other contract terms.

This is an entirely orthodox ruling and is to be welcomed. 

Security Pending Challenge

In X v Y [2013] the Commercial Court has refused to order a payment into court pending a challenge to an arbitral award under sections 67 and 68 of the Arbitration Act 1996.

The award required X to pay substantial sums to Y.  Y applied for security for its costs of resisting the challenges and a payment into court of the sums awarded (under sections 70(6) and 70(7) respectively).

The Court made an order for security for costs, finding that there was a real risk that X’s assets were not readily available to satisfy any order for costs that may be made against it. However, it refused to order the payment in of the sums awarded, having regard to the following guidance:

A) When exercising the discretion under section 70(7) to order payment in respect of a challenge under section 67 (but not section 68), there is a threshold requirement that the challenge to the jurisdiction is flimsy or otherwise lacking in substance (A v B [2011]).

B) The jurisdiction conferred by section 70 should not be used to assist a party to enforce an award (Peterson Farms v C&M Farming [2003]).

C) The challenge to the award must prejudice the ability to enforce the award.

The threshold requirement derives from the fact that in the case of challenges under section 68 (serious irregularity) or section 69 (appeal on a point of law), the award has a presumptive validity unless and until set aside. By contrast, an award challenged under section 67 for lack of jurisdiction is not presumed to be valid, and the jurisdictional challenge is determined by way of a complete rehearing and is not limited to a review of the tribunal’s decision.

Y satisfied the threshold requirement. However, the challenges to the award did not materially prejudice Y’s ability to enforce it. Any delay in enforcement would end if and when Y defeated the challenges. An order for payment in was not required to curtail that delay, especially since Y had the protection of a freezing order against X in Australia, where X had substantial assets.

The decision neatly illustrates the court’s exercise of its discretion under section 70(7). It also highlights the different factors to be considered by the court when exercising its discretion under section 70(6), on the one hand, and section 70(7), on the other.

Incorporation of arbitration clauses 2

In Lisnave Estaleiros Navais SA v Chemikalien Seetransport GmbH [2013] the court set aside an arbitration award for lack of substantive jurisdiction: section 67(1)(a).

The claimant entered into an agreement with the defendant, under which the parties agreed commercial terms for repairs to the defendant’s fleet.  The agreement did not contain an arbitration agreement.  A dispute arose and the defendant referred a claim to arbitration.  The defendant’s case was that the arbitration agreement in the claimant’s general conditions was incorporated by reason of the parties’ prior dealing. Alternatively, it was the parties’ clear intention that the agreement was to be subject to an arbitration agreement.

The claimant’s general conditions contained a clause providing for arbitration, but also other dispute resolution provisions. Those general conditions were incorporated in individual ship repair contracts, the contracting parties being the claimant and the individual ship-owning companies (not the defendant).

By a majority award, the tribunal found that it had jurisdiction and that the agreement incorporated the general conditions.

The court set aside the award.  This was not a case of an informal contract followed by a more formal one, in which a set of terms had been incorporated.  Here, there was a formal detailed contract in which there was no reference to the general conditions.  Further, the defendants were not seeking to incorporate the general conditions as a whole, only the arbitration clause. The court should give priority to what the parties have expressly agreed and should not readily supplement such terms.   This is consistent with earlier authority (see Incorporation of arbitration clauses below on 15/7/2010)

State Appointee and Independence

Venezuela is again pushing the boundaries of arbitral independence (see Repeat Appointments and Conflicts of Interest below).

In Saint Gobain v Bolivarian Repulic of Venezuela (2013) an ICSID party-nominated arbitrator has survived an attempt to disqualify him on the ground that he manifestly lacked independence and impartiality, qualities required by Article 14(1) of the ICSID Convention.  At the time of appointment, the arbitrator was a lawyer in the Argentinian Attorney General’s Office, a position he subsequently left.  The claimant proposed his disqualification, arguing that he would have been disqualified from sitting as a judge under the International Court of Justice (ICJ) Statute, because his position was political.  Even it were not political, there was an issue conflict, in he had previously argued from Argentina’s perspective issues that may arise in this case.

Rejecting the challenge, the remaining members of the tribunal noted that the ICJ Statute was of no direct application.

The arbitrator’s position was not, of itself, incompatible with his role as an arbitrator.  The tribunal noted the arbitrator was not subject to any current control by Argentina or Venezuela and it rejected the claimant’s concern that there was an issue conflict.  There was no evidence that cast reasonable doubt on his impartiality and independence, let alone that made it highly probable that he lacked these qualities.  The fact that a lawyer has argued a particular position in the past does not necessarily mean that he will take the same position in the future.  The tribunal accepted that the situation could be different if an arbitrator is simultaneously acting as counsel for a party in another arbitration, but there was no indication here that that was the case.

The test under s.69 AA ’96

In AMEC Group Ltd v Secretary of State for Defence [2013] the Court rejected a challenge against a dispute review board’s (DRB) award concerning the meaning of a guaranteed maximum price clause.  The DRB was constituted as an arbitration and the board’s award (a majority award and a dissent) was appealed under section 69 of the Arbitration Act 1996.  The result of the challenge is not of particular interest but the Court held that when considering whether the tribunal’s decision was obviously wrong for the purposes of section 69, the test is whether there has been a  ”major intellectual aberration”.  This has been applied several times before and suggests that this gloss may be establishing itself as a yardstick for section 69 applications.

The Court went to state that: “Another way of approaching the question … is to consider whether or not the dissenting view is at least seriously arguable.”  This emphasises that, despite its lack of legal status, the existence of a dissenting opinion may lend support to an application for permission to appeal.  However, as this case demonstrates, it will not be determinative.

SCC publishes Challenge Review

The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) has published a review of the challenges made to arbitrators.

Under the SCC Rules (in common with most other institutional rules), a party may challenge an arbitrator if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess the qualifications agreed by the parties (Article 15).  The SCC Board’s decisions on challenges are not published, so the review of nine decisions provides useful insight into the approach of the SCC Board , as well as the nature of the challenges.

Key points emerging from the review are:

• The SCC Board takes into account the IBA Guidelines on Conflicts of Interest when deciding arbitrator challenges.
• Of the nine challenges considered in the review, eight were sustained.
• Seven successful challenges involved allegations that the arbitrator or his law firm were either previously or currently instructed by a party in the arbitration.
• The eighth successful case, concerned a company owned by the arbitrator that had been involved in the bidding process for the contract that was the subject of the dispute.
• The one unsuccessful challenge was based on an allegedly close personal relationship between the challenged arbitrator and counsel for one of the parties, as they had written several articles together.

I am pleased to announce the ‘birth’ of the Guide to the IBA Rules

I am pleased to announce the ‘birth’ of  ”The IBA Rules on Taking Evidence in International Arbitration – A Guide”.  The Guide reproduces the Rules and the Commentary by the IBA Committee and I have added my own thoughts on how practitioners and arbitral tribunals might approach issues that arise from the Rules.

The IBA Rules are commonly used in international commercial arbitration (and investor – state arbitrations) and yet there are few guides to their use and interpretation.  I trust my thoughts benefit the discussion of their application.

The book is available from the publishers, Cambridge University Press, at http://www.cambridge.org/gb/knowledge/isbn/item6969277/?site_locale=en_GB (and other good bookshops!)

New Brussels Regulation

On 6 December 2012, the Economic and Monetary Affairs Council adopted the recast of the Brussels Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (44/2001).  This follows the endorsement of the recast Regulation by the European Parliament on 20 November 2012.

The key points of the new Regulation, as far as the treatment of the arbitration exception is concerned, are:

• The retention of the arbitration exception in article 1(2)(d) .
• The addition of a recital (recital 12) that clarifies the extent of the arbitration exception, including by:
  • expressly preserving the right of member states’ courts to rule on issues such as the validity of arbitration agreements;
  • stating that a ruling of a member state court on the validity of an arbitration agreement should not be subject to the rules on recognition and enforcement of the Regulation;
  • confirming that the New York Convention takes precedence over the Regulation and that, therefore, member states’ courts may recognise and enforce arbitral awards even if they are inconsistent with a judgment of another member state court (for example, where a member state court has decided that the arbitration agreement is not valid and has gone on to give judgment on the merits); and
  • clarifying that the Regulation does not apply to any action or ancillary proceedings relating to, in particular, the establishment of the tribunal, the arbitrators’ powers, the conduct of the arbitration, nor any action or judgment concerning the review, appeal, recognition or enforcement of the award.
• A new article 84(1)(a), expressly stating that the Regulation shall not affect the application of the New York Convention.

The recast Regulation will be published in the Official Journal in the coming weeks and enter into force 20 days later.  It will start applying two years after its entry into force.

Expert Determination and Limitation

The decision in Braceforce Warehousing Ltd v Mediterranean Shipping Company[2009]raised interesting questions about the extent to which the Limitation Act 1980 applies to expert determinations.

In Braceforce Mediterranean had agreed to build and grant a lease of a warehouse.  Disputes were to be determined by an expert surveyor in default of agreement to be appointed by the President of the RICS.  The parties proceeded on the assumption that the Limitation Act applied to expert determination and Mediterranean asked Braceforce to agree to the appointment of an expert.  Braceforce failed to respond and Mediterranean both issued court proceedings and applied to the RICS for the appointment of an expert.  Braceforce argued that (a) the appointment of the expert was out of time; (b) there was an agreement to litigate the dispute rather than refer it to expert determination and (c) Mediterranean had elected to have the dispute determined by the court and not the expert.

The judgment raised two interesting points.  Firstly, the court doubted that the parties’ agreement that the Limitation Act 1980 applied to expert determination was, in fact, correct.  The court was plainly correct to have those doubts.  The framework of the Limitation Act is to prevent “actions” being brought.  For example, section 5 provides that: “An action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued.”  Action is defined in section 38 as “includes any proceeding in a court of law”.  Although the use of the word “includes” may contemplate something other than a proceeding in a court it is difficult to imagine what that might be.  Another statutory definition of “action” in the Supreme Court Act 1981 defines action more tightly as meaning “any civil proceedings commenced by writ or any other manner prescribed by rules of court.”  Furthermore, in Johnson v Refuge Association [1913] Buckley LJ said: “In my opinion it was intended to include in the term “action” any civil proceeding in which there is a plaintiff, who sues, and a defendant, who is sued, in respect of some cause of action, as contrasted with proceedings, such as statutory proceedings, which are embraced in the word “matter.””   Where the legislature wishes to apply the Limitation Act to something other than court proceedings it has to do so expressly – as it has done by section 13 Arbitration Act 1996 which provides: “The Limitation Acts apply to arbitral proceedings as they apply to legal proceedings.” An expert determination is thus plainly not an action (or a legal proceeding) and the Limitation Act does not apply to it.

Secondly, the court held that even if the Limitation Act did apply, the expert determination was commenced by the letter to Braceforce asking it to agree to the appointment of an expert (rather than on the actual appointment of the expert) and hence would have been in time in any event. This too, is eminently sensible and borrows from the Arbitration Act.  Section 14(4) of that Act provides that: “Where the arbitrator or arbitrators are to be appointed by the parties, arbitral proceedings are commenced in respect of a matter when one party serves on the other party or parties notice in writing requiring him or them to appoint an arbitrator or to agree to the appointment of an arbitrator in respect of that matter.”  The contract between Braceforce and Mediterranean required them first to try and agree upon an expert and the letter was sufficient to commence the expert determination.

The practical point from the case is that expert determinations, not being subject to the Limitation Act, can be commenced at any time after the act complained of subject only to equitable and common law arguments such as laches, waiver or estoppel.  Such uncertainty is unlikely to be wanted by either party and, in consequence, expert determination clauses should have a contractual limitation to the effect that they can only be commenced within a specified period.

Tribunal alleged not to have considered issues

In the absence of any right of appeal awards are increasingly challenged on the basis of serious irregularity, under section 68 of the Arbitration Act 1996.  In order to challenge an award under section 68, the irregularity has to be one which has caused or will cause substantial injustice to the applicant, and the irregularity has to be of a certain kind.  These are set out in section 68(2), and include:

• Failure by the arbitrator to comply with the general duties under section 33 of the 1996 Act.
• Failure to deal with all the issues that were put to the arbitrator.

Section 33 provides that the tribunal is under a duty to act fairly and impartially as between the parties.  The tribunal must give each party a reasonable opportunity to put its case and to respond to its opponent’s case.

In Arduina Holdings BV v Celtic Resources Holdings plc, [2006] the court considered the extent to which a tribunal may have failed to properly evaluate evidence as a basis for a complaint under section 68:

“The assertion that the arbitrator failed to take any or proper consider (sic) of the evidence could in an exceptional case, give rise to a challenge under section 68, based on the general duty of an arbitrator under section 33 if, for example, an arbitrator genuinely overlooked evidence that really mattered, or got the wrong end of the stick in misunderstanding it.  But there is all the difference in the world between such cases and an arbitrator evaluating evidence but reaching factual conclusions on it (as will happen in most arbitrations) which one party does not like.  That cannot be the basis of a complaint under section 68.”

If it is not clear from the award whether or not the tribunal has dealt with an essential issue, the parties and the court should not have to guess whether the tribunal has failed to deal with it, or considered it and dismissed it on the grounds that it was totally devoid of merit as not worth mentioning.  The award should inform whether or not an essential issue has been dealt with.  However, the presence or absence of merit may be relevant to the question of whether substantial injustice has been caused to the applicant (Buyuk Camlica Shipping Trading & Industry Co Inc v Progress Bulk Carriers Ltd [2010] ).

In Petrochemical Industries Company (KSC) v The Dow Chemical Company [2012]  a dispute arose as to whether the claimant (PIC) had failed to enter into a joint venture with Dow. PIC had been obliged to pay US$7.5 billion for a 50% interest in certain assets of Dow.  The dispute arose because shortly before the parties entered into contract, Dow had agreed to purchase another business and Dow asserted that it had intended to use the sums payable by PIC towards the acquisition of that business and that following PIC’s failure to pay, Dow was forced to re-finance the acquisition, and suffered losses as a consequence.

The dispute was referred to ICC arbitration and the tribunal issued a partial award.  The tribunal found that PIC was in breach of contract in failing to pay US$7.5 billion.  It also held that Dow had established that it was entitled to damages for consequential losses of just over US$2 million.

PIC challenged the award on the basis that the tribunal had not dealt with PIC’s argument that it was not enough for Dow to show that the loss was one which the parties had contemplated: Dow also had to show that PIC had assumed responsibility for that loss (the assumption of responsibility issue).

The question of whether there was a serious irregularity within sub-section 68(2)(d) raised three specific questions:

• Whether the assumption of responsibility question was an “issue” within the meaning of that sub-section.
• If so, whether it was “put to” the tribunal.
• Whether the tribunal failed to “deal with” it.

The Court referred to the distinction drawn in the authorities between “issues” on the one hand, and matters often referred to as “arguments”, “points”, “lines of reasoning” or “steps” in an argument. The decisions demonstrate a consistent concern to maintain the “high threshold” that has been said to be required for establishing a serious irregularity, and this concern has sometimes been emphasised by references to “essential”, “key” or “crucial” issues.  However, these adjectives were not intended to import a definitional gloss on the wording in section 68, but simply to allude to the requirement that the serious irregularity must result in substantial injustice.

The Court said it would not attempt the “impossible task” of defining what is an “issue”, but he rejected three “suggested yardsticks” put forward in the authorities, which rely, to a certain extent, on the formulation of issues in the “list of issues” in the arbitration.  The question should be approached by considering the ordinary and natural meaning of the word “issue”, and accepted PIC’s submission that the assumption of responsibility question was an issue within the meaning of section 68(2)(d).  Although it could be difficult to decide where the line demarking issues from arguments falls, on the facts, almost the whole of Dow’s claim could have depended upon how the assumption of responsibility question was resolved.

On the question of whether that issue was “put to” the tribunal, PIC had put the issue about assumption of responsibility to the tribunal in its second pre-hearing memorial, which contained a sub-section headed “PIC did not assume responsibility for Dow’s losses”.  The Court rejected Dow’s argument that PIC had withdrawn or qualified the issue, either through its list of issues or closing remarks made by counsel.

As regards the question of whether the tribunal had dealt with the issue under section 68(2)(d), the authorities show that:

• This depends upon a consideration of the award.
• The tribunal does not have to set out every step by which they reach their conclusion, or deal with every point made by the parties.
• The tribunal does not fail to deal with an issue that it decides without giving reasons.

The Court  identified the following further considerations:

• A tribunal does not fail to deal with issues if it does not answer every question that qualifies as an “issue”. It can deal with an issue by making clear that it does not arise in view of its decisions on the facts or their legal conclusions. Moreover, a tribunal may deal with an issue by deciding a logically anterior point in such a way that the issue does not arise.
• A tribunal is not required to deal with each issue seriatim: it can sometimes deal with a number of issues in a composite disposal of them.
• The court’s approach when considering an award is to read it in a “reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault that can be found with it” (Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd, (1985)).
• This approach may involve taking account of the parties’ submissions when deciding whether, properly understood, an award deals with an issue. Although submissions do not dictate how a tribunal is to structure the disposal of a dispute, awards (like judgments) often do respond to the parties’ submissions and should not be interpreted in a vacuum.

The Court concluded that the tribunal dealt with the issue, admittedly succinctly.  To the extent that the tribunal may have conflated the forseeability question and the assumption of responsibility question, PIC could not complain about the composite disposal of these questions, provided they were both dealt with (which they were).

Accordingly, it was not necessary to decide whether substantial justice would be caused.  Nevertheless, the Court commented that no single test for deciding whether substantial injustice has been, or will be, caused had been found.  Moreover, to the extent that the relevant part of the award was directed to the issue, but fell short of dealing with it, then no substantial injustice was or would be caused.

If the matter was “free from authority” the Court would not regard a tribunal as being in breach of the duty in section 33(1)(a) or (b) if it overlooked evidence, genuinely or otherwise and would have interpreted that section as being concerned with the even-handed conduct of the arbitral proceedings, and not with mistakes in evaluating the evidence by oversight or otherwise.  However, the authorities indicated that the tribunal’s failure to properly consider the evidence could, in exceptional cases, give rise to a challenge under section 68, based on the general duty of an arbitrator under section 33 (Arduina).