Accepting Repudiation or Terminating for Breach? An expensive choice?

Shell Egypt v Dana Gas [2010] (the case is separately reported on whether “final, conclusive and binding” excludes a right of appeal – it does not) is a useful illustration of the need for precision in drafting notices to end contracts.  

Dana was in repudiatory breach and had also breached a specific term of the contract entitling Shell to terminate and providing specific remedies.  The repudiation entitled Shell to damages at common law, the breach to the contractual remedies that were, importantly, different from common law damages for repudiation.

 Shell accepted the breach and terminated the contract.  Later it appreciated that common law damages would have been considerably more valuable than the contractual remedy.  It sought to argue that its notice to accept the breach and the termination should also be capable of being construed as also accepting the repudiation.

 The Court upheld the award of the arbitrators and summarised the law as follows:

• Acceptance of repudiation requires only that there is a clear and unequivocal intention to treat the contract as discharged communicated to the party in breach (Vitol v Norelf [1996])
• If the contract and common law provide alternative rights which have different consequences, the innocent party will have to elect between them (Dalkia Utilities v Celtech International [2006])
• Where the contractual right to terminate corresponds to the common law rights, no election is necessary (Stocznia Gdynia v Gearbulk Holdings [2010])

To rub salt in the wound the Judge commented that Shell could have served a notice which accepted the repudiatory breach as discharging the contract but, in the alternative, in case they were wrong in asserting that Dana were in repudiatory breach, exercised the contractual right to terminate.  That is the lesson for the future – the choice can be made later.

SIAC Rule Changes

The Singapore International Arbitration Centre (SIAC) has issued new procedural rules effective from 1 July 2010.

The revisions aim to improve the speed and efficiency of arbitration and reflect best practice in international arbitration.

Key amendments include:

New expedited procedure. The new Rules introduce an expedited procedure which a party can apply for if the amount in dispute does not exceed S$5m, or if all parties agree, or in cases of exceptional urgency. If the SIAC Chairman agrees that the expedited procedure may be used, then:

• the SIAC Registrar has the power to shorten any time limits under the Rules;
• the case shall be referred to a sole arbitrator (unless the Chairman decides otherwise);
• the award shall be made within six months from the date the Tribunal is constituted; and
• the Tribunal will only state the reasons for the award in summary form.

Other institutions, including the AAA and the WIPO include similar provisions for an expedited process. This is in part to address the growing concern that the traditional benefits of arbitration, namely speed, cost and efficiency, have been diminished.

New Emergency Arbitrator procedure. In order to assist parties in obtaining emergency relief, the new Rules allow a party to apply for the appointment of an emergency arbitrator concurrent with, or following, the filing of a Notice of Arbitration but prior to the constitution of the Tribunal. An Emergency Arbitrator will be appointed by the SIAC Chairman within one business day of receipt of an application for emergency relief and must establish a schedule for consideration of the application within two business days of appointment. The Emergency Arbitrator shall have the powers of the Tribunal and may order any interim relief he deems necessary. After the Tribunal is constituted, the Emergency Arbitrator shall have no further power to act, and the Tribunal may alter any interim relief granted by the Emergency Arbitrator. Any order issued by the Emergency Arbitrator will cease to be binding if the Tribunal is not constituted within 90 days of the order, or when the Tribunal makes a final award.

Provisions to improve speed and efficiency. Various further amendments have been introduced to assist with the speed and efficiency of arbitrations. For example, the time period by which a party must nominate an arbitrator has been shortened from 21 to 14 days if three arbitrators are to be appointed. There is also a revised procedure for appointment of three arbitrators where there are more than two parties to an arbitration. The amendment provides a more defined and efficient process to follow and is in line with the multiple party provisions for the appointment of three arbitrators in the ICC Rules.

New Tribunal powers. The new Rules give the Tribunal various new powers, some of which have been transferred from the Registrar. For example, the Tribunal, rather than the Registrar, will decide the seat of arbitration where the parties do not agree. Further, the Tribunal may now choose to hold a hearing for the presentation of evidence and/or for oral submissions, on its own initiative as well as at the request of the parties. The powers of the Tribunal set out in Rule 24 have also been expanded and clarified.

Removal of Memorandum of Issues. The requirement for a Memorandum of Issues defining the issues to be determined in the arbitration has been removed. This will shorten the timetable of some arbitrations. However, the use of a Memorandum of Issues can sometimes assist in clarifying the issues to be decided so might still be useful in some arbitrations.

Mediation Tip: Gain Credibility & Respect

A couple of recent mediations have highlighted a (poor) tactic.  At some stage financial offers usually need to be made – typically by a Defendant (if there are proceedings).

Defendants will often have submitted a mediation position statement / brief and spoken during the opening session of how hopeless the case is.  To reinforce that view they will want to make a low offer (far below the likely settlement spectrum). 

Doing so is, I suggest, a poor tactic.  The aim of the negotiation process should be to have a credible position and gain respect.  Offering very low and coming up quickly is not credible nor does it gain respect – indeed the opposite can be the case.

Defendants should make a serious offer on a reasoned and dispassionate basis and then move slowly from there.  Starting too low can be a mistake.  The chance of overbidding (i.e. offering to pay at your first offer more than the Claimant would accept) is very rare.

Be bold – it will work!

Another Robust Backing to the Arbitral Process

In B v A [2010] the court dealt promptly and efficiently with challenges to the arbitral award.  B challenged the award on the basis that the majority of the tribunal had failed to properly apply Spanish law (as found by the dissenting arbitrator).

It being an ICC arbitration any right of appeal had been excluded.  B applied under both ss. 67 and 68 of the 1996 Act.   The s.67 was rejected as “an error in the application of the chosen law does not involve a lack of substantive jurisdiction”.  This is plainly right as many decisions as stressed that the jurisdiction referred to in s.67 is that referred to in s.30.

The s.68 challenge was on the basis that there had been a serious irregularity by failing to apply Spanish law properly.  The Court held that for a successful challenge there had to be a “conscious disregard” of the chosen law.  Even then conscious disregard was “necessary but not a sufficient requirement.”  The majority arbitrators were accepted by B to have not acted deliberately or consciously to disregard Spanish law and hence the challenge had to fail.

The willingness of the Court to deal with the application as a preliminary issue to see whether the necessary hurdles could be overcome is to be congratulated as it avoided a lengthy (and expensive) hearing on what Spanish law really was.

Mediation Tip: Sometimes the other party is just more powerful than you

The most any method of negotiation can do is to meet two objectives: first, to protect you against making an agreement you should reject and second, to help you make the most of the assets you do have so that any agreement you reach will satisfy your interests as well as possible.

To protect yourself, develop and know your WATNA / BATNA: Worst / Best Alternative to a Negotiated Agreement: for the reason you negotiate is to produce something better than the results you can obtain without negotiating. The result you can obtain without negotiating is between your WATNA and your BATNA.

The better your ATNAs, the greater your power so it’s essential to know your ATNAs and take time to make sure it’s as strong as it could be. The same will hold true for the other party. There are three steps to developing your ATNA:

• Invent a list of actions you might take if no agreement is reached
• Improve some of the more promising ideas and convert them into practical alternatives
• Select, tentatively, the one alternative that seems best or reasonable worst case and value it as best you can

London School of Mediation – Graduates of Course 60

Congratualtions to all those who graduated from Course 60: Andy, Angie, Chris, Helen, John, Jason, Julie, Lynne, Phil and Steve (I hope I have got you all).  Your were (and remain) a great bunch – keep in touch. Many thanks to Jonathan, Judith, and Tim for such a brilliant course and to the assessors Sir Peter, John and Steve. You all made it such a ball! To Lawrence and Nick, I am sure your time will come in September – Keep at it.

Mediation Tip: Insist on Using Objective Criteria

Principled negotiations are not battles of will. There is no winner and you don’t need to push your position until the other backs down. The goal is to “produce wise agreements amicably and efficiently”.

The use of objective criteria helps removes the emotion from the discussion and allows both parties to use reason and logic. You may have to develop objective criteria and there are a number of ways that can be done, from “traditional practices”, to “market value” to “what a court would decide”. Objective criteria need to be independent of each side’s will.”

Once objective criteria have been developed, they need to be discussed with the other side:

• Frame each issue as a joint search for objective criteria.
• Use reason and be open to reason.
• Never yield to pressure, only to principle.

Discriminatory choice of arbitrators

The Court of Appeal has decided that an arbitration agreement requiring an arbitrator to be a member of a particular religious group is void.  That may appear to be of little consequence to many commercial arbitrations but as the wording of the regulations in issue, the Employment Equality (Religion and Belief) Regulations 2003, are materially the same as other anti-discrimination laws the ruling could also apply to nationality and age discrimination.

 The matter came before the Court as Jivraj v Hashwani [2010].  The arbitration clause provided that “all [three] arbitrators shall be respected members of the Ismaili community and holders of high office within the community.”

 The Employment Equality Regulations prohibit an employer discriminating on grounds of religion in relation to employment.  Employment is widely defined and as the appointment of an arbitrator invariably involves the personal performance of work that was within the definition of employment and hence covered by the Regulation.  By requiring the arbitrators to have a particular religious belief the clause offended against the Regulation and any term unlawful under the Regulations is void.  That applied to the entire clause as the criteria for the arbitrators could not be severed.   

 The Court held that the exemption of justification (the employer having a religious ethos and being of a particular religion was a genuine occupational requirement) did not apply, as the arbitrators were to apply English law.  Membership of the Ismaili community was not necessary to apply English law – the position might have been different had the arbitrators been obliged to apply the principles of good faith within the community.

 Having a chairman from a different country (e.g. ICC Article 9(5) provides “… the chairman of the Arbitral Tribunal shall be of a nationality other than those of the parties.”) would be, prima facie, discriminatory (as nationals from the countries of the parties could not comply) but it might be a legitimate requirement in having a fair resolution by an impartial tribunal.   Having a particular legal qualification may be indirectly discriminatory (as more English can comply with a requirement to be an English lawyer then, say, French) but that too may be justified if the arbitrators must apply English law. Similarly being a lawyer of a number of years standing would discriminate on the grounds of age but might be justified on the grounds of relevant legal experience.

 This decision will only directly apply if the seat of the arbitration is in the UK but as much of our discrimination law originates from EU law the position may well be the same in other EU states.

The impending trial and mediation

Settlement is often left too late.  Lawyers can always justify waiting just that little bit longer to see if something comes out in disclosure or wait to see what the witnesses or experts will say.  This can lead to examples of cases literally settling at the door of the court and often the delay does not enable a cheaper settlement.  I had an experience earlier this year of a party refusing to mediate pre-action and then paying, in effect, 100% of the amount claimed with my client foregoing only some of the interest.  Substantially better terms would have been available months earlier but my opponent, having left it so late, had no costs protection and faced the prospect of paying for the trial costs when we were acting on a CFA had no negotiating position.

 In a salutory warning to the profession Coulson J said in Elliott Group v GECC [2010] that: “I am not sure that it could ever be a good ground for an adjournment of a fixed date for trial to say that the proposed adjournment would allow the parties an opportunity to settle the case … once started, court proceedings have to be brought to a conclusion … Every day is a new opportunity for the parties involved in civil litigation to resolve their differences …”  

The clear message is to settle and settle early.

Mediation Tip: Sometimes the other party just won’t play

In a principled negotiation, you don’t want to play games with the other party and you don’t want them playing games with you.

• Concentrate on the merits: talk about interests, options and criteria
• Focus on what the other party may do: try and identify the other party’s interests and the principles underlying their position
• Focus on what a third party can do: bring in a third party to assist if steps 1 and 2 aren’t successful