Posts tagged: appeal

Delay in Award Does not Justify Setting Aside

In BV Scheepswerf Damen Gorinchen v The Marine Institute [2015] the Court decided that delay on the part of a tribunal in issuing its award cannot, of itself, justify setting aside the award under s.68 of the Arbitration Act 1996.

Delay might well amount to a breach of the tribunal’s section 33 duty and, therefore, qualify as a “serious irregularity” for the purposes of s.68(2)(a). The Court did not consider that delay was a failure to conduct the proceedings in accordance with the procedure agreed by the parties, for the purposes of s.68(2)(c) even though the relevant institutional rules (LMAA) included that the Award should: “normally be available within not more than six weeks from the close of the proceedings”. To hold otherwise would be a distortion of language.

The Court’s main reasoning was that delay would not generally affect the outcome of the dispute, such that there could be no substantial injustice that would justify setting aside. In order to satisfy that test of substantial injustice, it has to be shown that, but for the inordinate delay (which on this hypothesis amounts to the relevant “serious irregularity”), the tribunal might well have reached a different conclusion more favourable to the challenger. It is impossible to satisfy that test unless it can be shown that there has in fact been a failure to deal with all the issues within s.68(2)(d). If the Award is otherwise unimpeachable and has dealt with all the issues, it makes no difference whether it was produced a month or twelve months (as it was) after the hearing, since however long the Award has taken to produce, the applicant cannot show that it has caused or will cause substantial injustice. That is why delay on its own does not amount to serious irregularity.

The Court then followed Primera Maritime (Hellas) Ltd v Jiangsu Eastern Heavy Industry Co Ltd [2013] and Secretary of State for the Home Department v Raytheon Systems Ltd [2014] (the former holding that “…Once it is recognised that [the tribunal] has dealt with the issue, there is no scope for the application of section 68(2)(d). …, the sub-section does not involve some qualitative assessment of how the tribunal dealt with it. Provided the tribunal has dealt with it, it does not matter whether it has done so well, badly or indifferently.”)

The Court held that the “issues” complained of were at best sub-issues or sub-sub-issues in any event. It is but another example of the Court determining issues at a high level so as to maintain a “high threshold” that has been said to be required for establishing a serious irregularity.

One interesting reflection is whether the appropriate remedy in this instance would have been a challenge under s.24 rather than s.68. The former provides that a party may apply to the court to remove an arbitrator on the grounds that he has refused or failed to use all reasonable despatch in making an award, and that substantial injustice has been or will be caused to the applicant. Before applying to the Court an aggrieved party must exhaust his remedy for removal under institutional rules. A Court is unlikely to second guess the institutional assessment and, furthermore, there remains the issue of establishing substantial injustice which the Court is likely to be fairly difficult to persuade on the reasoning of this case. A s.24 challenge would, in all probability, have suffered the same fate.



Whether Request without Fee is Valid

The steps that must be taken to stop time for the purposes of a contractual time bar provision must be determined by construing the contract and, as the contract itself is unlikely to say much beyond incorporating institutional rules, that means construing the rules.  The Court so decided in Libero Commodities SA v Augustin [2015]

Bylaw 302 of the 2011 version of the International Cotton Association (ICA) provides:

“1. Any party wishing to commence arbitration under these Bylaws … shall send us a written request for arbitration …

2. When sending the request, the Claimant shall also send:

… such application fee as may be due …”

Disputes arose in relation to the price under a contract for the sale of cotton. By a further agreement the parties agreed to submit the pricing dispute to ICA arbitration. The latter agreement also provided that if the reference was not commenced by a specified day the price was to be fixed at a spcified price.

On the final date specified, the seller sent a fax to the ICA requesting arbitration, but did not pay the required fee. The arbitration did not proceed further until the fee had been paid.

The first tier tribunal decided that failure to pay the required fee at the time of  the request meant that the seller had not validly commenced arbitration by the required date. The seller appealed to an appeal committee of the ICA, which decided that arbitration had been validly commenced in time, and, further, reached a decision on the substantive pricing issue.

The buyer challenged theappeal committee’s award.

The Court dismissed the appeal against the award on the issue of the commencement of arbitration. However, it allowed the buyer’s appeal against the substantive decision.

In relation to the commencement issue,the Court held that, as a matter of construction, it was not a prerequisite to the effective commencement of arbitration that the request for arbitration should be accompanied by the relevant fee. This conclusion was borne out by four principal factors:

  • Bylaw 302 drew a distinction between the “request for arbitration” and other matters (including the payment of the fee) that should be sent “when sending the request”.
  • The Bylaws did not expressly provide that the matters specified in Bylaw 302(2) were preconditions to the effective commencement of arbitration.
  • A written request for arbitration could be a meaningful and effective document without the matters specified (including the fee).
  • There was no commercial absurdity in this interpretation, and, indeed, it was consistent with the TAC’s own views.

It should not be assumed that the position will be the same under all institutional rules. For example, Article 1.4 of the LCIA  Rules (2014) provides that “The date of receipt by the Registrar of the Request shall be treated as the date upon which the arbitration has commenced for all purposes (the “Commencement Date”), subject to the LCIA’s actual receipt of the registration fee.” Similarly, the issue in this case was decided under the provisions of the 2011 ICA bylaws: those bylaws have since been amended to make clear that an arbitration is not commenced until the requisite fee has been paid.  However, Article 4.4 of the ICC Rules (2012) provides: “Together with the Request, the claimant shall: …b) make payment of the filing fee …
In the event that the claimant fails to comply with … these requirements, the Secretariat may fix a time limit within which the claimant must comply, failing which the file shall be closed without prejudice to the claimant’s right to submit the same claims at a later date in another Request.”

The Court further held, obiter, that some of the matters, such as the other party’s identity, were prerequisites of a valid notice.  Accordingly, it remains the case that it is important to check any applicable rules carefully and ensure that all requirements are addressed when commencing arbitration.

The Consequences of, and Tactics in respect of, a Failure to Pay an ICC Advance on Costs

The not uncommon problem of a party not paying an advance (a deposit) to the ICC[1] has been considered by the English High Court in BDMS Ltd v Rafael Advanced Defence Systems[2] – much the same analysis would probably apply to many other arbitral institutions.[3]

Decisions of ICC tribunals reflect differences in opinion as to whether the requirement to make an advance on costs under the ICC Rules gives rise to a contractual obligation owed to the other party, or merely a procedural obligation owed to the ICC court. The opposing views are summarised in the ASA Bulletin 2/2006 at pages 290 – 301:

“… [The] contractual approach … [is] based on two elements: (i) that … ICC Rules (or similar provision[s] in other arbitral rules) gives rise to reciprocal contractual obligation between the parties to pay the advance on costs because the contractual term was made part of the arbitration agreement by reference to the relevant rules; and (ii) that a dispute with respect to this obligation falls within the scope of the arbitration agreementThe contractual approach has been followed by what seems to be the majority of arbitral and court decisions on the subject and has been endorsed by most authors. The proponents of this approach consider the non-payment of the advance on costs a breach of a contractual obligation giving rise to a substantive claim … W.L. Craig, W.W. Park and J. Paulsson stated in this respect: ‘…Starting from the view that the matter in dispute is one of substance on which the arbitral tribunal is called upon to render a definitive decision in the form of a partial award.  There is, however, another way to look at this problem. According to the so called interim measure approach, the issue is one of procedure rather than substance.  The advocates of this approach emphasise that any decision by an arbitral tribunal ordering a party to pay an advance on costs is a procedural decision of administrative nature and is therefore not subject to review by state courts … the ICC Rules make the administration of all financial aspects, including in particular the advance on costs, the exclusive responsibility of the ICC Court … The arbitral tribunal is only competent to decide which of the parties shall bear the costs of the arbitration … and in what proportion … the agreement to submit a dispute to ICC arbitration also entrusted all questions of the advance on costs to the ICC Court.  Similarly, it is argued that Article 30(3) … only aims to define the relationships between the parties and the ICC Court, not the reciprocal relationships between the parties.

The generally accepted way of dealing with a party’s failure to pay a deposit is for the claimant (for it is invariably the respondent who fails to pay) to pay the respondent’s share and to invite the tribunal to make an interim or partial award that the respondent reimburse the claimant and then to enforce the award accordingly.[4]

The non-standard route that arose in BDMS is to seek to treat the respondent’s failure to pay as a repudiatory breach of the arbitration agreement, accept that repudiatory breach, consider the arbitration agreement as at an end and sue in a court.

That position (or its reverse) had been considered in at least three earlier court decisions.  The first was the English case of Paczy v Haendler[5] where the claimant argued on the basis of impecuniosity that the respondent should pay the entire advance and in default he could proceed in court.  The Court of Appeal had little difficulty in rejecting jurisdiction and described the claimant’s argument as a “fantastic assertion”.

The second was from the French Cour de Cassation, Societé TRH Graphic v Offset Aubin[6] where the court accepted jurisdiction where the claimant had declined to pay the respondent’s share of the advance on costs. The respondent, it held, had “paralysed the arbitration” by its dilatory attitude.  It is perhaps significant that the respondent had not supplied any explanation for its default

The third decision was a Canadian decision, Resin Systems Inc. v Industrial Service & Machine Inc[7] the court refused to grant a stay of court proceedings, finding that a refusal to pay an advance on costs under the ICC Rules rendered the arbitration unworkable and thereby inoperative: the respondent “is not entitled to rely on its own breach of the Arbitration Rules … [the claimant] is not obliged to pay the costs of [the respondent] and is entitled, under the Rules, to allow the claims made in the arbitration to be deemed withdrawn … the refusal to pay the costs makes the arbitration unworkable, and thereby inoperative, as there is no obligation on the other party to fund the defaulting party’s share.”  The Resin decision has been the subject of academic comment.[8]

The references to inoperative (or incapable of being performed) are a reference to Article 8 of the Model Law, enacted in England by s.9 Arbitration Act 1996:

“(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter…

 (4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.”

In BDMS a dispute arose in relation to sums allegedly due to BDMS by Rafael under a consultancy agreement. The agreement contained an arbitration clause providing for arbitration in London under the 1998 ICC Rules.  BDMS commenced arbitration and, after the appointment of the sole arbitrator, the ICC fixed an advance on costs.

Rafael expressed concerns about BDMS’s ability to meet an adverse costs award and notified BDMS that it intended to make an application for security for its costs. It stated that it would not pay the advance until adequate security had been put in place – but made it clear that the advance would be paid once adequate security was provided.  A date was set for the application for security for costs and in the meantime, the ICC wrote to the parties granting the claimant a fixed period, to substitute the balance of Rafael’s share and granted the parties a final 15 days to make payment, failing which the claims would be considered withdrawn.

Before the expiry of the time to provide the advance BDMS wrote to Rafael purporting to accept Rafael’s failure to pay its share of the advance on costs as a repudiatory[9] breach of the arbitration agreement and stated that BDMS would now pursue its claim in court.  Furthermore, BDMS wrote to Rafael stating that the claim was now withdrawn by operation of Article 30(4) and that the tribunal no longer had jurisdiction to make any determination of Rafael’s security for costs application.

BDMS argued payment of the advance on costs was a condition precedent, under Article 30 of the 1998 Rules, for the arbitration taking place: if payment was not made, the proceedings would be withdrawn. BDMS argued that, therefore, Rafael’s refusal to pay its share of the advance on costs amounted to a repudiatory breach of the arbitration agreement, which “paralysed” the arbitration proceedings and caused the withdrawal of the claims and hence was sufficiently fundamental to constitute a repudiatory breach of the arbitration agreement. It further contended that the repudiatory breach rendered the arbitration agreement “inoperative” for the purposes of s.9(4) of the 1996 Act, thereby enabling BDMS to bring its claim through the courts.

Rafael applied to the court seeking an order that the court had no jurisdiction to hear the claim and that the claim be stayed under s.9 of the 1996 Act.  Applying orthodox, albeit relatively recent, jurisprudence,[10] the burden of proof rested with BDMS to show that the arbitration agreement was inoperative or incapable of being performed.

The court granted the stay, concluding that although the failure to pay the advance did amount to a breach of the arbitration agreement, although the breach was not a repudiatory one, nor was the arbitration agreement rendered inoperative.

The judge addressed the issues under four headings.

  • Whether there was a breach of the arbitration agreement

The judge considered the different views expressed in ICC commentaries (as summarised above) as to whether the requirement that an advance on costs be paid under Article 30(3) of the ICC Rules gave rise to a contractual or merely a procedural obligation. He concluded that, as a matter of English law, the Article 30(3) requirement was a contractual one, an approach which was consistent with the Resin case, the contractual agreement to arbitrate under the 1998 Rules and the mandatory terms in which Article 30(3) is expressed: “the parties would, as a matter of contract, comply with mandatory requirements imposed on the parties under the Rules.”[11]  He noted that an arbitral tribunal can order the defaulting party to pay the advance, either by means of an interim award or measure.  Also any unpaid portion of the advance may be paid by posting a bank guarantee under Appendix II, Article 1.6 of the 1998 Rules.

  • Whether the breach was repudiatory

Although the court in Resin did not consider the issue of repudiatory breach, its reasoning was relevant to the issue.  If the refusal to pay rendered the arbitration unworkable, then if the refusal was a breach of contract and it may well have been repudiatory.  Having referred to various commentaries and the TRH Graphic decision, the judge accepted that there was a clear and unequivocal refusal by the defendant to pay its share of the costs. This was a continuing breach so there was no question of affirmation.

When the respondent / defendant refused to pay there were a number of possible outcomes:

  • The security for costs application could have been heard before there was any possibility of withdrawal. Had the tribunal ruled in the defendant / respondent’s favour and security may have been provided by the claimant, whereupon as the defendant had made it clear, that the advance would be paid.
  • The advance on costs issue could have been dealt with at a preliminary issue hearing, as the tribunal had ordered.
  • The claimant could have simply paid the defendant’s share.
  • The claimant could have objected against withdrawal of the claims to the ICC court potentially keeping the reference alive whilst the security for costs issue was resolved.

However, none of these scenarios had materialised. Nevertheless, the judge concluded that the breach was not repudiatory for the following reasons:

  • This was not a case where the respondent / defendant was refusing to participate in the arbitration. Indeed, it was actively participating. It had actively participated, for example, by settling the terms of reference: “Its refusal to ‘play by the rules’ was limited to the issue of payment of the advance … a matter which was to be addressed at the forthcoming preliminary issue hearing.  Further, the refusal was not absolute, but was a refusal to pay unless security for costs was provided.”
  • The breach did not deprive the claimant of its right to arbitration. It was open to the claimant at all times to pay or post a bank guarantee for the respondent / defendant’s share and seek an interim award or an order that the advance be paid by the defendant. In any event it could have sought such an order in the final award, or objected against withdrawal to the ICC Court.
  • The rules provide means whereby the arbitration could have proceeded and the withdrawal of the claims avoided.
  • For a breach to go to the root of the contract, it is generally necessary to show that the innocent party has been deprived of substantially the whole benefit of the contract.  It was difficult to see how the claimant was so deprived when he had the means to prevent that occurring and to seek recourse.
  • It had to be proved that the arbitration agreement was repudiated, not merely the particular arbitration reference. If a claim is deemed withdrawn as a result of non-payment of the advance on costs, there is no restriction on the same claim being brought to arbitration in the future (Article 30(4)). Future arbitration of the same claim is expressly contemplated so that the consequences as to arbitrability do not necessarily attach to the consequences of a failure to pay the advance on costs.

Finally, it is worth noting a failed attempt to argue for repudiation in another case (not considered by the court in BDMS).  In Elektrim SA v Vivendi Universal SA[12] it was argued that the deliberate concealment of a document and / or perjured evidence was a repudiatory breach.  The court rejected the submission on the evidence and on the basis that there was no implied term in the terms contended for.  Nevertheless, the court was apparently willing to accept that there could be a repudiatory breach with the attendant consequences in the appropriate case.

  • Whether the arbitration agreement was “inoperative”

Although the judge was prepared to assume, without deciding the issue, that an arbitration agreement may be inoperative even if there has been no accepted repudiation of the arbitration agreement, in this case he held that that was not the case. His reasons for finding that the breach did not go to the root of the contract (i.e was not repudiatory) applied equally to his reasons for finding that the arbitration agreement was not made unworkable and thereby inoperative.

  • Whether a stay is to be granted under section 9

Rafael argued that the time to assess whether the arbitration agreement was inoperative was when the proceedings were commenced and at that time, there was no alleged repudiatory breach. However, the judge held that the arbitration agreement did not need to be inoperative at the time of commencement of the proceedings.  If the court is satisfied on the evidence before it at the hearing (or at some stage after the proceedings had been commenced) that the arbitration agreement has become irrevocably inoperative, then the court should give effect to that conclusion, regardless of the position at the start of the arbitration proceedings.

The judge indicated that if, contrary to his conclusion, the arbitration had been repudiated he would have refused a stay.  This must be a logically correct, if the arbitration agreement is repudiated (and accepted) then there is no agreement to refer disputes to arbitration and the appropriate national court will have jurisdiction and hence the court proceedings (assuming they were commenced in the correct national court) should be allowed to continue.


The tactical approach of not paying an advance on costs (for it is invariably tactical rather than genuine impecuniosity – claimants are rarely well advised to pursue impecunious respondents) can be frustrated by a tactical response of a claimant paying or posting a guarantee and seeking interim measures and / or an interim or partial award.  The position is straightforward where there are mandatory obligations to pay an advance or deposit.  Rules that are coached in terms of a request need to be approached with care as the result may well be different.

The tactical ploy will inevitably cause delay in the arbitration proceedings and incur costs, the solution is clear and robust actions by the claimant and the arbitral tribunal.  Certainly in matters subject to English law the position is clear where there is incorporation of institutional rules with mandatory payments of advances.  There should be very few cases where default should be tolerated or debated: rather it should be dealt with summarily and robustly.

It is, however, also clear that there can be situations where a respondent will be in repudiatory breach.  These will probably be situations where respondents simply do not engage at all in the arbitral process.  This appears to be the position in TRH Graphic and the judge in BDMS was at pains to emphasise that Rafael had engaged in the arbitral process save for the payment of the advance.  The judge may also have been influenced by the fact that Rafael was wholly owned by the Israeli government and hence its ability to pay was, presumably, not questioned.  So a defaulting respondent might wish to demonstrate that it is defaulting on principled grounds, such as seeking security and that it would be well able to pay the advance if the impediment to providing the security were removed.  Conversely, respondents run significant risks if they refuse to pay an advance and refuse to engage in the arbitral process.  Their actions may well amount to repudiation permitting a claimant recourse to national courts.

[1] Article 30 of the 1998 Rules (equivalent to Article 36 in the 2012 Rules) provides that:”…(3) The advance on costs fixed by the Court shall be payable in equal shares by the Claimant and the Respondent. Any provisional advance paid on the basis of Article 30(1) will be considered as a partial payment thereof. However, any party shall be free to pay the whole of the advance on costs in respect of the principal claim or the counterclaim should the other party fail to pay its share. When the Court has set separate advances on costs in accordance with Article 30(2), each of the parties shall pay the advance on costs corresponding to its claims. (4) When a request for an advance on costs has not been complied with, and after consultation with the Arbitral Tribunal, the Secretary General may direct the Arbitral Tribunal to suspend its work and set a time limit, which must be not less than 15 days, on the expiry of which the relevant claims, or counterclaims, shall be considered as withdrawn. Should the party in question wish to object to this measure, it must make a request within the aforementioned period for the matter to be decided by the Court. Such party shall not be prevented, on the ground of such withdrawal, from reintroducing the same claims or counterclaims at a later date in another proceeding.”

[2]  [2014] EWHC 451 (Comm)

[3] Although see the discussion at footnote 11 of the mandatory provisions of the ICC Rules that are not replicated in all Rules.

[4] Note that this is expressly contemplated by the LCIA Rules: Article 24.4 (or 24.5 in the 2014 draft).

[5] [1981] Lloyd’s LR 302

[6] Cour de Cassation, 19 November 1991, 1992 REV.ARB 462

[7] [2008] ABCA 104

[8] Eamon and Holub, “See you in court! Respondents’ failure to pay the advance on arbitration costs” (2009) Int. ALR 168; James E. Redmond, “Party’s refusal to pay advance on costs rendered arbitration ‘inoperative’ pp 38-39 IBA Legal Practice Division Arbitration Newsletter March 2009; Jonette Watson Hamilton, International Commercial Arbitration, Too Costly Private Justice? University of Calgary Faculty of Law Blog on Developments in Alberta Law.  The Eamon and Holub article is supportive of the Resin decision, the other two more critical: e.g. Redmond: “… it appears questionable that the arbitration agreement could be properly described as inoperative or incapable of being performed.  Under ICC Rules, steps remained open to resolve the problem …

[9] Under English law, for a breach to be repudiatory, it must be shown that the party in breach: has clearly and unequivocally evinced an intention not to perform its obligations under the arbitration agreement in some essential respect, or, has committed a breach of the arbitration agreement which went to the root of the contract. The agreement is brought to an end by promptly accepting the repudiatory conduct.

[10] Joint Stock Company ‘Aeroflot-Russian Airlines’ v Berezovsky [2013] 2 Lloyd’s Rep 242 at [74] and Golden Ocean Group Ltd v Humpuss Intermoda Transportasi Tbk Ltd [2013] EWHC 1290 (Comm)

[11] It may be material that the ICC Rules use mandatory language for the payment of deposits: “The advance on costs fixed by the Court … shall be payable in equal shares …” (Art. 36.2) (emphasis added).  Similar mandatory language of payment is to be found in the SIAC Rules (Art. 30.2).  The LCIA Rules (Art. 24 – there is no material change in the 2014 draft) provide that the LCIA Court “direct” the parties to pay deposits and the decisions of the Court are binding (Art.29).  Conversely, the HKIAC (Art. 40), ICDR (Art.33) and Swiss (Art. 41) Rules merely provide for requests to be made of the parties albeit with the sanction of suspension or termination for non-payment.  The difference in language may well be material.  Under English law the obvious place to seek to ‘beef up’ the request to some form of obligation is s.40 which imposes on the parties an obligation to “do all things necessary for the proper and expeditious conduct of the arbitral proceedings.”  It is, however, clear that s.40 is a statutory duty and not the source of an implied term: Elektrim SA v Vivendi Universal SA [2007] EWHC 11 (Comm).  The remedies for breach of s.40 are contained in the Act in ss. 41 and 42 (pre-award) and s.68 (post-award).  It follows from s.40 being a statutory rather than a contractual duty that a breach cannot amount to a repudiatory breach.  As implied terms generally have to be necessary it is difficult to conceive of a necessary implied term of the agreement to arbitrate when there is an existing statutory duty in near identical terms.

[12] [2007] EWHC 11 (Comm)

The Law of the Agreement to Arbitrate

In Habas Sinai Ve Tibbi Gazlar Istihsal Endustrisi AS v VSC Steel Company Ltd [2013] the Court was faced with a dispute in relation to an alleged contract for the sale and purchase of steel.

Negotiations for the contract had involved Habas, its agents, and VSC.  Various drafts of the contract had suggested different governing laws of the underlying contract and arbitration clause.  Habas argued that its agents had known that it would only accept Turkish law and Turkish arbitration and that the agents did not have actual authority to agree to any other arbitration clause.  However, following further negotiations between the agents andVSC, the final contract did not provide an express choice of law, but simply provided for ICC arbitration in London.

VSC commenced arbitration proceedings, claiming damages.  The arbitral tribunal found that Habas’s agents, had ostensible authority to conclude the contract and arbitration agreement. It consequently found that there was a binding London arbitration agreement and awardedVSC damages.  Habas made various applications, including a challenge the tribunal’s jurisdiction and its award, under section 67 of the Arbitration Act 1996.

Habas acknowledged that, where there was no express law governing the underlying contract, it was clear on authority that the applicable law of the arbitration agreement should be that of the seat.  However, it argued that, in this case, there was good reason for departing from that principle, because the agents had exceeded their actual authority by agreeing to the London arbitration clause and it was only because of this, that it was possible to say that the arbitration agreement had its closest connection with English law.  Habas argued that English private international law should determine the proper law of the arbitration agreement without reference to the London arbitration clause. On that basis, the proper law of the arbitration agreement was Turkish law, being the law with the closest connection to the underlying contract.

The Court concluded that, even if it was the case that there was no actual authority for the agents to agree the London arbitration clause, the applicable law of the arbitration agreement was English law.

On the assumption, as argued by Habas, that as there was no choice of the law of the underlying contract, the law of the underlying contract would be Turkish law, being the law with which the underlying contract was most closely connected.

Referring to the conclusions reached in Sulamerica [2012] and Arsanovia [2012], the terms of the arbitration clause may themselves connote an implied choice of law.  Referring to the decisions in Cie Tunisienne v Cie d’Armement [1971] and Egon Oldendorff v Liberia Corp [1996],  the terms of the arbitration clause may operate as an implied choice of law for the underlying agreement.

The Court concluded:

  • There is no logical link between the issue of authority and the issue of the law with which a contract has its closest connection.  Determining the latter question involves a consideration of the terms of the contract as made, rather than the authority with which it was made.
  • It is well established that validity is determined by the putative proper law of the contract.  Furthermore, there is no reason why that principle should be limited to issues of validity arising out of lack of actual authority.
  • Habas’s argument involved English law giving special treatment to actual authority for conflicts of laws purposes. As a matter of English law, actual authority is not a stronger or more effectual form of authority than ostensible authority. As between the principal and the third party, there is no difference between actual and ostensible authority.
  • Habas’s argument would potentially affect the validity of many contracts which would otherwise be valid and binding because the agent had ostensible authority as a matter of English law as the putative applicable law, and for reasons outside the knowledge and control of the third party and contrary to the representations made to him as to that authority.
  • The first question that should be asked is: what is the applicable law of the putative agreement? All other questions then follow.
  • There is authority on agency principles which states that, whether an agent has ostensible authority is a matter for the law of the putative contract, and that law “also governs apparent authority to subject a contract, whether directly or indirectly, to a particular system of law” (Bowstead and Reynolds on Agency (Sweet & Maxwell, 19th edition, 2010) at paragraph 12- 016).
  • There are a number of decisions in which ostensible authority has been treated as being governed by English law as the result of putative agreement to a clause in a contract, without any consideration of actual authority to agree that clause and notwithstanding that it was being alleged that there was no actual authority to enter into the contract.
  • There are authoritative decisions in which arguments similar to that advanced by Habas had been rejected. In The Parouth [1982] (followed by the Court of Appeal in The Atlantic Emperor [1989] ) the Court of Appeal rejected an argument that, where the issue between the parties was whether a contract was made, it would be wrong to allow the English arbitration clause to be a factor pointing towards English law and that it should be treated neutrally.

 The case adds to the principles cited in cases such as  Sulamerica and Arsanovia on how to determine the applicable law of an arbitration agreement, in the absence of any express choice.  It highlights, in particular, that the terms of the arbitration clause themselves may suggest an implied choice of law.

The Court also distinguished between the ability of an agent to bind a principal to a choice of law clause when acting outside actual authority, and the ability to bind the principal to a clause which might affect the implied choice of a system of law, such as an arbitration choice of seat clause.

Due Process Challenge Fails

In Primera Maritime (Hellas) Limited v Jiangsu Eastern Heavy Industry Co Ltd [2013], the Court rejected a challenge under section 68(2)(d) of the Arbitration Act 1996.  The claimants alleged that the tribunal had failed to deal with all the issues put to it and that this failure amounted to serious irregularity.

The claimants had alleged that the defendants were in anticipatory breach of certain shipbuilding contracts because they had refused to perform the contracts and had renounced them. The tribunal found that the claimants had subsequently affirmed the contracts and that as a result the defendants were not liable for breach.

The claimants applied under section 68(2)(d) of the Act alleging that the tribunal had failed to consider the issues put before them by the claimants, namely: (i) that the renunciation by the defendants was continuous; and (ii) in relation to the quantum of the claimants’ claim, that the claimants could have “flipped” the contracts (sold them on at a profit to third parties).

In rejecting the challenge to the award, the Court provided guidance as to the serious irregularity challenge under section 68 of the Act.

A successful challenge under section 68 requires an applicant to demonstrate that there has been a serious irregularity affecting the tribunal, the proceedings or the award. A serious irregularity means an irregularity which falls within one of the closed list of categories in section 68(2) which has caused or will cause the applicant substantial injustice.

Section 68 was “only to cover extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected.” The point of section 68 is not to examine whether the tribunal has “got it right” but whether there has been due process.

A challenge on the basis that the tribunal failed to “deal with all the issues that were put to it” may be pursued pursuant to sub-section 68(2)(d). The judge held that there were four questions for the court to consider in relation to section 68(2)(d):

  1. whether the relevant point or argument was an “issue” within the meaning of the sub-section;
  2. if so, whether the issue was “put” to the tribunal;
  3. if so, whether the tribunal failed to deal with it; and
  4. if so, whether that failure has caused or will cause substantial injustice.

Firstly, the judge doubted whether “continuing renunciation” and “repeated renunciation” had been submitted to the tribunal as separate issues. Even if “continuing renunciation” were a separate and narrower “issue”, this had clearly been dealt with by the tribunal. The conclusions reached by the tribunal were conclusions of fact that could not be reviewed by the court under section 68 or otherwise and the Court held that it was wrong in principle to look at the quality of the reasoning if the issue had been dealt with.

In relation to whether the claimants could have “flipped” the contracts, the Court found that this issue had been dealt with appropriately. The point was moot, given that the tribunal had found that the claimants had repudiated the contract in the first place. The judge found that even if there had been any point in dealing with the issue, the claimant would not have been able to demonstrate that the failure to deal with the issue had caused substantial injustice.

The increasing number of failed challenges to awards under section 68 of the Act has prompted changes to the Commercial Court Guide earlier this year. The sanction of indemnity cost consequences against a party bringing an unmeritorious challenge is now expressly mentioned.

Award set aside where conditions precedent not complied with – no contract

In Hyundai Merchant Marine v Americas Bulk Transport [2013] the Commercial Court has set aside an award under section 67 of the Arbitration Act 1996 on the basis that no binding contract had ever been concluded. Disputes under a charterparty were referred to arbitration by the owners (O). The charterers (C) objected to the jurisdiction of the tribunal on grounds (broadly) that:

  • A “subject” or condition precedent had not been complied with.
  • There was no consensus between the parties.

The tribunal ruled that all conditions precedent had been complied with and that a binding contract therefore existed.

C challenged the award. Relying on dicta in UR Power v Kuok Oils & Grains [2009], it argued that, unless the parties had made it clear that the condition precedent also governed the arbitration agreement, the court should presume that the arbitration agreement was unaffected by any failure of the subject that might affect the underlying charterparty.  That might be thought to be an uncontroversial proposition and the judge did not disagree with it – rather he held the facts were sufficiently different and disagreed in the result.

Any conditions applied to the arbitration clause just like any other, and there was no evidence that the parties intended the arbitration clause to have effect independently of the charterparty.  Assuming that a binding contract otherwise existed, the judge would have held (like the tribunal) that the conditions had been lifted.  However, having reviewed the evidence, the judge held that there was no consensus, and no contract had ever come into existence.

Although the English courts have traditionally said that a jurisdictional challenge must “directly impeach” the arbitration agreement, this case illustrates that a complete lack of consensus will affect the arbitration agreement just as it affects the host agreement. The judgment also illuminates the evidential difficulties that can face a court when conducting a rehearing of a jurisdictional issue: the issues turned in part upon the proper effect of telephone calls which took place five years ago, and the contemporaneous documents were sparse.

Court entitled to grant injunction under SCA where AA not engaged

In Ust-Kamenogorsk Hydropower Plant JSC v AES Ust-Kamenogorsk Hydropower Plant LLP [2013] the Supreme Court has held that the English courts have jurisdiction to restrain proceedings brought in a state outside the Brussels Regulation or Lugano Convention regime and in breach of an arbitration agreement, even if no arbitration is on foot or contemplated.

The respondent had applied to the English court for a declaration that the arbitration clause in the parties’ contract was valid and enforceable and for an injunction restraining the appellant from pursuing proceedings commenced in Kazakhstan, in breach of the arbitration clause.  It had not commenced arbitration and had no plans to do so.  The judge granted an anti-suit injunction and a declaration, although limited to declare that specified claims could only be brought by London arbitration, so as not to usurp the arbitrators’ power to determine their own jurisdiction.  The Court of Appeal upheld that decision.

The Supreme Court unanimously rejected the appellant’s argument that the court had no jurisdiction to grant such relief where there was no arbitration on foot or contemplated. Lord Mance, giving the judgment of the court, held that there is nothing in the Arbitration Act 1996 that removes or limits the court’s general power under section 37 of the Senior Courts Act 1981 to restrain foreign proceedings commenced in breach of an arbitration agreement.


Divorce and International Arbitration – Unusual Bedfellows?

Divorce and international arbitration lawyers are unlikely bedfellows but speeches in the Supreme Court in a divorce case may assist the international arbitration community.

In Prest v Petrodel Resources Ltd & Ors [2013] the Supreme Court considered an appeal against a refusal to order certain companies to transfer properties to a wife in partial satisfaction of a divorce settlement.  The husband was found to be the ultimate beneficial owner of complexly structured offshore companies and had failed to comply with orders for full and frank disclosure of his assets.  The companies themselves were similarly obstructive.  The question was whether there was a legal basis for the assets of the companies being available to meet the husband’s liability to pay the wife a substantial settlement.

The Supreme Court rejected the option of piercing the corporate veil (which will be regarded as the most significant part of the decision) holding that it was a limited principle which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.  It also rejected an argument based on the wording of the relevant statute.

The companies were found to hold the properties on trust for the husband on conventional trust arguments.  The importance for the international  arbitration community was the use of adverse inferences to found the factual basis for the trusts.  Adverse inferences are common in international arbitration and are recognised by e.g. Article 9(6) of the IBA Rules.  The Supreme Court approved the following statement from R v IRC ex p Coombs [1991]:

“In our legal system generally, the silence of one party in face of the other party’s evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence.  Thus, depending on the circumstances, a prima facie case may become a strong or even overwhelming case.  But, if the silent party’s failure to give evidence (or give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party, may be either reduced or nullified.”

The Court modified that general proposition for financial aspects on divorce as (i) there is a public interest in ensuring proper financial support especially (but not only) where there are children involved;  and (ii) although there is a large adversarial element there is also a substantial inquisitorial element in divorce proceedings so the burden of proof – the classic riposte to the invitation to draw adverse inferences – is not in play in the same way.  Judges are entitled to draw on their own (judicial) experience and take notice of inherent improbabilities without engaging in pure speculation.

The Court found that the companies’ refusal to co-operate was deliberate and although an affidavit was presented the deponent refused to be cross-examined on it and that was found to be at the instigation of the husband.  “It is a fair inference from all [the] facts, taken cumulatively, that the main, if not the only, reason for the companies’ failure to co-operate is to protect the … properties.  That in turn suggests that proper disclosure of the facts would reveal them to have been held beneficially by the husband …” 

It is clear that the result was one that the Court was, on the facts, very pleased to arrive at but is shows adverse inferences being drawn and a proper test for doing so.  The public policy feature to modify the general proposition might also be relevant and be available to be invoked by the victim of a fraud or similar conduct contrary to public policy.  


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.


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