Posts tagged: arbitration clause

Vis Pre-Moot in London

Pre-Moot in London:

On the weekend 27-28 February 2016 Fox Williams’ International Arbitration Group will be hosting a Willem Vis Pre-Moot in their new offices in the City of London.

The Pre-Moot will be on the official problem of the 23rd Vis Moot.

Teams and arbitration practitioners, lawyers and academics with interest in participating or judging are encouraged to register their interest in attending the Pre-Moot as early as possible.

Precise timings will be circulated nearer the time depending on the number of participants.

Location:

The Pre-Moot will be held at Fox Williams’ new offices at 10 Finsbury Square, London EC2A 1AF.

Registration:

For further information and registration please contact Ms Sabrina Janzik at sjanzik@foxwilliams.com   (http://www.foxwilliams.com/profiles/132/)

 

We look forward to welcoming you to the 23rd Willem Vis London Pre-Moot !

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.

English Court refuses to enforce ICC Award

One of the key attractions of international arbitration is the relative ease of enforcement by reason of the New York Convention (“NYC”). Furthermore, the ICC prides itself on the enforceability of its awards.  As Steyn J (as he then was) said in Bank Mellat v GAA Development Co [1988]: “it is regarded as the first imperative of the ICC system that the awards under it should be enforceable … The system of scrutiny of awards by the Court contributes to the enforceability of ICC awards.” That the English Court of Appeal declined to enforce an ICC award therefore raises, at the very least, an eyebrow.

The case was Dallah v Ministry of Religious Affairs, Government of Pakistan [2009].  The Court had to consider s.103 Arbitration Act 1996 that closely follows Article V of the NYC and which is in the following terms:

“(1) Recognition or enforcement of a [NYC] award shall not be refused except in the following  cases. (2) Recognition or enforcement of the award may be refused if the person against whom it is  invoked proves … (b) that the arbitration agreement was not valid …”

The court decided the following points:

Firstly, the interrelationship of the courts of the supervisory jurisdiction (here France) and those of the enforcing country – the court held that s.103 was only brought into play where the award was made in a seat of another jurisdiction.  In that context the right to try and ‘prove’ something involves a right to adduce evidence and the court was not constrained to merely to review the tribunal’s award.  The court had, in this context the same rights as the courts of the supervisory jurisdiction.

Secondly, whether the Government of Pakistan was a party to the relevant agreement and agreement to arbitrate was in issue.  The judge had found that the subjective intention of all parties was that the Government was not to be a party having applied French law.  The appeal court agreed.  The tribunal had applied transnational laws to reach a different conclusion

Thirdly, it was argued that the Government was estopped from denying that it was a party as the tribunal was a court of competent jurisdiction that had ruled on the matter and the Government had not challenged that in the courts of the seat.  The tribunal represented a court of competent jurisdiction if, and only if, the parties agreed to confer jurisdiction upon it.  As the Government had not agreed to be a party, no estoppel could arise.  The absence of challenge was not fatal as the very purpose of Article V of the NYC was to preserve the right to challenge enforcement on the grounds of fundamental validity and integrity.

Finally, the court held that as a matter of discretion (noting that enforcement may be refused) it would normally be the proper exercise of discretion not to enforce an award once it was found that the entity against whom enforcement was sought was not a party to the arbitration agreement.  There was a general requirement to enforce subject to specific defences.  The court said that it was difficult to contemplate a more complete defence than the absence of consent to arbitrate.  The court approved the statement in Kanoria v Guinness [2006]:

“ … the limited circumstances in which an English court can be persuaded to refuse  enforcement of a [NYC] award concern … the structural integrity of the arbitration proceedings.  If the structural integrity is fundamentally unsound, the court is unlikely to make a discretionary  decision in favour of enforcing the award.”

Interest Update

Two recent cases have discussed issues relating to interest.  Firstly, Sonatrach v Statoil looked at post-award interest and, secondly, Martrade Shipping & Transport GmbH v United Enterprises Corporation looked at the application of the Late Payment of Commercial Debts (Interest) Act 1988 to international arbitration.  It is convenient to use those cases as an opportunity to review some basic principles.

Most references are concerned with recovering damages. With damages there is normally an award of interest.  The general principle as stated in Panchand Freres SA v. R. Pagnan & Fratelli[1] is that “In a commercial transaction, if the plaintiff has been out of his money for a period, the usual order is that the Defendant should pay interest for the time for which the sum has been outstanding.”

A failure to award interest can cause substantial prejudice to a party and in CNH Global NV v PGN Logistics Ltd[2] an award that was corrected by the Tribunal so as to include interest (inadvertently omitted from the original award) and which was done when the tribunal was functus, was allowed to stand as whilst it was an irregularity in the reference it did not cause substantial injustice within the terms of s.68 Arbitration Act 1996.

Approaches

In Europe and the U.S., an award of interest is common place.  Asian countries such as China, Taiwan, India, and Korea generally allow interest where there is default in the payment of money.  Interest is no more than the price of money (if borrowed) or the opportunity cost of money (if not borrowed)[3]. Rates at which interest should be awarded on damages may be heavily influenced by contractual terms on interest. The parties will often have stipulated a rate of interest for the late payment of invoices under the contract: should the same rate be used for interest on awards of damages?  Although awards of interest are matters of discretion for the Arbitral Tribunal, it seems right in principle that if the parties have agreed the price of money, that rate should be applied or at least considered in any award of damages. Of course, there may be good reason why the rate of interest on late paid invoices is higher than might be the case for damages. The parties might know that the product being sold was financed under especially expensive borrowing facilities and that interest on damages might not need to be compensated at the same rate.  Alternatively, there could be a coercive effect in setting a high rate to encourage payment of invoices.  It is suggested, however, that in normal circumstances a contractual rate should be applied to any award of interest on damages.

Interest on What and from When

Interest is normally awarded on the entire amount awarded but care should be taken not to overcompensate a claimant by awarding interest on the entire amount from the date of breach[4]. For example, interest on lost profits might run from each of the relevant years of loss rather from the date of breach. Equally, interest should, in principle, not be awarded on tax on grossed up damages (the grossing up being necessary if the damges are taxable in the hands of the claimant).  The tax is not a loss to the claimant and the claimant will simply be obliged to account to the tax authorities upon receipt. Unless there is a liability to the tax authorities for interest, it should generally not be awarded on the tax element of the loss.

Simple or Compound?

The further issue is whether interest should be awarded on a simple or compound basis[5].  Again, if the point is dealt with elsewhere in the contract, the same principle might be applied to the award of damages.  If the issue is not covered elsewhere then, as ever, it is a matter of discretion for the Tribunal. The point was considered by the House of Lords in Sempra Metals Ltd v. Inland Revenue Commissioners[6].  The House held that the time had come to recognise that money had a value: the court had a common law jurisdiction to award interest, simple and compound, as damages on claims for the non-payment of debts as well as on other claims for breach of contract and in tort.  Furthermore, a Tribunal is entitled to take into account the prevailing commercial practice of borrowing and investing on a compound basis.

Margins

If no rate is mentioned in the contract, a margin over bank base rates is probably the right starting point. The base rates should be taken as those prevailing in the country where the aggrieved party has its main banking arrangements. The margin may depend on whether the aggrieved party is a net borrower or depositor. A net borrower might be better compensated by say a margin over base rates equivalent to the rate a comparable company would be expected to pay and likewise a net depositor the rate a similar company might command on its deposits. A rate of 1 or, perhaps, 2% over bank base rate might be appropriate.  Generally, the larger and wealthier an organisation the cheaper will be its borrowing costs and hence the lower the rate of interest it will be able to recover.  Equally, the larger and wealthier an organisation the more money it will have to invest / deposit and the more sophisticated its treasury function and hence the higher the rates of interest it will receive on deposits.

In England there is a useful statute for the victims of late payment: the Late Payment of Commercial Debts (Interest) Act 1988.  The Act prescribes interest that is not intended to be compensatory rather it is penal and aimed to act as a deterrent to late payment.  The Act applies to domestic transactions but also has limited international reach.  This is because s.12 provides that where parties to a contract with an international dimension have chosen English law to govern the contract, the choice of English law is not, of itself, sufficient to attract the application of the Act.  To do so there must be a “significant connection” between the contract and England or the contract must be one that would be governed by English law apart from the choice of law.  The application of the Act to international arbitration albeit seated in England was reviewed by Popplewell J in Martrade Shipping & Transport GmbH v United Enterprises Corportation[7]Popplewll J identified the sorts of factors that would amount to a significant connection are (a) where the place of performance of obligations under the contract is England; (b) one of the parties is English; (c) the parties carry on some relevant part of their business in England; and (d) the economic effect of non-payment may be felt in England.  A London arbitration clause alone is insufficient connection[8].

The Court held that although choice of London arbitratuon will generally be treated as a choice of English law under Article 3 of trhe Rome Convention, that choice was to be ignored for the purposes of s.12 due to words providing ‘but for that choice’.

Post – Award

Finally, it is appropriate to consider whether any and if so what interest should be awarded post-award. In principle, it would seem logical that nearly every award should carry interest post-award down to payment.  In some instances it may be difficult to conceive of circumstances that would make it appropriate to not award such interest. It is incumbent on the party claiming interest to seek such an award and for the arbitral tribunal to consider making an award in those terms. Failure to do so can create difficulties as any judgment entered so as to enforce the award can usually only be in the terms of the award.  For example, §66(2) of the 1996 Arbitration Act states “ . . . judgment may be entered in terms of the award.” If the award does not deal with post-award interest, there is nothing an enforcing court can do: Walker v Rome[9].  As Aikens J (as he then was) said in that case “Section 66 of the 1996 Act enables the court to embody an award made by the tribunal in a judgment of the court.  But it does not empower the court to add an extra judgment for post-award interest when the arbitrators have not made such an award … Any attempt by the court to add a judgment for interest would be an intervention by the court … and so would infringe the principle set out in s.1(c) of the 1996 Act.”

If an award does not provide for post-award interest and payment is not made promptly, it may be appropriate to enter judgment in the terms of the award; for judgments may, depending on the jurisdiction, carry interest—e.g., in England under the Judgments Act 1838 judgments carry interest at the rate of 8%[10] on a simple (non-compounded) basis.

The authorities on this area were reviewed by Flaux J in Sonatrach v Statoil[11]Flaux J observed that Aikens J had not overlooked the statutory interest in Walker v Rome for Aiken J had said a little earlier in the judgment: “If interest was payable at all after the date of the judgment, then it would be payable under the Judgments Act 1838 …”

Aikens J was to make the same point in Pirtek (UK) Ltd v Deanswood Ltd[12] in a case where the court held that an arbitrator had no jurisdiction to make an award on interest in respect of a previous award where no interest had been awarded.  He said: “ … the difficulty could have been avoided by a much earlier application to make the Award a judgment.  Judgment Act interest would then have run on the sum awarded.”

As the above cases demonstrate once judgment has been entered under s.66 (or s.101(2) in the case of a foreign New York Convention award) of the Arbitration Act 1996 that judgment has the same characteristics as any other judgment and carries interest accordingly: the obligation to honour the award merges into a judgment which carries interest: see Dalmia v National Bank[13] and Gater Assets Ltd v Nak Naftogaz (No. 2)[14].  In the latter case Beatson J (as he then was) said: “The essential difference is that the obligation to honour an award arises by virtue of the agreement of the parties, whereas in the case of a judgment it follows from the powers of the court.”

 


[1] [1974] 1 Lloyd’s Rep 394

[2] [2009] EWHC 977 (Comm).  As the judge described it “This was simply a howler which was sought to be corrected.”  The writer represented the award creditor.

[3] Care should, however, be taken not to over compensate by looking too closely at the opportunity cost.  For remoteness reasons a claimant should not usually be compensated for the actual use they might have put the money to i.e. it would have purchased stock that has significantly increased in value.  The normal measure will be lost interest that the funds would have attracted.

[4] In general terms interest should run from when payment was due in the case of debts and from when the loss was suffered in the case of damages.  In civil law systems (such as France, Germany and Switzerland) as it is not sufficient merely for the payer to be in breach and the innocent party must give notice of default for interest to accrue, it will generally run from the date of the notice.  Practice Guideline 13 of the Guidelines for Arbitrators on how to approach the making of awards on interest, suggests that a mid-point is taken when losses are suffered over a period.

[5] English law gives the tribunal discretion: Arbitration Act 1996 s49.  In contrast Swiss law provides that compound interest cannot be awarded (Swiss Code of Obligations Articles 105 and 314).

[6] [2007] 3 WLR 354.

[7] [2014] EWHC 1884 (Comm)

[8] The Court allowed an appeal against an award that granted interest under the Act.  The Court was plainly very conscious not to extend domestic policy to international parties and not to dissuade international parties from choosing English law and seat.

[9] [1999] 2 All ER (Comm) 961, [2000] 1 Lloyd’s Rep 116.

[10] A generous rate at the time of writing such that it may be beneficial NOT to seek post-award interest and rely upon this or similar provisions.

[11] [2014] EWHC 875 (Comm)

[12] [2005] EWHC 2301 (Comm); [2005] 2 Lloyd’s Rep 728

[13] [1978] 2 Lloyd’s Rep 223, 275

[14] [2008] EWHC 1108 (Comm); [2009] 1 ALL ER (Comm) 667

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.

Court Injunctions in Aid of Arbitration

In Doosan Babcock Ltd v Commercializidora de Equipos y Materiales Mabe [2013], the Court considered the scope of section 44(3) of the Arbitration Act 1996. Section 44(3) empowers the courts in cases of urgency to make an order for interim relief for the purpose of preserving evidence or assets.  Crucially “assets” include contractual rights or ‘choses in action’.

Babcock had made an application for an injunction restraining the Respondent (known as Mabe) from making demands for payment under two “on demand” performance guarantees, on the ground that Mabe had failed to issue certain certificates as required by the contract. The significance was that guarantees were stated to expire upon the issuance of the certificates.

Babcok argued that it was entitled to interim relief on the grounds that:

  • any demand under the performance guarantees would be a breach of the contract, as Mabe had wrongfully failed to issue the certificates: had the certificates been issued, the guarantees would have expired;
  • if Mabe was entitled to make demands under the guarantees, its position would not be significantly prejudiced by the grant of an injunction for a short period, as there was some time left until the long-stop expiry date;
  • on the other hand, Babcok could not be adequately compensated in damages for the loss it would suffer if its application was dismissed.

Section 44(3) provides that: “If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets.

Cetelem SA v Roust Holdings [2005]  held that section 44(3) could be used to preserve a contractual right if the effect of any order made pursuant to section 44(3) was to preserve the value of that right. A contractual right was not preserved if a failure to give effect to it would destroy much or all of its value (as would occur if Mabe did not issue the certificates and then demanded payment under the performance guarantees), the case was one where the Court was empowered to grant an injunction under section 44(3) provided that the requirements of urgency and necessity were also met. These requirements were met, as there was sufficient evidence to suggest that Mabe intended to make demands under the performance guarantees.

Under English law, a court will not take action to prevent a bank from paying out on an “on demand” bond or guarantee unless material fraud is established at a final trial or there is clear evidence of fraud at an interim stage in proceedings. However, a court can grant an interim injunction restraining a beneficiary from making a demand under such a bond or guarantee.

In deciding whether to grant interim relief, the court will consider the criteria established in the case of American Cyanamid Co v Ethicon Ltd [1975]; but the applicant must show that it has a “strong case” that, under the terms of the underlying contract to which the bond relates, the beneficiary is not entitled to make a demand on the bond. The Court made an order restraining Mabe from making demands under the performance guarantees for a defined period.

This is an example of applying established principles but it is an interesting case nevertheless.  The power under s44(3) is a useful one especially as, in appropriate cases, the Court can grant an interim injunction that, in effect, amounts to the final relief that a tribunal would be asked to adjudicate upon.  Cetelem makes clear that provided the injunction is a genuine interim injunction and court ensures, by obtaining appropriate undertakings from the claimant, that the substantive rights of the parties would ultimately be resolved by arbitration such an injunction may be granted.

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.

 

Service of Arbitration Claim Form on Solicitors

In Cruz City 1 Mauritius Holdings v Unitech Ltd and Others [2013], the Court considered an application for an order requiring disclosure of assets worldwide and in the context confirmed the validity of the commercial court’s practice of permitting service of arbitration claims on solicitors within the jurisdiction where:

  • The underlying arbitration is seated within the jurisdiction (thereby engaging the court’s supervisory jurisdiction).
  • There is “good reason” for service to take place quicker than under the applicable service convention – the court will be satisfied in “the vast majority of cases” that good reason exists confirming the pro-arbitration policy of the English courts.

Therefore, it followed that the fact that arbitration enforcement proceedings and the application for disclosure had been served on the defendants’ solicitors in London, did not provide grounds for setting aside service.  The Court went on to hold that the court had jurisdiction to require disclosure of assets, even though the defendant was outside the jurisdiction and ordered such disclosure to be made.

The court has jurisdiction under section 37(1) of the Senior Courts Act 1981 (SCA) to order freezing injunctions, including ancillary orders requiring a defendant to disclose its assets worldwide. In Maclaine Watson & Co Ltd v International Tin Council (No 2) [1989] and The Naftilos [1995], it was held that such ancillary disclosure orders could be made even if no freezing injunction was ordered. Freezing injunctions may be granted in support of arbitral proceedings, including proceedings to enforce arbitral awards, pursuant to section 37(1) of the SCA or section 44 of the Arbitration Act 1996 (1996 Act).

In Masri v Consolidated Contractors International (UK) Ltd and others (No 4) [2008] , the House of Lords held that CPR 71 does not enable an order for examination to be made against an officer of a corporate judgment debtor who is outside the jurisdiction.

Service out of the jurisdiction by an alternative method may be ordered pursuant to CPR 6.15. However, this power will only be exceptionally exercised (Cecil v Bayat [2011] and Abela v Baardarani [2011]).  Nevertheless, in the arbitration context, the Commercial Court has generally allowed arbitration claim forms to be served within the jurisdiction on the solicitors representing the relevant party in the underlying arbitration.  This “invariable practice” was referred to in Kyrgyz Republic Ministry of Transport Department of Civil Aviation v Finrep GmbH [2006] and Joint Stock Asset Management Co Ingosstrakh-Investments v BNP Paribas [2012].

Criz City v Unitech concerned an LCIA arbitration seated in London, awards having been made against three defendants. Permission to enforce the awards was granted pursuant to section 66 of the 1996 Act . The arbitration claim form was stamped “not for service out of the jurisdiction” and was served, with the court’s permission, on the defendants’ solicitors in London. The claimant applied for a further order compelling the defendants to disclose their assets worldwide, pursuant to section 37 of the SCA. This further application was also served, with the court’s permission, on the defendants’ solicitors.

The defendants argued that:

  • There were no sufficiently exceptional circumstances justifying service on the defendants’ London solicitors and service should be set aside.
  • Masri precluded the court from ordering a foreign defendant to disclose its assets.

 The Court rejected the defendants’ arguments and granted the disclosure order noting that neither Cecil v Bayat or Abela was concerned with arbitration claims.  In Kyrgyz, Tomlinson J had commented that the Commercial Court’s “invariable practice” was to permit service of an arbitration claim form within the jurisdiction on the solicitors representing the defendant in the underlying arbitration.  The Court of Appeal had subsequently referred to this practice, without disapproval, in BNP Paribas.It followed that it was open to the Commercial Court to continue to implement its usual practice in respect of arbitration claims concerning arbitrations seated within the jurisdiction, as long as there is good reason for service to be achieved faster than it would be under the relevant service convention.

Furthermore, the fact that the current application was made pursuant to section 37 of the SCA did not prevent it from being an “arbitration claim” for these purposes. The claim was one “affecting arbitration proceedings” within the definition of an arbitration claim in CPR 62.2(1)(d). This conclusion was consistent with the overriding policy in favour of enforcement of arbitration awards.

Finally, the Court rejected an argument that the claimants ought to have applied for permission to serve the claim form out of the jurisdiction (rather than permission to serve on the defendants’ London solicitors). Where a claimant seeks an order for alternative service within the jurisdiction, it is unnecessary to apply for permission to serve out provided the court is informed that the proposed defendants are outside the jurisdiction.

In Masri, the issue was whether the court had jurisdiction to make an order under CPR 71.2 directing an individual non-party to attend court.  Here, by contrast, the order requested was not an order addressed to a non-party outside the jurisdiction but, rather, an order against defendants who are subject to the court’s jurisdiction.  There was nothing in the ratio of Masri that would prevent the court from making such orders pursuant to the SCA.

It followed that the court had jurisdiction to make the order for disclosure and, in light of the policy in favour of enforcement of arbitral awards, it would be just and convenient to do so.

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. 

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