Posts tagged: arbitration clause incorporation

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.”

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. 

Incorporation of arbitration clauses 2

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

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

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

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

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

Arbitration “Super Injunctions”

Whilst the English tabloid press works itself into a frenzy over ‘super-injunctions’ to protect the privacy of the rich and famous from exposure and ridicule over their adultery and other indiscretions, the Commercial Court and the Court of Appeal are steadily refining the ‘super-injunction’ of the arbitration field: the anti-suit injunction.  The latest word has come from the Court of Appeal in AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC

In dismissing the appeal the Court of Appeal held that where s.44 of the 1996 Act applied, it would be wrong as a matter of principle to utilise s.37 of the 1981 Act to get round the limitations of s.44.  However, where no arbitration had been commenced and none was intended (and hence s.44 was not engaged), and a party asked the court to protect its interest to have its disputes settled in accordance with its arbitration agreement, it was open to the court to consider whether, and how best, if at all, to protect such a right to arbitrate by the use of s.37 of the 1981 Act. Whether the Court would assist a claimant, and if so, how, was a matter for the Court’s discretion.  In exercising that discretion it would take care not to usurp any arbitral process, but it was clear that it had the jurisdiction to intervene in an appropriate case. That was not inconsistent with s.1(c) of the 1996 Act. The words “should not intervene” in section 1(c) were directed towards intervention in the conduct of an arbitration, and not towards intervention in the conduct of litigation which threatened the safety of an arbitration agreement or any possible arbitration pursuant to it. In any event, section 1(c) was only one of three principles stated in section 1: the other section 1 principles (in particular, the need to avoid unnecessary delay and expense) might well point in favour of court intervention.

Hydropower is helpful in clarifying the relationship between section 37 of the 1981 Act and section 44 of the 1996 Act.  Most recent decisions indicate that where an interim injunction is sought, as a matter of discretion, the 1981 Act power should be exercised to grant interim relief only where it would also be appropriate for the court to act under section 44.  However, that restriction does not apply where an application is made for a final injunction (see Welex AG v Roas Maritime [2003] and Steamship Mutual Underwriting v Sulpicio Lines [2008]).

 The approach of the Court of Appeal is founded not only on both the purpose and the policy of the 1996 Act but also in considerations of efficiency and convenience. On the owner’s interpretation of the Act (founded on the Vale do Rio [2000] case), the operator would have been obliged to commence arbitral proceedings for the sole purpose of seeking a ruling on a jurisdictional issue. Since jurisdictional issues will usually reach the court at some stage anyway, to require an arbitration to be commenced in such circumstances would be artificial and inefficient.

Tribunal lacks jurisdiction if reference commenced prematurely

I do not normally comment on investor-state cases but the Tribunal’s award of 15/12/10 in Murphy Exploration v Ecuador (ICSID case no. ARB/08/4) illustartes a general point.

The US-Ecuador BIT contained a ‘cooling-off’ provision such that any reference to arbitration could not be commenced unless and until 6-months had expired from when the dispute arose.   The majority of the tribunal found that Murphy had commenced the reference prematurely and that, in consequence, it had no jurisdiction.  Although there was powerful dissenting opinion it was based on whether notification of a dispute was required.  It did not challenge the lack of jurisdiction if the reference was premature.

A dispute resolution agreement may provide that any dispute may be arbitrated only after the occurrence of some specified event. The clause may stipulate that some aspect of the subject matter of the contract must be performed prior to the commencement. Alternatively, the contract may provide that, before submitting the claim, the parties should strive to settle their differences through any of a number of dispute resolution processes, which may include negotiation, conciliation, adjudication by an expert, mediation, or myriad other processes. Formal claims such as arbitration represent the final stage.  

Those favouring a strict compliance with the different tiers of dispute resolution will find comfort in the words of Lord Mustill in Channel Tunnel  Group  Ltd  v.  Balfour  Beatty Construction Ltd: 

Those who make agreements for the resolution of disputes must show good cause for departing from them . . . Having promised to take their complaints to the experts and if necessary to the arbitrators, this is where the appellants should go. The fact that the appellants now find their chosen method too slow to suit their purposes is to my way of thinking quite beside the point.

This may operate harshly but the UK Courts have upheld, no doubt correctly, compliance with  clauses that would have the effect of affording a limitation defence to a respondent:  Harbour and General Works Ltd. v. Environment Agency.

Finally, any argument that the tribunal has no jurisdiction to determine compliance or otherwise with a condition precedent is patently absurd and should not be upheld.   The better view must be that the tribunal has jurisdiction, at least to decide on whether the condition precedent has been complied with.[1] Similarly, the question of whether the arbitration agreement contains an enforceable condition precedent should be one for the tribunal to be decided in accordance with the principle of Kompetenz-Kompetenz. 

Murphy illustrates that whether in investor-state or commercial arbitration pre-conditions to a reference must be strictly observed.


[1] That the tribunal has jurisdiction is clearly envisaged by the UNCITRAL Model Law, Article 13 of which requires that a tribunal must give effect to pre-arbitration conditions, thereby implying that it has authority to take at least procedural actions in relation to the dispute.


Incorporation of arbitration clauses

The Commercial Court has clarified that arbitration clauses can be incorporated into contracts by general words such as “all the rest will be the same as our previous contracts”.  Clarke J in Habas v Sometal [2010] endorsed the distinction drawn by Langley J in The Athena [2007] between “single contract” and “two contract” cases.   

The former may well involve more than one contract but the key point is that they are a series of individual contracts between the same contracting parties.  In such cases incorporation by reference will ordinarily succeed.

In contrast, the latter concern contracts between different parties, for example contracts between insured and insurer and a separate contract between insurer and reinsurer.  It will generally be ineffective to incorporate an arbitration clause for the reinsurance contract to provide “all other terms as per contract of primary insurance”, even if that primary contract has an arbitration clause.  Express words of incorporation will be required.

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