Posts tagged: English law

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.

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 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.

Conclusions

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)

Foreign Judgments – Enforceability – Fines and Penalties

In JSC VTB Bank v Skurikhin and others [2014], the court  considered an application for summary judgment on the basis that final, binding and conclusive judgments had been obtained in Russia and none of the defences raised had a real prospect of success or gave rise to any compelling reason for a trial.

VTB entered into 40 loan agreements with a group of companies known SAHO. The loans were secured by guarantees from D. The loans and guarantees were subject to Russian law and to the jurisdiction of the Russian courts. VTB brought proceedings in the Russian courts for sums due under the loan agreements, and under related guarantees.

VTB secured judgments against D in the Russian courts. In the context of enforcement proceedings in the English courts, VTB applied for summary judgment on the basis that (a) the Russian judgments were “final, binding and conclusive”, (b) D had never suggested that they were not, and (c) that, although the Russian judgments referred to “penalties or fines”, they were actually recoverable contractual remedies.

D defended the summary judgment application. Although it was accepted that, on their face, the Russian judgments were “final binding and conclusive”, he raised the following five objections to enforcement of those judgments which, he said, had a real prospect of succeeding at trial:

  • The judgments were obtained as part of a fraudulent scheme to obtain control of the SAHO companies.
  • It would be contrary to English public policy to enforce the judgments.
  • The judgments were obtained in a manner contrary to natural justice.
  • There were compelling reasons, under CPR 24.2(b), why the case should not be disposed of without a trial.
  • The court should not enforce judgments insofar as they included sums that amounted to penalties.
A foreign judgment for a definite sum which is final and conclusive on the merits is generally enforceable by claim and unimpeachable for error of law or fact. There are four material exceptions to the common law rule on the conclusiveness of foreign judgments. A judgment can be impeached in the following circumstances:
  • Fraud:  This is partly on the basis that a party should not be able to take advantage of his own wrongdoing (see, for example, Gelley v Shepherd [2013]), and also takes account of the principle that “fraud unravels all” (see HIH Casuallty v Chase Manhattan Bank [2003]). The principle extends to all types of fraudulent conduct. In principle, a foreign judgment could be impeached for fraud irrespective of whether new evidence was produced or whether the fraud was alleged in the foreign proceedings (see, for example, AK Investment CJSC v Kyrgyz Mobil Tel Ltd [2012]) or whether the fraud was known and could have been raised in the foreign proceedings (Syal v Heyward [1948]). However, in such circumstances, the court would probably want to know why it had not been raised previously.
  • Public Policy. The ambit of this exception cannot be precisely defined and can change over time, as it is based on public policy. It can extend to a refusal to recognise or enforce judgments that offend universal principles of morality.
  • Natural Justice. See the principles clearly set out in Pemberton v Hughes [1899]. This will usually focus on the regularity of the proceedings, and will take account of the right to a fair trial.
  • Fine or a Penalty. A “penalty” in this sense means “a sum payable to the State, and not to a private claimant.  The question whether enforcement of a judgment can be refused on public policy grounds when the judgment is for exemplary, punitive or manifestly excessive damages is undecided. S.A. General Textiles v Sun & Sand Ltd [1978] and Lewis v Eliades [2004] are examples of cases where English courts have recognised the enforceability of awards of damages that would not have been awarded by an English court. However, an Australian decision (Schnabel v Lui [2002]) held that damages imposed to penalise a party would amount to a penalty even if they were not payable to the state.

The judge concluded that D had no prospect of successfully defending enforcement of the principal sums and contractual interest that was claimed, and granted summary judgment for those claims. However, he held that there was an arguable defence, on public policy grounds, to elements of the claims characterised as “penalties”.

The judge highlighted the need to remember that the fraud exemption is “carefully delineated” and should not be given an expansive application.  He concluded that the allegations of a fraudulent scheme on the part of VTB lacked reality, and was an artificial construct designed to avoid the consequences of the fact that SAHO had no defence to what were straightforward debt claims.

As to public policy and natural justice the judge noted that these argument relied upon the factual assumption based on the fraud exemption, and (a) it was difficult to see why enforcement could be contrary to public policy, unconscionable, unjust or immoral, if the fraud exception did not apply and (b) as there was no consistent and coherent explanation of why he had not advanced defences that were available to him, in the foreign proceedings there was no breach of natural justice.

D provided a breakdown of sums claimed under the Russian judgments (split into principal, interest and penalties). Approximately 20% of the sum claimed comprised “penalties” (that is, it did not represent actual loss or a genuine pre-estimate of loss and was over and above the contractual interest). These sums were described as “default interest” or “penalties” in translations of the Russian judgments, and represented sums incurred for being in default of payment obligations under the loans.

Referring to the conflicting decisions in S.A. General Textiles and Schnabel, the judge noted that the approach in Schnabel might lead to an argument that a judgment for exemplary damages was unenforceable. In his view, the question of whether a judgment for a very high rate of interest that had been awarded by a foreign court, was enforceable at common law should not be decided on the basis of the English court’s view of the appropriate rate of interest. Rather, the English court should consider whether the foreign court’s approach was contrary to domestic public policy.  He held that D had an arguable defence that sums of interest identified as “penalties” were not recoverable (being punitive in nature), albeit that they were not payable to the state.

The judgment highlights the uncertainty about the precise scope of the exception to the common law rule on the conclusiveness of foreign judgments for “fines or penalties”: in particular, whether damages imposed to penalise a party will constitute a penalty even where they are not payable to the state.

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.

 

Separability and Illegality

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

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

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

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

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

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

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

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

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

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

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

Security Pending Challenge

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

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

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

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

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

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

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

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

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

 

Incorporation of arbitration clauses 2

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

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

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

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

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

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