UK Supreme Court interprets the “stay” provisions of s9 of the Arbitration Act 1996: rules Mozambique’s claims fall outside scope of arbitration agreements and rejects s9 application for stay

Introduction

In Republic of Mozambique v Privinvest Shipbuilding SAL and others [2023] UKSC 32, the Supreme Court has unanimously found the Republic of Mozambique (Mozambique)’s claims for, among other things, bribery, conspiracy and dishonest assistance against the defendants to be “matters” which fall outside the scope of the arbitration agreements in a number of related supply contracts, for the purposes of section 9 of the Arbitration Act 1996 (the Act). Accordingly, the claims brought in the English court will not be stayed and can proceed to trial.

This is the first time that the interpretation and application of the stay provisions of s9 of the Act have been considered by the Supreme Court.

Background

The underlying dispute concerns three supply contracts for maritime projects developing Mozambique’s exclusive economic zone (the supply contracts). Mozambique established three Special Purpose Vehicles (SPVs) which entered into the supply contracts with several shipping companies (Privinvest). Each of these supply contracts was governed by Swiss law and contained Swiss-seated arbitration clauses.

Privinvest subcontracted its performance of the supply contracts. The SPVs took out loans and bonds from several banks (the loan agreements) to finance the sums they owed under the supply contracts. Mozambique guaranteed the SPVs’ performance of their obligations under the loan agreements by providing sovereign guarantees to the banks. The loan agreements and the guarantees were governed by English law and provided for the exclusive jurisdiction of the English courts.

Mozambique commenced proceedings in the English court against Privinvest and others in 2019 claiming it is a victim of a conspiracy by the defendants and alleging that Privinvest and its owner paid bribes to state and bank officials to procure the supply contracts and the loan agreements which were backed by the guarantees. Mozambique claimed that it had incurred c.$2 billion of liability under the guarantees due to these alleged actions. In response, Privinvest and its subcontractors commenced arbitrations against the SPVs and Mozambique under the supply contracts. Privinvest also made an application under s9 of the Act for a stay of the English court proceedings in favour of arbitration. The key issue was therefore whether the matters in the legal proceedings Mozambique brought before the English court were matters which the parties agreed to arbitrate within the scope of the arbitration clauses in the supply contracts.

The subcontractors (co-claimants in the arbitration) and Mozambique (co-respondents) were non-signatories to the supply contracts. However, the parties agreed that the English court was to decide the s9 application on the assumption that, as a matter of Swiss law (being the law of the arbitration agreements in the supply contracts), the non-signatories were bound by those arbitration agreements.

The High Court dismissed the stay applications under s9 of the Act, finding that Mozambique’s claims were not sufficiently linked to the supply contracts and there were no “matters” in respect of which those legal proceedings had been brought which fell within the scope of the arbitration clauses. This position was overturned by the Court of Appeal which considered the validity of the supply contracts to be a part of the dispute before it and that the dispute therefore fell within the scope of the arbitration agreements in the supply contracts.

The Supreme Court’s decision

The law

Section 9 of the Act states that ” 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” (emphasis added).

In considering the appeal, the Supreme Court reviewed the jurisprudence in relation to s9 and other similarly worded statutory provisions in other leading arbitral seats including Hong Kong, Australia and Singapore (recognising in particular that this was appropriate when the text of a legislative provision had its roots in an international convention, in this case the New York Convention 1958).  It then summarised the consensus position on the determination of “matters” which must be referred to arbitration, as follows:

  1. S9 involves a two-stage approach. First, the court must identify the matter or matters in respect of which the legal proceedings are brought. Second, the court must ascertain whether the matter or matters fall within the scope of the arbitration agreement.
  2. In carrying out this exercise, the court must ascertain the substance of the dispute or disputes between the parties, looking at the claimant’s pleadings and foreseeable defences. However, the “matter” need not encompass the whole dispute between the parties.
  3. A “matter” is a substantial issue that is legally relevant to a claim or defence, or foreseeable defence. If the “matter” is not an essential element of the claim or is peripheral or tangential to the subject matter of the legal proceedings, then it is not a matter in respect of which the legal proceedings are brought and does not, therefore, require a stay.
  4. The evaluation of the substance and relevance of the “matter” is a question of judgment and common sense. It is not sufficient merely to identify that an issue is capable of constituting a dispute within the scope of an arbitration agreement without carrying out an evaluation of whether the issue is reasonably substantial and whether it is relevant to the outcome of the legal proceedings of which a party seeks a stay whether in whole or in part.
  5. On the question of whether the “matter” falls within the scope of the arbitration agreement, the court must have regard not only to the true nature of the matter but also to the context in which the matter arises in the legal proceedings. While it may not yet be a point on which there is international consensus, existing jurisprudence and common sense supported this final point.

Application to this case

Mozambique’s claim involved allegations against Privinvest and others of, amongst other things, payment of bribes, conspiracy to injure Mozambique, unlawful means conspiracy, dishonest assistance and knowing receipt. In essence, Mozambique claimed that it did not get value for money from the guarantees. The Supreme Court noted that Mozambique, having withdrawn certain of its claims, did not challenge the validity of the supply contracts.

The Supreme Court assessed each of the grounds of claim, alongside Privinvest’s defences, in turn. It found that it was not necessary for the court to examine the validity of the supply contracts in order to assess Mozambique’s claims in the proceedings. The validity and genuineness of the supply contracts were not an essential part of Privinvest’s defence to Mozambique’s claims and the question of Privinvest’s knowledge of providing “substandard goods and services at inflated prices” was not an essential part of Mozambique’s claims (and proving the opposite was true was not an essential part of Privinvest’s defence to such claims).

The Supreme Court concluded that the commerciality of the supply contracts or the value for money of those contracts were not “matters” in respect of which the legal proceedings were brought. Accordingly, the claims and defences brought in the legal proceedings were not “matters” which were to be referred to arbitration and a stay under s9 should not be ordered.

Did a partial defence on quantum claimed affect the Supreme Court’s view?

Privinvest argued that the quantification of Mozambique’s claims was, itself, a “matter” in the legal proceedings.  Privinvest asserted that it provided valuable goods and services under the supply contracts that Mozambique had “squandered”, and that this value should reduce any damages claimed by Mozambique. The question before the court was whether, under Swiss law, this dispute and Privinvest’s partial defence to the damages claimed was within the scope of the arbitration agreements.

The Supreme Court found that in adopting a common-sense approach to the substance of a commercial dispute, the extent of loss and damage allegedly suffered by the claimant may be a substantial matter which is in dispute between the parties and that in this case, the loss allegedly suffered by Mozambique which arises from the implementation of the supply contracts was a significant part of the commercial dispute between the parties. However, the court found it was unnecessary to decide whether or not this is sufficient to make it a “matter” within the legal proceedings because of the Supreme Court’s interpretation of the scope of each of the three arbitration agreements.

The Supreme Court agreed with the High Court’s view that the existence of multiple different arbitration clauses in each of the supply contracts meant that the parties must have intended that each provision was intended principally only for that particular contract. This “narrow approach” was a “common sense proposition” in a dispute involving many parties and many contracts. Accordingly, the Supreme Court considered that it must have regard to what “rational businesspeople” would think when ascertaining the scope of an arbitration agreement. In this case, the partial defence arose in the context of legal proceedings where the claims advanced were outside the scope of the arbitration agreement, so, in this context, rational businesspeople would not intend or want such a “subordinate factual issue” to be arbitrated. The arbitration agreements must be construed accordingly.

Comment

This judgment clarifies the English courts’ approach to determining whether matters fall within the scope of an arbitration agreement for the purposes of a stay under s9 of the Act. It demonstrates that the court will analyse the substance of claims rather than the way they are presented by the parties. If a “matter” is not an essential element of the claim, or relevant defence to that claim, then it is not a “matter” which requires a stay.

A broadly drafted arbitration clause will usually encompass most possible disputes between contracting parties. However, this case highlights the particular challenges which may be presented by fraud or corruption claims, particularly where the factual matrix is broader than the contract containing the arbitration agreement. These claims can raise more substantive jurisdictional issues as to whether or not they fall within the scope of the arbitration clause and the outcome can, as in this dispute, be highly fact and case specific. Parties are advised to be aware of this point and the attendant risk of disputes across more than one forum.

While this is a decision of the Supreme Court of the United Kingdom, the judgment recognises that s9 of the Act has its roots in an international treaty, the New York Convention 1958. The careful consideration of the jurisprudence of other jurisdictions and the Supreme Court’s interpretation and application of similarly worded stay provisions may therefore give this decision a wider international relevance.

This judgment means that the litigation brought by Mozambique against Privinvest and others will now proceed to trial, currently scheduled to start in early October.

For more information, please contact Craig Tevendale, Partner, Hannah Ambrose, Partner, Vanessa Naish, Professional Support Consultant, Liz Kantor, Professional Support Lawyer or your usual HSF contact.

Craig Tevendale
Craig Tevendale
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Hannah Ambrose
Hannah Ambrose
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Vanessa Naish
Vanessa Naish
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Elizabeth Kantor
Elizabeth Kantor
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The authors would like to thank Sihame Sebbar for her contribution towards this post

English Commercial Court rules that a party must act “promptly” in raising a challenge to the effectiveness of arbitral proceedings, and rejects application for set aside of partial award

Summary

In Radisson Hotels APS Denmark v Hayat Otel Işletmeciliği Turizm Yatırım Ve Ticaret Anonim Şirketi [2023] EWHC 892 (Comm) the Commercial Court has rejected an application made by Radisson Hotels APS (Radisson) to set aside, on the grounds of serious irregularity, a partial arbitral award relating to a hotel mismanagement claim brought by Hayat Otel Işletmeciliği Turizm Yatırım Ve Ticaret Anonim Şirketi (Hayat).

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Fine-tuning the English Arbitration Act: reactions to the Law Commission’s consultation paper

Today, the Law Commission published its first consultation paper as part of its review of the Arbitration Act 1996 (the “Act“). The stated aim of the review has been to ensure that the Act remains “best in class”: an approach based upon fine-tuning, rather than root and branch reform. Nonetheless, the consultation paper proposes some notable and very welcome changes and clarifications, which we outline and briefly comment on below. Continue reading

English High Court confirms that a non-participating party may contest jurisdiction even though an arbitrator has been appointed

In National Investment Bank Ltd v Eland International (Thailand) Co. Ltd and another [2022] EWHC 1168 (Comm), the English High Court considered the interaction between sections 72(1) and 18 of the English Arbitration Act 1996 (the “Act“). Section 72(1) allows a non-participating party to an arbitration to seek a declaration from the English Court as to the lack of jurisdiction of the tribunal, and section 18 of the Act gives the Court the power to appoint a tribunal where there is a failure of the appointment procedure between the parties.

The claimant, which was a non-participating party in an arbitration, sought a declaration from the High Court under section 72(1) that the sole arbitrator did not have jurisdiction. In response, the defendants argued that the effect of the Court having appointed the sole arbitrator pursuant to section 18 was to render the claimant a party to the arbitral proceedings and thus to preclude the claimant from relying on section 72.

The Honourable Mr Justice Foxton rejected this argument, finding that the section 72 application remained available notwithstanding the section 18 appointment and upheld the merits of the application. This decision will give comfort to non-participating parties to arbitration proceedings that the important protection for non-participants to an arbitration under section 72 remains firmly intact.

Background

This case arose from the commencement of conflicting court and arbitration proceedings in respect of the same matter. The claimant, NIB, entered into a series of agreements with the defendants, Eland Thailand and Eland Ghana (together, “Eland“) which provided that disputes “may be referred to an Arbitrator under the Laws of the United Kingdom in London”.

Eland Thailand commenced proceedings against NIB under these agreements before the courts in Accra, Ghana (the “Accra Proceedings“). Both NIB and Eland formally participated in the preliminary stages of the Accra Proceedings, with NIB seeking to join Eland Ghana as a party to its counterclaim.

However, Eland Ghana then applied to stay the Accra Proceedings in order to commence arbitration. The application was granted and Eland served a Notice of Arbitration on NIB. When NIB did not engage with the arbitration, Eland applied to the English High Court to appoint an arbitrator under section 18, with Mr Justice Baker ordering the appointment of a sole arbitrator.

In parallel, NIB successfully applied to set aside the stay of proceedings in the Accra Proceedings. NIB then applied to the High Court under section 72(1) for a declaration that the arbitrator who had been appointed in the arbitration did not have jurisdiction to decide the claims which were the subject of the Accra Proceedings.

Decision

In its application, NIB argued that by electing to pursue the claims through the Accra Proceedings, Eland had irrevocably waived its right to pursue the same claims in arbitration. Eland argued that no such waiver had taken place, but that in any event the Court’s appointment of the arbitrator pursuant to section 18 prevented NIB’s reliance on section 72.

The effect of the Court’s appointment under section 18

Section 18(4) of the Act provides that “[a]n appointment made by the court under this section has effect as if made with the agreement of the parties“. Eland argued that the appointment of an arbitrator by the Court under section 18 therefore meant that the non-participating party could be treated as having participated in the appointment process, thereby becoming a party to the arbitral proceedings. As section 72(1) limits the availability of section 72 to a person “who takes no part in the proceedings“, NIB would not be able to rely on section 72 – either because the effect of section 18(4) and the Court’s appointment means that NIB was a party to the proceedings or was deemed to have participated in the appointment process.

Foxton J was unable to accept this argument. He first confirmed that in order to exercise its powers under section 18, it is not necessary for the Court to reach a final decision on whether there is an arbitration agreement between the parties, or whether the dispute in question falls within the scope of that arbitration agreement. It is sufficient that the applicant can show a good arguable case to that effect. Consequently, it is possible to satisfy the pre-conditions for an appointment by the Court under section 18, yet for there to be either no valid arbitration agreement or for the matter in question not to fall within the scope of the arbitration agreement for the purposes of sections 72(1)(a) and (c).

Citing the Department Advisory Committee on Arbitration Law (“DAC“) Report on the Arbitration Bill (February 1996), Foxton J emphasised the important protection provided by section 72 to those who dispute the arbitral tribunal’s jurisdiction and take no part in the arbitral process. On Eland’s construction, that “vital” protection would be lost. There is nothing in the DAC Reports of February 1996 or January 1997 to suggest that section 18(4) was intended to preclude reliance on section 72.

Moreover, the erosion of the section 72 protection would operate in a “haphazard way”. For instance, reliance on section 72 would not be precluded where a contractually-designated body (rather than the court) appointed an arbitrator, or where a sole arbitrator is appointed by the participating party under section 17. Furthermore, section 17(2) is intended to address the same issue as section 18(4), namely, non-participation in the appointment process. However, section 17(2) uses different language which is not susceptible to the same purported preclusion of section 72 (“whose award shall be binding on both parties as if he had been so appointed by agreement”). Eland’s argument would therefore involve a “stark and unexplained distinction” between sections 17(2) and 18(4).

Foxton J considered the statutory language of sections 18(4) and 72(1) to be “clearly aimed at different issues”. Section 18(4) clarifies that an arbitrator’s powers and the effect of an award do not differ where the arbitrator in question is court-appointed rather than party-appointed. In short, section 18(4) is intended to apply to the outcome or effect of the appointment, but it does not apply to the participation of the non-participating party in the appointment process for any other purpose. Section 72(1), by contrast, refers to a person “alleged” to be a party to arbitral proceedings, and thus operates in circumstances where this is the issue in dispute which section 72 is intended to resolve.

Eland’s waiver of its right to arbitration

Foxton J also accepted that both of the Eland entities had, on the facts, elected to pursue the claims in the Accra Proceedings, and that they had therefore waived the right to refer those claims to arbitration – emphasising that this decision was based on the specific circumstances of this case and the status of Eland Ghana as a “sister company” to Eland Thailand. He therefore granted the declaration which NIB sought pursuant to section 72. He also relieved NIB of liability for the costs of Eland’s section 18 application.

Comment

This decision serves as a strong message to litigants that the “important protection” provided by section 72 to those parties who dispute a tribunal’s jurisdiction and take no part in the arbitral process is not eroded by section 18. An arbitral tribunal is competent to decide whether it has jurisdiction over the dispute submitted to it, and in most cases, parties challenging an arbitrator’s jurisdiction will make their case directly to the tribunal itself. However, Section 72 provides an alternative route to those parties who wish to challenge the tribunal’s jurisdiction, but prefer to have nothing to do with the arbitration and apply directly to the Court instead.

Foxton J’s comments on “the unattractive prospect of claims by companies in the same corporate group raising the same claims relating to the same contracts in court and arbitration” also serve as a reminder to be cautious about pursuing parallel proceedings in respect of the same matters via affiliate companies.

For more information, please contact Craig Tevendale, Partner, Louise Barber, Senior Associate, or your usual Herbert Smith Freehills contact.

The authors would like to thank Jordan Robinson for his assistance with this article.

Craig Tevendale
Craig Tevendale
Partner, London
+44 20 7466 2445
Louise Barber
Louise Barber
Senior Associate, London
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ENGLISH COURT UPHOLDS ALTERNATIVE SERVICE OUTSIDE THE HAGUE SERVICE CONVENTION OF AN ORDER FOR ENFORCEMENT

In the recent case of M v N [2021] EWHC 360 (Comm), the English High Court upheld its earlier decision to allow alternative service outside the Hague Service Convention (“HSC”) of an order granting enforcement of an award under section 66(1) of the Arbitration Act 1996 (“1996 Act”).

This decision is in line with the pro-enforcement policy of the English courts and confirms the availability of alternative service outside the HSC in respect of claims for relief under the 1996 Act, especially where service in accordance with the HSC may involve inordinate delays.

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English Court rules that pre-conditions to arbitration are not matters of jurisdiction

The English High Court has declined to set aside an arbitral award, despite the fact that the Defendant had allegedly failed to comply with certain pre-conditions to arbitration agreed in a multi-tiered dispute resolution clause.

The Court said that the alleged non-compliance was a question of admissibility of the claim before the tribunal and not of the tribunal’s jurisdiction. The matter was best determined by the arbitrators and the award was not amenable to challenge under Section 67 of the English Arbitration Act 1996 (Act).

The decision provides welcome certainty that arbitration agreements will be upheld, even where there are questions regarding compliance with pre-conditions to arbitration, such as mandated cooling off or negotiation periods.

Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm)

Background

The underlying dispute concerned the cancellation of a large-scale mining licence. The licence contained a multi-tiered dispute resolution clause, in which the parties agreed to attempt to amicably settle disputes before commencing arbitration:

The parties shall in good faith endeavour to reach an amicable settlement of all differences of opinion or disputes which may arise between them in respect to the execution performance and interpretation or termination of this Agreement, and in respect of the rights and obligations of the parties deriving therefrom.

In the event that the parties shall be unable to reach an amicable settlement within a period of 3 (three) months from a written notice by one party to the other specifying the nature of the dispute and seeking an amicable settlement, either party may submit the matter to the exclusive jurisdiction of a Board of 3 (three) Arbitrators who shall be appointed to carry out their mission in accordance with the International Rules of Conciliation and Arbitration of the… ICC…

The Defendant served a Notice of Dispute on 14 July 2019 and its Request for Arbitration followed some six weeks later, on 30 August 2019.

The Claimant applied to set aside the award under Section 67 of the Act, which provides that an application may be made to Court to challenge any award as to its “substantive jurisdiction”. This is defined under Section 82(1) as referring to the matters specified in Section 30(1) of the Act.

Section 30(1) states that unless otherwise agreed by the parties, a tribunal may rule on its own substantive jurisdiction: “that is – as to: (a) whether there is a valid arbitration agreement; (b) whether the tribunal is properly constituted; and (c) what matters have been submitted to arbitration in accordance with the arbitration agreement.

The Claimant relied on Section 30(1)(c), submitting that because proceedings could not be commenced until the three month window for negotiations had lapsed, the dispute had not been submitted to arbitration in accordance with the parties’ arbitration agreement.

It was common ground between the parties that there is a distinction between a challenge that a claim is not admissible before the tribunal and a challenge that the tribunal had no jurisdiction to hear the claim. Only the latter challenge is available to a party under Section 67 of the Act. The distinction had been recognised by the Court in an earlier case in which it was said that: “Issues of jurisdiction go to the existence or otherwise of a tribunal’s power to judge the merits of a dispute; issues of admissibility go to whether the tribunal will exercise that power in relation to the claims submitted to it.”

Decision

The Court found that leading commentary and international authorities all lean “one way” in saying that pre-conditions to arbitration are questions of admissibility, not jurisdiction.

The Court cited Gary Born’s International Commercial Arbitration (3rd edn. 2021), in which Born said that the best approach is to presume, “absent contrary evidence”, that pre-arbitration procedural requirements are not jurisdictional, but matters better determined by the arbitrators. The rationale for this approach engages important public policy issues:

…parties can be assumed to desire a single, centralised forum (a ‘one-stop shop’) for resolution of their disputes, particularly those disputes regarding the procedural aspects of their dispute resolution mechanism.… The more objective, efficient and fair result, which the parties should be regarded as having presumptively intended, is for a single, neutral arbitral tribunal to resolve all questions regarding the procedural requirements and conduct of the parties’ dispute resolution mechanism.”

The Court was also persuaded by decisions in other leading international arbitration venues. The United States Supreme Court in BG Group v Republic of Argentina 134 S.Ct.1198 rejected a challenge to an arbitral award on the basis that a mandatory pre-condition to arbitration, namely a need to exhaust remedies before a local court, had not been complied with. The Supreme Court held that the question of compliance with pre-arbitration procedures was a matter for the arbitral tribunal to decide and not a question of jurisdiction to be reviewed by the courts.

The Singapore Court of Appeal in BBA v BAZ [2020] 2 SLR 453 and BTN v BTP [2020]SGCA 105 has also recognised the distinction between jurisdiction and admissibility. In the latter case, whether a claim was time barred was held to be a question of admissibility, not a question of jurisdiction.

As a matter of English law, the key question was whether the alleged prematurity of the proceedings properly fell within Section 30(1)(c) of the Act. The Court rejected the Claimant’s submission that this depends on the construction of the dispute resolution clause at hand, on the basis that there is no difference between a clause which provides: “No arbitration shall be brought unless X” and another which says: “In the event of X the parties may arbitrate”.

The Court found that Section 30(1)(c) of the Act has been applied so as to identify what matters have been submitted to arbitration, rather than whether or not matters have been submitted to arbitration. It concluded that if an issue relates to whether a claim could be brought to arbitration (i.e. whether arbitration is the appropriate forum), the issue is ordinarily one of jurisdiction and subject to further recourse under Section 67 of the Act. Whereas if it relates to whether a claim has been brought too early, the issue is one of admissibility and that is best decided by the arbitrators.

In reaching its conclusion, the Court distinguished its previous decisions in Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm) (see our blog post here) and Wah (aka Tang) v Grant Thornton International (GTIIL) Ltd [2012] EWHC 3198 (blog post here). In both cases, a challenge under Section 67 of the Act was entertained in circumstances where there was allegedly a failure to comply with a multi-tiered dispute resolution clause. However, the distinction between admissibility and jurisdiction had not been argued before the Court in either case.

Comment

The English High Court’s decision is of great practical and commercial significance, engaging fundamental policy considerations, including upholding arbitration agreements and promoting cost-effective and efficient resolution of disputes.

These policy issues are likely to be persuasive in other arbitration-friendly jurisdictions where this question may arise. Like the Act, many of its international counterparts limit the circumstances in which national courts can intervene in arbitration. In addition, although the Act is bespoke legislation and England and Wales is not an UNCITRAL Model Law jurisdiction, the distinction between matters of admissibility and jurisdiction has been recognised in Singapore, a Model Law jurisdiction.

Parties to disputes, however, remain best advised to comply with multi-tiered dispute resolution clauses where possible. Such clauses will usually be enforceable if they are drafted with a sufficient degree of certainty. Arbitral tribunals retain broad discretion to stay proceedings for a mandated cooling-off or negotiation period, or to apply cost sanctions on a non-compliant party.

It would also be open to a tribunal to rule that a premature claim is not admissible before it. In these circumstances, the parties may have to appoint a new tribunal after they have complied with the relevant pre-conditions, resulting in delay and unnecessary extra cost.

Simon Chapman
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Briana Young
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Charlotte Benton
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SECTION 1782 UPDATE: U.S. FOURTH CIRCUIT COURT OF APPEALS HOLDS THAT U.S. DISCOVERY CAN BE USED IN AID OF INTERNATIONAL COMMERCIAL ARBITRATIONS AND SUPREME COURT MAY NOW RESOLVE THE CIRCUIT SPLIT

The U.S. Supreme Court may soon have occasion to decide whether parties involved in international arbitrations outside of the U.S. can rely on 28 USC § 1782, “Assistance to foreign and international tribunals and to litigants before such tribunals,” to seek discovery from entities in the United States.

In October 2019, we noted in this post that the U.S. Courts of Appeals for the Fourth and Seventh Circuits were poised to decide the issue.  In March 2020, the Fourth Circuit Court of Appeals decided in the affirmative—consistent with the decision of the Sixth Circuit in Abdul Latif Jameel Transportation Company v. FedEx Corporation—that parties to an international commercial arbitration (in this case seated in the United Kingdom and constituted under the CIArb rules), are authorized to seek discovery orders under Section 1782.  Boeing and Rolls-Royce, which are resisting the application of Section 1782, are expected to file a petition for certiorari with the U.S. Supreme Court by June this year to challenge the decision of the Fourth Circuit’s Court of Appeals and seek to have the Supreme Court resolve the Circuit split over the application of Section 1782 in the context of international commercial arbitration.

Facts

These cases arose in the context of international arbitration over a 2016 aircraft that caught fire in South Carolina. Rolls-Royce manufactured an engine and installed it on the Boeing 787-9 Dreamliner aircraft. The petitioner, Servotronics, was the manufacturer of a valve used in the engine. Rolls-Royce settled with Boeing and brought an arbitration against Servotronics for an indemnity.

Servotronics petitioned the U.S. district court for the service of subpoenas on three South Carolina residents, all current or former Boeing employees, to give testimony. Two of the employees participated in troubleshooting the aircraft engine that caught fire, and the third employee was the chairperson of the Boeing Incident Review Board that investigated the fire.

In the district court proceedings, In re Servotronics, Inc., No. 2:18-MC-00364-DCN, 2018 WL 5810109 (D.S.C. Nov. 6, 2018), the U.S. District Court for the District of South Carolina held that Section 1782 did not apply to international commercial arbitration as the arbitral tribunal was not a “foreign tribunal” for purposes of § 1782. Servotronics appealed to the Fourth Circuit Court of Appeals.

Key arguments on appeal

Before the Fourth Circuit Court of Appeals, Servotronics argued, citing the U.S. Supreme Court’s decision of Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004): first, that an arbitral tribunal is a “foreign tribunal” within the scope of the definition in Section 1782; and second, that Section 1782(a) does not require that a tribunal be public, state-sponsored, or governmental.

Rolls Royce and Boeing argued that granting such a Section 1782(a) order would broaden the procedural scope of arbitration and make available in foreign arbitrations the full discovery process available under the Federal Rules of Civil Procedure. This would inject extraordinary delay and costs into arbitrations, thereby defeating their purpose and undermining the parties’ bargained-for method of dispute resolution.

The decision

On 30 March 2020, the Fourth Circuit Court of Appeals decided that the arbitral tribunal seated in the U.K. and operating under the CIArb rules, met the Section 1782 definition of a “foreign tribunal” and fell within the definition of “entities acting with the authority of the State”.

Providing the foundation for its decision, the Court affirmed Section 1782’s “long-term — over 150-year — policy of Congress to facilitate cooperation with foreign countries”, and this policy’s intent “to contribute to the orderly resolution of disputes both in the United States and abroad, elevating the importance of the rule of law and encouraging a spirit of comity between foreign countries and the United States.

First, referring to the changes to Section 1782 adopted in 1964, in which the words “in any judicial proceeding pending in any court in a foreign country” were replaced with the phrase “in a proceeding in a foreign or international tribunal”, the Court found that Section 1782 covered “all foreign and international tribunals”.  In support of this finding, the Court also described the enactment of the Federal Arbitration Act (“FAA”) as an endorsement of arbitration as a favoured alternative to litigation.

Second, noting the similarities of the English  Arbitration Act of 1996 to the FAA, the Court of Appeals concluded that under English law, arbitration was clearly a product of “government-conferred authority”. The Court observed that the English Act provides even more governmental regulation and oversight than does the FAA. Citing Sections 23(1), 9, 12, 15, 16, 24, 37, 38, 42, 43, 45, 66, 67-69 of the English Act, the Court concluded that, “even to a greater degree than arbitrations in the United States,” English-seated arbitrations are “sanctioned, regulated, and overseen by the government and its courts”.

In response to concerns that applying Section 1782 to international commercial arbitration would broaden access to information, inflate costs and undermine the benefits of arbitral efficiency, the Court was satisfied that this would not be the case. Striking a balance, the Court noted that the authority of U.S. district courts is relatively limited—Section 1782 does not authorize full discovery, a term absent from Section 1782. The statute only authorizes a U.S. district court to function “effectively as a surrogate” for a foreign tribunal to take statements and receive testimony and documents or other materials intended “for use” in the proceeding before the tribunal.  Viewed in this light, therefore, the District Court would function no differently than the tribunal itself.

Finally, the Court noted that the Supreme Court in Intel had rejected the notion that a Section 1782(a) applicant would have to show that United States law would allow discovery in domestic litigation analogous to the foreign proceeding. Indeed, Section 1782 could possibly apply in proceedings with no comparator  in U.S. domestic litigation.  Thus, any geographical expansion in the scope of a foreign tribunal’s authority under Section 1782 was the result of a purposeful legislative decision to authorize U.S. district courts to provide assistance to foreign tribunals as a matter of public policy.

Conclusion

As we mentioned above, the Seventh Circuit is currently considering a similar appeal arising from the same aircraft fire. In a separate matter, as we mentioned in our previous post, the Second Circuit has before it a similar appeal regarding the definition of  “entities acting with the authority of the State”. It remains to be seen whether the U.S. Supreme Court will issue a definitive ruling on the interpretation of Section 1782 in the context of international commercial arbitration, resolving the split among the Circuits.

For more information, please contact Christian Leathley, Partner, Amal Bouchenaki, Partner, Liang-Ying Tan, Associate, Christine Sim, Associate, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
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Amal Bouchenaki
Amal Bouchenaki
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English court sets aside arbitration award for serious irregularity due to tribunal’s non-disclosure of novel point central to award

The odds of successfully challenging an arbitral award in the English Courts on the basis of s68 of the Arbitration Act 1996 (serious irregularity) remain low. In the recent past over 95% of s68 challenges have been unsuccessful and in the period from 2015 to 2017 only 3 out of 112 s68 appeals succeeded, approximately 2.7% of applications made.

However, the English High Court has recently set aside an arbitral award for serious irregularity under s68(2)(a) in the case of RJ and another v HB [2018] EWHC 2833 (Comm). This case is a relatively rare and interesting example of a successful s68(2)(a) challenge.

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Arbitral tribunal’s refusal to strike out a claim could not be challenged under s68 or s69 of the Arbitration Act 1996

In a recent decision, the Mercantile Court dismissed two appeals under s68 (procedural irregularity) and s69 (error of law) of the Arbitration Act 1996 (the "Act") which sought to challenge an arbitral tribunal's refusal to strike out a claim. The appeals were dismissed on the basis that the tribunal's orders did not constitute "awards" for the purposes of the Act.  The fact that the parties had consented to the s69 appeals did not remove the need to establish that the court had jurisdiction under s69 of the Act: Enterprise Insurance Co Plc v (1) U-Drive Solutions (Gibraltar) Ltd (2) James Drake QC [2016] EWHC 1301 (QB). 

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