Full Court of the Federal Court of Australia gives guidance on award enforcement

In an appellate judgment, the Full Court of the Federal Court of Australia has ruled that a foreign arbitral award is not enforceable because the arbitral tribunal was not constituted strictly in accordance with the parties’ arbitration agreement. Notably, the decision also considers the courts’ discretion to enforce an award even where a party establishes a ground for non-enforcement, an issue on which there was previously “no authoritative statement in Australia”.

The Full Court allowed an appeal from its first instance decision that enforced a foreign award pursuant to the International Arbitration Act 1974 (Cth).

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ENGLISH SUPREME COURT TO DECIDE APPROACH TO DETERMINING GOVERNING LAW OF ARBITRATION AGREEMENT

On 27 and 28 July 2020, the Supreme Court heard an expedited appeal against a recent judgment of the Court of Appeal in Enka Insaat ve Sanayi AS v OOO Insurance Co Chubb [2020] EWCA Civ 574, which we discussed in one of our previous blog posts. The Supreme Court is asked to consider two issues: (i) the correct approach to determining the proper law of an arbitration agreement; and (ii) the role of the court of the seat of arbitration in determining whether foreign proceedings give rise to a breach of an agreement to arbitrate.

Background

In June 2020, the Supreme Court allowed OOO Insurance Co Chubb (“Chubb Russia”) to proceed with its appeal against the judgment in favour of Enka Insaat ve Sanayi AS (“Enka”). Chubb Russia was seeking to overturn the decision of the Court of Appeal, which precluded it from pursuing a subrogation claim in the Russian courts (the “Russian Court Claim”). The Court of Appeal had determined that the Russian Court Claim was brought in breach of the arbitration agreement (the “Arbitration Agreement”) in the main contract (the “Contract”).

The decision of the Court of Appeal

The Court of Appeal concluded that: (i) the English court as the court of the seat was necessarily an appropriate court to grant an anti-suit injunction and questions of forum conveniens did not arise; and (ii) the Arbitration Agreement in the Contract was governed by English law. In particular, on issue (ii) the Court of Appeal held that there was nothing to suggest an express choice of Russian law as the governing law of the Contract and/or the Arbitration Agreement. Accordingly, in the absence of any countervailing factors which would point to a different system of law, the parties had impliedly chosen that the Arbitration Agreement was governed by the law of the seat, i.e. English law.

The Court of Appeal emphasised that if there is no express choice of law in an arbitration agreement itself, then it is necessary to review whether the express law of the main contract also applies to the arbitration agreement. However, the law of the contract would apply to the arbitration clause only in the minority of cases. In “all other cases, the general rule should be that the…[arbitration agreement]  law is the curial law, as a matter of implied choice”, unless there are powerful factors to counter this being the implied choice of law. If there is no implied choice of law, the law of the arbitration agreement will be the system of law with which the arbitration agreement has its closest and most real connection.

Russian court proceedings

As noted in our previous blog post, Chubb Russia filed the Russian Court Claim in May 2019. The decision of the first instance court dismissing the claim was published in full in May 2020. Although the Russian Court Claim was dismissed, the court also dismissed Enka’s motion seeking dismissal without considering the merits of the case in reliance on the Arbitration Agreement, noting that the dispute did not fall within the Arbitration Agreement. Both Enka and Chubb Russia appealed, and the Russian appellate court is due to hear the appeal at the end of October 2020.

Supreme Court hearing: brief overview of the parties’ positions

Overview of submissions made by Chubb Russia

Chubb Russia argued that the Arbitration Agreement formed an integral part of the Contract, and therefore, upon the application of the rules of contractual construction, the Arbitration Agreement should be governed by the same system of law as the Contract (i.e. Russian law, being the law impliedly chosen by the parties). Chubb Russia also argued that it would be just and convenient for the English court to stay the English proceedings to allow the Russian court to determine whether it had jurisdiction to hear the Russian Court Claim.

Overview of Enka’s submissions

Enka argued that the Arbitration Agreement was a separate contract, and the starting point should accordingly be the Arbitration Agreement itself (rather than the Contract, as suggested by Chubb). By agreeing to arbitration seated in London, the parties (i) impliedly agreed that the Arbitration Agreement was governed by English law; and (ii) therefore submitted to the jurisdiction of the English courts to grant an injunction to restrain a breach of the Arbitration Agreement and to determine whether there was such breach.

Comment

This case is likely to become the leading English law authority on the applicable principles relating to the approach to determining the proper law of an arbitration agreement. It remains to be seen whether the Supreme Court agrees with the Court of Appeal in relation to the significance of the law of the seat for the purpose of determining the proper law of the arbitration agreement.

For more information, please contact Craig Tevendale, Partner, Rebecca Warder, Professional Support Lawyer, Olga Dementyeva, Associate or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

ENGLISH COURT OF APPEAL UPHOLDS STAY OF COURT PROCEEDINGS IN FAVOUR OF ARBITRATION, AS RELIEF UNDER THE COMPANIES ACT 2006 FELL WITHIN THE ARBITRATION AGREEMENT AND WAS ARBITRABLE

In Bridgehouse (Bradford No. 2) Ltd v BAE [2020] EWCA Civ 759, the English Court of Appeal upheld a stay of court proceedings in favour of arbitration under s9 of the English Arbitration Act 1996 (the “Arbitration Act”). The issue in dispute related to a company’s claim for relief under section 1028(3) of the Companies Act 2006 (the “Companies Act”), a provision which gives the court the power to give directions to put a previously dissolved but restored company in the same position as if it had never been dissolved.

The Court of Appeal rejected Bridgehouse’s (“BB2”) arguments, finding that the dispute fell within the parties’ arbitration agreement and was capable of arbitration. This decision is significant because it once again confirms the starting presumption that by entering into an arbitration agreement, the parties intend to arbitrate all disputes between them. It also analyses the extent to which disputes that engage public interest factors or may require the involvement of the courts or third parties can be arbitrable.

Facts

BAE Systems plc (“BAE”), entered into a contract (“the Contract”) with BB2 under which BAE was to procure the sale to BB2 of two parcels of land for sums totalling £93 million. The Contract stated that if BB2 suffered an “Event of Default”, BAE had the right to terminate the contract. An “Event of Default” included “being struck off the Register of Companies or being dissolved or ceasing for any reason to retain its corporate existence”.

On 31 May 2016, BB2 was struck off the register and dissolved for failure to file its accounts and annual return for the year ended 31 December 2015. BAE gave notice to terminate the Contract on the basis that there had been an Event of Default.

On 24 June 2016, BB2 made a successful application to the Registrar of Companies for administrative restoration. Section 1028(1) of the Companies Act provides that “The general effect of administrative restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register.” Therefore, BB2 was effectively restored to its pre-dissolution position.

The Contract contained two conflicting dispute resolution provisions. Clause 19.1(a) of the Contract was to apply if “any dispute arises between the parties to this agreement arising out of the provisions of this agreement”, in which case the dispute was to be referred to ad hoc arbitration (the “Arbitration Clause”). Separately, the Contract contained a jurisdiction clause providing that the English courts had exclusive jurisdiction to settle disputes.

BAE initially issued proceedings in the Chancery Division seeking a declaration that the Contract had been validly terminated. However, following BB2’s successful application under section 9 of the Arbitration Act for a stay in favour of arbitration, the matter was referred to arbitration.

The arbitration

The arbitrator determined that BAE had validly terminated the Contract. The Arbitrator rejected, among others, BB2’s contention that any effective termination had to be reassessed retrospectively as a result of BB2’s restoration to the register by virtue of section 1028(1) of the Companies Act. The Arbitrator considered that section 1028(1) did not serve to undo BAE’s decision to terminate the Contract during the period between striking off and restoration.

In its submissions in the arbitration, BB2 reserved the right (if its primary position failed) to make an application to the court for relief under section 1028(3) of the Companies Act, which provides that the court has the power to “give such directions and make such provision as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register”.

Chancery Division proceedings

As foreshadowed in its reservation of rights in the arbitration, and following an unsuccessful challenge to the arbitral award under s69 of the Arbitration Act, BB2 issued a claim in the Chancery Division seeking relief under section 1028(3) of the Companies Act.

BAE applied for BB2’s claim to be stayed under s9 of the Arbitration Act, claiming that any such dispute should also be resolved by (a second) arbitration. BB2 opposed this application for a stay, arguing primarily that its claim did not fall within the scope of the Arbitration Clause of the Contract because it did not arise out of the provisions of that Contract. If that was wrong, BB2 contended that the arbitration agreement was “inoperative” because the dispute was not capable of being settled by arbitration, on the basis that either the Arbitration Act or English public policy prohibited the reference of statutory remedies such as this one to arbitration.

The Chancery Division granted a stay in favour of arbitration, and BB2 appealed. The questions for the Court of Appeal were:

  • Did the Arbitration Clause apply to BB2’s claim for relief under section 1028(3) of the Companies Act?
  • Was that application in any event capable of arbitration (in other words, was the dispute “arbitrable”)?

Court of Appeal proceedings

Applicability of the Arbitration Clause

BB2 argued that the issue between the parties no longer arose out of the provisions of the Contract, which was the purported scope of the Arbitration Clause. Instead, the question was whether statutory relief should be granted. BB2 relied in particular on the fact that section 1028(3) of the Companies Act is, in principle, capable of affecting third parties, who would not be bound by the outcome of the arbitration.  BB2 said that made it inherently unlikely that the Arbitration Clause was intended to apply to such matters. BB2 also relied on the exclusive jurisdiction clause in the Contract, which it said was evidence that the parties envisaged some matters would fall outside the scope of the Arbitration Clause and fall to be determined by the courts rather than in arbitration.

In rejecting these arguments and determining that the dispute “arose out of the provisions of the Contract”, the Court of Appeal held as follows:

  1. BB2 only required the relief because BAE had terminated the Contract. The fact that the dispute related to whether relief should be given pursuant to statute did not mean that it did not also arise out of the Contract.
  2. The question of whether BB2 was entitled to relief under section 1028(3) of the Companies Act was intimately connected with section 1028(1), a provision which had already been ruled on by the arbitrator, so it clearly fell within the arbitrator’s remit.
  3. Following Fiona Trust, there was a presumption that the parties are likely to have intended any dispute arising from their relationship to be decided by the same tribunal. It could not be inferred from the existence of the exclusive jurisdiction clause that the Arbitration Clause was of more limited application than it would otherwise be taken to have. The exclusive jurisdiction clause ensured that the English courts would have jurisdiction over issues arising from the arbitration or an expert determination (as the Contract provided that an independent person could act as an expert rather than arbitrator). The Arbitration Clause should therefore be presumed to apply to this dispute.
  4. Very often, and indeed in this case, an application under section 1028(3) of the Companies Act would be of no significance to anyone but the immediate parties. If in a particular case third party interests were engaged, that might have implications for the relief that an arbitrator could grant. But that did not mean that disputes as to the application of section 1028(3) could not fall within the Arbitration Clause at all.

Arbitrability

The court considered both whether the Companies Act prohibited reference to arbitration and whether arbitration was precluded by public policy considerations. BB2 argued that applications under section 1028(3) engaged public interest factors which rendered them unsuited to arbitration, which is why Parliament tasked “the court” with granting relief. They were ancillary to applications to restore a company to the register, which could not be determined by arbitration.

The Court of Appeal held that the dispute was capable of arbitration:

  1. There was nothing in the Companies Act which precluded arbitration, including the reference to “the court” in section 1028(3). The fact that an arbitrator cannot grant all the remedies available to a court is not a reason to treat an arbitration agreement as having no effect, and is not determinative of whether the subject matter is arbitrable.
  2. Section 1(b) of the Arbitration Act explains that it is founded on the principle that the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest. Following previous case law, this was a “demanding test”.
  3. Relief under section 1028(3) did not affect company status and an application for such relief would normally be private, affecting only the company and one or more specific individuals or entities. This was comparable to essentially “internal disputes” which were the subject of unfair prejudice petitions under section 994 of the Companies Act, and which had already been held by the English court to be arbitrable.[1] There was a distinction between statutory sections which were motivated by public policy considerations and those which needed to be the subject of court proceedings out of public interest.
  4. Applications under section 1028(3) of the Companies Act were not unsuited to an arbitrator: they required consideration of what directions and provisions were just for placing that company and other persons in the same position as if it had not been dissolved or struck off, which fell within the arbitrator’s capabilities. Although this could lead to procedural complexity (as there would inevitably need to be an order for restoration made by the court), procedural complexity alone would not generally be capable of giving rise to non-arbitrability. Indeed, section 48 of the Arbitration Act provides for an arbitrator to have “the same powers as the court…to order a party to do or refrain from doing anything”.

The Court of Appeal dismissed the appeal.

Comment

This case is a further reminder that the English courts will give short shrift to arguments which seek to undermine the parties’ arbitration agreement. Where parties agree to arbitrate, they will be held to their bargain, and the court will construe potentially competing dispute resolution provisions to give effect to that agreement to arbitrate.

The Court of Appeal’s judgment is also significant because it analyses the circumstances in which a dispute is capable of being arbitrated where statutory provisions involving the court are engaged. In addition to drawing a close analogy with Fulham Football Club (1987) Ltd v Richards (where arbitration was held to be available in the context of unfair prejudice petitions under section 994 of the Companies Act), the court also referred to a similar conclusion reached by the Singapore Court of Appeal in Tomulugen Holdings Ltd v Silica Investors, in which it held that minority shareholder claims are arbitrable.

It is clear that exceptions to party autonomy in order to safeguard public interests are subject to a demanding test – they require an impact on company status, and implications beyond the company and any particular counterparty (key examples of non-arbitrable questions being the winding up and restoration of companies). Disputes are likely to be arbitrable where they are private, essentially “internal” in nature and do not affect the “status” of the company. Moreover, procedural complexity or potential impact on third parties are not complete barriers to arbitration, even if some issues will need to be determined by the court.

For more information, please contact Craig Tevendale, Partner, Elizabeth Kantor, Associate, or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

Elizabeth Kantor
Elizabeth Kantor
Senior Associate
+44 20 7466 2406


[1]        Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333

MALAYSIA: COURT OF APPEAL REFUSES STAY OF PROCEEDINGS WHERE PARTY ACTS INCONSISTENTLY WITH AN EXPRESS RESERVATION OF RIGHT TO REFER DISPUTE TO ARBITRATION

On 10 June 2020, the Court of Appeal in Yeo Eng Lam v Infinity Vantage Sdn Bhd (Civil Appeal No. N-02(IM)(NCvC)-507-03/2018, Court of Appeal considered whether an express reservation of a right to refer a dispute to arbitration in a defence and counterclaim pleading was effective to preserve a right to elect to arbitrate a dispute wrongly commenced in court. The court also considered whether an application to disqualify solicitors in the disputed court proceedings amounts to a step in the proceedings which would preclude a party from staying the court proceedings in favour of arbitration.

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DON’T COUNT YOUR CHICKENS: AUSTRALIAN COURT FINDS UNLIQUIDATED DAMAGES CLAIM OUTSIDE THE SCOPE OF A NARROWLY DRAFTED ARBITRATION AGREEMENT

In Inghams Enterprises Pty Limited v Hannigan [2020] NSWCA 82, the New South Wales Court of Appeal found that a claim for unliquidated damages for breach of contract could not be referred to arbitration because it was not within the scope of a narrowly drafted arbitration agreement. Relevantly, the scope of the arbitration agreement was confined to disputes concerning “any monetary amount payable and/or owed by either party to the other under this Agreement.”

The case is a further reminder to parties that they will almost always be best served by drafting the scope of the submission to arbitration broadly.

Background

Inghams entered into a ‘chicken growing contract’ with Mr Hannigan (Agreement), under which Inghams paid Mr Hannigan to receive batches of chicks, grow them into chickens, and return them. Clause 23 of the Agreement contained a multi-tiered dispute resolution clause requiring a dispute first to be mediated and then submitted to arbitration under clause 23.6 if:

  • the parties “fail to resolve the Dispute in accordance with Clause 23.4 within twenty eight (28) days of the appointment of the mediator”; and
  • the dispute “concerns any monetary amount payable and/or owed by either party to the other under this Agreement, including without limitation matters relating to determination, adjustment or renegotiation of the Fee” under certain sections of the contract.

Inghams purported to terminate the Agreement. Mr Hannigan was successful in seeking a court declaration that the purported termination was wrongful and Inghams resumed supplying batches of chicks to him. Mr Hannigan did not seek damages in the proceedings, but made express reservations of his right to do so.

Mr Hannigan then issued a dispute notice to Inghams seeking damages due to loss of profits for the failure to supply chicks to Mr Hannigan between the date of the purported termination and the date supply resumed. The parties unsuccessfully attempted to mediate and Mr Hannigan contended that clause 23.6 the Agreement entitled him to refer the dispute to arbitration. Inghams commenced proceedings in the New South Wales Supreme Court to restrain the arbitration, seeking declarations that:

  1. Mr Hannigan’s damages claim did not fall within clause 23 of the Agreement; and
  2. even if it did, Mr Hannigan had waived any entitlement to arbitrate the dispute under clause 23 because of his commencement of the wrongful termination proceedings.

The primary judge held that Mr Hannigan was entitled to refer his damages claim to arbitration under clause 23.6 of the Agreement. Inghams appealed, arguing the primary judge erred by:

  1. construing the contract such that the damages claim fell within clause 23.6 and could be referred to arbitration; and
  2. not finding that Mr Hannigan had waived his right to refer the dispute to arbitration.

Decision

Meagher and Gleeson JJA agreed with Inghams and allowed the appeal with costs, finding:

  • The claim for damages was not an amount that was “payable” or “owed” as a result of an express or implied term of the Agreement. The dispute was not one which affected or related to the negotiation, adjustment or determination of any amount “payable” or “owed” under such a term. Accordingly, the dispute did not concern a monetary amount payable under the Agreement.
  • There is an important distinction between monetary amounts which are payable or owed “under a contract” and remedies which arise by operation of law. Whereas liquidated damages are recoverable by a contractual right of recovery, unliquidated damages for breach of contract “are compensation assessed by the court in accordance with common law principles for loss occasioned by breach”.
  • As the dispute was not required to be referred to arbitration, the waiver issue did not arise. If the dispute had been required to be referred to arbitration, Mr Hannigan had not waived his right to do so.

Bell P dissented, holding:

  • The dispute resolution clause should be construed broadly, based on legal principles and textual indications in clause 23.6 which suggest the parties intended it be interpreted liberally, including the use of:
    • the indefinite pronoun “any” in the phrase “any monetary amount”;
    • the alternative formulation “payable and/or owed”;
    • the phrase “including without limitation”; and
    • the broader concept of “monetary amount” instead of “fees”.
  • Mr Hannigan had not waived his right to arbitration because the wrongful termination proceedings did not result in, or occur because of, Mr Hannigan unequivocally abandoning any right claim damages for breach of contract in arbitration at some future time.

Comment

The majority decision follows the recent High Court of Australia decision in Rinehart & Anor v Hancock Prospecting Pty Ltd & Ors [2019] HCA 13, which eschewed adopting the Fiona Trust principle as a principle of Australian law. In Rinehart, the High Court emphasised the importance of construing the words of an arbitration clause, like any clause in an agreement, in its context.

In this case, applying that approach, the narrow formulation found in the arbitration clause (“monetary amount payable and/or owed … under the Agreement”) led to the result that claims for unliquidated damages were outside the scope of the arbitration agreement.

Had the parties used a broader formulation, as is recommended by many arbitral institutions (such as “arising out of or in connection with” or a variant thereof), it is likely the outcome would have been different.

The case therefore serves as another reminder that parties should take care when drafting an arbitration agreement, and seek expert advice from practitioners with expertise in the field when deviating from the model clauses recommended by leading arbitral institutions.

For further information, please contact Brenda Horrigan, Head of International Arbitration (Australia), Chad Catterwell, Partner, Nicholas Brewer, solicitor, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
+61 2 9225 5536

Chad Catterwell
Chad Catterwell
+61 3 9288 1498

Nicholas Brewer
Nicholas Brewer
+61 3 9288 1049

 

 

ENGLISH COURT REFUSES TO STAY COURT PROCEEDINGS UNDER ARBITRATION ACT 1996 IN CASE INVOLVING COMPETING JURISDICTION AND ARBITRATION CLAUSES

In the recent case of Albion Energy Ltd v Energy Investments Global BRL [2020] EWHC 301 (Comm) (available here) the English High Court refused to stay court proceedings under section 9 of the Arbitration Act 1996 in a case involving competing jurisdiction and arbitration clauses.

The case concerned a claim for summary judgment in the English High Court brought by the seller of shares against the buyer for an outstanding payment due under a sale and purchase agreement (“SPA”). The SPA contained an exclusive English court jurisdiction clause. However, after the SPA had been executed (and before the court claim commenced), the parties had agreed to hold the disputed payment in escrow, in order to attempt to resolve the dispute. The escrow agreement contained an arbitration clause providing for London-seated ICC arbitration.

The relevant question before the court was whether the arbitration agreement in the escrow agreement operated to supplant the jurisdiction clause in the SPA. If it did, the seller’s summary judgment claim would have been commenced in breach of the arbitration agreement and would be stayed by the court under section 9 of the Arbitration Act 1996 (the “Act”).

The court determined, after analysing the contractual documents, that the arbitration agreement in the escrow agreement did not supplant the jurisdiction clause in the SPA in respect of the summary judgment claim. It therefore refused to stay the court proceedings under the Act. In reaching this decision, the court provided useful guidance in resolving conflicts between competing jurisdiction and arbitration clauses across different agreements.

Background facts

The dispute arose from an SPA for the sale of shares between Albion Energy Ltd (“Albion”) as seller and Energy Investments Global BRL (“EIGL”) as buyer. The SPA provided that EIGL would pay for the shares in instalments. In addition to Albion and EIGL, there were four other parties to the SPA including the owner of Albion, a Mr Buckingham. The SPA contained an exclusive court jurisdiction clause which provided as follows:

The Parties submit to the exclusive jurisdiction of the courts of England and Wales as regards any claim, dispute or matter (whether contractual or non-contractual) arising out of or in connection with this agreement (including its formation).

EIGL paid the first two instalments under the SPA but refused to pay the third instalment of US$33.3 million. It argued that it had legal claims against Mr Buckingham and Albion which entitled it to withhold payment under the SPA.

Following solicitors’ correspondence, Albion and EIGL agreed that US$20 million would be paid unconditionally by EIGL to Albion and that the remaining US$13.3 million would be held in escrow pursuant to an Escrow Agreement. The parties to the Escrow Agreement were Albion, EIGL and Mr Buckingham (but not the other three parties to the SPA). The Escrow Agreement provided that the parties would exchange information, would attempt to resolve the dispute, and would not commence proceedings before a specified date. The Escrow Agreement expressly provided that payment into escrow was without prejudice to the parties’ legal rights under the SPA.

The dispute resolution clause in the Escrow Agreement provided that:

Any dispute or difference (whether contractual or non-contractual) arising out of or in connection with this letter (including any question regarding its existence, validity, interpretation performance or termination) shall be referred to and finally settled by arbitration [in London under the ICC Rules].”

Commencement of proceedings and applications to the court

Albion commenced proceedings against EIGL and brought an application for summary judgment in respect of the outstanding US$13.3 million held in escrow.

EIGL applied to stay the court proceedings under section 9 of the Act, which provides:

Stay of legal proceedings.

(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.

EIGL’s position was that the arbitration agreement in the Escrow Agreement varied or supplanted the exclusive jurisdiction clause in the SPA in respect of the claim for US$13.3 million. Alternatively, it argued that summary judgment should not be granted because it had a realistic prospect of defending the claim for payment on the merits.

Court’s decision

The court observed that:

  • Before ordering a stay under section 9 of the Act, the court must be satisfied both that there is an arbitration clause and that the subject matter of the claim falls within that clause.
  • There are occasions when the court is willing to stay proceedings under its case management jurisdiction, in order to allow the arbitration tribunal to consider these matters under its kompetenz kompetenz
  • However, in this case neither party (in the judge’s view, correctly) suggested that this was the appropriate course or that the court should not finally determine the question.

The court considered the guidance provided by Hamblen LJ in BNP Paribas v Trattamento Rifiuti Metropolitani SpA [2019] EWCA Civ 768 in interpreting competing dispute resolution provisions across different contracts which are part of a single transaction. These guidelines include the following:

  • Where the parties’ overall contractual arrangements contain two competing jurisdiction clauses, the starting point is that a jurisdiction clause in one contract was probably not intended to capture disputes more naturally seen as arising under a related contract.
  • A broad, purposive and commercially-minded approach is to be followed.
  • Where the jurisdiction clauses are part of a series of agreements they should be interpreted in the light of the transaction as a whole, taking into account the overall scheme of the agreements and reading sentences and phrases in the context of that overall scheme.
  • It is recognised that sensible business people are unlikely to intend that similar claims should be the subject of inconsistent jurisdiction clauses.
  • The starting presumption will therefore be that competing jurisdiction clauses are to be interpreted on the basis that each deals exclusively with its own subject-matter and they are not overlapping, provided the language and surrounding circumstances so allow.
  • The language and surrounding circumstances may, however, make it clear that a dispute falls within the ambit of both clauses. In that event the result may be that either clause can apply rather than one clause to the exclusion of the other.

The court noted, however, that this guidance may apply with less force where (as in the present case) the parties had entered a second agreement after the first agreement, rather than multiple agreements at the same time.

The court also observed that in situations where there is a principal agreement and a security agreement, it is not unusual for the parties to agree to submit disputes under the principal agreement to one form of dispute resolution (often arbitration) and disputes concerning security to another (often court).

In the court’s view, the claim brought by Albion concerned its entitlement to be paid the purchase price under the SPA, rather than the operation of the Escrow Agreement so as to realise the benefits of the security. As a consequence, the claim fell outside the scope of the arbitration agreement in the Escrow Account and the application for a stay under section 9 was refused. The reasons for this conclusion included:

  • It was inherently more likely that the arbitration agreement was intended to address the security and other ancillary obligations under the Escrow Agreement, rather than to displace the jurisdiction clause under the SPA for determining EIGL’s liability to Albion.
  • The reference in the arbitration agreement to disputes arising in relation to “this letter” suggested that the focus of the clause was on obligations under the letter (i.e. the Escrow Agreement) rather than obligations under the SPA.
  • The express recognition in the Escrow Agreement that it was without prejudice to the parties’ rights under the SPA suggests that the arbitration agreement was not intended to take away the right conferred under the jurisdiction clause in the SPA to commence court proceedings.
  • The Escrow Agreement only involved three of the six parties to the SPA. This suggested that it was intended only to have a localised effect, in order to avoid the commercially unattractive position where claims between some of the parties to the SPA are subject to court jurisdiction, while other related claims under the SPA are subject to arbitration.

After dismissing EIGL’s application for a stay, the court decided to grant Albion’s application for summary judgment.

Comment

The case provides a useful illustration of the interpretation exercise that will be carried out by the English court in determining which of two competing dispute resolution clauses ought to apply to a claim. In particular, it reinforces that:

  • Some of the guidelines which generally apply where multiple contracts are entered at the same time may apply with less force where the parties have entered successive agreements at different times.
  • The court may consider that there is nothing unusual about the parties choosing to resolve disputes relating to security in a different forum from disputes relating to the parties’ principal obligations.

The case also serves as a reminder that care must be taken when drafting dispute resolution clauses across multiple contracts. Had the arbitration clause in the Escrow Agreement expressly addressed its relationship with the jurisdiction clause in the SPA, the case – and the associated expenditure of time and money – might have been avoided.

For more information, please contact Nicholas Peacock, Partner, Aaron McDonald, Senior Associate, or your usual Herbert Smith Freehills Contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803

Aaron McDonald
Aaron McDonald
Senior Associate
+44 20 7466 2980

BEIJING COURT UPHOLDS ARBITRATION IN DOMESTIC CONTRACT WHERE DISPUTE PROVISIONS CONFLICT

On 17 January 2020, by its ruling numbered (2019) Jing 04 Min Te 135 (Ruling), the Beijing Fourth Intermediate People’s Court (Beijing Court) upheld the validity of an arbitration agreement in a prospectus for a short-term financing bond which also contains conflicting litigation clauses.

In the Ruling, the Beijing Court followed the opinion of the Supreme People’s Court of China (SPC), reversing the lower court’s initial conclusion.  The SPC opined that, where a contract contains different dispute resolution clauses in different sections, the parties’ “last expression of intent” prevails.

Background

In October 2017, Beijing Huaye Capital Holdings Co., Ltd. issued a prospectus for its RMB500 million short-term financing bond.  The term of the bond is 365 days.  On 2 August 2018, Guangzhou Securities Co., Ltd. purchased the bond at par value for RMB50 million according to the terms of the Prospectus.

Chapter 11 of the prospectus  (under the heading “Investors Protections”) contains a number of inconsistent dispute resolution clauses:

  • Article 2, paragraph 1 (under the heading “Liability of Default”) provides that the investors “may commence litigation in accordance with the law” if the issuer fails to redeem the bond and pay interest on the maturity date;
  • Article 7, paragraph 2(3) (under the heading “Change of Control”) provides, in summary, that the investor “may commence litigation or arbitration” against the issuer for breach of contract if there is a change of control of the issuer;
  • The last paragraph of Article 7, which is also the last paragraph of the prospectus, provides: “The issuer, in issuing this debt financing instrument, the lead underwriter, in underwriting this debt financing instrument, and the holders, in subscription and purchasing this debt financing instrument, shall be deemed to have agreed to the agreement above. If the issuer breaches the agreement above, the investor shall have the right to apply to China International Economic and Trade Arbitration Commission (CIETAC) for arbitration in Beijing which shall be conducted in accordance with the CIETAC’s arbitration rules in effect at the time. [……]”. (Arbitration Agreement) (emphasis added)

In November 2018, Guangzhou Securities filed a request for arbitration against Huaye Capital with CIETAC, relying on the Arbitration Agreement.  It claimed that Huaye Capital had breached the terms of the prospectus by failing to redeem the bond or to pay interest.

In response, Huaye Capital challenged the jurisdiction of CIETAC in early 2019 on two main grounds.  First, it argued that the Arbitration Agreement applies only to disputes arising from the change of control of the issuer under Article 7, Chapter 11 of the prospectus.  Since Guangzhou Securities’ claims were based on Huaye Capital’s default in repaying the principal and interest, the Arbitration Agreement does not apply.  Second, it argued that the prospectus provided for both litigation and arbitration and was therefore invalid under Chinese law.

The Beijing Court’s initial conclusion

The Beijing Court initially concluded that the Arbitration Agreement was invalid.  It found that the language “the agreement above” in the Arbitration Agreement referred to the full prospectus, instead of Chapter 11 only.  However, the Beijing Court also noted that the prospectus “refers to the expressions like ‘commence litigation’ in several places; which means that the Prospectus provides for both litigation and arbitration as dispute resolution mechanisms without particular distinctions.”  It therefore considered that the Arbitration Agreement was invalid under the “Interpretation of the Supreme People’s Court on Certain Issues relating to Application of the Arbitration Law of the People’s Republic of China”, (SPC Interpretation on Arbitration Law), Article 7 of which provides that an arbitration agreement is invalid if “the parties agreed that the dispute can be either referred to an arbitral institution for arbitration or to a court for litigation”.

Minded to invalidate the Arbitration Agreement, the Beijing Court reported the case to the higher courts pursuant to article 2(2) of the Provisions of the Supreme People’s Court on Issues relating to the Reporting and Review of Cases Involving Judicial Review of Arbitration” (Reporting Provisions) (further explanation here).  The case was ultimately reported to the SPC for review.

SPC’s review opinion

The Beijing Court’s Ruling contains the SPC’s opinion.  While the SPC agreed with the Beijing Court that the term “the agreement above” in the Arbitration Agreement refers to all matters under the prospectus, it found that “[t]he Prospectus provides for different dispute resolution methods in its earlier and later parts, the parties’ last expression of intent shall prevail”.  The SPC accordingly reversed the Beijing Court’s decision and confirmed that the Arbitration Agreement is valid.

Comment

Two points are worth noting.

First, it has been trite law in China that a “hybrid arbitration clause”, i.e., an arbitration clause which provides that the parties can submit their disputes to either arbitration or litigation, is invalid.  This was reinforced after the SPC Interpretation on Arbitration Law came into effect in 2006.  The Beijing Court Ruling may indicate that the SPC is now adopting a more flexible and pro-arbitration approach to this issue.  Based on the limited SPC remarks in the Ruling, we think the language of the Arbitration Agreement, which refers to arbitration only and specifically covers “the agreement above”, and the fact that the Arbitration Agreement is the last paragraph of the prospectus, both influenced the SPC’s decision.  Although the Ruling should not be seen as a blanket removal of the restrictions imposed by Article 7 of the SPC Interpretation on Arbitration, it does suggest that the SPC may now consider this issue on a case by case basis.

Second, before the SPC issued its latest Reporting Provisions in December 2017, the “reporting system” applied only to foreign-related arbitrations.  Had the current case taken place before 2018, the Beijing Court would have delivered its ruling against the Arbitration Agreement without having to report to the SPC.  After the Reporting Provisions came into force in January 2018, the SPC has taken control of all cases – both foreign-related and domestic – in which a lower court is minded to hold an arbitration agreement invalid.  The Ruling is another example of the SPC supporting arbitration within the current legal regime.

Helen Tang
Helen Tang
Partner, Mainland China
+86 21 2322 2160
Stella Hu
Stella Hu
Senior Consultant, Hong Kong
+852 2101 4248
Tianyu Ma
Tianyu Ma
Associate, Mainland China
+86 10 6535 5040

ENGLISH COURTS DECLINE TO GIVE ORDER FOR TAKING OF EVIDENCE FROM NON-PARTY TO ARBITRATION AGREEMENT

The English High Court recently decided in A and another v. C and Others [2020] EWHC 258 (Comm) (“A v C”) that it did not have jurisdiction under s44(2)(a) of the English Arbitration Act (“the Act”) to issue a coercive order compelling a non-party to an arbitration agreement to give evidence in support of arbitration proceedings seated in New York.

The Claimants wished to compel the third defendant, E, who was not a party to the New York-seated arbitration, to give evidence in England. The claimants had been given permission by the New York tribunal to make such an application to the English court. However, despite the order of the tribunal, the Court ultimately found that it was unlikely that Parliament had intended to give the English courts jurisdiction to make the order sought under s44.

The Court considered the two leading authorities on the issue (Cruz City I Mauritius Holdings v Unitech Limited [2014] EWHC 3704 (Comm) (“Cruz City”) and DTEK Trading SA v Morozov [2017] EWHC 1704 (Comm) (“DTEK”)) and confirmed that the Court does not have jurisdiction under s.44 of the Arbitration Act to make an order against a non-party to the arbitration agreement.

Background Facts

The parties had embarked on a joint venture in relation to an oil field in Central Asia and the Claimants held a 15% interest in the oil field. A dispute arose between the parties, and an arbitration proceeding was initiated by the Claimants. The arbitration proceedings were seated in New York and, by the time of the High Court proceedings, the evidentiary hearing in the arbitration had already taken place. However, there remained an issue as to whether certain bonus payments made by the First and Second Defendants to the arbitration were deductible from the amount claimed by the Claimants in the arbitration.

Although the arbitral tribunal had already heard evidence from the assistant general counsel responsible for drafting and negotiating the agreements, the Claimants sought evidence from E, who was a non-party to the arbitration and the lead commercial negotiator who had been involved in negotiating the specific bonus payment.

The tribunal granted permission to the Claimants to bring an application in England, where E was domiciled, for the taking of his evidence.

S44 of the English Arbitration Act

Parties may apply under s44 of the English Arbitration Act for court assistance in relation to an arbitration seated within or outside England & Wales. The court’s power under this section is extensive and includes ordering the taking of witness evidence, the preservation of evidence, granting an interim injunction or appointment of a receiver, the sale of any goods which are the subject of the proceedings, and the power to make various other orders  relating to property which is the subject of the proceedings.

The Court noted that at first sight the language of s44 lent “some support” to the Claimants’ contention that it was possible for orders to be made against non-parties. The legislation specifically stated at s44(1) that the court had the same power in relation to the particular matters listed as it would do in respect of court litigation. This tended to suggest that the Court had the same power to make orders in respect of non-parties to an arbitration as it did against non-parties to court litigation. It was also noticeable that the specific legislative provision relevant to this case referred to “the taking of evidence of witnesses” and this might be taken as an indication that the provision was mainly focused on taking evidence from witnesses outside the control of the parties to the arbitration.

Cruz City and DTEK

The Court noted that while the wording of the legislation might suggest that the provision could be employed against non-parties, the leading authorities of Cruz City and DTEK made it clear that the question is much less straightforward.

Cruz City concerned an attempt to serve out of the jurisdiction an application for a freezing injunction against non-parties to the arbitration agreement. The court in Cruz City considered the question of application to non-parties and decided that there were a number of indications in s44 itself that it was intended to be limited to orders made against a party to the arbitration agreement. This was primarily because s44 is expressly stated to be subject to contrary agreement between the parties, which the court decided could only mean the parties to the arbitration agreement. Subsection (4) operated so that, unless the matter was urgent, the court could only act on an application made either with the tribunal’s permission or agreement in writing given by “the other parties”. This must again mean the other parties to the arbitration agreement.

In addition, Subsection (5) stated that the court can only act where the arbitrators either have no power or are currently unable to act effectively. This would always be the situation in respect of an order against a non-party. Subsection (6) provided that the court could hand back control in respect of the relevant issues to a tribunal with “power to act in relation to the subject matter of the order”. This could not be relevant to orders made against a non-party. Subsection (7) provided that an appeal could only be made against an order under s44 if the first instance court gave permission. The court commented that it would be surprising if the non-party’s right of appeal was limited in this way in respect of an order against a non-party. The court in Cruz City also noted that s44 was one of only a small number of sections in the Act to apply to arbitrations seated outside England and Wales or Northern Ireland. It seemed unlikely that Parliament would have intended to give the English courts the jurisdiction to give orders against non-parties in support of arbitrations happening around the globe. Had there been any intention to permit the court to make such third party orders this would have been clearly expressed in the Act.

The court in Cruz City accordingly decided that s44 did not allow orders to be made against non-parties and the court in DTEK later reached the same conclusion.

The Claimants’ application to the High Court

In A v C the Claimants advanced two arguments in an attempt to distinguish the current case from the position in Cruz City and DTEK.  They firstly contended that s44(2)(a) permitted orders to be made against non-parties because it referred to the taking of the evidence of witnesses, even if this was not the case for other sub-sections of s44(2). Secondly, the difficulties with making orders against non-parties in Cruz City and DTEK arose from the need to serve the applications out of the jurisdiction and this issue did not arise in A v C because E resided in England & Wales.

The Court took the view that the argument that some powers under s.44(2) can be exercised against non-parties, while others could not, was unattractive in the absence of statutory language justifying such a distinction. If s44(2)(a) orders could not  be made against non-parties, it would be surprising if coercive orders could nonetheless be made against non-party witnesses. The judge recognised that the English Court could issue letters of request asking foreign courts to take evidence from non-parties, but that ultimately depended on the discretion of foreign courts, which was a different matter from ordering non-parties to give evidence for the purpose of foreign arbitrations.

In respect of the Claimants’ second argument, the Court emphasised that the applications to serve out of jurisdiction in Cruz City and DTEK failed because s44 does not apply to non-parties, not because it is impossible to serve such applications out of jurisdiction.

Appropriateness of the order

The Court further considered whether it would have been appropriate to issue the requested order if the Court had found that it had the power to do so, having regard to the fact that the seat of the arbitration was New York.

The Court concluded that there was no particular inconvenience to the witness and there was sufficient justification for his attendance. The evidence requested was “clearly an issue of importance in the New York Arbitration”. Since the witness was the lead commercial negotiator of the contract under which the bonus was payable, the Court found that there was a sufficient possibility that he may have relevant evidence to give, notwithstanding the evidence already given by the assistant general counsel. It also did not matter that his memory of the events might have been compromised by the passing of time. In any event, his memory could be assisted by reference to the documents. In addition, the Court found that it would not be appropriate to delve too deeply into the relative weight of evidence, as this was “pre-eminently a matter for the arbitral tribunal”.

However, the proposed list of topics on which the Claimants wished to question the non-party was too broad and the Court would have required the Claimants to produce an amended, narrower list of questions. The Court also noted that E had offered to produce a witness statement and evidence by video-link to the arbitral tribunal. The proposal made by E reasonably balanced the interests of the arbitrating parties and E and, even if any order had been granted under s44 of the Act, the order would have been along the same lines.

Comment

This case has confirmed that the English courts’ powers in support of arbitration under s44 of the Act do not extend to orders against non-parties to the arbitration, whether or not there is a need to serve the application out of the jurisdiction. Accordingly, the current position is that s44 orders are unavailable against non-parties to the arbitration, even where those third parties are based within England & Wales. The decision is being appealed to the Court of Appeal.

For more information, please contact Nick Peacock, Partner, Rebecca Warder, Professional Support Lawyer, Peter Chen, Associate, Aseel Barghuthi, Associate, Christine Sim, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803

Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418

Peter Chen
Peter Chen
Associate
+44 20 7466 3868

Aseel Barghuthi
Aseel Barghuthi
Associate
+1 917 542 7859

Christine Sim
Christine Sim
Associate
+1 917 542 7853

 

THE COURT OF APPEAL CONFIRMS THE JURISDICTION OF ENGLISH COURTS TO RESTRAIN A FOREIGN ARBITRATION IN AN ‘EXCEPTIONAL’ CASE

In Sabbagh v Khoury and others, [2019] EWCA Civ 1219 (available here), the English Court of Appeal partly upheld the injunction granted by the Commercial Court restraining the pursuit of arbitration proceedings seated in Lebanon.  In doing so, the Court of Appeal confirmed the power of English courts to restrain a foreign arbitration on grounds that the foreign arbitration is oppressive and vexatious and provided helpful guidance on the exceptional circumstances in which English courts may exercise this power.

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SINGAPORE ARBITRATION UPDATE: A POTENTIAL CHANGE FOR ‘OPT-IN’ APPEALS FOR ERRORS OF LAW AND COURT CONFIRMATION OF THE CORRECT STANDARD TO BE MET TO RESTRAIN WINDING UP PROCEEDINGS WHERE A CLAIM IS SUBJECT TO ARBITRATION

Two recent developments in the Singapore arbitration landscape are of interest.  First, a written response from the Singapore Minister for Law confirms that the government is considering amending the International Arbitration Act (the “IAA”) to allow for appeals on errors of law on an opt-in basis. Second, a recent Singapore High Court decision confirms the standard to be met by a party seeking to restrain winding up proceedings when there is a valid arbitration agreement.  Underscoring both developments is a common objective of respecting party autonomy in arbitration.

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