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

2019 STATISTICS SHOW A “RECORD YEAR” FOR THE ICC

The ICC has recently published statistics for 2019, hailing it as a “record year”. 2019 saw a total of 869 cases registered (of which 851 were under the ICC Arbitration Rules). This is the second highest number of cases registered in the ICC’s history, with only 2016 having a larger caseload (966 cases). The statistics also show improved numbers for the gender and geographical diversity of both users and arbitrators. Overall, these numbers demonstrate ICC’s global reach and position as one of the leading arbitral institutions for complex, high-value disputes.

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ENGLISH HIGH COURT GRANTS APPEAL ON A POINT OF LAW UNDER S69 ARBITRATION ACT 1996

In a rare example of a successful appeal of an arbitral award on a point of law under s69 Arbitration Act 1996 (the “Act”), the High Court (the “Court”) in Alegrow SA v Yayla Argo Gida San ve Nak A.S [2020] EWHC 1845 (Comm) varied and remitted an award of the GAFTA Appeal Board (the “Board”) having found that the Board had made an error in law in deciding that Alegrow SA (“Alegrow”) had repudiated its contract with Yayla Argo Gida San ve Nak (“Yayla”), with Yayla being entitled to treat the contract as having come to an end.

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NAVIGATING THE LOW OIL PRICE ENVIRONMENT PODCAST: ALLOCATING CONTRACTUAL RISK AND REWARD WITH HOST STATES

Oil prices have recently reached historic lows and oil companies are faced with a number of potential legal issues as the prices impact their trading and operational agreements. In this podcast series, our energy disputes lawyers consider some of the key issues triggered by the current low oil price environment, looking in detail at a variety of topics around:

  • Host states: allocating value in challenging times
  • Joint Venture arrangements
  • Operational challenges and other contracts

Low commodity prices cause hardship for governments in resource rich countries, as well as the businesses commercialising those resources. In tough times, governments may be prompted to extract a greater share of value from projects to try to balance against a loss of revenue. In the first episode, Craig Tevendale, Chris Parker and Charlie Morgan discuss the key contractual mechanisms for allocating risk and reward with States, and how best these challenges can be addressed.

The episode can be found at the link here.

For more information, please contact Craig Tevendale, Partner, Chris Parker, Partner, Charlie Morgan, Senior Associate, or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

Chris Parker
Chris Parker
Partner
+44 20 7466 2767

Charlie Morgan
Charlie Morgan
Senior Associate
+44 20 7466 2733

COEXISTING WITH COVID-19: A CATALYST FOR PROGRESS IN INTERNATIONAL ARBITRATION?

As the Covid-19 pandemic continues, infection rates in many countries are starting to fall, and businesses and governments alike are seeking to establish a “new normal” recognising that the virus will be present in society for some time yet. Other countries still face climbing numbers and a peak yet to come. For all, the prospect of multiple waves of high infection rates throughout the year and beyond remains. As such, we will continue to see an ever shifting patchwork of lockdowns and other government responses internationally.

In our earlier series of blog posts, we highlighted the individual steps taken by different arbitral institutions, organisations and the wider community as an initial crisis response to the pandemic. We produced a table setting out those steps and will continue to monitor and update this information going forward. An updated table, accurate to 16 July 2020, can be found here.

In this blog post, we turn to the future and look at how the arbitration community continues to respond to the challenges of operating internationally, as different countries prepare in different ways to live with the Covid-19 virus in the medium term at least.

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ANNULMENT OF AL KHARAFI V. LIBYA ARBITRAL AWARD BY CAIRO COURT OF APPEAL

On 3 June 2020, the Cairo Court of Appeal set aside a US$ 1 billion investment treaty award arising out of a dispute between a Kuwaiti construction company and the State of Libya, in relation to a license for a tourist development project in Tripoli, Libya.

The award was issued under the Unified Agreement for the Investment of Arab Capital in Arab States dated 26 November 1981 (the “Unified Agreement” or the “Treaty”). The arbitration was seated in Cairo, Egypt and administered by the Cairo Regional Centre for International Commercial Arbitration (“CRCICA”).

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ENGLISH HIGH COURT REJECTS DEFERRAL OF A STAY APPLICATION FOR LITIGATION WITH PARALLEL ARBITRATIONS ON FOOT

In Republic of Mozambique v Credit Suisse International and others [2020] EWHC 1709 (Comm) here, the English High Court gave directions to proceed to a hearing of an application for a stay of English court proceedings under s9 of the 1996 Arbitration Act (the “Act“). The court rejected arguments brought by a number of defendants that determination of the s9 application should be deferred until the arbitrators in ongoing Swiss arbitrations had decided the question of jurisdiction. The court considered the effect on those defendants who were not party to the arbitrations and also the realistic timescale of 2.5-3 years before the arbitral proceedings would be completed. Based on that analysis, the court gave directions for the hearing of the s9 application in January 2021.

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UPDATE [8]: “NECESSITY IS THE MOTHER OF INVENTION”: COVID-19 DRAMATICALLY ACCELERATES DIGITALISATION OF ARBITRATION PROCESSES

This eighth (and final) update to a blog post initially dated 7 April 2020 takes into account developments between 25 June – 9 July 2020. These include various institutional changes (set out in the table attached to the blog), as well as perspectives on the development of “hybrid hearings” as some venues start to reopen in light of changing conditions and the easing of government restrictions. This updated blog post also includes the news of the launching of the “Protocol for Online Case Management in International Arbitration” for public consultation (produced by a working group led by Herbert Smith Freehills LLP) and VIAC’s recently announced Vienna Protocol – “A Practical Checklist for Remote Hearings”.

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Arbitration Foundation of South Africa (AFSA) launches new arbitration rules for public consultation

On Wednesday, 1 July 2020, the Arbitration Foundation of South Africa (AFSA), launched its new International Arbitration Rules for public comment.

The international Drafting Committee was chaired by Professor Dr. Maxi Scherer and included other high profile individuals including Ndanga Kamau, Jennifer Kirby, Lise Bosman, Chiann Bao, Remy Gerbay and Jonathan Ripley-Evans (Director, HSF Johannesburg). Gregory Travaini (Senior Associate, HSF Paris) acted as one of the committee secretaries and the drafting process was overseen by the AFSA Advisory Board (including Craig Tevendale, Partner, HSF London). A full list of Drafting Committee and Advisory Board members can be found here.

A copy of the draft rules can be found here. The draft marks a significant departure from existing arbitral practice in South Africa and demonstrates AFSA’s focus on widening its appeal to a truly international market. The new rules include provisions relating to emergency arbitrators, expedited proceedings, early dismissal of claims, non-participating parties, multi-party/contract proceedings (including joinder and consolidation), confidentiality, and third-party funding.

AFSA welcomes comments on the draft rules until 31 August 2020 at comments@arbitration.co.za.

For more information please contact Jonathan Ripley-Evans, Director, Craig Tevendale, Partner, Gregory Travaini, Senior Associate, or your usual HSF contact.

Jonathan Ripley-Evans
Jonathan Ripley-Evans
Director
+27 10 500 2690
Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445
Gregory Travaini
Gregory Travaini
Senior Associate
+33 1 53 57 13 63

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