ENGLISH HIGH COURT GRANTS AN ANTI-SUIT INJUNCTION IN FAVOUR OF ARBITRATION IN RESPECT OF PROCEEDINGS UNDER FOREIGN INSOLVENCY LEGISLATION

In Riverrock Securities Limited v International Bank of St Petersburg (Joint Stock Company) [2020] EWHC 2483 (Comm) the High Court granted Riverrock Securities Limited (“RSL”) an interim anti-suit injunction against bankruptcy proceedings brought against RSL by the receiver of the International Bank of St Petersburg (“IBSP”) (the Bankruptcy Proceedings).

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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

COURT OF APPEAL REFUSES TO ENFORCE AN ARBITRATION AWARD AGAINST A NON-PARTY

In Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ 6, the English Court of Appeal refused the enforcement and recognition of an arbitral award handed down by an ICC Tribunal seated in Paris, on the basis that the award was made against a non-party. This case provides helpful guidance on two significant issues: (i) how to determine the governing law of an arbitration agreement as a matter of English law and (ii) the extent to which No Oral Modification (“NOM”) clauses will be upheld by the English courts.

Background

The case concerned a Franchise Development Agreement (“FDA”) entered into by Kabab-Ji SAL (Lebanon) (“KJS”) and Al Homaizi Foodstuff Company (“AHFC”). Following a corporate reorganisation, AHFC became a subsidiary of Kout Food Group (Kuwait) (“KFG”). A dispute arose under the FDA, leading KJS to commence an arbitration against KFG (and not AHFC).

This raised a jurisdictional question as to whether KFG had become an additional party to the FDA, and therefore to the arbitration agreement, and if so how.  In order to answer that question, it was necessary to decide (i) which law governed the question of whether KFG became a party to the arbitration agreement (ii) whether, under that law, KFG had become a party to the arbitration agreement.

The arbitration clause specified that Paris would be the seat of arbitration, and the governing law clause stipulated that the FDA would be governed and construed in accordance with English law. The contract contained NOM clauses.

An ICC Tribunal seated in Paris determined that (i) whether KFG was bound by the arbitration agreement was a matter of French law and (ii) that English law governed whether a transfer of substantive rights and obligations to KFG took place. The Court of Appeal judgment does not say expressly whether the Tribunal determined that the arbitration agreement was governed by French law, suggesting that the Tribunal followed the French courts’ approach of assessing the arbitration agreement without reference to a specific national law (i.e. treating it as “autonomous”).

By majority decision, two of the arbitrators (who were not English qualified) concluded that, as a matter of English law and despite the NOM clauses, a novation was to be inferred by the conduct of the parties. Having found jurisdiction, the tribunal went on to determine that, on the merits, KFG was in breach of the FDA.

KFG filed an application before the French courts to annul the award. The application has yet to be heard and is scheduled for February 2020. Separately, KJS made an application for the enforcement of the award under section 101 of the English Arbitration Act (the “Act“). The English court initially made an ex parte order for the Award to be enforced as a judgment, and KFG responded by seeking an order refusing recognition and enforcement of the award under section 103(2) of the Act.  The first instance court heard the s103 application and determined that English law governed the validity of the arbitration clause. The court considered that KFG did not become a party to the arbitration clause, but declined to make a final determination on this point in case further evidence on this issue might emerge after the decision of the French court. The court accordingly refused enforcement and recognition of the award.

The first instance decision was appealed by KJS to the Court of Appeal.

The first issue on the law governing the arbitration agreement

KJS’s key arguments were:

  • There was no express choice of English law as the governing law of the arbitration agreement. The FDA was governed by English law supplemented by the obligation of good faith and fair dealing and by “principles of law generally recognised in international transactions” which included the UNIDROIT principles. The choice of “English law plus” was at odds with the common law requirement that the law applicable to an arbitration be the law of a country.
  • Alternatively, there was no implied choice of English law, as the seat of the arbitration was in a different country from the country whose law governed the main agreement. This was an important factor pointing away from English law being an implied choice of law governing the arbitration agreement. The judge should have concluded either that the implied choice of law governing the arbitration agreement was French law or, in default of any choice, that French law applied as the law of the place where the Award was made (the test for foreign arbitration awards under the New York Convention).

In contrast KFG argued that:

  • As a matter of construction, there was an express choice of English law as the governing law of the FDA. Article 1 provided:
    • This Agreement consists of the foregoing paragraphs, the terms of agreement set forth herein below, the documents stated in it, and any effective Exhibit(s), Schedule(s) or Amendment(s) to the Agreement or to its attachments which shall be signed later on by both Parties. It shall be construed as a whole and each of the documents mentioned is to be regarded as an integral part of this Agreement and shall be interpreted as complementing the others.
  • The governing law clause (Article 15) then made it clear that “This Agreement” was governed by English law, which must mean all the agreement, including the arbitration agreement.
  • The fact that the seat of the arbitration was in a different country should not displace the strong indication that there was an implied choice of English law to govern the arbitration agreement by virtue of the FDA being expressly governed by English law.

The Second Issue – had KFG become a party to the arbitration agreement?

The parties focused on the following contractual provisions of the FDA, known together as “No Oral Modification” clauses:

Article 3: Grant of Rights

3.1 License…This grant is intended to be strictly personal in nature to the LICENSEE and no rights hereunder whatsoever may be assigned or transferred by LICENSEE in whole or in part without the prior written approval of LICENSOR

Article 17: Waiver

17.1 Any waiver of any term or condition of the Agreement must be in writing and signed by the affected party…

Article 24: Entire Agreement

…No interpretation, change, termination, waiver of any provision hereof, and no consent or approval hereunder, shall be binding upon the other party or effective unless in writing signed…

Article 26: Amendment of Agreement

The Agreement may only be amended or modified by a written document executed by duly authorised representatives of both Parties

KJS argued that even if the first instance court was correct that the governing law of the arbitration agreement was English law, he had erred in concluding that consent in writing was required for KFG to become an additional party to the FDA. The good faith and fair dealing provisions contained in both the FDA and the UNIDROIT principles overrode the NOM clauses and KFG could therefore be a party to the arbitration agreement without written consent.

In response, KFG argued that the parties had sought to achieve a high level of business certainty in the drafting of the FDA. It contained a “double lock” owing to the combination of Articles 26 and 24 with Article 17. In other words, any amendment and consent to an amendment could only be effective in writing, and any consent to waive these requirements also had to be in writing. The UNIDROIT principles could not be relied upon to establish some amendment as this would contradict the double lock in the NOM clauses. The only way in which the NOM clauses could be overridden was to the extent that the test for an estoppel stated in Rock Advertising was satisfied (see our previous post on this topic here on our Litigation Blog).

The Court of Appeal’s decision

On the first issue, the Court concluded that Articles 1 and 15 of the FDA provided for an express choice of English law to govern the arbitration agreement. The “English law plus” provisions did not point to some other system of law (specifically French law) governing the arbitration agreement and said nothing about the law governing the arbitration agreement. The fact that the arbitration clause itself did not expressly refer to English law did not matter, as the wording in Articles 1 and 15 demonstrated a clear intention that the entire FDA would be governed by English law. It was therefore not necessary to consider whether there was an implied choice of law.

On the second issue, the Court of Appeal agreed with KFG that, under English law, the NOM clauses could only be overridden to the extent that the test for an estoppel in Rock Advertising was satisfied. Principles of good faith and fair dealing could not override the clear wording of the contract. The Rock Advertising test was therefore not satisfied. The Court also considered that the first instance judge should have made a final determination that KFG was not a party to the FDA or the arbitration agreement.

Comment

This case raises important issues of construction and interpretation. It is a reminder that there is real merit in including an express governing law provision within an arbitration clause or by expressly referring to the arbitration clause within the main governing law provision of the contract. This will avoid wasting time and money arguing the issue at both the arbitration and enforcement stage.

It also demonstrates the importance of the Supreme Court’s decision in Rock Advertising and its implications for the many contracts containing NOM clauses. These will generally be effective so as to prevent contracting parties being bound by a subsequent variation unless the formalities contained within the contract are complied with. In this instance, the inclusion of the clause ensured that KFG was not a party to the FDA or the arbitration agreement as the requirement for written notice had not been followed.

For more information, please contact Craig Tevendale, Partner, Emily Fox, Of Counsel, Elizabeth Kantor, Senior Associate, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445
Emily Fox
Emily Fox
Of Counsel
+33 1 53 57 72 48
Elizabeth Kantor
Elizabeth Kantor
Senior Associate
+44 20 7466 2406
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112

English Court of Appeal reinstates the appointment of an arbitrator on the basis that he qualifies for appointment under the arbitration clause

In Allianz Insurance and Sirius International Insurance Corporation v Tonicstar Limited [2018] EWCA Civ 434, the English Court of Appeal has reversed the decision of the High Court on whether a party-appointed arbitrator met the contractual requirements as to requisite experience. The Court of Appeal held that that an English QC with experience of insurance and reinsurance law was sufficient to comply with a contractual clause requiring arbitrators to have “experience of insurance and reinsurance”.

This decision is of particular interest as such challenges to arbitrators rarely come before the courts. It highlights once again the importance of drafting arbitration clauses clearly, particularly where parties require their arbitrators to possess certain qualifications or experience.

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The English Court of Appeal substitutes one anti-suit injunction for another (more limited one)

The English Court of Appeal is the latest court to weigh in on this long-running dispute spanning multiple jurisdictions between Messrs Emmott and Wilson, relating to an agreement to establish a “quasi-partnership”. Following an appeal brought by Mr Emmott against the High Court’s decision (which we reported here), the question for the Court of Appeal was whether to uphold the anti-suit injunction granted by the High Court preventing Michael Wilson & Partners, Limited (“MWP”) from pursuing proceedings in the Australian courts in light of the London-seated arbitration agreement between them.

The Court of Appeal allowed the appeal in part, issuing a substitute injunction against MWP advancing only the claims which the court deemed to be vexatious and oppressive in undermining the arbitration agreement and process.  This judgment helpfully clarifies the circumstances in which the English Court will issue an anti-suit injunction in order to safeguard the integrity of an English-seated arbitral process, and confirms that the court will not permit arbitral proceedings or awards to be undermined by parties against whom adverse findings have been made. However, it also demonstrates that the question of whether proceedings fall within the scope of an arbitration agreement can be a complex and controversial one.

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English High Court removes arbitrator on the basis that he did not possess necessary qualifications

In Tonicstar Limited v Allianz Insurance and Sirius International Insurance Corporation [2017] EWHC 2753, the English High Court considered an application under Section 24 of the Arbitration Act 1996  (the Act) for the removal of an arbitrator on the basis that he did not satisfy the contractual stipulation as to relevant experience. This judgment is of particular interest given that questions of the removal of arbitrators do not often come before the courts (because they are, in institutional arbitration, typically decided by arbitral institutions so are not usually public). The Court decided to remove the arbitrator on the basis that he had experience of insurance and reinsurance law, rather than required experience in the business of insurance and reinsurance. This decision highlights the importance of the careful drafting of arbitration clauses which specify characteristics of an arbitrator.  It also serves as a reminder of the importance of precedent in the English judicial system.

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Inside Arbitration: Issue #3 of the publication from Herbert Smith Freehills’ Global Arbitration Practice

We are delighted to share with you the latest issue of the publication from Herbert Smith Freehills' Global Arbitration Practice, Inside Arbitration.

In addition to sharing knowledge and insights about the markets and industries in which our clients operate, the publication offers personal perspectives of our international arbitration partners from across the globe.

In this issue:

  • Paula Hodges QC, Peter Leon, Craig Tevendale and Chris Parker share their insights into the development of commercial arbitration on the African continent and consider dispute resolution choices for parties negotiating Africa-related contracts.
  • We consider the development of arbitration in Rwanda and the Kigali International Arbitration Centre "in conversation" with KIAC's secretary general, Dr Fidèle Masengo.
  • Peter Godwin, Regional Head of Disputes Asia, reflects on his 16 years in Asia and the changes in attitudes towards dispute resolution amongst Japanese parties.
  • Dr Patricia Nacimiento, Thomas Weimann and Dr Mathias Wittinghofer give their view on whether Germany is on its way to becoming a true arbitration powerhouse.
  • Chris Parker, Elaine Wong, Gitta Satryani and Elizabeth Kantor provide a global perspective on the availability of security for costs and claim in international arbitration.
  • Dr Larry Shore discusses his path into public international law and the development of his interest in treaty disputes, as well as the differences in arbitration practice in the US and the UK and trends in US arbitration.
  • We highlight a number of key considerations for parties negotiating contracts with state and state-owned entities across the globe and provide comparative into state immunity in five key jurisdictions.

We are pleased to present our clients with an infographic providing a snapshot of our global arbitration practice in the two years 2014-2016.

The infographic details the successes of our growing practice and our huge geographical reach. The infographic is available at this link and at page 25 of Inside Arbitration.

The full digital edition can be downloaded in PDF by clicking on this link.

We hope that you enjoy reading Issue #3 of Inside Arbitration. We would welcome your feedback.

The English High Court extends an anti-suit injunction against proceedings brought in breach of an arbitration agreement

In the latest chapter of a long-running dispute (John Forster Emmott v Michael Wilson & Partners [2016] EWHC 3010 (Comm)), different aspects of which have been considered by various jurisdictions around the world for over ten years, the English High Court has continued an anti-suit injunction preventing proceedings in New South Wales on the basis that such proceedings were brought in breach of an arbitration agreement.

This is a welcome reminder that the English courts will take active steps to uphold party agreements to submit their disputes to arbitration and prevent parties from seeking to either side-step arbitration agreements or to re-litigate issues which have already been decided in a different forum.

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Multi-tiered dispute resolution clauses in construction contracts: watch out for potential pitfalls

In this article, Elizabeth Kantor and Philip Parrott consider the reasons why parties may wish to include multi-tiered dispute resolution clauses in their construction contracts and warn of common pitfalls which can cause the unwary party to become embroiled in time-consuming and costly procedural battles.

This article was first published in Construction Law on 9 August 2016.

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