ANOTHER ONE BITES THE DUST: THE FIONA TRUST PRINCIPLE AGAIN SEES OFF NDK’S CASE BEFORE THE ENGLISH COMMERCIAL COURT

In NDK Ltd v HUO Holding (No 2) [2022] EWHC 2580 (Comm), the English Commercial Court dismissed NDK’s section 67 challenge brought against an LCIA award, finding that a proposed shareholder was covered by the arbitration clause in the shareholders agreement.

The case stems from the same dispute as NDK’s previous s. 67 challenge (covered here) but the judgment is noteworthy in its own right for its pragmatic analysis of the core joint venture documents and its robust application of pro-arbitration principles to an arbitration clause.

What was the background?

NDK was one of the three shareholders in a Cypriot-incorporated SPV, established for a Russian joint venture in the mining sector. The investors were party to a Shareholders’ Agreement (the “SHA“), which contained an LCIA arbitration clause. HUO bought shares from K Co (another shareholder of the SPV). As part of this process, HUO signed and delivered a Deed of Adherence (the “DoA“), which was necessary to become party to the SHA. NDK alleged that the SHA was terminated due to a breach of pre-emption rights.

In response, HUO brought a claim under the arbitration clause and obtained an LCIA award declaring the SHA to be valid and binding. NDK lodged several challenges, most of which were decided in the previous judgment. In this proceeding, NDK applied to set aside the award under s. 67 of the Arbitration Act 1996 (the “AA“) for want of substantive jurisdiction. The challenge was based on the contention that HUO was not party to the arbitration clause.

For the overall context of the dispute, see our previous blog.

Did HUO become party to the SHA?

NDK argued that HUO was not a party to the SHA because it never became a shareholder in the SPV, a fact the Court assumed as accurate for the purposes of this challenge. NDK contended that HUO’s position that it acceded to the SHA was not possible given that it was only open to shareholders to accede to the SHA by signing it. This prevented HUO from ever validly delivering the DoA necessary to become party to the SHA. As a consequence, HUO did not become party to the arbitration clause contained in the SHA, which it was said justified a set aside ruling under s. 67 of the AA for lack of substantive jurisdiction.

The Commercial Court rejected this submission. Foxton J paid close attention to when the obligations under the SHA could arise. The proposed shareholder was required to make certain warranties under the SHA and the DoA upon the delivery of the DoA. Those warranties were enforceable whether or not the proposed shareholder had validly executed a transfer of shares. One such warranty was that the proposed shareholder was entitled to be registered on the SPV’s list of members. The SHA and DoA contemplated a situation where a proposed shareholder was not yet registered as a member of the SPV, and created binding obligations for such a scenario. Foxton J concluded that “by entering into the Deed of Adherence…certain contractual obligations which are intended to apply even in circumstances in which the terms of the SHA were not in all respects binding upon [the proposed shareholder]”.

The Commercial Court then followed the wording of the SHA and held that the delivery of an executed DoA was sufficient to become party to the SHA – whether or not the party became a validly registered shareholder. Foxton J, citing Tolley’s Company Law Service, noted in this regard that it was frequently the case that a deed of adherence will have the effect of making a signatory a party to an SHA before the formal transfer of shares is completed.

The Commercial Court ultimately held that because HUO delivered an executed DoA, it became party to the SHA even though (as assumed for the purposes of the proceedings) it never became a shareholder in the SPV. Foxton J emphasised that he reached this conclusion by reading the contract between the parties as a whole (considering Wood v Capita Insurance Services Limited [2017] UKSC 24 – see our digest of this case here).

Was HUO covered by the arbitration clause?

Foxton J addressed separately the issue of why HUO joining the SHA led to the dismissal of NDK’s challenge. The LCIA arbitration clause was expressed in very wide terms, so it included within its scope the parties’ dispute as to the validity of the SHA. Any conclusion to the contrary would result in a “very surprising” outcome. It would mean that the SHA and the DoA created obligations between NDK and HUO, yet the mechanism to settle disputes as to those obligations was inapplicable.

Foxton J also relied in his analysis upon the Fiona Trust principle, which holds that arbitration clauses governed by English law will be interpreted with a presumption that the parties, as rational businessmen, intend it to apply to all disputes arising from the relationship between the parties. It would have been “commercially absurd” for the parties to have intended for the SHA validity dispute between current shareholders (NDK and K Co) to be arbitrated, but for the very same dispute between a proposed shareholder and a current shareholder (HUO and NDK) not to be arbitrated. HUO was thus party to the arbitration clause and NDK’s s. 67 challenge failed.

Foxton J’s dismissal of this challenge also had the effect of rejecting the remainder of NDK’s challenges.

What are the practical lessons going forward? 

This decision illustrates the practical, pro-arbitration approach of the English courts in the joint venture context. Foxton J’s analysis of the key documents considered the parties’ agreement as a whole and accounted for the commercial need to ensure continuity of shareholding. A robust application of the pro-arbitration Fiona Trust principle followed, with Foxton J again focussing on the practical outcomes of his reasoning. The judgment reinforces that in England and Wales, the commercial arrangements of businesses will be upheld and their decision to arbitrate respected. This approach will continue to be one of the features of arbitration in this jurisdiction that makes England and Wales a popular choice as an arbitral seat for commercial parties.

The case also reminds parties to punctually raise arguments during the arbitration if they are to be used at the set-aside stage. Foxton J noted that NDK failed to raise its jurisdictional arguments in this proceeding during the arbitration, though the point was left undecided in this case. Under section 73 of the AA, a party that fails to raise certain arguments or challenge a certain ruling may lose the right to make those arguments upon enforcement.

For more information, please contact Craig Tevendale, Partner, Jake Savile-Tucker, Senior Associate, or your usual Herbert Smith Freehills contact.

The authors would like to thank Dan Kulebiakin for their assistance in preparing this blog post.

Craig Tevendale
Craig Tevendale
Partner
+44 780 9200648
Jake Savile-Tucker
Jake Savile-Tucker
Senior Associate
+447710085562

English Commercial Court dismisses s68 challenge but observes that the arbitrators exceeded their powers in granting interim relief in the form of an award

On 16 September 2022, the English Commercial Court delivered its judgment in EGF v HVF, HWG, TOM, DCK, HRY [2022] EWHC 2470 (Comm) in respect of a London-seated arbitration under UNCITRAL Rules, dismissing a challenge to a partial award. The challenge was made partly under section 68 of the English Arbitration Act 1996 (the “Act“).  Mr Justice Baker dismissed the challenge on the basis that substantive injustice had not been proven. However, he commented (obiter), that in his view, the arbitrators had exceeded their powers in making an interim payment order in the form of an award.

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Paula Hodges QC to participate in event celebrating 25 years of the English Arbitration Act

The Arbitration Act 1996 came into force on 31 January 1997. Exactly 25 years later, this event will celebrate its success and consider what the future may hold for the Act. There will be an afternoon of presentations offering differing perspectives, past and present, as well as a debate “This House believes that the Arbitration Act 1996 remains best in class“, in which Paula Hodges QC will be participating.

Other speakers will include Lord Saville, Prof. John Uff QC, Dame Sara Cockerill DBE, Prof. Sarah Green, Jacomijn van Haersolte-van Hof, Claudia Salomon, David Steward, Jonathan Wood, Sylvia Noury QC, Toby Landau QC, Duncan Matthews QC, Karyl Nairn QC, Audley Sheppard QC, Louis Flannery QC, Prof. Stavros Brekoulakis and Duncan Bagshaw.

WHEN: Monday, 31 January 2022

TIME: 3pm-6pm
WHERE: Old Hall, The Honourable Society of Lincoln’s Inn. London WC2A 3TL

The event will be hybrid, with registration for online viewing available. Venue capacity is limited so register now to ensure in-person attendance.

Please register to attend the conference here.

To join the celebratory drinks reception after the conference, you can register here.

For more information, please contact Paula Hodges QC, Head of Global Arbitration Practice, Vanessa Naish, Professional Support Consultant, Elizabeth Kanor, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

Paula Hodges QC
Paula Hodges QC
+44 20 7466 2027
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Elizabeth Kantor
Elizabeth Kantor
Professional Support Lawyer
+44 20 7466 2406

Law Commission Review

The Law Commission of England and Wales has today announced that it will conduct a review of the English Arbitration Act 1996, the principal legislation governing arbitrations in England, Wales and Northern Ireland, as part of its 14th Programme of Law Reform. The Law Commission has stated that the review aims to ensure that the UK remains at the forefront of international dispute resolution, and that the over-arching aim will be to “maintain the attractiveness of England and Wales as a “destination” for dispute resolution and the pre-eminence of English law as a choice of law“.

The Law Commission initially consulted on possible reform earlier this year, and received a number of submissions on areas of the Act that could be included, including a submission from Herbert Smith Freehills.  Although the scope of the review is yet to be determined, the Law Commission has stated that possible areas that will be included are:

  • the power to summarily dismiss unmeritorious claims or defences in arbitration proceedings
  • the courts’ powers exercisable in support of arbitration proceedings
  • the procedure for challenging a jurisdiction award
  • the availability of appeals on points of law
  • the law concerning confidentiality and privacy in arbitration proceedings
  • electronic service of documents, electronic arbitration awards, and virtual hearings.

The Law Commission also intends to consider the scope for introducing trust law arbitration, alongside wider work on modernising trust law. The Law Commission will launch the review during the first quarter of 2022 and aims to publish a consultation paper in 2022. Herbert Smith Freehills will continue its active engagement in the process.

For more information, please contact Paula Hodges QC, Craig Tevendale, Andrew Cannon, Vanessa Naish or Liz Kantor.

Paula Hodges QC
Paula Hodges QC
Partner
+44 20 7466 2027
Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445
Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852
Vanessa Naish
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112
Elizabeth Kantor
Elizabeth Kantor
Professional Support Lawyer
+44 20 7466 2406

English High Court sets aside award for failure to properly cross-examine a witness on a core issue and basing its decision on matters not properly argued by the parties

In P v D [2019] EWHC 1277 (Comm), the English High Court set aside an arbitral award on the basis that the tribunal had reached a finding of fact on a core issue that had not properly been put to a witness in cross-examination and that the tribunal had based its decision on a case not properly argued by the parties. Under s68 of the Arbitration Act 1996 (the “Act”), the court has the power to set aside an award on grounds of serious irregularity. It is rare for the court to exercise this power – although that does not deter aggrieved parties from submitting applications to set aside. The judgment gives important guidance on the court’s approach on this important procedural issue, and addresses considerations of fairness to witnesses in cross-examination, and to the parties putting those witnesses forward.

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APPLICATION FOR EXTENSION OF TIME TO BRING SECTION 67 CHALLENGE WHICH WAS 959 DAYS LATE REFUSED BY ENGLISH COURT

The English High Court’s decision in State A v Party B [2019] EWHC 799 (Comm), handed down in January 2019 but only recently published, concerned the court’s dismissal of an application to extend the time for bringing a jurisdictional challenge under section 67 of the Arbitration Act 1996 in circumstances where the challenge was 959 days late (available here).

The decision found that where the delay is lengthy and the application for an extension is based on fresh evidence, an extension will only be justified by fresh evidence that is “transformational” or “seismic“. The decision illustrates the importance that the English court places on the timeliness of challenges to awards and the high threshold that must be met in order to obtain an extension.

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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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English court endorses typical use of tribunal secretary in LCIA arbitration

The English Court has rejected an arbitrator challenge under s24 of the English Arbitration Act 1996 (the Act) on the basis of alleged "over-delegation" of their duties to their secretary. The Court's decision was based on a review of the Act, the LCIA Rules 1998, the various guidelines on the use of Tribunal Secretaries, academic commentary and previous English case law. In addition, the Court noted that it should be slow to depart from the conclusions of the LCIA Court on the same grounds of challenge.

This is a valuable judicial discussion of the practical use of tribunal secretaries and demonstrates that the Court will give robust consideration to whether the grounds of s24 are made out with regard to the use of a secretary.  

See P v Q 2017 EWHC 194 (Comm).

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UK Supreme Court rules that no security may be ordered when challenging enforcement of arbitration awards

The UK Supreme Court has overturned a Court of Appeal decision requiring Nigerian National Petroleum Corporation ("NNPC") to provide US$ 100m in security while the case was remitted to the Commercial Court to decide on IPCO (Nigeria) Limited's ("IPCO") challenges to enforcement of an award. The Supreme Court held that while the English courts had the express power to make such orders for security under section 103(5) of the Arbitration Act 1996 (the "Act") in the context of an adjournment pending a challenge to the award in the jurisdiction where it was made, the present proceedings rather concerned a challenge to the enforcement of the award under section 103(3) of the Act. As such, no power to order security was available under the Act or the scheme of the New York Convention 1958 (the "Convention").: IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2017] UKSC 16.

The Supreme Court also provided guidance on the relationship between the Act and the New York Convention (the "Convention"), on which the relevant sections of the Act are based.

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