KEY ISSUES IN ARBITRATION OF DERIVATIVES AND COMPLEX FINANCIAL DISPUTES: VIRTUAL PUBLIC CONSULTATION ON THE REVISION OF THE P.R.I.M.E. FINANCE RULES

Arbitration can provide an effective alternative to the courts for the resolution of disputes concerning derivatives and other complex financial products. In particular, given the inherent flexibility and emphasis on party autonomy, the arbitral process can be crafted to address the specific issues most likely to arise. Further, an arbitral tribunal experienced in financial markets law and practice can be appointed to resolve the dispute where appropriate. The advantages of arbitrating such disputes are explored in more detail in our article here.

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2020 SURVEY OF TMT SECTOR INVESTOR-STATE ARBITRATION

Technology, media, and telecommunications (“TMT”) as an overarching sector has experienced sustained growth and turmoil for a number of years characterised by cross-border collaboration, expansion, consolidation and, of course, innovation. The sector (and in particular the telecommunications sector) remains a focus for direct investment and capital demands for the underlying infrastructure such as full fibre networks, 5G networks, data centres, mobile towers and subsea cables – driven by the ever-increasing demand for data both at a consumer and enterprise level – remain high. Against this background, we continue to see investor-state disputes arise and develop into arbitrations. This article aims to consider any new trends in this area, and to offer some thoughts on the potential implications for investors and states.

For readers who are interested, our last survey on investor-state arbitrations in the TMT sector in 2018 may be found here. The number of active TMT cases has increased further from our last report, where we concluded that investor-state arbitration in this sector was “on the rise“. We identified 68 active cases in our last report – there are 71 active cases between May 2019 and May 2020.

While the incidence of disputes and claims continues to be high, so too does the percentage of settlements. This is perhaps reflective of the global need to build out the infrastructure support innovation and the delivery of content, supporting consumers interacting digitally on the move, machines communicating with machines and SMEs, enterprises and governments moving to the cloud, which tends to provide incentives for both sides to solve disputes as they arise and threaten investment and development, rather than treat them as reasons to abandon projects and write-off growth opportunities.

Introduction

The broad purpose and character of investor-state arbitrations will be familiar to many readers.  Those who require a primer or reminder of the essential characteristics may listen to our podcast series here. Investor-state arbitrations exist to enable foreign investors aggrieved by the conduct of a ‘host’ state to bring claims directly against the host state on defined grounds based on standards of treatment promised by that host state to investors from a particular state or group of states which are typically contained in an International Investment Agreement (“IIA”). Such IIAs are intended to offer a safe environment to encourage foreign investment between two states, or within a connected group of states. Typical protections will include a promises of non-discrimination, fair and equitable treatment (“FET”), and a commitment to compensate for any expropriation conducted by the host state (e.g. on nationalisation). Where an investor considers that these promised protection have been, or will be, breached, the investor may bring claims directly against the host state pursuant to the dispute resolution mechanism provided for in the IIA (which will often be international arbitration). In this regard, IIAs enjoy a number of advantages over relying on claims made between or through states, or in the national courts of the host state, including (1) providing a direct cause of action for investors against the host state; (2) allowing for claims to be heard by a neutral tribunal; (3) promising a higher prospect of enforcement and higher level of finality; and (4) offering greater procedural flexibility.

 Statistical Trends

Our main sources of case information come from the International Centre for Settlement of Investment Disputes (“ICSID”) database and The United Nations Conference on Trade and Development (“UNCTAD”) Investment Dispute Settlement Navigator, accessible here and here, respectively. Where detailed case information is not available or is limited due to parties’ choice of non-disclosure, we have gathered information from case reporters or news bulletins, which we cite below.

We recorded 71 active investor-state arbitrations in the TMT sector between May 2018 and May 2020, up from 68 cases in May 2018. According to ICSID, the information and communication sector made up 6% of the total ICSID caseload in 2019.[1] The sector also constituted 6% of the new cases registered in 2019 (compared to 8% in 2017).[2]

We then recorded the most up-to-date status of the cases – settled, decided in favour of the investor, decided in favour of the state or discontinued. After compounding the data, we found that between May 2018 and May 2020, 42% of the concluded cases in the TMT sector were settled before a final award, see Figure 1.[3] This is a high rate of settlement and supports the general understanding that the initiation of proceedings may give investors more leverage, and states a greater impetus, to negotiate a satisfactory settlement. There are bound to be other unreported disputes that were settled at an early stage prior to commencing arbitration.

Figure 1

Looking into the distribution of cases amongst the telecommunications, media and technology sub-sectors, we observe that a great majority of cases have arisen from the telecommunications industry, which amount to 75% of the total caseload of both concluded and pending cases for the TMT sector, see Figure 2 below.

Figure 2

 

The large amount of investment treaty arbitrations in telecommunications perhaps reflect both active cross-border investment and the ‘host’ governments’ often active involvement and regulation.  Of course, it may also reflect the more mature and embedded nature of much of the investment in the telecoms sector.

Figure 3

The top four states that appear as respondents within our survey are: India (seven cases),[4] Turkey (four cases),[5] Poland (four cases),[6] and the Czech Republic (four cases).[7]

The Technology behind the Disputes

As observed above, 75% of the TMT investment arbitration cases captured by our survey are within the telecommunications sub-sector. Mobile telecommunications services and networks have attracted global investors venturing into different countries in the past years, and indeed decades. Within our survey period alone (which covers roughly two years), we have identified on-going or newly concluded disputes concerning 2G mobile technology spectrum resources in India,[8] 2G mobile technology licenses in India,[9] 4G mobile technology network development in Poland,[10] mobile operation services in Nepal,[11] and wireless spectrum licenses in Canada,[12] to name a few.

The marked concentration of investor-state disputes in the mobile telecommunications industry is perhaps not surprising. The industry is capital-intensive, in both tangible and intangible forms. It requires a substantial amount of risky, high up-front sunk cost investment over a long period of time before investments reap returns. The mobile communications industry is often heavily regulated by the host government (in particular in developing economies), and the state or the state-owned enterprises often play a pivotal role. These characteristics of the industry and high sensitivity to state action or inaction create fertile ground for disputes to arise.

Cross-border investment played – and continues to play – a key role in the global deployment of 4G mobile technology networks and preceding generations of mobile technology. As the world races to the development and deployment of ubiquitous 5G mobile technology networks, cross-border investment will continue to play a key role. Of course, international investment opportunities are not limited to the underlying 5G network infrastructure. For instance, the increased peak speeds, lower latency and more efficient traffic handling characteristics of 5G mobile technology  will enable massive IoT – the ability to connect millions of things to the Internet – which in turn will stimulate international investment in  services and solutions in adjacent sectors such as transport and energy.

The foreseeable high volume of cross-border investment in mobile telecommunications means that both investors and states may benefit from our observations of some recurring themes that led to investor-state disputes in the TMT sector which we set out below based on the cases we surveyed.

Dealing with Changing Regulations

The TMT sector, especially the telecommunications industry, is highly regulated. When host governments introduce or change regulations this may significantly affect the profitability of investments especially if these decisions are unexpected and therefore had not been factored into investors’ original business plans. We identified multiple cases submitted as a result of the host government’s change of regulations and policies.

Global Telecom Holding S.A.E. v. Canada[13]

The Egyptian claimant (“GTH”) entered into a joint venture with other Canadian investors to obtain wireless spectrum licenses which were auctioned in Canada in 2008. The joint venture operated mobile telecommunications services in parts of Canada. GTH’s investment in the joint venture included an option to acquire a controlling stake in the joint venture. However, GTH was not allowed to take over the joint venture pursuant to a national security review under the Investment Canada Act.

At the time of investment, Canada had in place a transfer restriction that prohibited GTH from selling its interest in the joint venture to other incumbent operators in Canada within five years of its investment (“Transfer Framework”). GTH intended to sell its interest following the end of five years. However, this was not allowed due to a regulatory change in Canada’s Transfer Framework. GTH eventually exited the market in late 2014 by selling its shares to one of the original partners in the joint venture, allegedly suffering a loss of US$927 million.

GTH alleged that Canada breached several of its obligations under the Canada-Egypt Foreign Investment Promotion and Protection Agreement (“FIPA”) including the obligation to accord fair and equitable treatment, full protection and security, national treatment and to refrain from imposing restrictions on the transfer of investments and returns.

The Tribunal ultimately held by a majority that neither the Canadian government’s national security review, nor the change to the Transfer Framework breached its obligations under the Canada-Egypt FIPA, including in the provision of fair and equitable treatment. One key factor highlighted in the Tribunal’s reasoning was that the passage of the five-year “locked-in” period was a necessary but not sufficient condition to sell the stakes to other Incumbent operators. GTH should not have had any reasonable expectation that the sale of its interest would be automatically approved by the Canadian regulators after the expiry of five years.

Deutsche Telekom AG v. The Republic of India[14]

Following two rounds of equity investment in 2008 and 2009, Deutsche Telekom held a 20% interest in a company called Devas Multimedia Private Limited (“Devas”), via its wholly-owned Singaporean subsidiary Deutsche Telekom Asia Pte Ltd (“DT Asia”). The Indian state-owned entity Antrix and Devas had in place a 2005 agreement to lease the S-band electromagnetic spectrum capacity provided by two orbiting Indian satellites (“Devas Agreement”).

In February 2011, the Indian Cabinet Committee on Security (“CCS”) approved the annulment of the Devas Agreement (“CCS decision”). When Deutsche Telecom brought arbitration alleging India’s breach of the FET obligation under the Germany-India BIT, India justified its decision by invoking the “essential security interests” carve out of the Germany-India BIT. The investor also made alternative claims direct and indirect expropriation, and breach of full protection and security. After analysing in detail the events that led to the CCS’ decision, the tribunal found that “a mix of reasons or objectives led to the annulment of the Devas Agreement”. These include military-related concerns (which did seem to fall under the essential security rubric), as well as other rationales, including the perception that Devas did not pay enough for its contractual rights and the desire to use satellite space for other “societal needs, such as train-tracking, disaster management, tele-education, tele-health and rural communication”.

Given this mix of rationales, the Tribunal turned to examine “whether the CCS decision was necessary to protect those interests, in the sense that it was principally targeted to safeguard ‘to the extent necessary’ the defence and other strategic needs that fall within the purview of “essential security interests”. The Tribunal found that India had “failed to establish that the CCS decision was necessary to protect” its essential security interests.

On that basis, the Tribunal found CCS’ cancellation of the Devas Agreement arbitrary and lacking transparency, and in breach of the FET obligation under the Germany-India BIT.

India sought to challenge the Award in the Swiss Federal Tribunal, being the court of supervision of the arbitration. In December 2018, the First Civil Law Court of the Federal Tribunal rejected India’s application for the annulment of the Award.

Telcell Wireless, LLC and International Telcell Cellular, LLC v Georgia[15]

A subsidiary of the two claimant companies (“Magticom”) was embroiled in a dispute with Georgia’s telecommunications regulator, the National Communications Commission (“GNCC”). Magticom announced in 2018 that it would be increasing prices for mobile data tariffs, but it delayed its plans after the GNCC protested against the price increases. In early 2019, Magticom and another local competitor reportedly made another announcement about increasing their tariffs. However, in February 2019, the GNCC again suspended the price hike before it could come into effect.

The facts of this case are still scarce due to limited disclosure by the parties. This appears to be a dispute caused by the host government’s price control and regulations on mobile communications services. The claim is brought under the Georgia – U.S. BIT, and the tribunal has also been recently formed.

Continuation of Concessions/Contracts

In a highly regulated sector, the concession right or the licence is of course key to the value of an investment. Several cases in our survey revealed the potential for mismatch in the expectations of the renewal of such rights.

Neustar, Inc v Republic of Colombia[16]

Between 2009 and February 2020, Neustar operated the .CO internet domain under a 10 year concession agreement with the Colombian government, which, according to the company, was renewable for another 10-year term. The dispute arose when Colombia’s Ministry of Technology, Information and Communication refused to renew the concession agreement.

Neustrar initiated arbitration proceedings in March 2020 with ICSID based on the Colombia-US Trade Promotion Agreement. The case is currently at an early stage, and further details are yet to emerge.

Joshua Dean Nelson. Jorge Luis Blanco and Tele Fácil v. United Mexican States[17]

Nelson, Blanco and a Mexican national (“Miguel Sacasa”) founded Tele Fácil in 2009 in a bid to enter the Mexican market to provide telephone, internet and cable television services. The company was awarded a concession by the Mexican government in 2013.

The dispute concerns a series of measures taken by Mexico’s state telecoms regulator, the Federal Institute of Telecommunications (“IFT”). Tele Fácil needed to connect indirectly via a third party with the dominant telecommunications service provider (“TelMex”), however Tele Fácil and TelMex had differences relating to some of their commercial terms. In 2014 , the IFT ruled unanimously in Tele Fácil’s favour ordering both sides to sign an agreement to interconnect indirectly via a third party within 10 business days for a term of three years. TelMex, however, challenged IFT’s ruling and sent back a draft agreement to the claimants which reduced the duration of the contract from three years to 21 days. The claimants referred the matter back to the IFT for the implementation of its rulings.

The IFT then undid its prior ruling in April 2015, deciding instead that all previously agreed terms between Tele Fácil and TelMex, including the price to be paid, were no longer valid.

The case was brought to ICSID in 2016 based on NAFTA, on the grounds of unlawful expropriation and breach of FET obligations.

The claimants allege that the IFT originally recognised their legitimate investment rights, but then “dramatically, unjustifiably and illegally” reversed its own rulings. They argue that the IFT’s reversal of its original decision amounts to an expropriation of its investment, as one of Tele Fácil’s principal assets, the agreed terms for interconnection, was “deprived of all value” and its related rights “extinguished”.

The Claimants lost the case on both grounds.[18] One fatal flaw in their case was that the draft agreement on the rates between Tele Fácil and Telmex was never signed. Tele Fácil therefore had no “rights under the Interconnection Agreement”, hence no investment to be expropriated of. The Tribunal also found no evidence suggesting that IFT’s second ruling was arbitrary, discriminatory, grossly unfair or lacking due process. Consequently, the FET claim also failed.

Public Joint Stock Company Mobile TeleSystems v. Turkmenistan (II)[19].

MTS, which is part of the Russian conglomerate Sistema headed by Vladimir Yevtushenkov, invested in the telecommunications services in Turkmenistan. Its licence was valid until July 2018.

MTS attempted to negotiate with Turkmenistan’s regulatory authorities and the state-owned companies to extend permission to use frequencies and other resources necessary to operate in the country. Turkmenistan’s position is that while MTS’ licence for communications services was valid until July 2018, the company’s contract with TurkmenTelekom expired and the state entity had no obligation to extend it.

MTS was forced to suspend its operations in Turkmenistan. It alleges that the actions of state-owned entity TurkmenTelekom resulted in the disconnection of its local subsidiary’s international and long-distance zonal communication services and internet access, and harmed its investment.  It has brought an arbitration under the Russia-Turkmenistan BIT which is ongoing.

Fines and taxes

Our survey also identified a number of disputes related to fines, taxes or other levies imposed by the ‘host’ state within the survey period, some with substantial amounts of money at stake.

Telefónica, S.A. v. Republic of Colombia[20]

In 2017, a domestic arbitral tribunal at the Bogota Chamber of Commerce issued an award against the local subsidiaries of Telefónica and a Mexican company (“América Móvil”), for failing to comply with contractual obligations to revert ownership of certain telecoms infrastructure to the state in 2013. Telefónica was reportedly fined US$1.02 billion.

Although Telefónica paid the fine, it first put Colombia on notice of a dispute under the Colombia-Spain BIT  for the fine. In March 2016. Negotiations between the parties were attempted but eventually broke down. In February 2018, Telefónica submitted the disputes to ICSID, claiming Colombia’s indirect expropriation in the form of the fine, and breach of FET obligations.  The proceeding is reported to be at the document production stage as at mid-2020.

Axiata Investments (UK) Limited and Ncell Private Limited v. Federal Democratic Republic of Nepal[21]

Axiata acquired an indirect 80% interest in Ncell – Nepal’s largest mobile network operator – via the subscription of 100% shares in Reynolds Holding Limited. The dispute relates to the imposition of a capital gains tax on Axiata’s acquisition of Reynolds Holding Limited from TeliaSonera in 2016, levied on Axiata’s subsidiary Ncell. The Nepalese government demanded over US$348 million, but this was resisted by the claimants.

Axiata and Ncell commenced proceedings against Nepal at ICSID in May 2019, based on the UK-Nepal BIT. The proceeding is on-going.

Conclusion

The two year survey period (May 2018- May 2020) in our study provides an illuminating snapshot of the sorts of issues are leading to investor-state arbitrations in the TMT sector.

Changes to regulations, licence renewals, and regulatory fines and levies are aspects of the TMT environment that most companies will encounter in their operations.  However, it is the capacity for such matters fundamentally to undercut the profitability of a cross-border investment, coupled with the investment protections promised by host states seeking to attract such investment, that lead to such matters becoming the focus on investment treaty claims.

Investors, and regulators, need to be alive to the possibility of such disputes leading to investment treaty claims.  Even before then, investors also need to be aware of the existence of the network of investment treaties, and the requirements to fall within the scope of the protection of such treaties, so that such recourse will be available to them should the worst happen.

In a world when remote connection, developing technologies, and home media consumption have become more important than ever, the focus and investment on the TMT sector will be greater than ever.

For more information, please contact Nicholas Peacock, Partner, Aaron White, Partner, Peter Chen, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock

Nicholas Peacock
Partner
+44 20 7466 2803

Aaron White

Aaron White
Partner
+44 20 7466 2188

Peter Chen

Peter Chen
Associate


[1] The ICSID Caseload Statistics, Issue 2019-2, https://icsid.worldbank.org/en/Documents/ICSID_Web_Stats_2019-2_(English).pdf, p. 12.

[2] The ICSID Caseload Statistics, Issue 2019-2, https://icsid.worldbank.org/en/Documents/ICSID_Web_Stats_2019-2_(English).pdf, p. 12, p. 25.

[3] Telefónica S.A v. Mexico, ICSID Case No. ARB(AF)/12/4; Orange SA v. Jordan, ICSID Case No. ARB/15/10; Dunkeld v. Belize (II), PCA Case No. 2010-21; Dunkeld v. Belize (I), PCA Case No. 2010-13; Orascom Telelcom Holding S.A.E v. Algeria, PCA Case No. 2012-20; Millicom International Operations v. Senegal, ICSID Case No. ARB/08/20; Mobile TeleSystems v. Turkmenistan, ICSID Case No. ARB(AF)/11/4; Vivendi v. Poland, UNCITRAL; MTN v. Yemen, ICSID Case No. ARB/09/7; E.T.I. v Bolivia (II), UNCITRAL; E.T.I. v Bolivia (I), ICSID Case No. ARB/07/28; Telefónica v. Argentina, ICSID Case No. ARB/03/20; France Telecom v. Argentina, ICSID Case No. ARB/04/18; Motorola v. Turkey, ICSID Case No. ARB/04/21; IBM v. Ecuador, ICSID Case No. ARB/02/10; Lemire v. Ukraine (I), ICSID Case No. ARB(AF)/98/1; Ameritech v. Poland, UNCITRAL; France Telecom v. Poland, UNCITRAL; Telekom Malaysia v. Ghana, PCA Case No. 2003-03; France Telecom S.A. v. Argentine Republic, ICSID Case No. ARB/04/18; PT Ventures, SGPS, S.A. v. Republic of Cabo Verde, ICSID Case No. ARB/15/12.

[4] Astro and South Asian Entertainment v. India, UNCITRAL; Deutsche Telekom v. India, UNCITRAL; Khaitan Holdings Mauritius Limited v. India, UNCITRAL; Maxim Naumchenko, Andrey Poluektov and Tenoch Holdings v. India, PCA Case No. 2013-23; Vodafone v India (I), PCA Case No. 2016-35; Vodafone v India (II), UNCITRAL; Devas v. India, PCA Case No. 2013-09.

[5] Motorola Credit Corporation, Inc. v. Republic of Turkey, ICSID Case No. ARB/04/21; Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20; Cascade Investments NV v. Republic of Turkey, ICSID Case No. ARB/18/4; Ipek Investment Limited v. Republic of Turkey, ICSID Case No. ARB/18/18.

[6] Juvel and Bithell v. Poland, ICC; Ameritech v. Poland, UNCITRAL; France Telecom v. Poland, UNCITRAL; Vivendi v. Poland, UNCITRAL.

[7] Nagel v. Czech Republic, SCC Case No. 049/2002; CME v. Czech Republic, UNCITRAL; Lauder v. Czech Republic, UNCITRAL; European Media Ventures v. Czech Republic, UNCITRAL.

[8] Khaitan Holdings Mauritius Limited v. India, PCA Case No. 2018-50.

[9] Astro All Asia Networks and South Asia Entertainment Holdings Limited v. India (UNCITRAL Arbitration).

[10] Juvel Ltd and Bithell Holdings Ltd. v. Poland, ICC Case No. 19459/MHM.

[11] Axiata Investments (UK) Limited and Ncell Private Limited v. Federal Democratic Republic of Nepal, ICSID Case No. ARB/19/15.

[12] Global Telecom Holding S.A.E. v. Canada, ICSID Case No. ARB/16/16.

[13] ICSID Case No. ARB/16/16 – Tribunal rendered award on 27 March 2020.

[14] PCA Case No. 2014-10, award published in September 2018. On 11 December 2018, India failure to set aside the award in the Swiss Court.

[15] ICSID Case No. ARB/20/5 – request for arbitration on 12 February 2020.

[16] ICSID Case No. ARB/20/7 – ICSID registered the request for arbitration on 9 March 2020.

[17] ICSID Case No. UNCT/17/1.

[18] ICSID Case No. UNCT/17/1 – Award.

[19] ICSID Case No. ARB(AF)/18/4 – Tribunal formed on 18 December 2018.

[20] ICSID Case No. ARB/18/3.

[21] ICSID Case No. ARB/19/15.

RECENT DEVELOPMENTS IN INDIA-RELATED ARBITRATION

Herbert Smith Freehills has issued the latest edition of its India arbitration e-bulletin.

In this issue, we consider various court decisions which cover topics such as the limitation period for enforcement of foreign awards, the arbitrability of fraud, ‘patent illegality’ as a ground to set aside awards, and granting of interim directions against non-signatories to an arbitration agreement. We also consider India-related bilateral investment treaty news such as the tribunal’s decision in the Vodafone tax dispute and Nissan’s settlement of its claim against India. We also touch on other developments such as updates issued to the Indian Arbitration and Conciliation Act 1996 and the London Court of International Arbitration Rules.

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ENGLISH HIGH COURT CHARACTERISES UNSUCCESSFUL CHALLENGE TO AWARD UNDER S68 AS “SEEKING TO ATTACK AN ARBITRATOR’S FINDINGS OF FACT AND HER EVALUATION OF THE EVIDENCE” UNDER GUISE OF PROCEDURAL IRREGULARITY

In the recent decision in ASA v TL [2020] EWHC 2270 (Comm), the English High Court (the “Court”) rejected an application brought by ASA under s68 Arbitration Act 1996 (the “Act”) that sought to challenge an arbitral award on the basis of two alleged serious procedural irregularities.

ASA had contended that the arbitrator had decided two issues on points which ASA did not have a fair opportunity to deal with, as they had not been raised by either party or their experts, and departed from common ground.

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RUSSIAN MINISTRY OF JUSTICE CLARIFIES RUSSIAN ARBITRATION LEGISLATION UPON JOINT REQUEST OF HKIAC AND VIAC

In February 2020, the Hong Kong International Arbitration Centre (the “HKIAC”) and the Vienna International Arbitration Centre (the “VIAC”) jointly applied to the Russian Ministry of Justice (the “MOJ”) and the Council for the Development of Arbitration at the MOJ (the “Council”) for clarification of certain “grey areas” of Russian Arbitration legislation (the “Joint Request“). Both arbitration institutions have recently published the response issued by the Working Group No. 2 on Foreign Arbitral Institutions of the Council (the “Working Group”) on the questions posed in the Joint Request (the “Response“)[1]. Although the position in the Response was declared to be non-binding on the Russian courts, the Working Group’s views might impact Russian court practice on the reformed arbitration legislation.

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A decade of emergencies in Stockholm

The SCC Arbitration Institute was at the forefront of the development of emergency arbitration proceedings, which now constitute a permanent part of the international arbitration landscape. The end of 2019 marked a decade since the arbitral institution’s innovative rules amendment. In April this year, the SCC released a report analysing its emergency arbitration statistics, which demonstrate the success of these once novel provisions.

The introduction of emergency arbitration

In January 2010, the SCC introduced into its rules Appendix II, which provided for emergency arbitration. While there were some precursors to emergency arbitration rules (such as the ICC pre-arbitral referee procedure and the ICDR article 37 emergency measures provisions), the emergency arbitration rules implemented by the SCC represented one of the first examples of modern emergency arbitration provisions. Since these rules were promulgated, other leading institutions have followed suit, issuing their own emergency arbitration rules with a variety of refinements, for instance the SIAC, the ICC, the HKIAC and the LCIA.

The emergency arbitration rules allowed parties for the first time to make an application to the SCC for the urgent appointment of an emergency arbitrator who would be empowered to make emergency decisions on interim measures before the case had been referred to the arbitral tribunal. An emergency decision on interim measures was to be made not later than five days from the date when the application was referred to the “Emergency Arbitrator”. The SCC board could extend the five-day time limit upon a reasoned request by the Emergency Arbitrator, or if otherwise deemed necessary.

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ENGLISH COURT GRANTS ANTI-SUIT INJUNCTION RESTRAINING FOREIGN PROCEEDINGS IN BREACH OF ARBITRATION AGREEMENT INCORPORATED BY REFERENCE IN BILLS OF LADING

In Seniority Shipping v City Seed Crushing Industries, “Joker”, [2019] EWHC 3541 (Comm), the English Commercial Court granted an anti-suit injunction restraining proceedings brought by City Seed before a Bangladeshi court in breach of an arbitration agreement incorporated by reference in the bills of lading under which the dispute arose (the “Bills of Lading”). The Court first found that the arbitration agreement had been effectively incorporated from the relevant voyage charter and considered the law applicable to this issue of incorporation. The Court then concluded that, despite some steps taken by Seniority Shipping in the foreign proceedings, there was no good reason not to grant the anti-suit injunction.

Background

Seniority Shipping Corporation (“Seniority Shipping”) were owners of the m.v. Joker, a ship which collided with a tanker within Bangladesh waters, causing damage to cargo. City Seed Crushing Industries (“City Seed”) – as holder of the Bills of Lading and the intended recipient of the cargo – then filed a suit in Bangladesh (the “Cargo Claim”). The Bangladeshi court ordered the arrest of the ship.

Seniority Shipping subsequently issued proceedings in the English Commercial Court and filed an application for an anti-suit injunction in respect of the Cargo Claim on the basis that any claims arising under or relating to the Bills of Lading should have been referred to arbitration. Seniority Shipping argued that:

  • the Joker was operating under a time charter between Seniority Shipping and DHL Project & Chartering Ltd (“DHL”) and a voyage charger between DHL and COFCO (the “Voyage Charter”).
  • Clause 6 of the Voyage Charter, entitled “Law & Arbitration Clause” provided that: (a) the Voyage Charter was governed by English law; and (b) disputes which have not been settled shall be referred to arbitration in London in accordance with the small claims procedure of the LMAA.
  • The Bills of Lading incorporated this arbitration agreement by reference. Based on the Congenbill 1994 form (a standard form designed to be used with charter-parties), the Bills of Lading provided that “all terms and conditions… of the Charter Party [i.e. the Voyage Charter], dated as overleaf, including the Law and Arbitration Clause, are herewith incorporated” (emphasis added).

The Commercial Court granted an interim injunction restraining City Seed from continuing or further prosecuting the Cargo Claim. While Seniority Shipping participated in the Cargo Claim before the Bangladeshi court (discussed below), City Seed did not participate in the action before the Commercial Court.

The Court’s decision

In its decision on the question of a final anti-suit injunction, the Court considered two issues: (a) was the incorporation of the arbitration agreement in the Bills of Lading effective; and (b) if so, should the Court grant an anti-suit injunction restraining the Cargo Claim in breach of the arbitration agreement?

Was the incorporation of the arbitration agreement effective?

The Court began its analysis by determining the law applicable to the issue of incorporation. Applying English conflict of laws rules, the Court noted that the question of whether the Bills of Lading incorporated the express choice of English law from the Voyage Charter would typically be governed by English law by virtue of Article 10(1) of the Rome I Regulation. This Article 10(1) provides that “the existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Regulation if the contract or the term were valid” (emphasis added). However, Article 10(1) is subject to Article 10(2) of the Rome Regulation (addressed below).

If the choice of English law was incorporated from the Voyage Charter, the question whether the arbitration clause from the Voyage Charter was incorporated in the Bills of Lading would also be governed by English law (based on conflict of law rules under English common law as the Rome I Regulation does not apply to arbitration agreements.)

The Court found that if the issue of incorporation was governed by English law, it could “straightforwardly” conclude that the arbitration clause from the Voyage Charter had been incorporated in the Bills of Lading: the Bills of Lading expressly incorporated the “Law and Arbitration Clause” from the Voyage Charter and that was sufficient as a matter of English law.

Therefore, the only question was whether Article 10(2) of the Rome I Regulation precluded the application of English law to the issue of incorporation. In essence, pursuant to Article 10(2), the effectiveness of the incorporation of the choice of English law from the Voyage Charter would be determined by reference to the law of Bangladesh (i.e. the law of the country in which City Seed has habitual residence) if it was unreasonable to apply English law to that question.

The Court found that it was “eminently reasonable and in accordance with the ordinary expectations of international trade” to determine the effectiveness of the incorporation by reference to English law. The Court explained that City Seed, as a buyer who wished to leave to its seller responsibility for arranging carriage, had full freedom to contract and specify the terms on which the seller should cause it to become party to the Bills of Lading with Seniority Shipping.  In the absence of evidence to the contrary, the Court considered that the Bills of Lading, which were in a very well-known, widely used form, may be taken to have conformed with City Seed’s contractual requirements. If City Seed did not wish to refer disputes to London-seated arbitration or agree to any other terms of the Bills of Lading or the Voyage Charter whose terms were incorporated in the Bills of Lading, it was free to choose to contract on that basis.

In conclusion, the Court held that the incorporation of the arbitration agreement in the Bills of Lading was effective and City Seed was therefore bound to refer any disputes relating to the Bills of Lading (in this case, concerning the damage to the cargo) to London-seated arbitration.  It also followed that the Cargo Claim – the proceedings before the Bangladeshi court – was in breach of this arbitration agreement.

Should the Court issue an anti-suit injunction restraining the Cargo Claim?

It is well settled that, where foreign proceedings are brought in breach of a London arbitration agreement, the Court would enforce the negative aspect of that arbitration agreement (i.e. the obligation on the parties not to bring such foreign proceedings) by granting an anti-suit injunction unless there are good reasons not to restrain the foreign proceedings (including if they are covered by the intra-EU Brussels Regulation). Referring to The Angelic Grace, [1995] 1 Lloyd’s Rep 87, the Court considered that it would be right to restrain the Cargo Claim unless (a) Seniority Shipping had allowed the Cargo Claim to proceed so far and/or had participated in it to such an extent that it would now be inappropriate to interfere, or (b) there was some other good reason why City Seed should not be restrained.

As to (b), the Court held that the burden of establishing good reason lay upon City Seed.  By choosing not to participate in the injunction proceedings, City Seed had chosen not to seek to discharge the burden.  Nevertheless, the Court did briefly consider whether the possibility that City Seed would not comply with the anti-suit injunction was a good reason not to grant it (on the basis that equity would be acting in vain). The Court concluded that this should not affect its analysis because: (i) the fact that City Seed would not comply with the anti-suit injunction could not be inferred simply from its refusal to participate in the proceedings and/or other facts; and (ii) the Court should not lightly hold that it would be acting in vain if it granted the anti-suit injunction – the prospect of contempt proceedings against City Seed, its directors and/or insurers should not be assumed to be without value.

As to (a), the Court considered why, and the extent to which, Seniority Shipping had participated in the Cargo Claim before the Bangladesh Court. The Court found that while there was not complete inactivity on Seniority Shipping’s part before the Bangladeshi Court, Seniority Shipping’s participation did not advance the Cargo Claim to such an extent as to make it now inappropriate to interfere.  In particular, the Court noted:

  • Seniority Shipping issued proceedings in the English court and applied for an anti-suit injunction “perfectly promptly” (as the Cargo Claim was filed on 14 May 2019 and the English court proceedings were issued on 3 June 2019).
  • Seniority Shipping had neither done nor allowed anything to be done to advance the proceedings before the Bangladesh Court. Its participation was restricted to steps which were reasonably required to free the Joker from arrest, which arrest was a result of a breach of contract by City Seed.
  • The steps taken by Seniority Shipping could not be regarded as voluntary submission to the jurisdiction of the Bangladeshi Court.
  • Those steps were taken by Seniority Shipping alongside “clear and repeated protest” that City Seed was obliged to refer the matter to arbitration.
  • Seniority Shipping’s three appearances before the Bangladesh Court to obtain extensions of time to file a Written Statement of Defence should not have been necessary and “were capable in principle, and if judged in isolation, of amounting to a voluntary submission … to the jurisdiction of the Bangladesh court”. However, in the context of the other steps Seniority Shipping had taken (the bullet points above), the Court did not view Seniority Shipping’s appearances as amounting to voluntary submission.

In conclusion, the Court found that there was no good reason not to restrain the foreign proceedings and granted a final anti-suit injunction.

Comment

The decision in Joker is a helpful reminder that where foreign proceedings are brought in breach of a London arbitration agreement, the English courts may be prepared to grant an anti-suit injunction. More significantly, the decision provides useful guidance for applicants faced with foreign proceedings and seeking anti-suit injunctions:

  • An application for an anti-suit injunction should be made promptly. We have previously covered cases (see, for example, here and here) where English courts have denied delayed applications for anti-suit injunctions.
  • Careful consideration should be given to whether any steps taken in the foreign proceedings may amount to voluntary submission to the jurisdiction of the foreign court.

As we have previously noted, if the claimant in the foreign proceedings does not voluntarily comply with the English court’s anti-suit injunction, and the applicant is unsuccessful in challenging jurisdiction in the foreign court, the applicant may wish to consider commencing arbitration proceedings (including, potentially for breach of the arbitration agreement) in order to obtain an award. This may be appropriate where the claimant in the foreign proceedings has assets in the UK or in another New York Convention country other than that in which the vexatious claims are brought.

For further information, please contact Nicholas Peacock, Partner, Divyanshu Agrawal, Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock

Nicholas Peacock
Partner
+44 20 7466 2803

Divyanshu Agrawal

Divyanshu Agrawal
Associate
+44 20 7466 2593

ENGLISH COURT OF APPEAL ORDERS NON-PARTY TO GIVE EVIDENCE IN SUPPORT OF NEW YORK-SEATED ARBITRATION

In a recent judgment, the English Court of Appeal determined that English courts do indeed have jurisdiction under s44(2)(a) of the English Arbitration Act (“the Act”) to issue an order compelling a non-party to an arbitration agreement to give evidence in support of arbitration proceedings seated both inside and outside England and Wales. In A and B v C, D and E [2020] EWCA Civ 409 (“the Court of Appeal Decision”), the Court of Appeal deviated from a line of first instance decisions which had held that the English courts did not have the power to make orders against non-parties under s44. Having considered the facts of the case, the Court of Appeal held that it would exercise its discretion and grant the order. Accordingly, the Court of Appeal overturned the High Court decision (“the First Instance Decision”), which we had previously written about here.

Background

C and another party applied to the Commercial Court to compel the third defendant, E (a non-party to the New York seated arbitration), to give evidence in England on certain bonus payments. It remained an issue in the underlying arbitration whether these were deductible from the amounts claimed by C and another party in the underlying arbitration. E was involved in the negotiations regarding these bonus payments. The arbitral tribunal in New York delayed the closing of the evidentiary phase of the arbitration to enable this appeal to be heard and judgment to be given.

The First Instance Decision

In the First Instance Decision, the court acknowledged that the wording of s44 of the Act might suggest that s44(2)(a) could apply to give the court the power to issue an order compelling a non-party to give evidence in support of a foreign seated arbitration. However, given the decisions in earlier cases on s44, this was not a simple question.

The Commercial Court referred extensively to the decisions in Cruz City Mauritius Holdings v Unitech Limited [2014] EWHC 3704 (Comm) (“Cruz City”) and DTEK Trading SA v Morozov [2017] EWHC 1704 (Comm) (“DTEK”). In light of these authorities, the Court determined that s44(2)(a) was confined to parties to the arbitration agreement. This was due to the following reasons:

  • s44 was stated to be subject to contrary agreement between the parties;
  • a number of other subsections pointed towards an intra-parties interpretation of s44 as a whole (such as subsections (4), (5), (6), and (7));
  • if Parliament had intended to permit the court to make third party orders in support of arbitrations around the world, it would have expressly said so in the Act; and
  • a difference in treatment between different subsections of s44 was unattractive without a difference in language.

Permission was given to appeal the decision to the Court of Appeal.

The Court of Appeal Decision

Overruling the First Instance Decision, the Court of Appeal unanimously found that English courts do have jurisdiction under s44(2)(a) to compel a non-party to give evidence in support of an arbitration. Lord Justice Males, who had decided Cruz City, issued a concurring opinion to explain his decision.

This decision was based on the following considerations:

  1. S44(1) must be read alongside s2(3) and s82(2):

The Court of Appeal considered that s44(1) of the Act must be read alongside s2(3) and s82(2) of the Act. When read with these provisions, it was clear that the English courts have the same powers in relation to foreign-seated arbitrations as they would in relation to civil proceedings before the High Court or a County Court.

  1. The meaning of “witnesses”:

The Court held that the phrase “the taking of evidence of witnesses” in s44(2)(a) was broad enough linguistically to include all witnesses, and not just those who were parties to the arbitration. As the Act distinguished between witnesses and the parties in other sections when necessary, if Parliament had intended any different definition of witnesses in s44(2)(a), confining the term to parties only, it would have made this clear. The Court observed that it would be rare for a witness to also themselves be a party to the arbitration.

  1. Powers of the court in relation to English court proceedings:

The key question was what powers the court had in relation to non-parties in English court proceedings. It was clear that the English courts had the power to compel non-parties to give evidence by deposition under the Civil Procedure Rules (“CPR”) 34.8. While the Court acknowledged that this would create the “somewhat anomalous” situation that an English court can give an order requiring a deposition in support of a foreign arbitration, when this would not be possible in support of foreign court proceedings, the Court decided that this did not justify interpreting s44(2)(a) as applying only to parties to the arbitration.

  1. The relevance of other s44 subsections:

The various other subsections of s44 did not point against interpreting s44(2)(a) as applying to non-parties. The opening words of s44(1) and s44(4) were better understood as “gateways”, which needed to be satisfied before the court could exercise its discretion. Once the threshold was met, the court had the same powers regarding the taking of evidence of witnesses as it would in English court proceedings. The Court further observed that while the Respondents noted that third parties would not be able to appeal (given the limitation in s44(7)), this issue was “more apparent than real”. In practice, a first instance judge is likely to grant permission to appeal, and in any event this issue was not enough to justify interpreting s44(2)(a) so that it did not apply to non-parties.

  1. Practical use of the power to order a deposition was irrelevant:

The Court of Appeal rejected the Respondents’ argument that the power to order a deposition in civil litigation proceedings was rarely used in practice and only in limited circumstances. There was no reason to justify interpreting CPR 34.8 narrowly such that it only applied when a witness was unable to attend trial. There was in fact no reason why the court should not have the power to order the deposition of a witness in support of a domestic arbitration, for example in circumstances in which a reluctant witness was unwell or about to travel abroad, but the arbitrators were unavailable to hear the evidence at that time.

  1. The Respondents’ interpretation of s44(2)(a) would give the sub-section “little or no content”:

The Court rejected the Respondents’ narrow interpretation of s44(2)(a) on the grounds that it would mean the sub-section had “no or little content”. It was clear from previous authority that the section could not apply to inwards letters of request from arbitral tribunals. While it could apply to outward letters of request to a foreign court in support of an arbitration seated within England and Wales, it was hard to see how this would ever be useful in respect of a foreign-seated arbitration.

  1. It was not relevant that different subsections of s44(2) might fall to be treated differently:

Any apparent inconsistency could be explained on the basis of different language in each subsection. The Court of Appeal was content to leave the decisions in Cruz City and DTEK on their respective subsections to stand until any future appeal on either subsection.

  1. The reasoning of the decision in Commerce and Industry Insurance was compelling:

Finally, the Court of Appeal was persuaded by the earlier case of Commerce and Industry Insurance v Certain Underwriters at Lloyd’s [2002] 1 WLR 1323. This first instance decision directly dealt with the issue and held that an English court could issue an order in support of a foreign-seated arbitration to compel a witness who was a non-party to give evidence (although in this earlier case, the court had decided not to exercise its discretion to make the relevant order). The Court of Appeal cited the section of this judgment that considered it relevant that the arbitrators in New York had the power under s7 of the United States Federal Arbitration Act to subpoena witnesses to give deposition evidence in the form of oral testimony.

The Court of Appeal reiterated that in order to justify the court granting an order of this kind, the applicant must satisfy the relevant test. This requires the applicant to provide an explanation of the nature of the proceedings, identify the issues on which the witness was to give evidence, give reasons why the witness would be able to give evidence on these issues, and justify why the evidence is necessary for the just determination of the dispute.

In relation to the foreign-seated arbitral tribunal, the Court of Appeal noted that unless the parties are agreed, the party seeking the witness evidence will need the permission of the tribunal under s44(4) in order to make an application. In addition, the court always has a discretion under s44 whether to make the  order sought. In the case of a foreign arbitration, the court also has a specific discretion under s2(3) not to make an order if the court considers it inappropriate. In the circumstances of the case, the Court found that it was appropriate to make the order.

Comment

The decision of the Court of Appeal has provided some much-needed clarity on whether English courts have the power to issue orders under s44(2)(a) compelling a non-party witness to give evidence in support of arbitrations. This case has also provided useful guidance about the circumstances in which the courts will exercise their discretion and grant this type of order.

Whilst the decision has not overruled the earlier authorities of Cruz Shipping and DTEK, it is likely that some arbitration users will in future seek other types of orders against third parties in support of arbitrations under s44 of the Act.

For more information, please contact Nicholas Peacock, Partner, Rebecca Warder, Professional Support Lawyer, 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

Aseel Barghuthi

Aseel Barghuthi
Associate
+1 917 542 7859

Christine Sim

Christine Sim
Associate
+1 917 542 7853

ICCA-IBA JOINT TASK FORCE PUBLISHES ROADMAP TO DATA PROTECTION IN INTERNATIONAL ARBITRATION FOR CONSULTATION

A consultation draft of the highly anticipated ICCA-IBA Joint Task Force’s Roadmap to Data Protection in International Arbitration has now been released for public comment. The public consultation period runs until 31 March 2020.

The Roadmap and its Annexes have been developed by the Task Force (of which Charlie Morgan of HSF is a member) to help arbitration professionals identify and understand the data protection and privacy obligations to which they may be subject in an international arbitration context.

Following public consultation, the Roadmap and Annexes will be finalised and launched during the ICCA Congress in Edinburgh on 12 May 2020.

You can access a copy of the consultation draft here and submit any comments to bureau@arbitration-icca.org before 31 March 2020.

For more information please contact Nick Peacock, Partner, Charlie Morgan, Senior Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock

Nicholas Peacock
Partner
+44 20 7466 2803

Charlie Morgan

Charlie Morgan
Senior Associate
+44 20 7466 2733

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