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

On 9 October 2020, the English Supreme Court handed down its judgment in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, which is likely to become the leading English law authority on the applicable principles relating to determining the proper law of an arbitration agreement and the role of the courts of the seat in granting anti-suit relief.

The Supreme Court issued the decision following an expedited appeal against a recent judgment of the Court of Appeal ([2020] EWCA Civ 574), which we discussed in our previous blog post. The Supreme Court dismissed the appeal by a majority, with Lords Burrows and Sales dissenting.

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HERBERT SMITH FREEHILLS LAUNCHES FIRST GUIDE TO DISPUTE RESOLUTION AND GOVERNING LAW IN RUSSIA

Please click here to preview this publication. To request a copy of the Guide, please email RussiaDisputeResolutionGuide@hsf.com.

Our first Guide to Dispute Resolution and Governing Law in Russia provides a concise and accessible overview of some of the practical issues involving both litigation and arbitration across the region to help our clients understand the ways in which Russian law restricts the choice of law in contracts and the types of dispute resolution mechanisms that can be used for Russia-related commercial contracts.

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

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

Background

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

The decision of the Court of Appeal

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

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

Russian court proceedings

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

Supreme Court hearing: brief overview of the parties’ positions

Overview of submissions made by Chubb Russia

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

Overview of Enka’s submissions

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

Comment

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

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

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

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

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

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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RUSSIAN COURTS TO HAVE EXCLUSIVE JURISDICTION OVER SANCTIONED PERSONS

On 8 June 2020, the Russian President signed a new federal law (No.171-FZ), which will significantly change the dispute resolution landscape involving Russian sanctioned individuals and entities. It will come into force on 19 June 2020.

It is significant as it provides for exclusive jurisdiction of the Russian state arbitrazh (commercial) courts with respect to disputes involving Russian sanctioned individuals and entities as well as foreign entities controlled by them.

Even if the parties have agreed to the jurisdiction of a foreign court or an arbitral tribunal seated outside of Russia, sanctioned persons will be able to disregard the dispute resolution provisions if they cannot be enforced due to sanctions. A sanctioned person affected would need to assess the effect of sanctions on the contract, and, if there are grounds to believe that the applicable dispute resolution provisions cannot be enforced, it can refer the dispute for adjudication by the first-instance Russian arbitrazh courts at the place of its registration (for legal entities) or residence (for individuals). Such referral will be possible only if no similar dispute between the same parties is being considered by a foreign court or an arbitral tribunal seated outside Russia.

If the applicable dispute resolution provisions cannot be enforced, a sanctioned person will be entitled to apply to the Russian arbitrazh courts for an anti-suit injunction preventing the commencement or continuation of foreign court or international arbitration proceedings (where such proceedings are pending, this is the only way to seek protection from the Russian courts). The onus will be on a sanctioned person to demonstrate that either such proceedings have already begun or are imminently pending. At the same time, at the request of a sanctioned person, a foreign party failing to comply with the injunction imposed by a Russian court may be held liable to pay monetary compensation up to the amount claimed in the foreign court or arbitration proceedings. There is also a high risk that a decision rendered by a foreign court or arbitral tribunal as a result of such proceedings will not be enforceable in Russia.

Of course, it remains to be seen how the Russian courts will determine that the arbitration and other dispute resolution clauses involving sanctioned persons are unenforceable.

Even before the adoption of this new law, a disputable approach to enforceability of the dispute resolution clauses has already been tested by a Russian court. At least one controversial case exists (А40-149566/2019), where the Arbitrazh Court of Appeal held that an ICC arbitration clause is unenforceable due to the US sanctions and instead established the jurisdiction of the Russian courts. According to the court, the claimant, a Russian company subject to US sanctions, could not recover a debt from the defendant, a Russian branch of a US company, in reliance on the arbitration clause in the contract. The court concluded that the clause placed the defendant in a more favourable position, and an arbitral award in favour of the claimant would not be enforceable due to bank transfer restrictions as a result of sanctions. As the decision has been appealed, and the cassation court is due to hear the appeal at the end of June 2020, there will be many eagerly awaiting the judgment.

It is worth noting that the new law clarifies that a foreign court decision or an award of an arbitral tribunal seated outside Russia affecting a sanctioned person can still be recognised and enforced in Russia in accordance with general recognition and enforcement rules. Russia has been a party to the New York Convention since 1960 (replacing the former Soviet Union as a member state in 1991), and is a party to a number of international treaties that provide for enforcement of foreign court judgments and arbitral awards, and so the foreign party could rely on the relevant international instrument to ensure recognition and enforcement of the relevant decision or award in Russia.

However, according to the new law, enforcement will only be possible where either a sanctioned person filed a claim or did not make an objection to the jurisdiction of the foreign court or foreign-seated arbitral tribunal and did not make an application for an anti-suit injunction in the Russian courts.

So there are major changes in the offing.

It means that businesses dealing with Russian counterparties will need to carefully monitor whether the counterparty is a sanctioned person and whether the sanctions could affect the enforceability of the dispute resolution clauses in their contracts or provided by international treaties.

If this is the case, their disputes may be forcibly referred to the Russian arbitrazh courts, even though the parties have agreed to, or an international treaty provides for, an arbitration with a non-Russian seat; or opted for the jurisdiction of a foreign court.

In general, this law correlates with the trend determined by the draft amendments to the Russian Constitution providing for priority of Russian law and the Constitution over the international law. It will be interesting to see if these amendments are also adopted on a referendum scheduled for 1 July 2020.

Furthermore, as Russian law does not have extraterritorial effect, the relevant counterparty could nevertheless succeed in obtaining and enforcing abroad a foreign court decision or a foreign arbitral award in spite of the anti-suit injunction granted by the Russian court. However, it will still have to deal with and bear the consequences of any parallel proceedings in the Russian courts initiated in accordance with the new law and both assess whether a sanctioned person has any assets outside Russia and whether the Russian court judgment (including anti-suit injunction order) can be enforced against such party’s assets in Russia.

Enforceability of such Russian judgments abroad shall also be subject to supplemental analysis by foreign counterparties of sanctioned persons. So, in addition to monitoring sanctions legislation and its effects on the relevant contract with a sanctioned person, the foreign counterparty will need to consider whether any contractual mechanisms are available to protect its interests in the circumstances where the sanctioned person decides to rely on the new law.

It is also worth bearing in mind that the enforceability of the dispute resolution provisions could be misinterpreted by the Russian courts and confused with the possibility to enforce the decision of a foreign court or an arbitral award, as occurred in the example above. Hopefully, the cassation court will amend the approach taken by the Court of Appeal.

This law may complicate even further the already complex arbitration regime established as a result of the Russian arbitration reforms of 2016 and 2019, which were launched with the aim of eliminating the widespread practice of companies setting up their own “pocket” arbitration institutions to administer disputes. It could also lead to a deterioration of the investment climate in Russia.

This article was first published on Global Arbitration Review on 10 June 2020

For more information, please contact Alexei Panich, Partner, Olga Dementyeva, Associate, Polina Podoplelova, Associate, or your usual Herbert Smith Freehills contact.

Alexei Panich
Alexei Panich
Partner
+7 495 36 36515

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

Polina Podoplelova
Polina Podoplelova
Associate
+7 495 78 37499

ENGLISH COURT OF APPEAL GRANTS ANTI-ENFORCEMENT INJUNCTION TO PROTECT THIRD PARTY DEBTS UNDER AGREEMENTS SUBJECT TO ENGLISH ARBITRATION

In SAS Institute Inc v World Programming Limited [2020] EWCA Civ 599, the English Court of Appeal granted an anti-enforcement injunction in part, preventing enforcement of a US judgment in respect of assets in England and Wales. In an interesting example of an interplay between intellectual property (“IP”) claims and arbitration, the Court of Appeal held that SAS Institute Inc (“SAS”) cannot seek orders from a US court to enforce a US judgment confirming copyright infringement. The Court of Appeal decided that enforcement orders extending to debts due from customers to World Programming Limited (“WPL”), where WPL and its customers had agreed to submit their disputes to London-seated arbitration, would be an unwarranted interference with the jurisdiction of the English court.

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ENGLISH COURT OF APPEAL ISSUES CLEAR GUIDANCE ON THE LAW GOVERNING ARBITRATION AGREEMENTS AND GRANTS ANTI-SUIT INJUNCTION RESTRAINING PARTY FROM PURSUING RUSSIAN COURT PROCEEDINGS

In Enka Insaat ve Sanayi AS v OOO Insurance Co Chubb [2020] EWCA Civ 574, the English Court of Appeal restrained OOO Insurance Co Chubb (“Chubb Russia”) from pursuing Russian court proceedings brought in breach of an arbitration agreement. In this important decision, the Court of Appeal set out how the court of the seat should handle applications for an anti-suit injunction, confirming that forum conveniens questions are irrelevant for this purpose. In addition, the Court of Appeal has sought “to impose some order and clarity” on how the governing law of the arbitration agreement should be determined (the “AA law”) under English law.

Background

Enka Insaat ve Sanayi AS (“Enka”) was a party to a contract under which it was to perform equipment installation works at a power plant (the “Contract”). The Contract contained an arbitration agreement, which provided for disputes to be resolved by London-seated arbitration under the ICC Rules (the “Arbitration Agreement”).

Following a fire at the power plant, Chubb Russia paid out US$400 million in respect of the resulting losses to its insured, the other party to the Contract. Chubb Russia argued that it was subrogated to the claims of the counterparty and sought to recover from Enka in the Russian courts in respect of the sums Chubb Russia had paid out (the “Russian Court Claim”).

Russian court proceedings

Chubb Russia filed the Russian Court Claim in May 2019. However, due to various deficiencies in the Claim, which were not eliminated until September 2019, the substantive hearings took place only in January and February 2020. In March 2020, the judge announced the operative part of the judgment (with the reasoning to follow) dismissing both (i) the Russian Court Claim on the merits; and (ii) Enka’s motion seeking dismissal without considering the merits, in reliance on the Arbitration Agreement.

English court proceedings

As discussed in one of our previous blog posts, Enka made an urgent ex parte application for interim relief to the English Commercial Court, seeking an order requiring the defendants to withdraw the Russian Court Claim, and seeking a stay of the Russian court proceedings. The Court found that the matter was not in a position to proceed, because it was insufficiently prepared to enable there to be a fair hearing. It then determined that there should be an expedited trial commencing in December 2019.

After the trial the Court refused, on forum non conveniens grounds, to grant an anti-suit injunction restraining Chubb from pursuing the Russian Court Claim. The Court also noted that the scope and the governing law of the Arbitration Agreement should be determined by the Russian court. It held, in the alternative, that the anti-suit injunction should be refused due to Enka’s (i) delay in bringing proceedings in the English courts; (ii) degree of participation in the Russian Court Claim; and (iii) failure to commence arbitration proceedings. Enka appealed, arguing, in particular, that the Court’s approach to deciding the case on forum non conveniens grounds was wrong in principle.

The Court of Appeal decision

The Court of Appeal agreed with Enka, allowing the appeal. It concluded that: (i) the English court as the court of the seat was necessarily an appropriate court to grant an anti-suit injunction and questions of forum conveniens did not arise; (ii) the Arbitration Agreement was governed by English law; and (iii) there were no other reasons to refuse relief.

Forum conveniens questions irrelevant

The Court of Appeal explained that forum conveniens questions were irrelevant when a court of the seat decided whether to grant an anti-suit injunction. The choice of the seat is an agreement of the parties to submit to the jurisdiction of the courts of that seat in respect of such powers as the seat confers. The grant of an anti-suit injunction to restrain a (threatened) breach of the arbitration agreement is an exercise of such powers. If a court of the seat were to defer on forum conveniens grounds to the non-curial court, this would defeat the considerations of certainty and party autonomy.

The Court of Appeal further noted that, when faced with the question of whether to grant an anti-suit injunction, the English court must address the following two questions: (i) whether the foreign proceedings are a breach of the arbitration agreement (under the AA law); and (ii) if so, whether relief should be granted as a matter of discretion. Therefore, the Court of Appeal concluded that the Court was wrong not to decide whether the Russian Court Claim was a breach of the Arbitration Agreement.

Governing law of the Arbitration Agreement

The Court of Appeal noted that “the time [had] come to seek to impose some order and clarity” on the significance of the main contract law and the law of the seat for the purpose of determining the AA law, setting out the following principles:

Applying the above principles, the Court of Appeal concluded that the Arbitration Agreement was governed by English law. The term “Applicable Law” was defined in an attachment to the Contract so as to cover Russian law, with a particular focus on relevant regulatory legislation. The Contract did not have a clause which provided that it was governed by the Applicable Law, but merely provided that the terms used in the Contract would have the definitions set forth in the attachment.

Therefore, there was nothing to suggest an express choice of Russian law as the governing law of the Contract and/or the Arbitration Agreement. Accordingly, in the absence of any countervailing factors which would point to a different system of law, the parties had impliedly chosen that the Arbitration Agreement was governed by the law of the seat, i.e. English law.

The Court of Appeal then noted that the parties to the Contract would expect all aspects of the dispute, whatever their legal basis, to be covered by the Arbitration Agreement, concluding that the Russian Court Claim was brought in breach of the Arbitration Agreement.

No other reasons to refuse relief

According to the Court of Appeal, Enka’s failure to commence arbitration proceedings was not a relevant factor. As confirmed in AES Ust-Kamenogorsk (discussed in one of our previous blog posts) an arbitration agreement contains an independent negative promise not to commence proceedings anywhere in the world. Likewise, Enka’s degree of participation in the Russian Court Claim could not be a matter for legitimate criticism.

The Court of Appeal referred to Ecobank Transnational Inc v Tanoh (discussed in one of our previous blog posts) to confirm that Enka’s delay in bringing proceedings in the English courts could, in principle, justify a refusal to grant relief. However, it concluded that Enka could not be criticised for not seeking relief until it became clear that the Russian Court Claim would be accepted by the Russian courts in September 2019, and Enka sought injunctive relief only 12 days later. As for the Court’s reproach regarding Enka’s handling of the interim application, this did not result in any delay in obtaining injunctive relief. Therefore the Court of Appeal held that there were no other reasons to refuse relief.

Comment

This case has clarified the English law position in relation to the role of the court of the seat when granting anti-suit injunctions. The judgment confirms that forum non conveniens is not a relevant factor to consider when assessing whether anti-suit injunction relief should be granted and illustrates the English courts’ robust approach to breaches of arbitration agreements.

This Court of Appeal decision is also a welcome clarification of how the law of the arbitration agreement should be decided. The case is important in this respect and is likely to become a significant English law authority on the applicable principles. While the case has emphasised the importance of the law of the seat in ascertaining the governing law of the arbitration agreement, the starting point remains a consideration of any express choice of law. In some cases, the choice of law in the main contract will still be considered to be an express choice of law for the arbitration clause itself. The courts will also still assess the legal system with which the arbitration clause has the closest and most real connection. Some uncertainty is therefore likely to remain in relation to how the test will be applied in individual cases. The decision highlights once again the importance of including an express choice of law in the arbitration agreement itself.

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

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

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

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

ENGLISH HIGH COURT GRANTS CONDITIONAL STAY OF IP CLAIM

In an example of an interaction between intellectual property (“IP”) claims and arbitration, the English High Court granted a conditional stay of the claimants’ IP claim pursuant to s9 of the Arbitration Act 1996 (the “Act”) and its inherent case management jurisdiction. In AJA Registrars Ltd and another company v AJA Europe Ltd [2020] EWHC 883 (Ch), the claimants argued that AJA Europe Limited (“AJA Europe”) was using their logo in the UK in the same markets in which one of the claimants, AJA Registrars Limited (“AJA Registrars”) operated, thereby misrepresenting that AJA Europe’s business or services were the business or services of AJA Registrars. AJA Europe successfully applied for a stay, arguing that the underlying dispute between the parties originated from agreements containing an arbitration clause.

Background

The parties

AJA Registrars and AJA Europe entered into a number of agreements, which aligned their businesses in various territories and granted licences to use IP and other rights. AJA Registrars’s parent company, Holding Socotec S.A.S. (“Socotec”, and together with AJA Registrars, the “Claimants”), acquired AJA Registrars’s business in 2018.

The agreements

In particular, AJA Registrars and AJA Europe entered into:

  • an agreement, under which AJA Registrars granted to AJA Europe, until its termination in 2018, a revocable licence to use the “AJA” name (the “License”) in a number of territories, and which prohibited AJA Europe from registering logos or trade marks without AJA Registrars’s consent, which was subsequently amended (the “2014 Agreement”); and
  • an agreement, under which AJA Europe granted to AJA Registrars, until its termination in 2019, the Licence in the UK, and which prohibited AJA Registrars from registering logos and trade marks without AJA Europe’s consent (the “2015 Agreement”, and together with the 2014 Agreement, the “Agreements”).

Each Agreement contained an arbitration clause providing that any dispute or claim arising out of the Agreements was to be referred to arbitration. Socotec was not a party to the Agreements.

The trade marks

In 2018, a UK trade mark using “AJA” in a design was registered in AJA Europe’s name (“AJA Europe’s Trade Mark”). In the meantime, international trade marks using “AJA” were registered in Socotec’s name in 2018 and 2019 (“Socotec’s Trade Marks”).

The IP claim

The Claimants initiated proceedings before the High Court, alleging: (i) infringement by AJA Europe in the UK of Socotec’s Trade Marks; (ii) passing off in the UK by AJA Europe as AJA Registrars’s business or services; and (iii) invalidity of AJA Europe’s Trade Mark.

Stay application

AJA Europe successfully applied to stay the Claimants’ claim, relying on s9 of the Act, and, alternatively, the court’s inherent case management powers. It argued that the dispute was whether and to what extent the Claimants gave AJA Europe permission to use the “AJA” name, and whether any such permission had been terminated. It then argued that this dispute should have been referred to arbitration under the Agreements.

The court’s decision on the stay application

The court concluded that the main issues in the IP claim were (i) the underlying ownership of the “AJA” name rights in the UK; (ii) whether AJA Registrars exclusively owned the goodwill in the UK businesses associated with that name; and (iii) whether AJA Europe’s prior rights meant that there was no misrepresentation. The court noted that although the issues arose in a claim in tort, they reflected issues about entitlement and rights under the Agreements. Specifically, whereas AJA Registrars sought to rely on the 2014 Agreement, AJA Europe’s defence ultimately relied, in particular, on the 2015 Agreement. The court therefore decided that the passing off claim was brought in respect of a matter which was to be referred to arbitration under the 2015 Agreement.

The court noted that there was a sufficiently close connection between the issues in the tort claim and the dispute about the ownership that rational businessmen were likely to have intended such a dispute to be decided (like a contractual dispute) by arbitration, applying the test in Microsoft Mobile Oy v Sony Europe Limited [2017] EWHC 374 (Ch).

Conditions of stay

The court concluded that AJA Registrars’s claim should be stayed under s9 of the Act. Given that there was no arbitration agreement between AJA Europe and Socotec, the court could not stay Socotec’s claim under s9. However the court decided that Socotec’s claim should also be stayed as a matter of discretion and good case management, in order to avoid parallel proceedings.

Both stays were conditional:

  • AJA Registrars’s stay was conditional on AJA Europe appointing an arbitrator in the arbitration proceedings. The court noted that the reference had to relate to the determination of the ownership rights to use “AJA” under the agreements, or otherwise, but it may include other issues.
  • The stay in respect of Socotec’s claim was conditional upon (i) AJA Registrars’s stay being operational; and (ii) AJA Europe sending to the Claimants a draft defence to Socotec’s claim (as AJA Europe’s defence had emerged in an “unsatisfactory and piecemeal way”). The court accepted that AJA Europe should not be compelled to disclose the substance of the dispute to the public, given that the matters are to be arbitrated, and therefore remain confidential.

Arbitrability of IP claims

The court also noted that there was “the faintest of issues” about whether an IP claim could be referred to arbitration, on the basis that there was certain relief that only the court or the UK Intellectual Property Office could grant. The court reiterated that (i) this is not an impediment to an arbitrator determining the substance of the dispute and the underlying issues; and (ii) as part of the award the arbitrator can direct the parties to make necessary applications for the required relief.

Comment

This case is an interesting example of the potential interplay between IP claims and arbitration. While IP claims are mainly litigated in national courts, there has been an increase in the use of arbitration clauses in licence agreements and, therefore, of the arbitration of IP disputes. The decision confirms that the English courts will usually view contractual IP disputes as arbitrable.

For more information, please contact Chris Parker, Partner, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Chris Parker
Chris Parker
Partner
+44 20 7466 2767

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

 

ENGLISH COURT UPHOLDS SCC AWARD DESPITE RESPONDENT’S ARGUMENT THAT ARBITRATION AGREEMENT WAS SIGNED BY DEFUNCT PREDECESSOR

In Carpatsky Petroleum Corp v PJSC Ukrnafta [2020] EWHC 769 (Comm), the Commercial Court has upheld the enforcement of a US$147 million Stockholm Chamber of Commerce (the “SCC”) award issued in 2010 in favour of Carpatsky Petroleum Corporation, incorporated in Delaware (“Carpatsky”), against PJSC Ukrnafta (“Ukrnafta”), Ukraine’s oil and gas producer (the “Award”). Enforcement was allowed despite an argument from Ukrnafta that the arbitration agreement was signed by Carpatsky’s predecessor, which had ceased to exist in 1996. Given that the parties had already fought this issue on the enforcement front in a number of jurisdictions, including Ukraine and Sweden (the seat of arbitration), the Court had to consider whether an issue estoppel arose as a result of the foreign courts’ findings, noting that there was a public interest in sustaining the finality of supervisory courts’ decisions on properly referred procedural issues arising from the arbitration.

Background

The parties and the Agreements

In 1995, Carpatsky Texas (“CT”) and Ukrnafta’s subsidiary SE Poltavanaftogaz (“PNG”) entered into a joint activity agreement to develop and exploit a gas field in Ukraine (the “JAA”). In June 1996, CT was merged into Carpatsky: CT ceased to exist, Carpatsky assuming CT’s rights and obligations. In October 1996, PNG and “Carpatsky Petroleum Corporation, registered in Texas” entered into a restated JAA, which contained an arbitration clause. In 1998, the parties executed an addendum to the restated JAA (the “JAA Addendum”, and together with the JAA and the restated JAA, the “Agreements”).The JAA Addendum (i) replaced PNG with Ukrnafta; and (ii) amended the arbitration clause such that it referred disputes to SCC arbitration. All the Agreements were signed by the President of “Carpatsky Petroleum Corporation” and stamped with CT’s seal.

Arbitration proceedings

In 2007, Carpatsky filed a request for arbitration with the SCC. Ukrnafta submitted an answer without a reservation as to jurisdiction. Following two rounds of submissions by each party, Ukrnafta served objections to the tribunal’s jurisdiction alleging that there was no valid arbitration agreement under Swedish law because the Agreements were made with CT, which had ceased to exist. The tribunal determined that it had jurisdiction, at the very least because the parties had entered into an arbitration agreement by engaging in the arbitration without raising an objection to jurisdiction. The arbitration proceeded on the merits, and the tribunal issued the Award in favour of Carpatsky.

Ukrainian proceedings

In early 2009, upon the application of the Ukrainian Deputy Public Prosecutor, the Kyiv Commercial Court held that the Agreements had not been executed as they were signed by CT, which had ceased to exist as at the date of the Agreements (the “Kyiv Court Decision”).

After the tribunal issued the Award, Carpatsky commenced enforcement proceedings in Ukraine. In 2013, the application was dismissed with reference to the Kyiv Court Decision on the ground that there was no written arbitration agreement (the “Kyiv Enforcement Decision”, and together with the Kyiv Court Decision, the “Kyiv Decisions”).

Swedish proceedings

In 2009, Ukrnafta brought proceedings before the Stockholm District Court arguing, with reference to Swedish law, that the tribunal lacked jurisdiction. The proceedings were stayed pending the arbitration. In 2011, the District Court rejected Ukrnafta’s argument, confirming that the tribunal had jurisdiction.

In addition, Ukrnafta sought to set aside the Award on the basis that the tribunal had exceeded its mandate and had made errors which affected the outcome of the arbitration (the “Swedish Challenge Proceedings”). In 2015, the Svea Court of Appeal rejected all Ukrnafta’s challenges to the Award (the “Swedish Challenge Proceedings Decision”).

US proceedings

In February 2009, Ukrnafta sued Carpatsky in the 190th District Court of Harris County, Texas asserting a number of causes of action, including negligent misrepresentation, fraud and misappropriation of trade secrets, and contending that all amendments to the JAA after the date of the merger were void ab initio. The case was removed to federal court, and the US District Court for the Southern District of Texas (“SDT”) stayed the litigation pending the arbitration proceedings. The stay was lifted following the termination of the Swedish Challenge Proceedings. In October 2017, the SDT granted Carpatsky’s motion to confirm the Award. Ukrnafta appealed.

In April 2020, several days after the Commercial Court in London upheld enforcement of the Award, the US Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) dismissed Ukrnafta’s challenges to the District Court’s order confirming the award. In its ruling, the Fifth Circuit found that under Delaware law, the President of “Carpatsky Petroleum Corporation” had authority to enter into the JAA Addendum on behalf of Carpatsky and the use of CT’s seal was irrelevant. The Fifth Circuit also noted that Ukrnafta waived its right to challenge the tribunal’s jurisdiction by submitting to arbitration proceedings, and, in any event, an arbitration agreement was created during the arbitration. The Fifth Circuit dismissed the due process violations pleaded by Ukrnafta, noting, in particular, that the merits hearing looked “like a full-blown federal trial”. Finally, the Fifth Circuit held that allowing the Kyiv Decisions to prevent enforcement would “gut international arbitration and interfere with the global commerce it promotes.”

English proceedings

Carpatsky successfully applied to the English court to enforce the Award. Ukrnafta sought to set aside the order granting permission to enforce before the Commercial Court. Ukrnafta argued that under Ukrainian law there was no valid arbitration agreement given that the JAA Addendum was executed on behalf of CT. Ukrnafta also contended there was a serious procedural irregularity in that the tribunal (i) dealt with an issue concerning a limitation of liability clause on a basis which had not been pleaded; and (ii) took a procedurally irregular approach to the agreed methodology for assessing damages, which resulted in a serious mathematical error.

Overview of the Commercial Court decision

There was a valid arbitration agreement

The Court held that Ukraine was estopped by conduct from arguing that Ukrainian law governed the arbitration agreement given that it had argued that Swedish law was applicable in the arbitration and Swedish proceedings. It concluded that under Swedish law there was a valid arbitration agreement in the JAA Addendum between Ukrnafta and Carpatsky, noting, in particular, that the parties intended both objectively and subjectively, to enter into the JAA Addendum with each other. It further noted that both (i) the conduct of the parties’ representatives in the arbitration under the SCC Rules and (ii) the parties’ participation in the arbitration and exchange of pleadings gave rise to an arbitration agreement even if there had not been one before.

No issue estoppel on the validity of the arbitration agreement

The Court reminded the parties that an issue estoppel can arise from foreign court decisions in relation to enforcement, referring to Diag Human SE v Czech Republic (discussed in one of our previous blog posts). However, given that the Ukrainian courts did not address the existence of an arbitration agreement as a matter of Swedish law, an issue estoppel did not arise. The Court noted that to the extent its determinations related to the validity of the JAA Addendum under Ukrainian law it would be unjust to recognise an issue estoppel as precluding Carpatsky from successfully contending that the JAA Addendum was valid.

Issue estoppel on limitation of liability and on damages methodology

The Court held that there was a public interest in sustaining the finality of decisions of the supervisory courts (the Swedish courts in this instance) on properly referred procedural issues arising from the arbitration. It also noted that, in assessing whether there was an issue estoppel arising from a decision of the supervisory courts in respect of an arbitration-related procedural issue, English courts should not adopt an overly-narrow approach to whether the same issue has been decided by the supervisory court. The Court considered the arguments raised by Ukrnafta in the Swedish proceedings, concluding that Ukrnafta’s procedural irregularity complaints were either substantially the same (in the case of the limitation of liability point) or the same (in the case of the damages methodology) to those pursued before the Court. These arguments had been considered (and rejected) in the Swedish Challenge Proceedings Decision, which gave rise to an issue estoppel.

Comment

The Commercial Court’s decision in this case is another clear example of the English courts’ pro-enforcement stance. The judgment is also an important reminder to commercial parties that their participation in the arbitration proceedings may in itself be capable of constituting an agreement to arbitrate, even if the arbitration agreement in the relevant contract is in some way defective. In addition, the decision reiterates that the principle of issue estoppel may affect the parties’ ability either to enforce an award or resist enforcement in the English courts where there have already been attempts to enforce or challenge the award in foreign courts, especially before the courts of the seat of arbitration.

For more information, please contact Brenda Horrigan, Partner, Chiara Cilento, Associate, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
Partner
+61 2 9225 5536

Chiara Cilento
Chiara Cilento
Associate
+1 917 542 7842

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644