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

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

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

What was the background?

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

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

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

Did HUO become party to the SHA?

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

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

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

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

Was HUO covered by the arbitration clause?

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

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

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

What are the practical lessons going forward? 

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

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

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

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

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

English Court sets aside award on the ground that the arbitral tribunal lacked substantive jurisdiction

In DHL Project & Chartering Ltd v Gemini Ocean Shipping Co., Ltd [2022] EWHC 181 (Comm), the Commercial Court has set aside an arbitral award under s67 of the Arbitration Act 1996 (the “Act“) on the basis that the arbitral tribunal lacked substantive jurisdiction.

The case concerned a “subjects” provision which required “shipper/receiver’s approval“. The Court found that:

  • the “subjects” provision was a pre-condition to the effectiveness of both the contract and the arbitration agreement contained within it;
  • as “shipper/receiver’s approval” was not in fact obtained, the “subjects” provision was not satisfied, and so neither the contract nor the arbitration agreement became binding on the parties; and
  • the arbitrator therefore had no jurisdiction to decide the dispute, and the Award was set aside.

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ENGLISH HIGH COURT SETS ASIDE LMAA AWARD ON THE BASIS THAT THE ARBITRAL TRIBUNAL LACKED SUBSTANTIVE JURISDICTION

In MVV Environment Davenport Ltd v NTO Shipping GMBH & CO, MV Nortrader [2020] EWHC 1371 Comm, the High Court (the “Court”) set aside an LMAA award on jurisdiction (the “Award”) under s67 Arbitration Act 1996 (the “Act“) on the basis that the arbitral tribunal (the “Tribunal“) lacked substantive jurisdiction over the dispute.

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COURT OF APPEAL UPHOLDS HIGH COURT DECISION THAT A DISCLOSED PRINCIPAL IS ENTITLED TO ENFORCE AN ARBITRATION AGREEMENT DESPITE BEING A NON-SIGNATORY

In Filatona Trading v Navigator Equities [2020] EWCA Civ 109, the English Court of Appeal upheld a judgment of the High Court (which we discussed here) relating to an LCIA arbitration concerning ownership of a Russian textile company. The main issue in the appeal was whether a party who did not sign an agreement was entitled to enforce rights under it (including the right to arbitrate), on the basis that an agent had entered into the agreement on the non-signing party’s behalf.

The Court found, in the circumstances of this case, that the principal was able to enforce the agreement and so the LCIA arbitration initiated by the principal was validly commenced. The judgment offers important guidance on when a person who is not a signatory to a contract can enforce its terms, including the arbitration clause.

Background

We discussed the background to this case in more detail in our previous post here. Briefly, Ms Danilina and Mr Deripaska were signatories to a shareholders agreement (“SHA”) relating to the ownership of shares in a Russian textile company. Mr Chernukhin was not a signatory to the agreement, nor was he named in the SHA.  However, he argued that Ms Danilina entered into the agreement on his behalf and Mr Deripaska knew this. Mr Chernukhin was thus, he claimed, a party to the SHA as a disclosed principal, with Ms Danilina as his agent.

A dispute arose under the SHA and Mr Chernukhin commenced an LCIA arbitration. The tribunal issued an award, finding that Mr Chernukhin was a party to the SHA and that the tribunal had jurisdiction over the claim. Ms Danilina and Mr Deripaska challenged the award under s67 of the Arbitration Act 1996 (“the Act”), arguing that the tribunal had no jurisdiction over the claims by Mr Chernukhin as he was not a party to the SHA. Mr Deripaska also challenged the award under s68 of the Act on the basis that there was a serious irregularity affecting the award.

Commercial Court decision

The Commercial Court dismissed the claims of Ms Danilina and Mr Deripaska, finding that Ms Danilina had, in fact, entered into the SHA as an agent for Mr Chernukhin and that there was nothing in the SHA that prevented Mr Chernukhin from enforcing its terms. The Commercial Court judgment addressed other issues, including whether the tribunal had the power to order a buy-out of shares pursuant to Cypriot company law, but this and other issues were not the subject of the appeal.

Court of Appeal decision

The permission to appeal was granted on a limited basis and the Commercial Court’s finding of fact that Mr Chernukhin was a party to the SHA by virtue of the principal-agent relationship could not be challenged. The appeal instead focussed on whether “the terms and surrounding circumstances of the contract, either expressly or by necessary implication, excluded Mr Chernukhin from exercising contractual rights (including the right to arbitrate)”.

The Court of Appeal judgment noted that English law makes a “beneficial assumption” in commercial cases that an undisclosed principal is generally entitled to enforce the contract in their own name. It was stated that the same approach should apply where the person is a disclosed principal. The relevant question was whether there were “clear and unambiguous words or indications of an intent to exclude the known and identified principal”. There was a “heavy burden of persuasion” on the party who argues that an identified principal should be excluded from a contract.

Having regard to the contract in question and the surrounding circumstances, it was then considered (i) why Mr Chernukhin was not named as a party to the SHA and (ii) whether, in light of this circumstance, the SHA was to be construed as excluding him from the contract. It was likely that all parties knew that Mr Chernukhin was a party to the SHA, even though he was not named in the SHA, which was mainly related to his position in a Russian financial institution. There was nothing in the wording of the SHA that demonstrated a clear intention to prevent Mr Chernukhin from exercising rights under the SHA.

Comment

This case is a relatively rare instance of a s67 application reaching the Court of Appeal. The failure of the challenge in Filatona is a further example of the English courts’ reluctance to overturn arbitral awards and the courts’ non-interventionist approach.

For further information, please contact Nicholas Peacock, Partner, Rebecca Warder, Professional Support Lawyer, Nihal Joseph, 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

Nihal Joseph
Nihal Joseph
Associate
+44 20 7466 2212

ENGLISH HIGH COURT DISMISSES SECTION 67 JURISDICTIONAL CHALLENGE TO ARBITRAL AWARD IN MPB V LGK

In the recent case of MPB v LGK [2020] EWHC 90 (TCC), handed down on 23 January 2020,  the High Court dismissed an application to set aside an arbitration award on jurisdiction pursuant to section 67 of the Arbitration Act 1996 (the “Act”).

In a suite of contractual documents incorporated into the parties’ agreement, the arbitration agreement included in a lower ranking set of standard terms and conditions was held to bind the parties in the absence of any dispute resolution clauses existing in contractual documents which ranked higher in the contractual hierarchy.

Background facts

MPB, a building contractor, entered into an agreement with LGK for the installation of steel works. The agreement arose out of a series of email exchanges between the parties where various quotations, amendments to those quotations and standard terms and conditions were exchanged. The final order for the works expressly incorporated MPB’s standard terms and conditions (“MPB’s Terms”). It also included manuscript annotations and, in its description of the works and value, references to emails having attached LGK’s standard terms and conditions (“LGK’s Terms”), as well as other correspondence.

MPB’s Terms were silent as to the dispute resolution procedure to adopt in the event that a dispute arose between the parties. In contrast, LGK’s Terms provided, at Clause 11, that the parties could refer a dispute to adjudication at any time, and that the decision of the adjudicator would be binding on the parties “until the dispute is finally resolved through agreement for by Arbitration [sic] under the CIMAR rules”.

A dispute arose between the parties regarding the works performed by LGK, and MPB engaged other contractors to complete LGK’s works. A series of adjudications followed. The third was commenced by MPB with reference to Clause 11 of LGK’s Terms, and resulted in a decision being handed down in MPB’s favour, which provided that MPB was entitled to recover GBP 76,056.67. MPB sought to enforce the decision. LGK commenced arbitration proceedings to challenge the adjudicator’s decision, in accordance with Clause 11 of LGK’s Terms. MPB immediately challenged jurisdiction. Notwithstanding MPB’s position, an arbitrator was appointed, leading to a subsequent ruling that he had substantive jurisdiction over the parties’ dispute by virtue of Clause 11 of LGK’s Terms.

Application to the High Court

MPB applied to the High Court to set aside the arbitrator’s award on jurisdiction pursuant to section 67 of the Act, on the grounds that there was no arbitration agreement between the parties, such that the Tribunal has no substantive jurisdiction over the dispute referred to it. In particular, MPB argued that the agreement between it and LGK did not incorporate LGK’s Terms, in particular Clause 11.

The English court was asked to rule on two questions.

  • First, did the contract incorporate Clause 11 of LGK’s Terms?
  • Second, in light of MPB’s conduct in the adjudication, was it open to MPB to challenge the application of Clause 11 of LGK’s Terms in any event?

Before determining either issue, Veronique Buehrlen QC, sitting as a Deputy High Court Judge, reiterated that challenges under section 67 proceed by way of de novo rehearings of jurisdiction issues. While the arbitrator’s decision on jurisdiction can be considered, it has no evidential or legal weight in the court’s determination.

On the first question, the Tribunal had found that the contract did incorporate Clause 11 of LGK’s Terms. MPB had been given clear notice of LGK’s Terms. The scope of work and price for the same in the final order were clearly designed to be read in conjunction with LGK’s Terms. Express reference to MBP’s Terms being incorporated was not sufficient to exclude the application of LGK’s Terms. The Deputy High Court Judge added that it was not uncommon for construction contracts to be set out in a number of different documents and to contain different sets of standard terms. While that inevitably increases the risk of contradictions between those terms, here this situation was mitigated by the fact that precedence had been given to MPB’s Terms.

The Judge rejected MPB’s arguments that the absence of an arbitration agreement in MPB’s Terms entitled the parties to take their dispute to court, and that given their inconsistency with the arbitration agreement in Clause 11 of LGK’s Terms, MPB’s Terms should take precedence. She found that “[w]hilst the obvious implication where a contract is silent on the matter of dispute resolution is that any dispute will be brought before the Courts, that is not the same as an express dispute resolution provision being set out in MPB’s Terms which is inconsistent with a dispute resolution provision set out in LGK’s Terms.”

On the second question, the Judge found that MPB’s conduct demonstrated that it would adhere to the dispute resolution mechanism set out in Clause 11 of LGK’s Terms. LGK had argued that the doctrine of approbation and reprobation, which prevents a party from electing to take and pursue inconsistent stances, prevented MPB from now arguing that it was not bound by the arbitration agreement at Clause 11 of LGK’s Terms, having previously relied on the same terms in submitting its dispute to adjudication. Indeed, MPB had relied on Clause 11 in its notice of intention to refer its dispute to adjudication and had submitted pleadings in enforcement proceedings referring to LGK’s Terms forming part of the contract.

The Judge summarised the relevant principles on approbation and reprobation arising from case law as follows:

i) The first is that the approbating party must have elected, that is made his choice, clearly and unequivocally;

ii) The second is that it is usual but not necessary for the electing party to have taken a benefit from his election such as where he has taken a benefit under an instrument such as a will;

iii) Thirdly, the electing party’s subsequent conduct must be inconsistent with his earlier election or approbation.

In essence, the doctrine is about preventing inconsistent conduct and ensuring a just outcome.”

In this instance, MPB was found clearly and unequivocally to have elected to rely on Clause 11 of LGK’s Terms as setting out the dispute resolution provisions  governing the parties’ relationship. By challenging the arbitration agreement, MPB was now asserting a different and inconsistent right with Clause 11, namely that the adjudicator’s decision should be treated as binding on the parties until finally resolved by agreement or by the Courts.

The Judge gave weight to MPB’s submissions that courts should be slow to find that the doctrine of approbation and reprobation should apply in relation to matters dealt with in the context of adjudication, which is a “rough and ready” form of dispute resolution often conducted by parties without legal representation, and where the way in which a party puts its case should not be treated as giving rise to unequivocal elections binding the parties as to how they may put their case in the future. However, she found that the question here was not whether MPB should be bound by how they put their case in the adjudication, but about their more fundamental election to use a particular dispute resolution procedure.

The application to set aside the award was dismissed with costs.

Comment

MPB v LGK will serve as a useful reminder to contracting parties to ensure consistency in dispute resolution clauses where multiple contracts and standard terms are being adopted, or at the very least to set a clearly defined hierarchy between these contractual documents in the event of a conflict.

Similarly, if parties wish to retain their ability to submit their disputes to court, this should be expressly stated in the agreements, failing which alternative dispute resolution provisions set out in contractual documents placed lower down the contractual interpretation hierarchy may apply by default. This is of particular relevance in the construction context, where it is not unusual to see more than one set of standard terms and conditions incorporated across a suite of related contracts.

Finally, the judgment demonstrates that decisions made early on matters of jurisdiction tend to have far-reaching, and usually final, consequences.

For more information, please contact Craig Tevendale, Partner, Maguelonne de Brugiere, Senior Associate or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445
Maguelonne de Brugiere
Maguelonne de Brugiere
Senior Associate
+44 20 7466 7488

 

 

English Court holds that arbitration clauses in individual sales contracts govern the disputes arising from corrupt arrangement to induce the contracts when an “umbrella agent agreement” is silent about dispute resolution

In a decision dated 24 April 2018, the English Commercial Court (the “Court“) dismissed  challenges brought under s67 and s32 of the English Arbitration Act 1996 (the “Act“) by Dreymoor Fertilisers Overseas PTE Ltd. (“Dreymoor“).

The case concerned the construction and application of arbitration clauses to disputes arising out of a complicated business structure with multiple contracts between Eurochem Trading GMBH (“ECTG“), a fertiliser seller, and Dreymoor, an international trading company. Dreymoor sought to challenge the jurisdiction of tribunals constituted in two arbitrations (one LCIA and one ICC) commenced against it by ECTG, arguing (1) for a narrow interpretation of an LCIA arbitration clause to exclude non-contractual claims brought against it by ECTG; and (2) that there was no agreement to arbitrate between ECTG and Dreymoor in respect of the ICC arbitration.

The Court followed the liberal interpretation propounded in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40. The LCIA arbitration clause covered “any dispute or claim arising out of this Contract“. Those words were wide enough to cover the non-contractual disputes which ECTG had referred to LCIA Arbitration and the s67 challenge was dismissed. In respect of the ICC arbitration, the Court again held that the terms of the arbitration clause were very wide and sufficient to cover the disputes referred under it against Dreymoor. The s32 action therefore also failed.

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Challenges to an LCIA award on grounds of serious irregularity and substantive jurisdiction dismissed by the English Court

In C v D [2016] EWHC 1893 (Comm), the Commercial Court (the Court) dismissed an attempt to set aside an LCIA Award.  The claimants brought challenges to a partial award on the grounds of substantive jurisdiction (s67 of the Arbitration Act 1996 (AA 1996)) and serious irregularity (s68 AA 1996).  Both challenges were squarely rejected by the Court.  Click here for a copy of the judgment.

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English court sets aside London-seated tribunal’s award where arbitration was “to be held in Hong Kong”

The English Commercial Court has set aside an award under section 67 of the Arbitration Act 1996 (the “English Act“), and declared that the tribunal was not properly constituted, in Shagang South -Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics [2015] EWHC 194 (Comm).

In his judgment dated 5 February 2015, Hamblen J found that the procedural law of the arbitration agreement (the curial law) was Hong Kong law, on the basis that the arbitration clause provided for arbitration “to be held in” Hong Kong and there was not clear wording or other contrary indicia sufficient to displace the prima facie conclusion that this carried with it an implied choice of Hong Kong law as the curial law.

This decision demonstrates that parties should ensure, if they wish to designate in their arbitration agreement a convenient geographical location for hearings to take place, that they are content for the procedural law applicable at that location to apply to their arbitration agreement. If they do not wish that location to be the seat of the arbitration (the lex arbitri), it will be necessary to make that clear in the drafting of the arbitration agreement.

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