In its recent decision in Malini Ventura v Knight Capital Pte Ltd& others [2015] SGHC 225, the Singapore High Court has dismissed an application made under s. 6(2) of the International Arbitration Act (“IAA“) for an injunction to stay SIAC arbitration proceedings, made on the basis that there was no arbitration agreement in existence. The Singapore High Court first outlined the correct approach to determine such issues and held that the Tribunal could determine the issue as a preliminary question of its own jurisdiction. This case re-emphasises the Singapore courts adherence to the principle of competence-competence, such that the tribunal will be given the first say over questions regarding its jurisdiction.
Background
This application arose out of a SIAC arbitration commenced by the defendants against the plaintiff. The plaintiff allegedly entered into a guarantee (the “Guarantee“) in respect of a third party’s loan. The Guarantee contained an arbitration agreement which provided for SIAC arbitration in relation to any issue under it ‘including any question regarding its existence, validity or termination‘. The third party borrower defaulted and the defendants made a call on the Guarantee which was not satisfied. The defendants commenced SIAC arbitration proceedings against the plaintiff for non-payment.
The plaintiff argued that the signature on the Guarantee was not hers which meant that there was no valid arbitration agreement between the parties and, therefore, the Singapore courts, not the Tribunal (which had already been constituted), had jurisdiction to determine the existence of the arbitration agreement.
The plaintiff requested that the Tribunal stay proceedings and when the Tribunal refused to do so, the plaintiff commenced proceedings in court seeking a stay of the arbitration proceedings. In response, the defendants applied for the court proceedings to be stayed pending determination of the SIAC arbitration.
The parties’ positions
The key issue for the court was determining the correct approach under s.6 of the IAA where the existence of an arbitration agreement is in dispute.
The plaintiff argued that the court was not bound to stay the arbitration proceedings under s. 6(2) of the IAA because the defendants had no standing as the plaintiff had never signed the arbitration agreement. This was an issue that could only be decided by the court after a full trial applying the usual civil standard of proof, as if there was no arbitration agreement between the parties, no tribunal could be constituted to decide the issue.
The defendants argued that in order to be satisfied that s. 6(2) applied, the Singapore High Court need only be satisfied on a prima facie basis that an arbitration agreement existed, in order to grant a stay. For this reason, the defendant’s position was that the Singapore High Court had no choice but to refer the question to the Tribunal for its decision, given that the Guarantee appeared to be signed by the Plaintiff.
The Singapore High Court’s decision
The court considered whether, if the very existence of an arbitration agreement is in question, it is a matter for the arbitral tribunal or for the court. In doing so, the Court considered the position under English law and the decision of the English High Court on the same issue in Nigel Peter Albon (trading as N A Carriage Co) v Naza Motor Trading Sdn Bhd and anor [2007] 2 All ER 1075. In that case, the English High Court concluded that the wording of the English equivalent of s.6 IAA (section 9(1) of the Arbitration Act 1996) meant that the court had to decide whether or not there was enough evidence that an arbitration agreement had been concluded. If it was not possible to resolve this issue on the available evidence at the time of the application, the court could not grant a mandatory stay under section 9(1) of the Arbitration Act (but separately, it was open to it to exercise its inherent jurisdiction to stay proceedings).
However, the court declined to take on board fully the English position on the basis that the English Arbitration Act differs in many significant ways to the IAA. In particular, (a) the English Arbitration Act is not wholly based on (nor does it incorporate) the UNCITRAL Model Law, which strictly circumscribes court intervention in arbitral proceedings, (b) the English Arbitration Act deals with both domestic and international arbitration, whereas the IAA only deals with international arbitration; and (c) in England it possible for parties to contract out of a tribunal’s ability to determine its own substantive jurisdiction, in favour of such matters being dealt with by the courts.
Instead, the court held that the preferred approach in Singapore is that the party applying for the stay of proceedings under s. 6(2) of the IAA need only show a prima facie case that the arbitration agreement was concluded. If a prima facie case is made out, then the matter would be left to the arbitral tribunal to decide for itself.
In coming to this decision, the Singapore High Court cited Herbert Smith Freehills’ partner Larry Shore’s chapter “Commentary to the UNCITRAL Model Law” co-authored with Stavros L Brekoulakis in Concise International Arbitration which outlines the divergent approach adopted by national courts to the issue of competence-competence principles, and whether such questions of jurisdiction, arising from a dispute as to the existence of an arbitration agreement, should be decided by the national court or tribunal itself.
The court stressed that any discomfort arising from the fact that a tribunal has authority to determine its own jurisdiction and could therefore find that it had no authority to decide the issue if there was, in fact, no arbitration agreement, should be disregarded. It stated that “having accepted and given effect to the principle of ‘kompetenz-kompetenz’ for so many years we must disregard that discomfort. Otherwise we may find ourselves drawing finer and finer distinctions between situations in which the principle applies and situations in which it does not.”
On the facts of the case, the court was satisfied that a prima facie case had been made out as to the existence of the arbitration agreement. The application for a stay of proceedings was therefore dismissed and the issue of jurisdiction was left for the Tribunal to determine.
Comment
This case is a welcome confirmation of the application of the principle of competence-competence in circumstances where the existence of the arbitration agreement is in dispute. It is now clear that parties wishing to challenge the existence of an arbitration agreement in Singapore should do so before the arbitral tribunal itself, unless there is very strong proof that no arbitration agreement exists. In reaching its decision, the Singapore court has further reinforced its pro-arbitration stance and the policy of giving primacy to the arbitral tribunal.
For more information please contact Alastair Henderson, Partner, Daniel Waldek, Senior Associate or your usual Herbert Smith Freehills contact.
The Hague Convention of 30 June 2005 on Choice of Court Agreements (the Convention) comes into force today, 1 October 2015. The intention of the Convention is to provide a reciprocal regime in respect of exclusive choice of court agreements (also called forum selection clauses), which offers greater certainty to commercial parties that their choice of forum will be respected, and, moreover, that any judgment will be readily enforceable in other jurisdictions.
The key provisions of the Convention are:
Article 5, which provides that a court chosen in an exclusive choice of court agreement must hear the case (save for in limited circumstances)
Article 6, which provides that a court seised of a matter in relation to which an exclusive choice of court agreement applies, must stay or dismiss proceedings (subject to a limited number of exceptions)
Article 8, which provides that the courts of Contracting States are obliged to recognise and enforce a final judgment of the court of another Contracting State named in an exclusive choice of court agreement without review of the merits (subject to a limited number of grounds for refusal of recognition and enforcement).
The Convention is limited in scope – it only applies to exclusive choice of court agreements, as defined in Article 3. However, a forum selection clause which meets the defined criteria but is silent as to whether the jurisdiction of the chosen court is exclusive will be deemed to be an exclusive choice of court agreement and fall within the scope of the Convention. Its application is also subject to a number of exceptions – for example, employment contracts and rights in rem over immovable property are excluded. Further, it does not apply to arbitration or related proceedings, or to interim relief.
Mexico acceded to the Convention in 2007 and it was then ratified by 27 of the 28 Member States of the EU (Denmark having decided not to ratify it) earlier this year. Other countries have signed – the US in 2009 and Singapore in March of this year – but are yet to ratify the Convention. For commercial parties who are involved in international transactions, the benefits of the Convention will depend on it achieving broad acceptance in the same way as the New York Convention, which has been ratified or acceded to by 158 countries.
“International cases” and only civil and commercial matters.
The Convention applies to “international cases”. In relation to the issue of jurisdiction, the definition of international is based on the circumstances of the case – the default position is that the case is international unless the parties are resident in the same Contracting State and the relationship of the parties and all other elements relevant to the dispute, regardless of the location of the chosen court, are connected only with that State.
The definition of international in relation to enforcement hinges only on whether enforcement of a foreign judgment is being sought.
The Convention only applies to civil and commercial matters.
Jurisdiction
In short, the obligation on the chosen court is to hear the case. The exception is where the choice of court agreement is null and void under that State’s law (for example, for fraud, mistake or duress), or application of that State’s jurisdictional rules affecting the subject matter or value of the claim point to another court in that State having jurisdiction.
At the heart of the Convention is the obligation on courts of Contracting States who are seised notwithstanding an exclusive choice of court agreement in favour of the court of another Contracting State. That court is generally obliged to stay or dismiss the proceedings to which an exclusive choice of court agreement applies, subject to a number of exceptions. Some of these exceptions are potentially broad in scope – for example, those referring to manifest injustice and public policy. Furthermore, there is potential for a non-chosen court to reach a determination that the choice of court agreement is invalid under the law of the State of the chosen court. The chosen court may reach a different decision, so there remains potential under the Convention for parallel proceedings and inconsistent judgments, both on jurisdiction and on the merits.
Recognition and enforcement
Chapter III of the Convention contains a reciprocal obligation on recognition and enforcement. The courts of a Contracting State are obliged to recognise and enforce a final judgment of the court of another Contracting State designated in an exclusive choice of court agreement without review of the merits. However, the grounds on which an enforcing court can refuse are relatively broad or, at least, could be broadly interpreted. In the same way that the public policy exception in Article V(2) of the New York Convention is subject to varying degrees of interpretation (and some may say misuse), the public policy ground contained in Article 9 of the Convention provides similar scope for mischief making.
Unilateral Jurisdiction Clauses
There is nothing in the Convention which expressly deals with unilateral or asymmetric jurisdiction clauses. For example, if parties enter into an agreement whereby the English court has exclusive jurisdiction as far as claims by party A are concerned, and non-exclusive jurisdiction as far as claims by party B are concerned, and party B brings proceedings in the English court (ie. in the chosen court), is that judgment enforceable under the Convention in another Contracting State? The Explanatory Report to the Convention stipulates that asymmetric or unilateral clauses are outside the scope of the Convention. It also gives examples of clauses that would be regarded as exclusive and those which would not.
However, where a forum selection clause provides for one party to exercise an option between litigation or arbitration, and the jurisdiction element of that clause meets the definition of an exclusive choice of court agreement, the clause should be within the scope of the Convention.
The future of the Convention
As noted above, the success of the Convention depends on whether it is accepted by States. It is highly likely that Singapore will ratify the Convention in the near future – it would further assist Singapore’s intention to become a centre for dispute resolution, including by facilitating recognition and enforcement of judgments of the Singapore International Commercial Court across the EU (with the exception of Denmark). The intentions of other jurisdictions are not so clear. The Hong Kong SAR Government conducted two consultations on the Convention with stakeholders but received “mixed views” on the question of whether it should be applied in Hong Kong. As a clear rival to Singapore for dispute resolution business in the Asia-Pac region, Hong Kong is studying closely the impact of the Convention on the behaviours of international business parties in relation to choice of forum and enforcement. The United States has signed the Convention and there is draft legislation in order to facilitate its implementation but it is unclear whether a clash between state and federalist interests will undermine progress towards ratification. The Convention remains under consideration in Australia. Herbert Smith Freehills’ Consultant Prof. Richard Garnett, also Professor of Law at Melbourne University has written extensively on this subject and, at the invitation of the Australian Government is an expert member of the Australian delegation to the Hague Conference on Private International Law.
For further information, please contact Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.
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Vanessa Naish
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In Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2015] SGCA 57, a distinguished panel of the Singapore Court of Appeal considered an application to stay court proceedings in favour of arbitration under section 6 of the Singapore International Arbitration Act ("IAA"). They confirmed the appropriate standard of review to be adopted in respect of the existence and scope of the arbitration agreement as a prima facie standard. The Court of Appeal also provided guidance on determining whether the subject matter of a claim is arbitrable or not, holding that minority shareholder claims under s.216 of the Companies Act (Cap 50, 2006) are arbitrable. Finally, the Court of Appeal demonstrated flexibility in exercising its case management powers to regulate the conduct of court proceedings involving multiple parties, not all of whom are party to the arbitration agreement.
Background
The plaintiff entered into a share sale agreement (the "Share Sale Agreement") with the second defendant ("Lionsgate") for the sale of shares in Auzminerals Resource Group Limited (“AMRG”). The Share Sale Agreement contained an arbitration clause providing for SIAC arbitration in relation to "any dispute arising out of or in connection with [it]". The plaintiff commenced court proceedings on the sole ground that AMRG's affairs had been conducted in an oppressive or unfairly prejudicial manner towards it as a minority shareholder, pursuant to s.216 of the Companies Act. The proceedings were brought against seven other defendants, various shareholders and directors in Lionsgate and AMRG, none of whom were party to the Share Sale Agreement and, therefore, the arbitration clause.
High Court Proceedings
Pursuant to s.6 of the IAA, Lionsgate applied for a stay of the court proceedings on the ground that part of the dispute fell within the scope of the arbitration clause in the Share Sale Agreement and the rest of the court proceedings should be stayed pending the resolution of the arbitration. The remaining defendants were also of the view that the proceedings against them should be stayed pending resolution of the arbitration and filed stay applications that were contingent on the success of Lionsgate’s application relying on the court’s inherent power of case management.
Section 6 of the IAA provides for a stay in so far as court proceedings relate to "any matter which is the subject of the [arbitration] agreement" unless the court "is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed". The plaintiff's unfair prejudice claim was supported by four distinct allegations. Only one of these allegations was based on the existence of a particular clause in the Share Sale Agreement. At first instance, the High Court found the unfair prejudice claim fell within the scope of arbitration clause because there was a sufficient factual connection between at least two of the four allegations and the Share Sale Agreement. However, the High Court did not grant Lionsgate’s stay application because it found that the dispute was non-arbitrable. Lionsgate appealed the decision.
Court of Appeal Proceedings
Standard of review under s.6 of the IAA
The first issue examined was the appropriate standard of review that courts should use when deciding a stay application under s.6 of the IAA. The Court of Appeal noted that the principle of kompetenz-kompetenz – a tribunal's power to rule on its own jurisdiction – and s.6 of the IAA had the potential to give rise to a certain "friction". This arises because, in deciding a stay application, a court would necessarily have to take a view on the existence and scope of the arbitration agreement in question. This was noted recently in a decision of the High Court (see our blog post, here).
The Court of Appeal considered the travaux préparatoires of the UNCITRAL Model Law and the respective positions in England, Canada and Hong Kong, as well as the views of a court appointed amicus curiae – a rare occurrence in Singapore. The Court of Appeal concluded that the "prima facie" approach should be adopted in Singapore, rather than a full review of the merits.
Consequently, a court should grant a stay if it is satisfied that there is prima facie a valid arbitration clause which covers the dispute in question and then leave the tribunal to determine whether – on the merits – those conditions have in fact been met. The Court of Appeal's decision is in line with three previous Singaporean decisions as well as the position in Hong Kong, various states in Canada and many other jurisdictions (notably, not England).
Two of the key reasons underpinning the decision were: (1) it was closest to what had been envisaged by the drafters of the IAA, and (2) the full merits review could "significantly hollow" the kompetenz-kompetenz principle of its practical effect because a claimant could strategically manoeuvre away from arbitration to have this issue decided in court by bringing its claim in court.
Arbitrability
The next issue discussed by the Court of Appeal was arbitrability; in short, whether the subject-matter of the dispute was such that it would be contrary to public policy for that dispute to be resolved by arbitration.
The plaintiff commenced court proceedings on the sole ground that AMRG's affairs had been conducted in an oppressive or unfairly prejudicial manner towards it as a minority shareholder, pursuant to s.216 of the Companies Act. The plaintiff maintained that, as a matter of public policy, such a claim should not be resolved by arbitration. The Court of Appeal referred to Lord Hoffmann’s judgment in O’Neill v Phillips [1999] UKHL 24 which describes the essence of a claim for unfair prejudice as "upholding the commercial agreement between the shareholders of a company". Section 216 of the Companies Act was therefore concerned with protecting the commercial expectations of parties and not with furthering any public interest. As a result, it was open to parties to choose to resolve their differences relating to those commercial expectations by arbitration. There was, in general, no public element in disputes of this nature which mandated the conclusion that it would be contrary to public policy for them to be determined by an arbitral tribunal rather than by a court.
The Court of Appeal then turned to look at the two reasons given by the High Court for ruling the claim non-arbitrable: (1) the potential inability of an arbitral tribunal to grant appropriate relief compared to the powers available to a court under s.216 of the Companies Act; and (2) procedural complexity arising out of the fact there were defendants who were not party to the arbitration agreement. Regarding (1), the Court of Appeal held that the fact the relief sought might be beyond the power of the tribunal to grant does not, in and of itself, make the subject matter of the dispute non-arbitrable. It was merely a jurisdictional limitation. Regarding (2), this, at most, gave rise to regrettable substantial inconvenience but was not relevant to arbitrability.
Scope of the arbitration clause
Having found the issues in the claim arbitrable, the Court of Appeal then considered whether the issues raised in the unfair prejudice claim fell within the scope of the arbitration clause in question. The parties agreed that two of the four issues raised by the plaintiff fell outside the scope of the arbitration clause. Regarding the remaining two issues, the Court of Appeal found that the principles governing the construction of an arbitration clause were well settled, with the Court of Appeal construing the clause based on the presumed intentions of the parties as rational commercial parties: Premium Nafta Products Ltd v Fili Shipping Co Ltd [2008] 1 Lloyd’s Rep 619. The court must also consider the underlying basis and true nature of the issue or claim, and not solely the manner in which it is pleaded. Consequently, the court found a prima facie case that one of the claims made fell within the scope of the arbitration clause and that the court action between the plaintiff and Lionsgate only (and not the remaining six defendants who were non-signatories to the arbitration agreement) in respect of this one claim should therefore be stayed under s.6 of the IAA.
The Court of Appeal then had to consider what to do with the three remaining claims in the court proceedings which were not subject to a mandatory stay under s.6 of the IAA, along with the fourth claim against the remaining six defendants. The Court of Appeal considered that there were three possible options:
(a) stay all the court proceedings pending the resolution of the arbitration;
(b) stay the court proceedings only to the extent required under s.6 of the IAA, but on condition that the court proceedings which fall outside the s.6 stay be resolved before any arbitration is commenced; or
(c) stay the court proceedings only to the extent that is required under s.6 of the IAA, and allow the putative arbitration and the remaining court proceedings to run in parallel.
The Court of Appeal felt deciding on the appropriate option was a delicate task. There was an overlap in the parties, issues and remedies which would be involved in the putative arbitration and in the suit before the Court. Having considered jurisprudence from Australia, Canada, England and New Zealand, the Court of Appeal noted the difficulty in endeavouring to maintain the strong legislative policy in favour of arbitration in circumstances where the dispute which is covered by the arbitration clause in question forms only part of a larger dispute with a broader horizon. The Court of Appeal concluded that the court, as the final arbiter, should take the lead in ensuring the efficient and fair resolution of the dispute as a whole and that this would turn on the facts of each individual case. In reaching this conclusion, the Court of Appeal declined to follow the position in England and New Zealand that a stay on case management powers should only be given in "rare and compelling" circumstances.
The reasoning of the Court of Appeal involved striking a balance between: (1) the plaintiff’s right to choose who to sue and where; (2) preventing a plaintiff from circumventing the operation of an arbitration clause; and (3) preventing an abuse of process and ensuring the efficient and fair resolution of disputes. Adopting a pragmatic approach, the Court of Appeal therefore gave the plaintiff two weeks to decide whether to pursue the one allegation that was within the scope of the arbitration clause. If it chose not to pursue it, the court proceedings would not be stayed, but the plaintiff would also not be allowed to rely on that allegation as against the remaining defendants. If it did choose to pursue that allegation, then (subject to having an expedited arbitration) the court proceedings against all the defendants would be stayed. In such a case, the Court of Appeal suggested that the plaintiff should consider making an offer to the other defendants to be bound by the arbitral findings, and noted that any refusal by them to accept which resulted in them re-litigating issues determined in the arbitration could amount to an abuse of process (for example, by challenging the arbitral tribunal's decision when the dispute returned to court if such challenge was contrary to the present stance of seeking a stay).
Comment
Coming from an esteemed bench, including both the current and a former Chief Justice, this case should put an end to any uncertainty as to the proper test to apply in deciding applications under s.6 of the IAA – it is now settled as a prima facie review on the validity and scope of the arbitration clause.
The decision is also interesting as the Court of Appeal appointed Professor Laurence Boo, an established arbitration academic and arbitrator, to provide an independent brief on the standard of review to be adopted in an application for a stay under s.6 of the IAA. This is a rare example of the use of a court appointed amicus curiae. In addition to the detailed discussion on the history, background and varying positions on the standard of review in other jurisdictions, the use of the an amicus curiae (especially coming from such an esteemed bench) demonstrates a clear desire from the Court of Appeal to have finality on this issue. It is also a further demonstration of the robust approach the Singapore courts take on appropriate deference to arbitral tribunals.
Clients should keep in mind that where they are investing in a company, there is always the potential for multiple parties and multiple venues in in future disputes in relation to the conduct of such company. This could result in increasing the time and cost of resolving such disputes. It is therefore worth giving careful consideration to the appropriate forum and manner in which to bring claims concerning the conduct of the affairs of a company. It is also important to carefully consider the choice of dispute resolution clauses in shareholders' agreements, SPAs and other agreements relating to the business of a company.
For more information please contact Alastair Henderson, Partner, Daniel Waldek, Senior Associate, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.
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Andrew Cannon, Partner in our International Arbitration and Public International Law practices has posted a short video on our Public International Law Notes blog on "State immunity and waiver of immunity issues in English law". Andrew discusses the restrictive doctrine of immunity enshrined in the English State Immunity Act 1978 and describes the steps a party should take in dealing with a state to ensure an effective of waiver in respect of jurisdiction and enforcement. To view the video, please click here.
Subscribers to our Arbitration Notes blog may also wish to subscribe to our Public International Law Notes blog for regular updates, analysis and comment on state immunity, investment treaty cases, investment protection, free trade agreements and other public international law issues. To subscribe to the Public International Law Blog, please click here, and enter your email in the “subscribe” box.
For further information, please contact Andrew Cannon, Partner, or your usual Herbert Smith Freehills contact.
In Exmek Pharmaceuticals SAC v Alkem Laboratories Limited [2015] EWHC 3158 (Comm), the claimant ("Exmek") challenged an arbitral award for want of substantive jurisdiction, on grounds including the validity of the arbitration agreement; tacit abandonment by the defendant of reliance on the arbitration agreement; submission to the jurisdiction of the courts of Peru by the defendant; and the improper appointment of the Sole Arbitrator. The English High Court (the "Court") rejected the challenge, adopting a purposive and highly commercial approach to the construction of the arbitration agreement.
Background
Exmek terminated a Distribution Agreement (the "Agreement"), with Alkem, alleging breaches by Alkem, and initiated an arbitration with Alkem in relation to those breaches. It was indicated to Exmek by "C", a member of the Secretariat of the London Court of International Arbitration (the "LCIA"), that the relevant clauses of the Agreement would not comply with the requirements of the LCIA (on the basis that the Agreement did not refer to and incorporate the LCIA Rules, specify the place of arbitration or that the arbitral award would be final, or clearly set out the law according to which the Agreement would be construed and enforced).
Exmek and Alkem failed to reach agreement as to amendments designed to render the arbitration provisions compliant with the LCIA Rules. Exmek brought proceedings in the Peruvian courts for breach of the Agreement. Alkem challenged the jurisdiction of the Peruvian court on the basis of the arbitration provision, but the challenge was out of time. The Peruvian court held that Alkem had tacitly waived any objection to the jurisdiction of the court, and gave judgment on the merits against Alkem in the amount of approximately US$6 million. The judgment was upheld on appeal to the Peruvian Supreme Court.
Alkem then commenced arbitration in London against Exmek in relation to the dispute, including a number of counterclaims. The sole arbitrator was appointed by a notice given by Alkem under s.17 of the Act, and issued an award on jurisdiction in August 2014, finding he did have jurisdiction to hear the claims. Exmek challenged this award before the Court under s.67 of the English Arbitration Act 1996 (the "Act").
Validity of the arbitration agreement
Exmek argued that the arbitration agreement was invalid. The Court noted that Exmek's objection appeared to stem initially from the fact that C, as a member of the LCIA Secretariat, had advised that the arbitration provisions of the Agreement would be insufficient to render an LCIA arbitration effective. The Court found that the clause had been intended as an agreement to ad hoc arbitration, and it was therefore irrelevant whether or not it was compliant with the LCIA's requirements. In any case, the advice of C did not bind the Court.
Exmek argued that the Agreement contained two conflicting clauses, which could not be reconciled. The first of these was a provision that the governing law of the Agreement would be the "law of the UK", and that "the Parties submit to the exclusive jurisdiction of the Courts of the UK". The second was an agreement that all disputes arising in relation to the Agreement would be referred to arbitration "conducted in the UK in accordance with the provisions of the law of the UK".
The Court held that the exclusive jurisdiction clause did not eliminate the possibility of agreement to refer disputes to arbitration. Taking a common-sense view of the parties' commercial intentions, the clauses should be read together as providing for arbitration as the mechanism of dispute resolution, with "UK law" as the law governing the contract, and for the "UK courts" to have exclusive jurisdiction to supervise the arbitration (or to take substantive jurisdiction in the event of the arbitration agreement becoming "in some manner ineffective", as the judge observed).
The Court also held that the references to "UK" law and courts should be read as references to the law and courts of England and Wales, again on the basis of a "sensible commercial interpretation" of the parties' intentions. Given that international trade contracts regularly provide for dispute resolution under English law and subject to the jurisdiction of the English courts, the Agreement should be read as doing likewise, rather than be understood as referring to the courts of Scotland or Northern Ireland or being found to be entirely ineffective on grounds of impossibility (as the Peruvian courts had held). It was also held that the parties had intended the place of arbitration to be London, and that it was not necessary for there to have been a specific separate provision to this effect, or for it to have been expressly stated that the arbitral award would be final and binding (these matters being covered by the Act).
Waiver of the arbitration agreement
Exmek argued that Alkem had waived its right to rely on the arbitration agreement, having failed to respond adequately to Exmek's initial request for arbitration prior to the issue of the Peruvian court proceedings. This was rejected on the facts, on the basis that mere silence was insufficient to constitute waiver or abandonment of the contract in any event, and that Alkem had given indications in correspondence of its acceptance that the dispute would eventually be decided by arbitration.
Submission to jurisdiction
Exmek submitted that the English courts were bound by the decision of the Peruvian court, under the doctrine of res judicata. However, it was held that this would only be applicable if Alkem had submitted to the jurisdiction of the Peruvian court, and that it would not be considered to have done so on the basis only of it having resisted the claim on the merits after it was determined that its jurisdictional objections were out of time. Rather, it had made submissions on the merits while maintaining and reserving its jurisdictional challenges. Accordingly, Alkem had not submitted to Peruvian jurisdiction, and it was therefore not necessary to decide whether the English courts should recognise the Peruvian judgment.
Validity of the Sole Arbitrator's appointment
Exmek objected to the appointment of the Sole Arbitrator on the basis that there had been no agreement as to the number of arbitrators, and that an application to the English court would therefore be necessary to appoint an arbitrator under s.18 of the Act.
The Court held that the parties had agreed in correspondence that there would be a tribunal of three, although the terms of the Agreement only provided for "one or more arbitrators". This amounted to a clarification of the Agreement. Alkem had accordingly been entitled to the appointment of its nominee as Sole Arbitrator on the basis of Exmek's failure to nominate an arbitrator and in accordance with the terms of the Agreement.
Further, the Court held that there was no rule of English law imposing any nationality restrictions on arbitrators. Exmek's objection founded on the nationality of the arbitrator being shared with Alkem accordingly did not go to jurisdiction. Exmek's case was primarily an objection on grounds of fairness, and should therefore have been brought under s.68 of the Act rather than s.67.
Comment
This case is an example of the English courts taking a practical, common-sense view of imperfectly drafted arbitration provisions. The decision is in keeping with the interpretive presumption in favour of the validity of arbitration arrangements established in Fiona Trust & Holding Corp v Privalov [2007] Bus LR 1719, and clearly indicates that the English courts are prepared to uphold purported arbitration agreements even in the face of apparently significant inconsistencies and ambiguities. Further, it demonstrates that the English courts will not be easily persuaded that a party to an arbitration agreement has waived its right to rely on it, whether by conduct or by appearance before foreign courts. Accordingly, it represents a welcome further confirmation of the positive attitude of the English courts to arbitration provisions.
However, it should be noted that this decision may ultimately give rise to some practical difficulties for the parties, in the event that the Sole Arbitrator finds against Exmek on the merits. This would bring the Sole Arbitrator's award into conflict with the decision of the Peruvian Supreme Court, forcing any court in which the award was sought to be enforced to decide between recognition of the award and recognition of the Peruvian judgment. The final outcome of this arbitration may consequently give rise to considerable interest.
For further information, please contact Nicholas Peacock, Partner, or your usual Herbert Smith Freehills contact.
On 7 October 2015, in Cass. 1ère Civ., 7 October 2015, No 14-16.898, the Cour de cassation (the French Supreme Court) handed down a decision that significantly clarified its interpretation of the rules for jurisdiction clauses within the European Union (EU). It thereby added to its case law on unilateral or asymmetric jurisdiction clauses, that is, jurisdiction clauses that do not give the same rights to each party to the contract.
In this case, a company incorporated in France and a company incorporated in Ireland had signed a contract with a jurisdiction clause, whereby the parties agreed that disputes would come under the jurisdiction of the courts of the Republic of Ireland. However, the same clause also reserved the right for the Irish company alone to apply to the courts with jurisdiction over the counterparty's registered office, or those in any country where it suffered a loss caused by the counterparty. The French company complained that the Irish company was infringing competition law, and started proceedings before the Paris Commercial Court, seeking compensation for the harm it had suffered. The Irish company successfully argued that the Commercial Court lacked jurisdiction, which belonged to the courts of Ireland. When the French company's appeal to the Paris Court of Appeal was equally unsuccessful, it appealed to the French Supreme Court.
In its decision of 7 October 2015, the Supreme Court took the opportunity to:
Refine the case law from X v Banque Privée Edmond de Rothschild (Cass. 1ère Civ., 26 September 2012, No 11-26.022) (Rothschild) and Cass. 1ère Civ., 25 March 2015, No 13-27.264 (Crédit Suisse), upholding asymmetric jurisdiction clauses provided they objectively identify the courts that may have jurisdiction at the choosing of the party benefiting from the asymmetry (see our previous blog posts here and here)
Incorporate case law from the Court of Justice of the European Union (CJEU) into its decision: under EU case law, jurisdiction clauses only apply to disputes over alleged infringements of EU competition law if the clause specifically so provides.
Notwithstanding the fact that the French courts have not had a chance to consider the issue in relation to arbitration since the Rothschild case, there is nothing to suggest that the court's reasoning in the Rothschild, Credit Suisse or Apple cases would apply with regard to clauses containing an arbitration agreement with an option to litigate in one particular jurisdiction, or an exclusive jurisdiction clause with an option for one party to bring arbitration proceedings (so-called hybrid dispute resolution clauses). Throughout the period of uncertainty as to the availability of asymmetric jurisdiction clauses, hybrid arbitration clauses may be an appropriate option for parties in circumstances where there is a nexus with France.
We will analyse these two aspects below.
Validity of asymmetric jurisdiction clauses
In exclusive jurisdiction clauses, the parties to a contract agree in advance that any disputes between them will be submitted to a single court identified in the clause. However, in practice more complex arrangements have been developed, mainly under Anglo-American influence, aimed at expanding the array of possible jurisdictions, most often for the benefit of only one of the contracting parties (the party in the strongest position during contract negotiations).
This second type of clause, generally called an "asymmetric" or "unilateral" clause, provides for different solutions, depending on which party is the claimant in the legal proceedings. Most often, under these clauses:
One party is obliged to file its suit in a forum determined by the clause (generally the courts for its counterparty's place of domicile).
The counterparty, however, has greater freedom, within confines that may greatly vary with the wording of the clause. In practice, the clause may even allow the beneficiary to apply to any other court that would normally assume jurisdiction to hear the dispute if the jurisdiction clause did not exist.
In this case, the clause at issue was asymmetrical: while the French company had no choice but to apply to the courts of Ireland, the Irish company had greater flexibility. In addition to the courts of Ireland, the Irish company could apply to the courts for the place where the French company had its registered office, or those of any country where it had suffered a loss (attributable to the counterparty).
In the Court of Appeal, the French company contended that the jurisdiction clause was "void and ineffective because it is "potestative" (at the discretion of a single party), and does not meet the predictability requirement" (see Paris Court of Appeal, Pôle 1, Chambre 1, 8 April 2014, No 13/21121). The company was attempting to take advantage of the now well-known case law from Rothschild. In Rothschild, the French Supreme Court refused to uphold a jurisdiction clause that gave only one of the parties the option of submitting any disputes to either the court referred to in the clause or to "any other competent court". The court's reason was that the clause "is at the discretion of a single party (…), and so runs counter to the subject and purpose of the option of expanded jurisdiction set out in Article 23 of Council Regulation No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, which harmonised the rules for jurisdiction within the EU.
Despite the many criticisms of Rothschild, the French Supreme Court mostly upheld its decision in another ruling issued pursuant to the Lugano Convention (the counterpart to the 2001 Brussels Regulation), now referred to as the Crédit Suisse ruling. However, the court did remove all references to the concept of a potestative clause, and confined itself to citing predictability, which by the court's hand thereby became a cardinal rule.
The Crédit Suisse ruling had not yet been issued when the appeal in the present case was filed, but the contours of the present decision can be inferred from it. The court had implied in Crédit Suisse that it was not opposed in principle to all types of asymmetry in jurisdiction clauses. It only invalidated the clause at issue (which was similar to the clause in Rothschild) after noting that the clause did not define the "objective factors" based on which the clause beneficiary would be able to apply to a different forum than the one imposed on its counterparty. In other words, the court suggested that it would uphold an asymmetric clause as long as the party that was not free to choose jurisdiction under the clause could objectively anticipate the alternative forums available to their counterparty.
In this case, the Supreme Court has now confirmed this reading, which was implied in Crédit Suisse. The court assumed the lower courts' reasoning as its own, namely that the jurisdiction clause did satisfy the "predictability requirement" in this case because it was possible "to identify which courts would potentially have jurisdiction over a dispute". Therefore, it could not be said:
"that the choice of court was left to the sole discretion of [the Irish company] since disputes could only be brought before the courts with territorial jurisdiction over the registered office [of the French company] or over the place where the loss was suffered by [the Irish company]; consequently, the clause was not 'potestative' in light of the specific criteria set out for determining the court with jurisdiction, even if there were more than one such court (…)" (see Paris Court of Appeal, Pôle 1, Chambre 1, 8 April 2014, No 13/21121).
In the view of the French Supreme Court then, even though the French and Irish companies did not enjoy the same freedom in choosing which court would hear their dispute, the jurisdiction clause did abide by the predictability requirement by making it possible to objectively identify which courts could conceivably have jurisdiction. Thus, the choice was not under the beneficiary's complete control.
Three years after Rothschild, the case law from the French Supreme Court is now clear. Asymmetric clauses are still to be avoided if they allow a single party to apply to any court of its choosing, but they are valid if the other possible forums can be objectively determined (whether because explicitly stated or because specific rules for doing so are given).
Although the case law amassed by the court on this topic is perfectly intelligible to practitioners, it is not without critics.
Because they still reject asymmetric clauses that allow complete freedom to one of the parties to apply to any competent court outside the jurisdiction specifically identified by the parties in the agreement, the rulings in Rothschild and Crédit Suisse are clearly out of tune with the Anglo-American tradition, in which this kind of clause is perfectly valid. Moreover, since such clauses were expressly allowed under the Brussels Convention (the forerunner to the 2001 Brussels Regulation), the court implicitly found that the 2001 Brussels Regulation had restricted the freedom of contract on this issue.
Regardless, the case law of the French Supreme Court only stands thanks to the silence of the CJEU. No cases concerning this type of clause have cropped up before the European court since the Brussels Convention was replaced by the 2001 Brussels Regulation. However, other European courts, all applying the same EU law, continue to accept asymmetric clauses despite the situation in France, creating an unwelcome note of discord with the rest of the EU.
The goalposts were recently moved when Regulation No. 1215/2012 (Recast Brussels Regulation) entered into force on 10 January 2015, replacing the 2001 Brussels Regulation. Unlike the earlier regulation, which did not address the validity of jurisdiction clauses, the new text provides that this issue must be assessed in accordance with the laws of the courts given jurisdiction by the clause in question (see Article 25). As the court appointed by the clause is unlikely to be a French court, could this mean the end, at least in practice, for the Rothschild-Crédit Suisse case law? Only time will tell.
For now, businesses involved in transactions with ties to France must continue to take every precaution when drafting jurisdiction clauses. Those who wish to keep their options open when it comes to jurisdiction would be wise to phrase those options carefully.
This latest decision is also an opportunity for debate on whether asymmetric clauses are even useful within the EU at all. The circulation of court decisions within the zone has already been greatly facilitated – the Recast Brussels Regulation is a continuation of the movement begun by the Brussels Convention and improved by the 2001 Brussels Regulation, and so the practical benefits of this type of clause are not entirely clear. From a pragmatic point of view, in the majority of cases, parties should ensure that their choices of court and applicable law are aligned and then have the decision, once obtained, enforced in the relevant jurisdictions.
Scope of jurisdiction clauses and anti-competitive practices
The French company also argued that the Court of Appeal should not have ruled that the jurisdiction clause applied to its dispute with the Irish company. In its view, in so far as the dispute centred on alleged anti-competitive practices by the Irish company, it escaped the jurisdiction clause.
The Court of Appeal dismissed this argument, concluding that the dispute was governed by the jurisdiction clause, which provided no particular limits to its scope. Accordingly, it "applied to any dispute arising" out of the performance of the contract, including any anti-competitive practices. The Court of Appeal thus followed well-established French case law whereby a tort action (such as an action for damages for an infringement of competition law) is not inherently outside the scope of a jurisdiction clause, which depends on the wording of that clause (see, for example, Cass. Com, 20 March 2012, No 11-11.570).
The French Supreme Court reversed this determination based on a recent CJEU judgment. In Cartel Damage Claims (CDC)Hydrogen Peroxide SA v Akzo Nobel NV and Others, 21 May 2015, CJEU, C‑352/13 (CDC Hydrogen Peroxide), the European court concluded that Article 23 of the 2001 Brussels Regulation "must be interpreted as allowing, in the case of actions for damages for an infringement of [European competition law], account to be taken of jurisdiction clauses […] provided that those clauses refer to disputes concerning liability incurred as a result of an infringement of competition law."
The CJEU requires an express reference to anti-competitive practices in the jurisdiction clause if that clause is to apply to disputes over infringements of EU competition law. In the case at hand, the clause did not meet this requirement and the claims of the French company did rely, at least in part, on EU competition law. From this point of view then, the appellate decision was to be reversed.
From a practical perspective, the (mandatory) application of EU case law within the EU means that parties drafting jurisdiction clauses need to account for the CJEU's requirement for specific wording.
From a legal perspective, one question remains: does the determination in CDC Hydrogen Peroxide apply to infringements of EU competition law alone, or should it also cover all other infringements of competition law, including those derived from a member state's own laws? In so far as the French company relied on both EU and French law before the Court of Appeal, there is no doubt that the court of remand will need to consider this issue. Either it will decide that the clause simply cannot apply in a situation potentially involving infringements of EU and French competition rules, or it will conclude that only the claims based on EU law must be excluded from the scope of the clause. In the first case, French courts would then have jurisdiction to hear the whole dispute but this would also constitute a partial reversal of French case law (subject to the application of Article 5(3) of the 2001 Brussels Regulation (applicable to the facts)). In the second, the dispute would be divided: one part to be heard by the Irish courts and the other in France.
A version of this post was first published by Practical Law.
For further information, please contact Clément Dupoirier, Partner, Vincent Bouvard, Avocat or your usual Herbert Smith Freehills contact.
On 10 January 2016, the Singapore Academy of Law (SAL) published the results of its study on preferences for the choice of governing law and jurisdiction made by those involved in cross-border transactions "in Singapore and the region" (the Study). The Study, which was commissioned by the SAL's International Promotion of Singapore Law Committee, reflects the views of around 500 commercial law practitioners and in-house counsel who have involvement in cross-border transactions. The Study results can be accessed here.
The Study responses suggest the growth in (i) the internationalisation of transactions in the region, (ii) the importance of Singapore law and (iii) Singapore as a preferred choice of forum for the resolution of disputes. The most noteworthy points are highlighted below.
However, the value in the Study in signalling the comparative strength of Singapore's position as an international centre of dispute resolution will be determined by the demographics of the Study population, and, in particular, how many of the respondents are based outside Singapore and in which jurisdictions.
The most noteworthy points arising out of the Study are:
The most preferred choice of governing law in cross-border transactions was English law at 48%. Singapore law was second at 25%, with New York at 7% and Hong Kong at 3%. Amongst the Study population, Singapore law was widely accepted as a valid choice for the governing law of cross-border agreements in the region.
The most preferred venue for dispute resolution amongst study participants was Singapore at 52%, with Hong Kong second at 22%. The UK was only preferred by 7% of the respondents. The top three reasons cited in the Study for choosing Singapore as a venue were proximity, efficiency, and neutrality. The former of these qualities suggests that the Study population was based in or near Singapore.
71% of respondents indicated that arbitration was the favoured method of dispute resolution, compared to 24% for litigation and 5% for mediation. Enforceability of decisions was cited as a key priority. Mediation's low score is perhaps surprising and the outcome may reflect the way the Study question was framed, given that mediation is often attempted within the framework of litigation or arbitration and should not be selected as a sole method of dispute resolution on the basis that it may not reach a determinative outcome. Given the importance of enforceability in choosing litigation or arbitration, the introduction of the hybrid Arb-Med-Arb protocol by the Singapore International Mediation Centre in partnership with the SIAC may encourage the use of mediation in Singapore in the future. As described in our previous blog post, the combined process can result in a consent award enforceable under the New York Convention 1958.
All industry sectors represented by the Study showed a strong preference for arbitration. Consistent with our own experience, the highest scores were shown in the Construction and Oil & Gas sectors, at 84% and 82% respectively. The highest score for litigation was the Banking and Finance sector at 30%.
The general trend suggested by results of the Study matches our own experience both in Singapore and across our network that international arbitration is the most popular choice of dispute resolution mechanism for cross-border transactions. This was also reflected in the 2015 Queen Mary University of London International Arbitration Survey published in October 2015 where survey respondents were predominantly from Europe and Asia (see our earlier blog post here).
Whilst the potential limitations of the Study are noted, undoubtedly Singapore continues to increase in popularity as a venue for dispute resolution and Singapore law may begin to challenge the established use of English law as the preferred choice of governing law in cross-border transactions in the region.
It will be interesting to see if the SAL continues to commission such studies in the future, as this will provide the ability to track how these trends change over the coming years. Further, a comparison with the data from the Global Pound Conference (GPC) series, which Herbert Smith Freehills is sponsoring, may also prove informative. The series expects to generate considerable data worldwide over an extensive 18 month period from stakeholders on their use of various dispute resolution processes (see here for more details on the GPC series).
For further information, please contact Alastair Henderson (Partner), Daniel Waldek (Senior Associate), Yosuke Homma (Associate) or your usual Herbert Smith Freehills contact.
In the case of Anzen Limited and others (Appellants) v Hermes One Limited (Respondent) (British Virgin Islands), the Privy Council ("PC") considered the impact of a dispute resolution clause providing that "any Party may submit the dispute to binding arbitration". The PC held that this wording did not prevent a party from starting litigation in the courts but gave the other parties an option to require "the party which has commenced litigation to submit the dispute to arbitration, by making an unequivocal request to that effect and/or by applying for a corresponding stay".
Whilst, in this case, the PC upheld the right to have disputes determined by arbitration, the ambiguous wording led to additional expense for both parties and unwelcome delay. Also, parties cannot rely on a similarly benevolent approach to the construction of the arbitration agreements being taken in every case or jurisdiction. If the intention is to arbitrate all disputes under the relevant agreement, parties should include a clear, unambiguously drafted arbitration agreement to that effect.
The Privy Council Decision
The parties were shareholders in a BVI company (the "JV Co"). The Shareholders' Agreement ("SHA") included an arbitration clause providing that, if the parties were unable to resolve a dispute through negotiation within 20 business days, "any Party may submit the dispute to binding arbitration". The clause expressly provided for the number of arbitrators, the seat of arbitration and the applicable institutional rules.
Hermes One Limited started litigation against the appellants in relation to their alleged unfairly prejudicial conduct in the management of the JV Co. The appellants applied to stay the proceedings pursuant to section 6(2) of the Arbitration Ordinance 1976, on the basis that the SHA included a valid and binding arbitration clause. The PC considered three possible interpretations of the dispute resolution provisions in the SHA.
The PC refused to interpret the wording "may submit" as an exclusive agreement to arbitrate all disputes. However, the PC applied a broad interpretation of the word "submit", such that it covered not only proceedings initiated by the party in question but also any proceedings initiated by another party to the SHA.
The PC rejected an interpretation whereby a party could only end litigation proceedings commenced by another party by itself commencing arbitration. In the PC's view, this interpretation did not "make much commercial sense" because: (i) to do this, the objecting party might have to comply with complex mandatory pre-conditions to arbitration (e.g. settlement negotiation, mediation, etc); and (ii) the objecting party may have no real basis for commencing arbitration other than to seek a declaration of no liability for the claim brought by the claimant(s) in litigation.
Drawing on the conclusions in Bremer Vulkan v South India Corp [1981] AC 909 that parties to an arbitration agreement are under mutual obligations to cooperate in the pursuit of arbitration, the PC preferred an interpretation whereby notice alone could trigger the mutual agreement to arbitrate. The PC would have reached the same conclusion under the current English Arbitration Act 1996, which makes the cooperation duty express in section 40(1), by providing that: “The parties shall do all things necessary for the proper and expeditious conduct of the arbitral proceedings”. The PC also held that this obligation can apply before any arbitration proceedings are afoot.
The PC concluded, therefore, that the wording "any Party may submit a dispute to binding arbitration" enabled a party wishing for a dispute to be arbitrated, either to commence arbitration itself, or to insist on arbitration, before or after the other party commences litigation, without itself actually having to commence arbitration.
Comment
This decision confirms the PC's pro-arbitration stance. The PC's preferred interpretation of the permissive wording in the SHA comes close in effect to an exclusive agreement to arbitrate. The only difference is that, unless and until one party insists on arbitration, there is no promise not to litigate.
Under an exclusive agreement to arbitrate, court proceedings should not begin at all. On the PC's interpretation of "may submit", litigation was properly begun, but was required to be stayed as regards all arbitrable claims, if and when the appellants invoked arbitration.
The evident risk that the word “may” can be understood to mean that litigation is open, unless and until arbitration is elected, creates potential time and cost exposures for the parties, as well as creating concerns regarding the privacy and confidentiality of the dispute(s) in question.
If by commencing litigation a party is not in breach of the arbitration agreement, but another party can nonetheless require that the litigation be stayed in favour of arbitration, it is not clear which party would bear the costs incurred in the litigation until the stay is granted.
It is worth also noting the timings for challenging the courts' jurisdiction. In England and Wales, under s9(3) of the Arbitration Act 1996, a party must apply to stay the court proceedings before taking any step in the litigation to answer the substantive claim (i.e. before filing its defence).
Although the PC upheld the appellants' right to have disputes determined by arbitration in this case, the use of permissive language in a dispute resolution clause creates significant uncertainties for the parties. This is particularly so where – as was the case here – there is no indication regarding the courts in which litigation could be started. The outcome may have been different if Hermes One had commenced litigation in a different, less benevolent, jurisdiction.
Although this decision may assist parties seeking to enforce permissive arbitration clauses in certain pro-arbitration jurisdictions, where the common intention at the outset is to deprive a party of the right to litigate, the arbitration agreement should be clearly worded. The PC's decision suggests that parties should use the words "should" or "shall", instead of "may".
For further information, please contact Craig Tevendale, Partner, Charlie Morgan, Associate or your usual Herbert Smith Freehills contact.
The recent decision of the English Court of Appeal in Integral Petroleum SA v Melars Group Limited considers the jurisdiction of the court under s67 of the English Arbitration Act 1996 (the Act). S67 deals with challenges to an arbitral award on the grounds of want of substantive jurisdiction. S67(3) provides that on an application by a party to an award, the court may: confirm the award; vary the award; or set aside the award in whole or in part.
The Court of Appeal made clear that the permissive nature of the word "may" in s67(3) makes it open for a judge to decide to make no order, for good reason, on any application under s67.
The Court of Appeal also held that it has no jurisdiction to grant permission to appeal the order of the lower court. Permission to appeal must be granted by the lower court itself.
Integral Petroleum applied under s67 of the Act challenging the arbitrator's award concluding that he lacked jurisdiction. The application was rejected. The lower court held that the arbitrator had fallen into a jurisdictional error but that, on the facts, the error was inconsequential. The lower court therefore refused the s67 application and declined to grant leave to appeal the decision.
Integral Petroleum applied to the Court of Appeal for permission to appeal the lower court's decision. One ground of appeal advanced by Integral Petroleum was that the lower court did none of the actions it was confined to do under s67(3). On Integral Petroleum's case, the word "may" relates to the lower court's ability to do one of the following: confirm the award; vary the award; or set aside the award in whole or in part. Integral Petroleum asserted that the lower court effectively commented on the matter before it and reached no judicial decision.
The Court of Appeal concluded that the relief under s67(3) is discretionary and that it would be impossible to construe the subsection to mean that the permissive word "may" requires the court to make one of the three possible orders laid out. It must "always be open to a judge to decide, for good reason, to make no order on any application, including an application under section 67".
The Court of Appeal further confirmed that it had no jurisdiction to grant permission to appeal the lower court's order. S67(4) provides that "the leave of the court is required" for any appeal – it was well established that "the court" for these purposes referred to the first instance court only. The Court of Appeal had a limited power to intervene if the lower court's decision was itself made without jurisdiction, but that was not the case here. The lower court acted within its jurisdiction in declining to make any order. Therefore, the application for permission to appeal was refused.
Comment
This decision is significant as it clarifies the court's jurisdiction to make no order at all on an application under s67. The position appears to be the same under s68 (challenge to an award on the basis of serious irregularity), and s69 (appeal of an award on a point of law), both of which contain similar discretionary wording. Indeed, the Court of Appeal cited academic authority supporting the view that in all cases under s67 to s69, "the court is not required to make any order at all".
For further information, please contact Nick Peacock, Partner, Anees Naim, Associate or your usual Herbert Smith Freehills contact.
In Wing Bo Building Construction Company Limited v Discreet Limited (HCA 146/2015) the Hong Kong Court of First Instance ("CFI") has upheld the constitutionality of s.20(8) Arbitration Ordinance, which provides that CFI decisions to stay proceedings in favour of arbitration are not subject to appeal. This decision follows the Court of Appeal ("CA") decision in China International Fund Limited v Dennis Lau & Ng Chun Man Architects & Engineers (HK) Limited v Secretary for Justice, [link to our blog post] which upheld the constitutionality of the limits on appeal in s.81(4) of the Arbitration Ordinance. That section requires leave from the CFI to appeal its decision on setting aside an arbitral award.
Background
The dispute arose from a construction contract that contained an arbitration clause. Ng J heard an appeal against a decision to refuse to stay proceedings under s.20 Arbitration Ordinance, which had been made by a Master in Chambers. Notwithstanding that s.20(8) expressly provides that a decision of the CFI to refer the parties to arbitration is not subject to appeal, Wing Bo sought leave from the CFI to appeal on grounds that the provision was unconstitutional.
Wing Bo argued that s.20(8) Arbitration Ordinance limits the power of final adjudication vested in the Court of Final Appeal (CFA) by Article 82 of the Basic Law (which operates as the constitutional document of the Hong Kong SAR), and that any restriction on this power of final adjudication must be proportionate. The proportionality test requires that any such restriction must (i) pursue a legitimate aim; (ii) be rationally connected to that legitimate aim; and (iii) be no more than is necessary to accomplish that legitimate aim. Wing Bo contended that the total elimination of rights to appeal referrals to arbitration under s.20(8) (as opposed to its mere restriction under s.81(4)) was disproportionate, and therefore unconstitutional.
Wing Bo also argued that the CFI lacked jurisdiction to hear Discreet's appeal from the Master's decision, as Discreet had failed to seek the leave of the Master as required by s.20(9) of the Arbitration Ordinance. The Court rejected this argument, noting that Masters have no jurisdiction to give or refuse leave to appeal. The application had been improperly brought before the Master; applications under s.20 must instead be brought before the judge in charge of the CFI's Construction and Arbitration List.
The Decision
In testing the proportionality of the bar on appeals imposed by s.20(8), the Court referred to the broad aims of the Arbitration Ordinance and examined the entire scheme of the statute. Underscoring the principle of minimal judicial intervention, the judge noted that the Arbitration Ordinance aims to "facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense" and that the Court should interfere in the arbitration of a dispute "only as expressly provided for" in the Ordinance.
Applying the proportionality test, the Court held that determinations to stay proceedings under s.20 are based on a prima-facie or "plainly arguable" case made out by the applicant, and that any issues concerning the tribunal's jurisdiction can be raised or re-opened for a fuller examination under s.34 of the Ordinance which affords parties a right of appeal from the tribunal's decision to assume jurisdiction. Ng J was accordingly of the view that although the nature of the limitation under s.20(8) of the Arbitration Ordinance is absolute, it is not final. She went on to hold that the bar on appeals imposed by s.20(8) of the Arbitration Ordinance is "no more than necessary" to accomplish its legitimate aim.
This decision, which is noteworthy for its strong endorsement of the broad aims of the Arbitration Ordinance, sends another clear signal that the Hong Kong courts will not interfere with the legitimate policy aims of the Arbitration Ordinance, and the limitations therein are constitutionally sound.
For further information, please contact May Tai, Partner, Simon Chapman, Partner, Dominic Geiser, Partner and Briana Young, Professional Support Lawyer or your usual Herbert Smith Freehills contact.
On 3 April 2016, the DIFC Court ordered a stay of proceedings on the basis that, in light of the existence of parallel proceedings in the Californian courts on substantially similar grounds, the Claimant's commencement of a claim before the DIFC Court constituted an abuse of DIFC Court process.
However, in reaching its conclusion, the DIFC Court gave further consideration to the application of the jurisdiction gateways provided in Article 5(A) of the DIFC Law No. 12 of 2004 (as amended) (the "Judicial Authority Law") and the Protocol of Jurisdiction between the Dubai Courts and the DIFC Courts, discussed in a different light in our previous bulletins on Bocimar v ETA and DNB Bank. In addition, the decision in Gavin v Gaynor also sets an interesting precedent in respect of the DIFC Court's interpretation of arbitration agreements, including the possibility for the DIFC Courts to imply an agreement settling the seat of arbitration as the jurisdiction with "most connection" to the claim.
1. Background
In May 2007, the parties entered into a Stored Value Card Processing, Service and Marketing Agreement (the “SVC Agreement”), under which the Defendant was to process and market prepaid cash cards to customers in the UAE. Disputes in relation to alleged breaches of contract and unjust enrichment arose under the SVC Agreement and, in July 2011, the Defendant, and its US affiliate, commenced proceedings against the Claimant in the Federal District Court for the Central District of California in the USA (the "Californian Proceedings").
The protracted Californian Proceedings resulted in the Claimant issuing a counter-claim in November 2014 and the Defendant's US affiliate itself commencing a further action against the Claimant, seeking an order compelling the parties to arbitrate the dispute in California. Relevant to the DIFC Court proceedings, Clause 13.2 of the SVC Agreement stipulates that the interpretation of the SVC Agreement is to be governed "by the internal laws of the UAE". Further, Clauses 13.3 and 13.5 contain seemingly contradictory provisions – Clause 13.3 states that the parties have agreed to "submit to the jurisdiction of the courts in Dubai, the UAE", whereas Clause 13.5 provides that the any dispute emanating out of the SVC Agreement "shall be submitted to arbitration per the law of the United Arab Emirates".
Consequently, the Claimant commenced proceedings in the DIFC Court, requesting an order that the DIFC Court appoint a tribunal to determine the dispute in accordance with DIFC Law No. 1 of 2008 (the "Arbitration Law") and, immediately after, filed a motion in the Californian proceedings that those proceedings be dismissed in favour of those before the DIFC Court. In response, the Defendant contested jurisdiction at a hearing on 22 October 2015.
2. The DIFC Court's decision in Gavin v Gaynor
Jurisdiction of the DIFC Court
The Claimant contended that the DIFC Court had jurisdiction to appoint a tribunal under Article 17(3)(b) of the Arbitration Law pursuant to the jurisdiction gateways set out in DIFC Law No. 12 of 2004 (as amended) (the "Judicial Authority Law"). The Claimant argued that the DIFC Courts are, constitutionally, a court of the Emirate of Dubai, and therefore the reference in Clause 13.3 of the SVC Agreement to "the courts in Dubai, the UAE" may be construed as referring to the DIFC Courts.
In addition, the Claimant sought to establish a connection between the conduct of the Defendant and the DIFC, as a means by which to establish the jurisdiction of the DIFC Courts under Articles 5(A)(1)(a)-(c) of the Judicial Authority Law. Under these provisions, if a party can establish sufficient connection between the DIFC and the transaction or parties, for example, the relevant contract or transaction was concluded or was due to be performed within the physical territory of the DIFC, DIFC Court jurisdiction may be conferred on any subsequent dispute.
This principle has often been referred to as the 'coffee shop' jurisdiction, because any contract concluded within the geographical territory of the DIFC, including in one of its numerous coffee shops, would provide a nexus sufficient to allow the DIFC Courts to exercise jurisdiction. In Gavin v Gaynor, to establish such a connection, the Claimant contended that the Defendant had sought to incorporate within the DIFC and also referred to correspondence in which the address of the Defendant was stated as being in the DIFC.
The Defendant responded by arguing that there was no connection to the DIFC, sufficient or otherwise. In addition, the Defendant asserted that, even if the SVC Agreement itself were sufficiently connected to the DIFC to grant jurisdiction to the DIFC Courts, the question before the DIFC Courts concerned interpretation of the arbitration agreement contained in Clause 13.5. Therefore, it is the governing law of the separable arbitration agreement that is relevant, rather than the SVC Agreement as a whole. As performance of Clause 13.5 would instead take place in the seat of the arbitration, and Clause 13.5 does not specify a seat, there can be no jurisdiction conferred on the DIFC Courts. Therefore, Article 7 of the Arbitration Law, which provides that Article 17 of that law only applies where the DIFC is the juridical seat of the arbitration and DIFC law is therefore the curial law, rendered the Arbitration Law irrelevant, preventing the DIFC Court from having the jurisdiction to appoint a tribunal under its provisions.
After considering these issues, although the DIFC Court agreed that the effect of the absence of a reference to a seat in the SVC's arbitration agreement resulted in the DIFC Court lacking jurisdiction under the Arbitration Law, the DIFC Court determined that it did in fact have jurisdiction over the SVC Agreement by virtue of the Article 5(A)(1)(c) of the Judicial Authority Law. Article 5(a)(1)(c) provides that the DIFC Court will have jurisdiction in respect of claims arising out of "any incident or transaction which has been wholly or partly performed within the DIFC and is related to DIFC activities".
Most significantly, the DIFC Court held that a letter of May 2009, arranging a meeting between the parties to discuss an addendum to the SVC Agreement in the DIFC on the following day represented "quite clear evidence…that the parties transacted business in the geographical territory of the DIFC", and therefore that the SVC Agreement fell within the jurisdiction gateways and "must be governed by DIFC laws". As a natural consequence, any reference to UAE law or courts within the SVC Agreement was in fact a reference to UAE laws as applicable within the DIFC.
In determining that such a letter was "sufficient to link the transaction to the jurisdiction of this Court", and thereby arrive within one of the jurisdiction gateways in the Jurisdiction Authority Law, the DIFC Court has once again developed and expanded the scope of its jurisdiction.
The arbitration agreement
The Defendant sought to challenge the claim on the basis that Clause 13.5 was defective and could not operate validly so to as to permit the DIFC Court to appoint a tribunal. On the basis of its finding in relation to jurisdiction, the DIFC Court dismissed the Defendant's argument that, under UAE federal law, the arbitration agreement would be defective. UAE federal law was irrelevant for the purposes of interpreting the SVC Agreement.
Further, and more noteworthy for arbitration practitioners in the region, the DIFC Court expressly concluded that there was "no reason why the Seat of Arbitration cannot be determined by reference to an implied choice, giving consideration to the Seat with the most connection with the Agreement, the parties, the transaction and any other relevant consideration". Accordingly, the provisions of the SVC Agreement, for example, Clauses 13.2, 13.3 and 13.5 in effect gave rise to an "implied agreement" that the seat of arbitration should be Dubai, UAE, which the DIFC Court had of course already held to refer instead to the DIFC in the context of the SVC Agreement. This reasoning therefore provided "ample support to an implied Seat of Arbitration in Dubai (DIFC)", with DIFC law supervising the procedure.
Abuse of Process
Notwithstanding the above, the DIFC Court agreed with the Defendant's third submission and elected to stay the Claimant's claim on the basis that continuing parallel proceedings, i.e. appointment of a tribunal by the DIFC Court and arbitration in California, would run the risk of producing two analogous but irreconcilable awards. The DIFC Court held that, where the subject matters in two concurrent actions are "strongly connected", "hard to separate" and "stem from performance of the same agreement", in circumstances where the DIFC claim was commenced after the overseas proceedings, the appropriate decision would be to dismiss that claim. However, as the decision on jurisdiction in the Californian Proceedings is currently awaited, the DIFC court elected to order a stay, pending appeal in the Californian Proceedings.
Conclusion
For a number of reasons, the decision is Gavin v Gaynor is particularly significant. First, the decision exhibits the DIFC Court's continued willingness to expand the scope of its own jurisdiction, further weakening the requirement for a connection to the DIFC; parties appear to be able to acquire sufficient nexus to the DIFC on what appear to be relatively marginal grounds. Secondly, the decision reinforces the positon, first espoused in Taaleem v National Bonds, (2) that the DIFC court is a Court of Dubai, and that a reference the "Dubai Courts, UAE" does not necessarily exclude the jurisdiction of the DIFC Courts. This emphasises the need for parties to take care to specify whether DIFC law and / or jurisdiction is being chosen.
Finally, where parties do not expressly agree to a nominated arbitral seat, once DIFC Court jurisdiction is established (even if arguable), the DIFC Courts are prepared to imply an agreement between the parties in relation to the seat, based on the seat with the closest connection to the agreement, taking into account in the terms of the substantive agreement, the parties, the nature of the transaction, as well as any other relevant factors.
Given the variety of issues decided on, the potential incursion into the jurisdiction of the courts of onshore Dubai and its conclusions in relation to the substantive provisions or a contract and the factual background implying a choice of seat, it remains to be seen whether the parties to the proceedings will seek to appeal the decision. Notwithstanding this, we consider that the judgment in Gavin v Gaynor demonstrates the permissive stance the DIFC Courts tend to adopt and should provide a salutary lesson for contractual parties who intend to arbitrate to provide sufficient clarity and certainty in their arbitration agreements.
For further information, please contact Stuart Paterson, Partner, Joseph Bentley, Associate or your usual Herbert Smith Freehills contact.
1 The real names of the parties have been changed in the version of the judgment published by the DIFC Court in order to respect the confidential nature of the underlying arbitration proceedings.
2 Taaleem PJSC v (1) National Bonds Corporation PJSC and (2) Deyaar Development PJSC (CFI 014/2010).
In a recent decision, the English High Court determined that it would be wrong in principle for the court to determine whether parties to a disputed contract had entered into a binding arbitration agreement in circumstances where one party intended to commence arbitration proceedings on the basis of the disputed arbitration agreement: HC Trading Malta Ltd v Tradeland Commodities S.L. [2016] EWHC 1279 (Comm) (click here for the full judgment).
The decision highlights the respect afforded to the arbitral process under the Arbitration Act 1996 ("the Act") and affirms that it is only in circumstances where the court is required to "fill a gap", such as with anti-suit injunctions preventing a party from commencing or continuing proceedings in another forum, that it will rule on the jurisdiction of an arbitral tribunal.
Background
The claimant alleged that the parties had entered into a binding contract under which the defendant was to purchase 250,000mt of clinker in bulk from the claimant, to be shipped in a series of parcels. The claimant further alleged that the contract contained a London arbitration clause. The defendant never received any parcels of clinker and denied that there was any contract of sale.
The claimant's solicitors asked the defendant to agree to accept service of an arbitration notice at its London solicitors, but the defendant did not do so. The defendant did not have any claim of its own against the claimant and took the position that it would contest the arbitrator's jurisdiction if the claimant commenced arbitration in London.
The claimant sought a declaration that there was a binding arbitration agreement which was subject to English law and which covered the claimant's intended claims. The defendant applied to set-aside the claimant's claim for declaratory relief on the following bases: (a) the court had no jurisdiction to entertain the claim under the Act; (b) alternatively, even if the court had jurisdiction it would be wrong in principle to do so; and (c) insofar as it was a matter for the court's general discretion it should be exercised against granting any relief.
Decision
The court dismissed the claimant's claim for declaratory relief. However, it did not accept the defendant's principal case that the court was deprived of declaratory jurisdiction under the Act. The judge considered that if it had been Parliament's intention to exclude the court's jurisdiction in that way, it would have been expressly stated in the Act. As the Act was silent on this point, it would be wrong to conclude that the Act impliedly limited the court's jurisdiction. Instead, the judge held that the issue was better considered as a matter of principle.
The judge highlighted the fact that the Act lays down an extensive code for the governance of arbitrations from start to finish, and considered the existence of that scheme to be highly relevant when considering the scope of the court's powers prior to commencement of arbitral proceedings. Although the court had jurisdiction to intervene, the judge accepted that in general terms, the court must be extremely slow to intervene where an arbitration is concerned.
The judge held that respect for the arbitral process includes respect for the scheme of and the principles underlying the Act. That scheme and those principles would be frustrated when an arbitration is on foot or contemplated if the parties were simply able to invoke a general declaratory power of the court, limited only by a broad exercise of discretion. Rather, disputes as to the existence or scope of an arbitration agreement should be determined by the detailed provisions of the Act, and in particular, as a starting point by the power of a tribunal to determine its own substantive jurisdiction under s30 of the Act. The only exception is where the court has to "fill a gap", as with anti-suit injunctions.
It would therefore be wrong in principle for the court to entertain any application for a declaration by a claimant where there are at least the following three factors:
the claimant asserts that there is a binding arbitration agreement;
the claimant has a claim which it wishes to assert and which therefore (on the claimant's own case) can only be litigated by way of arbitration; and
the claimant is clearly able to commence arbitration in pursuance of that agreement whether or not he has yet done so, and whether or not it is imminent.
Finally, even if there was no principled argument against granting the declaratory relief sought by the claimant and it was all a matter of the court's discretion, it would "unhesitatingly" refuse to exercise it in favour of granting relief. The judge's reasons including the following:
it was a needless invocation of the court's powers where the arbitral tribunal was capable of making a declaration as to the validity of the arbitration agreement;
it could not be said at this stage that it would necessarily be quicker or cheaper to use the court process rather than the arbitrators;
there was a very real risk that in deciding the issue of the existence of the arbitration agreement, the court would decide the central issue between the parties of whether there was a binding contract for sale; and
there was no practical impediment to the claimant commencing the arbitration straight away.
For further information, please contact Chris Parker, Partner, James Allsop, Senior Associate, or your usual Herbert Smith Freehills contact.
London has long been a city associated with international arbitration. In 2015, even with the UK referendum on EU membership looming, according to analysis by theCity UK, London was the seat or centre of 4,738 international commercial arbitrations, mediations and adjudications in 2015. These were conducted under the auspices of numerous institutions, with the long-established LCIA governing only a relatively small percentage. In the year preceding the referendum, according to the Queen Mary University of London International Arbitration survey, 47% of participants included London amongst their top three choices of seat (Paris was the next most popular with 38%, followed by Hong Kong with 30%). Many different factors attract international parties to London as a seat of arbitration, including the legislative framework, the supportive powers of the English courts and the pro-arbitration attitude with which they are exercised, the common use of English contract law in commercial transactions (from which the choice of a London seat often follows), the infrastructure of London and the availability of legal, expert and other services to support arbitration.
The referendum outcome has inevitably led to reflection on the commercial, legal and practical effects in so many areas, arbitration included. Whilst the relationship between the UK and the EU is yet to be re-defined, it is timely to consider the ways in which Brexit may have an impact on arbitration in London, whether negative, or indeed positive.
In general terms, Brexit should not have a substantive impact. Arbitration is excluded from EU legislation regarding jurisdiction and enforcement, and a tribunal seated in London is not obliged to follow EU rules regarding choice of governing law. The UK and all other EU Member States are party to the New York Convention, and their obligations under the Convention are entirely independent of EU membership. As such, following Brexit, an agreement to arbitrate in London and a resulting award will continue to be enforceable across the EU. Likewise, an agreement to arbitrate anywhere in the EU (and indeed, in any state which is a contracting party to the New York Convention) and a resulting award will still be enforceable in the UK. And the stability, certainty and predictability of common-law made English contract law will remain unaffected, and as an excellent choice to govern contractual relationships.
But there are of course many issues to consider at a more micro level. This post focuses on an issue which has been the subject of much discussion in the last few years: the significance of the availability of anti-suit relief to halt proceedings in breach of an arbitration agreement in an EU Member State court. It also considers, among other things, whether Brexit could affect the pool of specialist arbitration practitioners which represents one of the many strengths of London as a seat of arbitration.
Going, coming and possibly going again? Anti-suit injunctions in respect of EU proceedings in breach of an arbitration agreement
As noted, arbitration has always been carved out of the Brussels regime on mutual recognition and enforcement of judgments. However, the scope of the so-called "arbitration exception" has long been under scrutiny, most famously in the West Tankers case (Allianz SpA and Others v West Tankers Inc (Case C-185/07)). This case was seen as bringing an end to the use of anti-suit injunctions within the EU to protect arbitration agreements.
The recast Brussels Regulation (1215/2012/EU) "clarified" the scope of the arbitration exception. Indeed, the clarification was so vehement in its removal of arbitration from the scope of the Regulation, that it led some to question whether anti-suit injunctions to protect arbitration agreements had again become a possibility in the EU. Many argue that the reciprocal respect between the Member State courts underpinning the Brussels Regime cannot accommodate anti-suit relief which has the effect of preventing a Member State court from determining whether, on the one hand, there is a valid and binding arbitration agreement or whether, on the other hand, it has jurisdiction. Others reason that, because arbitration remains outside the recast Brussels Regulation, a Member State court may issue an anti-suit injunction to deter proceedings in another Member State court in breach of an arbitration agreement. Since the recast Brussels Regulation was adopted, there has been no test case in any Member State court of which we are aware.
Accordingly, after the UK leaves the EU, parties may look to the English courts once more to seek to immobilise proceedings in Member State courts brought in breach of an arbitration agreement. Of course, it seems most likely that the UK and the rest of the Member States will reach some sort of arrangement either to replicate or replace the Brussels Regime, for example as was agreed with Denmark (which has an opt-out in this area of EU law). But it is uncertain precisely what features will be retained and, significantly, whether this regime will preclude anti-suit relief even in these circumstances, as interpreted anew by the English courts.
If anti-suit relief were to be available from the English courts to protect arbitration agreements wherever those foreign proceedings were brought, it would likely be seen as a further advantage of choosing London as a seat. But this consideration is unlikely to be the sole or even a main factor in the minds of most international commercial parties. The overall approach of the English courts to arbitration is arguably a far more attractive attribute of London as a seat.
A sound legislative framework and supportive courts
A key reason why international parties choose London as a seat is the robust procedural law – the Arbitration Act 1996 – combined with the careful exercise by the English courts of their supervisory powers under that statute. This won't change post- Brexit. Parties choosing to arbitrate disputes in London will continue to benefit from a tried and tested national arbitration law and, of course, the jurisprudence of the English courts created under that law.
Further, whilst the legislative programme of the Law Commission of England and Wales will necessarily be Brexit-dominated, there is scope for some evolution of the Act to respond to user requirements. In particular, the Law Commission has suggested in its recently opened consultation on the 2017-2020 program that it may focus on cost and efficiency of the arbitral process, including by considering whether the Act should provide for summary decision-making by arbitral tribunals.
Any exodus of international arbitration talent from London is highly unlikely
As the recent report of theCity UK shows, London is home to many of the world’s global law firms. Many of those firms specialise in international arbitration, with teams boasting lawyers from across the world. In such an international discipline, it is unsurprising that such practices are composed of lawyers from a variety of legal backgrounds, traditions and jurisdictions. The access to specialists – both lawyers and others involved in the process, for example, experts, translators and interpreters – is just one of the reasons why London thrives as a centre of international dispute resolution.
The freedom of movement guaranteed by EU membership has undoubtedly facilitated the movement of arbitration practitioners from Europe to London, and vice versa, as business needs dictate. However, undeterred by visa or immigration restrictions, these London practices are populated by specialists from all over the world, and not just the EU. It is an open question whether free movement rights will be affected by Brexit, but in any event, any additional costs or administrative burdens of maintaining an international team of experts in London are likely to be absorbed in the same way that they are now. Indeed, such costs are already associated with maintaining arbitration practitioners in other centres of arbitration that do not enjoy the EU's free movement rights (e.g. Hong Kong, New York, Singapore).
It is early days. But in short, notwithstanding the dramatic events of the past few weeks, international arbitration in the UK seems set to continue to thrive.
This post was first posted on Kluwer Arbitration Blog. The views expressed herein reflect the views of the authors.
For further information, please contact Andrew Cannon, Partner, Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant or your usual Herbert Smith Freehills contact.
A hearing on jurisdiction and the merits in ICSID Case No. ARB/14/24, United Utilities (Tallinn) B.V. and Aktsiaselts Tallinna Vesi v Republic of Estonia, will be transmitted live via internet feed from Monday, November 7, 2016 to Tuesday, November 15, 2016 (from 9:00 a.m. to approximately 5:00 p.m. CET (Central European Time) on November 10, 2016 and from 10:00 a.m. to approximately 6:00 p.m. CET on all other days).
This webcast is being made available pursuant to the parties’ agreement. To access the webcast, please click here.
Herbert Smith Freehills is co-counsel for the Claimants.
For more information, please contact Iain Maxwell, Of Counsel, Louise Barber, Associate, or your usual Herbert Smith Freehills contact.
Hong Kong's Court of Appeal (CA) has given judgment in the latest instalment of the dispute between Malaysia's Astro media group and Indonesia's Lippo.
On 5 December 2016, the CA dismissed an appeal by First Media, a Lippo Group entity, against an order granting leave to enforce in Hong Kong various arbitral awards made in Singapore in favour of Astro. First Media succeeded in overturning one limb of the first instance decision, in which Chow J held it had breached the principle of good faith by participating in the arbitration (albeit under protest) and then raising objections to jurisdiction at the enforcement stage. However, First Media failed to persuade the CA that its application to set aside the enforcement order should succeed despite having been made fourteen months out of time.
The decision brings Hong Kong law into line with Singapore on parties' right to elect "active" or "passive" remedies in arbitral proceedings. However, the principle that arbitrations should be resolved with "speedy finality" prevailed, and the CA declined to interfere with the judge's refusal to extend time for the application to set aside the enforcement order in Hong Kong.
Background
In 2005, various Astro companies entered a joint venture with several Lippo companies, including First Media, for the provision of multimedia and television services in Indonesia. The joint venture failed. Once constituted, the arbitral tribunal made a preliminary ruling on jurisdiction. It concluded that three of the Astro companies (the Additional Parties) were entitled to bring claims in the arbitration, despite not being party to the arbitration agreement. Lippo objected, and reserved its rights, but participated in the merits phase of the arbitration. Lippo did not exercise its right under Article 16(3) UNCITRAL Model Law to challenge in the Singapore courts the tribunal's ruling on jurisdiction. The tribunal went on to find that the Additional Parties were entitled to sums in excess of US$ 130 million from Lippo (Awards).
Lippo did not attempt to use its jurisdiction arguments to set aside the Awards in Singapore. Astro then sought enforcement of the Awards in Singapore, Hong Kong, England, Malaysia and Indonesia. Lippo did not resist enforcement in England, Malaysia or (initially) Hong Kong because it did not have assets in those jurisdictions, but it did resist enforcement in Singapore.
The time limit to resist enforcement in Hong Kong expired in November 2010 and judgment was entered on the award (Hong Kong Judgment). In July 2011, Astro obtained a Garnishee Order to attach a debt of USD 44 million due from Across Asia Limited (First Media’s parent company, listed in Hong Kong) to First Media. In early 2012, Lippo took out a summons to set aside the Hong Kong Judgment. Those proceedings were later stayed pending resolution of the Singapore enforcement proceedings.
In October 2013, the Singapore Court of Appeal ruled that the Awards were not enforceable in Singapore, because the Tribunal did not have jurisdiction over the Additional Parties (see our blog post here. Thereafter, it fell to the Hong Kong Court of First Instance to decide whether the Awards could be enforced in Hong Kong. On 17 February 2015, the Court granted leave to enforce the Awards. Click here for more detail on that decision.
First Media appealed. It sought an extension of time to apply to set aside the orders giving leave to enforce the Awards, and to set aside the orders and Hong Kong Judgment. First Media also sought discharge of the Garnishee Order. That appeal has now been dismissed.
Good faith principle clarified
The CA overturned the first instance decision that First Media was precluded by the principle of good faith from relying on s.44(2) Arbitration Ordinance (Cap. 341) from resisting enforcement. Chow J had misdirected himself in exercising his discretion under s.44(2) to refuse enforcement, by failing to take into account the "fundamental defect" that the Awards were sought to be enforced against parties who were "wrongly joined" to the arbitration.
Toby Landau QC, for First Media, took the court through each aspect of First Media's conduct that Chow J had criticised, and identified the relevant parts in the Singapore Court of Appeal Judgment in which it was conclusively determined, as a matter of Singapore law, that First Media was entitled to act in the way it did. Mr Landau also attempted to demonstrate that First Media had "persistently raised its objections to jurisdiction and had expressly reserved its rights in the course of the Arbitration".
The CA held that the first instance judge had "fallen into error", in not giving proper recognition to the findings in the Singapore Court of Appeal judgment. "In considering the conduct of the arbitration for the purpose of the "good faith" principle, it is particularly relevant to take account of the law of the seat of arbitration and the ruling of the supervisory court of the seat of arbitration", the CA noted.
The judge was wrong in his finding that the fact the awards were made without jurisdiction was not to be taken into account when exercising discretion as to whether a ground for refusal of enforcement under s.44(2) was made out, but only when exercising discretion to permit enforcement where such a ground for resisting had been made out. The CA commented: "In considering whether the 'good faith' principle may be successfully invoked to resist enforcement, there is only one discretion to exercise…and that discretion is found in the word 'may' in the opening part of s,44(2)…It is the use of the word 'may' that 'enables the enforcing court to enforce an award, notwithstanding that a s.44 ground might otherwise be established'".
The CA held that it was "quite clear" that "fundamental jurisdictional objections" should be taken into account when considering the exercise of discretion under section 44(2) The CA cited the English case Dallah, in which it was held that the discretion is a narrow one, and is "unlikely to be exercised where the award in question was subject to a fundamental or structural defect. There can hardly be a more fundamental defect than an award against someone who was never party to the relevant contract or agreement to arbitrate (CA's emphasis)". The judge had misdirected himself and failed to take account the "fundamental defect" that enforcement was sought against the Additional Parties, who had been wrongly joined to the arbitration. Had he taken this into account, he could only have exercised his discretion to refuse enforcement.
In obiter comments, the CA also accepted First Media's argument that the cases cited by Chow J, China Nanhai Oil [1994] 3 HKC 375 and Hebei Import & Export Corp [1999] 2 HCK 205, should be distinguished. In those cases, the parties resisting enforcement had remained silent about their objections to the tribunal's jurisdiction, keeping them "up their sleeve", and deploying them for the first time to resist enforcement. Here, although First Media did not challenge the tribunal's preliminary award on jurisdiction, it did raise its objection before the tribunal, and (importantly) expressly reserved its rights. Moreover, the Singapore Court of Appeal subsequently confirmed that such reservation was effective, not least because Astro had not been misled. However, the CA did recognise that there might be circumstances in which a party's failure to challenge jurisdiction before the supervisory court under Article 16(3) of the UNCITRAL Model Law could be construed as a breach of the good faith principle.
The CA found that the good faith principle is complementary with the "choice of remedies" principle, under which parties are entitled to pursue both "active remedies" in the supervisory court (e.g. an Article 16(3) application to contest jurisdiction) and "passive remedies" (resisting enforcement). If the good faith principle is applied too rigorously where there is a failure to pursue active remedies, it might come into conflict with the choice of remedies principle. In order to avoid this, the court must have regard to "the full circumstances why an active remedy is not pursued or other relevant considerations (such as whether there was a clear reservation of rights so the opposite party was not misled)".
Extension of time denied
The first instance judge cited a number of reasons for his decision not to extend time for the application to set aside the enforcement orders.
The delay was a "very substantial one";
The delay was a result of a "deliberate and calculated decision not to take action in Hong Kong";
The Awards had not been set aside at the seat. They were still valid and binding on First Media, despite the Singapore courts having refused enforcement in Singapore.
Chow J accepted that Astro had not suffered substantial prejudice as a result of the delay (other than costs, for which it could be compensated). However, he did not consider this, nor the size of the Awards, sufficient to override the three reasons above. Consequently, he was not prepared to exercise his discretion to extend time.
First Media appealed against the judge's exercise of his discretion. In order to succeed, it had to demonstrate that:
the discretion was exercised under a mistake of law or in disregard of principle; or
the judge took into account irrelevant matters; or
the judge failed to exercise his discretion; or
the conclusion he reached in the exercise of his discretion was "outside the generous ambit within which a reasonable disagreement is possible", such that it was "plainly wrong".
First Media claimed the fact the Awards were not set aside was an "irrelevant factor", and that the refusal to extend time was "plainly wrong". Citing The Decurion [2012] 1 HKLRD 1063, it submitted that the court should look at “all relevant matters” and consider the “overall justice of the case”, and that “[a] rigid mechanistic approach is not appropriate".
The CA disagreed, preferring the approach in Terna Bahrain Holding Company WLL v Al Shamsi & Ors [2013] 1 Lloyd's Rep. 86. That case emphasises the need for "speedy finality" of arbitral proceedings, which is the policy underpinning both the English Arbitration Act and the Arbitration Ordinance. Astro successfully argued that arbitration is "entirely different territory" from court proceedings, and calls for a "more disciplined approach" to time limits. Moreover, the CA did not agree that Chow J had either failed to consider all relevant matters or exercised his discretion in a "rigid mechanistic fashion".
The CA further rejected First Media's submission that Chow J had given insufficient weight to its "incontrovertible and fundamental" jurisdictional objection, which had been upheld in the Singapore Court of Appeal. The CA was not persuaded that the judge's assessment of the factors for and against extending time was "plainly wrong". To allow a delay of 14 months, against a time limit of 14 days, "would make nonsense of the policy of speedy finality, which underpins Hong Kong's Arbitration Ordinance.
The appeal was dismissed. However the CA awarded Astro only 60% of the costs of the appeal, on the basis that it had lost on the principle of good faith, and that argument on that issue had taken considerable time and effort.
Comment
The CA's decision brings welcome clarity to Hong Kong law on the issues under appeal, particularly the good faith principle, removing the uncertainty created by the first instance decision. Moreover, it is desirable that the laws of Singapore and Hong Kong, Asia's two main arbitral centres, be brought into line on this question. Had Hong Kong maintained its original stance on parties' ability to exercise their statutory right to choice of remedies, it risked being perceived as a less desirable seat than its Asian neighbour and close rival. As is so often the case, the Hong Kong courts have set the record straight, while demonstrating their support for arbitration and the policy underpinning the Arbitration Ordinance.
The Federal Court of Australia has recently held that a winding up application made in respect of a joint venture company should be stayed and the substantive underlying matters of dispute between the joint venture parties be referred to arbitration pursuant to the joint venture agreement.
The case of WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] FCA 1164 involved a joint venture between Woolworths (an Australian company) and WDR (a United States company) pursuant to which Hydrox Holdings (an Australian company) was formed to operate the Masters chain of hardware stores in Australia. Disputes arose between the joint venture parties regarding the operation of the joint venture, including in respect of provision of information to the WDR nominee directors, certain voting by the Woolworths directors and the purported termination of the joint venture agreement.
These matters resulted in WDR making an application to the Federal Court for the winding up (liquidation) of Hydrox pursuant to sections 233(1)(a) or 461(1)(k) of the Corporations Act 2001 (Cth) (Corporations Act). In either case this appears to have been based on the contention that the affairs of Hydrox had been conducted in a manner oppressive to, unfairly prejudicial to, or unfairly discriminatory against WDR, as a shareholder of Hydrox (there was no suggestion that Hydrox was insolvent). In response, Woolworths sought a stay of the winding up application on the basis that this was a dispute between Woolworths and WDR which should instead be determined by arbitration pursuant to the joint venture agreement between the parties, in accordance with section 7(2) International Arbitration Act 1974 (Cth) (IAA) or article 8(1) the UNCITRAL Model Law on International Commercial Arbitration. Under section 7(2) of the IAA, the Court must order a stay of court proceedings between parties to an arbitration agreement if the proceedings involve determination of a matter that is “capable of settlement by arbitration” under that agreement.
WDR argued that no part of the proceeding was arbitrable, as there was only one matter to be determined – whether Hydrox should be wound up on either of the statutory bases contended. It further submitted that a claim for a winding up order is not arbitrable because it effects the legal status of the company, it affects third parties, the creation and dissolution of a company is a matter uniquely subject to governmental authority and there is public interest in ensuring that the procedural steps by which a company is placed in liquidation is governed by the public court process rather than a private arbitration. It also relied on previous Australian cases.
In contrast, Woolworths argued that there were several matters comprising the proceeding for the purposes of section 7(2) of the IAA, namely the various instances of alleged wrongful conduct by Woolworths and in nominee directors which WDR advanced as grounds for the winding up Hydrox (i.e. evidencing oppressive, unfairly prejudicial or unfairly discriminatory conduct). Woolworths argued that such legal and factual disputes could be the subject to determination by arbitration, while leaving the court to make the ultimate decision as to whether the matters so determined were sufficient to persuade the court to make a winding up order.
The court agreed with Woolworths’ analysis that there were several matters to be determined. The court noted that these matters were not merely grounds for winding up Hydrox, but could be characterised as assertions of breaches of contract, wrongful conduct in a corporate governance sense and wrongful conduct in purporting to terminate the joint venture agreement in bad faith and grounds that did not justify termination.
The court also agreed that such matters were capable of arbitration. The court distinguished the present case from one where the parties seek to repose in the arbitrator the capacity to dissolve or wind up the joint venture company, and from cases involving insolvency. Instead, the court held that this was, in reality, a dispute between the shareholders of Hydrox as to their contractual and other obligations, and that there was no substantial public interest element in the determination of such a dispute. The court noted there were no solvency concerns and no creditor had sought to attend the court hearings or participate in the process (despite the winding up application having been advertised). Accordingly the court referred the matters identified by Woolworths for arbitration, and stayed the winding up application pending determination of that arbitration. The court would then take into account any arbitral awards in respect of those mattes when considering whether a winding up order would be made.
The decision is broadly consistent with the approach taken by English, Hong Kong and Singapore courts in cases such as Fulham Football Club (1987) Ltd v Richards [2012] Ch 333, Re Quicksilver Glorious Sun JV Ltd (2014) 4 HKLRD 759 and Tomolgen Holdings Ltd v Silica Investments Ltd [2015] SFGA 57 (all of which were cited by the Court).
For further information, please contact Brenda Horrigan, Partner, Paul Apáthy, Partner, Anne Hoffmann, Senior Associate, or your usual Herbert Smith Freehills contact.
In its decision in Silver Dry Bulk Company Limited v Homer Hulbert Maritime Company Limited [2017] EWHC 44 (Comm) the English Court has considered and clarified the principles which apply to an application under section 18 of the English Arbitration Act 1996 (the "Act"). Section 18 enables a party to apply to the court to exercise its powers to give directions as to the making of tribunal appointments or make the appointments itself. The decision confirms, amid conflicting case law, that the applying party must establish a "good arguable case" that a tribunal would have jurisdiction to hear the case, and emphasises that any jurisdictional arguments remain matters for the tribunal to decide in accordance with the principle of kompetenz-kompetenz. The case is also a good reminder of the purpose of section 18, which only applies where there has been a complete failure of the appointment procedure agreed between the parties, and cannot be used to declare or confirm the validity of a tribunal's constitution.
BACKGROUND
The case arose out of a Memorandum of Agreement ("MOA") (which included an arbitration agreement) governing the sale of a vessel by Homer Hulbert Maritime Company Limited ("Homer Hulbert"), a special purpose vehicle company incorporated in the Marshall Islands, to Silver Dry Bulk Company Limited ("Silver Dry") in 2010.
Although Homer Hulbert was dissolved soon after the sale of the vessel, section 105 of the Marshall Islands Business Corporations Act (2004) provides that a corporation remains in existence for the purpose of prosecuting and defending suits after dissolution for a period of three years. Silver Dry brought arbitral proceedings three years and eight months after Homer Hulbert's dissolution. Having nominated an arbitrator in its notice of arbitration, Silver Dry received no response from Homer Hulbert and, as a result, its nominee automatically became the sole arbitrator pursuant to the terms of the arbitration clause. The Tribunal held a procedural hearing and the arbitration process continued; however it became clear that no entity was willing and/or able to participate in the proceedings for or on behalf of Homer Hulbert.
Accordingly, the issue in dispute was whether Homer Hulbert was in existence for the purposes of participating in the proceedings. Silver Dry applied to the High Court to exercise its power under section 18(3) "to confirm that the Tribunal…has been validly constituted..." and to "remove any uncertainty arising in this regard", with the aim of encouraging Homer Hulbert's parent company, Sinokor, a Korean ship owner and operator, to participate in the arbitration.
APPLICATION OF SECTION 18
Section 18 is described as a "gateway" provision, providing a way of getting an arbitration started or preventing its abortion in circumstances where there is a failure in the parties' agreed appointment process. It gives the court certain powers, including the power to "direct that the tribunal shall be constituted by such appointments…as have been made". These powers can be exercised by the courts in its discretion, in circumstances where:
there has been a failure of the procedure for the appointment of the arbitral tribunal; and
there is no agreement between the parties as to what should happen in those circumstances.
Valid arbitration agreement – "good arguable case" test confirmed
Section 18 does not require the court to make a final determination on the issues affecting the tribunal's jurisdiction. However there is an initial threshold test that must be met in order for an application under section 18(3) to succeed, namely there must be an arguable case that a tribunal would have jurisdiction to hear the issue.
In this respect, there has been conflicting case law on the standard of proof required to meet this threshold to establish a valid arbitration agreement for the purposes of a section 18 application. In Noble Denton Middle East and another v Noble Denton International Ltd [2010] EWHC 2574 (Comm) and Man Enterprise Sal v Al-Waddan Hotel Ltd [2013] EWHC 2356 (TCC) the test applied was whether the claimant had "a good arguable case" or "an arguable case" that a tribunal would have jurisdiction. However, in Crowther and another v Rayment and another [2015] EWHC 427 (Ch) it was held that a lower threshold would be more in line with the principle of kompetenz-kompetenz, which provides that courts should as far as possible avoid anticipating a decision that the tribunal is empowered to make.
In Silver Dry v Homer Hulbert, the Court preferred the higher threshold test set out in Noble Denton. The Court described the test of a "good arguable case" as one that is "somewhat more than merely arguable but need not be one which appears more likely than not to succeed" (paragraph 27). Based on the evidence, it was determined that there was a good arguable case that proceedings were able to be validly brought against Homer Hulbert.
Failure of the procedure for the appointment of the arbitral tribunal
The Court then went on to consider Silver Dry's application under section 18(3). It found that the application must fail on the basis that there had been no failure of the appointment procedure. The arbitration clause in the MOA had provided that a party's nominee would automatically become the sole arbitrator in the event that the other party failed to appoint one within 14 days, and this had occurred. The Tribunal had already presided over one procedural hearing and, accordingly, the parties did not need assistance from the courts in order to constitute the Tribunal. The Court also noted that even if there had been a failure to appoint, the parties had in any event agreed within the arbitration clause on the procedure to be followed in such circumstances. As a result, it was found that the court did not have the power in this case to make any orders under section 18.
Exercise of discretion
Finally, it was concluded that, even if the court had such powers, these would not have been exercised as a matter of discretion, primarily because:
making an order that the Tribunal had been "validly constituted" in this case would go much further than would be justified from merely concluding that there was a "good arguable case"; and
in any event, the Tribunal was in existence, was already dealing with the matter and was capable of continuing without assistance from the court, even if its status was uncertain at the time.
The Court emphasised that the powers under section 18 were not to be used as a means of seeking an endorsement or declaration from the courts as to the valid constitution of a tribunal.
CONCLUSION
The case provides confirmation of the test to be applied for the purposes of an application under section 18 of the Act and is a useful reminder of the intended purpose of that section. Although this decision has endorsed the higher threshold of there being a "good arguable case" that a tribunal would have jurisdiction to determine the issue, the court's approach remains in favour of not interfering with decisions that fall within the ambit of an arbitral tribunal's jurisdiction, in line with the kompetenz-kompetenz principle.
Two recent decisions by tribunals have advanced the body of tribunal practice considering the issue of counterclaims by respondent states in investment treaty arbitration: Burlington Resources Inc. v. Ecuador, in which the tribunal awarded damages against the investor for breach of Ecuadorian environmental law in the performance of its investment, and Urbaser SA and Consorcio de Aguas Bilbao Bizkaia v. Argentina, in which the tribunal accepted jurisdiction to hear Argentina's counterclaim asserting that the investor had violated international human rights obligations. These decisions arise in the context of conceptual challenges to the pursuit of counterclaims in investment arbitration.
The challenges of advancing counterclaims in investment treaty arbitration
The question of whether, as a matter of principle, states can assert counterclaims against investors in investment arbitration remains under consideration. While some tribunals have either accepted jurisdiction to do so or have provided positive indications of their in principle willingness to hear such claims, others have declined to do so, and these decisions have typically relied on the features of the particular treaties being considered. Any wider acceptance by tribunals of the possibility of counterclaims can only develop in an incremental fashion on a case by case basis.
The issue of whether a counterclaim can be brought might be more easily resolved in the context of investment arbitration claims under contractual arbitration clauses. Tribunals may be more willing to accept the possibility of contractual counterclaims by the state as the complement to the contractual claims advanced by the investor, and such counterclaims may be able to be used to offset the amounts claimed by the investor (although such claims may still be afflicted by the same conceptual difficulties discussed below).
In arbitration commenced under investment treaties, however, there are myriad variables which may have a bearing on the way tribunals approach this issue, most of which go either to the critical issue of the scope of the investor's consent to arbitration or to the existence of actionable obligations on the investor (including in the relevant treaty) and the related issue of the tribunal's competence to make rulings on such obligations to the extent that they rely on municipal law or international law principles beyond the realm of investment law.
Treaty wording
Chief among these variables is the wording of the treaty in relation to the disputes which can be referred to arbitration. Very few treaties expressly contemplate the possibility of counterclaims by states. A notable exception is the Common Market for Eastern and Southern Africa Investment Agreement 2007, Article 28(9) of which allows counterclaims by states asserting that the investor has not fulfilled its obligations under the Agreement itself, including the obligation to comply with domestic measures. Articles 14.2 and 14.11 of the draft Indian Model BIT published in 2015 also contained provisions expressly permitting counterclaims by the state against the investor for a breach of specific obligations imposed on the investor under the treaty, including with regard to corruption, disclosure standards, taxation and compliance with host state law. However, these provisions were removed in the final version of the Indian Model BIT published in early 2016.
Indeed, some treaties have been interpreted implicitly to exclude the possibility of counterclaims, by permitting only arbitration of disputes in connection with breach of specific obligations in the treaty expressed to apply only to loss or damage incurred by the investor. It was on the basis of such a provision in NAFTA Chapter 11 that the majority of the tribunal in Roussalis v. Romania declined to accept jurisdiction over a counterclaim by the state.
However, most treaties are more neutral in their dispute resolution provisions and many require only a dispute arising between an investor and the host state in connection with an investment, without specifying which party should have occasioned the loss. As discussed further below, the tribunal relied on such a provision in accepting jurisdiction over a counterclaim in the recent Urbaser decision.
Arbitral rules
In determining whether the investor's consent to arbitration in commencing its claim can be said to encompass a counterclaim by the state, tribunals may have regard to the arbitral rules referred to in the treaty. Many of these rules expressly contemplate counterclaims (for example Rule 40(1) of the ICSID Arbitration Rules, Article 5 of the ICC Rules, Article 4 of the UNCITRAL Rules 2010, Article 2 of the LCIA Rules). However, the fact that some of these arbitral rules were designed to apply to commercial or contractual arbitration, where the asymmetry of investment arbitration and its associated consent issues do not typically arise, may make reliance on these provisions to derive an investor's consent to a state's counterclaim more complicated. Moreover, arbitral rules may in any event make the availability of counterclaims expressly subject to the consent of the parties (such as ICSID Arbitration Rule 40(1) and Article 46 of the ICSID Convention). In this regard, the SIAC Investment Arbitration Rules 2017 are of interest as these are arbitral rules designed specifically for investment arbitration which expressly contemplate counterclaims (see Rule 4, Rule 17 etc.).
Applicable law and the tribunal's competence
Further key questions are what (if any) obligations on the investor are actionable in such a counterclaim and what competence does the tribunal have to make rulings on such obligations.
Investment treaties do not commonly impose substantive obligations on investors, other than perhaps to establish their investments in accordance with host state law. Even then, any such obligation under a treaty is often limited to the initial establishment of the investment and not the performance of the investment thereafter. The wording of any applicable law provision in the treaty, including the existence or otherwise of references to municipal law, may be relevant for a tribunal in deciding its competence to examine alleged breaches of host state law in the context of a counterclaim. For example, in Goetz v. Burundi II, the tribunal relied on both the broadly worded dispute resolution clause in the BLEU-Burundi bilateral investment treaty and the fact that the applicable law clause referred to both municipal law and international law in order to conclude that it had jurisdiction to consider the state's counterclaim.
Where an applicable law clause makes a broad reference to international law, the question is whether obligations can be drawn from international law and imposed upon the investor in the context of a treaty arbitration, and whether it is within the tribunal's competence to rule on such obligations. The tribunal's decision in Urbaser (discussed below), which relied on allegations of the investor's breach of international human rights obligations, is a notable advance in tribunal practice in this regard.
In addition, tribunals may view as significant the degree of connection between the investor's primary claim and the basis for the counterclaim, and may require a connection beyond the mere fact of being a dispute arising out of the same investment. Some tribunals have required the counterclaim to be closely connected to the investor's allegations of breach of the treaty, such as in Saluka Investments B.V. v. Czech Republic.
Privity
The question of whether investment arbitration is the appropriate forum to resolve particular categories of dispute (including where the counterclaim is based on types of law which the tribunal may not believe itself to be competent to apply) also involves considering whether the investor is the right party to be subject to the substance of the counterclaim. The investor may not itself have operated in the host state and an allegation of a breach of host state law may properly attach to the investment (such as where the investment is an ownership interest in a local subsidiary) rather than the investor.
Conclusion: the difficulty of asserting counterclaims in investment arbitration
The conceptual difficulties associated with counterclaims by respondent states are, as with many aspects of investment arbitration, likely to continue to be resolved by reference to the peculiarities of particular treaties and the particular claims sought to be advanced by states. State-driven allegations against investors will likely continue to be relevant to investment arbitration in other indirect ways. These include claims of improper conduct by investors used as a basis to justify the state's actions and defend against claims of unfair treatment, or else to seek to reduce damages or costs awards on the basis of an investor's "contributory negligence" (such as in Occidental Petroleum v. Ecuador). States may also seek to rely on conduct by investors in asserting the claims themselves so as to seek "moral damages", such as appear to have been – unusually – claimed by the state (possibly for reputational damage), in Lundin Tunisia B.V. v. Republic of Tunisia, although these were not awarded.
Two recent decisions regarding counterclaims
Urbaser SA and Consorcio de Aguas Bilbao Bizkaia v. The Argentine Republic
In Urbaser, the dispute arose out of the termination of a concession for water and sewerage services in the Province of Buenos Aires granted to the claimants' subsidiary. In the course of the ICSID arbitration under the Spain-Argentina bilateral investment treaty, Argentina sought to introduce a counterclaim against the claimants alleging that through their administration of the concession (notably, an alleged failure to make appropriate investments), they had breached international human rights obligations in the form of the human right to water.
In December 2016, the tribunal issued an Award accepting jurisdiction over Argentina's counterclaim, but dismissing the counterclaim on the merits. In doing so, the tribunal relied on the wording of the treaty's dispute resolution provision which referred only to a dispute arising between the parties and being submitted to arbitration “at the request of either party to the dispute” (with the tribunal even going as far as to suggest that the treaty may permit the host state to commence a claim on its own initiative). The tribunal rejected the claimants' argument that the scope of their consent to arbitration had been implicitly limited to exclude counterclaims, as the claimants had been silent on this point in accepting Argentina's offer of arbitration under the treaty, and, in any event, if such acceptance had been in narrower terms than the offer then it would not have encompassed the claimants' claims either.
The tribunal concluded that there was a manifest connection between Argentina's counterclaim and the claimants' claims, as they were both based on the same investment in relation to the same concession. The tribunal also considered it significant that there was a "legal connection" in the form of the counterclaim not being alleged as a matter of domestic law only. It noted favourably Argentina's argument that what was at issue was a violation of the fundamental right of access to water, which was the purpose for which the claimants' investment – by which the protections of the treaty were engaged – was undertaken in the first place. Finally, the tribunal rejected the claimants' argument that a ruling on human rights obligations was as a matter of principle outside its competence, concluding that the dispute must only relate to the investment in order to be within the scope of the tribunal's authority.
On the merits, the tribunal agreed that the treaty primarily imposed obligations on the host state rather than the investor, but disagreed with the claimants' argument that there were no obligations at all on the investor, noting that the reference of disputes to arbitration under the treaty applied to “disputes arising between a Party and an investor of the other Party in connection with investments within the meaning of this Agreement” without making any distinction as to the basis for the rights to be enforced through the dispute.
The applicable law provision in the treaty referred to the application of the treaty itself as well as to domestic law of the host state and the general principles of international law. In regard to the latter, the tribunal stated that "such reference would be meaningless if the position would be retained that the BIT is to be construed as an isolated set of rules of international law for the sole purpose of protecting investments through rights exclusively granted to investors". It went on to conclude that this reference may in principle incorporate international human rights obligations. In so doing, the tribunal stated that it was "reluctant" to accept the claimants' argument that corporations cannot be the subject of obligations under international law, noting that the BIT itself conveys rights on corporations (as investors) under international law and that it cannot be the case that international law obligations on corporations are necessarily excluded.
The tribunal also relied on a range of human rights instruments and corporate social responsibility principles, such as the Universal Declaration of Human Rights, the UN Guiding Principles on Business and Human Rights and UN General Assembly resolutions, which in the tribunal's view established not only a state obligation to protect human rights (including the right to water) but also an obligation on private parties not to engage in activity aimed at destroying such rights. However, the tribunal considered that this constituted a negative obligation rather than a positive obligation on the claimants to in fact provide water, and that the claimants' obligations under their concession contract enabled Argentina to fulfil its own (positive) human rights obligations but did not amount to a positive obligation on the claimants themselves in this regard.
Accordingly, despite accepting both that it had jurisdiction to determine Argentina's counterclaim and that the consideration of international human rights obligations was within its competence, the tribunal ultimately concluded that there were no applicable human rights obligations which the claimants had breached and the counterclaim was dismissed.
This case is significant as an unusual example of a tribunal's willingness to take account of and apply international law principles beyond the international investment law principles typically considered by tribunals in this context, and to do so at the respondent state's instigation through a counterclaim.
Burlington Resources Inc. v. The Republic of Ecuador
In another recent decision, in February 2017 the ICSID tribunal in Burlington ordered the claimant to pay US$41.7 million to Ecuador in satisfaction of Ecuador's counterclaim. The counterclaim, which was raised in the context of an unlawful expropriation claim under the United States-Ecuador bilateral investment treaty, alleged breaches of Ecuadorian environmental law and contractual obligations by Burlington in failing to maintain certain oilfield infrastructure and return it to Ecuador in good condition.
Significantly, Burlington agreed with Ecuador in 2011 not to contest the tribunal's jurisdiction over Ecuador's counterclaim and consequently the tribunal was able to avoid this issue and address the counterclaim solely on its merits. In considering the Ecuadorian law issues raised, the tribunal reached conclusions on issues such as burden of proof, limitation periods, applicable interest rates and the legal meaning of environmental law concepts under Ecuadorian law.
A similar counterclaim has also been asserted by Ecuador against Burlington's consortium partner, Perenco, in the context of a parallel, related arbitration commenced by Perenco against Ecuador. While the prospect of double recovery by Ecuador through its two counterclaims was considered by the Burlington tribunal, it concluded that it could only reach its decision based on the issues before it.
Given the parties' agreement on jurisdiction, this case is significant less from the perspective of legal principle. However, it is nonetheless an unusual example of a counterclaim being successfully advanced by a respondent state. The damages awarded by the tribunal pursuant to the counterclaim were only a fraction of the US$2.8 billion Ecuador had sought (although a substantial sum nevertheless) and were awarded in parallel with the tribunal's award of damages to Burlington in the order of US$379.8 million (plus interest) for its primary claim. Nevertheless, the tribunal's willingness to engage in a very substantial analysis of Ecuadorian environmental law remediation obligations – a separate issue from the expropriation through windfall taxes alleged by the claimant in the primary claim – is notable.
The High Court has confirmed an UNCITRAL Tribunal's Award on Jurisdiction, which rejected jurisdiction under an investment contract (Contract) and the 1994 Kazakh Law on Foreign Investment (FIL).
The Court placed particular emphasis on expert evidence of the principles of contractual interpretation under the Civil Code of the Republic of Kazakhstan. It was not prepared to depart from these principles, which required a literal interpretation of the Contract and FIL.
Whilst the Court's reasoning differed in some respects from that of the Tribunal, it was broadly consistent with the Award on Jurisdiction.
Background
In 2010 Ruby Roz Agricol LLP (Ruby Roz) commenced UNCITRAL arbitration proceedings against the Republic of Kazakhstan. The Tribunal found that it did not have jurisdiction to determine the parties’ substantive dispute because there was no valid arbitration agreement between the parties, either under the Contract or the FIL (see our blog post on this Award here). As the parties had agreed to treat London as the seat of the arbitration, in Ruby Roz Agricol LLP v The Republic of Kazakhstan [2017] EWHC 439, Ruby Roz brought a challenge under section 67 of the Arbitration Act 1996 asking the High Court for a ruling on jurisdiction.
The Court's decision was consistent with that of the Tribunal: the Court held that the Tribunal did not have jurisdiction. That decision was based on similar grounds to the Tribunal in relation to the Contract but on different grounds in relation to the FIL.
The Contract
Clause 14.2 of the Contract states that any dispute should be referred to arbitration "if the interests of a foreign Investor are affected." Ruby Roz submitted that it was a "foreign investor" for the purposes of this clause, and that this was particularly clear when the Contract was read in the context of i) the draft Framework Agreement on which the Contract was based and ii) the FIL.
The Court was reluctant to situate the Contract in the context of the Framework Agreement or the FIL: the applicable law required a literal interpretation of the Contract. Since Ruby Roz was established under the laws of the Republic, it was not "foreign". Nonetheless, the Court went on to consider in more detail Ruby Roz’s arguments regarding the Framework Agreement and FIL.
The Court dismissed the significance of the Framework Agreement. The Framework Agreement was not derived from the FIL, but rather was offered under a Kazakh law on "State Support of Direct Investment." The Court noted that this law applied to both national and foreign investors and did not assist with the meaning of the word "foreign". Indeed, the Framework Agreement contemplated that for a "foreign investor", a contract would be drawn up in English and Kazakh or Russian. The Contract was in Russian only, suggesting Ruby Roz was not "foreign".
Nor did the FIL assist. Ruby Roz would have fallen within the definition of an "enterprise with foreign participation" under the FIL. Whilst those enterprises were offered some of the guarantees enjoyed by "foreign investors", under 4.5 of the FIL, this served only to demonstrate that there was a clear distinction between an "enterprise with foreign participation" and a "foreign investor". It did not assist Ruby Roz in its argument that it was a "foreign investor."
The fact that the owner of Ruby Roz may have been a foreign investor in Ruby Roz was also irrelevant: the Court highlighted the importance of distinguishing investment by Ruby Roz and in Ruby Roz.
The Foreign Investment Law
Ruby Roz submitted that the FIL also provided an independent submission to arbitration.
The FIL came into effect in 1994, underwent various alterations, and was finally repealed in 2003.
In its final iteration, Article 27 of the FIL provided that a foreign investor could refer any disputes to arbitration. The FIL also contained a 10 year stabilisation clause in relation to "foreign investments".
Much of the discussion in the UNCITRAL Award focused on when this stabilisation period would commence and whether Ruby Roz's investments fell within the stabilisation period. However, the Court's analysis focused on the initial question of whether Ruby Roz's investments were "foreign investments" and could therefore benefit from the stabilisation clause.
The Court accepted that Ruby Roz arguably fell within the definition of "foreign investor". However, the definition of "foreign investments" was narrow and did not cover the investments outlined in the Contract, namely the reconstruction of buildings and purchase of land and equipment.
Again, the applicable law required a literal interpretation of the FIL. The Court considered the language of the FIL to be clear, but briefly considered Ruby Roz's arguments as to the relevance of historical circumstances in interpreting the provision.
However, the Court found that the fact that the legislative's object of protection may have been "the foreign investor's position" (as Ruby Roz argued) could not tenably impact the interpretation of "foreign investment" where that definition clearly lists the forms of investment to which it extends. The commercial aim to protect investments could not supplant the clear words of the FIL. The Court also rejected Ruby Roz's other contextual arguments.
Conclusion
The Court reached the same conclusion as the Tribunal, namely that the Tribunal did not have jurisdiction under the Contract or the FIL. Whilst they agreed that, on a plain reading of the Contract, Ruby Roz was not a "foreign" investor, the reasoning of the Court and the Tribunal differed in respect of the FIL. The Tribunal found that the stabilisation period had expired and that Ruby Roz could no longer rely on the arbitration agreement in the FIL. The Court did not consider this issue as it found that Ruby Roz's claim failed on a prior issue: its investments did not qualify as "foreign investments" under the clear language of the stabilisation clause.
This case underlines that the Court will be likely to closely apply the principles of contractual interpretation required under an applicable foreign law when construing contracts and foreign legislation. It will usually be difficult to persuade the Court to adopt a more expansive approach, or one that draws upon principles more familiar in English law.
For further information, please contact Craig Tevendale, Partner, Susan Field, Senior Associate, or your usual Herbert Smith Freehills contact.
In the long running Astro/First Media (also known as Lippo) enforcement dispute, First Media has failed to obtain leave to appeal to the Court of Final Appeal in Hong Kong in respect of First Media's recent loss in the Court of Appeal (Astro v First MediaCACV 272/2015). As a result, First Media must pay to Astro sums due under five Singapore arbitration awards. Having failed to obtain leave from the Court of Appeal on 29 March 2017, it is not yet known whether First Media will seek leave to appeal directly from the Court of Final Appeal.
The Astro/First Media enforcement dispute will be familiar to arbitration practitioners in Asia. In proceedings that went to the Singapore Court of Appeal, First Media (Lippo) successfully resisted enforcement of five adverse arbitration awards on the grounds that they had been made without jurisdiction (see our blog post here). The issue in the Singapore appeal was whether First Media was entitled to resist enforcement on jurisdictional grounds (the "passive remedy") in circumstances where it had not sought to set aside the Tribunal's award establishing jurisdiction within the time allowed (the "active remedy"). The Court of Appeal concluded that in Singapore award-debtors have a free choice between the active and passive remedies: having lost on jurisdiction, an award debtor may choose to fight the arbitration and then decide whether to resist enforcement having seen the outcome.
Astro also enforced the awards in Hong Kong, where it has enjoyed more success (see our blog post on the Court of First Instance Decision here, and on the Court of Appeal decision here). First Media initially chose not to resist enforcement in Hong Kong, in the belief (which later turned out to be wrong) that First Media had no assets in the jurisdiction. When First Media eventually sought to set aside the court orders allowing enforcement of the awards, the less controversial issue for decision was whether First Media was entitled to an extension of time to resist enforcement. The Court of First Instance decided that no extension of time should be granted, and the Court of Appeal agreed. The 14 day period allowed for resisting enforcement had expired; First Media was fourteen months too late. These judgments serve as an important reminder to award-debtors that they must resist enforcement within the time allowed by Hong Kong law.
The more controversial issue in the Hong Kong proceedings was whether First Media was precluded by the principle of good faith from relying on its argument (that had been accepted in Singapore) that the tribunal lacked jurisdiction to make the awards. The Court of First Instance concluded that First Media lacked good faith as a result of its choice to wait and exercise its passive remedy, rather than exercise its active remedy in the time allowed. This conclusion was criticized by some commentators on the basis that Singapore law expressly allows a free choice between the active and passive remedies, and the Singapore courts had concluded that First Media had effectively and expressly reserved its right to resist enforcement when the time came. The Court of Appeal sided with the critics and overturned the first instance judge on the application of the good faith principle. However, this made no difference to the ultimate outcome (because of the court's conclusion that First Media was too late to resist enforcement).
