Overview

In a recent ex tempore judgment in the case of Loblaw Companies Limited v Origin & Co Ltd & Another [2017] SGHC 59 ("Loblaw v Origin"), the Singapore High Court declined to exercise its discretion under s10(9) of the International Arbitration Act ("IAA"), and refused to stay an arbitration pending final determination by the Singapore courts of a separate application by Loblaw to review the Tribunal's finding on its jurisdiction.

In its decision the High Court acknowledged the lack of authority on when and how a court shall exercise its discretion under s10(9) of the IAA, finding that "[u]ltimately, very much depends on the unique facts and circumstances of each case". However, an applicant would generally be required to show "special circumstances" justifying a stay, over and above the (alleged) merits of the jurisdictional objection or the obvious risk of wasted time and costs.

Background

The proceedings involved a large Canadian food retailer, Loblaw, and a South Korean distributor, Origin & Co., and related to ongoing arbitration proceedings between them at the International Chamber of Commerce.

Loblaw applied to the Singapore courts to stay the arbitration under s10(9) of the IAA, pending final determination of a separate application under s10(3) of the IAA to review a ruling by the Tribunal's on its jurisdiction (which it ruled on as a preliminary issue and which Loblaw disputed). Section 10(9) of the IAA provides that where a party appeals a tribunal's ruling on its jurisdiction, the appeal "shall not operate as a stay of the arbitral proceedings or of execution of any award or order made in the arbitral proceedings unless the High Court orders otherwise", and that "no intermediate act or proceeding shall be invalidated except so far as the High Court may direct".

Loblaw argued that if the arbitration were not stayed pending the court review, it would suffer prejudice and irreparable harm. It was particularly concerned that under a document production order handed down by the Tribunal in the arbitration (which retained its legal force during the appeal under s10(9)), Loblaw would have to hand over sensitive and confidential information to Origin while the issue of the Tribunal's jurisdiction remained in dispute.

As both parties acknowledged, there is a paucity of legal authority setting out the appropriate test to be applied to stay an arbitration under s10(9) of the IAA. The sole authority dealing with this point, AYY v AYZ and another [2015] SGHCR 22, found that a stay in arbitral proceedings will generally be ordered if an applicant is able to demonstrate with reasonable and credible substantiation that a refusal to stay would result in detriment or prejudice that could not be adequately compensated with costs. This was referred to as the "irreparable prejudice" test.

Loblaw disagreed that this test was the relevant measure for a stay under s10(9), and asserted that a more appropriate test was "balance of convenience" between the prejudice that may result from the carrying out of an unnecessary arbitration and the prejudice that would result from a delay. Origin, on the other hand, contended that the applicant must show "special circumstances" over and above inconvenience and wasted time and expenses before the court will grant a stay.

Decision

The High Court agreed with Origin, and found that the court's statutory discretion was not based on a balance of convenience test. Rather, the starting point is the statutory scheme outlined in s10(9), which allows for curial review of a tribunal's ruling on jurisdiction but only under certain conditions. It states that an application for such review “shall not operate as a stay of the arbitral proceedings", although the court is given the statutory discretion to stay arbitral proceedings pending the review. This implied a default presumption against the arbitration being stayed, though with a discretion for the court to reverse this. This puts a greater burden on the applicant: the court's discretion should be exercised only where there exist "special facts and circumstances that warrant the court's exercise of its statutory discretion to depart from the statutory default position", in which special circumstances "a stay ought to be granted".

By way of guidance as to what such "special circumstances" might comprise, and by reference to Loblaw's circumstances, the High Court stated that wasted time and costs are a "usual and attendant by-product or consequence of a tribunal's decision to continue with the arbitral proceedings" and hence cannot, in and of themselves, justify a stay. It was a "necessary corollary" of the IAA's preference for allowing the continuation of arbitral proceedings while a jurisdictional challenge was pending that factors such as the time and costs expended on an unnecessary arbitration are not "special" enough to warrant the granting of a stay.

Referring back to Article 16(3) of the UNCITRAL Model Law (on which s10(9) of the IAA was based), the court noted that the continuance of arbitral proceedings despite an application for curial review was a "fundamental feature" of Article 16(3). Furthermore, Article 16(3) reflected the balance the drafters had intended between the countervailing considerations of allowing the courts to have control over a tribunal's decision on jurisdiction on the one hand, and the need to ward against the abuse of such recourse as a dilatory tactic to hold up the arbitration on the other. The "balance" referred to by Loblaw was already achieved via the tribunal's inherent discretion to continue proceedings envisaged in the Model Law and enacted in the IAA.

In relation to Loblaw's concerns over the production of confidential documents, the court held that (i) Loblaw had not demonstrated that the information contained in the relevant documents was sufficiently sensitive or confidential to warrant the protection afforded by a stay; and (ii) disclosure orders are commonplace in arbitration proceedings and, if such orders justified a stay, the default position would be "turned on its head" and stays would be routinely granted. In any event, the court found that sufficient safeguards existed in the form of confidentiality arrangements.

Discussion

This decision is of particular interest in relation to applications under s10(9) of the IAA due to the lack of authority on when the court shall exercise its discretion to stay an arbitration in such circumstances  – an issue which the High Court acknowledged in its judgment.

While the judgment offers little in the way of a definitive test, it rejected the "irreparable prejudice" test, which it found to be simultaneously both over- and under-inclusive. As the court noted, a stay may well be warranted under s10(9) even where parties have not suffered any harm or prejudice per se.

Ultimately, the High Court made it clear that it will only exercise its discretion under s10(9) of the IAA in "special circumstances" – "[u]ltimately, very much depends on the unique facts and circumstances of each case". While this lacks clearly-defined parameters, it is clear that a party seeking a stay of arbitration pending an appeal against jurisdiction must meet a higher standard than merely balance of convenience – in this case, wasted time and costs were found to be part and parcel of such proceedings, and even the risk of the supposedly irreversible disclosure of sensitive and confidential information by Loblaw did not prompt the High Court to grant a stay.

For further information, please contact Alastair Henderson, Partner, or Daniel Mills, Associate, or your usual Herbert Smith Freehills contact.

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Daniel Mills

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In Tribunal des Conflits, 24 April 2017, C4075, the Tribunal des Conflits considered whether the administrative or ordinary courts had jurisdiction to hear an application to enforce an arbitral award made in respect of disputes arising under two public services contracts.

Background

Ordinary and administrative courts under French law

The French court system is divided into ordinary (ordre judiciaire) and administrative (ordre administratif) courts. The ordinary courts have jurisdiction over civil, commercial, social and criminal cases, while public law cases are heard in the administrative courts. The French Supreme Court (Cour de cassation) is the highest ordinary court. The Conseil d'Etat is the highest administrative court.

In the event of a dispute as to whether a case falls within the jurisdiction of the ordinary or administrative courts, the Tribunal des Conflits is the specialised court charged with resolving the issue.

Enforcement of a foreign award in France

As a matter of principle, Article 1516 of the French Code of Civil Procedure (CPC) grants the ordinary courts exclusive jurisdiction in respect of the enforcement (exequatur) of foreign arbitral awards (that is, awards made outside France) and international arbitral awards made in France.

France is a party to the 1958 New York Convention, Article III of which prohibits any form of procedural discrimination between domestic and foreign arbitral awards in respect of recognition and enforcement. Article V of the same Convention sets out the limited grounds on which the recognition and enforcement of a foreign arbitral award may be refused. A review of the merits of the award is not permitted.

French law on arbitration is regarded as being even more liberal than the New York Convention and French ordinary judges (juges judiciaires) generally refer to French law on arbitration (i.e. the CPC rather than the New York Convention). Article VII of the Convention permits reliance on a national law which is more favourable toward international arbitration than the Convention itself.

Facts

The dispute and issue of the arbitral awards

The Syndicat mixte des aéroports de Charente (SMAC) is a French public law entity. In February 2008, it concluded two agreements with Ryanair Limited and its wholly-owned subsidiary Airport Marketing Services Limited (together, Ryanair) concerning the development of a regular air link between London and Angoulême, and related publicity services.

The two agreements provided for London-seated arbitration under the rules of the London Court of International Arbitration (LCIA). Ryanair terminated both agreements in February 2010, and subsequently instituted LCIA arbitration. In parallel, SMAC commenced proceedings before the Poitiers Administrative Tribunal. In an award issued on 22 July 2011, the sole arbitrator found that he had jurisdiction over the dispute, and refused to stay proceedings until the Poitiers Administrative Tribunal had ruled on the same dispute. In a second award, issued on 18 June 2012, the sole arbitrator found that the agreements had been validly terminated.

The proceedings before the French Courts

On 21 May 2012, the President of the Paris Tribunal de grande instance issued an order granting enforcement of the first award. SMAC appealed against the order before the Paris Court of Appeal and, in parallel, also applied to the Conseil d'Etat. This ultimately resulted in the Conseil d'Etat, the highest administrative court, and the Cour de cassation, the highest ordinary court, issuing conflicting decisions (see Enforcement of foreign award involving public procurement contract falls within jurisdiction of the ordinary courts (France Supreme Court)).

1. Conseil d'Etat judgment of 19 April 2013

Before the Conseil d'Etat, SMAC sought (among other things) both the setting-aside of the award and a ruling that it could not be recognised or enforced in France.

On 19 April 2013, the Conseil d'Etat rejected SMAC's submissions on the grounds that: (i) the French courts (whether administrative or ordinary) do not have jurisdiction over an application to set aside a foreign award, as the courts of the seat alone have jurisdiction in that respect; and (ii) since Ryanair had yet to seek enforcement of the award, SMAC's submissions regarding the recognition or enforcement of the award were, in the circumstances, premature. 

However, in reaching its decision, the Conseil d'Etat also indicated that:

• The French administrative courts have jurisdiction over any challenge to an award made in France involving contracts subject to the mandatory rules of administrative law (such as public procurement contracts); and
• Irrespective of where it is made, the administrative courts have exclusive jurisdiction over the enforcement of an award involving contracts subject to the mandatory rules of French administrative law.

2. Paris Court of Appeal judgment of 10 September 2013

In its judgment of 10 September 2013, the Paris Court of Appeal adopted the Conseil d'Etat's reasoning. The court stated that, although Article 1516 of the French CPC grants the Paris Tribunal de grand instance exclusive jurisdiction over the enforcement of awards issued abroad, its scope is limited to questions of jurisdiction within the ordinary court system. As such, it is not relevant to questions concerning the division between the ordinary and administrative courts.

The Court of Appeal then went on to find, in keeping with the Conseil d'Etat, that: (i) the agreements between SMAC and Ryanair were public procurement contracts; and (ii) in consequence, the administrative courts had exclusive jurisdiction over an application for enforcement of the award. Accordingly, the Court of Appeal affirmed that the ordinary courts did not have jurisdiction, and overturned the enforcement order of 21 May 2012.

Ryanair appealed to the French Supreme Court.  

3. The Supreme Court judgment of 8 July 2015

In a judgment issued on 8 July 2015, the Supreme Court overturned the Court of Appeal decision, affirming that the enforcement of a foreign award falls within the jurisdiction of the ordinary courts.

The Supreme Court relied upon the fact that international arbitration is an autonomous "international arbitral order". As such, an international arbitral award is not linked to the legal system of a particular state; rather, it is an international decision whose lawfulness must be examined under the rules of the country in which recognition and enforcement is sought. In France, the enforcement of a foreign award falls within the jurisdiction of the ordinary courts, and any review of the merits of a foreign award is forbidden.

In this instance, the overturning of the enforcement order, and the Court of Appeal's refusal to uphold jurisdiction, breached this principle. Consequently, the Supreme Court overturned the Court of Appeal judgment pursuant to Article 1516 of the CPC and the New York Convention, and ordered the case to be re-heard.

It was in this context that the issue was, eventually, referred to the Tribunal des Conflits.

The Decision of the Tribunal des Conflits

The Tribunal des Conflits issued its judgment on 24 April 2017. The Tribunal first outlined, and clarified, the basic principles:

• Where a foreign arbitral award has been made in connection with a dispute related to the performance or termination of a contract entered into between a French public law entity and a foreign company, in circumstances where the contract concerns international trade interests and has been performed in France, any application for enforcement must be brought before the ordinary courts. Similarly, where such an award has been made in France, the ordinary courts have jurisdiction over an application for the award to be set aside.
• However, where the contract which is the source of the dispute is subject to mandatory French public law rules relating to public procurement or the occupation of public land, any application to enforce in France an arbitral award (whether made in France or not) or to set aside an award made in France falls within the jurisdiction of the administrative courts.

In this instance, the agreements concluded between Ryanair and SMAC constituted public services contracts within the meaning of the Code des marchés publics then in force. Accordingly, they were subject to mandatory French public law rules relating to public procurement, with the result that the administrative courts had jurisdiction over Ryanair's application for the enforcement of the first award.

Comment

The ruling of the Tribunal des Conflits is clearly in line with its 2010 Inserm decision, which had adopted the same approach in respect of setting aside proceedings against an award made in France. Following the Ryanair judgment, it is now clear that the same principles apply in the context of proceedings for the enforcement of foreign awards and awards made in France.

In addition, the Tribunal de Conflits ruling puts an end to the divergence between the Supreme Court and the Conseil d'Etat, and, at least on that basis, is therefore to be welcomed. However, as certain French arbitration practitioners have observed, a system in which the identity of the court reviewing an international award (and, ultimately, the nature of that review) depends upon its subject matter is likely to be less predictable than one in which a single court has exclusive jurisdiction over all claims – particularly in light of the Conseil d'Etat's recent ruling in Fosmax, in which it clarified for the first time the scope of its power to review international arbitral awards where mandatory French public law rules apply.  As such, it will be interesting to see whether the recently formed Macron government takes steps to grant the ordinary courts exclusive jurisdiction over such matters.  

A version of this post was first published by Practical Law.

For more information, please contact Vincent Bouvard, Avocat, Peter Archer, Associate, or your usual Herbert Smith Freehills contact. 

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Last week, the Dubai International Financial Centre Court issued its decision in Pearl Petroleum Company Limited & Others v The Kurdistan Regional Government of Iraq. The Court upheld its earlier decision which recognised two LCIA arbitration awards totalling US$2 billion issued against the Kurdistan Regional Government of Iraq (the “KRG”) and dismissed KRG’s arguments (1) that the enforcement proceedings should be set aside on the ground that the Court did not have jurisdiction to make such orders against it, and (2) that the DIFC Court should not decide issues of immunity and its waiver.

1. Background

On 4 April 2007, KRG and Dana entered into a gas exploration and production contract governed by the law of England and Wales (the “Contract“). Dana later assigned 50% of its interest in the Contract to Crescent. In 2009, both Dana and Crescent assigned their interests in the Contract to Pearl.

Thereafter, a dispute arose between KRG and Pearl and, on 21 October 2013, Pearl began LCIA arbitration proceedings against the KRG. Ultimately the Tribunal issued two partial awards in Pearl’s favour ordering the KRG to pay Pearl approximately US$ 2 billion plus interest.

Following this, Pearl filed an application in the DIFC Courts asking the DIFC Court to: (1) recognise the two LCIA awards; (2) enforce the two LCIA awards and (3) grant permission for alternative service of the order recognising and enforcing the two LCIA awards. Pearl could then enforce such an order in Iraq through the 1983 Riyadh Arab Agreement for Judicial Cooperation (the “Riyadh Convention“).

On 29 May 2017, the DIFC Courts issued an ex parte order granting Pearl’s application (the “Recognition Order“).

2. The KRG’s Appeal

On 3 July 2017, the KRG applied to set aside the Recognition Order relying on sovereign immunity as a defence to enforcement. The KRG also asserted that the DIFC Court did not have jurisdiction to issue the Recognition Order, as the sovereign immunity defence raised public policy questions which could only be determined by the UAE’s federal legislature and courts in Abu Dhabi. In particular, KRG argued that the DIFC Court did not have jurisdiction to determine issues of immunity, the existence of the doctrine of sovereign immunity in the UAE and the DIFC, or its ambit or extent (whether absolute or restrictive) or any issues of waiver.

3. DIFC Decision

The DIFC Courts upheld the order recognising the LCIA awards for US$2 billion. (It set aside the order granting permission for alternative service, but that analysis is not the subject of this briefing).

Sovereign Immunity

The contract between Pearl and KRG was governed by the law of England and Wales and provided that “the KRG waives on its own behalf and that of [The Kurdistan Region of Iraq] any claim to immunity for itself and its assets”. KRG argued that the DIFC Court should not decide (1) whether sovereign immunity exists as a doctrine in the UAE and the DIFC, (2) what the extent of any such immunity might be and (3) any question of waiver; as these were questions to be determined at a federal level.

The DIFC Court however decided that it could enforce the Awards without having to address the nature and extent of sovereign immunity. The Court acknowledged that whether or not an entity is to be recognised as a state is a separate question, and whether the UAE recognises another state may be a matter of its foreign policy. However, there could be no doubt that the judiciary decides when it comes to construing a waiver. As the Court said “the proposition that the extent of the contractual waiver should be determined by any entity other than a court, when determining its own jurisdiction over a defendant is not tenable.”

The Court examined the parties agreed waiver of immunity and held “where a clear and unequivocal waiver from suit and enforcement has been given in a contract, there is no good reason why effect should not be given to the words used. Where the construction is governed by English law and any relevant rules, customs or practices of International law, the conclusion which the DIFC court should reach is clear. Effect must be given to the plain words and they cannot be rendered meaningless by the means that the KRG suggest. To accede to the submission of KRG here would be to render the wording meaningless. It would destroy the bargain that the parties had made and enable a state or state body to succeed on an argument that it had expressly agreed not to run.” In simple terms, there were no questions of sovereign immunity to refer to the federal legislature and courts, because any immunity which might have existed had been waived.

The Court also looked at the arbitration clause and declared “it is clear that the KRG entered into an agreement to arbitrate in London … and that in agreeing to London as the seat of the Arbitration, it also agreed to the English Court as the supervisory court. It was inherent in that agreement, in my judgment, that the KRG waived any immunity from the exercise of the Court’s supervisory powers under English law …” As a result, the DIFC Court has endorsed the principle followed in many other jurisdictions that, where a state has agreed to submit to arbitration, it has left itself open to the processes necessary to make the arbitration effective.

The decision also raised an interesting comparison between DIFC and Hong Kong. In support of its case, the KRG had relied on the decision of the Court of Final Appeal of the Hong Kong Special Administrative Region in Democratic Republic of the Congo v FG Hemisphere Associates LLC. In that case, the Hong Kong Court had held that the Democratic Republic of the Congo’s defence of sovereign immunity raised questions of public policy which could only be decided by the Chinese legislature and referred the defence to the standing committee of the Chinese National People’s Congress.

The DIFC Court found that the situation in the DIFC was very different. Hong Kong’s Basic Law required that all issues of “acts of state such as defence and foreign affairs” were to be determined by the Peoples Republic of China. DIFC has no equivalent provision.

Therefore, as the KRG had expressly waived its right to rely on the sovereign immunity defence, the Recognition Order issued by the DIFC Courts against the KRG was upheld.

4. Conclusion

This decision sends a clear message that the DIFC Court will recognise and uphold properly drafted sovereign immunity waiver clauses allowing proceedings and enforcement to continue against states seeking to raise the defence contrary to the terms of the contract. As the DIFC Courts remain a conduit to enforcement in other jurisdictions, such as onshore in the UAE and Iraq, the certainty this decision provides is welcome news for anyone contracting with a sovereign entity.

As the DIFC Court decided that the waiver to immunity applied, it also decided that it did not need to determine whether the law of the DIFC or the UAE includes the concept of state or sovereign immunity. This was something which was debated at length in the proceedings and followers of this case were hoping to receive some clarity on this issue. It is unfortunate that the DIFC Court were unable to clarify the position. This will no doubt be the subject of another dispute in the future. Until then, this case highlights the importance of the drafting of sovereign immunity waiver clauses. In particular, it is essential that parties ensure that such clauses expressly exclude immunity from both suit and execution.

For more information, please contact Craig Shepherd, Partner, Michael Hartley, Associate, or your usual Herbert Smith Freehills contact.

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Michael Hartley

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Laurence Franc-Menget has published an article in the Revue de l’arbitrage, the journal of the Comité Français de l’arbitrage, discussing  the Paris Court of Appeal’s decision on an application by Ukraine to annul an $112 million UNCITRAL award against it in favour of OAO Tatneft.  The article, in French, considers the interpretation by the Court of the definition of emanation for the purpose of establishing jurisdiction of an investment arbitral tribunal. To read the full article, please click here.

This article was first published in the Revue de l’arbitrage, 2017, n°2, p. 500 et seq.

Laurence Franc-Menget

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A consortium of construction companies (the Consortium) was unsuccessful in obtaining a stay of court proceedings pending before the English High Court (the Court), even though parallel related ICC arbitration proceedings are ongoing. The Court rejected the application for a stay under section 9 of the English Arbitration Act 1996 (s9) on the basis that the proceedings, which concerned advance payment guarantees governed by English law and containing exclusive English jurisdiction clauses, concerned a “matter” outside the scope of the arbitration agreements. The Court found further that there was no compelling case for a stay to be granted under its inherent jurisdiction.

This decision illustrates the practical difficulties, costs and delays, caused when parties agree that disputes related to the same construction project are to be determined in different fora.

Autoridad del Canal de Panama v Sacyr SA and others [2017] EWHC 2228 (Comm)

Background

• The contracts

The case arose out of the construction project to widen the Panama Canal.  As is common in large construction projects, performance of the obligations of the main contract (assigned to a locally incorporated entity owned by the Consortium, Grupo Unidos por el Canal S.A. (GUPC)) was secured through a series of financial guarantees. The consortium companies entered into advance payment guarantees with Autoridad del Canal de Panama (the Employer) as beneficiary, to secure advance payments made by the Employer to GUPC under the main contract. Whilst the main contract and certain of the advance payment guarantees (the Associate Guarantees) were governed by Panamanian law and specified that disputes would be resolved by arbitration seated in Miami, certain of the later advance payment guarantees (the APGs) were governed by English law, and provided for the exclusive jurisdiction of the English courts.

• The disputes

Several disputes arose between the Employer, on one hand, and GUPC and the Consortium on the other hand, over advance payments made by the Employer to GUPC, which the Employer sought to have repaid by the Consortium. Parallel proceedings were initiated as follows:

• The Court Proceedings: In 2016, the Employer brought proceedings before the English Courts under the APGs. The Employer sought to have the Consortium repay advance payments paid to GUPC by the Employer under the main contract (the GUPC Repayment Issue). The proceedings were brought under the APGs exclusively.
• The Arbitration: In early 2017, the Consortium commenced arbitration proceedings in Miami. These proceedings were brought under the main contract and several of the Associated Guarantees, but did not include claims under the APGs.

Application for summary judgment and application for a stay of the Court Proceedings

In the Court Proceedings, the Employer argued that the APGs should be treated as automatically enforceable “first demand guarantees” and that, for this reason, the Court could issue summary judgment without considering defences under the main contract or any other arguments related to the Arbitration. The Consortium, on the other hand, sought to have the Court Proceedings stayed pending the resolution of the Arbitration. It relied on: (i) s9, which provides for a mandatory stay in respect of “a matter” which, under an arbitration agreement, is to be referred to arbitration; and (ii) the court’s inherent, discretionary power to grant a stay of the proceedings on case management grounds. Whilst the Consortium accepted that the GUPC Repayment Issue fell within the scope of the exclusive jurisdiction clauses in the APGs insofar as it arises in relation to claims under the APGs, it contended that it also was the same “matter” within the arbitration agreements, and so fell within the provisions of s9. The Employer accepted that the GUPC Repayment Issue fell within both the scope of the exclusive jurisdiction clauses in the APGs and within the scope of the arbitration agreements, but contended that this issue was not the “matter” in the Court Proceedings.

With the parties’ consent, the Court decided to deal with the application for summary judgment and the stay application together.

Application for Summary Judgment

The Court found that the APGs were not first demand guarantees. A successful defence to a claim under the Main Contract could impact the extent to which the Consortium was liable to repayment under the APGs, and should therefore be considered by the Court before ordering any repayment. Consequently, the Court found that the claim was unsuitable for summary judgment.

The Application for a Stay under Section 9 of the Arbitration Act

The Court’s reasoning focused on s9 and the meaning of “in respect of a matter” that should have been referred to arbitration. The Consortium’s case was that the issues raised by the APGs overlapped substantially with issues to be determined in the Arbitration. These included questions of liability and of interpretation under the main contract, and whether and for how much GUPC (and thus the Consortium under the APGs) was in fact liable to repay the advance payments made by the Employer.

The test under s9 applied by the Court was as follows:

• What is the “matter” in respect of which the court proceedings are being brought?
• Does that matter fall within the scope of the arbitration agreements under which the arbitration proceedings are brought?
• Are the arbitration agreements manifestly inoperative?

The Court found that the “matter” in respect of which the Court Proceedings were brought was whether there was any liability for the Consortium to repay under the APGs. This “matter” was within the exclusive jurisdiction clauses, and was not one which the parties had agreed to refer to arbitration. The Arbitration, on the other hand, would seek to determine issues of liability under the main contract and the Associate Guarantees.  While there might be an overlap of issues to be discussed in the two fora (and thus a risk of conflicting decisions), the Court consequently refused to grant a stay under s9(1).

The Application for a Stay of Proceeding on Grounds of Case Management

The Consortium argued that the issue of GUPC’s liability to repay the advance payments was a matter that would be better decided by the arbitral tribunal, as the forum deciding, among other issues, liability for repayment under the main contract. The Employer, on the other hand, argued that the exclusive jurisdiction clause, “fortified” by the forum conveniens clauses in the APGs, precluded the exercise of the Court’s case management powers to grant a stay – the parties’ agreement was simply that the only appropriate forum for hearing issues pertaining to the APGs was the English courts, thus excluding all consideration of the Arbitration.

The Court formally rejected this argument on the basis that it would set the bar “too high”. Instead, it conceded that “[i]n circumstances in which an international commercial dispute involves arbitration as well as court proceedings, it makes good commercial sense for the court to have regard, where appropriate, to the orderly resolution of the dispute as a whole, if necessary by granting a temporary stay in favour of arbitration“. This would, as previous case law confirmed, minimise the risk of inconsistent decisions and avoid unnecessary costs resulting from two proceedings. The Court nevertheless considered that a discretionary stay could only be granted “in rare and compelling circumstances“. Among other factors, the Court considered that the Arbitration was still at a very early stage (the arbitral tribunal having not been constituted) and any relevant Panamanian legal issues could be dealt with by the Court with the use of expert evidence. In summary, the Court found that the Consortium had not made a “compelling case” for a case management stay, but hinted at the possibility of the Consortium bringing forward new arguments in a new stay application.

Conclusion

This decision illustrates the difficulty resulting from the inclusion of conflicting dispute resolution provisions in contracts related to the same transaction. While the specificities of each case might vary, parties are encouraged to exercise caution to ensure that the terms of all related contracts work together effectively, with particular attention to the contracts’ applicable law and dispute resolution clauses.  This will help to ensure that closely connected merits issues are not decided separately in multiple fora.

The Court has subsequently considered the issues of the Consortium’s application for permission to appeal the dismissal of the stay application brought under s9 and the Consortium’s application for a stay of the proceedings pending such appeal (or pending an application to the Court of Appeal for permission to appeal if necessary). This judgment will be discussed in a subsequent blog post.

For more information, please contact Craig Tevendale, Partner, Hannah Ambrose, Professional Support Consultant, Caroline Le Moullec, International Arbitration Intern, or your usual Herbert Smith Freehills contact.

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Hannah Ambrose

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Caroline Le Moullec

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We recently reported on three decisions of the Judicial Tribunal (please click here) following our commentary on the Judicial Tribunal’s controversial first decision in Daman v Oger and the effect on the Banyan Tree jurisdiction (click here). We concluded that, notwithstanding the absence of detailed reasoning in individual decisions, it was possible to piece together the Judicial Tribunal’s approach from its decisions taken as a whole. The two new decisions shine further light on that approach.

1.    The Judicial Tribunal’s approach

We suggested in our last report that, fundamentally, the Judicial Tribunal approaches its role in determining conflicts of jurisdiction as between the DIFC and Dubai Courts on the basis that the Dubai Courts are the courts of general or ‘natural’ jurisdiction, from which the DIFC Court’s jurisdiction is carved out. Therefore, for the DIFC Courts to have jurisdiction, special circumstances, such as submission of a party, must be present. Accordingly, the Judicial Tribunal would only decide in favour of the DIFC courts if certain conditions have been satisfied, namely (i) express submission (or concession) by a party to the DIFC’s jurisdiction (whether to the DIFC Court or for the DIFC to be the seat of arbitration); or (ii) the absence of parallel proceedings in the onshore Courts of Dubai (and therefore no conflict).

The Judicial Tribunal’s approach has important repercussions for the conduit jurisdiction. Typically, when a party seeks to enforce non-DIFC awards or judgments (ie. those rendered in onshore Dubai or abroad), the award or judgment debtor will not have submitted to the jurisdiction of the DIFC. This has led to a concern that a party looking to frustrate enforcement of an award or judgment could simply manufacture a Dubai Court connection (relatively straightforward if the party is situated in Dubai), commence proceedings in onshore Dubai and then apply to the Judicial Tribunal, resulting in a stay of any DIFC Court enforcement proceedings.

Decisions such as these have shaken the foundation of the conduit jurisdiction, painstakingly assembled by the DIFC courts over a line of decisions, and cast doubt over whether awards rendered in arbitrations seated in either onshore Dubai or internationally can be enforced in the DIFC without time-consuming and expensive satellite litigation. As a practical consequence, it could be argued that, while the conduit jurisdiction has been damaged, the Judicial Tribunal’s decisions have in fact enhanced the attractiveness of the DIFC as an arbitration venue.  After all, DIFC awards can be enforced without conduit questions arising.

The Judicial Tribunal has handed down two new decisions, ruling in favour of the DIFC Courts on both occasions. We review each of the decisions in turn below and reflect on how they further clarify the Judicial Tribunal’s approach.

2.    The recent decisions

IGPL v Standard Chartered Bank – Cassation No. 7 of 2017 (JT)

This is a novel decision insofar as it involves a reference made by a previous applicant to the Judicial Tribunal in the same dispute, (Cassation No. 4 of 2016 (JT)). In the earlier case, the Judicial Tribunal had determined the conflict of jurisdiction in favour of the DIFC Courts on the grounds that the applicant had already conceded that the DIFC Court had jurisdiction.

Following the decision in Cassation No. 4 of 2016, in the resumed DIFC Court proceedings, the judgment debtor filed a counterclaim, which the DIFC Court allowed subject to certain conditions, including payment of an outstanding costs order and discontinuance of the proceedings before the Union Supreme Court, commenced prior to Cassation No. 4 of 2016. Refusing to withdraw its petition before the Union Supreme Court, the judgment debtor filed a new application to the Judicial Tribunal, seeking an order from the Judicial Tribunal that the DIFC Court be compelled to accept the counterclaims without condition.

The parties’ arguments turned on Article 4 of Decree No. 19 of 2016 pursuant to which the Judicial Tribunal was established (the “Decree“) which sets out the scope of the Judicial Tribunal’s jurisdiction.  Article 4 provides that the Judicial Tribunal has authority to decide which of the DIFC or Dubai Court is competent to hear proceedings in circumstances where either both Courts accept claims or neither does (in other words, a positive or negative conflict). The judgment debtor contended that the Judicial Tribunal’s previous decision, in proscribing the Dubai Court from hearing the case, and the DIFC Court’s conditional consent to its counterclaims amounted to a negative conflict, ie neither the DIFC nor the Dubai Court had accepted jurisdiction.

The Judicial Tribunal unreservedly dismissed the reference, stating that there were no proceedings before the Dubai Court, and therefore no possible conflict. Further, Article 7 of the Decree provides that the Judicial Tribunal’s decisions “are final and not subject to any form of appeal or challenge” – the judgment debtor’s reference was simply an attempt to appeal or re-litigate the same issues. Finally, the Judicial Tribunal explained its scope, stating that it “is not tasked with dictating the procedures or decision of the Dubai Courts or DIFC courts, and is only authorised to make a determination of the competent court when a conflict of jurisdiction arises“.

Assas OPCP Limited v VIH Hotel Management Ltd – Cassation No. 8 of 2017 (JT)

The second decision is potentially very significant. The application related to a much-reported dispute involving the termination by the owner of the Viceroy Hotel on the Palm of a hotel management agreement. Following the owner’s takeover of the hotel, the hotel operator under the management agreement commenced substantive arbitration proceedings and applied to the DIFC Court for a prohibitive injunction restraining the owner from effecting the takeover, which the DIFC Court granted.

In response, the owner commenced proceedings before the Dubai Court submitting that: (i) the hotel management agreement should be annulled; and (ii) the arbitration agreement was invalid because the individual representing the hotel operator lacked authority. On the basis of the Dubai Court proceedings, the hotel operator argued that the parallel proceedings in the DIFC and Dubai Courts created a positive conflict of jurisdiction and referred the matter to the Judicial Tribunal, at which point all proceedings, including the DIFC Court injunction, were stayed in accordance with Article 5(1) of the Decree.

Significantly, the Judicial Tribunal dismissed the application, holding that the nature of the remedy granted by the DIFC court, an interlocutory injunction aimed at “maintaining and restoring the status quo pending determination of the dispute” by arbitration, did not “prevent either the court or the arbitral panel from entertaining the case“. Accordingly, there could be no conflict as between the DIFC and Dubai Courts, although the Judicial Tribunal did note that there was the potential for one to arise in the future, which would depend on the construction and validity of the arbitration agreement.

3.    Conclusion

The new decisions further elucidate the court’s approach. Although the Judicial Tribunal appears to maintain the view that the Dubai Court is the court of ordinary jurisdiction, the latest decisions demonstrate that the Judicial Tribunal will not necessarily tolerate parties seeking to expand its limited remit or abuse its procedures.  Further, the Viceroy Hotel case illustrates that the Judicial Tribunal is prepared to examine the nature of the proceedings before each of the Courts, determining in that case that the DIFC Court’s orders were preservatory in nature and therefore did not establish a conflict. This should provide comfort to parties with DIFC seated arbitrations that the exercise of the Court’s powers as the courts of supervisory and curial jurisdiction is not likely to be affected if Dubai Court proceedings are commenced.

For more information, please contact Craig Shepherd, Partner, Caroline Kehoe, Partner, Joseph Bentley, Associate or your usual Herbert Smith Freehills contact.

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In GMR Energy Limited v. Doosan Power Systems India Private Limited, the Delhi High Court confirmed that two Indian parties can contract to have a foreign seat of arbitration (in this case, Singapore), and also ruled that a non-party to the Arbitration Agreement could be made part of the arbitral proceedings on the grounds that it acted as an alter ego to the contracting party.

A brief summary of the case can be found below.

Facts

The matter related to the development of a 1350 MW Coal Fired Thermal Power Plant in Chhattisgarh. Doosan India had entered into (i) three agreements with GMR Chhattisgarh Energy Limited (“GCEL”) all dated 22 January 2010 (together the “EPC Agreements“); (ii) a corporate guarantee dated 17 December 2013 with GCEL and GMR Infrastructure Ltd (“GIL”); and (iii) two subsequent Memoranda of Understanding (the “MOUs“) with GCEL’s parent, GMR Energy, dated 1 July and 30 October 2015.  The agreements with GCEL and GIL contained arbitration agreements providing for disputes to be resolved by arbitration under the rules of the Singapore International Arbitral Centre (“SIAC“), and for the “place” of such arbitration to be Singapore.  However, whilst the MOUs with GMR Energy referred to the agreements with GCEL and GIL, they did not make an express reference to arbitration.

When disputes subsequently arose, Doosan India sent a notice of arbitration under the SIAC Rules to GIL, GCEL and GMR Energy. GMR Energy applied to the Delhi High Court to restrain Doosan India from instituting or continuing or proceeding with the SIAC arbitration proceedings against it.

Issues

The main issues tried by the Delhi High Court in these proceedings included:

1. Whether the SIAC arbitration proceedings would fall under Part I or Part II of the (Indian) Arbitration and Conciliation Act, 1996 (the “Arbitration Act“)^[1]?; and
2. Whether GMR Energy could be party to the arbitration in circumstances where it was not a party to the EPC Agreements or the corporate guarantee which contained the arbitration clauses?

Issue 1: Applicability of Part I or Part II of the Arbitration Act

This issue arose in relation to the procedure for the appointment of the arbitrators in the SIAC Arbitration Proceedings as well as in relation to whether the issue of alter ego (discussed below) should be decided by the Delhi High Court or the Arbitral Tribunal.

GMR Energy argued that the Court should apply the Arbitration Act as the law governing the seat of the arbitration because:

• on the plain reading of the arbitration clauses, Singapore was not the seat of arbitration but only the chosen place or venue for hearings;
• the parties being Indian, choice of a foreign seat for arbitration would be in contravention of Section 28 of the Indian Contract Act 1872 (the “Contract Act“) which provides that agreements which restrain parties’ rights to commence legal proceedings are void (save for those which do so by way of an arbitration agreement) – GMR Energy contended that an agreement between Indian parties to arbitrate offshore would fall foul of this provision; and
• for two Indian parties to choose an overseas seat for their arbitration (thereby disapplying Part I of the Arbitration Act) would amount to a derogation from Indian substantive law, and therefore would not be permissible.

The Court rejected GMR Energy’s submissions and ruled that:

• as decided by the Supreme Court in Yograj Infrastructure Ltd v Ssangyong Engineering & Construction,[2] the reference to Singapore (and to the SIAC Rules) in this way amounts to a choice of Singapore as the seat of the arbitration;
• as to the submission relating to the Contract Act, this was rejected by the Supreme Court in Atlas Exports v Kotak,[3] as an offshore arbitration would meet the requirements of section 28 of the Contract Act.
• in any event a question about whether the arbitration agreement was lawful was not within the scope of the Court’s inquiry: under section 45 of the Arbitration Act, the Court’s inquiry was limited to the issue of whether the arbitration agreement was “null and void, inoperative or incapable of being performed“.[4] The Court was not to look into the lawfulness or otherwise of the substantive provisions of the agreement at this stage.

The Court thus confirmed that, irrespective of the parties’ substantive rights and obligations under the contract, Indian parties were free to choose an offshore seat for their arbitrations.

Issue 2: Applicability of Arbitral Proceedings to third parties

GMR Energy argued that it could not be made party to the Arbitral proceedings on the grounds that:

• It was not a signatory to any of the arbitration agreements, and could not be roped into an international arbitration by applying the alter ego doctrine – the mere fact that two companies have common shareholders or common directors will not make the two companies a single entity; and
• In any event, Doosan India had terminated the MoUs and discharged GMR Energy’s liabilities under them.

Doosan India contended that GMR Energy should be party to the SIAC Arbitration proceedings by virtue of common family ownership and governance, lack of corporate formalities between the companies, common directorships, logos and letterheads, and GMR Energy’s past conduct in making payments towards GCEL’s debts.

Doosan India further argued that in any case the Delhi High Court should not determine the issue because it was one that fell within the competence of the Arbitral Tribunal in Singapore.  The issue was being raised in response to GMR Energy’s injunction application, and not because Doosan India required the Court to make a final ruling on the matter.

The Court noted that the alter ego doctrine was not limited to cases where fraud was alleged, but was potentially of broader application. Therefore, it ruled that Doosan India had established grounds for proceeding against GMR Energy in the arbitration proceedings, alongside GCEL and GIL, on account of:

• the common ownership between the entities;
• the non-observance of separate corporate formalities and co-mingling of corporate funds; and
• GMR Energy’s undertaking to discharge liabilities of GCEL (and the fact that it had made part payments towards the same);

However, the Court clarified that its finding on the issue of alter ego was limited to confirming that GMR Energy was a party to the arbitration, and not a final determination on merits as to GMR Energy’s liability (if any), which would be in the domain of the Arbitral Tribunal’s jurisdiction.

As to GMR Energy’s arguments regarding the termination of the MOUs, the Court decided that this was a merits issue that could be determined within the arbitration.

Comment

The decision that Indian parties can chose to arbitrate in a seat outside India is helpful, but is perhaps unsurprising in light of other decisions from the Indian courts. The ability to choose an overseas seat is particularly useful for Indian subsidiaries of foreign investors, who might enter into agreements that are exclusively between Indian parties, but might nonetheless wish to have disputes resolved outside India.

Perhaps more noteworthy is the Court’s application of the alter ego doctrine to bind GMR Energy in the arbitral proceedings.  In many jurisdictions, this doctrine is available only (or mostly) in the fraud context, but the developing Indian jurisprudence appears to be that it can apply on the basis of commonality of ownership and operations, and the apparent lack of separate legal personalities in practical, day-to-day terms (which will no doubt be common features of many corporate groups).  It is also interesting that, whilst Doosan (the party wishing to rely on the doctrine) suggested that the Court should not rule definitively on the question of whether GMR Energy should be bound under this doctrine, and should instead leave it to be dealt with by the arbitral tribunal in Singapore, the Court decided that it could and should rule on the matter itself.  This approach risks a potential conflict arising if the tribunal were to reach a different conclusion as to its jurisdiction over GMR Energy, and it remains to be seen whether this approach will be followed in other cases in future.

[1]        The Arbitration Act provides two distinct regimes depending on the seat of the arbitration. Part I provides a framework of rules for disputes – both domestic and those with an international element – where the seat of arbitration is in India. This Part confers significant powers on the Indian courts to order interim measures, appoint and replace arbitrators and hear challenges to arbitral awards. Part II applies to arbitrations seated outside India, and significantly limits the scope of judicial intervention in the arbitration.

[2] (2011) 9 SCC 735

[3] (1999) 7 SCC 61

[4] This was the reasoning of the Supreme Court in Sasan Power Limited vs. North American Coal Corporation India Private Ltd., which was followed here.

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On 9 January 2018, amendments were passed to the Supreme Court of Judicature (Amendment) Act (“SCJA “) which clarify that the Singapore International Commercial Court (“SICC“) has jurisdiction to hear proceedings relating to international commercial arbitration.  The amendments also abolish the pre-action certificate procedure for applications to the SICC.

Established in 2015 as the ‘international’ division of the Singapore High Court, the SICC has gone from strength to strength in a short span of time, gaining a reputation for the quality and speed of judgments rendered. Since its establishment the SICC has heard 17 cases on matters ranging from construction, investment, banking and finance, and shipbuilding, all of which are high value cases involving international parties and counsel.

These latest amendments, along with the addition of four new esteemed international jurists to the SICC bench, are intended to further increase the popularity and usage of the SICC, and Singapore as a preferred seat of international arbitration.

Key provisions of the SCJA Bill

• Jurisdiction of SICC

A new section 18D(2) of the SCJA will be included to provide that “…the Singapore International Commercial Court (being a division of the High Court) has jurisdiction to hear any proceedings relating to international commercial arbitration that the High Court may hear and that satisfy such conditions as the Rules of Court may prescribe“.

The new provision expressly empowers the SICC to hear any matter relating under the Singapore International Arbitration Act (“IAA“), which will include applications to set-aside awards, jurisdictional challenges and enforcement applications.  Whilst Senior Minister of State for Law and Finance Ms Indranee Rajah (“Minister Rajah“) expressed in moving the bill that “it has always been the intention that parties should be able to appear before the SICC for IAA-related matters“, it is noteworthy that none of the 17 matters involve applications under the IAA, and that Singapore practitioners had continued to bring international arbitration applications in the ordinary courts.  The latest amendments therefore provide helpful clarification to litigants looking to bring an application under the IAA.

Consequential amends have also been made to section 80(2A) of the SCJA allowing the Rules of Court to prescribe what constitutes “international commercial arbitration” and any proceedings that such a dispute must satisfy before being heard before the SICC.

• Removal of pre-action certification procedure for application to the SICC

Currently, parties wishing to have their matters heard by the SICC could apply for a “pre-action certificate” which, if granted, represents early acknowledgment by the court that the claim in question is international and commercial in nature (and, where applicable, was an “offshore case”, which would allow foreign counsel representation). Our previous article which describes in greater detail the specific processes of the SICC can be found here.

However, feedback collated by the Supreme Court determined that this process has been of limited utility and so has been removed.  Accordingly, parties wishing to avail of the SICC’s jurisdiction must now provide the necessary justification at the same time that the action is commenced.

New international judges

At the Opening of the Legal Year 2018 on 8 January 2018, the Chief Justice Sundaresh Menon confirmed that 11 out of 12 of the SICC international judges appointed in 2015 had been reappointed for a period of three years (Justice Irmgard Griss has not sought and will not be offered reappointment as she had been elected to the Austrian Parliament). In addition, four new foreign jurists have been appointed:

• The Honorable Robert French (retired Chief Justice of the High Court, Australia)
• The Honorable Beverley McLachlin (retired Chief Justice, Canada)
• The Right Honorable Lord Neuberger of Abbotsbury (retired President of the Supreme Court, United Kingdom)
• The Honorable Sir Jeremy Cooke (former judge overseeing the Commercial Court, United Kingdom)

Comment

Singapore is widely acknowledged as one of the most popular seats of arbitration globally. A 2015 report of the International Chamber of Commerce (ICC) for example ranks Singapore as the number one preferred seat for arbitration in Asia and among the top five preferred seats globally.

The recent developments represent a further step to reinforce this status. Parties opting for Singapore as the seat of their arbitration now do so in the knowledge that curial support is available through the SICC, with its vastly experienced and internationally renowned bench of jurists. The addition of the four new jurists, three of whom served as immediate past Chief Justice of their respective jurisdictions (Judges McLachlin, Lord Neuberger and French) further adds to the confidence and stature of the SICC, and arbitration in Singapore more generally.

One caveat remains in relation to counsel entitled to represent parties in arbitration-related matters before the SICC. In introducing the amendments to the SCJA, Minister Rajah made it clear that “parties which have arbitration related matters heard in the SICC must be represented by Singapore-qualified lawyers” practicing in Singapore law practices, and that the Rules of Court will be amended to clarify that an “offshore case” (in which registered foreign counsel can appear before the SICC) does not include matters under the IAA.  This will be the position even if foreign lawyers, including those registered with the SICC, had represented the parties in the original international arbitration, where Singapore law freely allows foreign counsel to make submissions on substantive and procedural aspects of Singapore law, including on the IAA.

It is unlikely that the requirement for parties to engage Singapore counsel in an IAA application before the ICC will adversely impact upon parties’ choice of Singapore as the seat for their arbitrations. Having said that, there is something to be said, both in terms of costs, continuity and (from parties’ perspective) familiarity with counsel, for parties to be allowed to retain their international counsel from the underlying arbitration in proceedings before the SICC. The government has indicated that it will continue to monitor, “refine and develop this offering to meet the needs of parties“, and further developments will be keenly watched.

For further information, please contact Alastair Henderson, Managing Partner – SE Asia, Emmanuel Chua, Senior Associate, or your usual Herbert Smith Freehills contact.

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There is a growing appetite to resolve employment disputes by arbitration.  This is the finding of the UK Employment Lawyers Association (ELA) which published its Report on Arbitration and Employment Disputes in November 2017.  The Report, a product of over two years of research, conducted by ELA’s Arbitration and ADR Group (chaired by Peter Frost of HSF and Paul Goulding QC of Blackstone Chambers), concludes that arbitration clauses are increasingly found in partnership and LLP agreements, deferred remuneration scheme rules and contracts of employment.

The Report notes the development of the European Employment Lawyers Association (EELA) arbitration scheme, including EELA’s bespoke arbitration rules, a model arbitration clause and a submission agreement (prepared with the assistance of Hannah Ambrose of HSF) under which existing disputes can be resolved by arbitration. Interestingly, the Report encourages the adaptation of the EELA’s documentation to provide the materials for a truly bespoke dispute resolution process for UK employment contracts.

In addition, the ELA intends to bolster its training programme by including sessions focusing on arbitration and its applications. The goal is twofold. First, ELA seeks to provide practical education to those involved in drafting and negotiating employment contracts and those litigating employment disputes. Second, this initiative will help to develop a pool of specialised arbitrators, advocates and advisers.  Such efforts will ensure appropriate use of arbitration in the context of an area that is tightly regulated by statute in many jurisdictions.

What is arbitration?

Arbitration is a system of dispute resolution whereby disputes are finally resolved before an independent and impartial tribunal of either one or several private individuals.  When parties enter into an arbitration agreement, the intention is that the arbitral tribunal then has exclusive jurisdiction to determine any disputes falling within the scope of that agreement. Such determination is final in the sense that there is (usually) no appeal on the merits available and the award issued by the arbitrators can be enforced, either in the country in which it was issued, or internationally in 157 countries that are signatory to the New York Convention 1958. The number of arbitration cases around the world has grown exponentially over the last half century, and arbitration clauses continue to be included in all sorts of commercial (and other) transactions of vastly varying value, in a myriad of sectors by parties of various nationalities and different legal traditions.

Key features of arbitration and their suitability for resolution of employment disputes

The ELA Report draws out the key features of arbitration which may be particularly suited to employment disputes – not least its private nature. Whilst there are circumstances in which the details of an arbitration may become public (for example, if the arbitral award is challenged or enforced before national courts), arbitration hearings are held in private and there is no public access to the file.  This is beneficial in employment disputes, where confidentiality can be in the interest of both parties. For example, it may be damaging to enforce a restrictive covenant concerning the use of confidential information in a public forum.  The private nature of hearings and largely confidential nature of arbitral awards might even, in many cases, positively influence the substantive outcome. For instance, witnesses may be more comfortable in private proceedings than they would in open court proceedings and may therefore give evidence with a greater degree of clarity.

Other features of the arbitral process can be an advantage in employment claims – for example, a key principle of arbitration is party autonomy.  The parties can thus influence the procedure to craft something which provides an efficient and effective way of resolving their specific dispute, without being bound by the often rigid civil procedure rules of national courts.  They can, in many cases, also appoint arbitrators with industry knowledge or experience, which makes them better suited to understand and decide the case.

A key consideration in any dispute resolution process is costs. Unlike a state court system, parties to arbitration must pay for all expenses (e.g. hearing of their dispute and the tribunal’s remuneration). In the UK (and in many other jurisdictions), an arbitral tribunal generally allocates these costs between the parties after it determines the dispute, generally following the principle that costs follow the event except where it appears that this is not appropriate. Nevertheless, the costs involved are undoubtedly a consideration for parties, in particular individuals. Parties need to be aware of the various ways in which the costs of arbitration can be practically reduced (for example, by using a sole arbitrator or by increased use of technology to minimise in-person hearing time).

As mentioned above, an arbitration award also offers significant benefits in terms of enforcement of the outcome of a dispute.  Whilst there is no global system for reciprocal enforcement of judgments, 157 countries are party to the New York Convention under which state courts are obliged to recognise and enforce arbitral awards on a reciprocal basis as if the award was a judgment of the enforcing court.

Limits on how arbitration may be used in an employment context

Notwithstanding the above characteristics, arbitration may not always be suitable, or even legally enforceable in some employment disputes.

In the UK, contractual and tortious claims arising from an employment relationship are largely arbitrable without restriction. However, there are constraints on contracting out of future statutory employment claims. Indeed, any inconsistency between the dispute resolution provisions agreed to in an employment contract and statutory requirements as to those dispute resolution provisions can lead to undue delay, costs and have the potential for increased publicity regarding the claim. For example, in Clyde & Co LLP, John Morris v Krista Bates van Winkelhof [2011] EWHC 668 (QB) the High Court refused to injunct proceedings before an employment tribunal between an LLP member and an LLP on the basis that the arbitration clause in the LLP agreement violated statutory provisions in the Employment Rights Act 1996 and Equality Act 2010.

Considerations as to the enforceability of arbitration clauses in an employment context are not restricted to the UK. ELA’s Report highlights other jurisdictions which impose restrictions on the use of arbitration for resolution of employment disputes.  Even in the US, a jurisdiction where arbitration of employment disputes has been historically more prevalent, a bipartisan bill recently introduced to Congress in the wake of the increased attention on gender discrimination and harassment, proposes to restrict compulsory arbitration of sex discrimination or harassment claims. Whilst similar bills have not reached the statute book, the political climate and bipartisan nature of the bill may lead to success. Notably, neither this bill nor its predecessors intends to preclude arbitration completely in the context of employment disputes.  Instead, the aim is to ensure that arbitration agreements are entered into only after a dispute has arisen and therefore with the unequivocal, voluntary and informed consent of the parties.

It is clear that parties that seek to have their disputes resolved by arbitration must be aware that, unlike standard commercial contracts, employment-related issues may be subject to additional requirements and therefore not all disputes arising therefrom are arbitrable. This raises considerations as to the most practical and effective way of making sure that all claims arising from a single dispute / set of disputes – whatever their legal basis – can be resolved in the same forum, minimising the risk of parallel proceedings.

A practical solution: submission to arbitration after a dispute has arisen 

To use arbitration effectively and ensure compliance with statutory restrictions in the UK, parties may agree to arbitrate after the dispute has arisen by entering into a settlement agreement.  Providing that such settlement agreement is compliant with the statutory requirements, the arbitration clause therein (known as a submission agreement), will be enforceable in relation to all the claims that have arisen. As ELA observes, in a situation where an employee has brought a number of claims based in both contract and statute, this can be an appealing solution for both parties who wish to resolve all their claims (sometimes in more than one jurisdiction) in a single forum. They can take advantage of the benefits of arbitrating, rather than litigating, and avoid the risk of inconsistent outcomes, inherent in cases of multiple related proceedings.

A valuable option for resolution of disputes in employment related transactions

Whilst arbitration will not be suitable for all employment-related transactions, bringing together expertise in both employment law and arbitration law and practice can help parties identify where alternative dispute resolution methods can be used. Arbitration can bring advantages in a wide variety of employment disputes from those concerning bonuses and deferred remuneration, to disputes about restrictive covenants and team moves.  Parties are encouraged to consider the benefits of including an arbitration clause in employment related contracts and the opportunity to submit their dispute to arbitration after it has arisen.

For more information, please contact Peter Frost, Partner, Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

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In a decision dated 2 March 2018 (the “Decision“), the English High Court has set aside parts of an award on jurisdiction (the “Award“) from a London-seated arbitration (the “Arbitration“) concerning claims brought by GPF GP S.a.r.l (“Griffin“) against Poland under the bilateral investment treaty between the Belgium-Luxembourg Economic Union and Poland (the “BIT“).

In so doing, the Court upheld Griffin’s application under section 67 of the 1996 English Arbitration Act (the “Act“), in which Griffin submitted that the Award issued by the tribunal (the “Tribunal“) on 15 February 2017 contained two separate errors as to substantive jurisdiction, namely:

     (i)          the Tribunal’s determination that it did not have jurisdiction over Griffin’s claims for breach of the Fair and Equitable Treatment (“FET“) standard in the BIT; and

    (ii)          the Tribunal’s determination, in respect of Griffin’s claims for indirect expropriation, that it had jurisdiction to consider only the effects of one specific allegedly expropriatory event, namely a decision of the Warsaw Court of Appeal, and not all the prior conduct of Poland.

All of Griffin’s claims should now proceed to the liability phase in the Arbitration. Poland has, however, expressly reserved the right to argue the compatibility of the BIT with EU law and any rights it may have in the context of the decision of the Court of Justice of the EU (“CJEU“) in the case of Achmea v Slovakia, which was issued just a few days after this judgment, on 6 March 2018.

Background

Griffin’s claims in the Arbitration concern the alleged expropriation of its rights to a historic site in central Warsaw (the “Property“) which was to be developed commercially under a 2001 Perpetual Usufruct Agreement (the “PUA“).  When Griffin made its investment in 2008, demolition work had already begun under a decision and building permit issued by the City of Warsaw in 2005, but Griffin had applied for, and obtained, a recommendation from the monuments conservation official supporting a proposed expansion of the existing development project.

This official subsequently reversed her position.  Despite the formal challenges brought by Griffin, actions of the conservation official and the City of Warsaw ultimately culminated in the Warsaw Regional Court terminating the PUA for an alleged failure to develop the Property within the specified time limits.  This termination was confirmed by the Warsaw Court of Appeal on 19 December 2014.

In the Arbitration, Griffin has advanced claims: (i) for violation of the FET standard contained in Article 3.1 of the BIT; and (ii) for indirect expropriation in breach of Article 4.1 of the BIT.  In support of its indirect expropriation claim, Griffin seeks to rely on the combined effect of both the Warsaw Court of Appeal decision and all the prior conduct of Poland (the “Prior Measures“) that it claims led to the termination of the PUA.

In the Award, the Tribunal found, inter alia:

     (i)          that it did not have jurisdiction over Griffin’s claims for breach of the FET standard in the BIT; and

    (ii)          that, so far as Griffin’s claim for indirect expropriation was concerned, its jurisdiction was limited to considering whether the decision of the Warsaw Court of Appeal of 19 December 2014 had effects similar to expropriation, and that it did not have jurisdiction to consider any of the Prior Measures relied upon.

Griffin’s application under section 67 of the 1996 Arbitration Act

Because the arbitral seat is London, Griffin sought to challenge the Tribunal’s decision on jurisdiction in the English Court under section 67 of the Act, on the basis that the Tribunal had erred in both of its findings as to its lack of substantive jurisdiction.

The Court was satisfied from the authorities (including dicta of the Supreme Court in Dallah v Pakistan) that a section 67 application involves a re-hearing, and that it is for the Court to decide afresh whether jurisdiction does or does not exist, unfettered by the reasoning of the arbitrators or indeed the precise manner in which arguments were advanced before the arbitrators.  The Court also gave permission, to the extent this was necessary, for Griffin to advance arguments and adduce evidence that had not been put to the Tribunal.

The Decision

The Court, interpreting the arbitration agreement in the BIT in accordance with international law and the principles of interpretation set out in the 1969 Vienna Convention on the Law of Treaties (the “Vienna Convention“), found that the Tribunal had jurisdiction over all the factual matters, actions, allegations and/or measures relied upon by Griffin in its Statement of Claim in support of its expropriation and FET claims.

The scope of the Tribunal’s jurisdiction is defined by Article 9.1(b) of the BIT, which Griffin divided into a “first clause” and “second clause” as follows (using the originally agreed translation into English – there were some differences raised between the parties on certain aspects of the translation but the Court ultimately considered them immaterial):

“…disputes relating to expropriation, nationalization or any other similar measures affecting investments, and notably the transfer of an investment into public property, placing it under public supervision” (the “first clause“) “as well as any other deprivation or restriction of property rights by state measures that lead to consequences similar to expropriation” (the “second clause“).

The Court held that the Tribunal was wrong to conclude that any claim for creeping expropriation fell within the second clause, considering that it rightly fell within the first. On the Court’s interpretation, the second clause is concerned with measures “other” than expropriation (lesser wrongs) that lead to consequences similar to expropriation, as opposed to being in and of themselves expropriatory. It ruled accordingly that this provision granted jurisdiction to the Tribunal to consider Griffin’s FET claim.

The Court considered that its interpretation of Article 9.1(b) was consistent with the principles set out in the Vienna Convention, namely, that words are to be interpreted in good faith in accordance with their ordinary meaning in their context and in the light of the object and purpose of the BIT, and that all the words used should be given meaning and effect (“effet utile”).  It found that the Tribunal’s interpretation, on the other hand, failed to give meaning and effect to the second clause, and all the words therein.

Further, the Court found, contrary to the holding by the Tribunal, that a claim for creeping expropriation was not precluded where there was a specific event in the chain of events that might ultimately be found to be itself a form of direct or indirect expropriation (such as the Court of Appeal decision).  The Court considered that its position better reflected international law and was consistent with previous cases such as Siemens v Argentina, Crystallex v Venezuela and Teinver v Argentina.  The Court also found that the Tribunal had misapplied the so-called “pro tem” test, the purpose of which is to protect the integrity of the merits phtase whilst making preliminary jurisdictional determinations. The question for the Tribunal to determine was whether “assuming Griffin could establish its factual case was it capable of falling within the Tribunal’s jurisdiction“?  It was wrong to assume at the jurisdictional phase that any of the alleged acts would be established to be a form of direct or indirect expropriation at the merits phase “so as to foreclose consideration of all prior acts“.

Accordingly the Court upheld Griffin’s application, and set aside the relevant concluding paragraphs of the Award, replacing them with its own language confirming the Tribunal’s jurisdiction.

Comment

While rare, there are other examples of national courts considering the question of a tribunal’s jurisdiction in a treaty case.  However, the courts will usually either confirm the tribunal’s ruling of jurisdiction or overturn a finding of jurisdiction.  This case appears to be unique in overturning a finding of no jurisdiction and sending the claims back to the same Tribunal.  It will be interesting to see how this is dealt with by the Tribunal in the Arbitration.

It bears emphasis that such an outcome would not be possible in ICSID arbitration, where awards are not subject to the supervisory power of any national court, or indeed in non-ICSID arbitration in one of the many other jurisdictions where the courts do not have the power to set aside a tribunal’s finding that it lacks substantive jurisdiction.  This accordingly represents another factor to take into account when considering a choice of dispute resolution options under an investment treaty.

For more information, please contact Andrew Cannon, Partner, Naomi Lisney, Senior Associate, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

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On 6 April 2018, a Tribunal constituted under the UNCITRAL Arbitration Rules rendered an Award on Jurisdiction in the case Dawood Rawat v. The Republic of Mauritius (PCA Case 2016-20).  Following a thorough analysis of the interpretation of the 1973 Investment Protection Treaty between the Republic of France and Mauritius (the “France-Mauritius BIT” or the “Treaty”), the Tribunal denied protection of the relevant investment protection treaty to a dual national – a French-Mauritian businessman – despite the treaty was silent on its application to dual nationals.  This approach was contrary to prior investment treaty decisions, such as Serafín García Armas and other v Venezuela, in which tribunals have rejected jurisdictional objections brought by respondent states where relevant the bilateral investment treaty (“BIT”) was silent on the exclusion of dual nationals.

Background of the dispute

The claimant in this case is Mr Dawood Rawat, a national of Mauritius who married a French woman in 1969, acquiring French nationality in 1998. In the late 1980s, Mr Rawat acquired a shareholding stake in British American Insurance through his employment.  During the 1990s he acquired further shares in the British American Insurance group and other Mauritian businesses.

In November 2014, the Mauritian government initiated certain investigations into Mr Rawat’s businesses for money laundering. The government allegedly adopted a series of measures against his businesses which the Claimant considered were in violation of the Treaty.

The France-Mauritius BIT does not provide for investor-state arbitration for disputes arising under the Treaty. Instead, the Treaty provides in Article 9 that:

“Agreements relating to investments to be made in the territory of one of the Contracting States by nationals, companies or other legal persons of the other Contracting State, must include a clause providing that their disputes relating to these investments shall be submitted, in the event that an amicable agreement cannot be reached within a short period of time, to the International Center for the Settlement of Investment Disputes [ICSID], with a view to their settlement by arbitration, in accordance with the Convention on the Settlement of Investment Disputes between States and nationals of other States.”

Therefore, the only ‘procedural’ protection that the Treaty grants to foreign investors is that, if they enter into an investment agreement with a Contracting State, that agreement must include an ICSID arbitration clause.

For this reason, the Claimant argued that the most-favored-nation (“MFN”) clause in the Treaty covered dispute settlement.  The Claimant therefore sought to import the dispute settlement mechanism from the Agreement between the Government of the Republic of Finland and the Government of the Republic of Mauritius on the Promotion and Protection of Investments (the “Finland-Mauritius BIT”), in order to gain jurisdiction ratione voluntatis.

Against this background, the Respondent brought two jurisdictional objections: one for lack of ratione personae given that Mr Rawad was a dual national; and another for lack of ratione voluntatis alleging that Mauritius had not consented to submit any disputes under the Treaty to international arbitration. The Tribunal decided to rule on the lack of ratione personae objection first.  Having found merit in the objection – and therefore dismissed the case-, it did not rule on the Respondent’s second objection.

Application of the France-Mauritius BIT to dual nationals

Unlike other BITs, the France-Mauritius BIT does not use the term “investor” in any of its provisions. Instead, the Treaty refers to “national” or “ressortissant” in French.  In addition, the Treaty does not contain a definition of a ‘qualifying investor’.

In ruling on Respondent’s objection, the Tribunal first determined what nationalities Mr Rawat held. Its first factual findings were that (i) the Claimant became a French national long before the dispute arose, and (ii) the Claimant had been a Mauritian national since his date of birth.

The Tribunal then proceeded to consider whether the term “national” as used throughout the Treaty included or excluded dual nationals. The Claimant relied on the plain meaning of the Treaty which contained no express exclusion of dual nationals from its protection. However, the Tribunal went further than the plain meaning interpretation and referred to Article 31 of the Vienna Convention on the Laws of Treaties (“VCLT”) to interpret the France-Mauritius BIT.

Article 31(1) provides that “[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” Under this provision, the Tribunal concluded that interpreting the ordinary meaning of the term “ressortissant” in its context and in light of the object and purpose of the France-Mauritius BIT pointed to the inclusion of dual nationals under the protection of the BIT.

However, the Tribunal also applied Article 31(2) which provides that “[t]he context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, […] its preamble and annexes.” In this regard, the Tribunal looked at the provisions of the Treaty where the term “ressortissant” was used.  As mentioned, Article 9 of the France-Mauritius BIT provides that nationals from France and Mauritius, who enter into investment contracts with a host state, shall arbitrate their disputes under the ICSID Convention.  Based on this provision, the Tribunal then referred to Article 25(2) of the ICSID Convention which – unlike the Treaty- contains a definition of “national” / “ressortissant” (in the French version).  The ICSID definition of “national of another Contracting State” expressly excludes dual nationals.  Therefore, under Article 25 of the ICSID Convention there would be no ICSID jurisdiction if a dispute arose out of an investment contract entered into by a French-Mauritius dual national (such as Mr Rawat) and a host state.

The Tribunal concluded that the explicit reference to the ICSID Convention in Article 9 of the Treaty was “part of the context in which the BIT term “ressortissant” must be interpreted” (¶ 177). The Tribunal ruled that the inclusion of the ICSID Convention in Article 9 created “a strict and conventional alignment between the notion of “ressortissant” under the ICISD Convention and under the France-Mauritius BIT” (¶ 178). Therefore, the Tribunal concluded that the mandatory reference to the ICSID Convention in Article 9 implicitly excluded dual nationals from the scope of application of the Treaty.

In addition, the Tribunal ruled that the interpretative principle of effet utile supported its conclusion.  Under this principle, the adjudicator shall discard interpretations which would render the text of a treaty or contract meaningless, when a meaningful interpretation is possible (the Tribunal cited to Cemex v Venezuela).  While the effet utile principle is not contained in the VCLT, the Tribunal concluded that it “is generally accepted to flow from the principles of interpretation of treaties in good faith as envisioned in VLCT Article 31(1)” (¶ 182). In applying this principle, the Tribunal considered that it would be meaningless to interpret “ressortissant” in Article 9 as applying to dual nationals because any arbitration clause entered into under Article 9 (providing for ICSID arbitration), would be ineffective.

Application of MFN clauses to dispute settlement provisions

Having found that personal jurisdiction was lacking, the Tribunal did not address the second jurisdictional objection relating to the applicability of the MFN clause from the France-Mauritius BIT to import the dispute settlement clause from the Finland-Mauritius BIT.  However, the Tribunal did refer to the test it would have applied when resolving this legal issue which may be of relevance and interest in future cases based on the MFN clause.  First, it would have defined “matters” / “matiéres” in each MFN clause of the relevant BITs.  Second, it would have decided whether those “matters” were of same kind in order to distinguish “matters” from “treatment of those matters” pursuant to Article 8 of each BIT.

Inconsistent decisions?

Where a BIT is silent on the applicability to dual nationals, investment tribunals have historically allowed claims to be heard. For example, in Serafín García Armas and other v Venezuela, the Tribunal (constituted under the Spain-Venezuela BIT and the UNCITRAL Rules) looked at the BITs entered into by Venezuela and Spain and assessed whether those contained an express exclusion of dual nationals, finding some of them did.  In the Tribunal’s opinion, only express exclusions in the treaty would support a finding that dual nationals cannot abide by its protections. Because the Spain-Venezuela BIT did not contain such language, the Tribunal upheld its jurisdiction to hear the Claimants’ claims.   The Court of Appeals of Paris later annulled this award but on another basis.

One view of reconciling this apparent inconsistency would be to emphasize that the particular provision of Article 9 of the France-Mauritius BIT is uncommon in most BITs, which would normally provide for investor-state arbitration as the applicable dispute resolution mechanism. In this case, the BIT was part of the ‘old generation BITs’ as it was entered into by France and Mauritius in 1973 and later ratified in 1974.

Curiously, France and Mauritius entered into a modern BIT in 2010 which in fact provides for investor-state arbitration. However, this treaty has not yet been ratified by both states.  Mauritius relied heavily on this fact to argue that this showed the Contracting Parties had not consented to investor-state arbitration, denying the Claimant the possibility to establish jurisdiction via the MFN clause.  It will be interesting to see, if in the future, tribunals adopt this view when hearing a case that requires application of the MFN clause to dispute settlement.

For further information, please contact Christian Leathley, Partner, Daniela Paez, Associate, Vanessa Naish, Professional Support Consultant or your usual Herbert Smith Freehills contact.

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

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

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

Background and Issues

ECTG and Dreymoor entered into two fertiliser distribution arrangements in respect of (1) Di-ammonium phosphate and Mono-ammonium phosphate (DAP/MAP); and (2) Urea. Dreymoor was to act as ECTG’s sales agent in India and as ECTG’s direct trading partner for the rest of the world. ECTG alleged that there were corrupt arrangements between Dreymoor and two former employees of ECTG which enabled Dreymoor to obtain more volume of high margin products deals and favourable appointment terms as an agent.

Each of the DAP/MAP and Urea arrangements involved (i) an Umbrella Agency Agreement (each an “Agency Agreement“); (ii) individual sales contracts between Dreymoor and customers outside India (the “Sales Contracts“); and (iii) sales contracts between ECTG and Indian companies, in which Dreymoor was acting as agent (the “Third Party Contracts“). There was no jurisdiction or dispute resolution clause in the DAP/MAP Agency Agreement, while the Urea Agency Agreement contained a short-form LCIA arbitration provision. Each of the Sales Contracts provided for LCIA Arbitration, while the Third Party Contracts each contained an ICC arbitration clause.

ECTG brought proceedings in respect of its corruption allegations against Dreymoor in two arbitration fora: (i) LCIA arbitration in relation to the Urea and DAP/MAP arrangements under the Sales Contracts; and (ii) ICC arbitration in relation to the Third Party Contracts where Dreymoor acted as agent.

Dreymoor challenged the jurisdiction of both arbitral tribunals, arguing in respect of the LCIA Tribunal:

1. In terms of resolution of disputes over the alleged corrupt arrangements, the Agency Agreements, not the Sales Contracts, governed the dispute because the “centre of gravity” of the claims was alleged breach of the Agency Agreements and not the Sales Contracts. The DAP/MAP Agency Agreement did not contain a dispute resolution clause. The bribery complained of must have occurred before the Urea Agency Agreement and the short-form LCIA clause could not be construed as covering such claims. As a consequence, disputes should be referred to an “appropriate” forum, which Dreymoor contended to be Russia.
2. As a matter of construction, the corruption allegations did not fall within the arbitration clauses of these contracts, even if any of those were applicable. The arbitration clauses referred to “disputes on this agreement” or “any dispute… arising out of this contract“, but the corrupt arrangements alleged were not only non-contractual claims but also predated the contracts themselves, since they allegedly aimed to induce these contracts.

In respect of the ICC Tribunal, Dreymoor argued it was not a party to the Third Party Contracts, and therefore was not bound by the arbitration clauses in them. Consequently:

1. there was no agreement to arbitrate between ECTG and Dreymoor.
2. alternatively if there was, the claims brought by ECTG did not fall within it.

Construction of inconsistent arbitration arrangement in inter-related contracts

This was a complex set of contractual arrangements with inconsistent dispute resolution provisions. The Court therefore decided it needed to consider “what the parties, as reasonable business people, must be taken to have intended as to how and where disputes which might arise between them should be resolved“. [56] Applying this “reasonable business people” test, the Court held that reasonable business people would not have intended that if there were to arise questions as to whether there had been bribery by Dreymoor which induced a number of different Sales Contracts, these were to be resolved only under the dispute resolution procedures of the Agency Agreements, rather than under the dispute resolution procedure specified in the individual Sales Contracts. [57]

In addition, the Court noted that the “centre of gravity” analysis referred by Dreymoor did not necessarily support Dreymoor’s position. The “centre of gravity” approach, which was introduced in the decision in AmTrust Europe Ltd v Trust Risk Group SpA [2015] EWCA Civ 437, examines which of the inter-related contracts is the “centre of gravity” of the dispute, based on which the dispute resolution provisions of the “centre of gravity” contract will govern its resolution. The Court held that there was no reason to suggest that the “centre of gravity” of the bribery dispute was located in the Agency Agreements and held instead that the Sales Contracts were no more distant from the claim.[61]

Applying the “commercially rational construction” approach advanced by the Court of Appeal in Sebastian Holdings v Deutsche Bank [2011] 1 Lloyd’s Rep 106 which held that the correct approach of construction was to “find … the commercially-rational construction … giving effect to clear agreements, even if this may result in a degree of fragmentation in the resolution of disputes between parties to a series of agreements”, the Court confirmed that the same conclusion would be reached.

The scope of arbitration clauses

The Court said that in certain exceptional circumstances, an arbitration clause would be construed as excluding a tortious or other non-contractual claim if the parties would, at the time of conclusion of their contract, have considered that any possible non-contractual claim in the relevant area would have been outlandish or unarguable. [54]

However, no such exceptional circumstances applied in this case. Rather, the Court employed a “liberal or general interpretation” (as first espoused in the case of Fiona Trust) and held that the arbitration clauses as drafted would cover disputes which related to non-contractual claims, including for pre-contractual misrepresentation and antecedent bribery inducing the contract. [53]

Third party contracts

As regards jurisdiction under the ICC arbitration agreements contained in the Third Party Contracts, the Court held that Dreymoor was a party to the Third Party Contracts, not least because Dreymoor, as Agent, was referred to as one of the “Parties” in those contracts and assumed certain performance obligations. Dreymoor had argued that the arbitration clauses in the Third Party Contracts did not work with disputes between Dreymoor and other parties because the arbitration agreements provided that each of ECTG as Seller and the Buyer party (Indian company), but not Dreymoor as Agent, would choose one arbitrator. However, the Court rejected this obstacle holding that the mechanism for the appointment of the arbitrators did not change the intention of the contract that Dreymoor should be a party and that all disputes arising out of or relating to the contract should be subject to arbitration. [68] Where the dispute was one between ECTG and Dreymoor, then they would each appoint an arbitrator. Only if the dispute concerned the Seller, the Buyer, and the Agent, was Dreymoor denied a choice of arbitrator and must accept the appointments made by the Seller and the Buyer. [69]

Comment

It is not uncommon for complex contractual arrangements to contain jurisdiction/arbitration clauses which are not fully consistent with each other. Prior English authorities have established a variety of approaches to be applied to such disputes. However, such approaches only offer guidance when tackling such issues, and careful case-by-case analysis is required in each scenario. In this case, the Court did not opt to prefer a particular approach to the construction of these arbitration clauses. Rather, the Court considered several different methods of analysis on the basis that the same conclusion was reached no matter which approach was employed.

The case is perhaps most interesting in its analysis of the limited relevance and importance of the umbrella Agency Agreements in this contractual arrangement, and the conclusion that the dispute resolution provisions in the underlying Sales and Third Party contracts were wide enough to encompass disputes regarding the conduct of the Agent in concluding those agreements. However, it is difficult to draw too many conclusions from this particular decision. There is a clear sense in the judgment of a need to give effect to the parties’ consistent choice of London arbitration to govern disputes under the various contracts (where an explicit choice was made), particularly when faced with Dreymoor’s argument that the arbitration provisions should be ignored and jurisdiction given to the Russian courts.

For further information, contact Nick Peacock, Partner, Vanessa Naish, Professional Support Consultant, Noriaki Wakabayashi, Legal Assistant, or your usual Herbert Smith Freehills contact.

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In Atlas Power v National Transmission and Despatch Company Ltd [2018] EWHC 1052 the English High Court granted a final anti-suit injunction to permanently restrain a national grid company owned by the Government of Pakistan (“NTDC“) from challenging an LCIA Partial Final Award in Pakistan (or anywhere other than England and Wales).

The injunction was granted on the “entirely straightforward” basis that the seat of the arbitration was London.  Phillips J rejected NTDC’s arguments that the courts of Pakistan had concurrent jurisdiction or that the seat of the arbitration was Lahore, Pakistan, and confirmed that an agreement on the seat of the arbitration is also an agreement on the forum for any challenges to an award. 

Background

The underlying dispute concerned sums owed by NTDC to nine independent power producers registered in Pakistan (“Claimants“) who supplied energy exclusively to NTDC under individual Power Purchasing Agreements (“PPAs“).

The PPAs all contained a similar dispute resolution clause (“DR Clause“).  The DR Clause contained carve outs for “mutual discussions” and expert determination, with all remaining disputes (including those left unresolved by other methods) to be “settled by arbitration in accordance with the London Court of International Arbitration“.

The DR Clause further stated that “the arbitration shall be conducted in Lahore, Pakistan” provided that if (among others) the amount in dispute exceeded $4 million “either Party may […], require that the arbitration be conducted in London […].”

Expert determination process

Initially the dispute was referred to expert determination.  The expert found that NTDC had unlawfully withheld various sums owed to the Claimants under the PPAs (“Determination”).

The Claimants sought payment of the sums specified in the Determination.  However, the Government of Pakistan sought a declaration from the courts of Pakistan that the Determination was null, void and illegal, and obtained an injunction preventing the Claimants and NTDC from acting upon the Determination until further order.

Arbitration proceedings

Each of the Claimants had commenced separate LCIA arbitration proceedings and stayed them pending the outcome of the expert determination process.

Following the injunction, in November 2015, the Claimants wrote to the LCIA asking for: (i) the arbitrations to be resumed on the basis that the Determination was final and binding; and (ii) declaratory relief as to the validity of the Determination and payment of the specified sums.

Seat of the arbitration

Relying on the provisions of the DR Clause and the value of the claim, the Claimants designated London as the seat of the arbitration.

NTDC argued in its Responses to the arbitrations that the DR Clause only entitled the Claimants to select the venue of the arbitrations and not the seat.  NTDC maintained that the seat of the arbitrations was Lahore, Pakistan.

On 31 December 2015 the Claimants wrote again to the LCIA asserting that, if NTDC’s interpretation was correct: (1) the parties had not agreed on a seat at all; and (2) the seat accordingly fell to be determined under article 16(1) of the LCIA Rules 1998, which provides that in the absence of any agreement between the parties: “the seat of the arbitration shall be London unless and until the LCIA court determines […] that another seat is more appropriate“.

The LCIA Court determined that the seat of the arbitrations was London.

Partial Final Award

NTDC unsuccessfully applied to stay the arbitrations.  The Government of Pakistan sought further injunctive relief against the arbitrations from the courts of Pakistan.

The sole arbitrator ruled that the (by now consolidated) arbitration could proceed nonetheless.  However various preliminary issues were determined on the basis of written submissions as NTDC considered itself unable to participate in a hearing due to interim orders granted in Pakistan.

On 8 June 2017 the arbitrator issued a Partial Final Award finding that:

• the Claimants had validly exercised a conditional option under the PPAs to vary the seat of the arbitration, but, in any event, the LCIA had determined the seat in a manner that was final and binding;
• the Determination was final and binding on the parties; and
• NTDC should pay interim security for the Claimants’ claims.

In July 2017 NTDC sought an order from the courts of Pakistan setting aside the Partial Final Award.  In August 2017 the Claimants filed an application in the English High Court for an anti-suit injunction.

Decision

NTDC argued that under the law of Pakistan, the parties could not exclude the supervisory jurisdiction of the courts of Pakistan from a contract concluded between Pakistani parties and governed by Pakistani law. Therefore, on NTDC’s case, the choice of a London seat could not give rise to a “presumed intention” that the English courts had exclusive supervisory jurisdiction.  NTDC maintained that the courts of Pakistan must have at least concurrent jurisdiction over the dispute and that an anti-suit injunction was inappropriate.

In the alternative, NTDC argued that if there could only be one supervisory jurisdiction, (i.e. the jurisdiction of the courts of the seat of the arbitration) then the choice of a London seat must be invalid as it was contrary to the law of Pakistan.

However, the Claimants successfully argued that the seat of the arbitration was London (as determined by the LCIA Court and the arbitrator) and relied on the Court of Appeal decision in C v D [2008] 1 Lloyd’s Rep 239, to assert that the English courts did have exclusive supervisory jurisdiction over the arbitration.

Phillips J held (applying C v D) that the choice of the seat determined the “curial law” of the arbitration (i.e. the law governing the arbitration proceedings), which would include any challenge to an award.  In particular, Phillips J referred to paragraph 42 of the first instance judgment of Cooke J in C v D [2007] EWHC 1541 (Comm) (approved by the Court of Appeal):

“it does not matter whether English law is or is not the governing law of the agreement to arbitrate.  It is the curial law which governs the question of the validity of the award and challenges to it“.

NTDC’s attempts to distinguish C v D on the basis that the PPAs were governed by the law of Pakistan were therefore rejected.

Phillips J further confirmed that the English courts regard the choice of arbitral seat as “analogous to an exclusive jurisdiction clause” in favour of the courts of the seat, and rejected the “highly unsatisfactory” alternative where more than one jurisdiction could hear challenges to an award.

NTDC’s alternative argument that the seat was in Pakistan also failed, as it had not made a timely challenge to the LCIA’s determination that the seat was in London.  Phillips J rejected NTDC’s argument that it could not have brought a challenge within the jurisdiction without implicitly accepting that the seat of the Arbitration was in England, holding that an application to challenge jurisdiction or the seat of an arbitration “plainly” does not amount to an acceptance of that jurisdiction or seat.  NTDC was therefore bound by the decision of the LCIA Court.

Accordingly, Phillips J held that the English courts represented the only venue in which the Award could be challenged and granted the anti-suit injunction.

Comment

This is the latest decision in a line of case law confirming that the English courts will treat a choice of seat as akin to an exclusive jurisdiction clause in favour of the courts of the seat.  Atlas Power acts as a welcome reminder of the robust position that the English courts will take towards their supervisory powers under the Arbitration Act 1996, and the consistency of English case law in this area.

The case also highlights the importance of: (i) clearly defining the seat of the arbitration in the arbitration agreement; and (ii) clear drafting, particularly where the parties seek to customise an arbitration clause – in this case the bilateral option to vary the seat of the arbitration.  The concurrent proceedings in England and Pakistan demonstrate the additional delay and costs that can be incurred by parties though satellite litigation over the terms of the arbitration agreement.

The case also acts as a reminder for parties to bring a timely application if challenging an arbitral seat.  NTDC faced difficulties with its alternative argument that the arbitration was seated in Pakistan as it had not challenged the LCIA’s determination at the time, and there was no pending challenge to the Partial Final Award on the basis that the seat was not London.

For further information, please contact Chris Parker, Partner, Emily Blanshard, Senior Associate, or your usual Herbert Smith Freehills contact.

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In Nori Holdings Limited et al v PJSC Bank Okritie Financial Corporation [2018] EWHC 1343 (Comm) the English court has applied the Recast Brussels Regulation, finding that the West Tankers principle remains applicable and, as a consequence, refused to grant an anti-suit injunction in relation to parallel EU court proceedings.

At the same time, it found alleged Russian mandatory jurisdictional rules referring an insolvency dispute to the Moscow Arbitrazh Court insufficient to displace the wide and general wording of an arbitration clause, with the result that it granted an anti-suit injunction in relation to non-EU proceedings.

Background

The Russia-incorporated Defendant (the “Bank“) advanced over US$500m by way of short-term loans to a number of entities which were secured by five Share Pledges over shares owned by the three Claimants (the “Claimants“). These Share Pledges all contained an LCIA / London seat arbitration clause. There was then a series of transactions in August 2017 (the “August Transactions”), whose net effect was to replace the short-term loans secured by Share Pledges with long-term unsecured bonds. The Share Pledges were allegedly terminated by five Pledge Terminations which were governed by the laws of Cyprus and contained a reference to the arbitration clause of the Share Pledges.

The parties disputed whether the August Transactions were a genuine commercial arrangement or a fraud on the Bank. It was, however, common ground that determination of this substantive issue was not for the English court. The court also confirmed the traditional position that arbitration clauses are untainted by allegations of fraud.

Following the August Transactions, the Claimants transferred the shares which had been the subject of the earlier Share Pledges to other companies, who then pledged them to another bank as security for other loans.

Three weeks after the August Transactions, the Central Bank of Russia appointed a temporary administrator to manage the Bank.

Russian proceedings

The Bank – acting by the temporary administrator – commenced proceedings in the Moscow Arbitrazh Court against ten defendants, including the Claimants, seeking invalidation and reversal of various transactions including the Pledge Terminations. This would result in the reinstatement of the Share Pledges. The administrator claimed that the August Transactions (i) involved unequal consideration pursuant to Art 189.40 of the Russian Bankruptcy Law – something akin to the English concept of a transaction at an undervalue – and, under Russian law, subject to Moscow Arbitrazh Court jurisdiction; and (ii) constituted an abuse of rights contrary to Arts 10 and 168 of the Russian Civil Code.

Cypriot proceedings

The First and Second Claimants, incorporated in Cyprus, sought an order from the Cypriot court preventing the Bank from taking any steps to register the Share Pledges pursuant to the Russian proceedings. Meanwhile, the Bank commenced substantive proceedings in Cyprus alleging a fraudulent conspiracy and seeking orders annulling certain transactions and restoring the Share Pledges and / or damages. These broadly mirrored the Russian proceedings, albeit there are no insolvency issues.

LCIA arbitrations

At the same time, the Claimants commenced (or purported to commence) ten arbitrations against the Bank, one under each Share Pledge and related Pledge Termination. The Tribunal appointed in each arbitration was identical and the parties appeared to have agreed to consolidate the arbitrations. The Claimants sought  declarations from the arbitral tribunal(s) that the Pledge Terminations are valid and an anti-suit injunction, similar to the one sought before the English court.

English court proceedings

The Claimants made an application before the English court for a final anti-suit injunction to restrain the pursuit of the court proceedings in Russia and Cyprus which they alleged had been brought in breach of the arbitration clauses in the Share Pledges and Pledge Terminations.

The court’s decision

Court’s general power to issue anti-suit injunction

The court confirmed its general power to grant an anti-suit injunction in support of an arbitration under section 37 of the Senior Courts Act 1981, noting that the power does not depend on whether an arbitration has been or is about to be commenced.

The application need not be made to the arbitrators

The court disagreed with the Bank’s position that an anti-suit application should be made to the arbitral tribunal that had already been constituted and not to the court. The court noted that, in the absence of a section 9 application by a defendant for a stay of the application, “there is no reason why the court should not exercise the jurisdiction to grant anti-suit relief which it undoubtedly has“. The effect of The Angelic Grace [1995] 1 Lloyd’s Rep 87 and AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] UKSC 35 was that the availability of anti-suit relief from the arbitrators was no reason for the court to refuse an injunction or to issue only a temporary, as opposed to a final, injunction. As an aside, the court noted that, in practice, a defendant would rarely make the necessary section 9 application to stay the anti-suit action brought in court in favour of arbitration. The mere fact of parallel court proceedings would indicate that the putative section 9 applicant disputes the validity of the arbitration clause. It would therefore be highly unlikely to seek a stay from the court to allow the tribunal (whose jurisdiction it disputes) to order an anti-suit injunction.

Russian proceedings are in breach of arbitration agreements

The court found that the “abuse of rights” claim in Russia was an ordinary civil claim and had nothing to do with insolvency law, and hence was clearly within the scope of the arbitration agreement.

As to the insolvency claim, the Bank argued that it was either outside the scope of the arbitration agreements or not arbitrable at all. The court rejected both arguments for the following reasons, and consequently granted the injunction sought:

Russian insolvency proceedings within the scope of the arbitration agreements

It rejected the suggestion of a presumption (as exists in Singapore[1]) that would exclude insolvency proceedings from the ambit of arbitration agreements in the absence of express language. The court also noted the “modern view” that commercial parties agreeing to arbitrate do not deprive themselves of fundamental rights to access the courts, and found inapplicable the necessity test[2] to imply a limitation of the scope of the arbitration clause.

Russian proceedings are arbitrable

Emphasising substance over form, the judge had no difficulty finding that, however one wished to characterise the dispute, it was “plainly” capable of being determined in arbitration.

No injunction to restrain Cyprus proceedings – West Tankers principle stands

Following review of West Tankers Inc v Allianz SpA (Case C-185/07) [2009] AC 1138, Proceedings concerning Gazprom OAO (Case C-536/13) and AG Wathelet’s Opinion in Gazprom, the court concluded that the effect of the Recast Brussels Regulation (Council Regulation 1215/2012) is “clear“.

Effectiveness of Regulation not to be undermined via anti-suit injunction

The judge found that there was nothing to undermine or even address the “fundamental principles concerning the effectiveness of the Regulation which were affirmed in the West Tankers case and reiterated in Gazprom“. The relevant principle was that an anti-suit injunction directed at EU Member States’ court proceedings, while not itself within the scope of the Regulation, undermines the effectiveness of the Regulation and is, therefore, prohibited. He further noted the absence of an express provision in the Recast Regulation itself or its recitals that these principles no longer apply or that an anti-suit injunction should take precedence.

The judge analysed AG Wathelet’s opinion in Gazprom (that was not adopted by the CJEU) and strongly disagreed with it in several respects, concluding that “there is nothing in the Recast Regulation to cast doubt on the continuing validity of the decision in West Tankers“.

No injunction regarding the Cyprus proceedings

Because Cyprus was an EU Member State, the court could not order an anti-suit injunction against the Cypriot proceedings. The court pointed out several possibilities that could bring an end to those proceedings: (i) the Cypriot court itself may order a stay or (ii) the Tribunal could issue an order restraining the Cypriot proceedings which, following Gazprom, would be entitled to recognition and enforcement under the New York Convention even in EU Member States. The second possibility, however, presupposes that such an order would be treated as an “award” for the purposes of the New York Convention.

Effect of Recast Regulation: Tribunal’s award upholding jurisdiction takes precedence over court’s finding no valid arbitration agreement

The court further noted that the Regulation’s framework provides for the possibility of a court judgment negating the effectiveness of an arbitration agreement and a conflicting arbitral award upholding jurisdiction. In this case, the judge held that “recognition and enforcement of the award under the New York Convention is to take precedence“, noting that this scenario may well arise in the present circumstances.

The court found there were no other extenuating circumstances or reasons not to grant the anti-suit injunction against the Russian court proceedings. The court also deferred the Claimants’ claim for indemnification for the costs of the Cypriot proceedings.

Comment

This important judgment makes certain welcome clarifications to the law:

1. In this carefully reasoned and balanced interpretation of the arbitration-related provisions of the Recast Brussels Regulation, the following are of particular note:
   1. the court’s duty to consider an application for a stay;
   2. the precedence of an arbitral award upholding jurisdiction over a court’s decision refusing to refer parties to arbitration; and
   3. the continuing validity of the West Tankers principle requiring the Regulation’s effectiveness, unaffected by the Recast Brussels Regulation. This means that an anti-suit injunction continues to be unavailable vis-à-vis EU court proceedings.
2. English courts remain reluctant to exclude categories of disputes from widely drafted arbitration clauses, notwithstanding alleged mandatory foreign jurisdictional rules.
3. As between commercial parties that have agreed to arbitrate, there is no fundamental right to court access that would generate a presumption to uphold that right to court access in the face of a clear and unequivocal agreement to arbitrate.

It remains to be seen whether the judge’s West Tankers interpretation and rejection of AG Wathelet’s analysis in Gazprom will be followed more widely in England and Wales, and mirrored by other EU jurisdictions. While historically anti-suit injunctions tend to be a common law creature, there is scope for its increased use across the EU (both to restrain subsequent court proceedings under lis pendens and non-EU court proceedings in support of arbitration).

It is also interesting that the court suggested that the Cypriot proceedings could be brought to an end by an “order” of the tribunal. It may be that the choice of language here was not intentional, but if it were, it presupposes that such an order would be treated as an “award” for the purposes of the New York Convention. This is an unsettled area and judicial pronouncements are rare. For example, the Singaporean Court of Appeal found an interim award enforceable as it was finally dispositive of a preliminary issue (and it distinguished the decision from a “provisional” award that was open to revision) – see here for a further discussion. Arguably a Tribunal’s final anti-suit injunction has the necessary aspect of finality and this court’s decision appears to support this view, as does the Gazprom judgment – see here for more detail. A party seeking to enforce such a decision via the New York Convention should request the Tribunal to make it in the form of a partial award, as opposed to (as may be commonly the case) a Procedural Order.

For further questions, please contact Adam Johnson, Maximilian Szymanski, Associate, or your usual Herbert Smith Freehills contact.

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[1]        Larsen Oil & Gas Pte Ltd v Petroprod Ltd [2011] SGCA 21 – itself based on the English case of Exeter City Association Football Club Ltd v Football Conference Ltd [2004] 1 WLR 2910, but the later Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855 declined to follow Exeter.

[2]        Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72.

Two key developments emerge from the long-running proceedings in Xiamen Xinjingdi Group Co Ltd v Eton Properties Ltd [2016] 2 HKLRD 1106 and Xiamen Xinjingdi Group Co Ltd v Eton Properties [2018] HKCFI 910. The Hong Kong Court of Appeal (CA) has held that, when parties enter into an arbitration agreement, they make an implied promise that they will honour the terms of any subsequent arbitral award. If one party fails to honour the award, this may give rise to a separate cause of action at common law, for which the Hong Kong courts have jurisdiction to grant a full range of remedies, including damages. These proceedings also confirm that the Hong Kong Court of First Instance (CFI) has statutory powers to stay proceedings before it, pending the determination of an application for leave to appeal to the higher courts.

Background

In 2003 Xiamen Xinjingdi Group Co Ltd entered into an agreement with Eton Properties Ltd to develop a piece of land in Xiamen, China. This land was owned by Xiamen Legend, which was held by Hong Kong Legend, whose shares were held by Eton.

Under the agreement, Xiamen was to pay Eton RMB120 million for possession of the land, on which Xiamen would build and then sell apartment blocks. Eton was then to transfer its shares in Hong Kong Legend to Xiamen.

However, before the shares of Hong Kong Legend were transferred to Xiamen, Eton purported to terminate the agreement. Xiamen Legend subsequently developed the land itself, building and selling the apartment blocks.

The agreement contained a CIETAC arbitration clause, which provided for Chinese governing law and a Beijing seat.

CIETAC arbitration

In 2006, a CIETAC arbitral tribunal issued an award in favour of Xiamen. The award ordered Eton to pay damages of RMB1,275,000 in respect of its late delivery of the land, and to “perform its obligations” under the agreement by completing the transfer of shares from Hong Kong Legend to Xiamen. However, Xiamen and the Tribunal were unaware that, during the arbitration, Eton had commenced a restructuring process, in which its holdings were diluted. This made any prospect of the share transfer pursuant to the agreement impossible, thus rendering the Tribunal’s order for continued performance nugatory.

Xiamen subsequently applied to the Xiamen courts to enforce the award, but the Xiamen Municipal Intermediate Court dismissed the application, on grounds that included the fact that Hong Kong Legend’s assets were outside the Chinese court’s jurisdiction. Xiamen therefore sought to enforce the award in Hong Kong.

Hong Kong proceedings

Hong Kong Court of First Instance

Statutory enforcement

The CFI recognised the award under Hong Kong’s old Arbitration Ordinance (Cap. 341) and issued an enforcement order. However, the order lacked practical effect due to Eton’s restructuring. Consequently, Xiamen commenced further proceedings in the Hong Kong courts against Eton and nine other defendants who were companies or individuals associated with Eton.

Common law action

Xiamen brought a common law action on the award, which consisted of two sub-actions. First, Xiamen used the CFI’s enforcement order to seek damages from Eton in lieu of the continued performance ordered in the award. Second, Xiamen brought original actions against all the defendants on the grounds that they had conspired to restructure Eton in order to avoid carrying out the agreement. The CFI dismissed Xiamen’s application and Xiamen appealed.

Hong Kong Court of Appeal

The CA held that when parties enter into an arbitration agreement, they make an implied promise that they will honour any subsequent arbitral award. Eton’s failure to honour the award constituted a breach of the implied promise which had, in turn, led to Xiamen suffering loss. This gave rise to a separate cause of action, for which the appropriate remedy could include damages.

The CA outlined three criteria that a plaintiff must meet in order to rely on this cause of action. First, the plaintiff must demonstrate that there has been a valid submission of the dispute to arbitration. Second, there must be an award rendered in favour of the plaintiff. Third, the defendant must have failed to honour the award. Here, the CA found that Xiamen met all three criteria.

The CA also held that it had power at common law to order Eton to pay damages. In contrast to the statutory enforcement process, the common law permits a court to grant an order from a range of remedies – including damages – even when the arbitral tribunal has not done so.

The party seeking enforcement must elect one of the two remedies.

Hong Kong Court of First Instance: application to stay proceedings

In May 2016, both parties applied for leave to appeal to the Hong Kong Court of Final Appeal (CFA). In November 2017, Xiamen applied for directions regarding further conduct of the proceedings. In December 2017, Eton applied to the CFI for the proceedings to be stayed until the parties’ application for leave to appeal to the CFA was determined.

Xiamen argued that it was inappropriate for the CFI to stay the proceedings and that only the CA or the CFA were permitted to stay execution of the CA judgment and the order. Xiamen argued that, in cases where a judgment does not require the payment of money or performance of a duty (per Section 26 of the CFA Ordinance), only the CA and CFA have implied powers to grant an interim stay of execution pending the determination of an application for leave to appeal to the CFA, as well as having inherent jurisdiction to grant a stay of execution pending appeal. Xiamen argued that the application to stay proceedings in this circumstance was an application for stay of execution.

The CFI found that, in the present circumstances, there was indeed no order for payment of any amount by Eton to Xiamen, only an order for damages to be assessed. However, there was found to be no “execution” of a judgment pending appeal which Eton sought to stay. Accordingly, the CFI did not accept Xiamen’s argument that the CA and CFA were the only courts permitted to stay the proceedings. The CFI was itself permitted to grant an interim stay of the proceedings.

In elucidating the CFI’s position, Chan J noted that, while the CA and CFA have independent powers to stay execution of a judgment pending appeal, neither court has limited the power of the CFI to stay proceedings which take place before it. Section 16(3) of the High Court Ordinance and Order 1B, Rule 1(2)(e) of the Rules of the High Court in fact provide the CFI with statutory powers to stay proceedings until a later time, where it thinks fit to do so. As to when these powers should be invoked, Chan J noted the CFI must consider what is fair and just towards the parties in the circumstances.

Chan J found that any delay caused by an interim stay pending determination of the application for leave to the CFA would not cause substantial prejudice to Xiamen, given Xiamen had already waited ten years after becoming aware of Eton’s restructure to pursue its claim for damages. Accordingly, the CFI granted the stay.

Comment

If parties fail to honour the terms of an arbitral award, they may breach their implied promise at common law. This breach constitutes a cause of action for which the Hong Kong courts may grant a range of remedies, even though these remedies may differ from those provided in the original arbitral award. This common law action therefore provides aggrieved parties with an alternative avenue, when enforcement of the original award (through the traditional statutory process) becomes impossible. These proceedings also confirm the CFI’s statutory power to stay proceedings before it, provided the stay is fair and just in all the circumstances.

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An UNCITRAL arbitral tribunal has reportedly dismissed a US$36 million claim by a French investor, Louis Dreyfus Armateurs SAS (“LDA“), against India under the 1997 France-India bilateral investment treaty (“BIT“). The award is not public at this time, but press reports state that LDA has also been ordered to pay approximately US$7 million in respect of India’s substantial legal expenses.

Background

The dispute concerns the Haldia Dock Complex, situated near Kolkata, under the authority of the Kolkata Port Trust. In 2010, LDA, the shipping business within the Louis Dreyfus Group conglomerate, became part of a joint venture as a minority indirect shareholder in a special purpose vehicle, Haldia Bulk Terminals Pvt Ltd (HBT), which was to carry out modernisation works at Haldia Docks. From 2012 a number of problems began to occur. A dispute arose between HBT and the Kolkata Port Trust over the removal of equipment and the project faced disruption due to trade union unrest following the dismissal of 275 workers, resulting in multiple pieces of litigation. Following the alleged armed kidnapping of company officers and members of an officer’s family, the joint venture was abandoned.

In 2014, LDA filed a treaty claim under the BIT alleging that the Indian government had breached its treaty commitment to provide full protection and security, in particular as regards HBT’s employees and their families, and was also in breach for its failure to follow court orders dealing with the removal of equipment. The claim gave rise to a request for an anti-arbitration injunction from the Calcutta High Court and a judgment on that application in September 2014. In December 2015, the tribunal ruled in India’s favour, finding that LDA lacked jurisdiction to bring the claim, however it granted permission to LDA to reformulate its claim.

The tribunal’s award

The tribunal in its latest award is reported to have upheld its previous ruling. Despite LDA’s reformulation of its claim, the tribunal found that LDA’s claims still lacked jurisdiction since the BIT requires that an investor in an indirect investment hold at least 51% ownership in order to fall within the BIT’s protection. This is an express requirement under Article 2(1) of the BIT. LDA however owned a stake of less than 51% in the Indian intermediary company which in turn was the majority shareholder of the joint venture vehicle (HBT).

Comment

This dispute is one of a number of investment treaty arbitrations initiated against India from 2011 onwards, which resulted in an overhaul of India’s BITs. As we previously reported here, India subsequently sent notices of termination to 58 countries with which it has BITs, which included termination of the BIT under which LDA brought its claim. This first investment treaty arbitration victory for India therefore appears to come too late to influence India’s policy of renegotiation of existing BITs and replacement with its more restrictive 2015 Model BIT (previously analysed on this blog).

For further information, please contact Nicholas Peacock, Head of India Arbitration Practice, Jake Savile-Tucker, Associate or your usual Herbert Smith Freehills contact.

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In Rakna Arakshaka Lanka Ltd (“RALL“) v Avant Garde Maritime Services (Private) Limited (“AGMS“) [2018] SGHC 78, the Singapore High Court dismissed an application to set aside an award on jurisdiction, on the basis that the applicant had failed to challenge the tribunal’s preliminary ruling on jurisdiction within the deadline stipulated under section 10(3) of the International Arbitration Act (“IAA“) and Article 16(3) of the UNCITRAL Model Law. The decision provides guidance on the distinction between active and passive remedies in the context of applicable deadlines when seeking to set aside an award on grounds of jurisdiction, and resisting enforcement on the same basis.

Background

The underlying dispute arose between two Sri Lanka incorporated companies under an umbrella Master Agreement (the “Agreement”) concerning various maritime security-related projects.

RALL, as a state affiliated company, was required to procure authorizations and approvals necessary for AGMS to operate these projects in Sri Lanka. Following a regime change in Sri Lanka and the subsequent detention of one of the vessels operated by AGMS under Agreement, AGMS commenced arbitral proceedings on the basis that RALL had breached the Agreement. The Agreement provided for disputes to be referred to arbitration in Singapore under the rules of the Singapore International Arbitration Centre (“SIAC“).

RALL did not participate in the arbitration despite having what the court described as “ample opportunity” to do so. It did however write a series of letters to the SIAC; these included:

1. a letter of 21 August 2015 alleging the disputes were beyond the scope of the arbitration agreement and the arbitration conflicted with Sri Lankan public policy. The Tribunal considered that this letter did not constitute a proper objection to the Tribunal’s jurisdiction; and
2. a letter of 12 November 2015, informing the SIAC that settlement had been achieved and that it was no longer necessary to proceed with the arbitration. A preliminary hearing was convened after this position was challenged by AGMS, in which RALL chose not to participate. The Tribunal found that the dispute was still alive.

The arbitration therefore proceeded, and a final award (“Award“) was rendered in favour of AGMS in November 2016.

RALL’s setting-aside application

In February 2017, RALL filed an application to set aside the Award on the following grounds:-

1. that the Award dealt with matters beyond the scope of the tribunal’s jurisdiction and so should be set aside (the “Jurisdiction Ground“);
2. that the Award was made in breach of the rules of natural justice because certain correspondence was not copied to RALL (“Natural Justice Ground“); and
3. that the Award should be set aside for breach of public policy because the umbrella agreement out of which the dispute arose had been procured and furthered by bribery and corruption (“Public Policy Ground“).

The Singapore High Court (the Court) dismissed RALL’s application on each of these grounds and upheld the Award. On the Natural Justice Ground, the Court found that having elected not to participate in the arbitration, any prejudice that it suffered was of its own doing, and RALL could not fulfil any of the requirements of Article 34(2)(a)(ii) of the Model Law or section 24 of the IAA to make its case. On the Public Policy Ground, the Court noted that the allegations of fraud and corruption related to the underlying agreement rather than the award, and (perhaps more importantly) that these allegations had not been made out in a court of law. As to RALL’s further argument that the umbrella agreement required RALL to perform an illegal act, this had been considered and dismissed by the Tribunal. The Tribunal’s finding of fact was therefore binding on the parties and could not be reopened by the supervisory court.

This note focuses on the Court’s approach to the Jurisdiction Ground, in particular its treatment of an application made out of time to set aside a tribunal’s decision on jurisdiction.

The Court’s decision on the Jurisdiction Ground

At the outset, the Court held that the operative provisions were section 10(3) of the IAA and Article 16(3) of the Model Law, given the tribunal had ruled on its jurisdiction as a preliminary issue. Article 34(3), which deals with challenge of final awards and which was the provision under which RALL had brought the application, was therefore not relevant.

This has important implications. In particular, a party is required to challenge a tribunal’s preliminary ruling on jurisdiction within 30 days pursuant to section 10(3) of the IAA and Article 16(3) of the Model Law, but where the issue of jurisdiction is dealt with in the final award, Article 34(3) permits a party to apply to set aside that ruling with 3 months of that party receiving the award.

The Court then went on to consider the purpose and operation of Article 16(3) of the Model Law (and by extension, section 10(3) of the IAA), in particular whether Article 16(3) remains binding on a party that had not participated in the arbitration process, or had walked out of the process at an early stage. It held that Article 16(3) continued to bind an absent party. The Court agreed that Article 16(3) of the Model Law “was intended as an early avenue for parties to promptly and finally resolve jurisdictional disputes so as to save costs and time, and it would defeat these purposes to allow a party to reserve jurisdictional challenges to the award on the merits…“. Therefore, where a tribunal has determined jurisdiction as a preliminary issue, “considerations of finality, certainty, practicality, cost, preventing dilatory tactics and settling the position at an early stage at the seat militate against allowing a respondent to reserve its objections to the last minute and indulge in tactics which result in immense delays and cost“.

Having said that, the Court emphasized that even though a party that had applied out of the time prescribed under section 10(3) of the IAA and Article 16(3) of the Model Law may have lost its right to set aside a preliminary ruling on jurisdiction, it would not have lost its passive remedy of resisting enforcement, whether in another jurisdiction or as a domestic international award at the seat.

Comment

The decision confirms on the one hand that the Singapore courts will construe, and hold parties to, the deadlines set out in the IAA and the Model Law strictly. On the other, it also reaffirms Singapore’s commitment to the choice of remedies doctrine, which was endorsed by the Court of Appeal in the landmark decision of PT First Media TBK v Astro Nusantara International BV and ors [2014] 1 SLR 372. In the latter decision, the court, having carried out a detailed examination of the negotiating history of the Model Law, concluded that article 16(3) constituted “neither an exception to the ‘choice of remedies’ policy of the Model Law, nor a ‘one-shot remedy“. PT First Media considered a party’s right to pursue either an active remedy by challenging the preliminary award on jurisdiction, or a passive remedy by challenging enforcement.

In the present case the court held that, while the applicant in that case had lost its active right to challenge preliminary award on jurisdiction under the timescales applicable by Article 16(3), this did not prevent it from exercising its passive remedy to resist enforcement of the underlying awards.

The two decisions together therefore provide practical guidance on the steps that parties involved in international arbitrations seated in Singapore looking to challenge an award on the basis of excess jurisdiction may wish to take depending on tactical considerations, including cost, efficiency and timing. The key takeaways may be summarized as follows.

• A plea that the Tribunal does not have jurisdiction should be raised not later than in the Statement of Defence, or in a Statement of Defence to a counterclaim. The Tribunal may then rule on a challenge to jurisdiction either as a preliminary question or in an Award on the merits.
• If the Tribunal decides to deal with the issue of jurisdiction as a preliminary question, a dissatisfied party must appeal to the supervisory court within the 30 days stipulated in Article 16(3) of the Model Law. Failing to do so will mean that the party will not be able to set aside any subsequent and final award on the same jurisdictional objections.
• Alternatively, a party that disagrees with the Tribunal’s positive finding on jurisdiction may simply choose to disengage from the arbitration process. This will mean giving up on its right to an ‘active remedy’, such that the dissenting party will be precluded from thereafter applying to set aside the final award on the basis that the Tribunal’s jurisdiction had been exceeded. It will however continue to be able to exercise its passive remedy to challenge enforcement of the award on this basis, in the event a final award is rendered against it, and enforcement of that award is sought by the successful party against it in Singapore.

It is understood that the decision is presently on appeal.

For further information, please contact Alastair Henderson, Managing Partner-SE Asia, Emmanuel Chua, Senior Associate or your usual Herbert Smith Freehills contact.

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In the recent landmark decision of Marty Ltd v Hualon Corp (Malaysia) Sdn Bhd [2018] SGCA 63, the Singapore Court of Appeal held that the commencement of court proceedings notwithstanding the existence of a binding arbitration agreement and without any explanation or qualification is in and of itself sufficient to constitute a prima facie repudiation of the arbitration agreement. Counterparties who have accepted the court’s jurisdiction would correspondingly be deemed to have accepted the repudiatory breach, and will also no longer be entitled to insist on adherence with the arbitration agreement.

The Singapore Court of Appeal’s decision is noteworthy as it departs from longstanding authority that the mere commencement of litigation proceedings would not constitute repudiation of the arbitration agreement. The Court also provides important guidance to parties to Singapore seated arbitrations on whether (and when) it is appropriate to commence litigation in circumstances where an arbitration agreement exists, and how to react if a counterparty does so.  We analyse the decision below.

BACKGROUND

Hualon Corp (Malaysia) Sdn Bhd (“Hualon“) had been in receivership since November 2006. In July 2014, Hualon’s receiver commenced proceedings in the courts of the British Virgin Islands (the “BVI“) against Marty Ltd and its two shareholders, Mr Oung Da Ming and Mr Oung Yu Ming. The Oung brothers had been substantial shareholders and directors of Hualon before incorporating Marty Ltd in the BVI.

In the BVI court proceedings, Hualon sought to invalidate the transfer of its shares in a Vietnamese subsidiary company to Marty Ltd on the ground that the transfer had been wrongfully procured by the Oung brothers and Marty Ltd. The share transfer had reduced Hualon’s shareholding in the subsidiary from 100% to 0.19%. The parties’ respective shareholdings following the transfer had been recorded in the subsidiary’s constitution, revised in 2008 (the “Revised Charter“) i.e. in the course of Hualon’s receivership.

In March 2015, Hualon filed a notice of arbitration with the Singapore International Arbitration Centre against Marty Ltd and the Oung brothers alleging the same breaches as it did in the BVI court proceedings. Hualon’s case was that it was only in end February 2015 – seven months after the commencement of the BVI proceedings – that it came to know that the Revised Charter had an arbitration agreement for the settlement of disputes between shareholders of the subsidiary. Upon filing its notice of arbitration, Hualon also proposed to its counterparties that the BVI proceedings be stayed in favour of arbitration, but took no further steps to obtain such a stay until April 2015, by way of an application to the BVI courts.

The arbitration proceedings therefore progressed in parallel with the BVI proceedings. A sole-arbitrator tribunal had been constituted, Marty Ltd challenged the jurisdiction of the tribunal, and by April 2016, the tribunal ruled that it had jurisdiction over the dispute. In May 2016, Marty Ltd commenced proceedings in the Singapore High Court to challenge the arbitral tribunal’s decision, arguing that Hualon’s commencement and conduct in the litigation in the BVI rendered it in repudiatory breach of the arbitration agreement, such that it was no longer entitled to continue with the arbitration proceedings.

In May 2017, the Singapore High Court dismissed Marty Ltd’s jurisdictional challenge. Marty Ltd appealed to the Singapore Court of Appeal.

THE COURT OF APPEAL’S DECISION

The Court of Appeal allowed the appeal. It held that by commencing the BVI court proceedings without any explanation as to why it did so in the face of the arbitration agreement, Hualon was no longer entitled to rely on the arbitration agreement, and therefore could not proceed with the arbitration proceedings.

In strongly stated obiter remarks, the Court indicated that the mere commencement of court proceedings by a party bound by an arbitration agreement would constitute a prima facie repudiatory breach of the arbitration agreement. The Court expressly doubted longstanding English authority that (i) a party can only be found to have repudiated an arbitration agreement if it evidences unequivocal repudiatory intent; and (ii) on that analysis, that the mere commencement of court proceedings alone would not constitute unequivocal repudiatory intention.

The Court reasoned as follows:- parties who enter into a contract containing an arbitration clause are entitled to expect (and have a contractual obligation) to refer disputes to arbitration. Thus, the commencement of court proceedings notwithstanding that obligation, without any qualification, strongly indicates that the party no longer intends to be bound by the arbitration agreement i.e. repudiatory intention. To avoid such a conclusion, a party must qualify the scope of the court proceedings or the relief sought thereunder in order to explain its actions and to reserve its right to subsequently refer the matter to arbitration.

In this case, Hualon had commenced and maintained the BVI court proceedings without any reservation or explanation. Its conduct therefore evidenced that it did not intend to be bound by the arbitration agreement. The Court also found repudiatory intention in the fact that Hualon’s position in the BVI proceedings was that the Oung brothers had ceased to have the authority to act on behalf of and bind Hualon in the course of receivership. Objectively, this meant that all documents and transactions entered into by the Oung brothers, including the Revised Charter containing the arbitration agreement, were invalid and not binding. On its own argument, Hualon could not insist that it had the option of relying on the arbitration agreement.

The Court also did not accept Hualon’s argument that it could not have intended to repudiate the arbitration agreement by commencing court proceedings because it had only became aware of the arbitration agreement belatedly. A party’s ignorance of an arbitration agreement was subjective – an objective counterparty remained entitled to infer that the party who commenced court proceedings does so because it no longer intends to be bound by the arbitration clause. In any case, the Court was satisfied that Hualon had, on the facts, possessed actual knowledge of the arbitration agreement.

Finally, as a matter of contract law, following repudiation of a contractual obligation, the counterparty to the contract must accept the repudiation in order for the breach to crystallise. Here, the Court held that Marty Ltd had accepted Hualon’s repudiation of the arbitration agreement when it accepted the BVI court’s jurisdiction over the merits of the dispute, as evidenced by its application to the court for summary judgment. Interestingly, Marty Ltd’s application (and in that regard, acceptance of the repudiation of the arbitration agreement) came after Hualon had filed its notice of arbitration and proposed that parties stay litigation in favour of arbitration. The Court held that a repudiatory breach can be accepted at any time until the ‘innocent’ party itself affirms the contract or otherwise acts inconsistently with the continuing existence of a right to accept the repudiation.

COMMENT: CONSIDERATIONS FOR PARTIES INVOLVED IN SINGAPORE SEATED ARBITRATIONS

A number of practical considerations follow from this decision of the Singapore Court of Appeal for parties involved in Singapore seated arbitrations.

As a default position, parties to a valid arbitration agreement should consider themselves bound to resolve their disputes by arbitration. Where there are nevertheless reasons for a party to commence court proceedings (such as to pursue a claim that falls outside the scope of the arbitration agreement) a party who chooses to do so should carefully consider whether and how it wishes to explain and qualify its litigation in order to effectively reserve its right to arbitration. Further, steps taken and arguments raised in the course of litigation should not be inconsistent with the reserved right to later rely on the arbitration agreement.

A party at the receiving end of such litigation should also give thought to how it wishes to respond, and what may be deemed to be acceptance by it of the repudiatory breach of the arbitration agreement so as to disentitle all parties from relying on the arbitration agreement. In this case, Marty Ltd was taken to have accepted the repudiation by agreeing to the jurisdiction of the BVI court by applying for summary judgment of the dispute i.e. agreeing to the BVI court’s jurisdiction over the merits of their dispute. Arguably, mere participation in the court proceedings through its ordinary course (e.g. the filing of pleadings and attendance at interlocutory applications) alone will also suffice to evidence a party’s acceptance of the repudiation. Conversely, the Court found that Marty Ltd’s initial challenge to the litigation on forum non conveniens grounds was not an acceptance of repudiation as it did not amount to an unequivocal acceptance of the court’s jurisdiction.

For those with a Singapore-seated arbitration agreement, the decision provides greater clarity on how parties may choose their dispute resolution forum, and how they should proceed where there appear to be inconsistencies with the existing arbitration agreement. The issue is not uncommon, in particular, when dealing with parties from developing jurisdictions who commence satellite litigation in the face of a binding arbitration agreement. Whether the decision will have any wider ramifications for other common law jurisdictions remains to be seen.

For further information, please contact Alastair Henderson, Partner, Emmanuel Chua, Senior Associate, Reshma Nair, Associate, or your usual Herbert Smith Freehills contact.

Alastair Henderson

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Emmanuel Chua

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In the recent decision of Sonact Group Limited v. Premuda SPA [2018] EWHC 3820 (Comm), the English High Court confirmed its pro-arbitration approach to the interpretation of arbitration agreements. The Court held that an arbitration agreement contained in a charterparty contract could apply in relation to disputes arising out of a subsequent settlement agreement contained in correspondence between the parties relating to the sum allegedly due under the charterparty. The Court concluded the parties could be taken to have intended that the arbitral tribunal under the principal agreement would also have jurisdiction over disputes arising out of a settlement agreement between the same parties, despite the absence of an express arbitration clause in the settlement agreement.

Background

The defendant owned the “Four Island” tanker, which it chartered to the claimant. The charterparty included an arbitration clause and the parties elected London as the seat of arbitration.

The owner claimed demurrage of US $718,948.08 and heating costs of US $190,200 from the charterer under the charterparty. That claim was settled by means of an exchange of emails in which the charterer agreed to pay US $600,000. However, the charterer failed to make the payment.

The owner served a notice of arbitration on the charterer claiming payment of demurrage and heating costs, but ultimately pursued a claim for payment of the agreed sum of US$600,000, which the Tribunal in due course awarded. The charterer challenged the jurisdiction of the arbitral tribunal to decide a claim arising under the settlement agreement on the basis that the settlement agreement did not include an arbitration clause.

The tribunal concluded that it had jurisdiction as the nature of the negotiations and the manner in which they had been carried out suggested the parties intended, although they did not say so expressly, that the settlement agreement should be governed by the same provision for dispute resolution as the original charterparty.          

Application under section 67 of the Arbitration Act

The charterer sought to challenge the arbitral award under section 67 of the Arbitration Act 1996. The charterer argued that the tribunal did not have jurisdiction to issue its award.

The Court re-affirmed that a challenge under section 67 of the Arbitration Act requires the question of jurisdiction to be analysed de novo by the Court (as per the Supreme Court’s decision in Dallah Real Estate & Tourism Holding Company v Ministry of Religious Affairs of the Government of Pakistan [2010] UK SC 46). As a consequence, the Court did not consider itself bound by the decision of the tribunal and although the tribunal’s decision could inform and be of interest to the Court, it was not to be given any particular status or weight.

The decision

The charterer presented two arguments on jurisdiction. First, the owner’s claim was a claim under the settlement agreement and that agreement did not contain an arbitration clause. Second, pursuant to the notice of arbitration sent by the owner, the tribunal was appointed to hear disputes under the charterparty and not under the settlement agreement.

The Court concluded that the parties intended for the arbitration clause contained in the charterparty to continue to apply in the event that the sum agreed to settle claims under that agreement was not paid. The wording of the arbitration clause was broad enough to encompass such a claim, even though the settlement agreement to pay US $600,000 represented a new cause of action under a new and binding agreement. The Court considered it inconceivable that the parties could be taken to have agreed that if the agreed sum was not paid, the owner would be unable to pursue its claim in arbitration and, instead, would be required to commence court proceedings. Further, the Court concluded that although the settlement agreement did not contain a choice of law provision, the parties intended that the choice of English law contained in the charterparty would continue to apply. The Court considered that it would be very odd to assume that the settlement agreement, which said nothing about choice of law, was to be governed by any law other than the law that governed the charterparty.

The Court also held that – although the notice of arbitration did not refer to the settlement sum and, instead, referred to “a claim for demurrage and heating costs as well as other possible claims” – the claim for the agreed sum could properly be regarded by commercial parties as a claim for demurrage and heating costs. Thus, the Court concluded that the notice of arbitration was effective. The arbitration clause allowed the parties to submit further disputes to arbitration after proceedings had commenced, as long as such disputes arose under the charterparty. Thus, the Court concluded that, even if the notice of arbitration as submitted had not encompassed a claim for the US $600,000, the owner could, in any event, have submitted such claim at a later stage in the arbitration as long as it was a claim under the charterparty. On that hypothesis, the Court found that this is what it did.

Conclusion

This case provides a reminder of the complexities that can arise (leading to delays and increased costs) if settlement agreements or contractual amendments do not expressly state the applicable governing law and dispute resolution mechanism.

In this instance, the English Court took a commercially pragmatic, pro-arbitration approach and held that the arbitration clause in one agreement could effectively be implied into a subsequent agreement seeking to settle a claim under the former. The outcome of this case turned on its particular facts, including the commercial context of maritime practice, and parties should not assume that the dispute resolution mechanism and governing law that is set out in an underlying agreement will necessarily apply to every agreement seeking to settle a claim arising under the original agreement. Parties are recommended to always document the settlement they have reached in express terms, including a governing law and dispute resolution clause.

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

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Charlie Morgan

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Israel Sorin Shohat, the Third Defendant in proceedings commenced by Mr Balram Chainrai, sought to challenge the jurisdiction of Hong Kong courts to hear a matter related to an Israeli arbitral award issued in 2013. The court held that, while the deadline for challenging jurisdiction had not passed, Shohat had ultimately taken steps which indicated that he had submitted to the jurisdiction of the Hong Kong courts and therefore waived his right to challenge.

Balram Chainrai v Kushnir Family (Holdings) Ltd [2019] HKCFI 234

Background

See our previous discussion of this matter here. In the latest developments, Shohat alleged that he did not submit to the jurisdiction of the Hong Kong courts and was therefore entitled to challenge jurisdiction under Order 12, Rule 8 of the Rules of the High Court, which defines the deadline for challenging jurisdiction as ‘the time limited for service of a defence’. In response, the Plaintiff argued that:

1. the court could not hear Shohat’s application as he failed to make an application to challenge jurisdiction before the time limit for service of a defence
2. Shohat has taken steps invoking the court’s jurisdiction

Questions before the court

While Shohat and the Plaintiff made a number of allegations beyond those listed above, the court only found it necessary to consider the following questions:

1. Whether it had jurisdiction to hear Shohat’s application or was precluded from doing so as a result of his alleged failure to comply with the time limits under Order 12, Rule 8 of the Rules of the High Court
2. Whether the steps taken by Shohat invoked the court’s jurisdiction, such that he waived the right to challenge

Decision

Regarding the first question, the court held that it had jurisdiction to hear Shohat’s application. It found that the deadline for challenging jurisdiction under Order 12, Rule 8 was within the time for filing a defence, however this should take account of any extensions of time. Shohat received numerous extensions and consequently, the deadline for filing was 28 days after the disposal of the Strike-Out application. The court held that, as the Strike-Out application was disposed of on 4 January 2018 and this application was commenced on 31 January, the time had not expired for Shohat’s challenge to jurisdiction.

With respect to the second question, the Court held that Shohat had submitted to the Hong Kong court’s jurisdiction and therefore waived his right to challenge as a result of the following actions:

1. On 11 February 2016, he made an application under Order 3, Rule 5 of the Rules of the High Court, requiring the Plaintiff to file and serve a Statement of Claim within 7 days or otherwise have their claim dismissed. This was followed by a Consent Summons 7 days later. The court held this had ‘invoke[d] the Court’s jurisdiction without reservation or any intention to challenge the jurisdiction and those conducts … could be viewed as an unequivocal indication or intention … to have the case tried in Hong Kong.’
2. On 9 March 2016, he requested an extension on the time for filing a ‘Defence and Counterclaim, if any, and/or to make such application as may be appropriate pursuant to Order 12, rule 8’. However, he did not ‘expressly and clearly reserv[e] the right to challenge the court jurisdiction and … clearly indicate that the Strike-Out Summons was made without prejudice [to any future application under Order 12, Rule 8]’.
3. On 3 May 2016, he commenced Strike-Out proceedings for this matter in Hong Kong, in part based on res judicata issues arising as a result of both the prior arbitration, as well as specific reasons for refuting the Plaintiff’s Statement of Claim. Again, the court noted that the right to challenge the court’s jurisdiction was not expressly reserved until two weeks after this application was made and when a letter reserving the right was produced, the wording did not clearly indicate ‘that the Strike-Out Summons was made without prejudice to the Order 12 Rule 8 application’ but only that an Order 12, Rule 8 application would be filed if the Strike-Out application failed. Instead, the Strike-Out application ‘was an application under the general jurisdiction of the court to have the action conclusively determined by dismissal.’

Discussion

Importantly, this finding demonstrates that parties seeking to challenge the jurisdiction of a Hong Kong court should expressly and clearly reserve this right from the beginning of proceedings. Where steps are taken, including strike-out applications, these should be expressly stated to be taken without prejudice to any subsequent application to challenge the court’s jurisdiction. The court also usefully clarified that the deadline for the submission of a challenge to the court’s jurisdiction under Order 12, Rule 8 accounts for extensions to the deadline for filing a defence.

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