The case of Philpott & Orton v Lycee Francais Charles De Gaulle School serves as a welcome reminder that the English court will strictly enforce agreements to arbitrate by ordering a mandatory stay of court proceedings, even in contexts where court procedures may traditionally apply. Where a party argues that a matter should be settled by the court, the court will consider both as a matter of substance whether this is a dispute that the parties have referred to arbitration, and also whether the dispute can be resolved through arbitration as a matter of practice.

Background

Welconstruct Limited (the “Company”) entered into a construction contract with a school (the “School”) based on the JCT Intermediate Building Contract 2005 Revision 1 (the “Contract”). The Contract provided for disputes to be submitted to arbitration. The Company subsequently went into administration followed by voluntary liquidation. Both the School and the Company submitted competing positions regarding the final account, which led the liquidators to apply to the court for directions.

The School objected to the liquidators’ application on the basis that the arbitration clause was binding and continued to apply after an administration and liquidation. It argued that pursuant to s. 9(5) of the Arbitration Act 1996, the court had to order a mandatory stay of the court proceedings unless it was satisfied that the arbitration agreement was null and void, inoperative or incapable of being performed. The liquidators argued that proof of debt proceedings fall within the domain of the court and are governed by the procedure set out in the Insolvency Rules 1986. In particular, Rule 4.90(3) of the Insolvency Rules provided that where there were mutual dealings in a liquidation, an account had to be taken of what was due from each party to the other so that the claims could be set off against one another. Although the rule was silent as to the exact procedure to be adopted, case law made it clear that the court had ample power to give directions for the taking of an account.

The question framed by the court was whether the Arbitration Act “trumped” the “taking of an account under the court’s directions”, as envisaged by the Insolvency Rules.

Decision

The judge considered that the arbitration agreement did not become inoperative following a liquidation, or in consequence of the statutory set-off. Instead, he was mindful of the principle that parties are free to decide how their disputes should be resolved, subject only to such safeguards as are necessary in the public interest. In this case, the exercise of “taking of the account” meant no more than the calculation of the balance due in accordance with relevant principles of insolvency law, which fell within the remit of the arbitration clause, just as a claim by the liquidators against the school to recover an outstanding sum would plainly fall within the scope of the arbitration clause. Therefore, the procedure contained in the Insolvency Rules was not incompatible with referral of the matter to arbitration proceedings. Accordingly, it was necessary to follow the intention of parliament as laid down in the Arbitration Act and refer the matter to arbitration.

The judge also confirmed that the fact that the school had submitted a “proof of debt” claim did not mean that it had submitted to the jurisdiction of the court pursuant to s9(3) of the Act. Therefore the school had not deprived itself of its entitlement to a stay.

Comment

This case demonstrates that a court will uphold an agreement to arbitrate subject only to limited exceptions. Where an argument of arbitrability is raised, the court will consider both as a matter of substance whether this is a dispute that the parties have referred to arbitration, and also whether the dispute can be resolved through arbitration as a matter of practice. Here, the judge held that the underlying dispute could easily be determined by arbitration, following which the net balance would be a matter of simple calculation. This approach provides certainty for parties that their agreement to arbitrate will be upheld and that the court will look at the substance of the dispute in order to determine the appropriate forum.

This decision also provides an interesting contrast with the case of Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 575 Civ, in which the Court of Appeal held that the mandatory stay provisions in s9(1) of the Arbitration Act do not apply to winding-up petitions brought on the basis that a company is unable to pay its debts where what is in dispute is whether the company is, in fact, unable to pay its debts.

Whilst this is a welcome development, these contrasting decisions may be a source of some uncertainty for insolvency practitioners, who will need to consider carefully the circumstances in which they should apply to the court to supervise certain procedures where the parties have submitted disputes to arbitration. This case nonetheless makes it clear that there should be no reason why book debts cannot be quantified in arbitration.

For further information, please contact Craig Tevendale, Partner, Elizabeth Kantor, Associate or your usual Herbert Smith Freehills contact

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In the recent case of Ever Judger Holding Company Limited v Kroman Celik Sanayii Anonim Sirketi (HCCT 6/2015), the Hong Kong Court of First Instance (CFI) granted an anti-suit injunction to restrain the further conduct of litigation commenced in Turkey (click here for the full judgment). The CFI noted an historic reluctance in English law to enjoin litigation in foreign jurisdictions – for reasons of comity or the appearance of undue interference – but concluded that, at least when it comes to enforcing agreements to arbitrate in Hong Kong, the courts of Hong Kong will ordinarily be prepared to grant anti-suit injunctions in appropriate cases.

Background

The proceedings in Turkey relate to a dispute over the condition of a cargo of steel wire rods purchased by a Turkish company, Kroman Celik Sanayii Anonim Sirketi (Kroman). Upon the arrival of the cargo in Turkey by ship, Kroman commenced litigation in the Turkish courts against the ship’s owner, Ever Judger Holding Company Limited (Ever Judger), seeking approximately USD 3.93 million for damage to the cargo. Ever Judger, relying on the Hong Kong arbitration clause incorporated into the bills of lading, served a notice of arbitration and subsequently applied to the CFI for an injunction to restrain further conduct of the Turkish litigation against it.

Discussion

Counsel for both parties referred the CFI to s.45 (2) of the AO as the basis for its jurisdiction. However, the CFI pointed to two possible sources of authority to grant the requested injunction: s. 45 of the Arbitration Ordinance (Cap. 609) (AO), and s. 21L of the High Court Ordinance (Cap. 4) (HCO).

The CFI highlighted several differences between the two: 

The CFI suggested – without deciding – that its jurisdiction to grant the requested anti-suit injunction is more likely founded on s. 21L of the HCO. It reasoned that the requested injunction was more accurately described as a measure in relation to the arbitral agreement, not to arbitral proceedings, and that its purpose was not to protect a local process from harm or prejudice, but to enforce a contractual right breached by the pursuit of foreign litigation. In any event, having satisfied itself that it had the authority to grant the requested injunction, the CFI turned to the principles guiding the exercise of its power.

In that respect, the CFI concluded that they are the same irrespective of the source of its authority. The key issues for determination were whether Ever Judger had come to court with “clean hands”, and whether there were strong reasons not to grant an injunction notwithstanding the arbitration clause. In considering the Kroman’s unclean hands defense, the CFI noted that it would require a significant evidentiary showing to defeat Ever Judger’s request for injunctive relief. Kroman had not, however, presented evidence of “commensurate cogency” in support of its claim that Ever Judger had committed fraud in issuing clean bills of lading relating to the cargo. Further, the CFI concluded that the other reasons advanced by Kroman – including the existence of related litigation in Turkey between Kroman and its insurers – were insufficiently strong to overcome Ever Judger’s entitlement to the requested injunction.

Accordingly, the CFI ordered an injunction to restrain Kroman from further conduct of the Turkish litigation until further order, and awarded costs to Ever Judger.

Comments

The judgment reaffirms that the Hong Kong courts are prepared to enjoin the conduct of foreign proceedings brought in breach of an agreement to arbitrate in Hong Kong. It is a welcome reminder that Hong Kong law requires a significant evidentiary showing to avoid enforcement of the negative aspect of an arbitration agreement – that is, the (often implied) obligation not to pursue proceedings in breach of it. In that way, this decision forms a further facet of the Hong Kong courts’ demonstrated willingness to enforce agreements to resolve disputes by way of arbitration.

It is also important for its discussion of the source of the Hong Kong courts’ jurisdiction to enter injunctions against the pursuit of foreign proceedings. This is a key issue, particularly given the different provisions governing rights of appeal for injunctions ordered under the AO and HCO. As the CFI noted, that issue will be “left to another occasion” – potentially sooner than later, given the rising use of anti-suit injunctions to restrain foreign litigation in breach of agreements to arbitrate.

For further information, please contact Dominic Geiser, Partner, Timothy Hughes, Associate, Briana Young, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

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In a recent decision, the French Supreme Court (Cour de cassation) has again refused to apply a unilateral jurisdiction clause. A unilateral jurisdiction clause requires one party to bring proceedings in one jurisdiction only, while the other may choose to bring proceedings in other jurisdictions.

The decision, which comes after the much-discussed 2012 Supreme Court judgment in the Rothschild case (Cass. 1. Civ, 26 September 2012)(see our previous blog post here), is a further reminder of the need to give careful consideration to the validity of dispute resolution provisions in the possible jurisdiction of any future proceedings when drafting contracts.

This decision (and the decision in Rothschild) are significant in the context of unilateral jurisdiction clauses. However, and notwithstanding the fact that the French courts have not had a chance to consider the issue in relation to arbitration since the Rothschild decision, there is nothing to suggest that the same approach would be taken with regard to clauses containing an arbitration agreement with an option to litigate in one particular jurisdiction, or an exclusive jurisdiction clause with an option for one party to bring arbitration proceedings (so-called hybrid dispute resolution clauses). As such, a hybrid arbitration clause may be an appropriate option in circumstances where there is a nexus with France and one of the parties wishes to have a degree of flexibility regarding the forum in which disputes will be heard.

Cour de cassation, chambre civile 1, 25 mars 2015, 13-27.264

Background

The appeal before the Supreme Court related to unilateral jurisdiction clauses in two framework credit agreements concluded in August 2007 and October 2008 between Credit Suisse and Danne holding patrimoniale (“Danne”). Each jurisdiction clause provided that “the borrower acknowledges that the sole forum for any proceedings is Zurich or the place of the branch of the bank where the relationship is established” and that “the bank has, however, the right to bring proceedings against the borrower before any other competent tribunal”.

The financing arrangement had been entered into with the assistance of Mr X, who acted in a personal capacity and on behalf of NJRH Management (“NJRH”). Société Générale, which is incorporated in France, had provided an on-demand guarantee as part of the arrangement. ICH, which had succeeded Danne, challenged the financing arrangement and brought proceedings against Credit Suisse, Mr X, NJRH and Société Générale before the French courts.  

Credit Suisse raised a jurisdictional objection, which was upheld by the Angers Court of Appeal, on the basis of the jurisdiction clause in the credit agreements. The Court of Appeal rejected the submission that the contracts should be regarded as consumer contracts under Article 16 of the Lugano Convention and that the drafting of the jurisdiction clause, in a standard form contract, was particularly favourable to the bank. It found that the imbalance complained of, which was no more than a jurisdiction clause agreed between two contracting parties from different countries, was not enough to render the clause irregular within the meaning of the Lugano Convention. As such, the Court of Appeal found that ICH, which had entered into the contract as part of its commercial activities, could not invoke the right granted to consumers under Article 16 of the Lugano Convention to bring proceedings in their state of domicile, and the dispute should be heard by the Swiss courts.

The Supreme Court decision

The Angers Court of Appeal judgment was overturned by the Supreme Court.

The Supreme Court first drew attention to Article 23 of the Lugano Convention, which permits the parties to a contract to agree on the courts which will have jurisdiction over any dispute. It then highlighted the fact that the Court of Appeal had reached its conclusion without considering whether the imbalance criticised by ICH – relating to the fact that the clause granted the bank the right to bring proceedings before “any other competent tribunal” but did not specify the objective basis on which this alternative jurisdiction was founded – was contrary to the objectives of foreseeability and legal certainty underpinning the Lugano Convention. In doing so, the Court of Appeal had deprived its decision of a legal basis. As a result, the ruling was overturned and the parties were returned to their original positions. The case will now be reheard by the Rennes Court of Appeal.

Comment

This decision is another example of the French Supreme Court refusing to enforce a unilateral jurisdiction clause and is important for two reasons.

First, it is a further reminder of the need to ensure that dispute resolution clauses are tailored to the circumstances of individual contracts. It is common to use unilateral jurisdiction clauses in a finance context, and this will be a particularly important consideration for banks where there is a risk of proceedings being brought, in breach of the clause, in France.

Second, and perhaps surprisingly, the Supreme Court did not state expressly that the clause in question was potestative. A condition potestative is one which depends for its performance upon an event which only one of the parties has the power to make happen or to prevent and is void under French law (Articles 1170 and 1174 of the Civil Code). In the Rothschild case (see here), the court found that the unilateral clause in question was potestative, on the basis that it “bound, in reality, only Madame X […] who was alone required to seise the Luxembourg courts”, and from that drew the conclusion that the clause was contrary to the object and purpose of Article 23 of the Brussels Regulation (Regulation (EC) 2001/44).

Rothschild has been subjected to heavy criticism. One of the major criticisms focuses upon the fact that, although it was applying EU law (the Brussels Regulation), the Supreme Court appears to have relied upon the French concept of a condition potestative in order to refuse to apply the unilateral jurisdiction clause. With its 25 March 2015 judgment, the Supreme Court has, with one important exception, extended its Rothschild approach to the Lugano Convention. In its appeal to the Supreme Court, the appellant had expressly argued that the “clause was potestative and contrary to the objective of foreseeability and legal certainty” behind Article 23 of the Lugano Convention. The Supreme Court, however, appears to have deliberately avoided any reference to the clause’s allegedly potestative nature. Instead it focused on (i) the absence of objective criteria setting out the basis for any alternative jurisdiction and (ii) the fact that the unbalanced nature of unilateral jurisdiction clauses is, in its view, contrary to the aims of the Lugano Convention.

It remains to be seen whether the Supreme Court will adapt its approach when interpreting the Recast Brussels Regulation. The Recast Brussels Regulation, which entered fully into force on 10 January 2015, makes it clear that questions as to the validity of a jurisdiction clause are to be decided in accordance with the laws of the courts given jurisdiction by that clause and Article 25, which is the equivalent provision to Article 23 of the Brussels Regulation, now provides expressly that the courts of a Member State designated in a clause will have jurisdiction, “unless the agreement is null and void as to its substantive validity under the law of that Member State”. This appears to sit uneasily with the approach adopted in Rothschild, and it will be interesting to see how the Supreme Court responds when (and if) it is asked to consider a unilateral jurisdiction clause under the Recast Brussels Regulation.

Given the French courts’ hostility to unilateral jurisdiction clauses under both the Lugano Convention and the Brussels Regulation, parties to a contract with a connection to France would be advised to avoid such clauses. Nonetheless, there may be circumstances in which a party attaches particular importance to having the right to bring proceedings in places other than the named jurisdiction. In such a scenario, and where there is a nexus with France, one possibility (in addition to using a hybrid arbitration clause) would be for the jurisdiction clause to list expressly the alternative jurisdictions in which that party has the right to bring proceedings. Such a clause has not been tested before the French courts, but it might go some way towards addressing the Supreme Court’s concerns about certainty.

For further information, please contact Clément Dupoirier , Partner, Laurence Franc-Menget, Avocat, Peter Archer, Associate or your usual Herbert Smith Freehills contact.

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In Hashwani v OMV Maurice Energy Ltd [2015] EWHC 1811 (Comm), the English High Court (the Court) dismissed an application by reference to section 72 of the English Arbitration Act 1996 (the Act) challenging the jurisdiction of the International Chamber of Commerce (ICC) to arbitrate the dispute.

The Court considered two arbitration provisions contained within two transaction documents, the Joint Operating Agreement and the Farmout Agreement (both defined further below). The Joint Operating Agreement, on its face, appeared to only apply to two of the parties to the arbitration that was the subject of the reference. The Court held that the ICC arbitration provision in this Agreement was valid and binding on two of the parties and that, in spite of an inconsistent arbitration provision contained in the Farmout Agreement which was subsequently entered into between all three parties to the dispute providing for domestic arbitration, such provision did not oust the former nor render it invalid. The Court then proceeded to take a purposive approach to the arbitration provision in the Joint Operating Agreement, looking at the intention of the parties. The Court expressed the view that the Joint Operating Agreement clearly contemplated that there would be further parties to the Agreement in future and, as such, the arbitration provision should be construed to allow the resolution of disputes between all such future parties. If such an approach were followed, the third party to the dispute would therefore also have been bound by that provision.

However, the Court did not reach a ruling on this point, stating that when a court cannot be sure of jurisdiction but there would in any event be an arbitration between closely-related parties as to the same matters in issue, the sensible course would be to leave the question of jurisdiction in relation to the claim to be finally decided by the arbitrators in question.

Facts

The parties to the proceedings were Ocean Pakistan Limited (OPL) and Zaver Petroleum Corporation Limited (ZPCL) on the one side and OMV Maurice Energy Limited (OMV) on the other side. The proceedings arose out of oil and gas exploration in Pakistan.

In 1999, OPL was granted an oil exploration licence by the President of Pakistan. It then entered into a series of agreements with ZPCL and OMV including (i) the Petroleum Concession Agreement dated 29 December 1999 (the Concession Agreement); (ii) a Joint Operating Agreement dated 29 December 1999 (the Joint Operating Agreement); and (iii) the Farmout Agreement dated 30 March 2000 (the Farmout Agreement). In 2011, OMV issued proceedings in the Pakistan courts claiming that OPL and ZPCL had failed to pay calls under the Joint Operating Agreement, which if correct, would lead to draconian consequences under the Farmout Agreement. In 2014, OMV made a Request for arbitration to the ICC. This Request was made pursuant to Article 28 of the Concession Agreement (Article 28) which contained an arbitration provision. Such provision was incorporated into the Joint Operating Agreement by virtue of Article 17 of the same, which provided that any dispute arising out of the Joint Operating Agreement would be dealt with ‘mutatis mutandis’ in accordance with Article 28. The key question for the Court to determine was therefore whether Article 28 constituted a valid arbitration agreement that governed the present dispute between the parties.

Article 28 only applied to disputes between foreign working interest owners (FWIO) and did not apply to disputes between a FWIO and a Pakistani working interest owner (PWIO). In this case, OPL and OMV were FWIOs whereas ZPCL was a PWIO.

Article 7 of the Farmout Agreement (to which all three of OPL, ZPCL and OMV were parties) contained a further arbitration provision which provided for domestic arbitration in Pakistan in the event of any dispute between the parties.

There were two applications before the Court in this proceeding:

1. An application by OPL and ZPCL by reference to section 72 of the Act challenging the jurisdiction of the ICC and seeking injunctions; and
2. An application by OMV for a stay of the present proceedings on the basis that the ICC tribunal should determine the question of jurisdiction, or in the alternative, an application for a stay under section 9 of the Act on the basis that there was a valid arbitration agreement.

The key issues before the Court were therefore:

1. Given that OMV was pursuing claims against both a FWIO and a PWIO, whether this constituted a hybrid claim against OPL and therefore fell outside the scope of Article 28 (Issue 1); and
2. Whether Article 28 applied to OPL’s claims against ZPCL, as a PWIO (Issue 2).

Judgment

Issue 1

Burton J held that the claim by OMV against OPL plainly fell within Article 28, irrespective of whether there was also a claim against ZPCL. The arbitration provision at Article 28 was valid and the dispute as to whether OPL was in breach of the Joint Operating Agreement fell within it. The provisions of the Joint Operating Agreement had not been overtaken nor superseded by those in the Farmout Agreement, and even if the dispute fell within both provisions, this did not oust the former nor render it invalid. Burton J was therefore satisfied that the claim by OMV clearly fell within the jurisdiction of the ICC.

Issue 2

Burton J expressed his preference for ZPCL’s submission that the claim against it also fell within the jurisdiction of the ICC, despite the fact that the wording of Article 28 limited the ICC’s jurisdiction to disputes between FWIOs.

ZPCL’s submission was as follows. The Concession Agreement initially had only three parties – the President of Pakistan, Government Holdings (a PWIO) and OPL (a FWIO). It would be plainly contemplated that there would be more parties with a working interest in future. The Joint Operating Agreement at the outset had only two parties – Government Holdings and OPL. ZPCL and OMV only became parties to the above agreements some months later and, when they did, Article 17 of the Joint Operating Agreement applied to them. Therefore, the provision had to be read so as to reflect the express agreement of the parties, thus including OMV and ZPCL, that Article 28 would apply mutatis mutandis. Mutatis mutandis therefore had to operate so as to provide that any dispute between a FWIO and a PWIO should be subject to ICC arbitration rather than domestic arbitration, which was limited to disputes between Pakistani parties. Therefore, when ZPCL became a party to the Joint Operating Agreement, it became subject to the rights and obligations of Article 28 mutatis mutandis, i.e. to the ICC arbitration clause.

However, Burton J held that when a court cannot be sure of jurisdiction but there would in any event be an arbitration between closely-related parties as to the same matters in issue, it was the sensible course to leave the question of jurisdiction in relation to the claim (i.e. the claim by OMV against ZPCL) to be finally decided by the ICC tribunal.

Comment

This is a good example of the purposive approach taken by the English Court to the interpretation of arbitration clauses. The court shied away from a ruling on the question of whether ZPCL was bound by the arbitration clause in the Joint Operating Agreement. However, the “preference” expressed by Burton J was clear. The Court analysed the background to the oil exploration project and its planned future development, adopting a highly commercial construction of the arbitration clause which went beyond the wording of the contract to allow it to continue to function as further contracting parties became involved in the project.

The case also serves to show the Court’s high regard for the principle of Competence-Competence by stepping back from a ruling on this point, leaving the ultimate determination of jurisdiction to the ICC tribunal appointed. That said, the “preference” expressed by the Court is likely to colour the approach taken by the arbitrators in question.

However, the case also serves as a reminder that inconsistent arbitration provisions within a series of agreements between the same parties relating to the same subject matter can cause difficulties. Wherever possible, where changes are anticipated to the parties to an agreement, the dispute resolution provisions should be drafted to accommodate those future changes. It is also important to consider carefully whether related disputes can arise under different documents in a transaction. If so, drafting complementary and consistent dispute resolution provisions in such agreements will ensure that those disputes can be resolved together in a single arbitration.

For further information, please contact Craig Tevendale, Partner, Madhu Krishnan, Associate or your usual Herbert Smith Freehills contact.

Craig Tevendale

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Madhu Krishnan

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Herbert Smith Freehills has published a new edition of its well-regarded guide on dispute resolution and governing law clauses in India-related commercial contracts. The Guide is intended to assist in-house counsel who handle India-related commercial contracts on behalf of non-Indian companies and who need to have a practical understanding of the nuances of drafting dispute resolution and governing law clauses in the Indian context.

To access an extract of the guide please click here. If you would like to request a copy please email asia.publications@hsf.com.

For further information, please contact Nicholas Peacock, Head of India Arbitration Practice, Alastair Henderson, Managing Partner-SE Asia, Donny Surtani, Senior Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock

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Alastair Henderson

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Donny Surtani

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In Re Ikon Group Ltd (No 2) [2015] NSWSC 981, the New South Wales Supreme Court granted a stay of proceedings in favour of international commercial arbitration.  

The relevant arbitration clause was contained in an addendum to a joint venture agreement.   It referred “[a]ny and all Disputes including any question regarding the existence, validity or termination of any of the JV Documents or the Third Addendum [ … ]” to arbitration under the LCIA Rules.  It expressly revoked or amended an exclusive jurisdiction clause contained in the original joint venture agreement.  

The term  “Disputes” (used in the arbitration clause) was defined in clause 22 of the joint venture agreement to mean “any dispute or difference [arising] out of, or in relation to or in connection with the JV Documents or any of them or the Third Addendum”.   Brereton J concluded that “a dispute or difference that arises out of or is in relation to or in connection with the performance of any of the joint venture documents is within the words of [clause 22] and thus within the concept of a “Dispute” for the purposes of [the arbitration clause]”. 

There was no dispute before the Court as to the validity of the arbitration agreement.  There was also no issue amongst the parties as to whether the requirements for a stay as set out in Australia’s International Arbitration Act 1974 (Cth) (IAA) had been satisfied in this case.  The question for the Court on hearing the application was whether “the proceedings before this court involve the determination of a matter that, in pursuance of the arbitration agreement, is capable of settlement by arbitration”.  

His Honour accepted that in answering this question, regard ought be had not only to the relief claimed or pleaded (which is the starting point), but also to what is alleged in support of the claims and what defences which will be raised in response to them.  

There were parties to the proceedings who were not parties to the joint venture documents (and the claims against them were not therefore the subject of the application before the court).  In relation to claims against parties to both the proceedings and the joint venture documents and thus bound by the arbitration agreement, his Honour was satisfied that each of those claims necessarily invoked provisions of the joint venture agreement.  This meant that the respective dispute “arises out of, relates to or is in connection with” the joint venture agreement.  However, his Honour noted that these claims also involved allegations of breaches of directors’ duties, bringing into play provisions of the Corporations Act 2001 (Cth) (CA). 

As to the interplay between the civil claims and potential action pursuant to the CA, his Honour observed, in reliance on earlier authority of the NSW Court of Appeal, that: 

… [I]t is beside the point that the rights sought to be invoked by the plaintiff may be statutory rights under [the CA] and not rights directly arising under joint venture agreements, and it is also beside the point that an arbitrator may not be able to grant all the relief which a court could grant under [the CA].  Rinehart v Welker confirms that it matters not that an arbitrator may not be able to grant all the relief or remedies that a court could grant […] and also that rights under statute can be the subject of arbitration […]. 

His Honour granted a stay in respect of the claims brought against the defendants who were also parties to the arbitration agreement. 

For further information, please contact Bronwyn Lincoln, Partner, or your usual Herbert Smith Freehills contact.

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A recent Thai Cabinet resolution relaxes the restriction on arbitration clauses in some public contracts.  The resolution is seen as a positive move for arbitration and investment in Thailand, but more remains to be done.

The New Cabinet Resolution

On 14 July 2015, the Thai Cabinet passed a resolution (the "2015 Resolution") amending a 2009 resolution (the "2009 Resolution") which prohibited the inclusion of arbitration clauses in all contracts entered into by private contracts with the public sector unless approved by the Cabinet on a case-by-case basis. 

Under the 2015 Resolution, Cabinet approval for arbitration clauses will now only be required for three types of contract, as explained further below.

Although a Cabinet resolution is a statement of government policy and does not have the binding status of a law, decree or regulation, in practice Cabinet resolutions will be followed by all of those affected.  In this case, all Thai ministries, government departments and other public bodies were notified of the 2015 Resolution on 17 July 2015.

Background

The 2009 Resolution was issued in response to the Thai government's defeat in an investment arbitration brought by Walter Bau under the German-Thai Bilateral Investment Treaty.[1]  On 1 July 2009, the UNCITRAL tribunal awarded Walter Bau over 29 million Euros plus interest and legal costs of around 2 million Euros.  By the end of the same month, the Cabinet had issued the 2009 Resolution, reasoning that when disputes arising out of government contracts with the private sector, particularly in large projects or concessions, are submitted to arbitration, “the state agencies, most of the time, tend to lose the case or be found liable for compensation resulting in a burden on the state budget”.[2] 

An earlier Cabinet Resolution issued in 2004 (the "2004 Resolution") had already placed restrictions on the inclusion of arbitration clauses in concession agreements.  This was also in response to an adverse arbitration award against the Thai government – an award of US$150m against the Expressway and Transit Authority following an expressway construction dispute.[3]  The 2009 Resolution, expanding the restriction to all public sector contracts, was a further blow to arbitration in Thailand.

2015: a new dawn for arbitration in Thailand?

The 2015 Resolution is obviously a very positive move for arbitration in Thailand.  But equally important are the Ministry of Justice's reasons for requesting the new resolution.  The Ministry concluded, rightly, that the 2004 and 2009 resolutions gave the impression that the government does not support arbitration as a method of resolving disputes, with negative consequences for the image of Thailand and investor confidence.  In addition, as Thai state agencies increasingly look to invest outside of Thailand, the 2009 Resolution was seen as hindering that potential.

What contracts are still affected by the restriction on arbitration clauses?

In the meantime, the three types of contract to which the restriction still applies are as follows.

1. Public Private Partnerships ("PPP")

The new Private Investment in State Undertaking Act B.E. 2556 (2013) sets out a legal framework for private sector participation in developing infrastructure and public services.  It applies to PPP projects with a value of more than THB 1 billion, or where ministerial regulations prescribe.

Recent high profile PPP projects in Thailand include projects in the energy sector (power plants constructed in conjunction with EGAT), telecommunications (AIS Mobile, Telecom Asia, ThaiCom) transport (BTS SkyTrain, BMCL Underground Train, Don Muang Tollway) and water and sanitation (Municipal Solid Waste Management and  Thai Tap Water (TTW) Water Production and Distribution).  Cabinet approval for arbitration clauses in these types of contract will still be required under the 2015 Resolution.

2. Concession agreements

There is no clear definition of what constitutes a "concession agreement" for the purposes of the 2015 Resolution.  However, legal scholars generally understand this to mean agreements granting the private sector the right to operate public services for a limited period at their own risk and using their own funds.  "…Notably, even though arbitration clauses in concession agreements in the oil and gas sector are already permitted by the Thai Petroleum Act B.E. 2514 (1971), it is not yet confirmed whether the 2015 Resolution would still be applied for the next bidding round for oil and gas concessions in the Gulf of Thailand.

3. Contracts that require Cabinet approval under Royal Decree 2005

This category is a catch-all provision to encompass all types of contracts that require Cabinet approval, and includes any large-scale investment (THB 1 billion plus) projects involving the public sector.

Obtaining Cabinet approval

Under the 2009 Resolution, Cabinet approval for arbitration clauses was not impossible.  For example, the Cabinet approved the use of arbitration in contracts between the government and the European Organisation for Nuclear Research and between Thai Airways and the International Air Transport Association ("IATA").

Hopefully, the new positivity towards arbitration will mean that obtaining Cabinet approval for those contracts that are still restricted by the 2015 Resolution is even more likely.  There is, for example, recognition that it may be expedient to accept arbitration clauses in PPP contracts and concession contracts. 

Looking ahead

While the restriction on arbitration clauses has not been fully lifted, international investors will remain wary about the investment climate in Thailand.  However, the relaxation of the restriction in the 2015 Resolution is a welcome step.  It demonstrates that the Ministry of Justice recognises that it needs to accept and promote arbitration in order to improve the investment climate in Thailand.   This, together with the Ministry's decision to establish a new arbitration institution, the Thailand Arbitration Center ("THAC"),[4] are positive signs for the future of arbitration in Thailand.

For further information, please contact Gavin Margetson, Partner, Vanina Sucharitkul, Senior Associate or your usual Herbert Smith Freehills contact.

Gavin Margetson

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Vanina Sucharitkul

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[1] Werner Schneider, acting in his capacity as insolvency administrator of Walter Bau Ag (In Liquidation) v. The   Kingdom of Thailand (formerly Walter Bau AG (in liquidation) v. The Kingdom of Thailand) (award dated 1 July 2009), http://www.italaw.com/sites/default/files/case-documents/ita0067.pdf.

[2] The 2009 Resolution.

[3] See Bangkok Expressway Plc v. Expressway and Rapid Transit Authority of Thailand (ETA) (the enforcement decision was later reversed by the Supreme Court in 2006 (Decision No. 7277/2549)).

[4] http://thac.or.th/EN_THAC/

 

 

 

 

 

 

 

 

 

In this short video in our Observations on Arbitration series, Hannah Ambrose, Professional Support Consultant in our International Arbitration practice, considers the relevance of the choice of seat of arbitration. Hannah discusses what the legal and practical consequences of the choice of seat, the features of so-called "safe" seats, relevant considerations on choosing an unfamiliar seat and the features of an arbitration unlikely to be affected by the choice of seat.

The video posts can be downloaded to your computer for offline viewing. Click here to download the video.

For more information on arbitration, please contact Hannah Ambrose, Professional Support Consultant, Vanessa Naish, Professional Support Consultant or your usual Herbert Smith Freehills contact. 

Hannah Ambrose

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Vanessa Naish

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In the case of Anzen Limited and others (Appellants) v Hermes One Limited (Respondent) (British Virgin Islands), the Privy Council ("PC") considered the impact of a dispute resolution clause providing that "any Party may submit the dispute to binding arbitration". The PC held that this wording did not prevent a party from starting litigation in the courts but gave the other parties an option to require "the party which has commenced litigation to submit the dispute to arbitration, by making an unequivocal request to that effect and/or by applying for a corresponding stay".

Whilst, in this case, the PC upheld the right to have disputes determined by arbitration, the ambiguous wording led to additional expense for both parties and unwelcome delay. Also, parties cannot rely on a similarly benevolent approach to the construction of the arbitration agreements being taken in every case or jurisdiction. If the intention is to arbitrate all disputes under the relevant agreement, parties should include a clear, unambiguously drafted arbitration agreement to that effect.

The Privy Council Decision

The parties were shareholders in a BVI company (the "JV Co"). The Shareholders' Agreement ("SHA") included an arbitration clause providing that, if the parties were unable to resolve a dispute through negotiation within 20 business days, "any Party may submit the dispute to binding arbitration". The clause expressly provided for the number of arbitrators, the seat of arbitration and the applicable institutional rules.

Hermes One Limited started litigation against the appellants in relation to their alleged unfairly prejudicial conduct in the management of the JV Co. The appellants applied to stay the proceedings pursuant to section 6(2) of the Arbitration Ordinance 1976, on the basis that the SHA included a valid and binding arbitration clause. The PC considered three possible interpretations of the dispute resolution provisions in the SHA.

The PC refused to interpret the wording "may submit" as an exclusive agreement to arbitrate all disputes. However, the PC applied a broad interpretation of the word "submit", such that it covered not only proceedings initiated by the party in question but also any proceedings initiated by another party to the SHA.

The PC rejected an interpretation whereby a party could only end litigation proceedings commenced by another party by itself commencing arbitration. In the PC's view, this interpretation did not "make much commercial sense" because: (i) to do this, the objecting party might have to comply with complex mandatory pre-conditions to arbitration (e.g. settlement negotiation, mediation, etc); and (ii) the objecting party may have no real basis for commencing arbitration other than to seek a declaration of no liability for the claim brought by the claimant(s) in litigation.

Drawing on the conclusions in Bremer Vulkan v South India Corp [1981] AC 909 that parties to an arbitration agreement are under mutual obligations to cooperate in the pursuit of arbitration, the PC preferred an interpretation whereby notice alone could trigger the mutual agreement to arbitrate. The PC would have reached the same conclusion under the current English Arbitration Act 1996, which makes the cooperation duty express in section 40(1), by providing that: “The parties shall do all things necessary for the proper and expeditious conduct of the arbitral proceedings”. The PC also held that this obligation can apply before any arbitration proceedings are afoot.

The PC concluded, therefore, that the wording "any Party may submit a dispute to binding arbitration" enabled a party wishing for a dispute to be arbitrated, either to commence arbitration itself, or to insist on arbitration, before or after the other party commences litigation, without itself actually having to commence arbitration.

Comment

This decision confirms the PC's pro-arbitration stance. The PC's preferred interpretation of the permissive wording in the SHA comes close in effect to an exclusive agreement to arbitrate. The only difference is that, unless and until one party insists on arbitration, there is no promise not to litigate.

Under an exclusive agreement to arbitrate, court proceedings should not begin at all. On the PC's interpretation of "may submit", litigation was properly begun, but was required to be stayed as regards all arbitrable claims, if and when the appellants invoked arbitration.

The evident risk that the word “may” can be understood to mean that litigation is open, unless and until arbitration is elected, creates potential time and cost exposures for the parties, as well as creating concerns regarding the privacy and confidentiality of the dispute(s) in question.

If by commencing litigation a party is not in breach of the arbitration agreement, but another party can nonetheless require that the litigation be stayed in favour of arbitration, it is not clear which party would bear the costs incurred in the litigation until the stay is granted.

It is worth also noting the timings for challenging the courts' jurisdiction. In England and Wales, under s9(3) of the Arbitration Act 1996, a party must apply to stay the court proceedings before taking any step in the litigation to answer the substantive claim (i.e. before filing its defence).

Although the PC upheld the appellants' right to have disputes determined by arbitration in this case, the use of permissive language in a dispute resolution clause creates significant uncertainties for the parties. This is particularly so where – as was the case here – there is no indication regarding the courts in which litigation could be started. The outcome may have been different if Hermes One had commenced litigation in a different, less benevolent, jurisdiction.

Although this decision may assist parties seeking to enforce permissive arbitration clauses in certain pro-arbitration jurisdictions, where the common intention at the outset is to deprive a party of the right to litigate, the arbitration agreement should be clearly worded. The PC's decision suggests that parties should use the words "should" or "shall", instead of "may".

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

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Charlie Morgan

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The Hong Kong CFI has stayed a claim under a deed of guarantee pending arbitration on the basis of an arbitration agreement in a Subscription Agreement containing the guaranteed obligations (Bluegold Investment Holdings Ltd v Kwan Chun Fun Calvin [2016] HKEC 532) – notwithstanding a non-exclusive choice of the Hong Kong courts in the Guarantee.  Applying established authority, Mimmie Chan J concluded that it was not "clear" that the dispute was outside the scope of the arbitration agreement (to the contrary, it was arguable the claim was within the scope of the arbitration agreement) and therefore stayed the claim. The court again ordered that the claimant in the Hong Kong proceedings pay costs on an indemnity basis, justified by the claimant's failure to comply with the arbitration agreement. 

This decision is a warning to consider the full suite of documents when drafting choice-of-venue clauses in a multi-contract relationship. Unless there is clear provision to the contrary (potentially an exclusive jurisdiction agreement) in the contract generating the claim, the Hong Kong courts will likely stay proceedings in favour of an arbitration agreement between the same parties.

Background

Bluegold claimed against Mr Kwan, the founder and director of Accelstar Enterprises Limited (the Company). All three parties entered into a Subscription Agreement whereby the Company was to issue to Bluegold convertible notes to the value of US$ 10 million (the Notes); and a warrant to subscribe for shares in the Company.  Furthermore, Mr Kwan, the Company and its PRC, BVI and HK subsidiaries, covenanted and agreed to use their best endeavors to conduct a public offering of certain shares (Qualified IPO) within three years with a pre-listing value of not less than US$ 235 million. Bluegold had the right to redeem the notes at a specified rate of return if the Qualified IPO did not occur within three years.

Mr Kwan executed a separate guarantee in favour of Bluegold which provided, amongst other obligations, that he (as primary obligor) would guarantee the punctual performance by the Company of its obligations under the Subscription Agreement and Notes (the Guarantee). The Subscription Agreement and Notes contained a standard form (broad) HKIAC arbitration clause. The Guarantee contained a non-exclusive submission to the Hong Kong courts.

The Judgement

The question before the Court was whether, under s. 20 of the Arbitration Ordinance, the action brought by Bluegold under the Guarantee was "a matter which is the subject of an arbitration agreement". Mimmie Chan J followed PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309, emphasising that under s. 20, the burden on the applicant for stay was only to establish a prima-facie case that the parties were bound by the arbitration clause and that unless the point was clear, the Court should stay the matter in favour of arbitration rather than attempt to resolve the issue.

Applying the test to the particular facts before it, the Court held that the question whether there is a breach of the Guarantee in this instance necessitates a determination of whether there was a breach of the Subscription Agreement and in particular, whether there was a Qualified IPO within 3 years. The non-exclusive choice of Hong Kong courts in the Guarantee was not "clear" evidence to displace the intention of the parties as expressed in the arbitration clause in the Subscription Agreement.

For further information, please contact May Tai, Partner, Simon Chapman, Partner and Tomas Furlong, Senior Associate or your usual Herbert Smith Freehills contact.

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In a recent decision, the English High Court determined that it would be wrong in principle for the court to determine whether parties to a disputed contract had entered into a binding arbitration agreement in circumstances where one party intended to commence arbitration proceedings on the basis of the disputed arbitration agreement: HC Trading Malta Ltd v Tradeland Commodities S.L. [2016] EWHC 1279 (Comm) (click here for the full judgment).

The decision highlights the respect afforded to the arbitral process under the Arbitration Act 1996 ("the Act") and affirms that it is only in circumstances where the court is required to "fill a gap", such as with anti-suit injunctions preventing a party from commencing or continuing proceedings in another forum, that it will rule on the jurisdiction of an arbitral tribunal.

Background

The claimant alleged that the parties had entered into a binding contract under which the defendant was to purchase 250,000mt of clinker in bulk from the claimant, to be shipped in a series of parcels.  The claimant further alleged that the contract contained a London arbitration clause.  The defendant never received any parcels of clinker and denied that there was any contract of sale.

The claimant's solicitors asked the defendant to agree to accept service of an arbitration notice at its London solicitors, but the defendant did not do so.  The defendant did not have any claim of its own against the claimant and took the position that it would contest the arbitrator's jurisdiction if the claimant commenced arbitration in London.

The claimant sought a declaration that there was a binding arbitration agreement which was subject to English law and which covered the claimant's intended claims.  The defendant applied to set-aside the claimant's claim for declaratory relief on the following bases: (a) the court had no jurisdiction to entertain the claim under the Act; (b) alternatively, even if the court had jurisdiction it would be wrong in principle to do so; and (c) insofar as it was a matter for the court's general discretion it should be exercised against granting any relief.

Decision

The court dismissed the claimant's claim for declaratory relief.  However, it did not accept the defendant's principal case that the court was deprived of declaratory jurisdiction under the Act.  The judge considered that if it had been Parliament's intention to exclude the court's jurisdiction in that way, it would have been expressly stated in the Act.  As the Act was silent on this point, it would be wrong to conclude that the Act impliedly limited the court's jurisdiction. Instead, the judge held that the issue was better considered as a matter of principle.

The judge highlighted the fact that the Act lays down an extensive code for the governance of arbitrations from start to finish, and considered the existence of that scheme to be highly relevant when considering the scope of the court's powers prior to commencement of arbitral proceedings.  Although the court had jurisdiction to intervene, the judge accepted that in general terms, the court must be extremely slow to intervene where an arbitration is concerned.

The judge held that respect for the arbitral process includes respect for the scheme of and the principles underlying the Act.  That scheme and those principles would be frustrated when an arbitration is on foot or contemplated if the parties were simply able to invoke a general declaratory power of the court, limited only by a broad exercise of discretion.  Rather, disputes as to the existence or scope of an arbitration agreement should be determined by the detailed provisions of the Act, and in particular, as a starting point by the power of a tribunal to determine its own substantive jurisdiction under s30 of the Act.  The only exception is where the court has to "fill a gap", as with anti-suit injunctions.

It would therefore be wrong in principle for the court to entertain any application for a declaration by a claimant where there are at least the following three factors:

1. the claimant asserts that there is a binding arbitration agreement;
2. the claimant has a claim which it wishes to assert and which therefore (on the claimant's own case) can only be litigated by way of arbitration; and
3. the claimant is clearly able to commence arbitration in pursuance of that agreement whether or not he has yet done so, and whether or not it is imminent.

Finally, even if there was no principled argument against granting the declaratory relief sought by the claimant and it was all a matter of the court's discretion, it would "unhesitatingly" refuse to exercise it in favour of granting relief.  The judge's reasons including the following:

1. it was a needless invocation of the court's powers where the arbitral tribunal was capable of making a declaration as to the validity of the arbitration agreement;
2. it could not be said at this stage that it would necessarily be quicker or cheaper to use the court process rather than the arbitrators;
3. there was a very real risk that in deciding the issue of the existence of the arbitration agreement, the court would decide the central issue between the parties of whether there was a binding contract for sale; and
4. there was no practical impediment to the claimant commencing the arbitration straight away.

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

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In The Incorporated Owners of Wing Fai Building, Shui Wo Street v Golden Rise (HK) Project Company Limited DCCJ 225/2016, a Hong Kong court considered the effect of a dispute resolution clause that provided that parties "may" refer disputes to arbitration (click here for the full judgment).

The Defendant applied for a stay of proceedings under s.20 Arbitration Ordinance, on the basis that the clause constituted a binding arbitration agreement; or, in the alternative, the clause was an option to arbitrate that became mandatory when one party elected for arbitration (relying on the Privy Council decision in Anzen Ltd v Hermes One Ltd ("Anzen")). The Court rejected both arguments. Whilst recognising that there are cases in which "may" actually means "shall" in respect of obligations to arbitrate, the Court held that this was not one of those cases and the evidence suggested the parties did not intend to be bound to arbitrate disputes.

The Court held that the arbitration clause in Anzen was "substantially different" from the clause in the present case. Accordingly, the Court held that the finding in Anzen, that the clause gave the parties a right to compel arbitration after litigation had commenced, should be limited in application to cases with similar facts. The judgment is a useful reminder that, if parties intend to arbitrate all disputes under an agreement, the  arbitration agreement must be clearly and unambiguously drafted, to avoid any dispute as to its effect.

The Court awarded costs on the indemnity basis.

For further information, please contact Simon Chapman, Partner, Martin Wallace, Senior Associate, Briana Young, Professional Support Consultant or your usual Herbert Smith Freehills contact.

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In this article, Elizabeth Kantor and Philip Parrott consider the reasons why parties may wish to include multi-tiered dispute resolution clauses in their construction contracts and warn of common pitfalls which can cause the unwary party to become embroiled in time-consuming and costly procedural battles.

This article was first published in Construction Law on 9 August 2016.

For further information, please contact Elizabeth Kantor, Senior Associate, Philip Parrott, or your usual Herbert Smith Freehills contact.

It has long been believed that an arbitration clause in a contract could not be enforced against a UAE company unless the person signing the contract had specific authority to bind the company to arbitration, and not simply authority to enter into the contract. In Ginette PJSC and (1) Geary Middle East FZE and (2) Geary Limited, however, the DIFC Courts held that an arbitral award should be recognised and enforced notwithstanding that the individual who signed the arbitration agreement (which was contained in a settlement agreement) on behalf of an Award Debtor did not have express authority to bind the Company to arbitration. 

The Award Debtor, Ginette PJSC (the “Company”), sought to set aside the DIFC-LCIA arbitral award on the basis that Article 103 of Federal Law No. 8 of 1984 (the “Old UAE Companies Law”) provided that a private joint stock company could only be authorised to enter into an arbitration agreement if the power had been granted to the individual in the company’s articles of association or if authority was given by way of a shareholder resolution or a power of attorney. Although the Company’s articles of association granted its board of directors the authority to enter into arbitration agreements, the Executive Managing Director, who signed the settlement agreement on behalf of the Company was not, it claimed, a member of the board. The Company argued that the DIFC Court should set aside the award under Article 41(2)(a)(i) of DIFC Law No. 1 of 2008 (the “DIFC Arbitration Law”) because the arbitration agreement was not valid under the law. 

The Award Creditors, Geary Middle East FZE and Geary Limited (the “Contractors”) argued that the Company had not been able to provide any evidence that the Executive Managing Director was not an authorised signatory and successfully relied on the doctrine of apparent authority under Articles 130 and 131 of DIFC Law No. 6 of 2004 (the “DIFC Contract Law”). The judge also held that, as a result of Article 25 of Federal Law No. 2 of 2015 (the “UAE Commercial Companies Law”), which provides protection to a bona fide party in its relations with a company, the result of the dispute would have been the same even if UAE law (rather than DIFC law) had been applied.

1. The DIFC Courts’ decision

The DIFC Courts held that there was a distinction between there being no evidence that the Executive Managing Director had express authority to sign arbitration agreements and there being no actual evidence that the same individual was not authorised to sign arbitration agreements. 

Notwithstanding the absence of any express authority, the Executive Managing Director was found to have held himself out as having the requisite authority to sign the settlement agreement on behalf of the Company and therefore was deemed to have “apparent authority” pursuant to Articles 130 and 131 of the DIFC Contract Law. 

Articles 130 and 131 of the DIFC Contract Law provide: 

“130. Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s conduct towards such third persons.

131. Except for the conduct of transactions required by statute to be authorised in a particular way,
apparent authority to do an act is created as to a third person by written or spoken words or any other
conduct of the principal which, reasonably interpreted, causes the third person to believe that the
principal consents to have the act done on his behalf by the person purporting to act for him”
(emphasis added).

The DIFC Courts held that the Company’s conduct had caused the Contractors to believe that it had consented to the individual signing the settlement agreement (and therefore the arbitration agreement) on its behalf.

2. The DIFC Courts consideration of UAE law position

Despite having jurisdiction over the dispute and acknowledging that DIFC law should be applied, interestingly, the
DIFC Courts went on to consider the position under UAE law and concluded that the outcome of the case would
have been the same even if UAE law had been applied. The judge drew parallels with Dubai Court of Cassation
Case No. 547/2014 in which it was held that there would be a presumption that a signatory, who had signed the
contract in the name of and on behalf of the company, was authorised if the company’s name was listed in the preamble of, or introduction to, the contract. The use of a company seal was also considered to be of further evidence that the signatory acted on behalf of the company, which meant that the rights and obligations of the contract would be attributable to the company.

The DIFC Courts also considered the application of Article 25 of the UAE Commercial Companies Law, which aims to grant protection to a bona fide party in its dealings with a company. Under Article 25 of the UAE Commercial Companies Law, a company may not claim lack of liability towards another party on the grounds that the managing director was not duly appointed (whether in accordance with the law or the company’s articles of association), provided that the acts of such director are within the usual scope of responsibility of individuals holding the same position in companies conducting the same type of activities. The exception to this principle is where a party knows or could have known based on its relationship with the company that there was a lack of authority. It was considered that there was no evidence that the Contractors knew or could have known that the signatory did not have authority to bind the Company to arbitration.

3. The significance of the judgment

The judgment suggests that if an individual holds himself or herself out as being authorised to sign an arbitration agreement on behalf of a company, and this results in a counterparty believing that the signatory has been given such authority, the company may be bound. 

Although this is not the first time that the doctrine of “apparent authority” has been considered by the DIFC Courts, it has never before been considered in this detail or within the context of arbitration. 

While the DIFC Court’s judgment is not binding on the UAE Courts, it provides some indication that Article 25 of the UAE Commercial Companies Law may provide recourse to a party where its counterparty attempts to deny the validity of an arbitration agreement on the basis of lack of authority. However, the judgment does not comment on the relationship between Article 25 of the UAE Commercial Companies Law and Articles 58(2) and 203(4) of Federal Law No. 11 of 1992 (the “UAE Civil Procedure Code”), which require specific authority to be given to the signatory of an arbitration agreement, and it is unclear how these provisions can be reconciled. 

In this case, the individual signed the arbitration agreement as the Executive Managing Director of the Company. Much of Article 25 of the UAE Commercial Companies Law centres on what the norm is for an individual in the specific position and it is unclear how other roles may be regarded by the courts. 

The recommended position therefore remains to ensure that specific authority has been granted to a person seeking to bind a company to arbitration in order to comply with Articles 58(2) and 203(4) of the UAE Civil Procedure Code. However, it will be interesting to see whether Article 25 of the UAE Commercial Companies Law is used by the UAE courts to recognise and enforce arbitration agreements in circumstances where the signatory is not appropriately authorised.

For further information, please contact Caroline Kehoe, Partner or Janine Mallis, Associate.

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In the recent decision in Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2016] SGHC 23, the Singapore High Court confirmed the validity of "one-way" or unilateral clauses which bind one party to one dispute resolution method or jurisdiction, but give the other party the option of choosing a different procedure.  This decision is significant as it confirms what was previously assumed to be the position in Singapore.  It also reconfirms that wherever possible the Singapore courts will uphold the agreement of parties on the manner in which they choose to resolve disputes arising between them.   

Background

Dyna-Jet Pte ltd ("Dyna-Jet") and Wilson Taylor Asia Pacific ("Wilson Taylor") entered into an agreement under which Dyna-Jet was engaged to install underwater anodes on the island of Diego Garcia in the Indian Ocean. Both Dyna-Jet and Wilson Taylor are incorporated and based in Singapore, but have clients across the region.

Dyna-Jet's standard terms and conditions included a dispute resolution agreement which allowed Dyna-Jet – and only Dyna-Jet – to elect to refer any dispute to arbitration in Singapore ("Disputes Clause").

A dispute arose under the contract in 2015 and after parties failed in their attempts to reach a negotiated settlement, Dyna-Jet commenced proceedings in the Singapore High Court. In response, Wilson Taylor applied for a permanent stay of the court proceedings (under section 6 of the Singapore International Arbitration Act), to compel Dyna-Jet to submit the dispute to arbitration pursuant to the Disputes Clause.

Key issues and the court's decision

Wilson Taylor's stay application engaged two key issues:

Firstly, whether the Disputes Clause constituted an "arbitration agreement" within the meaning of section 2A of the IAA; and

Secondly, assuming that it constituted an arbitration agreement, whether the Disputes Clause was nevertheless "null and void, inoperative or incapable of being performed" under section 6(2) of the IAA.

At first instance, the application was dismissed by an assistant registrar on the basis that (i) the dispute resolution agreement was an arbitration agreement because, once Dyna-Jet elected to arbitrate, Wilson Taylor would also be bound to arbitrate, and (ii) since Dyna-Jet had not elected to arbitrate the dispute on this occasion, the arbitration agreement was incapable of being performed.

Justice Vinodh Cooramaswamy at the Singapore High Court dismissed the appeal.

Preliminary issue: Approach to construing arbitration agreements

At the outset, the court accepted that the general approach to be taken to construing arbitration agreements, unless there is a good reason to conclude otherwise, is a generous one. The court would as far as possible seek to determine and advance the parties' commercial intention, objectively ascertained from their arbitration agreement. This was held to be consistent with the modern approach to construction applicable to general contractual provisions as provided for in the seminal case of Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029.

Issue 1: whether the Disputes Clause constituted an arbitration agreement

Justice Cooramaswamy rejected Wilson Taylor's first argument that a dispute resolution agreement which refers to arbitration, without more, constitutes an arbitration agreement. The essential element of an arbitration agreement is the agreement, in a contractual sense, of both parties to be bound to arbitrate.

On this basis, the court accepted that a dispute resolution agreement which confers on only one party a clear right to submit disputes to arbitration would constitute a valid arbitration agreement. Taking its cue from "the overwhelming weight"[1] of modern Commonwealth authority, the court helpfully distilled five propositions of law that it considered represented the state of law in Singapore.

1. There is no requirement for mutuality and for the arbitration agreement to create a present obligation to arbitrate.

    

   • On mutuality, a contractual dispute-resolution agreement that gives only one party a right to elect whether or not to arbitrate a dispute was an arbitration agreement. There is no need for both parties to have the same, mutual right to elect to arbitrate their dispute. The only element of mutuality required for a valid arbitration agreement was the mutual consent of the parties at the point when they entered into a dispute resolution agreement.
   • A contractual dispute-resolution agreement which grants a party the right to decide whether to arbitrate a dispute in the future would also constitute a valid arbitration agreement.
2. A contractual dispute resolution agreement which confers a right to elect to arbitrate a future dispute would therefore constitute a valid arbitration agreement. This position is consistent with Section 2A of the IAA, which does not require an arbitration agreement to refer all future disputes to arbitration, or to do so unconditionally
3. Such an agreement would constitute an arbitration agreement from the moment parties entered into it contractually. Subsequently, when the right to elect to arbitrate is exercised under that agreement, a specific (and separate) arbitration agreement would be created in relation to that dispute. The underlying arbitration, however, would continue to exist, and could still be invoked by election in relation to other disputes.
4. In relation to the party who has the right to elect to arbitrate, it remains a question of construction of that agreement whether, (i) if that party does not elect to arbitrate, that party remains entitled to commence litigation; or (ii) if that party elects to arbitrate, that party can stay any litigation brought by the counterparty.

Applying these principles to the present case, Justice Cooramaswamy held that the Disputes Clause was an arbitration agreement within the meaning of Section 2A of the IAA.

Issue 2: whether the arbitration agreement was "null and void, inoperative or incapable of being performed" under section 6(2) of the IAA

Turning to the second issue, the court found that the proviso “incapable of being performed” in Section 6(2) of the IAA referred to situations where a contingency had arisen that prevented the arbitration from being set in motion. This covered all contingencies whether foreseen or unforeseen by the parties.

The court found that on a true construction of the Disputes Clause, Dyna-Jet's right to elect arbitration could only be exercised once in respect of a particular dispute.  In other words, this right would be definitively spent with respect to that dispute and could not be exercised again.  Therefore, when Dyna-Yet commenced litigation instead of arbitration, it effectively extinguished its right to elect.  In the courts' view, this meant that post Dyna-Jet's election the arbitration agreement was now incapable of being performed for the purposes of section 6(2) of the IAA.

On this basis, the court upheld the assistant-registrar's decision. It nevertheless clarified that the parties would still be bound to arbitrate if a dispute distinct from the present dispute arose, and Dyna-Jet elected to arbitrate that dispute.

Comment

This is a welcome decision from the Singapore High Court in a number of ways.

First, it confirms that properly drafted dispute resolution clauses granting one party the option to arbitrate would constitute a valid arbitration agreement. This already represents the position in many major common law and civil law jurisdictions, and express confirmation of the applicability of this position to Singapore would provide a welcome measure of certainty.  On the basis of the High Court's reasoning, it is likely that a similar clause granting one party the option to submit disputes to litigation over a default arbitration provision would similarly be upheld (although the Singapore courts have not made a definitive pronouncement on this issue).

Second, whilst the decision confirms that the Singapore courts will give effect to arbitration agreements wherever possible, the broader (and arguably more important) point is the court's commitment to giving effect to the commercial intent of the parties. Here for example, the court went to considerable lengths (over a 188 paragraph judgment) to interpret the intention behind the Disputes Clause and the effect of Dyna-Jet's failure to bring the dispute to arbitration. Having done so, it was clear and decisive in deciding that the dispute could no longer be referred to arbitration.

Wilson Taylor has since appealed against the decision.

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

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[1] Paragraph 61 of the Judgment

 

 

 

 

 

In the latest chapter of a long-running dispute (John Forster Emmott v Michael Wilson & Partners [2016] EWHC 3010 (Comm)), different aspects of which have been considered by various jurisdictions around the world for over ten years, the English High Court has continued an anti-suit injunction preventing proceedings in New South Wales on the basis that such proceedings were brought in breach of an arbitration agreement.

This is a welcome reminder that the English courts will take active steps to uphold party agreements to submit their disputes to arbitration and prevent parties from seeking to either side-step arbitration agreements or to re-litigate issues which have already been decided in a different forum.

Background

The dispute arose out of an agreement between Mr. Emmott and Michael Wilson & Partners Ltd ("MWP") by which the parties agreed to operate as a "quasi-partnership" by sharing contacts and information (the "MWP Agreement").  That agreement contained an arbitration clause providing for arbitration in London.  Mr. Emmott subsequently entered into an agreement with two other MWP employees which provided for the establishment of a consultancy owned and operated by Temujin International Ltd (the "Co-Operation Agreement").  In December 2005, Mr. Emmott left MWP to work at Temujn, as a result of which he and MWP parted on acrimonious terms. 

MWP commenced arbitration proceedings against Mr. Emmott for breach of the MWP Agreement and sought an account of profits and equitable compensation.  Mr. Emmott counterclaimed for sums due.  An award on liability was issued by an arbitration tribunal in February 2010, followed by an award on quantum in September 2014, the net effect of which was an order for MWP to pay Mr. Emmott sums of £3.2m and $841,000.  MWP also commenced parallel proceedings in New South Wales against the two MWP employees with whom Mr. Emmott had entered into the Co-Operation Agreement (the "First NSW Proceedings").

On 2 February 2016, MWP commenced a second set of proceedings in New South Wales, against Mr. Emmott seeking (a) an order for contribution from the two MWP employees under the First NSW Proceedings and (b) an account of fees, commissions, shares and other benefits of the Temujin business (the "Second NSW Proceedings").  These proceedings were ostensibly brought under certain deeds of assignment made by the liquidators of Temjun in favour of MWP, which were stated to be subject to the laws of New South Wales.

Mr. Emmott subsequently sought an anti-suit injunction to restrain MWP from taking any further steps in the Second NSW Proceedings and from commencing or pursuing any other substantive claims against him on the ground that such proceedings were in breach of arbitration agreement(s) between the parties.  On 2 March 2016, Mr Justice Burton granted interim anti-suit relief on a ‘without notice’ application.  This was the return date for the application.

The issues

The key issues for the court to determine in considering whether to continue the anti-suit injunction were:

1. whether the Second NSW Proceedings constituted a breach of the arbitration agreement; and
2. if so, whether it was in the interests of justice for the court to exercise its discretion (under Section 37 of the Senior Courts Act 1981) to continue the anti-suit injunction. 

Decision

Mrs. Justice O'Farrell held that the Second NSW Proceedings fell within the scope of the arbitration agreement and exercised the court's discretion to continue the anti-suit injunction.

The starting point (based on the case of Ecobank Transnational Inc v Tanoh [2015] EWCA 1309) was that Mr. Emmott had to show a high degree of probability that there was an arbitration agreement governing the dispute in question.  The court determined that the Second NSW Proceedings were indeed claims which fell within the arbitration agreement on the following grounds, amongst others:

1. The arbitration agreement governed the relationship between MWP and Mr. Emmott and was drafted in wide terms.  In line with the Fiona Trust case of Premium Nafta Products Limited v Fili Shipping Company Limited [2007] UKHL 40, it was likely that the parties intended that any dispute arising out of the partnership arrangement should be decided in arbitration.
2. Although the assigned claims did not arise under the MWP Agreement, the arbitration clause was sufficiently wide to include disputes that "arose out of or in connection" with it.
3. There was nothing in the MWP Agreement which indicated that the parties contemplated any other form of dispute resolution.
4. Although MWP argued that the claims were brought in its capacity as assignee and that the assignors were not party to the arbitration agreement, the effect of the assignment was that MWP was entitled to bring the claims in its own name and did not have to join the assignors.  Therefore this was considered to be an artificial distinction.
5. Some of the alleged breaches were the subject of the arbitration proceedings, and others were directly connected with the MWP Agreement in any event.

The judge then went on to exercise her discretion in favour of continuing the anti-suit injunction based on considerations of issue estoppel and abuse of process.  She held that both the arbitration and the Second NSW Proceedings concerned claims with common necessary ingredients.  The judge also found that there had been a clear abuse of process by MWP which was intended to defeat the enforcement of the arbitration award, whilst the Second NSW Proceedings were a collateral attack on the arbitration award. The determining factor in favour of continuing the injunction was that there had already been final and binding proceedings and it would be unfair and contrary to the policy of finality of proceedings to permit Mr. Emmott to be vexed by further litigation. 

Comment

This decision is a welcome example of the robust approach taken by the English courts when faced with breaches of arbitration agreements, even where such breaches are under the guise of different but related contracts and ostensibly between different parties.  It provides useful reassurance that the courts will not permit arbitral awards to be re-opened or unpicked by dissatisfied parties. 

On a more practical level, this decision is also a useful reminder of the importance of ensuring that arbitration clauses are sufficiently broad to cover any possible disputes which might arise, as this could be the factor which determines whether a party must incur the time and cost of fighting the same battle on a number of fronts.  That said, this case demonstrates the unfortunate reality that even where an arbitration clause is sufficiently drafted, in some circumstances parties may nonetheless face the unwelcome risk of being dragged into a multiplicity of proceedings and having to rely on the courts' use of their discretionary powers to uphold an award in their favour and defeat determined attempts to re-litigate essentially the same disputes.

For more information, please contact Craig Tevendale, Partner or Elizabeth Kantor, Associate.

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This autumn, the ICC Commission on Arbitration and ADR published a report on Financial Institutions and International Arbitration (the "Report"). The Report offers a detailed analysis of the use of international arbitration in specialist sectors of the banking and finance industry, from derivatives and sovereign finance to advisory matters and asset management. The Report is based on interviews with over 50 financial institutions from across the globe, data received from 13 arbitration institutions and a review of relevant awards, internal policies and scholarly writing. Overall, the Report finds that despite a recent gradual shift towards more arbitration in the finance and banking industry, the use of arbitration by financial institutions remains limited. It concludes that this appears to be due to a lack of awareness of the benefits of international arbitration, combined with the traditional view that arbitration does not meet the needs of specialist financial disputes. In order to tackle these two findings, the Report seeks to give specific recommendations on how to tailor arbitration to the needs of the finance industry.

I.The users' experience with arbitration

The Report gives a condensed overview of financial institutions' experience of arbitration and concludes that there is only limited experience of arbitration to date. 70% of interviewees did not know whether their financial institution had participated in an international arbitration over the last five years. 24% of the interviewees had been involved in a small number of international arbitrations over the past five years, representing 5% or less of all of the financial institutions' disputes. Only 6% of the interviewees had participated in a larger number of arbitration proceedings.

As to the benefits that financial institutions perceived in international arbitration, the Report confirms that financial institutions favour arbitration when:

• the transaction is significant or complex;
• confidentiality is important;
• the counterparty is a state-owned entity; and
• enforcement of a judgement in the counterparty's jurisdiction may be an issue.

As regards the limitations of arbitration, the Report revealed the following to be greatest concern for financial institutions:

• the need to seek interim measures before state courts before an arbitral tribunal is constituted;
• the lack of summary disposition in arbitration as well as the inability of arbitral tribunals to issue default awards, which hampers a swift resolution of so-called "open-and-shut" cases;
• the concern that parallel, and yet interrelated, proceedings may not be consolidated in arbitration;
• the lack of precedent;
• the costs of arbitration, in particular in those jurisdictions were court litigation is comparably cheap;
• the lack of transparency, meaning that financial institutions do not feel comfortable navigating an arbitration; and
• limited powers in situations of insolvency and enforcing security rights.  

II.Insights into specialist sectors

A significant part of the Report is devoted to analysing the use of arbitration in specific specialist areas of the industry. Without going into the details of all sectors, the Report rightly points out that in light of the differences in financial disputes there can be no one-size-fits all approach.

There are areas where the use of arbitration has grown to a notable extent. Arbitration is increasingly used in derivatives disputes where counterparties come from emerging markets and where the financial expertise of the decision makers is considered to be vital. However, arbitration is not often used for derivatives disputes in Europe as arbitration is not viewed as the "default" dispute resolution option. It will be interesting to see whether this finding shifts over the next five to ten years as the ISDA Arbitration Guide makes arbitration more mainstream and accessible.

In sovereign finance, arbitration is an accepted form of dispute resolution and is generally viewed as advantageous both for the neutrality of the decision making body and the ability to appoint arbitrators who are outside the scope of influence of a sovereign counterparty. For Regulatory disputes, public policy considerations seem to deter financial institutions to opt for arbitration. However, industry-specific arbitration rules have developed that are tailored to these types of specific disputes, such as the Financial Industry Regulatory Authority in the United States or the Financial Dispute Resolution Centre in Hong Kong.

The Report notes that arbitration has yet to make inroads into the field of Islamic Finance Disputes and that it offers untapped potential for growth.

III.The ICC's recommendations

In response to the perceptions of arbitration in financial institutions, the Report reiterates the general advantages of arbitration which could be of benefit in financial disputes including the ability to appoint specialist arbitrators and obtain interim relief through emergency arbitrators. The Report also highlights the way in which arbitration can be tailored to reduce the concerns of users, from using case management techniques in order to reduce time and cost, to agreeing on an appellate procedure to limit concerns about the finality of the arbitral process.

The full report can be accessed on the ICC's website. 

For further information, please contact Mathias Wittinghofer, Partner or Tilmann Hertel, Senior Associate.

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The Federal Court of Australia has recently held that a winding up application made in respect of a joint venture company should be stayed and the substantive underlying matters of dispute between the joint venture parties be referred to arbitration pursuant to the joint venture agreement.

The case of WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] FCA 1164 involved a joint venture between Woolworths (an Australian company) and WDR (a United States company) pursuant to which Hydrox Holdings (an Australian company) was formed to operate the Masters chain of hardware stores in Australia. Disputes arose between the joint venture parties regarding the operation of the joint venture, including in respect of provision of information to the WDR nominee directors, certain voting by the Woolworths directors and the purported termination of the joint venture agreement.

These matters resulted in WDR making an application to the Federal Court for the winding up (liquidation) of Hydrox pursuant to sections 233(1)(a) or 461(1)(k) of the Corporations Act 2001 (Cth) (Corporations Act). In either case this appears to have been based on the contention that the affairs of Hydrox had been conducted in a manner oppressive to, unfairly prejudicial to, or unfairly discriminatory against WDR, as a shareholder of Hydrox (there was no suggestion that Hydrox was insolvent). In response, Woolworths sought a stay of the winding up application on the basis that this was a dispute between Woolworths and WDR which should instead be determined by arbitration pursuant to the joint venture agreement between the parties, in accordance with section 7(2) International Arbitration Act 1974 (Cth) (IAA) or article 8(1) the UNCITRAL Model Law on International Commercial Arbitration. Under section 7(2) of the IAA, the Court must order a stay of court proceedings between parties to an arbitration agreement if the proceedings involve determination of a matter that is “capable of settlement by arbitration” under that agreement.

WDR argued that no part of the proceeding was arbitrable, as there was only one matter to be determined – whether Hydrox should be wound up on either of the statutory bases contended. It further submitted that a claim for a winding up order is not arbitrable because it effects the legal status of the company, it affects third parties, the creation and dissolution of a company is a matter uniquely subject to governmental authority and there is public interest in ensuring that the procedural steps by which a company is placed in liquidation is governed by the public court process rather than a private arbitration. It also relied on previous Australian cases.

In contrast, Woolworths argued that there were several matters comprising the proceeding for the purposes of section 7(2) of the IAA, namely the various instances of alleged wrongful conduct by Woolworths and in nominee directors which WDR advanced as grounds for the winding up Hydrox (i.e. evidencing oppressive, unfairly prejudicial or unfairly discriminatory conduct). Woolworths argued that such legal and factual disputes could be the subject to determination by arbitration, while leaving the court to make the ultimate decision as to whether the matters so determined were sufficient to persuade the court to make a winding up order.

The court agreed with Woolworths’ analysis that there were several matters to be determined. The court noted that these matters were not merely grounds for winding up Hydrox, but could be characterised as assertions of breaches of contract, wrongful conduct in a corporate governance sense and wrongful conduct in purporting to terminate the joint venture agreement in bad faith and grounds that did not justify termination.

The court also agreed that such matters were capable of arbitration. The court distinguished the present case from one where the parties seek to repose in the arbitrator the capacity to dissolve or wind up the joint venture company, and from cases involving insolvency. Instead, the court held that this was, in reality, a dispute between the shareholders of Hydrox as to their contractual and other obligations, and that there was no substantial public interest element in the determination of such a dispute. The court noted there were no solvency concerns and no creditor had sought to attend the court hearings or participate in the process (despite the winding up application having been advertised). Accordingly the court referred the matters identified by Woolworths for arbitration, and stayed the winding up application pending determination of that arbitration. The court would then take into account any arbitral awards in respect of those mattes when considering whether a winding up order would be made.

The decision is broadly consistent with the approach taken by English, Hong Kong and Singapore courts in cases such as Fulham Football Club (1987) Ltd v Richards [2012] Ch 333, Re Quicksilver Glorious Sun JV Ltd (2014) 4 HKLRD 759 and Tomolgen Holdings Ltd v Silica Investments Ltd [2015] SFGA 57 (all of which were cited by the Court).

For further information, please contact Brenda Horrigan, Partner, Paul Apáthy, Partner, Anne Hoffmann, Senior Associate, or your usual Herbert Smith Freehills contact.

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In its decision in Silver Dry Bulk Company Limited v Homer Hulbert Maritime Company Limited [2017] EWHC 44 (Comm) the English Court has considered and clarified the principles which apply to an application under section 18 of the English Arbitration Act 1996 (the "Act").  Section 18 enables a party to apply to the court to exercise its powers to give directions as to the making of tribunal appointments or make the appointments itself.  The decision confirms, amid conflicting case law, that the applying party must establish a "good arguable case" that a tribunal would have jurisdiction to hear the case, and emphasises that any jurisdictional arguments remain matters for the tribunal to decide in accordance with the principle of kompetenz-kompetenz. The case is also a good reminder of the purpose of section 18, which only applies where there has been a complete failure of the appointment procedure agreed between the parties, and cannot be used to declare or confirm the validity of a tribunal's constitution.

BACKGROUND

The case arose out of a Memorandum of Agreement ("MOA") (which included an arbitration agreement) governing the sale of a vessel by Homer Hulbert Maritime Company Limited ("Homer Hulbert"), a special purpose vehicle company incorporated in the Marshall Islands, to Silver Dry Bulk Company Limited ("Silver Dry") in 2010.

Although Homer Hulbert was dissolved soon after the sale of the vessel, section 105 of the Marshall Islands Business Corporations Act (2004) provides that a corporation remains in existence for the purpose of prosecuting and defending suits after dissolution for a period of three years. Silver Dry brought arbitral proceedings three years and eight months after Homer Hulbert's dissolution. Having nominated an arbitrator in its notice of arbitration, Silver Dry received no response from Homer Hulbert and, as a result, its nominee automatically became the sole arbitrator pursuant to the terms of the arbitration clause. The Tribunal held a procedural hearing and the arbitration process continued; however it became clear that no entity was willing and/or able to participate in the proceedings for or on behalf of Homer Hulbert.

Accordingly, the issue in dispute was whether Homer Hulbert was in existence for the purposes of participating in the proceedings. Silver Dry applied to the High Court to exercise its power under section 18(3) "to confirm that the Tribunal…has been validly constituted..." and to "remove any uncertainty arising in this regard", with the aim of encouraging Homer Hulbert's parent company, Sinokor, a Korean ship owner and operator, to participate in the arbitration.

APPLICATION OF SECTION 18

Section 18 is described as a "gateway" provision, providing a way of getting an arbitration started or preventing its abortion in circumstances where there is a failure in the parties' agreed appointment process. It gives the court certain powers, including the power to "direct that the tribunal shall be constituted by such appointments…as have been made". These powers can be exercised by the courts in its discretion, in circumstances where:

1. there has been a failure of the procedure for the appointment of the arbitral tribunal; and
2. there is no agreement between the parties as to what should happen in those circumstances.

Valid arbitration agreement – "good arguable case" test confirmed

Section 18 does not require the court to make a final determination on the issues affecting the tribunal's jurisdiction.  However there is an initial threshold test that must be met in order for an application under section 18(3) to succeed, namely there must be an arguable case that a tribunal would have jurisdiction to hear the issue.

In this respect, there has been conflicting case law on the standard of proof required to meet this threshold to establish a valid arbitration agreement for the purposes of a section 18 application. In Noble Denton Middle East and another v Noble Denton International Ltd [2010] EWHC 2574 (Comm) and Man Enterprise Sal v Al-Waddan Hotel Ltd [2013] EWHC 2356 (TCC) the test applied was whether the claimant had "a good arguable case" or "an arguable case" that a tribunal would have jurisdiction. However, in Crowther and another v Rayment and another [2015] EWHC 427 (Ch) it was held that a lower threshold would be more in line with the principle of kompetenz-kompetenz, which provides that courts should as far as possible avoid anticipating a decision that the tribunal is empowered to make.

In Silver Dry v Homer Hulbert, the Court preferred the higher threshold test set out in Noble Denton. The Court described the test of a "good arguable case" as one that is "somewhat more than merely arguable but need not be one which appears more likely than not to succeed" (paragraph 27). Based on the evidence, it was determined that there was a good arguable case that proceedings were able to be validly brought against Homer Hulbert.

Failure of the procedure for the appointment of the arbitral tribunal

The Court then went on to consider Silver Dry's application under section 18(3).  It found that the application must fail on the basis that there had been no failure of the appointment procedure. The arbitration clause in the MOA had provided that a party's nominee would automatically become the sole arbitrator in the event that the other party failed to appoint one within 14 days, and this had occurred. The Tribunal had already presided over one procedural hearing and, accordingly, the parties did not need assistance from the courts in order to constitute the Tribunal. The Court also noted that even if there had been a failure to appoint, the parties had in any event agreed within the arbitration clause on the procedure to be followed in such circumstances. As a result, it was found that the court did not have the power in this case to make any orders under section 18.

Exercise of discretion

Finally, it was concluded that, even if the court had such powers, these would not have been exercised as a matter of discretion, primarily because:

1. making an order that the Tribunal had been "validly constituted" in this case would go much further than would be justified from merely concluding that there was a "good arguable case"; and
2. in any event, the Tribunal was in existence, was already dealing with the matter and was capable of continuing without assistance from the court, even if its status was uncertain at the time.

The Court emphasised that the powers under section 18 were not to be used as a means of seeking an endorsement or declaration from the courts as to the valid constitution of a tribunal.

CONCLUSION

The case provides confirmation of the test to be applied for the purposes of an application under section 18 of the Act and is a useful reminder of the intended purpose of that section. Although this decision has endorsed the higher threshold of there being a "good arguable case" that a tribunal would have jurisdiction to determine the issue, the court's approach remains in favour of not interfering with decisions that fall within the ambit of an arbitral tribunal's jurisdiction, in line with the kompetenz-kompetenz principle.

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On 25 January 2017, the Full Federal Court of Australia dismissed Trina Solar US, Inc.’s (Trina) appeal from an earlier decision of a single Federal Court Judge not to exercise residual discretion to refuse Jasmin Solar Pty Ltd (Jasmin) leave to serve an originating application on Trina in the US, while arbitration proceedings were ongoing in New York. As discussed below, the decision highlights the importance of ensuring that all parties to a transaction are bound by the relevant arbitration agreement from the outset of the transaction.

Background

The contract

The parties to the dispute were:

• Trina Solar US, Inc., a wholesale seller of solar panels;
• JRC-Services LLC (JRC), a marketing company incorporated in Nevada; and
• Jasmin, an Australian company which sells and installs solar panels.

Jasmin wished to procure new solar panels from Trina. In order to avoid tax-related issues for Jasmin, JRC agreed to buy the solar panels from Trina instead, with Jasmin acting as the guarantor. JRC had an on-going agency agreement with Jasmin.

The resulting agreement between Trina and JRC was governed by New York law and contained an arbitration clause (seated in New York), as well as a clause to the effect that the agreement did not intend to confer rights to enforce any term on an entity not a party to the agreement.

Arbitration proceedings

The solar panels eventually supplied were allegedly defective, leading to Jasmin refusing to pay Trina. Trina then commenced arbitration proceedings against JRC and Jasmin. Jasmin refused to participate in the arbitration, arguing it was not bound by the agreement.

The arbitrator found that Jasmin was a party to the contract (and bound by the arbitration clause). The arbitral award was upheld by US District Judge Caproni in the Southern District of New York, who held that Jasmin was bound by the arbitration clause as:

• Jasmin entered the contract as principal through its agent JRC; and
• Jasmin was estopped from denying the arbitrator’s jurisdiction, as it had received direct benefits from the contract.

The first instance proceedings

While the arbitration was on foot, Jasmin sought leave in the Federal Court to serve an originating process on Trina in the US to commence court proceedings in Australia, claiming Trina (and its Australian subsidiary) had engaged in misleading and deceptive conduct contrary to Australian consumer law, causing loss to Jasmin.

The Federal Court has the power to grant such leave by virtue of rule 10.43 of the Federal Court Rules 2011 (Cth). However, even where the preconditions of rule 10.43 are met, the Federal Court still retains residual discretion to refuse an applicant’s application for leave.

Decision at first instance – 17 December 2015

Justice Edelman found that the preconditions for granting leave were satisfied and that the issue was whether to exercise residual discretion to refuse leave. Such discretion can be exercised if the proceeding for which leave is sought is liable to be stayed.

Pursuant to section 7(2) of the International Arbitration Act 1974 (Cth) (Act), courts shall stay proceedings and refer them to arbitration, if the parties are parties to an arbitration agreement and the proceedings involve matters that can be settled by arbitration.

The question was then ostensibly simple: was Jasmin a party to the contract between JRC and Trina? This involved a preliminary question of whether New York law (as the law of the disputed contract) or Queensland law (the law of the forum – lex fori) applied. The judgment states that

• Under New York law, Jasmin would likely be found to have been a party to the contract, by reason of the doctrine of estoppel. That is to say, a company may be bound by a contract that it has not signed where it ‘knowingly accepted the benefits’ of that contract, by exploiting the contractual relationship of the parties.
• Under Queensland law, JRC would likely be found to have entered into the contract as principal and not as Jasmin’s agent.

Justice Edelman drew a distinction between the questions of whether there is a contract and whether a contract is valid. The law of a disputed contract is applied to determine its validity, but the law of the forum is applied to determine whether an agreement was in fact reached. Applying Queensland law, his Honour found that Jasmin was not a party to the contract, and that the proceedings would not inevitably be stayed. Hence, his Honour held that there was no reason for the Court to exercise residual discretion to refuse leave to serve out an originating process abroad.

Decision on appeal – 25 January 2017

Trina appealed Justice Edelman’s decision on the ground that his Honour erred in applying the law of the forum (Queensland law), instead of the law of the contract (New York law).

Trina’s main submission was, given that s 8(5)(b) of the Act provides that the validity of an arbitration agreement is determined by the law expressed in the agreement (or where no law is expressed, the law of the country where an arbitration award is made), the determination of whether an entity is a party to an arbitration agreement should likewise be made by applying the law of the disputed contract (and not of the forum).

Justice Beach rejected this submission. His Honour approved of Justice Edelman’s distinction between the law to be applied to determine whether there is a contract, and the law to be applied in determining the validity of, and rights and obligations arising from, a contract. His Honour’s reasoning was that, to apply the law purportedly chosen by the parties in an agreement to which an entity claims not to be a party, in order to prove that the entity is a party to that agreement, would be ‘to assume what was to be proved.’

Hence, the Full Federal Court affirmed the first instance decision to grant leave to serve an originating application on Trina outside of Australia. However, the Court highlighted that it was still open to Trina to make a formal application for a stay of the proceedings under s 7 of the Act and seek recognition and enforcement of the arbitral award under s 8 of the Act.

Lessons learned

The decision highlights the importance of ensuring that all parties to a transaction are bound by the relevant arbitration agreement from the outset of the transaction.

There are risks for Australian businesses in contracting with parties in foreign jurisdictions, where the laws of those jurisdictions differ from those of Australia. For example, the concept of privity of contract is much stronger in Australia than it is in New York. This means that a party is more likely to be bound by a contract governed by New York law (even if it has not signed that contract) than a contract that is governed by Australian law.

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