Effective January 2017, the German Institution of Arbitration (Deutsche Institution für Schiedsgerichtsbarkeit, "DIS") has adopted a new model clause to be used with the 2002 ISDA Master Agreement ("DIS ISDA Model Clause"). The DIS ISDA Model Clause provides for use of the institutional rules of the DIS and Frankfurt, Germany as the seat of the arbitration. While the underlying substantive agreement is subject to English or New York law, the arbitration clause is governed by German law. The DIS ISDA Model Clause can be found here:

http://www.disarb.org/en/17/clause/isda-model-clause-for-dis-rules-frankfurt-main-seat-id35

Background

In 2013, the International Swaps and Derivatives Association (ISDA) published the 2013 ISDA Arbitration Guide (the "Guide"). The Guide's purpose was to provide guidance on the use of arbitration clauses with either the ISDA 2002 Master Agreeement or the ISDA 1992 Master Agreement. The Guide included a range of model clauses for a number of combinations of national and international arbitration institutions and arbitration seats for users to choose from.  However, the DIS was not among the institutions featured, nor was any German city. It had subsequently been suggested to include a model clause for Frankfurt, not least because of the economic size of Germany but also because Frankfurt is the largest financial centre in continental Europe and the seat of the ECB (see "Finanzbranche entdeckt Schiedsgerichte", Börsen-Zeitung, No. 201, October 2013).

In cooperation with ISDA, the DIS has now closed this gap. 

Outlook  

With the newly-adopted DIS ISDA Model Clause, financial parties – especially when doing business in Germany – can now choose arbitration in Germany under the auspices of the DIS. For banks with German customers, this is a big step forward: they can offer arbitration on 'home-turf' to customers who might otherwise be reluctant to agree to arbitration. For the DIS, this is another success in its continued bid to establish itself among the top arbitration institutions.

Dr Peter Werner, Senior Counsel at ISDA, commented: "We welcome the interest in ISDA model clauses expressed by German market participants and the dispute resolution community. ISDA is looking forward to including the new model clause as one of the additional appendices in the next edition of the ISDA Arbitration Guide."

Dr Mathias Wittinghofer

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In K.V.C Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd and another Suit [2017] SGHC 32 ("KVC Action") the Singapore High Court discussed the extent to which the Singapore courts and the Singapore International Arbitration Centre, in its capacity as default appointing authority under the Singapore International Arbitration Act ("IAA"), are able to support and facilitate an arbitration commenced pursuant to a bare arbitration clause which specifies neither the place of arbitration nor the manner in which arbitrators are to be appointed.

Background

The KVC Action was a consolidation of two separate actions brought by two different Thai-incorporated companies ("Thai Companies") against a Singapore company, Asian Mineral Resources Pte. Ltd. (“Asian Mineral”) arising out of outstanding payments allegedly due by Asian Mineral under rice supply contracts. Each of these contracts contained a 'bare' arbitration clause which failed to set out the place or law applicable to the arbitration, and referred to non-existent rules.  They also contained no provisions specifying the number of arbitrators or the mechanism for constituting the arbitral tribunal. Asian Mineral's rejection of the Thai Companies' attempts to submit the subsequent disputes to arbitration led the Thai Companies bringing the KVC Action in the Singapore courts. The issue then arose as to whether the bare arbitration clauses should be upheld and enforced despite their deficiencies, and whether the litigation should therefore be stayed.

Relevant Law

Singapore law gives legal force to the UNCITRAL Model Law on International Commercial Arbitration ("Model Law"), as amended and supplemented (for international arbitrations) by the International Arbitration Act, Cap. 143A ("IAA").

Article 11(3) of the Model Law provides that if the parties cannot agree on an arbitrator, or if either or both parties fail to appoint an arbitrator, either party can ask the court or other designated appointing authority to make the appointment, so that the arbitration can move forward.  Section 8(2) of the IAA provides that the appointment powers under Article 11(3) will be exercised in Singapore by the President of the SIAC Court of Arbitration ("SIAC President").  However, Article 1(2) of the Model Law provides that the appointment powers under Article 11(3) (and therefore also section 8) will apply "only if the place of arbitration is in [Singapore]". 

Decision

A bare arbitration clause which fails to designate the seat of arbitration therefore raises the question of whether the SIAC (and indeed, the Singapore courts) can support and facilitate an arbitration by appointing an arbitrator in case of party disagreement, bearing in mind the territorial limitations of Article 1(2) of the Model Law; and if not, whether such a clause should be considered "null and void, inoperative or incapable of being performed" for the purpose of section 6(2) of the IAA.

The arbitration clauses in both contracts here had factors pointing in different directions as regards the possible seat of arbitration.  The contract involved Thai sellers, a buyer based in Singapore and performance of parts of the contracts in both Thailand and Benin, with payment occurring in Singapore. It was therefore unclear where the contract drafters intended for disputes to be arbitrated; and consequently whether the territorial requirements of Article 1(2) would be satisfied.  Further, if Article 1(2) could not be satisfied, so that the appointment powers under Article 11(3) were not available, did the Singapore court have any residual power to assist under broader general principles of Singapore law?

Judicial Commissioner Pang Khang Chau considered the law to be clear that 'the SIAC President cannot act in a case where it is clear that the place of arbitration is not Singapore'.  Consequently, in cases where the SIAC President is asked to make an appointment under Article 11(3) and section 8, the SIAC President must necessarily make some enquiry as to whether Article 1(2) has been satisfied. 

However, Pang JC held that it is not the duty of the SIAC President to reach a definitive finding on this issue.  Rather, "the standard of review to be applied is the prima facie standard".  Applying this standard, the Court concluded that there were sufficient grounds in each of the cases for the SIAC President to make a prima facie finding that the place of arbitration would be Singapore, clearing the way for the SIAC President to appoint an arbitrator and for the arbitrations to proceed.   Pang JC carefully noted that "the SIAC President’s prima facie enquiry is undertaken for the limited purpose of ascertaining whether he should exercise his powers of appointment and does not bind the arbitral tribunal. It remains open to the arbitral tribunal, after undertaking a full review of the matter, to come to a different view from the SIAC President on the place of arbitration".

In light of this finding it was strictly unnecessary for the court to further consider whether it had the authority to step in and to make an appointment in cases where the SIAC President was unable to act. Nevertheless, the Court proceeded to address this issue in light of the possibility that the SIAC President would eventually decide that he lacked any power to make the appointment in this case, having made a prima facie assessment that Singapore was not the likely seat of arbitration.

Whilst it was clear that the Model Law and the IAA would not confer any such power on the court in light of the territorial restriction in Article 1(2), it was nevertheless relevant to consider whether such a power could be found in broader general principles of Singapore law. 

The court first considered whether the Model Law precluded any such residual power.  The court reviewed the minutes of UNCITRAL's meeting held on 19 June 1985 (shortly before the Model Law was adopted on 21 June 1985), from which it appeared that the draftsmen of the Model Law had not taken a firm policy position against allowing the courts to appoint arbitrators in such instances. On the contrary, the court found that the preparatory materials recorded the preference of the working committee members for such powers to be available in such cases.  The reason why an express permissive provision was ultimately not included in the Model Law was because the drafters could not agree on the connecting factors that should be used in determining which court or statutory appointing authority should exercise such powers. This notwithstanding, the court found that the clear intention of the draftsmen was that the Model Law should not be regarded as precluding the courts or statutory appointing authority from exercising any available powers under domestic law to assist the arbitration by appointing an arbitrator.

The court concluded that it had the requisite power and authority under general principles of Singapore law, provided that the dispute had some connection (undefined) with Singapore. It observed that in any jurisdiction with a strong policy in favour of arbitration, the courts should be able to assist with the appointment of arbitrators as a last resort in order to make sure that the parties' intention to have their dispute settled by arbitration is not defeated. The court considered that "such a decision could be justified either on the basis of contract law (by applying the principles of interpretation articulated by the Court of Appeal in Insigma Technology Co Ltd v Alstom Technology Ltd [2009] 3SLR(R) 936, with the appropriate use of implied terms, if needed) or as an exercise of the court’s inherent jurisdiction to prevent injustice".  The Court took comfort from and followed the Hong Kong High Court’s decision in Comtec Components Ltd v Interquip Ltd [1998] HKCFI 803, which had similarly held that the courts retain 'a residuary jurisdiction to make an appointment to implement the intention of the parties that their disputes should be resolved by arbitration'.

Practical guidance and commentary

As a practical matter, this decision underscores the need to ensure that arbitration clauses are drafted with care, and clearly set out the parties' intentions in the event of an arbitration. As far as possible, a well-drafted and effective arbitration clause should define the possible disputes to be arbitrated, specify the governing law of the arbitration agreement, provide for the place of arbitration, the number of arbitrators and the method for establishing the arbitral tribunal.  This will ensure that parties avoid unnecessary and time-consuming disputes about the intent, ambit and application of an arbitration clause, and focus instead on resolving their dispute through arbitration quickly and effectively.

As a policy matter, the drivers underlying the decision were clearly articulated and understandable.  It would be unfortunate if a clear agreement to arbitrate should be frustrated by the parties' failure to designate a seat of arbitration.  Bare arbitration clauses are nonetheless agreements to arbitrate disputes, and it is not surprising that the court would want to uphold and enforce them if possible.

There are however some points arising out of the judgment worth keeping an eye on.

Whilst either or both legal foundations for the ruling may be justified in principle (i.e. that the power derives from an implied term in the parties' agreement, or from a residual inherent jurisdiction to prevent injustice and to implement the intentions of the parties), that could leave the door wide open for courts to intervene in a very wide and ill-defined range of scenarios, ostensibly in support of arbitration but potentially inspiring vexatious and wasteful applications.   Further clarity might be desirable as to the basis on which this power is founded, and as to the circumstances in which it may be exercised.

It is also noted that the judgment does not (and did not need to) address a theoretical and technical but nonetheless conceivable scenario where the SIAC President's or the court's appointment of an arbitrator could be problematic.  If, in a case with a bare arbitration clause, the SIAC President finds a prima facie case that Singapore is the seat of arbitration, and proceeds to make an appointment, or if the Singapore court does so under its 'last resort' residual powers, problems could arise if the arbitral tribunal later concludes that the seat of arbitration is in fact in a different territory.  In that scenario, the arbitration will be subject to procedural laws other than the laws of Singapore, and those laws could then hold that Singapore's purported appointment of the tribunal was not proper or permissible.  This after-the-event conflict of laws and resulting uncertainty about the validity of the appointment would create a difficult situation for a tribunal seeking to move the case forward and to render a valid award.  The present case did not need to address that complex hypothetical, but it may one day  be necessary to address it as a consequence of this judgment.

Alastair Henderson

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The High Court has confirmed an UNCITRAL Tribunal's Award on Jurisdiction, which rejected jurisdiction under an investment contract (Contract) and the 1994 Kazakh Law on Foreign Investment (FIL).

The Court placed particular emphasis on expert evidence of the principles of contractual interpretation under the Civil Code of the Republic of Kazakhstan.  It was not prepared to depart from these principles, which required a literal interpretation of the Contract and FIL.

Whilst the Court's reasoning differed in some respects from that of the Tribunal, it was broadly consistent with the Award on Jurisdiction. 

Background

In 2010 Ruby Roz Agricol LLP (Ruby Roz) commenced UNCITRAL arbitration proceedings against the Republic of Kazakhstan. The Tribunal found that it did not have jurisdiction to determine the parties’ substantive dispute because there was no valid arbitration agreement between the parties, either under the Contract or the FIL (see our blog post on this Award here). As the parties had agreed to treat London as the seat of the arbitration, in Ruby Roz Agricol LLP v The Republic of Kazakhstan [2017] EWHC 439, Ruby Roz brought a challenge under section 67 of the Arbitration Act 1996 asking the High Court for a ruling on jurisdiction.

The Court's decision was consistent with that of the Tribunal: the Court held that the Tribunal did not have jurisdiction. That decision was based on similar grounds to the Tribunal in relation to the Contract but on different grounds in relation to the FIL.

The Contract

Clause 14.2 of the Contract states that any dispute should be referred to arbitration "if the interests of a foreign Investor are affected."  Ruby Roz submitted that it was a "foreign investor" for the purposes of this clause, and that this was particularly clear when the Contract was read in the context of i) the draft Framework Agreement on which the Contract was based and ii) the FIL.

The Court was reluctant to situate the Contract in the context of the Framework Agreement or the FIL: the applicable law required a literal interpretation of the Contract. Since Ruby Roz was established under the laws of the Republic, it was not "foreign". Nonetheless, the Court went on to consider in more detail Ruby Roz’s arguments regarding the Framework Agreement and FIL.

The Court dismissed the significance of the Framework Agreement.  The Framework Agreement was not derived from the FIL, but rather was offered under a Kazakh law on "State Support of Direct Investment."  The Court noted that this law applied to both national and foreign investors and did not assist with the meaning of the word "foreign".  Indeed, the Framework Agreement contemplated that for a "foreign investor", a contract would be drawn up in English and Kazakh or Russian. The Contract was in Russian only, suggesting Ruby Roz was not "foreign".

Nor did the FIL assist.  Ruby Roz would have fallen within the definition of an "enterprise with foreign participation" under the FIL.  Whilst those enterprises were offered some of the guarantees enjoyed by "foreign investors", under 4.5 of the FIL, this served only to demonstrate that there was a clear distinction between an "enterprise with foreign participation" and a "foreign investor". It did not assist Ruby Roz in its argument that it was a "foreign investor."

The fact that the owner of Ruby Roz may have been a foreign investor in Ruby Roz was also irrelevant: the Court highlighted the importance of distinguishing investment by Ruby Roz and in Ruby Roz.

The Foreign Investment Law 

Ruby Roz submitted that the FIL also provided an independent submission to arbitration. 

The FIL came into effect in 1994, underwent various alterations, and was finally repealed in 2003. 

In its final iteration, Article 27 of the FIL provided that a foreign investor could refer any disputes to arbitration.  The FIL also contained a 10 year stabilisation clause in relation to "foreign investments". 

Much of the discussion in the UNCITRAL Award focused on when this stabilisation period would commence and whether Ruby Roz's investments fell within the stabilisation period. However, the Court's analysis focused on the initial question of whether Ruby Roz's investments were "foreign investments" and could therefore benefit from the stabilisation clause. 

The Court accepted that Ruby Roz arguably fell within the definition of "foreign investor". However, the definition of "foreign investments" was narrow and did not cover the investments outlined in the Contract, namely the reconstruction of buildings and purchase of land and equipment. 

Again, the applicable law required a literal interpretation of the FIL. The Court considered the language of the FIL to be clear, but briefly considered Ruby Roz's arguments as to the relevance of historical circumstances in interpreting the provision.

However, the Court found that the fact that the legislative's object of protection may have been "the foreign investor's position" (as Ruby Roz argued) could not tenably impact the interpretation of "foreign investment" where that definition clearly lists the forms of investment to which it extends.  The commercial aim to protect investments could not supplant the clear words of the FIL. The Court also rejected Ruby Roz's other contextual arguments.

Conclusion

The Court reached the same conclusion as the Tribunal, namely that the Tribunal did not have jurisdiction under the Contract or the FIL.  Whilst they agreed that, on a plain reading of the Contract, Ruby Roz was not a "foreign" investor, the reasoning of the Court and the Tribunal differed in respect of the FIL. The Tribunal found that the stabilisation period had expired and that Ruby Roz could no longer rely on the arbitration agreement in the FIL. The Court did not consider this issue as it found that Ruby Roz's claim failed on a prior issue: its investments did not qualify as "foreign investments" under the clear language of the stabilisation clause.

This case underlines that the Court will be likely to closely apply the principles of contractual interpretation required under an applicable foreign law when construing contracts and foreign legislation. It will usually be difficult to persuade the Court to adopt a more expansive approach, or one that draws upon principles more familiar in English law.

For further information, please contact Craig Tevendale, Partner, Susan Field, Senior Associate, or your usual Herbert Smith Freehills contact.

Craig Tevendale

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Susan Field

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On 9 March 2017, the Arbitration Amendment Bill (Bill) was introduced to the New Zealand Parliament. The Bill proposes to amend the Arbitration Act 1996 (Act), and follows recommendations by the Arbitrators’ and Mediators’ Institute of New Zealand (AMINZ).

The proposed changes include:

1. permitting the inclusion of arbitration clauses in trust deeds;
2. greater confidentiality of arbitration-related court proceedings; and
3. narrowed grounds for the set-aside of an arbitral award.

Other amendments to the Act came into effect on 1 March 2017, which we earlier reported on here.

1. Trust-related arbitration

Arbitration can be a suitable mechanism for resolving disputes involving trusts, as its inherent privacy is more suited to the private nature of most trusts. However, the enforceability of arbitration clauses in trust instruments has often been doubted, including on the following grounds:

• There may be a lack of privity to bind any non-signatory beneficiaries of a trust to an arbitration clause which has been included in a trust deed by the settlor of a trust.
• Certain beneficiaries of a trust may be incapable, like minors, and arbitral tribunals often lack the power of national courts to name special guardians for such beneficiaries.

Nevertheless, many of the traditional obstacles to trust arbitration can now be addressed by legislative reform. The Bahamas and Guernsey have recently enacted such reforms.

The Bill proposes that arbitration clauses in trust instruments be considered arbitration agreements, thereby allowing such agreements to be enforceable in court. It also proposes that arbitral tribunals be given the power to appoint representatives on the part of an incapacitated or unascertained beneficiary, ensuring that those who cannot represent themselves will be effectively represented.

2. Confidentiality of arbitration-related court proceedings

The Act presently provides that any arbitration-related court proceedings in New Zealand will be public.¹ However, this does not accord with the expectation of many users of arbitration for the arbitral process and any ancillary processes to be confidential. It also places New Zealand out of step with leading jurisdictions around the world, such as England, Hong Kong and Singapore.

The Bill proposes that the presumption of confidentiality in respect of arbitration proceedings be extended to a rebuttable presumption of confidentiality in respect of satellite litigation proceedings (such as applications to set aside an arbitral award and appeals on questions of law) under the Act.

Upon an application by a party, courts would be required to make a direction as to what aspects of arbitration-related court proceedings may be published in law reports. In particular, courts would be able to redact certain aspects of such proceedings in law reports, and direct that these law reports not be published until after the end of a specified period (being not more than 10 years).

3. Narrowed grounds for the set-aside of arbitral awards

The Supreme Court of New Zealand recently held that an arbitration clause providing for invalid recourse against an arbitral award (in that case, an appeal on a question of fact, when only appeals on questions of law are allowed under New Zealand law) is not a valid arbitration agreement.² This was seen by some as unwarranted judicial interference in the parties' agreed arbitration process. The Bill proposes to amend the Act, to avoid the set aside or unenforceability of arbitration agreements by reason of their procedural provisions being incompatible with the Act.

The decision also highlighted that the Act provides that an arbitral award may not simply be set-aside for non-conformity with the arbitration agreement, where the arbitration agreement itself was in violation of a mandatory provision of Schedule 1 to the Act (which contains the Model Law). This means that an arbitral tribunal’s decision to derogate from the provisions of the arbitration agreement because it is bound by some mandatory provision of the Model Law is protected and that a resulting arbitral award cannot be set-aside on that ground. The Bill extends that protection to other provisions of the Act outside of Schedule 1.

It is encouraging to see New Zealand considering further arbitration-related reforms so promptly after previous reforms which were introduced only last year. Not only do these reforms address inadequacies in New Zealand’s current law, but they also lay a foundation for New Zealand to distinguish itself from other jurisdictions – particularly in respect of trust arbitration.

[1] Arbitration Act 1996, Schedule 1, Article 14F

[2] Carr v Gallaway Cook Allan [2014] NZSC 75

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In the recent decision of Wilson Taylor Asia Pacific Pte Ltd v Dyna-Jet Pte Ltd [2017] SGCA 32, the Singapore Court of Appeal confirmed that the Singapore courts will enforce a dispute resolution clause which gives only one party the option to arbitrate.  The court also clarified the requirements and threshold for a stay of proceedings to be granted under section 6 of the Singapore International Arbitration Act ("IAA")

Background

The background to the dispute, as well as the decision of the court below, is set out in our previous report which can be accessed here.  In summary, the decision revolved around a dispute resolution agreement which allowed only the Respondent ("Dyna-Jet") to elect to refer any dispute to arbitration in Singapore ("Disputes Clause"). A dispute arose and Dyna-Jet elected to commence proceedings in the Singapore court. In response, the Appellant applied for a permanent stay of the Singapore court proceedings to compel Dyna-Jet to bring the dispute to arbitration ("Stay Application").

The Stay Application was dismissed by the Singapore High Court, which upheld the decision of the assistant registrar below.

Decision of the Court of Appeal

Citing its previous decision In Tomolugen Holdings,[1] the Court of Appeal held that the following three conditions would have to be satisfied before a court would grant a stay under IAA, section 6(2):

1. a valid arbitration agreement exists between the parties;
2. the proceedings concern a dispute which falls within the scope of that arbitration agreement; and
3. the arbitration agreement is not null and void, inoperative, or incapable of being performed.

The Court of Appeal agreed with the court below that the Disputes Clause constituted a valid arbitration clause, and held that on the weight of Commonwealth authority, neither the fact that the clause was asymmetrical nor the fact that it made arbitration of a future dispute entirely optional prevented the court from arriving at this decision.

On the second condition however, the Court of Appeal disagreed with the High Court's apparent assumption that the dispute fell within the scope of the clause.  It held that the optional nature of the clause (insofar as only the respondent had the ability to elect arbitration) meant that the Clause "would give rise to an arbitration agreement only if and when [Dyna-Jet] elected to arbitrate a specific dispute in the future." In other words, unless and until Dyna-Jet elected to arbitrate, the Dispute could not be a "matter which is the subject of the agreement" under section 6(1) of the IAA.

Accordingly, the Court of Appeal held that "at the time the stay application was filed, the Dispute could not possibly be said to fall within the scope of the arbitration agreement that was contained in the Clause." On the basis of this finding, the Court of Appeal found it unnecessary to consider the third condition, which would have canvassed the question the question of whether the clause was 'null and void, inoperative or incapable of being performed' under IAA, s 6(2).

The court also took the opportunity to reiterate that when considering whether a dispute, on a prima facie standard of review, fell within the scope of an arbitration clause and where the principal argument by the applicant for a stay of proceedings in favour of arbitration turned on a particular construction of the arbitration agreement, the burden lay squarely on the applicant to advance the interpretation that would support its contention that the dispute fell within the scope of the arbitration agreement.

Comment

This decision confirms that the Singapore courts will enforce a properly drafted dispute resolution clause granting one party the sole option to arbitrate. This already represents the position in many major common law and civil law jurisdictions, and whilst this was assumed also to represent the position in Singapore, the Court of Appeal's express endorsement of the decision of the lower courts provides a welcome measure of certainty. On the basis of the courts' 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).

More generally the decision shows that the Singapore courts will not shy away from scrutinising the scope and content of the underlying dispute and the relevant clause in order to arrive at a correct decision, whether or not this ultimately results in the dispute being referred to arbitration. Notable in particular is the Court of Appeal's thorough analysis which led it to depart from the High Court's finding that the Dispute fell within the ambit of the Clause This robust approach reaffirms Singapore's standing as a supervisory jurisdiction of choice and should bolster confidence in parties considering Singapore as a forum for arbitration.

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

Alastair Henderson

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Emmanuel Chua

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---

[1] Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2016] 1 SLR 373.

 

 

 

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.

The full digital edition can be downloaded in PDF by clicking on this link.  If you would like to request a hard copy please email asia.publications@hsf.com.

We hope that you enjoy reading the sixth edition of this Guide. We would welcome your feedback.

In Diag Human S.E. v Czech Republic Ministry of Health, the District Court of Columbia in Washington D.C. has dismissed an application brought by Diag Human (Diag) to enforce a 2008 arbitration award it obtained against the Czech Republic. The decision rests on the implications of triggering a review process that the parties had agreed in their arbitration agreement and is illustrative of the importance in making sure that any bespoke review or appeal proceedings which are agreed by the parties are clear as to their effect on any award.

Background

The background is more fully described in our blog posts here and here. In summary, Diag and the Czech Ministry of Health agreed to arbitrate claims by Diag that the actions of a senior Czech official had crippled its business activities in the Czech Republic. Further to an ad hoc arbitration under the Czech Arbitration Act 1994, and subsequent to the tribunal having issued an interim award and a partial award (the Partial Award), a final award (the Award) was issued in 2008 ordering the Czech Republic to pay Diag over US$325m in damages as well as both pre and post-award interest. However, the arbitration agreement provided for a review process, under which “an arbitral award could be subject to review by a second tribunal of arbitrators…selected in the same manner as the first and subject to the same rules of procedure” if a party submitted an application for review within 30 days of receipt of the award to be reviewed. If no application for review was submitted within 30 days, then the award would take effect and be enforceable. Both parties triggered the review process in relation to the Award within the 30 day period (although Diag later withdrew its application) and a second tribunal (the Review Tribunal) was constituted to review the Award. The Review Tribunal issued its final resolution (the Resolution) in 2014. The Review Tribunal upheld the Czech Republic’s position that, under Czech law, the Partial Award constituted the entire award issued to Diag. On this basis, it decided in its Resolution that: (i) the review proceedings are discontinued and (ii) neither party shall be entitled to compensation of the costs of the review proceedings. As discussed further below, in these enforcement proceedings before the District Court of Columbia (the Court) each party took a different position on how the Resolution affected the Award.

Enforcement Proceedings During the Review

Diag brought a series of legal proceedings in a number of jurisdictions concurrent with the review process in an attempt to enforce the Award. The Austrian courts in 2013 determined that the Award could not be binding as the review process was still pending at the time, and a similar decision was taken in the French courts the following year. An application in the English courts was again met with a dismissal due in part to the fact that the review process had been triggered, and also due to the determination that the decision in the Austrian courts created an issue estoppel (see our blog post here).

Enforcement Proceedings Following the Review

In the US, Diag filed an application to enforce the Award in 2013. The Czech Republic moved to dismiss the complaint on numerous grounds and the dismissal was granted after the judge found that the parties did not have a commercial relationship and as such the Czech Republic benefitted from sovereign immunity. This decision was overturned in 2016 by the US Court of Appeals for the DC Circuit, which remanded the case to the lower court. See our blog post here.

The case therefore once again came before the Court. In these proceedings the Czech Republic argued, amongst other things, that the Resolution nullified the Award and therefore there was nothing to enforce. Diag contested that the Resolution had no effect on the Award because it was procedural in nature only, and that only the “decretal” paragraphs of the Resolution (discontinuing the review proceedings and deciding that each side should bear its own costs thereof) had any legal effect.  On this basis, Diag argued that the discontinuation of the review proceedings left the Award intact and enforceable.

The judgment

The Court determined the Award was not a final award that could be enforced under the New York Convention 1958. The Convention provides a number of grounds on which courts may to refuse or defer recognition of a foreign arbitral award, one of which is if the party challenging the enforcement is able to show that the “award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made“.

The arbitration agreement stated that any award “will enter into effect” and the parties will implement the award “if the review application of the other party has not been submitted in the deadline“. However, a review application had been submitted by the Czech Republic within the 30 day deadline so the Award was held not to have entered into effect. The discontinuation of the review proceedings by the Review Tribunal in 2014 effectively ended the arbitration. Therefore by operation of the parties’ own arbitration agreement, the Award never took effect and so never became binding.

Comment

Whilst a refusal to enforce a foreign award under the New York Convention often causes concern, this decision highlights the importance the Court placed on the terms of the parties’ arbitration agreement.  The Court has blocked Diag from being able to enforce the Award, however the decision is consistent with a respect for party autonomy and freedom of contract, as well as showing deference to the jurisdiction of the arbitral tribunal. As the Judge stated in her decision, the courts are “neither authorised to second guess the…[Review] Tribunal’s [R]esolution nor ignore the terms of the arbitration agreement“. The outcome of the US proceedings is consistent with the outcome in other pro-arbitration jurisdictions in which Diag has sought to enforce the Award.

It is important for parties to consider carefully how any review process in an arbitration agreement will operate, the implications for enforcement of an award once that review process has been triggered and whether the outcome of a review will deliver sufficient clarity in relation to the effect on any previous award.

For more information, please contact Christian Leathley, Partner, Amal Bouchenaki, Of Counsel, Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

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The Indian Supreme Court’s judgment in Roger Shashoua v Mukesh Sharma sheds further light on the court’s approach to interpreting arbitration agreements, particularly regarding the parties’ implied choice of seat. The court found that the designation of London as the “venue” of the arbitration in the absence of any express designation of a seat would suggest that the parties agreed that London would be the seat of the arbitration (in the absence of anything to the contrary). It is also notable that the court expressly followed the English courts’ approach to the same question. Shashoua is particularly relevant to contracts with Indian parties providing for arbitration that were concluded prior to 6 September 2012, the date of the court’s judgment in Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc. (“BALCO“) (discussed here). As we consider in further detail below, this can have significant implications on the degree of Indian courts’ powers to interfere in arbitration proceedings, grant interim relief, appoint arbitrators or set aside an award, in connection with pre-BALCO agreements.

Background and facts

The parties in Shashoua provided that “the venue of the arbitration shall be London, United Kingdom”. They also provided for arbitration in accordance with the arbitration rules of the International Chamber of Commerce, and that the substantive law of the contract would be Indian law. There was no express choice of seat. After an arbitral tribunal had rendered its award, the award debtor applied to have the award set aside under Section 34 of India’s Arbitration and Conciliation Act, 1996 (the “Arbitration Act“). The award debtor (the respondent) argued that the parties had not expressly designated a seat and the courts should find that India was the proper seat of the arbitration, and consequently, the Indian courts had jurisdiction to set aside the award.

English High Court proceedings

This was not the first attempt by the respondent in Shashoua to argue that India and not London was the seat of arbitration. In an application for interim measures under Section 44 of the (English) Arbitration Act, the respondent argued that India was the correct seat of the arbitration as the parties applied Indian law to the substantive aspects of the agreement and only designated London as the location for the arbitration hearings. In his judgment (Shashoua v Sharma 2009 EWHC 957 (Comm)), Cooke J held that London was the seat of the arbitration since there was an express designation of London as the venue, no alternative designation of a seat and the parties had adopted a supranational body of rules (ie, the ICC Rules). He observed that “London arbitration” was a well-known phenomenon that was often chosen by foreign parties together with a different governing law, and did not place much emphasis on the choice of Indian law as the substantive law.

After the tribunal issued its award following the High Court’s judgment, the respondent applied to set aside the award under Indian law, arguing again that India was the seat of the arbitration.

The Supreme Court’s decision

Prior to hearing this matter, the Indian Supreme Court had already cited Cooke J’s reasoning in Shashoua v Sharma in several other cases, including in BALCO. The respondent argued that the Supreme Court’s references to Cooke J’s decision did not form part of the ratio of those cases, and that in any event, given that the decision was an interim decision of the English High Court, it should not be given substantial weight.

The Supreme Court dismissed these arguments holding that its previous decisions had not only cited Shashoua v Sharma with approval but had relied on its reasoning. It found that Cooke J’s decision was part of the “propositional pyramid” upon which the previous Indian judgments were based.

Implications for pre-BALCO contracts

As we note in our blogpost here, BALCO is an important decision for contracts with Indian parties providing for arbitration. Prior to BALCO, Indian courts held that Part I of the Arbitration Act applied to all arbitrations, seated in India or abroad, unless it was impliedly or expressly excluded by the parties. This meant that it was open to an Indian party to request that the Indian courts exercise their supervisory jurisdiction over offshore arbitrations that had sufficient connections to India.  Crucially, an Indian court could set aside such an award if it found that Part I of the Arbitration Act was not excluded by the parties. BALCO changed this and held that the court’s supervisory power under Part I of the Arbitration Act did not apply to offshore arbitrations meaning that the old rule applied (and continues to apply to) contracts entered into prior to 6 September 2012, such as the one in Shashoua.

As Shashoua and other cases show, pre-2012 contracts can still be the subject of considerable litigation where it is not clear whether the parties intended to exclude Part I of the Arbitration Act. Shashoua is a welcome decision as it shows that the Supreme Court is adopting a pragmatic approach even when it comes to pre-2012 contracts. While the facts of Shashoua are likely to be unique (ie, a prior English judgment on the same issue between the same parties) it is another example of the willingness of the Indian courts to take into account international practices and norms when deciding issues relating to international commercial arbitration.

For more information, please contact Nicholas Peacock, Partner, Donny Surtani, Partner, Nihal Joseph, Associate, or your usual Herbert Smith Freehills contact.

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In Heartronics Corporation v EPI Life Pte Ltd and Others [2017] SGHCR 17, the Singapore High Court considered applications to stay proceedings pursuant to arb-med-arb clauses in the relevant agreements. The defendant had argued that even if attempts at mediation had failed, the arbitration agreement nevertheless remained separate and enforceable.  This decision – which rejected the stay application after finding a repudiatory breach of an integrated med-arb procedure – highlights the unitary nature of certain multi-tiered dispute resolution clauses, and provides helpful guidance on the circumstances in which an arbitration agreement may be rendered inoperative or incapable of being performed.

Background

Heartronics Corporation (“Heartronics“) sued EPI Life Ptd Ltd, its sole shareholder and the latter’s two directors (“EPI“) in respect of a licensing agreement and a distribution agreement for medical devices (“Agreements“).

Heartronics claimed that it had been induced into entering the Agreements as a result of EPI’s false representations, in reliance upon which Heartronics also entered into downstream distribution agreements with third parties to distribute the devices in France and India. It transpired that the devices could not be marketed in either jurisdiction, and Heartronics sought damages and rescission of the Agreements.

The Agreements contained virtually identical dispute resolution clauses (“ADR Clauses“) requiring the parties to submit to the Singapore Mediation Centre (“SMC“) and Singapore International Arbitration Centre (“SIAC“) for resolution by mediation-arbitration (“med-arb“). Heartronics attempted to initiate med-arb proceedings in the SMC, but EPI persistently refused to agree on a date for mediation or to pay the requisite fees. Heartronics eventually commenced proceedings in the Singapore Courts on the basis that the ADR Clauses had been discharged due to repudiatory breaches by EPI.

In response, EPI sought a stay of the proceedings pending the outcome of any med-arb proceedings between Heartronics and EPI, pursuant to section 6 of the International Arbitration Act (“IAA“). In support of its applications, EPI submitted that the ADR Clauses contained not one, but two separate dispute resolution agreements, comprising a mediation agreement and a separate agreement to arbitrate (if mediation failed).  Accordingly, even if EPI had committed repudiatory breaches of the ADR Clauses, such breaches only entitled Heartronics to treat the mediation agreement as having been discharged.  The arbitration agreement remained operative, and as such, court proceedings should be stayed in favour of arbitration.

Decision

In determining whether EPI should be granted a stay, the Court considered the following key issues:

1. Whether the ADR Clauses contained one dispute resolution agreement or two separate dispute resolution agreements.
2. Whether the arbitration agreement in the ADR Clauses had been rendered “inoperative” within the meaning of the IAA due to EPI’s conduct.

The Court also considered – briefly – a subsidiary argument that the defendant’s cessation of business and admitted impecuniosity separately rendered the arbitration agreement incapable of being performed.

ADR Clause was a unitary agreement

The Court considered the provisions of the SMC-SIAC med-arb procedure, which provided for closely intertwined mediation and arbitration proceedings, and found that to view mediation and arbitration separately would be inconsistent with the commercial intentions of the parties, who had expressly agreed to the hybrid mechanism.  Further, if a stay were granted, Heartronics would be compelled to adopt a dispute resolution procedure materially different from that which had been agreed (i.e. the dispute would be referred to arbitration as if the ADR Clauses had not provided for mediation).

Accordingly, the Court found that the obligations to mediate and arbitrate contained within the ADR Clauses constituted a unitary dispute resolution mechanism, the entirety of which needed to be considered as the “arbitration agreement” for the purposes of the IAA.

Arbitration agreement was inoperative

In deciding whether the “arbitration agreement” was inoperative, the Court noted that – in principle – an arbitration agreement would be considered inoperative where a party has committed a repudiatory breach of the arbitration agreement and that repudiation has been accepted by the innocent party.

In RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] SGCA 39 the Court of Appeal described the situations in which an innocent party to a contract may elect to treat a contract as having been discharged by the other party’s breach.  Two such grounds were relied on in this case, namely (1) that the defendant, by its words and conduct, had renounced the contract (specifically, the arbitration agreement) by clearly conveying to the claimant that it would not perform its obligations at all; and (2) that the defendant’s breach deprived the claimant of substantially the whole benefit which it was intended to obtain from the contract (specifically, the arbitration agreement).

The Court held that EPI had committed (and Heartronics had accepted) a repudiatory breach of the arbitration agreement on both bases.  EPI’s actions deprived Heartronics of substantially the whole benefit that it should have derived from the agreement. In failing to pay the necessary SMC fees and continually seeking to postpone the commencement of arbitration, EPI’s actions fell short of what was required for it to participate in good faith in the med-arb process. EPI had prevented Heartronics from proceeding to resolve the dispute in the manner provided for under the ADR Clauses, and these actions had rendered the arbitration agreement inoperative. Similarly, EPI’s actions demonstrated a clear intention not to perform its relevant obligations under the agreed (unitary) disputes procedure, which again justified a finding of repudiatory breach.

On the above basis, the Court dismissed EPI’s applications for a stay of proceedings.

As a subsidiary argument, Heartronics had asserted that EPI’s admitted suspension of business and dormancy since 2015, and its admitted impecuniosity, rendered the arbitration agreement incapable of being performed as there was no prospect of EPI being able to pay the fees for the agreed procedure.  Rejecting this argument, the Court noted that ‘incapability of performance’ required a permanent impossibility in setting the arbitration in motion, not merely transient obstacles; but ultimately it dismissed the argument for lack of cogent substantiating evidence.

Comment

This decision confirms the Singapore Courts’ support for the principle that arbitration is grounded in party autonomy (specifically, that the parties are free to agree how they shall have access to arbitration in the event of a dispute). Parties to (or contemplating) a multi-tiered dispute resolution procedure may  take comfort in the fact that the Singapore Courts are unlikely to allow one party to “cherry pick” aspects of an agreed procedure; particularly where to do so would be tantamount to compelling the other party to adopt a procedure that is materially different from that which was agreed.

Further, a hybrid dispute resolution mechanism, or at least a hybrid whose parts are as closely intertwined as the SMC/SIAC med-arb procedure, should be regarded as a unitary mechanism in which all parts function as integrated components of the parties’ intended dispute resolution procedure.

It seems clear in this case that egregious delays (and other misconduct) on EPI’s part likely played a part in persuading the Court that EPI had committed a repudiatory breach, and should not be entitled to reverse its conduct and insist on arbitration. However, in arriving at its decision, the Court also provided examples of conduct that a court would (or would not) deem to be a repudiatory breach, which should serve as helpful guidance as to the categories of conduct that could render an arbitration agreement inoperative.

The subsidiary issue – whether a party’s impecuniosity could render an arbitration agreement incapable of being performed – has been raised occasionally in cases in Europe and the United States.  Whilst the Singapore Court did not reach a definitive ruling on the issue as a matter of law, the Court’s observations strongly suggest that such factors would not typically be accepted in Singapore as a basis for refusing a stay of proceedings.  No matter how dire a party’s financial circumstances, they would not ultimately prevent an arbitration from proceeding, if the other party chooses to shoulder the whole cost in order to progress the case.

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In Tonicstar Limited v Allianz Insurance and Sirius International Insurance Corporation [2017] EWHC 2753, the English High Court considered an application under Section 24 of the Arbitration Act 1996  (the Act) for the removal of an arbitrator on the basis that he did not satisfy the contractual stipulation as to relevant experience. This judgment is of particular interest given that questions of the removal of arbitrators do not often come before the courts (because they are, in institutional arbitration, typically decided by arbitral institutions so are not usually public). The Court decided to remove the arbitrator on the basis that he had experience of insurance and reinsurance law, rather than required experience in the business of insurance and reinsurance. This decision highlights the importance of the careful drafting of arbitration clauses which specify characteristics of an arbitrator.  It also serves as a reminder of the importance of precedent in the English judicial system.

Background

A dispute arose between the parties under a contract of reinsurance dated 12 February 2001 (the Contract) which incorporated the “Joint Excess Loss Committee, Excess Loss Clauses”. These were a set of standard form clauses, published in January 1997 under the instructions of The Institute of London Underwriters.

The arbitration clause in the Contract provided for the appointment of three arbitrators and specified that “unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years’ experience of insurance or reinsurance“.

The dispute was referred to arbitration pursuant to the Contract.

The issue

The claimant applied pursuant to s24 of the Act to remove the respondents’ nominated arbitrator, Mr. Schaff QC. Whilst the claimant accepted that Mr. Schaff had considerably more than ten years’ experience of insurance and reinsurance law, it argued that he did not have more than ten years’ experience of insurance or reinsurance within the meaning of the arbitration clause, as the clause required experience in the business of insurance or reinsurance.

The claimant relied on Company X v Company Y, unreported (17 July 2000) in which the Court had decided the exact same question of whether a QC with considerable experience as a lawyer in insurance and reinsurance disputes was qualified to act as an arbitrator within the meaning of the same Joint Excess Loss Committee arbitration clause.  In that case, the Court noted that this construction of the clause was supported by the fact that the default appointment bodies specified in the clause were the Chairman of the Lloyd’s Underwriters’ Association and the Chairman of the International Underwriting Association, both of whom were unlikely to be in a position to identify appropriate lawyers.

The respondents submitted that the decision in Company X v Company was obviously wrong, as the ordinary and natural meaning of “experience of insurance or reinsurance” included experience acquired by working with or on behalf of the insurance and reinsurance industry. Such a construction offered the parties the flexibility to nominate an arbitrator whose particular experience made them most suitable for the dispute in question. If the parties had wished to confine their choice of arbitrators to persons working within the insurance or reinsurance industry, they could have used language which made such intention clear.

As a separate and secondary issue, the respondents also argued that the Court had no power to grant the relief sought, as the Tribunal itself should first rule on its own jurisdiction pursuant to the following two provisions of the Act:

• Section 30(1)(b), which provides that the arbitral tribunal may rule on its own substantive jurisdiction as to whether the tribunal is properly constituted; and
• Section 24(2), which provides that if there is an arbitral or other institution or person vested by the parties with power to remove an arbitrator, the court shall not exercise its power to remove the arbitrator unless satisfied that the applicant has first exhausted any available recourse to that institution or person.

Decision

• No departure from precedent

As a starting point, the Court went back to first principles concerning the importance of case precedent, referring to Willers v Joyces [2016] UKSC 44 in which it was held that where there is a previous decision at first instance, a first instance judge should generally follow that decision unless there is powerful reason for not doing so.  The previous decision on the same issue in Company X v Company Y was made 17 months previously (with no subsequent challenge), just 7 months before the Contract was signed and in circumstances where the Joint Excess Loss Committee had produced a revised draft of the Excess Loss Clauses in November 2003 which did not alter the wording of the arbitration clause.  The Court also noted that the decision must have been fairly well-known in the reinsurance market and concluded that there would have to be a very powerful reason for the Court not to follow the decision in Company X v Company Y.

The Court concluded that the decision in Company X v Company Y was not “obviously wrong”, as it could be supported by reference to the context of the clause, given it was drafted by a trade body. Therefore the Court granted the application despite Mr Schaff QC’s undoubted experience of insurance and reinsurance derived from acting as counsel in those fields.

• Secondary issues

The Court found that it did have the power to grant the application. The two arbitrators appointed by the parties did not have the power to remove one of them, as the power to rule on questions of jurisdiction is different from the power to remove an arbitrator.

In light of the removal of Mr Schaff QC, the Court also determined as a practical matter that the contractual procedure regarding the respondent’s appointment of an arbitrator could also apply to the re-appointment, albeit with “some manipulation” of the contractual wording.  It therefore ordered that the respondents had 30 days from the Court’s decision to appoint a new arbitrator to fill the vacancy.

Comment

This decision emphasises the importance of precise drafting if an arbitration clause specifies particular characteristics required of arbitrators.  In particular, the clause should be clear not as to the relevant experience of the arbitrators, but also the capacity in which such experience has been obtained. This may mean amending standard form clauses. Such attention to detail at the drafting stage should minimise the risk of incurring the delay and costs associated with an arbitrator challenge.

This case also serves as a reminder, especially to those parties from civil law systems, of the importance of judicial precedent in English law. It is clear that the primary factor in the Court’s decision was the previous judgment on the issue. This was the case even though the Court appeared to follow the judgment with some reluctance, concluding that absent the previous decision it may have decided that “the ordinary and natural construction of the phrase in question did not limit the fields in which experience of insurance or reinsurance could be acquired and that the “context” argument was not sufficiently strong to justify implying the suggested limitation that the relevant experience be acquired in the business of insurance or reinsurance“.

Interestingly, the Joint Excess Loss Committee appears to have already responded to this decision in a practical way. The model form arbitration clause in the Joint Excess Loss Clauses has now been amended so that it expressly allows the parties to appoint lawyers or professional advisers to as arbitrators provided they have at least 10 years’ experience of the industry. The new arbitration clause will be effective from 1 January 2018. Parties with contracts which incorporate the previous version of the Joint Excess Loss Clauses may wish to amend their arbitration clause to reflect this change, before any dispute arises.

For more information, please contact Chris Parker, Partner, Elizabeth Kantor, Senior Associate, or your usual Herbert Smith Freehills contact.

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In Neo Intelligence Holdings Ltd v Giant Crown Industries Ltd HCA 1127/2017, the Hong Kong Court of First Instance held that an arbitration clause was not necessarily superseded by a clause in a supplemental agreement that conferred non-exclusive jurisdiction on the Hong Kong courts.

While the two clauses did not sit “wholly happily” together, it was at least possible that the parties intended the jurisdiction clause to govern post-award enforcement, or to indicate the lex arbitri. As a result, the court’s proceedings should be stayed and the question of jurisdiction referred to the arbitral tribunal. The applicant for a stay need only show that there is a prima facie, or plainly arguable, case that the parties are bound by an arbitration clause. Once that threshold is met, it is for the arbitral tribunal to determine its own jurisdiction.

Background

In June 2015, the parties concluded a Letter of Intent (June Agreement), by which they agreed to negotiate the plaintiff’s purchase of 80% stakes in Giant Crown Industries and another company. The parties entered into a supplemental agreement dated 30 November 2015 (November Agreement), which supplemented and varied the June Agreement.

The June Agreement provided for disputes to be negotiated by the parties, “failing which any party may submit the dispute to arbitration in accordance with the UNCITRAL Arbitration Rules then enforce [sic] at the Hong Kong International Arbitration Centre in Hong Kong”.

The November Agreement amended certain of the parties’ obligations under the June Agreement. It contained the following clause:

“4.1  The conclusion, the validity, interpretation of performance of this Supplemental Letter of Intent and [any] dispute arising therefrom shall be governed by the laws of the Hong Kong Special Administrative Region of the People’s Republic of China, and the parties agree to submit to them on exclusive jurisdiction of the Hong Kong Special Administrative Region.”

The stay application

The defendants applied to stay the court’s proceedings under s.20(1) Arbitration Ordinance. S.20(1) requires the court to order a stay if the matter before it is the subject of an arbitration agreement, unless it finds that the agreement is null and void, inoperative or incapable of being performed.

The plaintiff objected to the stay application, arguing that the dispute before the court arose from both the June and November Agreements, and that when construing those Agreements, the parties’ intentions had to be considered.. The plaintiff’s case was that, against this backdrop, the parties’ express decision to include the jurisdiction clause in the November Agreement must mean that the parties intended to supersede the arbitration agreement in the June Agreement.

The defendant disagreed, arguing that the November Agreement only amended certain aspects of the June Agreement. . There was no reference to the November Agreement superseding or amending the arbitration clause in the earlier June Agreement. Rather, Clause 4.1 of the November Agreement was a governing law clause which “sits happily, and can operate “in parallel” alongside the arbitration clause in the June Agreement.

The court’s decision

The case was heard by Deputy Judge Sherrington, who agreed with the defendant. Sherrington DJ held that it was “clear that the parties did not intend the November Agreement to replace the June Agreement” in its entirety. In reaching his decision, he relied on the express provision in the November Agreement that, unless otherwise provided, the June Agreement has full force in accordance with its content. That the November Agreement post-dated the June Agreement, and was in some respects inconsistent with it, did not necessarily mean that the parties must have intended to invalidate the arbitration agreement. Referring to both English and Hong Kong case law, the judge found that it was not necessarily inconsistent to have both arbitration and jurisdiction clauses in the same agreement. The clauses in this case had “differing scopes”, with the jurisdiction clause in the November Agreement operating to confirm that Hong Kong law governs the parties’ agreement and where the non-exclusive submission to the Hong Kong courts “could be … the lex arbitri or for the purposes of post arbitral enforcement“.

On this basis, and absent “overwhelming evidence of an unequivocal waiver” of the arbitration clause in the June Agreement, the judge ordered a stay. To do otherwise would be to “usurp the function of the arbitral tribunal, which is empowered [by law] to rule on its own jurisdiction“.

Moreover, the defendant had done enough to establish a “plainly arguable” case that the parties were bound by an arbitration agreement. Thus, the s.20(1) threshold test was met, and the court was required to stay its proceedings.

Conclusion

As the judge noted, it can be difficult to reconcile the presence of both arbitration and jurisdiction clauses in the same agreement. However, common law courts will typically strive to do so, in order to uphold the fundamental principle that parties who have agreed to arbitrate should not find themselves in court instead. Although the courts have shown themselves willing to reconcile such apparent inconsistencies, a decision to stay proceedings under s.20(1) merely refers the final decision on jurisdiction to the arbitral tribunal. The parties in this case do not yet have a final resolution to their dispute over jurisdiction, let alone the substantive issues in dispute.

This case reminds draftsmen to pay close attention to the dispute resolution mechanisms they include in a contract, particularly supplemental or amendment agreements. Far from being mere “boilerplate” provisions, these clauses are a crucial pillar in the contractual framework. If undermined, there is a risk they will not survive.

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On 19 December 2017, the Singapore International Arbitration Centre (SIAC) released a proposal on cross-institution cooperation and consolidation of arbitral proceedings conducted under different arbitral rules (the SIAC Proposal).

SIAC has invited comments on its Proposal by 31 January 2018. The memorandum enclosing the SIAC Proposal can be accessed here.

Current framework for cross institution consolidation of arbitral proceedings

Currently, the arbitration rules of most arbitral institutions (including those of the ICC, SIAC, HKIAC and LCIA) contain provisions for consolidation of arbitral proceedings into a single arbitration under certain conditions. These consolidation provisions typically require (among other criteria) that the parties’ arbitration agreements are “compatible“. A necessary element of compatibility is that the arbitration agreements refer to the same institutional arbitral rules. In practical terms, this means that while an ICC arbitration may potentially be consolidated with another ICC arbitration, it cannot be heard together with a SIAC, HKIAC or LCIA arbitration. SIAC argues that this requirement limits the types of international arbitrations that can be consolidated and prevents many interrelated disputes from being heard together.

SIAC’s proposal for a cross institution consolidation framework

The Proposal put forward by SIAC seeks to provide a solution to allow arbitral proceedings conducted under different arbitral rules to be consolidated.

Main features

Under the Proposal, leading arbitral institutions would adopt and incorporate into their respective arbitration rules a “consolidation protocol“, which sets out the framework for the review of consolidation applications when two or more arbitration institutions are involved and governs which institution will administer the consolidated proceedings.

When an application for consolidation of arbitrations initiated under the arbitration rules of two or more arbitral institutions is made, a joint committee composed of appointed members of the Courts or Boards of the concerned institutions would decide (applying the framework set in the protocol) whether the arbitrations in question should be consolidated. Alternatively, one institution could be authorised under the protocol to determine any cross institution consolidation application based on its own consolidation rules.

If consolidated, the arbitrations would be administered only by one institution applying its own arbitration rules. The administering institution would be designated on the basis of objective criteria to be agreed in the Protocol, such as the number of disputes subject to the different rules or the time of commencement of the first proceeding.

No opt-in necessary for the parties

Under the SIAC Proposal, the consolidation protocol would form part of the arbitration rules of the participating institutions. Parties would therefore be deemed to have consented to cross-institution consolidation (provided that the conditions set in the protocol are met) by choosing arbitration rules which incorporate the protocol. There would be no requirement for the parties to include a dedicated provision in their arbitration agreements.

Arbitral institutions could however decide to make the protocol applicable only to agreements concluded after the date of the protocol or initially make the protocol an ‘opt-in’ mechanism for a transition period.

Comment

The SIAC Proposal offers an interesting basis for further discussions between arbitral institutions. Pending feedback from other leading institutions (which SIAC says it has sought), SIAC’s approach towards greater cooperation between institutions in this area is to be welcomed. As the recent case of Autoridad del Canal de Panama (see our post here and here) illustrate, parallel proceedings too often result in significant costs and complexity for the parties.

The limited potential for consolidation of related disputes without matching arbitration provisions or parties can come as a surprise to some users, particularly those more used to litigation where a court may be more proactive in consolidating disputes before it. Arbitration is a creature of contract, however, and it is critical that all parties have given their consent to the resolution of any disputes by arbitration. This consent must be demonstrated for each contract and between all parties in order for a Tribunal to have jurisdiction to hear the dispute before it.

A potentially controversial issue raised by the Proposal is therefore the question of party consent to consolidation by this mechanism. Under the SIAC Proposal, parties to an arbitration agreement will be deemed to have accepted the possibility of consolidation through their choice of the applicable institutional arbitral rules in its different agreements. The Proposal will then result in the election of a single forum and set of arbitral rules for the resolution of the disputes between the parties, while the parties’ arbitration agreements designate different institutions. The Proposal could, therefore mean that a dispute under a contract providing for (say) arbitration under the SIAC Rules will – because it is related to a dispute arising under a different contract containing an ICC arbitration clause – be resolved by arbitration conducted under the ICC Rules and administered by the ICC Court.  While that may make sense in terms of efficiency and avoiding inconsistent outcomes, it may come as surprise to the parties concerned that agreeing to SIAC arbitration could – without any further agreement – require them to arbitrate pursuant to the rules of a different institution.

If the idea of a protocol is adopted, it would seem prudent for it only to apply to agreements entered into after the date of adoption, in order to avoid obvious issues of party consent being raised against the process at a challenge or enforcement stage. Similarly, it would seem prudent to clarify that parties may opt out of cross-institutional consolidation if they wish. Some transactions will have different fora chosen for the resolution of disputes under different agreements for a reason, and it would be important for this to be recognised.

Finally, significant thought will need to be given to ensuring that the criteria for consolidation under the Protocol are not left open to party manipulation. There are some significant differences between the arbitration rules of leading arbitral institutions, which can be seen by parties as more or less advantageous to their own position, particularly once a dispute has arisen. Parties may seek to exploit the criteria for cross-institution consolidation of proceedings, for example by commencing an arbitration under the agreement with the institutional rules that most benefit them first to sway cross-institutional consolidation towards that particular institution.

All that said, this is a welcome and innovative proposal from SIAC and practitioners will no doubt be keenly interested in how this Proposal is received. As the latest round of arbitration rule revisions has demonstrated, arbitral institutions are quick to adopt new and innovative ideas to ensure arbitration meets the user requirements. It may be that this Protocol is the next new innovation for the industry.

Authors

Alastair Henderson

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Since our previous report on the Delhi High Court refusing to uphold an arbitration clause that provided for the tribunal to be comprised of one party’s employees or retired employees, there have been several cases which have provided useful guidance in relation to the appointment of arbitrators under the new provisions in the Arbitration and Conciliation (Amendment) Act 2015, which came into force on 23 October 2015 and amended the Arbitration and Conciliation Act 1996 (“Amended Act“).  The Amended Act applies to arbitration agreements which pre-date the amendments.[1]

The recent jurisprudence on appointing former employees as arbitrators has dealt with a number of issues, but four key principles emerge:

1. The provisions of the Amended Act dealing with independence of arbitrators do not prohibit the appointment of former employees.
2. Nonetheless, it is still important for there to be no doubts in relation to the neutrality, impartiality and independence of the arbitral tribunal. Therefore, where a party has a contractual right to compose a list or panel from which the other parties are to select an arbitrator, a ‘broad based’ approach must be adopted.
3. The Courts have adopted a narrow definition of what constitutes an employee, and therefore all government employees are not automatically ineligible to be appointed as an arbitrator where one of the parties is a government body.
4. If an ineligible person (e.g. an employee) was nominated as an arbitrator in the arbitration agreement but is now ineligible as a consequence of the Act, that person cannot nominate another independent arbitrator, notwithstanding what the agreement might provide.

Eligibility of former employees

Section 12(5) read along with paragraph 1 of Schedule 7 of the Act deals with the appointment of employees as arbitrators. Section 12 (5) states that “[N]otwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator…”
Paragraph 1 of Schedule 7 states that “The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with the party.”

In the case of Reliance Infrastructure v Haryana Power Generation Corporation Ltd[2], the Punjab and Haryana High Court found that “past relationships” in the Act only referred to “other business relationships”, i.e. the word “past” did not apply in respect of an employee, consultant or advisor. Therefore, in this case a former Chief Secretary of the State of Haryana was eligible to be appointed as an arbitrator.

Since then, the cases of Offshore Infrastructure Limited v Bharat Heavy Electricals Limited[3] and M/S Rahee Infratech Limited vs The Principal Chief Engineer[4], both in the Madras High Court, have confirmed that former employees can be appointed as arbitrators.

Supreme Court emphasis on neutrality, impartiality and independence

In the case of Voestalpine Schienen GmbH v Delhi Metro Rail Corporation Ltd.[5], the Respondent (DMRC, a public sector railways body) initially provided a list of five arbitrator candidates, and invited the Petitioner to nominate its arbitrator from this list (as provided for in the arbitration agreement).  All five candidates were serving or retired engineers of government departments or public sector undertakings.  The Petitioner objected on the basis that the DMRC was a public sector undertaking and that the approach set out in the arbitration agreement would lead to the appointment of “ineligible persons”, and applied to Court for a retired judge to be appointed as arbitrator.  Prior to the hearing, the DMRC put forward an expanded list of 31 names, all of whom were current or former government employees, but not all of whom were from the Railways, and invited the Petitioner to make its choice from this expanded list.

The Supreme Court dismissed the petition on the basis that the expanded list was appropriate, as it did not contain any persons connected with the DMRC.  In so doing, the Court emphasised the importance of neutrality, impartiality and independence, citing authorities from both the UK Supreme Court and the French Cour de cassation.  However, whilst it made clear that the Petitioner had to nominate its arbitrator from the list of 31 names, it also queried the provisions in the DMRC’s arbitration agreement which gave the DMRC the power to put forward a shortlist of five names from which the other party would have to choose.  Whilst the DMRC (ultimately) opted not to invoke that power in this case, the Court noted that this approach may create suspicion in the minds of opposing parties.  It also questioned the need for the panel to be restricted to serving or retired public sector engineers, noting that such panels should be ‘broad based’, and ought to include persons from other backgrounds, such as judges, lawyers and accountants.

In subsequent cases the Delhi High Court[6] has held that, whilst a party may have a contractual right to provide a list from which an arbitrator must be chosen, such a list must not be limited to ex-employees and must be broad based so as not to give rise to apprehensions in the minds of the other party that would adversely affect its confidence in the arbitral process.  In Afcons Infrastructure v Rail Vikas Nigam Limited, the Court declined to require the Petitioner to choose from a list of former Railways employees, even though such individuals are not strictly prohibited by the Amended Act.  It instead allowed a retired Supreme Court judge to be appointed on the Petitioner’s behalf (thus departing from the contractual mechanism).

Narrow definition of who an employee is

The breadth of the definition of “employee” was considered in Voestalpine Schienen. The Petitioner argued that the list of nominees provided by the Respondent, DMRC, contained individuals who worked with the Railways and therefore should be regarded employees of the Respondent. The Court held that whilst such individuals worked for Railways entities or other public sector undertakings, they were not in any way related to the DMRC, and were therefore eligible.  It also noted that the named parties did not fall within the scope of the ‘red’ or ‘orange’ lists of the IBA Guidelines on Conflicts of Interest in International Arbitration.

The Chhattisgarh High Court applied the reasoning in Voestalpine Schienen in the case of Surendra Kumar Chhabda vs State of Chhattisgarh[7], although it noted that the position might be different if it were in relation to former employees of private sector parties.

An ineligible arbitrator cannot appoint a nominee

In the case of TRF Ltd v Energo Engineering Projects Ltd[8], the arbitration clause stated that unless otherwise agreed, the sole arbitrator was to be the Managing Director of the Respondent or his nominee. The Supreme Court held that since the Energo’s Managing Director was not eligible to be an arbitrator (as he was an employee) any nominee picked by him would also be ineligible as this would be “tantamount to carrying on the proceeding of arbitration by himself“.

A similar issue arose in the case of Bharat Broadband Network Limited v United Telecoms Limited[9], where the arbitration agreement provided that the Chairman of the Petitioner or his nominee was to be appointed as sole arbitrator. This provision would ordinarily have been unenforceable on the basis of TRF v Energo.  However, the Court noted that the conditions in Section 12(5) of the Act can be waived by the parties subsequent to disputes having arisen, by an express agreement in writing. In this case the Court noted that after the Petitioner’s Chairman appointed an arbitrator, the Respondent continued to participate in the proceedings, including by filing a statement of claim without any reservation.  Because these steps were taken in writing, the Court considered that the waiver provisions in section 12(5) of the Amended Act had been engaged.

Comments

Historically, public sector undertakings in India have often appointed arbitrators with whom they have an existing relationship such as past or current employees of that public sector body, or other current or former civil servants.

The general thrust of the decisions since the Amended Act came into force, however, point towards at least a partial change in that practice.  It is clear that current employees and any person nominated by them cannot serve, unless the parties agree otherwise in writing after the dispute arises (although as the case law shows, if a party wishes to make an objection, it should do so at the first opportunity).  Also, whilst public sector bodies can stipulate in their contracts that arbitrators be chosen from lists comprising current or former employees of other public sector bodies, those lists should be broad based and should not give rise to apprehensions in the minds of opposing parties.  Otherwise, even if they do not strictly fall foul of the Amended Act, the Courts may still be willing to disapply them and impose other arrangements instead.

Finally, it is worth noting again the continuing practice of the Indian Supreme Court in drawing on international jurisprudence and encouraging the development of Indian arbitration law in line with global norms and standards.

[1] Sahib Infrastructure v Secretary to the Government of India, Madhya Pradesh High Court, 14 December 2017.

[2] Punjab and Haryana High Court, 27 October 2016.

[3] Madras High Court, 9 December 2016.

[4] Madras High Court, 10 October 2017.

[5] Supreme Court of India, 10 February 2017 (MANU/SC/0162/2017).

[6] Afcons Infrastructure Ltd v Rail Vikas Nigam Limited (29 May 2017) and S.P. Singla Constructions (P) Ltd. vs Delhi Metro Rail Corporation Limited (25 September 2017).

[7] Chattisgarh High Court, 14 December 2017.

[8] Supreme Court, 3 July 2017.

[9] Delhi High Court, 22 November 2017.

For more information, please contact Donny Surtani, Partner,  John Mathew, Associate, or your usual Herbert Smith Freehills contact.

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In Arjowiggins HKK2 Ltd v Shandong Chenming Paper Holdings Ltd [2018] HKCFI 93, the Hong Kong Court of First Instance has granted an anti-suit injunction in favour of a recipient of a Hong Kong arbitral award to restrain the continuation of the overseas proceedings by the losing party. The Court held that such proceedings were essentially commenced to re-litigate the same matters that had already been decided in a previous arbitration and ultimately to avoid honouring the arbitral award.

Facts

On 27 October 2005, the parties entered into a contract (Contract) to establish a joint venture company (Company) in the Mainland for the manufacturing of paper products. Under the Contract, any dispute arising out of or in connection with the Contract shall be resolved by arbitration in Hong Kong in accordance with the Arbitration Rules of the Hong Kong International Arbitration Centre.

Disputes arose and the Claimant commenced arbitration proceedings pursuant to the Contract against the Respondent for breach of contract (Arbitration). The Claimant obtained an award in its favour on 20 November 2015 (Award).

Subsequently, the Respondent instituted further proceedings in Hong Kong and Mainland China:

1. in February 2016, the Respondent applied to the Hong Kong Court to set aside the Award and an order of the Court granting leave to the Claimant to enforce the Award. The application was dismissed;
2. in November 2016, the Respondent applied for an injunction in Hong Kong to restrain the Claimant from filing a winding up petition against the Respondent. The Court dismissed the application and considered it to be an “unethical” attempt to refuse to honour the Award; and
3. on 5 July 2017, the Respondent filed proceedings before the Intermediate People’s Court of Weifang City in the Shandong Province in China (Weifang Court) against the Claimant, its director Mr Tong Chong (Tong), and the Company (2017 Proceedings). In fact, the Respondent had already instituted the same proceedings, against the same parties, before the same Chinese Court in 2013 (2013 Proceedings). The 2013 Proceedings were subsequently withdrawn by the Respondent at the request of the judge in the Weifang Court.

In view of (3), the Claimant applied for an injunction under section 21L of the High Court Ordinance (Cap. 4) to restrain the Respondent from continuing the 2017 Proceedings. This was on the grounds that (i) the 2017 Proceedings were instituted in breach of the parties’ arbitration agreement; and (ii) the Respondent’s conduct was vexatious and oppressive, since the Respondent was attempting to re-litigate matters which had already been decided by the arbitral tribunal and the Hong Kong Court. Alternatively, the Claimant sought a stay of the 2017 Proceedings.

Findings

The Court found in favour of the Claimant and granted an anti-suit injunction. In reaching its conclusion, the Court took into account and analysed (i) the claims made in the 2017 Proceedings; and (ii) the conduct of the Respondent.
(i) The claims made in the 2017 Proceedings

Notwithstanding the Respondent’s assertion that the issues in the 2017 Proceedings did not arise out of and were entirely unrelated to the Contract so as to come within the ambit of the arbitration clause, the Court found that the claims in the 2017 Proceedings fell within the scope of the exclusive arbitration clause in the Contract which had already been raised and dealt with in the Arbitration. As such, the Respondent was bound by the findings and determination in the Award, and the Claimant was contractually entitled to restrain the continuation of the 2017 Proceedings or ask for them to be stayed.

(ii) Respondent’s conduct

The Court found that the Respondent, by refusing to accept its liability under the Award, displayed “intentional and deliberate disregard of the order of this Court” and “complete disrespect for the arbitration agreement and the arbitral process to which it had voluntarily agreed“. The Court accordingly saw “no just or fair basis or cause” to exercise its discretion in favour of the Respondent.

Comment

The use of anti-suit injunctions to restrain foreign proceedings in breach of an arbitration agreement is becoming increasingly common. This case is a helpful illustration that the Hong Kong Court will not hesitate, in an appropriate case, to grant such relief, even after an arbitral award is obtained. It is a further example of the Court’s pro-arbitration stance in the context of attempts to re-litigate essentially the same disputes that have already been decided in arbitration. This is welcome reassurance that even where the claims are under the guise of different causes of action and ostensibly between different parties in litigation versus arbitration, the Court will not permit arbitral awards to be re-opened or re-argued.

For further information, please contact Dominic Geiser, Partner, Jojo Fan, Senior Associate, or your usual Herbert Smith Freehills contact.

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Jojo Fan

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In its recent decision in the case of A v B [2017] EWHC 3417 (Comm) (available here), the English Commercial Court (the “Court“) set aside the tribunal’s award upholding its own jurisdiction, on the grounds that the LCIA Rules 2014 do not permit a party to commence a single arbitration in respect of disputes under multiple contracts.  As a result, the Claimant’s Request for Arbitration was invalid. The Court also held (contrary to the tribunal’s award) that the Respondent had not lost its right to object to the tribunal’s jurisdiction by failing to raise its jurisdictional challenge until shortly before filing its Statement of Defence.

This is a rare instance of the English court setting aside a tribunal’s award and a significant reminder to parties to transactions involving multiple related contracts to consider efficient resolution of disputes at the contract drafting stage.

Background to the case and summary of the arbitration proceedings

Under two separate contracts (the “Contracts“) B agreed to sell to A two consignments of crude oil. The Contracts were governed by English law and provided for arbitration under the LCIA Rules 2014, seated in London.

B commenced arbitration in September 2016 in a single Request for Arbitration (the “Request“) accompanied by payment of a single registration fee, claiming the full purchase price due under each of the Contracts.  A served its Response, denying liability and stating that its Response should not be construed as submission to the arbitral tribunal’s jurisdiction to hear B’s claim as formulated.  A reserved its rights to challenge the jurisdiction of the LCIA and any tribunal appointed and repeated similar statements in subsequent correspondence with the LCIA and the tribunal.

On 24 May 2017, A challenged the jurisdiction of the tribunal contesting the validity of B’s Request on the grounds that it purported to refer claims to a single arbitration under both Contracts.  A served its Statement of Defence on 2 June 2017 (the “Defence“), without prejudice to its jurisdictional challenge.

On 7 July 2017, the tribunal issued a partial award on jurisdiction dismissing A’s challenge on the grounds that it was brought after the expiry of the period for doing so under Article 23.3 of the LCIA Rules. The tribunal did not determine the merits of A’s objection to jurisdiction.  On 4 August 2017, A challenged the tribunal’s award under section 67 of the Arbitration Act 1996 (the “Act“).  The Commercial Court upheld the challenge.

The parties’ arguments and the Court’s findings

The Court decided two key issues.

1. Was a single Request for LCIA arbitration, seeking to refer disputes under two separate contracts (each containing an LCIA arbitration clause) valid?
2. If the Request was not valid, had the Respondent lost the right to object by failing to take the point until shortly before its Defence was due?

• Validity of the Request for Arbitration

A contended that the Request was contrary to Article 1(1) of the LCIA Rules and that it was therefore invalid and ineffective. B accepted that an arbitration under the LCIA Rules can only encompass a dispute arising under a single arbitration agreement, but argued that the Request validly commenced two separate arbitrations under each of the Contracts.  B asserted that the references to the singular in Article 1 (a single “arbitration”, a single “written request” and a single “arbitration agreement”) include the plural.

The Court denied that references to the singular under Article 1 should be read as including the plural, holding:

• The LCIA Rules treat a single Request as giving rise to a single arbitration, the payment of fees for one arbitration and the formation of a single arbitral tribunal. This is reinforced by Article 22.1(x), which gives the tribunal the power to consolidate two or more arbitrations into a single arbitration, but only where all parties consent.
• B’s position that it commenced two arbitrations was inconsistent with the LCIA Rules because B’s case: (i) would allow it to pay only one registration fee; and (ii) would require that the tribunal be appointed in respect of both arbitrations, notwithstanding that the absence of party consent to this.
• Other cases in which it had been possible to commence a single arbitration referring to multiple contracts could be distinguished from the present case because in those cases there were no applicable arbitral rules preventing a single arbitration.
• A reasonable person in the position of the recipient would have understood the Request as starting a single arbitration (for example, B claimed a single amount of damages and referred to the seat of arbitration and the governing law of the arbitration agreement in the singular). The Request was therefore an ineffective attempt to refer separate disputes to a single arbitration, as a result of which it was invalid. The tribunal therefore did not have jurisdiction to make the award.

• Loss of the right to object to the tribunal’s jurisdiction

Article 23.3 of the LCIA Rules provides that an objection to the tribunal’s jurisdiction “shall be raised as soon as possible but not later than the time for its Statement of Defence“.

The tribunal’s analysis of Article 23.3

The tribunal reasoned that: (i) save in exceptional circumstances, “as soon as possible” in Article 23.3 requires a Respondent who knows of an objection when it receives the Request to raise that objection in its Response and, more generally, requires a Respondent to raise an objection as soon as it knows or ought to know the facts giving rise to the objection; and (ii) a general reservation of a party’s position as to jurisdiction does not serve to keep the right to object open.  On the basis that A’s delay in raising its objection was unjustifiable, the tribunal rejected A’s challenge.

The Court’s analysis of Article 23.3

The Court concluded that A had not lost the right to object to the tribunal’s jurisdiction by only raising its objections shortly before its Defence was due:

• The starting point to determine the timeframe in which A was entitled to object should be sections 31 and 73 of the Act, as those provisions are mandatory and “it is highly unlikely that the LCIA Rules were intended to have an effect which materially diverges from such provisions“.
• Section 31(1) (which provides that an objection to the substantive jurisdiction of the tribunal at the outset of the proceedings “must be raised by a party not later than the time he takes the first step in the proceedings“) does not impose a requirement that an objection be made as soon as possible (or earlier than the Statement of Defence). This closely follows the equivalent provision in the UNCITRAL Model Law.  Section 31(1) requires only that the objection be raised not later than the Statement of Defence.
• The words “as soon as possible” in Article 23.3 of the LCIA Rules do not impose a stricter requirement than section 31(1), but operate to exclude “untimely objections”.
• Although section 73 of the Act provides that the right to object is lost where a party takes part in proceedings and does not raise an objection “forthwith”, this does not impose any stricter requirement nor require Article 23.3 to be read as doing so. An alternative to the requirement to object “forthwith” is to object “within such time as is allowed by the arbitration agreement or the tribunal or by any provisions of this Part“, which includes section 31(1).

Comment

The Court’s decision underlines the need to consider carefully at the outset of proceedings what is required by the applicable institutional rules to commence an arbitration, particularly in the case of multi-contract or multi-party proceedings.  Specifically, the decision highlights the contrast between the position under the LCIA Rules and the rules of other major institutions which permit parties to commence a single arbitration in respect of multiple contracts.

Under the LCIA Rules, rather than commencing a single arbitration, parties instead need to issue multiple separate Requests for Arbitration and then seek to have the separate arbitrations consolidated.  In order to circumvent this, parties choosing LCIA arbitration should expressly agree in their arbitration clauses that the parties are permitted to commence a single arbitration to resolve disputes arising under different related agreements, and they should consider consolidation at the contract drafting stage.

It will be interesting to see if the LCIA makes any further amendments to its Rules going forward in order to allow parties to bring claims under multiple contracts in a single arbitration.  This would be consistent with the changes already introduced in the LCIA Rules 2014 to increase efficiency in respect of claims under multiple related contracts.

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

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In Allianz Insurance and Sirius International Insurance Corporation v Tonicstar Limited [2018] EWCA Civ 434, the English Court of Appeal has reversed the decision of the High Court on whether a party-appointed arbitrator met the contractual requirements as to requisite experience. The Court of Appeal held that that an English QC with experience of insurance and reinsurance law was sufficient to comply with a contractual clause requiring arbitrators to have “experience of insurance and reinsurance”.

This decision is of particular interest as such challenges to arbitrators rarely come before the courts. It highlights once again the importance of drafting arbitration clauses clearly, particularly where parties require their arbitrators to possess certain qualifications or experience.

The first instance decision

As we previously reported here, the parties entered into a contract of reinsurance in 2001 which incorporated the “Excess Loss Clauses” of the Joint Excess Loss Committee (“JELC“). The arbitration clause contained the following provision:

“Unless the parties otherwise agree the arbitration tribunal shall consist of persons with not less than ten years’ experience of insurance and reinsurance.”

The appellants appointed Mr. Schaff QC to act as an arbitrator. The respondent successfully applied under s24 of the Act to remove Mr. Schaff on the basis that he did not satisfy the above requirement. The respondent’s argument was that whilst Mr. Schaff had considerably more than ten years’ experience of insurance and reinsurance law, he did not have more than ten years’ experience in insurance or reinsurance itself.

The respondent relied on the precedent set by an unreported Commercial Court case called Company X v Company Y, which had considered an identical clause and decided that a QC who had more than ten years’ experience of acting in insurance and reinsurance disputes did not qualify for appointment under the clause.

The judge at first instance in Tonicstar granted the application.  He was not persuaded that there were sufficiently powerful reasons for departing from the decision in Company X v Company Y.  He relied on the following factors in reaching that conclusion: (i) the wording of the arbitration clause was not altered when the JELC produced a new addition of the clauses (ii) the decision must have been fairly well-known in the reinsurance market and therefore formed part of the relevant background and (iii) that decision had stood unchallenged for 17 years. However, he granted permission to appeal, recognising that the Court of Appeal would not be constrained from departing from the first instance decision in the same way as the High Court.

Court of Appeal decision

Interpretation of the clause

The Court of Appeal turned first to the meaning of the arbitration clause. It noted that it did not say that the person appointed as an arbitrator must have been employed in the insurance or reinsurance industry for at least ten years. In fact, the clause did not impose any restriction on the way in which that experience had been acquired.

The Court also did not consider that the context of the clause justified reading any such limitation into the clause – the fact that JELC clauses are drafted by a trade body did not mean that only members of the trade would be suitable to arbitrate disputes between parties who incorporate the clauses in their contract. Indeed, the contract clearly required the tribunal to apply the laws of England. Given that the arbitrator’s task is to decide the dispute by applying the law, it reasoned that you might expect parties to expressly exclude persons with expertise in the law if that is their intention. Finally, the Court of Appeal was also not persuaded by the suggestion that the Chairmen of the Lloyd’s Underwriting Association and the International Underwriting Association would not be able to identify any lawyers suitable for appointment as arbitrators.

The Court of Appeal rejected the respondent’s argument that there was a distinction between experience of insurance and reinsurance itself, and insurance and reinsurance law. It therefore concluded that there was no clear expression of any intention to restrict the parties’ freedom of choice by excluding a lawyer from eligibility to act as arbitrator.

Departure from precedent

The Court of Appeal then addressed the secondary question of whether to depart from the decision in Company X v Company Y. It noted that there would be two key reasons for adhering to the previous decision: first, earlier decisions may form part of the relevant background against which the parties have contracted, and second, adherence to an established interpretation provides certainty in commercial law.

In this case however, the contract was entered into only 7 months after Company X v Company Y was decided, and, as that case was not reported, it was not realistic to regard that decision as forming part of the relevant background reasonably available to the parties at the time of contracting. The Court also concluded that even had the contract been made more recently, its decision would have been the same, as the assumption that court decisions have been taken into account should not be carried too far (and may depend on the degree of publication of the decision in question), and context must not be used to impose on the text a meaning which it cannot reasonably bear. As regards legal certainty, certainty is also enhanced if contractual language is interpreted in accordance with its natural meaning, and there is value in the ability of a legal system to correct error. It therefore concluded that the decision in Company X v Company Y could not be defended and should be overruled.

Comment

This decision highlights yet again the importance of clear drafting of arbitration clauses, particularly when specifying the characteristics required of arbitrators. If parties intend to limit their pool of potential arbitrators to those with particular trade experience, then they should explicitly say so in their clauses. It is a reasonable assumption that the parties intend their arbitrator(s), whose task is generally to decide a dispute by applying the law, to have, or be able to have, a legal background.

For more information, please contact Chris Parker, Partner, Elizabeth Kantor, Senior Associate, or your usual Herbert Smith Freehills contact.

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Elizabeth Kantor

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In a recent Court of First Instance case before Harris J, Southwest Pacific Bauxite (HK) Ltd (Company) sought to strike out a winding-up petition issued against it by Lasmos Ltd (Petitioner). The ground of insolvency relied on by the Petitioner was a statutory demand of US$259,700.48 (Debt), arising out of a management services agreement (MSA) between the Company and the Petitioner (Parties). The Company disputed the Debt.

The issue in this case was the impact of the arbitration clause in the MSA on the exercise of the court’s discretion to make a winding-up order.
Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426

Background
Traditionally, the Hong Kong court’s approach in deciding whether to strike out a winding-up petition was to ask whether the debt was disputed in good faith on substantive grounds (the Test). It was the view of the courts that the mere existence of an arbitration clause in the relevant contract was insufficient to satisfy the Test.

The new Test
Comparing recent authorities from England and Singapore against the Hong Kong approach, Harris J noted a difference in emphasis. Hong Kong courts have typically viewed winding-up petitions as a class remedy, sought on behalf of all creditors against the petitioned company, meaning debts were not subject to the form of recourse (including arbitration) agreed by the parties in a specific contract.

Harris J disagreed with this position, commenting that ‘there is a material distinction between the purpose for which a creditor presents a petition and the interests of the general class of unsecured creditors, who have an interest in a potential winding up’. Having considered case law from England and Singapore, the judge decided to depart from the traditional approach in Hong Kong. He held that:
(a) if the company disputes the debt relied on by the petitioner; and
(b) the contract out of which the debt allegedly arises contains an arbitration clause covering any dispute relating to that debt; and
(c) the company:
(i) takes steps to commence the contractually mandated dispute resolution process under the arbitration clause, which    may include preliminary stages such as mediation; and
(ii) files an affirmation in accordance with Rule 32 of the Companies (Winding Up) Rules (Cap. 32H) demonstrating that it has done so;
the winding-up petition should generally be dismissed.

The judge reiterated that the new approach, in purporting to pay deference to arbitration in winding-up petitions, did not remove the discretion afforded to the Companies Court when deciding whether to make a winding-up order. The presence of an arbitration clause is relevant to the court’s consideration, but is not determinative. In exceptional circumstances – where there is a risk of misappropriation of assets, or where the company has failed to comply with Rule 32, the Companies Court is free to exercise its discretion and order the company to be wound up.

Conclusion
Winding-up petitions brought before the court must be in respect of a ‘debt’, i.e. a monetary claim for a liquidated amount. Thus, until there was a resolution between the Parties as to the amount to be paid under the MSA, no debt was due. The winding-up petition was therefore dismissed.

Kathryn Sanger

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In Warner Bros Feature Productions Pty Ltd v Kennedy Miller Mitchell Films Pty Ltd [2018] NSWCA 81, the New South Wales Court of Appeal overturned the decision of the New South Wales Supreme Court by referring a dispute to arbitration in California pursuant to the parties’ agreement and by ordering a stay on court proceedings pursuant to section 7(2) of Australia’s International Arbitration Act 1974 (Cth). The Court of Appeal applied a pragmatic approach to determine whether an arbitration clause found in standard term contracts used by other members of a company’s corporate group should be incorporated into the parties’ agreement.

Background

Warner Bros Feature Productions Pty Ltd (WB Productions) entered into an agreement with Kennedy Miller Mitchell Films Pty Ltd (KMMF) and Kennedy Miller Mitchell Services Pty Ltd (KMMS). The agreement was in the form of a ‘Letter Agreement’ (Letter Agreement).

A dispute arose regarding, among other things, KMMS and KMMF’s entitlement to a bonus payment under the Letter Agreement for services provided in connection with the production of a film. KMMF and KMMS brought proceedings against WB Productions in the Supreme Court of New South Wales. WB Productions sought a stay on those proceedings on the basis that, pursuant to the Letter Agreement, the dispute should be submitted to arbitration in California. WB Productions’ position was that an arbitration clause had been incorporated into the Letter Agreement as the Letter Agreement contained the following clause: “The balance of terms will be WB and WB standard for ‘A’ list directors and producers, subject to good faith negotiations within WB’s and WB’s customary parameters” (Incorporation Clause). Relevantly, WB Productions sought to incorporate an arbitration clause which was found in standard form contracts used by other members of the Warner Bros Group.

Hammerschlag J, the primary judge, dismissed the application for a stay on the proceedings and determined that the New South Wales Supreme Court had jurisdiction to decide the matter. It was held that none of the contracts which were exhibited as evidence by KMMF and KMMS were agreements to which WB Productions was a party, and that there was “no evidence of any regularity of contracting on the standard terms by [WB Productions] itself”. His Honour also refused to read the clause as including WB Pictures given that the Letter Agreement unambiguously defined ‘WB’ as WB Productions. As such, WB Productions, as distinct from other members of the corporate Warner Bros Group, did not have any terms which were ‘standard’ and which could be incorporated into the Letter Agreement.

The applicants WB Productions and Warner Bros Entertainment Inc subsequently appealed the decision to the New South Wales Court of Appeal.

Court of Appeal Decision

Chief Justice Bathurst delivered the leading judgment and drew upon the constructional approach in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 in interpreting the Letter Agreement which required: “consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.”

The first issue for the Court of Appeal’s consideration was whether the Letter Agreement incorporated terms which were “WB Standard for ‘A’ list directors and producers prior to good faith negotiations occurring.” His Honour held that the proper construction of the clause was that the standard terms “were immediately incorporated, while leaving room for subsequent negotiations about their precise effect.” Accordingly, the Incorporation Clause did not require that the parties engage in good faith negotiations prior to the incorporation of standard terms.

The second and primary issue for determination was whether the arbitration clause was incorporated into the Letter Agreement. On this point the Court of Appeal disagreed with the decision of the primary judge. Bathurst CJ noted that the evidence established that WB Productions (the contracting entity) was under the control of WB Pictures and the fact that negotiations in respect of the film occurred between WB Pictures business affairs executive in conjunction with the Senior Vice-President and General Counsel and that of the United States representatives of KMMF and KMMS. In these circumstances, it was held that ‘WB standard’ referred to in the clause were terms which were ‘standard’ for companies generally, throughout the Warner Bros Group. Rather than evaluating what constitutes a ‘standard’ term based on the frequency of usage by WB Productions or use in a “sufficient preponderance of cases”, the Court of Appeal preferred to describe terms which are ‘WB standard’ as “terms which are habitually proffered by companies in the Warner Bros group for agreements with ‘A’ list directors and producers.”

The Court of Appeal then noted a number of factors which suggested that the arbitration clause was habitually proffered in Warner Bros Group agreements relating to ‘A’ list directors and producers. These included: that both of the 2009 Form Agreements contained the same arbitration clause; that this arbitration clause had been used since the early 2000s (as indicated by the 56 agreements in evidence) and that a substantially similar arbitration clause was also used in additional ‘Certificate of Employment’ agreements made between the same parties (including WB Productions).

As a result, it was held that the clause requiring arbitration in California contained in the 2009 Form Agreements was incorporated as a term which was ‘WB standard for ‘A’ list directors and producers’ into the Letter Agreement. Given that the procedure in relation to arbitration was governed by Californian law, the law of a Convention country (the United States), the proceedings were stayed under s 7(2) of the International Arbitration Act 1974 (Cth).

Comment

While it is significant that in this case the Court of Appeal determined that a standard arbitration clause used by one corporate entity could be incorporated into the contract of another entity in the same group, it must be noted this was largely a question of contractual construction which will always be approached on a case-by-case basis. Absent the Incorporation Clause there would have been no arbitration agreement, although had the arbitration clause been included directly within the Letter Agreement then it is unlikely that this dispute would have arisen in the first place. The case reinforces that it is important for those drafting arbitration agreements to take care to ensure that they are incorporated into the contract.

Brenda Horrigan

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Mitchell Dearness

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

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

Background

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

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

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

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

Russian proceedings

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

Cypriot proceedings

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

LCIA arbitrations

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

English court proceedings

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

The court’s decision

Court’s general power to issue anti-suit injunction

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

The application need not be made to the arbitrators

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

Russian proceedings are in breach of arbitration agreements

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

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

Russian insolvency proceedings within the scope of the arbitration agreements

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

Russian proceedings are arbitrable

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

No injunction to restrain Cyprus proceedings – West Tankers principle stands

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

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

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

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

No injunction regarding the Cyprus proceedings

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

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

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

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

Comment

This important judgment makes certain welcome clarifications to the law:

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

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

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

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

Adam Johnson

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Maximilian Szymanski

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

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

The English Commercial Court (the Court) has considered[1] the principles governing contractual time-bars and an application under s12 of the English Arbitration Act 1996 (the Act) to extend a contractually agreed limitation period to allow the claimant to bring claims in an arbitration.

As a matter of English law, parties are generally held to the consequences of exceeding a contractual time-bar, especially when the consequences are explicit. Parties should, therefore, be wary of agreeing such a deadline in circumstances where their ability to meet a deadline may potentially be impacted by the conduct or inaction of third parties. When such time-bar relates to the bringing of proceedings by arbitration, a court dealing with an application for extension of that time-bar under s12 will first consider whether there are exceptional circumstances which explain why the time-bar has been exceeded. Assuming that there are “exceptional circumstances”, the court will then consider whether the parties would have contemplated that the time-bar “might not” have applied. Finally, in deciding whether to exercise its discretion to grant the extension, the court will consider whether the applicant has “acted expeditiously and in a commercially appropriate fashion to commence proceedings“.

Context

Factual background

The parties to the proceedings were parties to back-to-back voyage charters and occupying the middle of the charter chain. The charters included an arbitration clause and the following time-bar at Clause 67:

“Any claim other than the demurrage claim under this contract must be notified in writing to the other party and claimant’s arbitrator appointed within thirteen (13) months of the final discharge of the cargo and where this provision is not complied with, the claim shall be deemed to be waived and absolutely barred.”

A dispute arose regarding the condition of the cargo. The holder of the bill of lading covering the cargo issued a Statement of Claim against the head owners at the top of the entire chain. This triggered various notices down the chain, which were alleged not to comply with the contractual time bar.

The claimant applied to the Court for:

1. declarations that their claims against the charterers had been brought in time, notwithstanding the wording of Clause 67;
2. in the alternative, an extension of time under s12 of the Act either to validate the notices of arbitration they had served on the defendant charterers or for such extension of time as the Court saw fit.

The Court’s decision

Time-bar wording to be given literal meaning

The Court found that Clause 67 should be given a literal reading, even though the parties’ intention was that claims for breach of contract would be passed up or down the chain, and a party may not know about the claim in time. Such clauses operate mutually and make commercial sense: at the end of the relevant period the parties know where they stand regarding any outstanding claims and the difficulties of dealing with a claim only long after the event are largely averted. The parties took the risk that it may not be possible to pass on a claim validly received within the required period.

It was, therefore, necessary to consider whether the Court should exercise its power to extend time under s12.

Section 12 application

Section 12(1) provides that where an arbitration agreement “provides that a claim shall be barred, or the claimant’s right extinguished, unless the claimant takes within a time fixed by the agreement some step (a) to begin arbitral proceedings … the court may by order extend the time for taking that step.”

Any party to the arbitration agreement may apply for such an order after exhausting any arbitral process to obtain an extension of time, but the Court “shall make an order only if satisfied –

• that the circumstances are such as were outside the reasonable contemplation of the parties when they agreed the provision in question, and that it would be just to extend the time, or
• that the conduct of one party makes it unjust to hold the other party to the strict terms of the provision in question.

Relevant factors

The Court accepted that where parties agreed a contractual time-bar, they must be taken to have contemplated that non-compliance “in not unusual circumstances arising in the ordinary course of business” would result in a claim being time-barred, unless the other party’s conduct would make it unjust. The Court adopted Hamblen J’s factors in SOS Corporation Alimentaria SA & Anor v Inerco Trade SA [2010] EWHC 162 (Comm), viz:

1. whether there were circumstances beyond the parties’ reasonable contemplation and, if so, had they contemplated them, whether they would also have contemplated that the time-bar might not apply;
2. whether the circumstances significantly contributed to the non-observance of the time limit;
3. if the circumstance was “not unlikely” or “prone to” occur, or “not unusual“, the test would probably not be satisfied, but if was “relatively exceptional” it would be outside the reasonable contemplation of the parties;
4. as to whether the parties would also have contemplated that the time-bar might not have applied in the circumstances in question, the test is whether they would contemplate that the time limit “might not” apply rather than it “would not” apply or “must not” apply. In general, time limit clauses are addressed at steps which the party in question can reasonably be expected to take within the prescribed time.

Application: s12 triggered in principle

Following a review of the factual history, the Court found that the “direct, dominant and effective cause” of the relevant notice being served after the expiry of the contractual time-bar was the receipt of the previous claim (that was intended to be passed down the charter chain) on the last day of the stipulated period after the recipient’s business hours. These circumstances were outside the parties’ reasonable contemplation as the eventuality was “in all probability … relatively exceptional“. Further, the parties would have contemplated that the time-bar “might not” apply given the expectation that claims could be passed up or down the charter chain.

Whether just to grant the extension of time sought under s12

However, in the Court’s view, it would only be just to extend the time following a s12 application by a party in a charter chain “if the applicant has acted expeditiously and in a commercially appropriate fashion to commence proceedings” after becoming aware that a claim is being made above or below in the chain. Two of the three applicants did not act expeditiously and in a commercially appropriate fashion. Relevant factors included (i) whether a party investigated the time-bar (either through the operational staff checking the contracts, or informing the legal department or the company’s P&I club and asking for urgent advice); (ii) how soon a party appointed solicitors and nominated an arbitrator; and (iii) how soon it served a further notice down the chain and sought an extension.

Comment

This judgment serves as a reminder of what factors a court will take into account when considering (i) contractual time-bars in an arbitration context and (ii) s12 applications. The basic position on contractual time-bars in a commercial context, especially when the consequences are explicit, is that those consequences will apply. This is the price the parties pay in exchange for certainty. At the time of contracting when it is often unclear who might sue whom, this represents a mutual acceptance of risk.

An English court considering a s12 application will look for exceptional circumstances as to why the time-bar has been exceeded, but, once those have been found, the threshold is whether the parties would have contemplated that the time-bar “might not” (as opposed to “would not” or “must not“) have applied. Finally, the court’s residual discretion whether to extend the time limit (at least in a charter chain scenario) will depend on whether the applicant has “acted expeditiously and in a commercially appropriate fashion to commence proceedings“.

For more information, please contact Nicholas Peacock, partner, Maximilian Szymanski, associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock

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Maximilian Szymanski

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[1] P v Q [2018] EWHC 1399 (Comm)