In the case of Perkins Engines Company Limited v Mohammed Samih Hussein Ghaddar & Ghaddar Machinery Co. S.A.L [2018] EWHC 1500 (Comm) the English Court was asked to issue an anti-suit injunction against court proceedings brought in Lebanon. The relevant dispute resolution clause between the parties provided for English court jurisdiction to the extent that “reciprocal enforcement procedures” exist between the United Kingdom and Lebanon, failing which, disputes were to be submitted to arbitration. The Court found that the ordinary and natural meaning of the words required the existence of a multilateral/ bilateral treaty facilitating reciprocal enforcement of judgments in the United Kingdom and Lebanon. Since no such treaty existed, an anti-suit injunction should be granted against the Respondents in respect of proceedings they had brought in Lebanon.

Background

The UK Claimant and Lebanon-based Respondents entered into an Agreement for the distribution of gas and diesel engines in Lebanon. The Agreement contained a dispute resolution agreement which stated:

“This Agreement shall be deemed to be an agreement made in England and shall be read and construed and take effect in all respects in accordance with the Laws of England and the Parties hereby submit to the jurisdiction of the English Courts.

To the extent there is no reciprocal enforcement procedures between the United Kingdom and the country in which the Distributor is located, the Parties agree to submit any dispute arising between them that cannot amicably be settled to arbitration. The arbitration shall be held in London, England …”

The Claimant alleged that the Respondents had made sales into Syria in breach of the Agreement and therefore sought to terminate it. The Respondents commenced proceedings against the Claimant in Lebanon under a Lebanese law that entitles a commercial representative to damages where their principal has unlawfully terminated the representation agreement. Meanwhile, the Claimant sent a Notice of Arbitration to the Respondents purporting to refer the dispute to arbitration in England. The Respondents did not take part in the arbitration.

The Claimant sought an anti-suit injunction in respect of the Lebanese proceedings, alleging that it was commenced in breach of the arbitration agreement between the parties.

The Decision

The focus of the anti-suit application was on the meaning of the words “to the extent there is no reciprocal enforcement procedures between the United Kingdom and [Lebanon]“.

The Claimant contended that the ordinary and natural meaning of these words required the existence of a multilateral or bilateral treaty facilitating the reciprocal enforcement of judgments in the United Kingdom and Lebanon. The Claimant laid special emphasis on the use in the clause of the words (1) “between”, since only a treaty can exist between countries, and (2) “United Kingdom”, since the UK, unlike England (which is used elsewhere in the clause) is not a legal jurisdiction, but a country that can enter into a treaty. Further, it was contended by the Claimant that interpreting “reciprocal enforcement procedures” to mean international treaties provided the parties with a certain, speedy and simple means to determine whether they are obliged to arbitrate or litigate, and guaranteed them clear enforcement rights prescribed by an international treaty.  The fact that Lebanon was not party to the New York Convention at the time of entry into the contract was not significant since it would have applied in many other countries where the Defendant had assets. This approach would be consistent with business common sense and reasonableness.

The Respondents, in turn, claimed that the clause merely required reciprocity of procedures in both countries that would ensure that judgments delivered in one country would be enforceable in another. They argued that this was the case under the common law enforcement rules in England, and also as a matter of Lebanese law. It was also argued that a clause ousting a party’s important judicial right to sue for compensation in their local courts in exchange for arbitration needed to be clear and justified. The term “treaty” was mentioned nowhere in the clause and interpreting it into the clause would be a “gloss” over the actual text.

The court adopted the rules of interpretation in the context of dispute resolution provisions laid down in Fiona Trust   (i.e. that the court should give effect to the commercial purpose by ascertaining the reasonable commercial expectation of rational businessmen) and held that the Claimant’s interpretation was true to the ordinary and natural meaning of the words and also was consistent with commercial common sense.

Since no treaty for enforcing English judgments in Lebanon and vice versa existed between the UK and Lebanon it was held that there are no “reciprocal enforcement procedures” and an interim anti-suit injection was granted with respect to the Lebanese proceedings in support of the arbitration agreement.

Comment

In interpreting “reciprocal enforcement procedures” to require agreement at a state-to-state level by way of a bilateral or multilateral treaty for enforcement of judgments, the court has set a high threshold. The availability of domestic procedures within either country which would allow for the enforcement of foreign judgments were not considered sufficient in this context. In any event, on the facts the judge considered that there would likely have been no reciprocity of enforcement available under such domestic procedures.

This decision also has potentially wider implications, particularly in the context of Brexit. Post-Brexit, the UK has indicated its intention to continue arrangements akin to those under the Brussels Recast Regulation subject to EU agreement, and will in any event sign the Hague Convention on the Recognition and Enforcement of Foreign Judgments (to which the EU is already party). A number of businesses are considering “Brexit clauses” which provide for English court jurisdiction where judgments would be enforceable in the EU under an agreed reciprocal regime, failing which, English-seated arbitration is designated as the fallback. The judgment offers some guidance on the principles to consider when drafting such clauses. However, particular care is needed in any such “Brexit-proofing” of contracts, for example given the requirement of an exclusive jurisdiction clause under the Hague Convention, and specific legal advice should be sought.

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

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In Leung Kwok Hung trading as Kaiser (M&E) Decoration Engineering Company v. Johnson Controls Hong Kong Limited [HCCT 56/2017], the Hong Kong Court of First Instance granted the Defendant’s application under s.20 of the Arbitration Ordinance, staying Court proceedings in favour of arbitration. In doing so, Justice Mimmie Chan noted that the principles for granting such a stay were clear and had not been disputed by the parties.

In light of the termination of the parties’ subcontract containing the arbitration clause, the Court reiterated that the arbitration agreement is separable from the underlying contract and confirmed that the matters in dispute between the parties relating to alleged breach, termination of contract and payment fell within the scope of the clause.

Background

Leung Kwok Hung and Johnson Controls Hong Kong Ltd. entered into a subcontract; subsequently a dispute arose between the parties. The Defendant claimed that it was entitled to terminate the agreement because of the Plaintiff’s suspension of work and alleged breach of contract, while the Plaintiff contended there had been wrongful repudiation of the agreement and that it was accordingly entitled to damages, as well as payment for the work done.

As per the arbitration clause in the subcontract “any dispute whether arising during the execution or after the completion of the Subcontract works, in regard to any matter or thing of whatsoever nature arising out of” the subcontract was to be arbitrated. When the Plaintiff commenced court proceedings, the Defendant applied under s.20 of the Arbitration Ordinance (Cap. 609) for a stay of the proceedings in favour of arbitration.

Decision

The Court noted that the arbitration clause contained in the subcontract was “widely drafted” and could not be confined only to disputes arising from the execution of the Subcontract Works (as defined), or disputes about the performance of the subcontract, nor could it exclude disputes due to the Plaintiff’s abandonment and non-performance of the Subcontract Works. Accordingly, there was a prima facie case that the dispute between the parties was covered by the clause. Chan J was not satisfied that the clause was inoperable.

The judge held that claims and issues in dispute, namely whether the Defendant could rely on the terms and conditions to terminate the subcontract in light of the Plaintiff’s alleged breach, and whether the Plaintiff was entitled to payment for the works it had carried out, arose during the execution of the Plaintiff’s works and fell within the wide description of “any matter or thing of whatsoever nature arising out of” the subcontract. The Court rejected the argument that the arbitration agreement between the parties had been terminated owing to the termination of the subcontract, on the basis of the well-established principle that an arbitration agreement is separable from the underlying contract and, consequently, termination and discharge of the underlying agreement does not affect the validity and operation of the arbitration agreement.

Ultimately, Chan J did not find any merit in the argument that the arbitration agreement was inoperative and hence granted the stay under s.20 of the Arbitration Ordinance.

Discussion

The decision of the Court to defer to the arbitral tribunal, in light of a valid and applicable arbitration agreement, accords with both the letter and the spirit of the Arbitration Ordinance, and the Hong Kong courts’ consistent refusal to interfere in any dispute that is subject to an arbitration agreement.

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The London Court of International Arbitration (the LCIA) and the Government of Mauritius have announced the termination of their joint venture which established the LCIA-MIAC Arbitration Centre. LCIA-MIAC was created in 2011 as a focal point for international arbitration in Africa. In terminating the joint venture both the LCIA and the Government of Mauritius have nonetheless restated their commitment to international arbitration both in and in relation to Africa.

The termination will take effect from 27 July 2018. Parties to contracts should not include provisions for LCIA-MIAC arbitration in their arbitration agreements after this date.

The LCIA will continue to administer arbitrations and mediations arising out of agreements referencing the LCIA-MIAC Arbitration Centre which have already been concluded or which are inadvertently concluded up to 31 August 2018. For those agreements, parties should refer to the newly amended LCIA-MIAC Arbitration Rules 2018 and LCIA-MIAC Mediation Rules 2018.

A new arbitration centre (entirely separate from the LCIA), the Mauritius International Arbitration Centre (MIAC), has been set up with the support of the government of Mauritius. Along with administering new arbitrations arising out of agreements which reference MIAC alone, MIAC will administer arbitrations and mediations arising out of agreements which reference the LCIA-MIAC Arbitration Centre and are inadvertently entered into after 31 August 2018. MIAC has published a new set of rules, the MIAC Arbitration Rules 2018. Based on the UNCITRAL Arbitration Rules 2010, these will come into effect on 27 July 2018.

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

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In Mercato Sports v Everton[1], the English High Court found that two parties were bound by an implied horizontal contract containing an arbitration clause. Accordingly, it granted a stay of proceedings under section 9 of the Arbitration Act 1996 (‘S9 AA 1996’). In this case, a football agent (the Claimant)[2] sought payment for bringing a player to the attention of Everton (the Defendant) and by doing so, it enabled them to sign the player. While Claimant and Defendant had no direct contractual relationship, the Court established that both were bound by the Football Association’s Rules (‘FA Rules’), in particular by the arbitration agreement therein. While the Court emphasized that such arrangements would not always automatically lead to an implied horizontal contract, the parties’ dealings in this case did lead to an implied contractual relationship, governed by the FA Rules.

1.            Background

The Claimant brought a claim against the Defendant in the English High Court for payment for their services after it had brought AB, a professional football player, to the attention of the Defendant who then entered into an employment contract with AB. The Defendant sought to stay the proceedings pursuant to S9 AA 1996. The Defendant invoked the arbitration clause contained in the FA Rules and claimed that this clause operated as an arbitration agreement between the Claimant and Defendant. The Claimant argued that it was not a FA registered intermediary and thus claimed not to be bound by the FA Rules. However, during the hearing it came to light that the Claimant’s invoice bore a FA registered intermediary membership number, giving a strong indication that the Claimant did act as such.

2.            Issues

First, the Court followed the approach set out in Joint Stock Company Aeroflot Russian Airlines v Berezovsky[3]; the burden of proof is with the party that asserts that there is (i) a concluded arbitration agreement, and (ii) that it covers the disputes that are the subject of the court proceedings. This approach was undisputed by the parties. Nor did any of the parties contest the scope or validity of the arbitration agreement. Thus, the Court’s judgement was limited to determining whether the parties were bound by the arbitration clause.

For there to be an arbitration agreement, there must be a contract between those parties. An implied contract between two parties who have not engaged directly with each other (“a horizontal contract”) can arise where each of those parties has a separate contract (“a vertical contract”) with the same third party committing them to abide by particular rules laid down by or stipulated for by that third party.[4] Such a vertical contract can arise where a person’s actions amount to an accession to the rules laid down by the relevant third party. Whether a series of vertical contracts gives rise to a horizontal contract between particular parties will depend on (i) the facts and circumstances of each alleged party’s entry into the vertical contract in question and (ii) the nature of their dealings with the other parties.

Was there a vertical contract between each party and the FA?

The Court noted that whether the parties have entered into a vertical contract is largely a fact based decision. In the context of sports, as in this case, the Court considered that those engaging in a sporting event organised under the auspices of a particular governing body are likely to be held to have agreed to be bound by the rules of that body. However, such a conclusion would less readily be reached the further removed the activity in question is from the actual playing of the sport concerned.

However, while in this case the matters were far removed from the actual playing of football, the Court found that due to the Claimant’s registration as an intermediary with the FA, it was bound by the Rules.

Did the vertical contracts give rise to a horizontal contract?

The Court considered both the decision of the House of Lords in Clarke v Earl of Dunraven[5] and Bony v Kacou & Others to determine the relevant circumstances that could lead to finding a horizontal contract.

The Court concluded that the facts showed that the Claimant was dealing with the Defendant as an intermediary and it had explicitly made reference to its position as a FA registered intermediary on the invoice sent. Under those compelling circumstances, Judge Eyre QC found that the dealings between the parties were subject to the FA Rules and accordingly gave rise to an implied horizontal contract between the Claimant and Defendant. As such, they fell within the scope of the arbitration agreement constituted by the FA Rules. The Court stayed the proceedings and referred the claim to arbitration under S9 AA 1996.

3.            Comment

This judgement is a reminder that under specific circumstances (often in the context of sports), dealings that fall within the scope of a certain governing body might contractually bind the parties, even when they have not directly contracted with each other. In this case, the invoice bearing an FA intermediary registration was key to the Court’s determination that an implied horizontal contract bound the Claimant and the Defendant. However, an implied horizontal contract will not automatically arise in all such circumstances and the Court noted that any decision should be based on a ‘fact sensitive analysis’ in the context of wider contractual interpretation.

For more information, please contact Vanessa Naish, Professional Support Consultant, Jonas Thierens, Paralegal, or your usual Herbert Smith Freehills contact.

Vanessa Naish

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Jonas Thierens

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[1] Mercato Sports (UK) Ltd & Anor v The Everton Football Club Company Ltd [2018] EWHC 1567 (Ch)

[2] The claim was brought by two Claimants. However, the second Claimant accepted from the outset to be bound by the FA Rules. Consequently, the legal question in this case was only relevant in regards to the first Claimant. When this blogpost makes reference of ‘the Claimant’, the author refers to the first Claimant.

[3] Joint Stock Company Aeroflot Russian Airlines v Berezovsky & others [2013 ] EWCA Civ 784, [2013] 2 Lloyd’s Rep 242

[4] Bony v Kacou & others [2017] EWHC 2146 (Ch)

[5] Clarke v Earl of Dunraven [1897] AC 59 (The “Satanita”)

In its recent decision in Union of India v Hardy Exploration and Production (available here), the Supreme Court of India found that a contractual clause stipulating Kuala Lumpur as the ‘venue’ of arbitration did not amount to a choice of juridical seat. While the Indian courts’ jurisdiction to hear set-aside applications will be excluded if the seat of the arbitration is outside India, the Supreme Court found that in this case there was no chosen seat (and the tribunal had not determined a seat), notwithstanding the choice of Kuala Lumpur as the venue for the arbitral proceedings, and the fact that the award was signed in Kuala Lumpur. Since this was a case where the arbitration agreement pre-dated 6 September 2012 (the date of the key Supreme Court ruling in BALCO), it appears that the Court did not find it necessary to positively determine that the seat was in India; the fact that an overseas seat had not been established appears to have been sufficient for the Indian courts to have jurisdiction to hear the application.

Background

On 2 February 2013, Hardy Exploration and Production (India) Inc (“Hardy“) obtained an arbitration award (the “Award“) in excess of £70 million against the Union of India (“UoI“).[1] The dispute arose from a production sharing contract dated 19 November 1996 (the “PSC“), and related to oil and gas exploration rights in Indian territorial waters.

UoI challenged the Award by filing a set-aside application under Section 34 of the (Indian) Arbitration and Conciliation Act 1996 (the “Act“) before the Delhi High Court. Hardy resisted this application on the basis that the Indian courts did not have jurisdiction to decide the set-aside application as the seat of the arbitration was Kuala Lumpur, Malaysia. Article 33 of the PSC contained the arbitration agreement, and Article 33.12 provided that:

“The venue of conciliation or arbitration proceedings pursuant to this Article unless the parties otherwise agree, shall be Kuala Lumpur…“

UoI argued that Kuala Lumpur was merely the physical venue where the arbitration was conducted and the award was signed, and the application of Part I of the Act (which includes Section 34) was not excluded by the parties.

The Delhi High Court found that since the Award was made and signed at Kuala Lumpur, and there was no indication of any dispute between the parties regarding the seat of the arbitration, it could be inferred that Kuala Lumpur was the seat. As a result, the Indian courts were found to have no jurisdiction under the Act. UoI appealed the decision before the Supreme Court.

Hardy’s enforcement action in US courts

Separately, in 2016, Hardy also filed a petition for enforcement of the Award before the United States District Court for the District of Columbia (“US District Court“). In response, UoI argued that the US District Court should decline to enforce the Award as doing so would violate US public policy, and in any event, the court should stay the enforcement proceedings while its set-aside application in the Indian courts remained pending.

In its decision on 7 June 2018,[2] the US District Court denied India’s application for a stay primarily on the basis that the set-aside proceedings in the Indian courts had remained pending for more than five years, and that there was no clear end in sight. Granting a stay in such a case would cause further delays and be in conflict with the general objectives of arbitration – expeditious resolution of disputes and the avoidance of protracted and expensive litigation. Since the court exercised its discretion and refused to grant a stay on the enforcement of the Award, it did not find it necessary to determine the seat of the arbitration, and whether Indian courts were the competent authority under Article V(1)(e) of the New York Convention to hear a set-aside application.

However, the US District Court’s eventual decision was to refuse enforcement of the Award as it agreed with UoI’s argument that confirming certain aspects of the Award would violate US public policy. One of the orders in the Award required UoI to allow Hardy to exercise its oil and gas exploration rights in accordance with the PSC i.e. an order of specific performance. While a US court may confirm an award providing for compensatory damages against a state or a state entity, the US District Court found that enforcement of an order of specific performance against a state, especially one which requires UoI to allow Hardy to undertake oil and gas exploration, would be forced interference with UoI’s sovereignty over its territory (and natural resources), and therefore, against US public policy. For the same reason, the US District Court also refused to confirm the tribunal’s award of interest pending India’s compliance with the order of specific performance.

In rejecting Hardy’s petition for enforcement, the US District Court did note that recourse was available to Hardy – litigation in the Indian courts, and this brings us back to the decision of the Indian Supreme Court.

Principles governing the ability of Indian courts to intervene in foreign-seated arbitrations

As readers may recall, historically, Indian courts were willing to intervene in arbitrations seated outside India pursuant to the Supreme Court’s decision in Bhatia International.[3] In summary, the Act sets out India’s arbitration law in two parts – Part I of the Act, which is based on the UNCITRAL Model Law, deals with commencement and conduct of arbitration, and enforcement and set-aside of any award; and Part II of the Act deals with enforcement of awards delivered in foreign-seated arbitrations. In Bhatia International, the Supreme Court had held that Part I of the Act applied even to arbitrations seated outside India, unless the parties had expressly or impliedly agreed to exclude Part I of the Act. This decision had significant consequences as even in the context of foreign-seated arbitrations, Indian courts could, among other things, set aside arbitral awards. This led disputing parties to seek to involve the Indian courts in foreign arbitrations on various matters ranging from appointment of arbitrators to enforcement of awards.

In Bharat Aluminium (or BALCO),[4] the Supreme Court overruled this controversial decision and held that Part I of the Act only applied to arbitrations seated in India. However, the Court held that this decision would only apply prospectively, to arbitration agreements entered into after 6 September 2012. (For further background on the Indian Supreme Court’s decisions in Bhatia International and BALCO, please see our previous coverage here.)

However, in subsequent decisions, the Court has incrementally reduced the impact of Bhatia International even on pre-BALCO arbitration agreements by extending the situations where parties could be deemed to have excluded Part I of the Act. Significantly, in its 2015 decision in Union of India v Reliance Industries,[5] the Court held that Part I of the Act would be taken to have been excluded if: (i) the juridical seat is outside India; or (ii) the law governing the arbitration agreement is a law other than Indian law.

Since the PSC was entered into before 6 September 2012, the pre-BALCO rules were applicable here and the Supreme Court’s decision must be read in that context. At the same time, the Supreme Court’s observations on the difference between seat and venue, and the principles governing the determination of a seat in the absence of an express agreement, potentially have wider implications.

Decision

The question before the Supreme Court was whether the juridical seat of the arbitration was outside India, which would mean that the Indian courts did not have jurisdiction to consider the set-aside application.

In analysing this question, the Court held that the starting point was the arbitration agreement and laid down the following principles:

1. If the ‘place’ or the ‘seat’ of the arbitration was expressly indicated in the arbitration agreement, that would be considered a reference to the juridical seat of the arbitration. In line with the UNCITRAL Model Law, the Court also noted that ‘place’ and ‘seat’ are used interchangeably.
2. In the absence of an express choice of seat, if the arbitration agreement provided for a procedure to determine the seat of the arbitration, the Court would accept the seat determined in accordance with such procedure.[6]
3. In the absence of an express choice of seat and where the seat had not been determined in accordance with the procedure in the arbitration agreement, and a venue has been specified, there needed to be some additional factor for that venue to be considered the juridical seat of the arbitration. For instance, in Harmony Innovation Shipping Limited,[7] the parties had provided for “arbitration in London” without indicating whether London was also the seat of the arbitration. The Court considered additional factors – the arbitrators were to be members of the “London Arbitrators Association” (sic), the contract was governed by English law, and there was reference to the small claims procedure of the “London Maritime Arbitration Association” (sic) – all of which supported the conclusion that London was also intended to be the seat of the arbitration, and Part I of the Act was excluded.

The Court noted that Article 33.12 of the PSC expressly provided for the ‘venue’ of the arbitration proceedings to be Kuala Lumpur. In line with the analysis above, and relying on the well-established distinction between the juridical seat of the arbitration and the physical venue where the arbitration is conducted, the Court held that Article 33.12 on its own was not sufficient to indicate that Kuala Lumpur was the seat of the arbitration.

The Court also considered the parties’ (unusual) choice that the arbitration proceedings were to be conducted in accordance with the UNCITRAL Model Law (as opposed to the UNCITRAL Rules). It noted that Article 20(1) of the UNCITRAL Model Law provided that absent the parties’ agreement, the place of arbitration shall be determined by the arbitral tribunal. The Court held that the fact the hearings were held in Kuala Lumpur and that the Award was signed there was also not sufficient to indicate that Kuala Lumpur was the seat of the arbitration. According to the Court, Article 20(1) of the UNCITRAL Model Law requires a positive determination – adjudication by the arbitral tribunal as to the seat of the arbitration, and indicating the result of that adjudication in an award.

In the absence of any additional factor which pointed to Kuala Lumpur being the seat of the arbitration, the Court held that Kuala Lumpur could not be considered the seat of the arbitration. In its judgment, the Court did not go so far as to say that the seat of the arbitration was in India, but in the absence of a positive finding that the seat was outside India, Part I of the Act was not excluded, and Indian courts had jurisdiction to decide the set-aside application filed by UoI.

Comment

The decision is a reminder that the legacy of the controversial decision in Bhatia International continues to be felt six years after it was overruled. Nevertheless, the Supreme Court has confirmed the reduced impact of Bhatia International on arbitration agreements entered into before 6 September 2012 – Part I of the Act will be taken to have been excluded and Indian courts will not have any supervisory jurisdiction in those cases where either the juridical seat is outside India, or the law governing the arbitration agreement is not Indian law.

More generally, and in respect of arbitration agreements entered into before and after 6 September 2012, this decision could have achieved more and provided clarity on a still-murky area of arbitration jurisprudence in India. Indeed, while the Court found that Kuala Lumpur was not the seat of the arbitration, it did not determine what the seat of the arbitration was (presumably, because it was not required to do so under the principles laid down in Bhatia International ­– a contrast with the post-BALCO regime, in which Part I only applies where there is a positive finding that the seat is / was located in India).

However, this decision illustrates the importance of clear drafting of arbitration agreements to avoid uncertainty and resulting delays. A clear contractual choice of ‘seat’ rather than ‘venue’ would, it seems, have made the position clear, as would a choice of institutional rules which provide for the appointing authority to prescribe a seat where one is not chosen. It also appears that where there is no express choice of seat and no institutional power to designate a seat, such as in ad-hoc arbitrations, it is important for the parties to apply to the tribunal to determine a juridical seat so that such issues are not raised at the stage of enforcement.

[1]       Hardy Exploration & Production (India) Inc v Government of India v India Infrastructure Finance Company (UK) Limited, [2018] EWHC 1916 (Comm).

[2]       Hardy Exploration & Production (India), Inc v Government of India, Ministry of Petroleum & Natural Gas, 2018 WL 2758220 (United States District Court, District of Columbia, 7 June 2018).

[3]       Bhatia International v Bulk Trading SA, (2002) 4 SCC 105.

[4]       Bharat Aluminium v Kaiser Aluminium, (2012) 9 SCC 552.

[5]       Union of India v Reliance Industries Limited & Others, (2015) 10 SCC 213.

[6]       For instance, in IMAX Corporation v E-City Entertainment (India) Pvt. Ltd., (2017) 5 SCC 331, the parties did not choose a seat but provided for arbitration under the ICC Rules. In accordance with the ICC Rules, the International Court of Arbitration of the ICC decided that London would be the seat of the arbitration. On this basis, the Court held that the seat was London, and Part I of the Act was excluded.

[7]       Harmony Innovation Shipping Limited v Gupta Coal India Limited and another, (2016) 11 SCC 508.

For further information, please contact Nicholas Peacock, Partner, Donny Surtani, Partner, Kritika Venugopal, Senior Associate, Divyanshu Agrawal, Associate (India) or your usual Herbert Smith Freehills contact.

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Entering into a contract with an entity owned or controlled by the state poses unique challenges not faced when dealing with a private commercial counterparty. Parties should be aware of certain distinctive features of negotiating with a state entity from the start of any commercial relationship. It is particularly important for parties to consider these implications when conducting business in the Middle East given that:

i. state entities play a major role in the procurement of major projects, particularly in GCC countries; and

ii. the reconstruction of infrastructure and the development of natural resources in countries such as Iraq require significant foreign investment in the form of contracts with state-owned entities.

Determining whether or not a commercial party is dealing with a state entity is not always a straightforward process in the Middle East. As such, parties should take extra care and consider the following factors at the outset:

a) the capacity of the entity to enter into an arbitration agreement;

b) the ability of the state in question to raise a defence of sovereign immunity in the future; and

c) the investment treaty protections that a company may be able to utilise.

In this article, we set out the key factors that parties should consider when negotiating with a state entity in order to maximise the protections available should a dispute arise at a later point.

The risks of contracting with a state

The actions of a state may be influenced by political turbulence, swings in public opinion or economic instability. In addition to the risk of expropriation, commercial parties may also suffer from unfavourable treatment by national courts, legislative or regulatory changes which directly affect the contractual relationship itself (of particular concern in infrastructure and energy projects), or a failure of the state to honour a guarantee.

Failure to consider such risks when negotiating a contract may have considerable consequences in practical terms. A party may find itself unable to bring proceedings against the state or to enforce a court judgment or arbitral award against state assets. The terms of the contract should be carefully drafted to minimise these risks and legal advice should be sought in the jurisdiction in which proceedings may be brought and in any jurisdictions in which a judgment or award may need to be enforced.

If a dispute with a state entity does arise, a private commercial counterparty may face jurisdictional challenges if the state itself is not a party to the arbitration clause. Moreover, whether a national court will consider that a party contracted with (or is arbitrating against) a “state” varies by jurisdiction according to local law.

A common hurdle faced by parties attempting to enforce contractual rights against a state is the defence of sovereign immunity. Sovereign immunity protects states from legal proceedings brought before the courts of a foreign jurisdiction and operates on two levels: (i) it can offer protection to a state or state-owned entity from legal proceedings before a court or arbitral tribunal (immunity from suit), and (ii) it can prevent the recognition/enforcement of a court judgment or arbitral award and execution against state-owned assets (immunity from execution).

Commercial counterparties must therefore be particularly careful when contracting with government entities, navigating the potential pitfalls by ensuring that state immunity from both suit and execution is duly waived. It is important to distinguish between jurisdictions where states have total immunity from suit and execution and jurisdictions in which a state is only immune in matters where it is exercising sovereign power (rather than acting in a commercial capacity). A counterparty should pay particular regard to any limitations on such a waiver and the approach of the courts to state immunity in the relevant jurisdiction where a judgment or award may need to be enforced.

Regional considerations

Can the state entity enter into an arbitration agreement?

Importantly, the UAE effectively has a three tier legal system:

i. federal laws that apply to each Emirate,

ii. laws that operate at the specific level of each Emirate

iii. within Dubai and other Emirates, the government has established free zones such as the DIFC in Dubai or the ADGM in Abu Dhabi, which are independent jurisdictions with their own civil and commercial laws and separate courts.

At the federal level, governments in the UAE must obtain approval from the Ministry of Justice before entering into an arbitration agreement (Council of Ministers Decision No. 406/2 2003). It is important that the commercial counterparty ensures that this approval has been granted before entering into the contract.

Additional restrictions apply in the Emirate of Dubai where “departments, institutions, bodies or authorities” are prohibited from entering into:

a) Contracts that include a governing law clause that does not include Dubai law (Dubai Instruction Order of February 6, 1988; Dubai Law No. 6 of 1997, Article 36).

b) Arbitration clauses which specify a seat outside Dubai, unless approval is obtained in writing from the Ruler of Dubai (Dubai Law No. 6 of 1997, Article 36). Without such approval the arbitration clause will be null and void.

c) Contracts that incorporate conditions of international contracts (Dubai Law No. 6 of 1997, Article 37). The entity needs approval of the Ruler of Dubai to agree to any such provisions. This is particularly relevant to parties in the construction sector as incorporating FIDIC provisions by reference is invalid without such approval.

The Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) is commonly used in disputes concerning contracts with Abu Dhabi government entities and, whilst there is no law proscribing this, the commercial reality may be that counterparties will need to agree to arbitration seated in Abu Dhabi under the ADCCAC rules.

Similar restrictions apply elsewhere in the region. For example, arbitration is prohibited in disputes involving Saudi Arabian government bodies, unless the approval of the Prime Minister has been obtained or arbitration is provided for under a special provision of law (Article 10(2), new Arbitration Law). Similarly, government entities in Qatar can only agree to arbitrate with permission from the Prime Minister, whilst in Iraq approval must be obtained from a special committee at the Secretariat of the Council of Ministers.

Sovereign immunity

There is no concept of state immunity under UAE law per se and federal law does not grant state entities immunity from suit. However, Article 247 of UAE Federal Law No. 11 of 1992 (the Civil Procedures Law) includes a general prohibition on the seizure of “[p]ublic property owned by the state or any of the Emirates” for the purposes of enforcement. Moreover, Dubai law provides that:

a) suits cannot be filed against the Ruler without his approval;

b) suits against a state entity are subject to numerous formalities, including submitting details of the claim to the Government of Dubai Legal Adviser and then waiting for two months before issuing a claim; and

c) no debt or financial obligation against the Ruler or the Government may be collected “by means of detainment, public auction sale or possession by any other legal procedures of the properties and assets of the Ruler or of the Government whether such debt or financial obligation has received a final and conclusive judgment or not” (Dubai Law No. 3 of 1996, Article 3 (BIS) as amended by Dubai Law 10 of 2005, Article 2).

The DIFC Courts have thus far avoided the question of whether or not the law of the DIFC or the UAE includes the concept of sovereign immunity. However, in the recent decision of Pearl Petroleum Company Limited & Others v The Kurdistan Regional Government of Iraq, the Court clarified that it will uphold correctly drafted waivers of sovereign immunity and permit proceedings and enforcement to continue against states seeking to raise the defence contrary to the contract. This decision is helpful for commercial parties contracting with a sovereign entity, given that the DIFC Courts remain a conduit to enforcement in other jurisdictions such as in “onshore” UAE and Iraq.

Elsewhere in the region, immunity from execution will generally apply. In Saudi Arabia, enforcement is not permitted against government assets pursuant to Article 21(1) of the new Enforcement Law. In Iraq, Article 62 of the Enforcement Law and Article 71 of the Iraqi Civil Code provide respectively that assets of the state and “public property” may not be attached. Similarly, Article 87 of the Egyptian Civil Code provides that public assets are immune from enforcement and attachment procedures.

What comfort should a party seek from a state entity when negotiating the contract?

Are you dealing with a state entity?

Commercial parties should ask at the outset whether, as a matter of fact, the state is in fact a party to any arbitration agreement. Consideration of this point during the negotiation of the contract will assist should there be a dispute at a later stage. If the state may have a degree of involvement in the contract itself, or if the entity has links to the state, the commercial counterparty may wish to make the state a party to a future dispute. In such circumstances, the counterparty should ensure that the state is expressly named in the arbitration clause.

Commercial parties should also be wary of potential uncertainty over the legal rights of the state entity in question. For example, uncertainty regarding the status of the government of the semi-autonomous Kurdistan Region of Iraq continues to pose challenges for foreign investors.

Waiver of sovereign immunity

Obtaining a court judgment or arbitral award against a state entity can be somewhat of a pyrrhic victory if the state raises the defence of sovereign immunity in order to prevent enforcement of the award and execution against its assets. Substantial costs may have been incurred by the commercial party over a significant period only to find that damages cannot in fact be recovered. Parties should seek a waiver of sovereign immunity to avoid such a situation and ensure that this constitutes a waiver of immunity as to suit and execution.

An arbitration clause is usually sufficient as a waiver of state immunity from suit and such clause should in theory grant a tribunal jurisdiction. However, an express waiver offers greater protection to the counterparty. An arbitration clause and express waiver of immunity from suit will not assist when it comes to enforcing an arbitral award and as such a commercial party should always seek an express waiver of immunity from execution. The party should also consider whether both the state entity and the state ultimately controlling that entity have consented to the waiver.

A waiver of immunity will only be effective to the extent permitted by national law and consequently local law advice should be sought in respect of the relevant jurisdiction. In the UAE, there is no guarantee that a waiver of immunity from execution would be upheld by national courts.

Stabilisation clauses

After entering into a contract, there is always a risk that the state in question will legislate in a way which effectively changes the terms of the contract. In order to protect against this, a private commercial counterparty should consider incorporating a stabilisation clause into the contract.

A stabilisation clause allows an investor to minimise risk by addressing how legislative or regulatory changes in the country will modify the rights and obligations of the parties under the contract, usually by stating that the applicable domestic legislation shall not apply to the investor (freezing clauses) or that the host government shall indemnify the investor from and against the costs of compliance with such laws (economic equilibrium clauses), or a combination of the two.

The existence of such a clause acts as an indication that the state itself is entering into the contract rather than just a related entity. This may be helpful at a later point if a court or tribunal is asked to conduct a factual and legal analysis of the background to the transaction in order to assess whether or not the entity is in fact an emanation of the state.

What protections are available for investors?

Bilateral Investment treaties

In addition to commencing commercial arbitration proceedings or proceedings in national courts, a party may be able to bring a separate claim against the relevant state pursuant to the investor state dispute settlement (“ISDS“) provisions of an investment treaty. Bilateral investment treaties (“BITs“) are entered into between countries to promote and protect investments made by investors from respective countries in each other’s territory. A state consents to international arbitration proceedings through the ISDS provisions of a BIT and therefore a claim by the party for a breach of the provisions of a BIT would be brought against the state itself.

The commercial party may wish to consider which countries have entered into treaties with the state in question and structure the transaction from the outset to benefit from such treaties. For example, only Kuwait, Japan and Jordan currently have BITs in force with Iraq.

Multilateral investment treaties

Whilst a BIT will generally offer greater protections to qualifying investors, a party could also consider bringing a claim under a regional multilateral investment agreement. The Organisation of Islamic Cooperation Agreement on promotion, protection and guarantee of investments among Member States (the “OIC Agreement“) has been signed by 33 Member States and ratified by 27 countries across the Middle East, Asia and Africa and offers a number of potential advantages. The definition of “investor” is very broad and does not provide for specific requirements as to the nationality of the legal entity. “Investment” is also defined very broadly and was held by a tribunal to encompass “all assets”. Furthermore, the “most-favoured nation” provision under Article 14 of the OIC Agreement allows an investor to import provisions from other investment treaties entered into by the state in question.

A further option for consideration would be to commence proceedings pursuant to the dispute resolution provisions of the Unified Agreement for the Investment of Arab Capital in the Arab States (the “Arab Investment Agreement“). However, the Arab Investment Agreement offers fewer protections than the OIC Agreement as the criteria for an investor are much more limited.

Enforcement

Certain BITs allow investors to commence proceedings under the ICSID Convention, which has its own enforcement mechanism pursuant to which an ICSID award must be recognised as a final judgment of a national court and as such cannot be appealed to national courts. This is worth noting given that the Inter Arab Convention on Judicial Co-Operation (the Riyadh Convention), the most commonly used treaty in the Middle East for the recognition and enforcement of both court judgments and arbitral awards between Arab nations, and the Agreement on the Execution of Rulings, Requests of Legal Assistance and Judicial Notices (the GCC Convention) do not apply to awards against a government.

The option to commence ICSID proceedings may be attractive where the state in question is not a signatory to the New York Convention (“NYC“) and given that the Riyadh Convention does not apply to awards against a government. For example, Iraq is not yet (although it should accede soon) a contracting state in respect of the NYC but did accede to the ICSID Convention in December 2015. However, it is important to note that a state’s consent to ICSID arbitration does not constitute a waiver of its immunity as to execution which remains a matter of domestic law (articles 54(3) and 55).

At the point at which an award is obtained, the commercial party should ensure that the award is made against the state rather than or in addition to the entity to minimise the risk that a national court will question whether or not the award has been made against the state itself at the enforcement stage.

Conclusion

Given the prevalence of state-controlled entities in the Middle East in the infrastructure, energy and construction sectors, commercial parties should be alert to the potential pitfalls of contracting with such an entity. An awareness of the potential risks at the outset should enable the party to draft the contract to minimise risk and maximise protection should a dispute arise in the future. Predicting political and economic crises and the sympathies of future governments towards foreign investors is never an easy task. However, it is possible to anticipate that future regulatory or legislative changes may occur or that a state may be able to raise a defence of sovereign immunity. Addressing such issues in the contract itself may prevent a situation where a party finds that it cannot commence proceedings or enforce an award against state assets. If a dispute does occur, private counterparties should also be fully aware of the options available and the enforcement risks in any relevant jurisdictions.

For further information, please contact Craig Shepherd, Partner, Caroline Kehoe, Partner, Stuart Paterson, Partner, Patrick O’Grady, Associate or your usual Herbert Smith Freehills contact.

Craig Shepherd

Partner Global Head of Contentious Construction
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Stuart Paterson

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Caroline Kehoe

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Patrick O'Grady

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According to Russian media, the ICC has recently applied to the Russian Supreme Court (“SC“) asking that it clarify the approach of Russian courts to the ICC standard arbitration clause demonstrated in one of their cases (No. A40-176466/17). In this case the Moscow Arbitrazh Court and appeal courts (including the SC), found that a reference to the arbitration rules of an arbitral institution was not sufficiently clear evidence that the parties had agreed on that specific institution to administer the resolution of their disputes.

Background

The dispute arose between Dredging and Maritime Management SA (“Claimant“) and JSC “InzhTransStroy” (“Respondent“) on the grounds of the Respondent’s improper performance under a contract.

The contract contained the standard ICC arbitration clause: “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules”. Geneva, Switzerland was chosen as the seat of arbitration.

The Claimant brought arbitral proceedings and the ICC Tribunal issued an award in its favour for the recovery of EUR 3.6 m plus interest.

When the Claimant applied to have the award recognised and enforced in Russia, the Russian courts dismissed the application on two principal grounds:

1. The Respondent had been in insolvency, reached a settlement with its creditors and was supposed to pay the debts in instalments. The enforcement of the award would prejudice other creditors, therefore, it violates the Russian public policy. (We do not comment on this ground in this note.)
2. The standard ICC arbitration clause failed to provide for a specific arbitration court to administer the arbitration as it only referred to the ICC Rules and not to the ICC itself. Therefore, the ICC Tribunal lacked jurisdiction.

Comment  

Russian courts have upheld the ICC and other standard arbitration clauses on numerous occasions in the past. The conclusion in this case that a reference to a set of institutional rules does not indicate a clear intention to refer that dispute to a specific institution or arbitration court is therefore somewhat surprising. It is also an analysis which is difficult to support, particularly given that the first article of the ICC Rules agreed between the parties refers to the International Court of Arbitration of the International Chamber of Commerce as the administrative body for resolving disputes under those rules.

The approach is concerning given that a large number of contracts involving Russian parties contain the standard arbitration clauses published by the ICC or other recognised arbitral institutions. It is quite possible that a number of these standard clauses may refer to the rules of a particular arbitral institution but not expressly name the arbitration court.

It is not clear if the SC will respond to the ICC’s request or if such request will become publicly available. The above judgments do not set a binding precedent under Russian law, but the case may well have a persuasive effect in future. Clarity would therefore be welcomed.

In the meantime, it would be advisable for those considering entering into an arbitration agreement with a Russian party to amend the recommended standard arbitration clauses of any arbitral institution to make it clear that any disputes are to be referred to arbitration, administered by the named arbitration institution in accordance with its rules.

For further information, please contact Alexei Panich, partner, Nick Peacock, partner, Alexander Khretinin, senior associate, or your usual Herbert Smith Freehills contact.

Alexei Panich

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Nicholas Peacock

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Alexander Khretinin

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In Castlemil Infant (HK) Supplies Co Ltd v Care N Love Development Ltd [2018] HKDC 1419, the Hong Kong District Court granted a mandatory injunction, having found that the plaintiff’s underlying tort claims did not fall within the scope of the parties’ arbitration agreement.

Background

The defendant was engaged as the plaintiff’s marketing consultant or sales agent under a Marketing & Sales Agency Agreement. The defendant set up a Facebook account for the plaintiff which became of central importance, being the only platform where clients and potential clients could access information about events, promotions and sales of the plaintiff’s business. When their relationship broke down, the plaintiff served a termination notice on the defendant. The defendant requested HK$200,000 in return for the Facebook account, later reducing this amount to HK$50,000. The plaintiff then applied to the court for an injunction directing the defendant hand over the Facebook account. The defendant was not represented at the injunction hearing and did not appear.

Decision

Judge MK Liu of the Hong Kong District Court granted the injunction, being satisfied that the plaintiff may succeed in a claim against the defendant in the proceedings because:

• the Agreement came to an end in late September as a result of the termination notice;
• the plaintiff was the owner of the Facebook account and, after September 2018, the defendant refused the plaintiff access to the Facebook account and deleted contents without consent. In the court’s view, this could amount to the torts of conversion and wrongful interference; and
• the arbitration agreement which referred “any dispute, controversy or claim arising out of or relating to [the] Agreement” to arbitration did not affect the plaintiff’s claim in tort.

The court granted the injunction and directed the defendant to disclose the password e within 24 hours after the service of the injunction order.

Discussion

Ultimately, the Hong Kong court had power to grant this injunction whether the plaintiff’s claim fell within the arbitration agreement (in which case the court’s power would be derived from s.20 Arbitration Ordinance (Cap. 609) or not (in which case it was an exercise of its inherent jurisdiction). However, we might have expected a fuller discussion of the scope of the arbitration clause. The judge did not explain why this arbitration agreement did not affect a tortious claim, nor engage in a close analysis of its wording with reference to cases such as Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40. That case advocates a broad interpretation of arbitration clauses, on the basis that commercial parties generally intend all their disputes to be determined in a single forum.

Simon Chapman

Partner, Hong Kong
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May Tai

Managing Partner-Greater China
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Kathryn Sanger

Partner, Hong Kong
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Briana Young

Foreign Legal Consultant, Hong Kong
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As discussed in our recent blog post, the Moscow Arbitrazh Court and appeal courts recently found that a reference to the arbitration rules of an arbitral institution was not sufficiently clear evidence that the parties had agreed on that specific institution to administer the resolution of their disputes. The case related to the ICC standard arbitration clause and the ICC has applied to the Russian Supreme Court for clarity on its approach.

However, in the meantime, the ICC has issued an additional modified standard arbitration clause “to take account of the requirements of national laws and any other special requirements that the parties may have“. The ICC then proceeds to state that it is “prudent” for parties wishing to have an ICC Arbitration in Mainland China or in Russia “to include in their arbitration clause an explicit reference to the ICC International Court of Arbitration“.

The modified clause proposed by the ICC is as follows:

“All disputes arising out of or in connection with the present contract shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”

For further information, please contact Alexei Panich, partner, Nick Peacock, partner, Alexander Khretinin, senior associate, or your usual Herbert Smith Freehills contact.

Alexei Panich

Partner
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Nicholas Peacock

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Alexander Khretinin

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As discussed in this post, Xiamen Xingjingdi Group Co Ltd (XJ) and various co-defendants affiliated with Eton Properties Ltd (together, EP) have been involved in a long-running dispute in multiple fora, including a PRC-seated CIETAC arbitration and several Hong Kong court proceedings. The case appears now to have come to an end, with the Court of Appeal (Court) confirming its position on common law actions to enforce arbitral awards and rejecting both parties’ applications for leave to appeal the Court’s 15 April 2016 judgment.

Background

XJ and EP entered into an agreement in 2003 (Agreement), under which EP would sell the right to develop a plot of land to XJ. The transaction was structured as an indirect purchase, with XJ to buy all shares in the EP entity holding the right over the land. However, shortly after entering into the Agreement, EP had a change of mind and decided to terminate the Agreement. XJ did not accept the termination and initiated CIETAC arbitration proceedings. The tribunal found in favour of XJ and ordered EP to “continue to perform the agreement“.

When XJ attempted to enforce the award (under statute) in Hong Kong in 2007, it became aware that EP had restructured the group during the course of the arbitration proceedings. As a result of the restructuring, the shareholding in the entity that was to be transferred was heavily diluted. Performance of the order in the terms of the award would therefore have been ineffective in transferring the right over the land to XJ.

XJ subsequently initiated a common law action in the Hong Kong courts seeking (among other things) damages from EP in lieu of the performance order in the award. The High Court dismissed the claim in full. On appeal, however, the Court held that XJ was entitled to claim for such damages (even though damages had not been awarded by the tribunal). It reasoned in its judgment that, whenever parties submit a dispute to arbitration, they create a new ‘implied contract’ that is separate from the contract underlying the dispute. This implied contract contains a promise, implied by law, that the losing party will honour the award. The Court found that a common law cause of action had accrued in favour of XJ as a result of EP’s failure to perform the award and the resulting breach of the implied contract. XJ could therefore claim for damages under this cause of action.

Leave to appeal

In the present application, the Court considered the parties’ requests for leave to appeal to the Court of Final Appeal. The plaintiff and the defendant each sought to appeal different parts of the Court’s judgment, on the ground that the questions raised were of “great general or public importance” for the purposes of s.22(1)(b) of the Hong Kong Court of Final Appeal Ordinance. Both parties’ requests were ultimately rejected, with the Court holding that the questions were not of sufficient public importance and/or not reasonably arguable. Two of the defendant’s suggested questions to the Court of Final Appeal (and why they were rejected) are particularly interesting. The defendant proposed to ask:

1. Whether damages for loss of bargain may be granted to the plaintiff in a common law action to enforce an award which merely stipulated continuance of performance of contract?
2. Whether the Court should have stayed the proceedings and required the plaintiff to go to arbitration if it wished to bring such a claim for damages?

The Court found that both of these questions were based on the mistaken premise that, when awarding damages in an action on the award, the Court is awarding damages for loss of bargain of the Agreement (which contains the arbitration clause). Instead, the Court noted, any damages awarded are to compensate for breach of the implied contract rather than for breach of the Agreement.

Addressing question 1, the Court commented that damages may well be different from the loss of bargain under the Agreement, as the causes of action are different. The Court also considered that it was not limited to giving judgment in terms of the award: the full range of remedies is available to the plaintiff for a breach of promise in the implied contract.

Regarding question 2, the Court held that the matter clearly concerned enforcement rather than a determination of the merits. As such, the action was a matter within the courts’ remit, rather than a matter for the arbitral tribunal to decide.

In principle, either party may now apply directly to the Court of Final Appeal for leave to appeal the Court’s judgment. Subject to any such application, this long running case appears to have come to an end.

Comment

The Court’s decision not to grant leave to appeal cements its findings on enforcement at common law and the consequences of a party’s breach of the implied contract to honour an award. The Court’s reasoning confirms that parties claiming under this cause of action may request remedies that differ from those provided for in the original award. This position is welcomed for its ability to protect parties who were successful in an arbitration, but are not able to enforce the award under statute, which can occur for various reasons.

Simon Chapman

Partner, Hong Kong
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Kathryn Sanger

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Dominic Geiser

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Briana Young

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

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

BACKGROUND

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

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

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

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

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

THE COURT OF APPEAL’S DECISION

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

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

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

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

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

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

COMMENT: CONSIDERATIONS FOR PARTIES INVOLVED IN SINGAPORE SEATED ARBITRATIONS

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

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

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

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

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

Alastair Henderson

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Emmanuel Chua

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Reshma Nair

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

Background

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

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

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

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

Application under section 67 of the Arbitration Act

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

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

The decision

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

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

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

Conclusion

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

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

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

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The global financial markets are currently preparing for the phasing out of the London Inter-bank Offered Rate (or LIBOR) and other Inter-bank Offered Rates (or IBORs). LIBOR is the most widely used benchmark interest rate globally, employed in an estimated US$350 trillion worth of financial contracts worldwide. LIBOR may also be used in commercial contracts – for example, in price adjustment mechanisms in share purchase agreements, price escalation clauses or as a reference rate for contractual interest on late payments. LIBOR may also be specified in arbitration clauses as a benchmark rate for interest on the award.

Many financial instruments affected by the discontinuation of LIBOR will include arbitration clauses. As discussed below, whilst the substantive disputes arising from the end of LIBOR will be the same whether they are resolved in a court or by an arbitral tribunal, there are some additional considerations particular to the arbitration process which are relevant in the context of LIBOR discontinuation disputes. Further, even when determining a dispute which does not arise from the end of LIBOR, arbitral tribunals may have to grapple with how to award interest where an arbitration clause uses LIBOR as a reference point. Read more in the E-bulletin here.

Arbitration clauses in financial instruments and “end of LIBOR” disputes

As noted in the ICC Commission Report on Financial Institutions and International Arbitration, “[a]rbitration is increasingly a part of the strategic options considered for cross-border banking and financial disputes“.  Arbitration clauses are included in all types of financial instruments in the loan, bond, securitisation and derivatives markets. As such, it is likely that some of the inevitable disputes arising from the phasing out of LIBOR will fall to be determined by arbitral tribunals.

Disputes may arise out of (i) legacy contracts which contain inadequate fall-back mechanisms to address the phasing out of LIBOR; and (ii) contracts entered into now whilst the replacement for LIBOR is uncertain, containing placeholder or temporary replacements for LIBOR. The nature of disputes arising in the loan, bond, securitisation and derivatives markets are discussed in detail in this E-bulletin. The E-bulletin focuses on English law agreements and illustrates the uncertainty of outcomes, where standard English contract law principles of construction are applied or attempts are made to imply terms to address the discontinuation of LIBOR in an anticipated range of different situations. Of course, similar issues will apply in relation to other IBORs, for each of which replacement risk-free rates are being developed, and tribunals may consider similar disputes under various different governing laws.

Arbitration of LIBOR discontinuation disputes – considerations for parties

There are a number of additional considerations when it comes to resolving disputes by arbitration relating to the end of LIBOR. These are relevant when legacy contracts contain arbitration clauses, as well as in the context of new contracts (or existing contracts which are being amended to address end of LIBOR uncertainty), where the parties are considering their dispute resolution options:

• Identity of arbitrator – parties who have chosen arbitration may be able to nominate an arbitrator. In view of the likely nuances behind the use of LIBOR in any given financial contract and the arguments that could be raised as to whether the replacement should be treated as an applicable substitute in the circumstances of a particular transaction, a party may wish to appoint an arbitrator with a solid practical knowledge of both the financial instrument in question but also the operation of that particular financial market. (See, for example, the reference to “a material “winner” and a material “loser” as a result of the transition from LIBOR” in the context of loan agreements, here).
• Challenges on a point of English law – as described here, LIBOR discontinuation disputes are likely to raise complex issues of English law. Under English law, an award can be appealed on the basis of an error on a point of English law (English Arbitration Act 1996, section 69). However, many of the institutional arbitration rules (such as the LCIA Rules and ICC Rules – model clauses for both of which are included in ISDA’s Arbitration Guide) exclude any non-mandatory rights of challenge to an award. The parties’ choice of institutional rules will typically determine whether section 69 challenges are automatically excluded and therefore whether any alleged error in the application of a potentially evolving area of English law by a tribunal sitting in London can be appealed.
• Non-precedential value of an arbitral award – an award will bind only the parties to it, and will not create a binding precedent. As a consequence, the resolution of a dispute by arbitration will not introduce any legal certainty with regard to the resolution of the same dispute under a financial instrument with the same contractual terms with a different counter-party. Where a party enters into multiple financial instruments on the same terms but with different parties and with the same potential for LIBOR discontinuation disputes, this could lead to multiple parallel proceedings with the attendant costs, delay, management distraction and potential for inconsistent outcomes.
• Powers of the tribunal – it is possible that a situation may arise in which, if there is no LIBOR, the tribunal is asked to step in and determine an applicable interest rate. As described in the E-bulletin, there is English jurisprudence which addresses the situation where a third-party determination is required for operation of a contractual formula. However, whether a tribunal can make a similar discretionary determination of a replacement reference rate will be dependent on the scope of the tribunal’s powers under the arbitration agreement, law of the seat and any applicable rules.

Arbitration of LIBOR discontinuation disputes – considerations for financial market institutions

As described in the E-bulletin, various financial market institutions such as ISDA and the LMA have made proposals for how to deal with LIBOR discontinuation and they may wish to intervene in significant disputes concerning the interpretation of their market documentation in the context of the end of LIBOR. Third party interventions in civil proceedings in the English court are possible (for example, ISDA has intervened in civil proceedings concerning the interpretation of provisions of the ISDA Master Documentation). Third party intervention is usually not possible in commercial arbitration and, where it is possible, it usually requires the consent of at least one of the parties and the tribunal. Moreover, even if a financial market institution intervened in an arbitration concerning LIBOR discontinuation, the impact would be limited by any confidentiality restrictions concerning the arbitration and publication of any award.

Pre-award interest, post-award interest: selection of an interest rate

Many arbitration clauses do not address the award of interest, leaving the award of interest (including the rate) to be determined by the tribunal under the powers granted by the law of the seat. For example, neither the LMA Developing Markets Loan Documentation which includes an arbitration clause, nor the model arbitration clauses in the ISDA Arbitration Guide, include any express provisions on interest.

However, there are contracts which specify that the tribunal shall award interest by reference to LIBOR. Depending on how it is drafted, such an interest provision may displace the default powers to award interest which a tribunal would otherwise have under the law of the seat. This leads to uncertainty as to whether the tribunal has any power under the law of the seat to substitute another reference rate.

Comment

The disputes risk arising from the phasing out of LIBOR is significant and multi-jurisdictional. The forum for dispute resolution may understandably be further down the parties’ list of key concerns with the present focus at least being on the mitigation of risks associated with LIBOR discontinuation. However, for parties who have included arbitration clauses in legacy contracts with LIBOR discontinuation implications, or who are reviewing their dispute resolution options in such contracts now, there are a number of considerations to bear in mind. One of the most noteworthy is the ability to appoint an arbitrator with significant market experience and expertise, in order that the tribunal’s decision will not be made in isolation from the operation of the financial markets in which the financial instrument was entered into.

For more information, please contact Nick Peacock, Partner, Hannah Ambrose, Senior Associate, or your usual Herbert Smith Freehills contact.

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In Dickson Valora Group (Holdings) Co Ltd v Fan Ji Qian [2019] HKCFI 482, the Hong Kong Court of First Instance has granted an anti-suit injunction restraining mainland Chinese court proceedings commenced by Fan Ji Qian on the ground that the dispute should be referred to arbitration. Although Fan was not a signatory to the contract containing the arbitration clause, he had nevertheless sought to enforce a contractual right under that agreement, such that he was also bound by any conditions integral to the exercise of this right (including the agreement to arbitrate).

This decision shows that an arbitration agreement can, in certain circumstances, bind third parties. This is something which should be considered when drafting agreements which purport to confer a benefit on non-signatories, particularly if it is intended that third parties exercising rights under the contract should also be bound by the arbitration provisions.

Background

Moravia CV and Dickson Holdings Enterprise Co Ltd (DHE), owned by Fan, had set up a joint venture company, Dickson Valora Group (Holdings) Co Ltd (Dickson Valora) to pursue a real estate project in Mainland China. The three parties entered into a Shareholders Agreement, which contained a Hong Kong arbitration clause. The parties later entered into the Addendum, which provided that Fan was entitled to a success fee as long as Dickson Valora successfully completed the land development and was able to pay after the sales income. In June 2018, Fan commenced an action in the Shenzhen Qianhai Cooperation Zone People’s Court against Dickson Valora, claiming the success fee pursuant to the Addendum.  The Qianhai Court granted a freezing order over Dickson Valora’s assets. Dickson Valora then challenged the jurisdiction of the Qianhai court, contending that the matter was subject to arbitration. The Qianhai court rejected the challenge.

The Court of First Instance judgment

Dickson Valora, in turn, sought an anti-suit injunction from the Hong Kong Court to restrain Fan from pursuing the Qianhai proceedings and commencing similar proceedings in Mainland China. The questions before the Hong Kong Court were (i) whether the arbitration clause in the Shareholders Agreement was incorporated into the Addendum; (ii) whether the arbitration agreement bound Fan even though he was not a party to the Shareholders Agreement or the Addendum; (iii) whether the Qianhai Court’s judgment rejecting Dickson Valora’s jurisdictional challenge constituted an issue estoppel against Dickson Valora and (iv) whether there were strong reasons not to grant the anti-suit injunction.

On the first issue, the Court answered in the affirmative. The Addendum was complementary and not standalone. It was part and parcel of the Shareholders Agreement, and commercial sense dictated that a single dispute resolution clause (i.e. the arbitration clause) governed the parties’ relationships throughout.

On the second issue, the Court held that as Fan was asserting his right to the success fee, the conditions integral to this right (i.e. the Hong Kong arbitration clause) bound him. Applying the principles of equity, Fan was not allowed to act in a manner inconsistent with the arbitration clause and this did not depend on him being a party to the contract.

As regards issue estoppel, the judge noted that, pursuant to section 3 of the Foreign Judgments (Restriction on Recognition and Enforcement) Ordinance (Cap 46), the Hong Kong court will not recognise and enforce a foreign judgment in breach of a dispute resolution agreement. Commencing the Qianhai proceedings was contrary to the Hong Kong arbitration clause. As such, the Qianhai Court’s judgment was unenforceable and did not bar the Hong Kong court from deciding any of the issues before it.

The Court additionally dismissed an argument that a two-month delay was “unconscionable”. Likewise it rejected arguments that the Companies were guilty of abuse of process and having “two bites of the cherry”, by applying for the anti-suit injunction in Hong Kong only after their jurisdictional challenge in the Mainland had failed.

For further information, please contact Briana Young, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

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In the highly complex and contentious case of Filatona Trading Ltd and another v Navigator Equities Ltd and others [2019] EWHC 173 (Comm), the English High Court dismissed an attempted challenge to an LCIA award brought on the grounds of jurisdiction (s.67 Arbitration Act 1996) and serious irregularity (s.68 Arbitration Act 1996).

In particular, the Court held that an LCIA arbitral tribunal did not exceed the scope of its powers in ordering relief that was not available to an English court.

Background

The dispute arose under a shareholder agreement (SHA) concerning land in central Moscow.  Ms Danilina and Mr Deripaska were named as parties to the SHA. Ms Danilina’s former partner, Mr Chernukhin, was not.  Mr Chernukhin’s position was that Ms Danilina was acting as his nominee or agent and that, consequently, he was the true party to the SHA by virtue of being Ms Danilina’s disclosed principal and the beneficial owner of Ms Danilina’s shares. Ms Danilina and Mr Deripaska disputed this.

In arbitration proceedings between Mr Chernukhin and Mr Deripaska, an arbitral tribunal held that Mr Chernukhin was a party to the SHA and ordered Mr Deripaska to pay $95 million to “buy out” Mr Chernukhin’s shareholding in the relevant Cypriot company.

Mr Deripaska sought to challenge the award. Mr Deripaska contended (as he had done before the tribunal) that Mr Cherunkhin was not a party to the SHA and the arbitration agreement in it, and thus challenged the Award under s.67 on the basis that the tribunal did not have jurisdiction to make it (Section 67 Challenge).  Mr Deripaska also argued that the award should be set aside on the grounds of serious irregularity under s.68, alleging that the tribunal had acted ultra-vires by ordering buy-out (Section 68 Challenge).

Ms Danilina was not party to the arbitration and so was not bound by the award.  Shortly after the award had been rendered, she entered into an agreement to transfer the beneficial interest in her shares to Mr Deripaska. She then began litigation in England seeking a declaration from the court that she was the true party to the SHA and the owner of the shares, and not Mr Chernukhin.

Given the related nature of Ms Danilina’s claim in litigation and Mr Deripaska’s challenge in arbitration, the Court heard both cases together.

Section 67 Challenge

The Court acknowledged that the key factual issue of whether Mr Chernukhin was a party to the SHA, and the related legal issue of whether Mr Chernukhin was precluded from suing under the SHA, was common to both Ms Danilina’s request for a declaration and the Section 67 Challenge.  It followed that this required consideration of the same issue that was at the heart of the arbitration.  The Court emphasised, however, that the challenge was “not an appeal from the decision of the arbitration tribunal” but a “re-hearing“.

The Court concluded that it agreed with the tribunal’s finding, holding that Mr Chernukhin was indeed the true party to the SHA and not Ms Danilina, and that the SHA did not exclude Mr Chernukhin’s ability to sue under it as the disclosed principal of Ms Danilina.  The Court accordingly dismissed the Section 67 Challenge.

Section 68 Challenge

The award ordered Mr Deripaska to buy out Mr Chernukhin’s shareholding in the Cypriot entity, by reference to Cypriot company law concerning relief in circumstances of shareholder oppression.  By contrast, under English law, the English court does not have the power to order the buy-out of shares in a foreign company. Mr Deripaska consequently argued that the Tribunal did not have the power to make such a buy-out order, whether under s.48 of the Arbitration Act 1996 (as the procedural law of the LCIA arbitration) or under the SHA.  Therefore, he argued that the award should be set aside on the ground of serious irregularity.

Under s.48(5) an arbitral tribunal seated in England has the same powers as the English court to order a party to do or refrain from doing anything, and to order specific performance of a contract. It was common ground between the parties that the tribunal did not have power to make the buy-out award pursuant to s.48(5), because an English court would not have that power in relation to a foreign company.  However, the Court also noted s.48(1), which provides that the parties are free to agree on the powers exercisable by the tribunal as regards remedies.  The correct question for the Court to determine, therefore, was whether the SHA, properly construed, provided the tribunal with the relevant power.

The SHA provided the Tribunal with the power to settle “all disputes and disagreements arising from this Agreement or in connection herewith“. The Court noted that a Cypriot court would have the power to make a buy-out order in respect of a Cypriot company. However, given that the parties had chosen to refer all disputes and agreements to arbitration, a dispute concerning shareholder oppression in the Cypriot company to which the SHA relates and requiring a buy-out order would not come before the Cypriot court but an arbitral tribunal.  The Court concluded that a reasonable person would not understand the parties to have intended that all disputes would be resolved by an arbitral tribunal, except those concerning shareholder oppression requiring a buy-out order which would need to be brought before a Cypriot court.  Rather, a reasonable person would understand the parties to have intended the SHA to provide a ‘one-stop shop’ for dispute resolution.  On that basis, the Court found that the SHA did grant the tribunal the necessary power to make the buy-out order.  Consequently, the Section 68 Challenge was dismissed, as there was no serious irregularity.

Comment

This is a prominent example of the English court hearing a challenge to an arbitral award at the same time as a related, yet separate, claim in litigation in order to ensure consistent decisions on the same points.  The reasoning and dismissal of the challenges highlights the Court’s continued non-interventionist approach to arbitration and its considered yet robust approach towards applications to set aside awards.

In this case, the Court’s conclusion that the tribunal had not exceeded its powers was based on the facts of the case and contractual interpretation of the SHA. It is unclear from the judgment which version of the LCIA Rules (1998 or 2014) was applicable here. However, it is possible that the English court could, in future cases with similar facts, base a similar decision on Article 22.1(vii) of the LCIA Rules (2014), which bestows upon an arbitral tribunal the power to “order compliance with any legal obligation, payment of compensation for breach of any legal obligation and specific performance of any agreement“.

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

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

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

Background

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

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

Questions before the court

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

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

Decision

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

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

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

Discussion

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

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On February 14, 2019, in considering cross applications to vacate and confirm an arbitration award, the United States District Court, S.D. New York decided to grant the same deference to a decision made by an appellate arbitration panel as is given to an arbitral award under the Federal Arbitration Act (“FAA”) (Hamilton v. Navient Solutions, LLC., No. 18 Civ. 5432 (PAC) (S.D.N.Y. February 14, 2019).[1]

BACKGROUND

In 2007, Ms. Lucin Hamilton (“Hamilton”) signed a student loan application and a promissory note per which she had given her consent to receive calls from collection companies such as Navient Solutions, LLC (“Navient”) in relation to the loan, including through the use of “automated telephone dialling equipment or an artificial or pre-recorded voice message”.

The student loan agreement contained an arbitration clause providing for AAA arbitration, with reference to the application of the AAA’s Optional Appellate Arbitration Rules.[2] The arbitration agreement provided, in the relevant part, as follows:

Any court with jurisdiction may enter judgment upon the arbitrator’s award. The arbitrator’s award will be final and binding, except for: (1) any appeal right under the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (the “FAA”); and (2) Claims involving more than $50,000. For Claims involving more than $50,000, any party may appeal the award to a three-arbitrator panel appointed by the Administrator, which will reconsider de novo any aspect of the initial award that is appealed. The panel’s decision will be final and binding, except for any appeal right under the FAA…

Hamilton’s loan payments were declared in default as of November 30, 2016, and Navient started contacting Hamilton through the use of automatic telephonic dialling system (“ATDS” or “autodialer”). After numerous calls by Navient through ATDS, Hamilton entered in contact with Navient’s agents in order to revoke her consent to receive the calls. Navient, however, did not stop the calls.

In accordance with the terms of the arbitration agreement, in October 2016, Hamilton commenced arbitration against Navient arguing the calls were a form of harassment and in violation of the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. § 227, which restricts use of ATDS and other types of electronic messaging.[3]

During the arbitration proceedings, the following facts were established as uncontroversial:

9. On April 21, 2016, Ms. Hamilton instructed one of [Navient’s] call-centre agents to stop calling her on her cellular telephone. She was advised that she would be “taken off the autodialer.”
10. On April 21, 2016, NSL’s call-centre agent updated [Navient’s] system of record to update Ms. Hamilton’s autodial consent permission from “Y” to “N.”
11. After the conversation on April 21, 2016 [Navient] no longer possessed Ms. Hamilton’s consent to place calls to her cellular telephone using an automatic telephone dialling system.
12. NSL called Ms. Hamilton’s cellular telephone number two hundred thirty-seven (237) times after April 21, 2016.

After the close of the hearing, but before the issuance of the award, on June 22, 2017, the Second Circuit, in Reyes v. Lincoln Automotive Financial Services, 861 F.3d 51 (2d Cir. 2017), recognized that the TCPA does not permit parties to unilaterally revoke bargained-for consent to use an ATDS to contact them.

In light of Reyes, Navient requested the arbitration record be reopened so the sole arbitrator considered the effect of that decision over Hamilton’s case. On June 27, 2017, however, the sole arbitrator refused to reopen the record to consider the effect of Reyes, stating that the parties had established that Hamilton’s consent was indeed revoked. On June 28, 2017, the arbitrator issued an award in favour of Hamilton, ordering Navient to pay damages in the amount of $103,487.28.

Relying on the AAA Optional Appellate Procedure rules, Navient appealed the arbitrator’s decision to a three-judge arbitration panel.

The arbitration panel issued a final award on March 19, 2018, finding that under Reyes, Hamilton’s “consent was not revocable, and her withdrawal of consent was null and void,” reversing and vacating the portion of the initial award ruling in Hamilton’s favour, and affirming the initial award ruling in favour of Navient the outstanding balance of the Loan — $12,512.72.

Hamilton sought to vacate the decision of the appellate arbitration panel, on grounds of excess of power in violation of the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 10(a). Hamilton argued that the appellate arbitration panel could not make new factual determinations on appeal that were against the stipulations made by the parties in the original proceedings. Naturally, Navient countered Hamilton’s application for vacatur and cross-moved to confirm the award pursuant to 9 U.S.C. § 9 of the FAA.

THE COURT’S DECISION

Judge Paul Crotty of the U.S. District Court for the Southern District of New York considered the question of whether Ms. Hamilton could unilaterally revoke her bargained-for consent a legal one, not subject to factual determination by the parties.

In contrast to Hamilton’s allegations, the Court noted that:

While Ms. Hamilton may not have presented evidence concerning her consent to be contacted by an ATDS at the initial arbitration hearing because of this factual stipulation, the appellate arbitration panel did not exceed its powers, show manifest disregard for the law, or otherwise violate 9 U.S.C. § 10(a) in considering Reyes and holding that Hamilton could not unilaterally revoke her consent.

Consequently, the Court agreed with Navient, confirming the decision rendered by the appellate arbitration panel and ordering Hamilton to pay the outstanding amount of the loan for $12,512.72.

COMMENT

This case demonstrates the way in which an award rendered by an appellate arbitration panel is no different than an arbitration award for judicial review purposes. The US District Court of New York applied the narrowly limited grounds for reviewing an arbitral award provided in the FAA even though the original decision was altered by the appellate arbitration panel. Equally important in this decision is the enforcement of the AAA’s Optional Appellate Arbitration Rules, which empowered the arbitral panel to review the award in a final and binding form. Accordingly, parties considering a challenge to an appellate arbitration panel award need to be aware that these decisions might be subject to the same amount of deference as provided under the FAA to arbitral awards.

[1]        Hamilton v. Navient Solutions, LLC., No. 18 Civ. 5432 (PAC) (S.D.N.Y. February 14, 2019), available at  https://www.transnational-dispute-management.com/legal-and-regulatory-detail.asp?key=21638 (subscription required).

[2] https://www.adr.org/sites/default/files/AAA%20ICDR%20Optional%20Appellate%20Arbitration%20Rules.pdf

[3]        https://transition.fcc.gov/cgb/policy/TCPA-Rules.pdf

For further information, please contact Florencia Villaggi, Senior Associate, Emily Westphalen, Visiting Attorney, or your usual Herbert Smith Freehills contact.

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