Kluwer Law International

Posts Tagged ‘English Law’

Conway & Partners

There are many clients who are often engaged in industrious works that result in disputes. Typically, the applicable arbitral agreements requirement submitting claims to international arbitration and, in this author’s opinion, appropriately so. However, these same clients may also be subject to frequent claim assertions that lack any true merit. Despite this, there is not truly a mechanism in place to protect such clients against having to fully defend themselves against such frivolous claims.

Under the ICSID rules the situation is different. Originating in the 2006 Amendments, Rule 41(5) allows a party to object to a claim that is “manifestly without legal merit.” This rule has, over the years, been tested and utilized by ICSID investment treaty claims. As the ICSID framework operates independently, however, it is not subject to a review under the terms of the New York Convention.

Could and should such a process be extended to international commercial claims under the auspices of international arbitration institutions? Many arbitral rules have recently undergone rigorous review and changes from appointed committees, such as the ICC Arbitration Rules. However, no such rule as found in the ICSID Rules exists. Why? There are, perhaps, many cultural reasons but the most obvious issue stems from the New York Convention, which may allow a party to claim under Article V that it was not given a proper opportunity to be heard and make its case. Clearly, protecting one’s right to assert its full claim is legitimate, it can also lead to abuse of the system – ultimately, hassling companies by making them carry-on a full defense on what can be determined early-on as a claim “manifestly without legal merit.”

Other commentators have considered models found in the common law system, such as that often referred to summary judgment or in the civil law system, such as the “kort geding” in the Netherlands which captures elements of both the common law summary judgment style motions and interim measure reviews.

The question raised is whether it could possibly hold up against a claim under the New York Convention when seeking recognition or enforcement of an arbitral award. Published in the Arbitration International (the Journal of the London Court of International Arbitration) in 2010, myself along with two co-authors (Ned Beale and Matthijs Nieuwveld) considered some preliminary motion options in practice in the United Kingdom and The Netherlands. In the article, entitled Summary Arbitration Proceedings: A Comparison Between the English and Dutch Regimes, “The authors recognize that the Dutch kort geding procedures should be distinguished from the English summary judgment procedure, having a requirement of urgency, as opposed to a strong case on the merits, and producing, at least technically, only interim remedies. However, given that interim awards resulting from arbitration kort geding procedures are often not challenged in subsequent main proceedings, in reality such an interim award often amounts to a final, summary, disposition of the claim. Specific provision for arbitration kort geding procedures make such ‘summary’ dispositions fairly frequent in the Netherlands, and also on the authors’ analysis protect against risk of being refused recognition and enforcement under the New York Convention.

Given that arbitral summary judgment is relatively rare in England, and that on the authors’ analysis there is a risk of such awards being appealed to the English court or refused recognition and enforcement under the New York Convention, the authors conclude that there is a good argument for specifically providing for summary judgment in the 1996 Act and/or the LCIA Rules. Obviously, whether a tribunal would exercise such a power would remain in the tribunal’s discretion, but in the authors’ opinion an express statement of the tribunal’s powers in this regard would be a useful clarification of the law.” (Ned Beale, Lisa Bench Nieuwveld, and Matthijs Nieuwveld, 26/1 Arbitration International 159 (2010)).

Furthermore, there is no precedent – looking to the ICSID examples can give arbitrators something to rely on when considering using a rule that would allow early-on review of the merits. What is crucial is finding a way to satisfy the NY Convention Article V(b) wherein the party may seek setting aside the arbitral award because the party was “unable to present his case.”

Surely, this can be worked around? The parties can “adequately” present their case while clearly demonstrating early on whether there are sufficient merits to press forward with a full-blown arbitration? I have no doubt this sparks controversy arising from all of our legal system biases, etc., but thoughts would be interesting to hear – is it ever possible to follow the ICSID example when constrained by the NY Convention? If so, how?

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Linklaters LLP

A recent Australian case has resulted in a ruling that arbitration clauses, jurisdiction clauses and choice of law clauses in charter parties involving shipments to or from Australia are now unenforceable if such clauses seek to limit the jurisdiction of any Australian court.

On 6 October 2009 the Claimant ship owner, Dampskibsselskabet Norden A/S (“DKN”), and the Respondent charterer, Beach Building & Civil Group Pty Ltd (“BBCG”), entered into a charter party (the “Charter Party”) to carry a cargo of coal from Australia to China. The Charter Party contained a London seated arbitration clause and was governed by English law.

A dispute subsequently arose between the parties in relation to whether or not BBCG was required to pay demurrage at both the loading and discharging ports after the vessel had encountered delays. BBCG raised two preliminary issues for consideration by the arbitrator. One issue was whether or not the arbitrator had jurisdiction to hear disputes arising under the Charter Party. BBCG submitted (unsuccessfully) that the arbitration clause in the Charter Party was invalid and of no effect due to the operation of section 11 of the Carriage of Goods by Sea Act 1991 (Cth) (“COGSA”). Section 11 of COGSA reinforces the primacy of Australian Commonwealth or State jurisdiction over disputes arising out of certain sea carriage documents. DKN was ultimately successful in the arbitration, and obtained a declaratory arbitration award (the “first Award”) in November 2010 and a final arbitration award (the “final Award”, together with the first Award, the “Awards”) in January 2011 in the amount of US$824,663.18 together with interest and costs.

In April 2011 DKN commenced enforcement proceedings in the Federal Court of Australia (the “Federal Court”) pursuant to the Australian International Arbitration Act 1974 (Cth) (the “Australian Arbitration Act”) which gives effect to the New York Convention.

One ground upon which BBCG resisted enforcement was that the arbitration clause in the Charter Party was invalid and ineffective by reason of the operation of section 11 of COGSA.

The New York Convention (and by extension the Australian Arbitration Act which gives effect to it) requires courts of contracting states to give effect to private agreements to arbitrate and to recognise and enforce arbitral awards made in other contracting states. However, section 2(c) of the Australian Arbitration Act also provides that nothing in the Australian Arbitration Act affects the operation of section 11 of COGSA.

Section 11 of COGSA states:

“Section 11: Construction and Jurisdiction

(1) All parties to:

(a) a sea carriage document relating to the carriage of goods from any place in Australia to any place outside Australia; or

(b) a non-negotiable document of a kind mentioned in subparagraph 10(1)(b)(iii), relating to such a carriage of goods;

are taken to have intended to contract according to the laws in force at the place of shipment.

(2) An agreement (whether made in Australia or elsewhere) has no effect so far as it purports to:

…

(b) preclude or limit the jurisdiction of a court of the Commonwealth or of a State or Territory in respect of a bill of lading or a document mentioned in subsection (1); or

(c) preclude or limit the jurisdiction of a court of the Commonwealth or of a State or Territory in respect of:

(i) a sea carriage document relating to the carriage of goods from any place outside Australia to any place in Australia; or

(ii) a non negotiable document of a kind mentioned in subparagraph 10(1)(b)(iii) relating to such a carriage of goods.”

The primary question to be decided by the Federal Court was whether the Charter Party was a sea carriage document or a non-negotiable document so that it could determine whether section 11(2)(b) or section 11(2)(c) would operate to render the Awards unenforceable.

The term “sea carriage document” is not expressly defined in COGSA. However the term “sea carriage document” is defined in the Hague-Visby Rules, a set of international rules for the international carriage of goods by sea, which are incorporated into COGSA. BBCG contended that the meaning of “sea carriage document” should include a voyage charter on the basis that Article 1(1)(g)(iv) of the Hague-Visby Rules defined sea carriage document as “[a] non-negotiable document (including a consignment note and a document of the kind known as a sea waybill or the kind known as a ship’s delivery order) that either contains or evidences a contract of carriage of goods by sea” and that on a literal reading the charter party fell within that definition.

Against this, DKN argued that the term “sea carriage document” should be interpreted not merely by reference to the ordinary meaning of the words used, but in the context of COGSA as a whole, with a purposive approach and having regard to the amendments made by the Commonwealth Parliament in 1998. DKN argued that though a “sea carriage document” may be characterised as a non-negotiable document that either contains or evidences a contract of carriage of goods by sea,  it was not a consignment note, sea waybill or ship’s delivery order and so did not fall within the class of documents captured by Article 1(1)(g)(iv) of the Hague-Visby Rules.

DKN referred to previous Australian case law (Jebsens International (Australia) Pty Ltd v Interfert Australia Pty Ltd [2012] SASC 50) in which the meaning of “sea carriage document” had been considered by the Supreme Court of South Australia. In Jebsens v Interfert Justice Anderson held that:

• a charter party was not a “sea carriage document” within the definition contained in the Hague-Visby Rules (for instance because of Articles 5 and 10 of the amended Hague-Visby Rules which draw a distinction between charter parties and sea carriage documents);
• COGSA deals with the rights of persons holding bills of lading or similar instruments and not with the rights of persons to a charter party; and
• a charter party is not a sea carriage document simply because it is a document containing a contract for the carriage of goods by sea.

Accordingly the London arbitration award in Jebsens v Interfert was held to be enforceable in Australia.

In DKN v BBCG the Federal Court disagreed with the purposive approach taken to the interpretation of “sea carriage document” by Justice Anderson, and instead adopted a literal approach. The Federal Court held that “[t]he expression “… document relating to the carriage of goods from any place in Australia …” as a matter of ordinary English is apt to encompass a voyage charter party.” Accordingly section 11(1)(a) and section 11(2)(b) together operated to render the arbitration clause unenforceable.

The DKN v BBCG decision is at odds with the parties’ freedom of contract to decide the law, jurisdiction and means by which they wish any disputes to be resolved. It is also arguable that the decision is contrary to the key tenet of the New York Convention that foreign arbitral awards will not be discriminated against and that foreign awards will be recognised and enforced in the same manner as domestic awards. Does DKN v BBCG then represent a departure from the generally pro-arbitration approach of the Australian courts in relation to the enforcement of foreign awards? The decision has certainly caused some controversy, and no doubt will have caused some speculation that Australia may be unfriendly to arbitration. Taken alone, the outcome may suggest a divergence of the usual pro-arbitration approach of the Australian courts. However, there is nothing in the Judge Foster’s reasoning to support this conclusion. Indeed in an earlier Federal Court case also decided by Justice Foster which was handed down in March 2011 (Uganda Telecom Ltd v Hi-Tech Telecom Pty Ltd [2011] FCA 131), Justice Foster adopted a resolutely pro-arbitration approach in relation to the enforcement of foreign awards (though it should be noted that Uganda Telecom was not a case decided in the context of shipping law and COGSA).

Whether or not there will be an appeal from the DKN v BBCG decision is as yet unknown. In view of the opposing decisions in Jebsens v Interfert and DKN v BBCG (each of which has been handed down within the last six months), it is likely that there will either be an appeal in DKN v BBCG or that the Commonwealth Parliament will update COGSA to clarify the position. In the short term however, parties to charter parties should assume that the DKN v BBCG decision represents the current law in Australia. Consequently any arbitration clauses in affected charter parties should be reviewed and carefully considered, in particular where are enforcement action might be contemplated in Australia. Parties contemplating entry into charter parties involving shipments to or from Australia should be mindful that currently Australian law and jurisdiction will override any attempt to choose foreign law or foreign arbitration.

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Herbert Smith LLP

In June 2010 the Court of Appeal’s decision in Jivraj v Hashwani caused dismay in the arbitration community. Does an arbitration agreement which provides criteria for the appointment of arbitrators risk falling foul of the Employment Equality (Religion or Belief) Regulations 2003 (the “Regulations”) or other UK anti-discrimination law? The Supreme Court judgment of 27 July 2011 restored certainty, confirming that arbitrators are not “employees” under the Regulations and that the inclusion of certain “discriminatory” criteria for appointment does not breach the Regulations (see here for an earlier blog post on this decision).

That was expected to be the final word on the matter. The Supreme Court refused to refer the point to the ECJ. But now the issue has been revived, in the form of a complaint to the European Commission under article 258 of the Treaty on the Functioning of the European Union (“TFEU”).

Mr Hashwani’s complaint is hinged upon the Supreme Court’s decision not to refer two questions for preliminary ruling by the Court of Justice of the EU (“CJEU”). The complaint avers that this breaches the UK’s obligations under article 267(a) TFEU, which provides that where “a question [as to treaty interpretation] is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under national law, that court or tribunal shall bring the matter before the Court”. Furthermore, it is said that the Supreme Court failed to adopt the proper interpretation of Council Framework Directive 2000/78/EC.

The complaint requests that the Commission bring infringement proceedings against the UK in the CJEU. Mr Hashwani seeks:-

• a declaration that the UK has breached article 267 by virtue of the Supreme Court’s failure to refer questions to the CJEU for preliminary ruling;
• a determination of those questions by the CJEU; and
• a declaration that the UK must take necessary measures to ensure that those determinations are applied in Jivraj v Hashwani.

What impact will Mr Hashwani’s complaint have in practice? Certainly, it (re)introduces a degree of uncertainty as to the enforceability of “discriminatory” arbitration agreements. However, it is unlikely that we will see a return to the pre-Supreme Court practice of advising clients to remove such clauses from their agreements.

First, it will be a long and difficult road for Mr Hashwani. The Commission and the CJEU are not courts of final appeal on the merits. Mr Hashwani must persuade the Commission to exercise its preliminary powers under Article 258 TFEU: “If the Commission considers that a Member State has failed to fulfil an obligation under the Treaties, it shall deliver a reasoned opinion on the matter after giving the State concerned the opportunity to submit its observations. If the State concerned does not comply with the opinion within the period laid down by the Commission, the latter may bring the matter before the Court of Justice of the European Union.” If the Commission opines that the UK has breached its treaty obligations, and if the UK does not remedy this, the Commission may bring infraction proceedings in the CJEU against the UK under Article 260.

If the CJEU were to find that the UK has indeed breached its treaty obligations, the Commission and CJEU’s powers of enforcement would be limited to those available under article 260 TFEU. The CJEU has no power to determine the questions which Mr Hashwani poses by making a preliminary ruling on its own initiative. It is for the national court to refer a question to the CJEU within the context of a live case; not for the parties to use the mechanism as a method of appeal after judgment has been handed down. Under article 260, the CJEU may only require a state to “take the necessary measures to comply with the judgment”. Moreover, if a state does not comply, the Commission and the CJEU have no powers of enforcement. At most, the Commission may bring the case before the CJEU once again and the court may impose a lump sum or penalty payment. Although there may be political ramifications to a refusal to “take the necessary measures”, the European institutions cannot compel the Supreme Court to re-open the case or to refer any question back to the CJEU.

So much for the limited scope of the remedies available. It is in any event far from clear that the Commission will use its discretion to refer the complaint to the CJEU or, if it did, that the CJEU would find that the UK has breached its treaty obligations.

The Supreme Court handed down a very cogent judgment which explained in clear terms its decision not to make a preliminary reference to the CJEU. Its duty to refer a question of treaty interpretation to the CJEU is subject to the acte clair and acte eclaire exceptions: no reference need be made where the point is sufficiently clear so as not to require interpretation or where the question has already been interpreted by the CJEU. In relation to Mr Hashwani’s first question, the Court noted that the issues had been resolved by the CJEU in numerous cases and were considered acte clair. No preliminary reference was therefore required.

Against this, the fact that the Court of Appeal came to a different conclusion on the merits of the case invites the retort that the Regulations cannot be so clear that they do not require interpretation by the CJEU. Yet it is the Supreme Court’s prerogative to declare that the lower courts got it wrong – and the fact that the Supreme Court’s decision overturns the decision of a lower court does not, of itself, render its reasoning any less certain.

Mr Hashwani’s second question was moot because the Court found that the Regulations did not apply.

On the merits, the Supreme Court recognised that the role of an arbitrator is ‘different’. And it is. An arbitrator is not an employee and not a self-employed person: the role is of an “independent provider of services” who is “in effect a ‘quasi-judicial adjudicator’”. The parties do not control the arbitrator, once appointed; on the contrary, it is the arbitrator who runs the procedure and imposes his or her rulings, listening to the parties but independent of them.

Unless and until the UK acts upon an opinion of the Commission or a declaration of the CJEU, the Supreme Court judgment remains a binding precedent. It is not easy to see a scenario in which that will change.

The complaint may, however, prompt further debate upon discriminatory criteria in arbitration agreements. At first glance the Supreme Court decision clashes with values which the EU – and indeed the UK – hold dear. It permits discrimination on the grounds of religion in the appointment of an arbitrator.

Or, on another view, it promotes party autonomy in arbitration.
The legislation and the Supreme Court judgment recognise that there is a distinction between “acceptable” and “unacceptable” discrimination through the “genuine occupational requirement” exception. Such safety valves ensure that equality legislation does not have a negative impact beyond the intended scope of protection.

Regardless of the outcome of Hashwani’s complaint, party autonomy may come to be limited through other routes: see, for example, the draft Mediation and Arbitration Services (Equality) Bill. This draft private members bill, introduced to the House of Lords by Baroness Cox, aims to address the issue of gender discrimination in arbitration. The bill would amend the Equality Act 2010 to prohibit any term of an arbitration agreement or process which discriminates on the grounds of sex. Women continue to be under-represented on arbitral tribunals: 11% of partners in the GAR top ten international arbitration teams are women, but only 5% and 6% of all arbitrators appointed in ICSID and commercial arbitrations, respectively, are women.

The final (?) chapter in the Jivraj saga will take some time to be written, but in the meantime the discrimination vs. party autonomy argument will continue to be aired in other fora.

Craig Tevendale, Partner, Herbert Smith LLP, and Susan Field, Associate, Herbert Smith LLP

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CMS Cameron McKenna LLP,
for YIAG

On 16 May 2012, the Court of Appeal of England & Wales (“CA”) dismissed an appeal against an anti-suit injunction restraining three insured entities from pursuing proceedings in the Brazilian courts against their insurers (Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638). This is the latest in a series of decisions in Brazil and in England & Wales testing the approach of the courts in both jurisdictions to the enforcement of arbitration agreements in circumstances where there are contradictory provisions in the contract.

A consortium of Brazilian construction companies (the “Insureds”), working as the contractor for the construction of one of the world’s largest hydro-electric facilities, in Jirau – Brazil, entered into two all risk insurance policies (the “Policy”) with a group of Brazilian insurance companies (the “Insurers”). In March 2011, incidents caused damages at the construction site, which led to the Insureds to claim under the Policy. The Insurers, in response, commenced arbitration proceedings in London on 29 November 2011, seeking declarations of non-liability.

The Policy’s relevant terms (translated from Portuguese) provided:

Condition 7 – Law and Jurisdiction:

It is agreed that this Policy shall be governed exclusively by the laws of Brazil.

Any dispute arising under, out or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil.

Condition 12 – Arbitration:

In case the Insured and the Insurer(s) fail to agree as to the amount to be paid under this Policy through mediation as above [condition 11], such dispute shall then be referred to arbitration under ARIAS Arbitration Rules. …

The seat of the arbitration shall be London, England. …

The tale of two jurisdictions starts at the end of 2011, when both sides referred the matter to court:

• On 12 December 2011 the Insureds (relying on condition 7) initiated proceedings in Brazil, challenging the enforceability and scope of arbitration agreement, and the requirement for mediation before commencing arbitration. The Insureds also applied for an ex parte interim order to restrain the Insurers from proceeding in arbitration until the issue was finally decided by the Brazilian courts. The ex parte application was refused.

• On 13 December, the Insurers made a without notice application to the Commercial Court in London and obtained an interim anti-suit injunction to restrain the Insureds from continuing the injunction proceedings in the Brazilian court.

• On 16 December 2011, a single judge of the São Paulo Court of Appeal (“TJ-SP”), on an interlocutory appeal from the refusal to grant the ex parte application, granted an interim order preventing the Insurers from continuing with the arbitration in London.

• On 19 January 2012, the Commercial Court, on the Insurers’ request for continuation of the interim anti-suit injunction in London, decided that (i) English law was applicable to the arbitration agreement as a result of it having the closest and most real connection with the law of the seat of the arbitration; (ii) the Insureds be restrained from pursing proceedings in Brazil; (iii) there was no binding obligation to mediate before arbitration; (iv) the scope of the arbitration agreement covered any dispute, without restriction; (v) the Insurers could continue with the arbitration; and (vi) the exclusive jurisdiction clause at condition 7 of the policy, was superseded by the arbitration agreement (SulAmerica CIA Nacional De Seguros S.A. & Ors v Enesa Engenharia S.A. & Ors [2012] EWHC 42 (Comm)).

• On 19 April 2012, a majority decision of a full bench of the TJ-SP, confirmed the previous interim order in Brazil against the Insurers and determined that (i) the Insurers were prevented from continuing with the arbitration in London until the enforceability of the arbitration agreement was finally decided by Brazilian courts; and (ii) a fine of approximately US$200,000.00 per day be imposed on the Insurers if and for as long they continued with the arbitration (TJ-SP, AI no. 0304979-49.2011.8.26.0000 Energia Sustentável do Brasil S/A e outros v Sul América Companhia Nacional de seguros S/A).

• On 16 May 2012, the CA dismissed the Insureds’ appeal.

The CA’s decision (against which the Insureds are seeking leave to appeal) maintained the decision of the Commercial Court that the applicable law of the arbitration agreement is English law, although with different reasoning.

The TJ-SP’s decision did not decide on the law applicable to the arbitration agreement, but the courts have taken substantially different positions. The Insurers can now continue the arbitration (as far as the English court is concerned) so but face a substantial daily fine by the Brazilian courts in doing so.

Whether the applicable law of the arbitration agreement is English law or Brazilian law may have a significant effect on its enforceability. If the arbitration agreement is governed by English law, as established by the Commercial Court and CA decisions, the arbitration agreement is enforceable notwithstanding a submission to the jurisdiction of the Brazilian court in the same contract. Brazilian arbitration law, on the other hand, imposes additional requirements on arbitration clauses in adhesion contracts¹ (art. 4°, §2° Law 9,307/96) and the regulatory authority of the insurance industry in Brazil also requires specific provisions in order to arbitrate in insurance contracts (rules 256/2004, SUSEP). In essence the secondary consent of the Insureds is necessary before arbitral proceedings can be commenced. Accordingly, in this case, the Insureds assert that the arbitration agreement is subject to Brazilian law and, by virtue of the nature of this agreement, the Insureds’ (secondary) consent is required before arbitration proceedings can be brought, although this has yet to be decided in Brazil.

The Policy’s contradictory provisions (conditions 7 and 12), were recognized by the English court. The approach under English law is to favour the arbitration agreement, leaving a jurisdiction clause applicable in only very limited circumstances. Where the seat of arbitration and the jurisdiction of the chosen court are different, the value of the jurisdiction clause is limited even further. In fact, the Brazilian Superior Tribunal of Justice (“STJ”) has previously reached similar conclusions that a jurisdiction clause does not invalidate an arbitration agreement, and results in national courts having only residual competence to assist the arbitration (Empreendimentos e Participações A. B. F v Arco Engenharia Com Ltda, Ag 1.088.705/MG).

In addition, the STJ supports the principle of competence-competence that issues of existence, validity and efficiency of the arbitration agreement shall be decided by the arbitral tribunal itself (Interclínicas Planos de Saúde S/A v Saúde ABC Serviços Médicos Hospitalares, Resp 14.295-SP).

In the circumstances, the current decision of the Brazilian court is hard to explain but seems to turn on the question of whether (assuming the arbitration agreement is governed by Brazilian law) the Insureds are required to give a secondary consent. In Brazil the case is expected to be appealed to the STJ, as the final competent court to decide the matter, although this may take years. Based on the pro-arbitration stance taken by the STJ in previous arbitration cases, the expected outcome will be the referral of the question to the arbitral tribunal. However, the STJ may come to the conclusion that, since the arbitral tribunal’s hands are tied given the position taken by the CA, the STJ has no choice but to determine the question itself.

The conflict over the applicable law of the arbitration agreement remains. The CA in its reasoning departed from the Commercial Court and questioned the approach taken in recent cases which simply link the applicable law of the arbitration agreement to the seat of the arbitration. (See XL Insurance Ltd v Owens Corning [2001] 1 All E.R. (Comm) 530 and C v D [2007] EWCA Civ 1282.) The CA recognized that in many cases the applicable law of the arbitration agreement will or should be the same as the applicable law of the contract of which it forms part. In concluding that the parties must have intended that the arbitration agreement was subject to English law, the CA seemed to take the position that English law should be preferred, as Brazilian law gave rise to the possibility of the secondary consent requirement. This ignores the fact that the Brazilian court has not yet decided if the secondary consent requirement applies. If under Brazilian law, that is not the case, it would seem that the reasoning relied on by the CA cannot be sustained. Lord Justice Moore-Bick posed the question: “with which system of law does the agreement have the closest and most real connection”. On this question in Brazil, the Insureds argue in the ongoing proceedings that (i) the case involves Brazilian parties; (ii) the Insureds project is located in Brazil; (iii) the project is financed by the Brazilian Development Bank; (iv) the events which triggered the claim for compensation took place in Brazil; (v) the agreement includes an exclusive jurisdiction clause in favor of Brazilian courts; and (vi) the proper law of the contract is Brazilian. On the other hand, the CA considers that one has to distinguish the connection to the substantive contract (which is undoubtedly connected to the arbitration agreement) and the system of law by which the substantive contract is governed.

The simple question arguably is this, did the parties chose arbitration in London and intend that, despite all other connections to Brazil, the arbitration agreement would be governed by English law? One doubts the issue crossed the parties’ minds at all (although if asked one suspects rather than agreeing to English law, the seat of arbitration might have changed). The circumstances of this case highlight the flaw in simply linking the applicable law of the arbitration agreement to the seat of arbitration, and the doubt cast on this by the CA is welcomed. If leave to appeal is granted, the Supreme Court will have the opportunity to recast the test, which may permit appropriate weight to be given to all circumstances under the arbitration agreement and the substantive contract of which it forms part.

Guy Pendell and Felipe Sperandio, CMS Cameron McKenna LLP

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Herbert Smith LLP

On 17 July 2012, the Privy Council (UKPC 27) passed a landmark judgment of relevance for creditors of States seeking to enforce against the assets of State-owned corporations. The Privy Council held that only in ‘quite extreme circumstances’ would a State-owned corporation (a separate juridical entity formed by the State for commercial or industrial purposes) be deemed as equivalent to the State itself, and so be liable for the State’s liabilities (or the State for the entity’s liabilities). By reference to a broad review of international case law, the Privy Council set out clear principles which are likely to be persuasive in a number of jurisdictions.

The facts

Hemisphere, a Delaware corporation, purchased the assignment of two International Chamber of Commerce arbitration awards against the Democratic Republic of Congo (the ‘DRC’) and attempted to enforce those awards against Gécamines, a DRC state owned corporation and its Jersey-based assets (to the value of approximately $100m).

Hemisphere purchased the debt (assignment of the awards) from Energoinvest DD, a Yugoslavian hydroelectric company, which entered into supply and financing contracts with the DRC when Mobutu Sese Seko was in power 30 years ago. It has been reported that the debt was originally purchased by Hemisphere at approximately $3.3m. The media often refer to companies such as Hemisphere as ‘vulture funds’, which buy distressed sovereign debt at a discount and then seek to enforce in a variety of jurisdictions. Hemisphere’s efforts have included enforcement actions in the US, Hong Kong, South Africa, Australia and, in this case, Jersey. The most widely reported decision to date being the Hong Kong Court of Final Appeal’s judgment (Democratic Republic of Congo v. FG Hemisphere (FACV Nos. 5, 6 & 7 of 2010) which addressed similar facts and held that States enjoy absolute immunity in Hong Kong as a result of the sovereign immunity policy of the People’s Republic of China.

The lower courts’ decision

Hemisphere brought proceedings against Gécamines in Jersey and on 27 October 2010 the Royal Court of Jersey upheld this claim (including injunctive relief) against Gécamines by concluding that:

‘the exceptional degree of power accorded to the state over the affairs of Gécamines, at all levels, was such that the company was no more, in truth, than an arm of the state with responsibility for operations in a sector of vital importance to the national economy’.

The lower courts decidedd Hemisphere’s case on the basis of the common law test set out in the English Court of Appeal case of Trendtex Trading Corp v. Central Bank of Nigeria [1977] 1 QB 529 (‘Trendex’) (a decision on whether the Central bank of Nigeria, a legal entity incorporated by a Nigerian statute, was a department or organ of the State of Nigeria) where Lord Denning held that he would ‘look to all the evidence to see whether the organisation was under government control and exercised governmental functions’. The Royal Court and the Court of Appeal looked to the company’s formal constitutional position and examined the control exercised by the State in practice over Gécamines and Gécamines’ functions, and ultimately concluded that Gécamines was an organ of the DRC.

On 14 July 2011, the Court of Appeal upheld this judgment. Gécamines appealed to the Judicial Committee of the Privy Council. Lord Hope, Lord Walker, Lord Mance, Lord Wilson and Lord Carnwath (the ‘Board’) heard the appeal.

The Privy Council’s decision – ‘the correct approach’

The Board held that the Court of Appeal had erred in concluding that Gécamines was an organ of the DRC. Lord Mance set the tone right from the outset of the judgment noting that ‘…Hemisphere has here, located, and obtained interim injunctive relief relating to, substantial assets of Gécamines in Jersey, in respect of the DRC which has nothing to do with Gécamines’ activities (emphasis added).’

Lord Mance noted that the Board looked beyond the Trendex decision and in particular to the UK State Immunity Act 1978 (the ‘Act’) (and the State Immunity (Jersey) Order, 1985 which extends the provision of the 1978 Act to Jersey) where a clear distinction in the context of immunity has emerged between the State and a ‘separate entity’. Section 14 of the Act essentially provides that references to a State include references to the government of that State and department of its government ‘but not to any entity [thereafter referred to as a ‘separate entity’] which is distinct from the executive or organs of the government of the State and capable of suing or being sued (emphasis added).’

Lord Mance continued to explain the correct approach to distinguishing between an organ of the State and a separate legal entity, a distinction which he notes is relevant not only to the question of immunity but also to substantive liability and enforcement, and the key point being that where:

‘a separate juridical entity is formed by the State for what are on the face of it commercial or industrial purposes, with its own management and budget, the strong presumption is that its separate corporate status should be respected , and that it and the State forming it should not have to bear each other’s liabilities. It will… take quite extreme circumstances to displace this presumption.’

The ‘quite extreme circumstances’ may include the situation where the entity has a juridical personality but in effect has no separate existence. To determine whether this is the case requires an examination of the constitutional arrangement as applied in practice as well as the State’s control over the entity’s activities and functions. In other cases, where the State can be said to have interfered with a State-owned entity it may be appropriate to lift the veil of incorporation. In this case, although the DRC may have interfered with its activities, the impact of lifting the corporate veil was not justified nor was Gécamines considered to be a sham company.

The Board undertook a detailed examination of the evidence and concluded that Gécamines was not an organ of the DRC, and therefore not liable, nor its assets answerable, for the DRC’s debts.

Conclusion

The reality faced by investors is that States regularly function through corporations. With the increase in investor-State treaties over the years, enforcing against the assets of a State-owner entity is often an attractive option for those investing into particular jurisdictions. This decision clarifies this area of law and effectively raises the bar. It will be persuasive in many jurisdictions and is likely to make it even more difficult for creditors of States to seek enforcement against the assets of State-owned corporations (and vice versa). Conversely, this is good news for State-owned corporations and should go some way in alleviating their fears of being sued for debts of the State from which they emanate. The Privy Council has set out clear principles in this decision, and emphasises the need for investors to evaluate the risk of entering into transactions with States right from the outset.

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A recent decision of the English Commercial Court (Lombard North Central plc & Anor v GATX Corporation [2012] EWHC 1067 (Comm)) has provided some insight and clarification into how the English courts will interpret and implement Section 9(1) of the Arbitration Act 1996. Section 9 is how English law has complied with Article II(3) of the New York Convention, which provides for the dismissal or stay of proceedings in national courts brought in breach of an agreement to arbitrate. Generally speaking, all major common law systems (including England) expressly provide for a stay of litigation brought in violation of a valid arbitration agreement, whereas courts in civil law jurisdictions do not merely stay pending litigations, but dismiss them entirely. ¹

In Lombard Andrew Smith J considered an application to stay proceedings under Section 9(1). Section 9(1) states as follows:

“(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter…”

In Lombard, the parties (Lombard and GATX) had entered into a train financing agreement, under which GATX could in some circumstances force a sale of the trains and thereby realise any profit share. Subsequently, the parties entered into a second agreement, which contained a reference to arbitration. The essence of this second arrangement was that GATX agreed to give up its right to force a sale of the trains, and the parties agreed they would establish a joint venture (JV) by a specified date that would arrange the leasing and sub-leasing of the trains, and share any profits arising from the JV. If a JV could not be established by that date, the parties agreed to negotiate in good faith to achieve their objectives through other means at the earliest opportunity. The arbitration clause in the second agreement provided that any dispute relating to the creation of the JV that could not be resolved by the good faith efforts of the parties would be referred to, and finally resolved by, arbitration in London. It was common ground between the parties that no JV was established by the specified date in the second agreement.

There was a dispute between the parties as to the scope of the arbitration clause in the second agreement. Lombard contended that it was intended only to resolve disputes about how the prospective JV should be constituted, rather than disputes about the second agreement itself. On that basis, Lombard brought proceedings in the Commercial Court against GATX seeking (inter alia) a declaration as to the unenforceability of the parties’ agreement to negotiate in good faith.

GATX sought a stay of the proceedings under Section 9(1), and, alternatively, under the court’s inherent jurisdiction at law. GATX submitted that the proceedings were “in respect of” a referred matter under Article 9(1), and should be stayed because Lombard’s claim of non-enforceability would draw a referred matter (the scope of the arbitration agreement) into the legal proceedings. Smith J agreed with GATX’s submissions, and granted GATX’s application to stay the proceedings.

In reaching his determination on the Section 9(1) issue, Smith J considered the meaning of the phrase “in respect of” in Section 9(1), noting that “[t]here is no judicial authority of which counsel or I know that directly considers the meaning of ‘in respect of’ in section 9(1) or how the court determines whether proceedings are in respect of a referred matter.”

Smith J held that: “the question of course depends upon the nature of the claim (or claims) made in the legal proceedings, but not, I think, only on the formulation of it (or them) in the claim form and any pleadings. That would allow a claimant to circumvent an arbitration agreement by formulating proceedings in terms that, perhaps artificially, avoid reference to a referred matter, knowing that any application to stay them must be made before a defence is pleaded. In considering a Section 9(1) application, the court should therefore consider what questions will foreseeably arise for determination in the proceedings and whether they include referred matters.”

Smith J rejected a narrow approach that proceedings are “in respect of” a referred matter only when they are “mainly or principally” resolving a dispute about a referred matter. He held that this was consistent with the Court of Appeal’s approach in Fulham Football Club (1987) Ltd v Richards and another [2011] EWCA Civ 855, where the CoA had considered that a question whether proceedings under section 994 of the Companies Act 2006 asserting unfair prejudice should be stayed depended upon whether the arbitration agreement was inoperative under section 9(4) rather than upon whether the proceedings were covered by section 9(1).

In Fulham Football Club, Patten LJ had held that “Section 9(1) is concerned only to identify the existence of an arbitration agreement which in terms covers the matters in dispute as the preconditions (sic) for the making of the stay application”. Smith J held that he did not understand Patten LJ to mean that it is a precondition to a stay application that all the matters in dispute be referred matters.

Smith J’s decision in Lombard raises two pertinent issues. First, whether proceedings are “in respect of” a matter referred to arbitration depends on the nature of the claim, but not on the formulation of the claim in the claim form or pleadings. Therefore, lawyers cannot avoid the risk of a stay under Section 9(1) through clever drafting.

Secondly, Section 9(1) may bite if there is a referred “matter” in issue, even if there are other “matters” in dispute before the court that are not included within the scope of the arbitration agreement. In such a scenario, the court can adopt one of two approaches. It may stay the entire proceedings pending the outcome of the arbitration, or alternatively, it may allow the general court proceedings to carry on, but stay only the discrete arbitral matter. The key issue for the court is in determining how peripheral the arbitral issue has to be to the dispute as a whole before it will order a general stay of proceedings. That will depend on the specific facts of each case.

In the Lombard case, Lombard accepted that, if GATX was entitled under Section 9(1) to a stay of its first claim, then a second, related claim should also be stayed under the court’s inherent jurisdiction, if not Section 9(1). Accordingly, Smith J did not appear to feel required to consider whether the related claim should also be stayed. He did say however that had be been required to do so, he would have stayed the related claim in any event as this would have been demanded by sensible case management.

Where, as in Lombard, the parties agree to refer to arbitration only certain disputes that might arise from their contractual relationship (in this case, only disputes relating to the creation of a future joint venture), the risk of fragmentation of proceedings with the attendant cost and delay is inherent in the agreement, even in the post-Fiona Trust legal landscape where English courts are required to interpret arbitration agreements expansively.

Written by Gary Born and Charlie Caher

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The High Court of England & Wales has confirmed the nature of the test that will be applied when determining the proper law of an arbitration agreement in the absence of the parties’ express or implied choice. In two recent cases, Sulamérica CIA. Nacional De Seguros S.A. and Anors v Enesa Engenharia S.A. – ENESA and Anors [2012] EWHC 42 (Comm) and Abuja International Hotels Limited v Meridien SAS [2012] EWHC 87 (Comm), the court heard argument in two very different contexts on the law governing the parties’ agreement to arbitrate, but delivered judgments affirming the same principle.

The distinct identity afforded to arbitration agreements under the doctrine of separability means that, when called upon to ascertain the proper law of an agreement to arbitrate, national courts will undertake a conflicts analysis which is separate from that undertaken in respect of the parent contract. National courts within the European Union will not, in this regard, have recourse to Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I), as arbitration agreements fall outside the scope of the Regulation (See, Article 1(2)(e) of Rome 1). A national court seised of such a dispute must therefore apply its own conflicts of law rules to determine the governing law of the arbitration clause. In England, that analysis will lead the court to enquire into the law with which the arbitration agreement has its closest and most real connection.

Two recent cases have highlighted the process the English court will go through when seised of a dispute regarding the proper law of an arbitration clause. Sulamérica CIA. Nacional De Seguros S.A. and Anors v Enesa Engenharia S.A. – ENESA and Anors concerned a dispute as to liability under two all risk insurance policies following incidents at a hydro electric construction site in Brazil. The defendant insureds made a claim under the policies against the claimant insurers and the latter denied liability. An issue subsequently arose as to the validity of the arbitration agreement contained in the policies; the claimants approached the High Court seeking the continuation of an interim anti-suit injunction restraining the defendant from pursuing proceedings instituted in Brazil. In the English anti-suit proceedings before Mr Justice Cooke, the defendant argued that the arbitration agreement was invalid because it was governed by Brazilian law and did not comport with that system of law in a number of key respects. The claimant argued to the contrary. As the seat of the arbitration was London, it was said, English law governed the agreement to arbitrate and as a matter of English law that agreement was valid.

At first blush, all the indicators pointed to the arbitration agreement being governed by Brazilian law: the proper law of the policies was expressly that of Brazil, the signatories to those policies were Brazilian, the subject matter of those policies was situated in Brazil and the incidents leading to the claim thereunder occurred in Brazil (See paragraph [2] of the judgment). However, an examination of previous authority where the court was called up on to determine the proper law of the arbitration clause, where it was said to differ from the proper law of the parent contract, produced a different result.

Mr Justice Cooke in particular considered the Court of Appeal’s decision in C v D [2007] EWCA Civ 1282 and found it to be persuasive. In C v D it was said that it would be rare for the law of the separable arbitration agreement to be different from the law of the seat of the arbitration chosen by the parties. The reason was that “an agreement to arbitrate will normally have a closer and more real connection with the place where the parties have chosen to arbitrate, than with the place of the law of the underlying contract, in cases where the parties have deliberately chosen to arbitrate in one place disputes which have arisen under a contract governed by the law of another place” (See paragraph [26] of the judgment). In these circumstances Mr Justice Cooke had no hesitation in concluding that the law with which the arbitration agreement contained in the Sulamérica policies was most closely connected was the law of the seat of the arbitration, namely English law. It followed that the arbitration agreement was binding on the parties, as it was valid under English law.

The findings made by Mr Justice Cooke in the Sulamérica case were echoed by Mr Justice Hamblen in Abuja International Hotels Limited v Meridien SAS. In Abuja, an ICC arbitration was commenced following Abuja’s alleged breach of a management agreement. The Terms of Reference signed by the parties confirmed that the governing law of the management agreement was the law of Nigeria and the curial law applicable to the arbitration was English law. In the event, the Tribunal upheld the claim against Abuja and dismissed Abuja’s counterclaim. Abuja then challenged the substantive jurisdiction of the Tribunal on the ground that the arbitration agreement was invalid under Nigerian law.

Mr Justice Hamblen summarised the relevant issue of substantive jurisdiction in the following terms. The sole enquiry was whether a valid arbitration agreement existed, which enquiry was to be undertaken in accordance with English law as the law governing the arbitration agreement. Mr Justice Hamblen had no difficulty in reaching the conclusion that English law governed the agreement to arbitrate, as, on the authority of C v D, the law with which the arbitration agreement had its closest and most real connection was England because the seat of the arbitration was there. The parties had recognised and acknowledged the fact that the seat of the arbitration was in England when they signed the Terms of Reference. It followed as a matter of English law that the arbitration agreement was valid.

It is clear from the line of English cases which has been continued by Sulamérica and Abuja that when called upon to determine the proper law of arbitration agreements, the English Court will look to the law with which that agreement is most closely connected. It is also clear that, in circumstances where the parties have agreed that the seat of the arbitration is England, the Court will not hesitate to find that the law with which the agreement is most closely connected, is English law. The test, so far as it goes, seems settled.

However, if the Court has adopted a “closeness” test which is contingent upon the parties choosing England as the seat of the arbitration, in the absence of such a choice by the parties, by which law do we construe the substantive effect of the agreement to arbitrate? There are a myriad of circumstances in which parties may be required to arbitrate their dispute in England when they have not have chosen to do so. They may find that their silence on the matter leads to the imposition of an English seat under the LCIA Rules, (Article 16.1 LCIA Rules) or, perhaps less commonly, under the ICC Rules. (Article 18 ICC Rules (in force as from 1 January 2012) and Article 14 ICC Rules (in force as from 1 January 1998)). Their arbitrator or Tribunal may choose an English seat on their behalf, should they fail to reach agreement on the matter. In numerous ways, the parties may come to have England as the place where they are to arbitrate, despite the fact that the same did not form part of the bargain they struck. In those circumstances, can the “closest and real connection” test, which hitherto dictated that the law governing the arbitration agreement be that of the curial law, be justified?

Each case will turn on its facts, however, it may be that in such cases the Court will be persuaded to look to the law of the underlying contract instead of the curial law. Recall for a moment that in C v D it was said an agreement to arbitrate will normally have a closer connection with the place where the parties have deliberately chosen to arbitrate than with the place of the law of the parent contract. On that basis it is arguable that in cases where the parties have deliberately chosen the governing law of their contract but not the seat of the arbitration, the agreement to arbitrate will be more closely connected with the law of the contract chosen by the parties.

English arbitration law has developed in a subtle but distinct way since issues relating to governing law were first considered. The difference lies in what is now said to indicate the closest system of law to the arbitration agreement. The authors of a seminal text on English arbitration law (Mustill & Boyd, Commercial Arbitration (1989)) described the common law position over two decades ago, when they stated (at page 63) that “if there is no express or implied choice of law, the arbitration agreement will be governed by the law with which the agreement has its closest and most real connection”. Indeed, that precise language forms the backbone of the current legal test. However, the prevailing view at the time was that, as a general rule, the law with the closest connection to the arbitration agreement was the law governing the contract, since the arbitration agreement was considered “part of the substance of the underlying contract.”

English law now dictates that the law with which the arbitration agreement is most closely connected is the law of the seat of the arbitration. The necessary caveat to this otherwise settled position is that, to date, the principle has not been tested in a case where the seat of the arbitration has not been chosen by but, rather, imposed on the parties. Absent the parties’ agreement to arbitrate in a particular place, whether by express agreement or by signing Terms of Reference, it cannot be said that the parties have “chosen” a place to arbitrate their dispute – a crucial element of the test. A case with just such a difficult factual matrix may be the exception that proves the rule, in the true sense of testing its robustness.

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This is an update on the post of 27 January 2012 dealing with the African Fertilisers decision. Last week, the English Court of Appeal handed down its judgment in the latest episode of the West Tankers dispute, upholding the first instance decision and approving the decision of the Commercial Court in African Fertilisers. The decision affirms the continued pro-arbitration stance of the English courts, the Court of Appeal emphasising that “the efficacy of any award by an arbitral body depends on the assistance of the judicial system”.

The factual background to West Tankers has been widely discussed (and is summarised in paragraphs 1 to 14 of the judgment) and there is no need to do so again here. Before the Court of Appeal, West Tankers submitted that judgment be entered under s. 66(2) of the English Arbitration Act 1996 (the “Act”) against the insurers on the terms of a declaratory arbitral award. This was on the basis that such a judgment would allow West Tankers to establish the primacy of the award over any judgment by Italian courts in ongoing proceedings of the same dispute. The High Court held that “[t]he purpose of s. 66 (1) and (2) [of the Act] is to provide a means by which the victorious party in an arbitration can obtain the material benefit of the award in his favour other than by suing on it” and that “[w]here … the victorious party’s objective in obtaining an order under s. 66 (1) and (2) is to establish the primacy of a declaratory award over an inconsistent judgment, the court will have jurisdiction to make a s. 66 order because to do so will be to make a positive contribution to the securing of the material benefit of the award”.

The insurers appealed, arguing that Field J had erred in his construction of s. 66 of the Act, specifically in the meaning of the word “enforced”, and that a declaratory judgment (and in particular a negative declaratory judgment) is incapable of being “enforced” under the meaning of the section. Lord Justice Toulson, in the leading judgment, however agreed with West Tankers that a broader interpretation of the phrase ‘enforced in the same manner as a judgment to the same effect’ in s. 66 is “closer to the purpose of the Act and makes better sense in the context of the way in which arbitration works”. He rejected the insurers’ argument that in the present case the court would not be enforcing an award but only the rights determined by an award as being “an over subtle and unconvincing distinction [that] sits on shaky foundations”, emphasising that “the enforcement of any judgment or award is the enforcement of the rights which the judgment or award has established”. However, Toulson LJ emphasised that the language of s. 66 is permissive and requires the court to determine whether it is appropriate in the situation before it to enter judgment – it is not “an administrative rubber stamping exercise”.

Although Toulson LJ emphasised that the issue before the Court of Appeal “is not a question with a distinctively European flavour”, the consequences of the judgment, and more generally of the approach of the English courts, clearly are (as illustrated earlier in African Fertilisers). It remains uncertain whether the judgment falls under the arbitration exception to the Brussels Regulation 44/2001, thereby underlining the need for reform of the Regulation. As any such reform is likely to take time, there remains the real possibility that the English courts may, before any such reform, be faced with enforcement proceedings under the Regulation of an (inconsistent) judgment of the Italian courts. The questions presented by African Fertilisers remain unanswered for the time being.

Phillip Capper and Christian Blank

White & Case LLP
London

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The judgment in the case of Mary Harvey v. Motor Insurer’s Bureau (QBD (Merc) (Manchester), Claim No: 0MA40077, 21 December 2011) just before Christmas provided another opportunity for the English courts to rule on their ability to consider appeals on a point of law.

This controversial power, retained in the UK’s Arbitration Act notwithstanding its absence from most other national legal systems, has often been criticised. Perhaps for this reason, the trend of the English courts in recent years has been increasingly to restrict its application. This latest, fully reasoned, judgment is no exception.

The Claimant, Mary Harvey, was a victim of a road traffic accident, and applied to the Motor Insurer’s Bureau (‘MIB’) for compensation for her injuries. Dissatisfied with the amount of compensation awarded, she served notice on the MIB requiring the matter to be submitted to arbitration. After an oral hearing, the arbitrator concluded that there was no evidence to infer that the driver of the vehicle that struck her was driving negligently, and concluded that the Claimant was not entitled to any compensation. She applied to the court, seeking leave to appeal under section 69 of the UK Arbitration Act on a question of law arising out of the Award.

In his judgment, Judge Hegarty QC reiterated certain features of appeals under section 69. It was clear that its provisions were ‘of a highly restrictive nature’. First, the only type of appeal that the courts can entertain is one involving a question of law arising out of an award, and that question must be one which the tribunal was asked to determine. Second, in the absence of an agreement between the parties, leave of the court is required before an appeal can be pursued, and, unless the question is one of ‘general public importance’, leave can be granted only if the decision is ‘obviously wrong’.

The court dismissed the application on the grounds that in essence this was an appeal on a question of fact, not of law. Citing the judgment of Steyn LJ in Geogas SA v. Trammo Gas Limited (The Baleares) [1993] 1 Ll Rep 215 at 228, the Judge affirmed the principle that any question as to the admissibility, relevance or weight of any evidential material was a matter solely for the arbitrator. The arbitrator’s findings of fact were ‘effectively immune from scrutiny’ by the courts, and this included not only primary facts but also any secondary findings or inferences of a factual nature.

The Judge commented further that: ‘I very much doubt if even a total absence of any evidential basis for a finding of fact can give rise to a question of law for the purposes of section 69’, though ‘it might conceivably amount to a serious irregularity under section 68(2)(a) of the Act’. A question of law might arise if, on the basis of the facts found by the tribunal, the conclusion which it reached was ‘outside the range which could properly have been arrived at by a tribunal which had properly directed itself as to the applicable law’. But it must still be possible to conclude that the error arose from a misapprehension or misapplication of law.

The case also raised questions regarding the application of the maxim res ipsa loquitor in this context, but after a full review the judge concluded that any failure to apply this maxim would not necessarily constitute an error of law, since ‘it simply refers to the way in which factual inferences may be drawn from other factual findings’.

Under English law (and virtually all other national systems) appeals are not possible from arbitral awards on questions of fact, probably even if the parties expressly so agree (Guangzhou Dockyards Co Ltd v. ENE Aegiali 1 [2010] EWHC 2826). Nevertheless, in contrast to the UNCITRAL Model Law and most other national systems, the provisions of the UK Arbitration Act are clear that there may be circumstances in which an appeal on a point of law will be available – the underlying justification focusing on the general public interest in the law being correctly applied. But this case reaffirms the very limited grounds on which an appeal on a point of law may be available. As Judge Hegarty noted, this limited right reflects ‘the increasing recognition accorded to the autonomy of the arbitral process’.

Of course, section 69 is a non-mandatory provision: in contrast to rights to challenge awards under sections 67 (lack of jurisdiction) and 68 (serious irregularity), the parties can, by agreement, opt out of it. This requires clear language, however (see, for example, Shell Egypt West Manzala GmbH v. Dana Gas Egypt Ltd [2009] EWHC 2097 (Comm)). An opt-out is also achieved where parties elect to apply institutional rules such as those of the ICC or the LCIA, whose articles 34(6) and 26.9 respectively provide for a waiver of a right to any form of recourse regarding the award, insofar as such waiver can validly be made.

As mentioned, there are few other legal systems where a right to appeal on a point of law exists, and it seems their number is diminishing. There is no express right under the US Federal Arbitration Act (‘FAA’) to appeal an arbitral award on a point of law. US courts have found in the past that awards could be set aside where there has been a ‘manifest disregard of the law’ (following the dictum in Wilko v. Swan 346 US 427 (1953)). But recent cases suggest that this may no longer be the correct position, and Awards may only be challenged on the basis of the specific categories set out in the FAA (Hall Street Associates, LLC v. Mattel, Inc 522 US 576 (2008), followed in Medicine Shoppe International, Inc v. Turner Investments, Inc  614 F3d 485 (8th Cir. 2010)). Under English law, the right to appeal on a point of law is enshrined in statute, but the circumstances in which it can be invoked are applied by the courts only on a very restrictive basis.

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Following the path of the hotly debated West Tankers decision, in African Fertilizers v BD Shipsnavo, the English Commercial Court held that a declaratory award is enforceable, allowing judgment to be entered on the same terms as the arbitral award. Such an order enables a party to obtain the material benefit of the award and indicates the continuing trend of the English courts in favour of arbitration and the enforcement of arbitral awards. However, this approach does raise questions for the health of the inter-twining co-existence of the arbitration and court systems.

The declaratory award (on the tribunal’s jurisdiction) was made pursuant to an arbitration agreement contained in a bill of lading for the carriage of African Fertilizer’s cargo from Romania to Nigeria. The English court had given the claimant, Shipsnavo, leave to enforce the arbitration award and to enter judgment again the defendant, African Fertilizers.

The English court had previously issued an injunction restraining African Fertilizer from continuing an arbitration in Romania, as well an interim declaration that such arbitration proceedings, together with court proceedings commenced in Romania, were both in breach of the arbitration agreement.

Shipsnavo had sought an order for enforcement under s66 of the Arbitration Act 1996 because it was concerned that, should African Fertilizer be successful in its Romanian court proceedings, then it would seek to enforce that judgment under Article 34 of the Brussels Regulation 44/2001, notwithstanding the arbitration award. If Shipsnavo had already obtained an English judgment, then it could seek to resist the recognition of an irreconcilable judgment of the Romanian court.

African Fertilizers resisted the application on the ground that the English court had no jurisdiction to make such an order because the material terms of the award were in purely declaratory terms.

First, it argued that enforcement of an award of a purely declaratory nature is not possible (notwithstanding the ruling – albeit on appeal – in West Tankers). Second, it argued that a judgment entered under s66 of the 1996 Act does not constitute a judgment within the meaning of Article 34 of the Brussels Convention, relying on the ECJ case Solo Kleinmotoren v Boch.

The first limb raised questions of the distinction between “recognition” and “enforcement” in the context of New York Convention awards. African Fertilizers argued that the West Tankers decision was incorrect, that Shipsnavo really intended simply “recognition” of their award in order to defend any adverse Romanian court judgment, and enforcement was not appropriate. The court disagreed, aligning itself with the West Tankers decision and giving primacy to the party’s right to the benefit of the award. The court preferred the plain meaning of “enforce” in s66 of the Act, and cited both textbooks and case law in support of its jurisdiction to enforce a declaratory award.

The second limb was also rejected. The court distinguished the Solo Kleinmotoren decision as being a case about a court approved settlement, in which the ECJ held that a settlement agreement recorded in a court order is not a judgment for the purposes of Article 34(3). Beatson J commented that a settlement is essentially contractual, and while the “submission to arbitration is consensual, the outcome of the arbitration and contents of the award are not”. Further, there were public policy considerations. Citing Briggs on Civil Jurisdiction, Beatson J noted that an English court could not give “leave to enforce an arbitral award and then be required to recognise and enforce a foreign judgment which undermined or contradicted that arbitral award”.

However, there are public policy considerations not considered by the court. Shipsnavo’s objective in seeking to enforce the declaratory award was to pre-empt the enforcement of any irreconcilable judgment that may be given by the Romanian court. What happens if the Romanian courts do find in favour of African Fertilizers? The parties could each have irreconcilable judgments from England and Romania, arising from the same agreement.

While the pro-arbitration stance of the English courts is welcome, this approach can result in inconsistent judgments within Europe. It may be that the current proposals to reform the Brussels Regulation will go some way to temper this risk. The European Parliament’s Legal Affairs Committee (LAC) has proposed maintaining the arbitration exception to the Regulation, but with clarifications for the interface between arbitration and the courts. The first reading of the LAC’s report is reported to take place on 18 April 2012 and the process can take several years to pass through the European parliament. Are those reforms appropriate? And meanwhile, are there risks for the health of the inter-twining systems of justice that are arbitration and litigation?

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