English courts supporting international arbitration

The Court of Appeal in Fiona Trust & Holding Corporation v Privalov [2007] EWCA Civ 20 (affirmed by the House of Lords in [2007] UKHL 40) considered Section 9(1) of the Arbitration Act 1996 (“the 1996 Act”), under which a party to an arbitration agreement may apply for a stay of court proceedings where the subject matter is subject to an agreement to arbitrate. This provision provides the principal remedy where English court proceedings are commenced in breach of an arbitration agreement.

The specific facts in Fiona Trust involved a dispute as to whether a contract could be set aside or rescinded for bribery. The dispute was covered by an arbitration clause and, consistently with the presumption that parties who enter into an arbitration agreement intend for all disputes arising out of their relationship to be decided by arbitration (also known as the presumption in favour of one-stop arbitration), there was no reason why the arbitrators should not have jurisdiction. This was supported also by the principle of separability under Section 7 of the 1996 Act, which provides that an arbitration agreement must not be regarded as invalid, non-existent or ineffective simply because it forms part of another agreement which is itself invalid, or has not come into existence or has become ineffective, and but that the arbitration agreement must instead be treated as a distinct agreement.

The decision in Fiona Trust highlights the English courts’ liberal approach to the construction of arbitration agreements, and their commitment to legal certainty, by ensuring that parties who agree to resolve disputes through arbitration will be free to do so without interference from the courts.

Extending the Fiona Trust Principle

In a number of cases subsequent to Fiona Trust, the generous interpretation to be given to jurisdiction clauses has been extended to cover multi-contract disputes, so that a jurisdiction agreement contained in one contract could be found to extend to a claim made under another contract. This will be so if the wording of the arbitration clause in one contract is fairly capable of applying to disputes under the other, the parties to the two contracts are the same and the contracts are interdependent or have been concluded at the same time as part of a single package of agreements or deal with the same subject-matter. This was referred to in Terre Neuve SARL and others v Yewdale Limited and others [2020] EWHC 772 (Comm) as the extended Fiona Trust principle.

A recent example of the application of the extended principle is provided by Alexander Tugushev v Vitaly Orlov and others [2021] EWHC 926, where the court refused a co-defendant permission to bring a Civil Procedure Rule (CPR) Part 20 claim against another co-defendant under a contract between them on the basis that the issue between them fell within the scope of an arbitration agreement made in a subsequent contract between them.

The arbitration agreement in question purported to cover “any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination”. The claimant relied on Section 9(4) of the 1996 Act, which provides that the court “shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed”.

In reaching its decision to refusing permission to bring the Part 20 claim, the court noted a two-stage process is required under Section 9. The court must:

1. identify the matters at issue in the relevant proceedings; and
2. decide which of those matters, if any, the parties have agreed to refer to arbitration.

On the first point, the court explained that this does not merely refer to the main issue, but also to “any and all issues which may be the subject matter of the arbitration agreement”. This is a common-sense enquiry, having regard to any reasonably foreseeable issues.

On the second, the court will have regard to the presumption in favour of one-stop adjudication, as explained in the Fiona Trust decisions. Thus, the starting point is that these parties intended to determine any dispute arising out of their relationship by the same forum—arbitration seated in London. The court acknowledged that there was sufficient similarity between the parties and subject matter of the different agreements, such that claims under the prior agreements were ‘in connection’ with, and therefore could be subject to, the later agreement containing the arbitration clause.

The recent judgment in Surrey County Council v Suez Recycling and Recovery Surrey Ltd [2021] EWHC 2015 (TCC) confirms that the presumption of ‘one-stop adjudication’ has application in situations where there are multiple contracts between the same parties containing multiple dispute resolution clauses.

Inconsistent Dispute Reslution Clauses

The recent case of Melford Capital Partners (Holdings) LLP and others v Frederick Digby [2021] EWHC 872 (Ch) required the English courts to consider an agreement containing competing dispute resolution clauses – providing for both the jurisdiction of the English courts and for LCIA arbitration.

Digby had been a partner in Melford and, following his expulsion from the partnership, injunctions had been sought in the English courts to prevent Digby from using confidential information to undermine the partnership. Digby made a number of counterclaims which Melford argued were not within the English court’s jurisdiction but should be determined by arbitration. Melford went on to commence an LCIA arbitration.

The parties’ relationship was governed by two limited liability partnerships – one which provided for the exclusive jurisdiction of the Guernsey courts and a second which contained competing provisions on jurisdiction. Those competing clauses provided for dispute resolution through the courts and, in conflict to that provision, also through LCIA arbitration as follows:

27.2. The parties irrevocably agree that the courts of England have exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this agreement.
28. Any dispute arising out of or in connection with this agreement, including any question regarding its existence, validity or termination, or the legal relationships established by this agreement, shall be referred to and finally resolved by arbitration under the Rules of the London Court of International Arbitration (LCIA), which Rules are deemed to be incorporated by reference into this clause.

Digby claimed that, as a consequence of having sought the injunctions through the English courts, Melford had waived the right to invoke the arbitration clause. Melford however claimed that the clauses meant that the English court provision (27.2 above) provided the courts with a supervisory role.

The court granted the stay, taking the view that the parties, described as “sophisticated business people”, must have intended to enter into an arbitration agreement. The competing clause 27.2 would be given operative effect as vesting the courts with “supervisory jurisdiction” or “residual jurisdiction” as to the proper law. Thus, there was no conflict and the arbitration agreement would be upheld as operative.

Limitations on the Court’s power to order a stay

Looking more specifically at jurisdictional issues relating to the ability to order a stay, the decision in Hulley Enterprises Ltd & others v The Russian Federation [2021] EWHC 894 (Comm) saw the English court reject an application to lift a stay on proceedings to enforce awards of the Permanent Court of Arbitration in the Hague. The court found that the stay should not be lifted whilst Russia’s challenge of the awards was ongoing in the Dutch Supreme Court.

The case arose from the long running Yukos Oil dispute, in which The Hague held that Russia had breached the Energy Charter Treaty, awarding the claimants (the Yukos shareholders) a combined total of $50 billion in compensation, the largest arbitration award in history. Following this, the claimants applied for recognition and enforcement of the awards in England under Section 101 of the 1996 Act. Russia challenged the English court’s jurisdiction and applied for a stay under Section 9, claiming there was no valid arbitration agreement on grounds of state immunity.

Russia had successfully challenged the awards in the District Court of the Hague in 2016. However, in February 2020, the Court of Appeal in the Hague reinstated the awards and the claimants began enforcement in the Netherlands, the seat of the arbitration. Russia has challenged the awards but the Dutch courts have not granted a stay on enforcement.

The claimants applied to lift the stay of the recognition and enforcement proceedings in England. In the alternative, the claimants relied on Section 103(5) of the 1996 Act to seek an order that Russia pay security amounting to USD7 billion (which would have been the largest recorded order for security made in English court history).

The English court concluded that the stay should be maintained while the parties awaited the outcome of the Dutch proceedings, giving consideration to the risk of inconsistent decisions and that it was more appropriate for the courts of the seat, the Netherlands, to decide on the validity of an award.
As to the application for security, Section 103(5) of the 1996 Act provides that the court:

“…may also on the application of the party claiming recognition or enforcement of the award order the other party to give suitable security.”

The court decided it could not exercise any powers under Section 103 unless and until Russia’s claim to state immunity had been rejected, noting that security should only be ordered where the challenge is “flimsy” (with reference to Sections 67 and 70 of the 1996 Act).

This case clarifies the scope of the court’s powers in ordering a stay and importantly, highlights that remedies under the 1996 Act are only available if it is determined that the court can assume jurisdiction over the defendant.

Comment

These decisions demonstrate the non-interventionist approach to disputes governed by arbitration that the English courts have adopted following the 1996 Act. The courts will seek to give effect to arbitration clauses and avoid meddling where the parties have agreed to refer disputes to arbitration. Their treatment of international arbitration works to bolster London’s standing as a leading destination for the resolution of such disputes.