The International Journal of Public and Private Arbitration
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- Introduction
- Regional Overviews
- Country Overviews
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The European & Middle Eastern Arbitration Review 2008
Section 2: Country Overviews
2007 marked the 10th anniversary of the coming into force of the Arbitration
Act 1996, on 31 January 1997. In a number of decisions this year, English courts
reinforced their arbitration-friendly credentials.
As at 16 November 2007, a search on LAWTEL using the key word ‘arbitration’
produced a list of 65 decisions.3 This compares with 62 decisions over the same
period in 2006 (and 70 for the whole year) and 74 decisions over the same period
in 2005 (and 81 for the whole year). Of the 65 decisions in 2007, 46 appear
substantively to deal with arbitration issues, of which nine are of the Court
of Appeal and two of the House of Lords Judicial Committee. Space does not permit
a review of all the interesting cases that have contributed to English arbitral
jurisprudence during the year, but we summarise several significant decisions
below.
Separability of arbitration clause
The decision of 2007 most eagerly awaited and likely to be cited regularly
in the years to come was that of the House of Lords in Fiona Trust & Holding
Corp v Yuri Privalov.4
A dispute arose under a series of charterparties between the shipowners and
eight charterers. The shipowners alleged that an associate of the charterers
had induced the contracts by bribery. The ship owners applied to the English
court for a declaration that they had validly rescinded the charterparties.
The charterers applied for a stay of the litigation in favour of arbitration,
pursuant to section 9 of the Arbitration Act 1996. The stay was refused at first
instance, but was granted by the Court of Appeal. On appeal to the House of
Lords, the two principal issues were:
• whether the arbitration clause, as a matter of construction, covered
a dispute over whether the contract was procured by bribery; and
• whether a party was bound to submit to arbitration when it alleged that,
but for the bribery, it would never have had entered the contract containing
the arbitration clause.
Lord Hoffmann gave the leading speech. In his introductory remarks, he noted
that questions of construction must be influenced by the purpose of the arbitration
clause, which is to have disputes decided by a tribunal that the parties have
chosen, commonly on the grounds of such matters as its neutrality, expertise
and privacy, the availability of legal services at the seat of the arbitration
and the unobtrusive efficiency of its supervisory law. He added that, particularly
in the case of an international contract, the parties want a quick and efficient
adjudication and do not want to take the risks of delay and, in too many cases,
partiality, in proceedings before a national jurisdiction. He went on to say:
If one accepts that this is the purpose of an arbitration clause, its construction
must be influenced by whether the parties, as rational businessmen, were likely
to have intended that only some of the questions arising out of their relationship
were to be submitted to arbitration and others were to be decided by national
courts....5
The first question in the appeal concerned the scope of the arbitration agreement.
Some authorities had drawn a distinction between clauses that used the words
‘arising under’ (which had been held to cover contractual, but not
tortious and other claims) and those that used the words ‘arising out
of’ (which had been held to be wide enough to include non-contractual
claims). This was sometimes called the ‘battle of the prepositions’.
Applying a purposive approach, Lord Hoffmann concluded that businessmen would
be very unlikely to have intended different consequences by such subtle semantic
differences and he approved the approach of Longmore LJ in the Court of Appeal,
who said: “the time has come to draw a line under the authorities to date
and make a fresh start”.6 Lord Hoffmann concluded that there was nothing
in the arbitration agreement to suggest that the parties intended that a dispute
as to the invalidity of the charterparties on the basis of bribery was to be
submitted to a national court rather than to arbitration.
As regards to the second issue, whether fraud tainted and rendered the whole
agreement void and unenforceable, the House of Lords endorsed the doctrine of
the separability of the arbitration agreement enshrined in section 7 of the
Act and held that the arbitration agreement was ineffective only if the owners
could produce credible evidence that showed that bribery had specifically induced
the parties to agree to arbitration.
It is hoped that the Fiona Trust decision will be followed in other common law
jurisdictions, where allegations of fraud can be used to try to derail arbitration
and move the dispute to the local courts.
Anti-suit injunctions
The West Tankers case7 placed squarely before the House of Lords the issue
of the compatibility of anti-suit injunctions with the provisions of the EC
Council Regulation of 22 December 2000 on jurisdiction and the recognition and
enforcement of judgments in civil and commercial matters (the Judgments Regulation).8
Whether the English court is entitled to issue an anti-suit injunction against
a party that has started court proceedings in another EU jurisdiction is an
issue that has elicited considerable debate on both sides of the common law–civil
law divide. The issue was the subject of a well-attended seminar organised by
the British Institute of International and Comparative Law as part of its seminar
series on private international law.
The House of Lords decided to refer the issue to the European Court of Justice
for a preliminary ruling. The following question is now pending before the ECJ:
Is it consistent with [the Judgments Regulation] for a court of a Member State
to make an order to restrain a person from commencing or continuing proceedings
in another Member State on the ground that such proceedings are in breach of
an arbitration agreement?9
Nevertheless, the Law Lords, and in particular Lord Hoffmann, left little doubt
as to how they thought the question should be answered. In his opinion, arbitration
was outside of the operation of the Judgments Regulation, not only by its express
terms (article 1(2)(d)), but also because the principles on which it is based
are wholly unsuited to arbitration, “in which the status and governing
law are generally chosen by the parties on grounds of neutrality, availability
of legal services and the unobtrusive effectiveness of the supervising jurisdiction.”10
Anti-suit injunctions prevent parties from seeking to defeat this commercial
expectation by starting court proceeding in breach of an agreement to arbitrate.
Lord Hoffman noted that the European Community is engaged not only with regulating
commerce between member states but also in competing with the rest of the world.
If the member states of the European Community are unable to offer a seat of
arbitration capable of making orders restraining parties from acting in breach
of the arbitration agreement, there is no shortage of other states that will
(such as New York, Bermuda and Singapore).
Arbitration and human rights
Article 6 of the European Convention on Human Rights (which has been incorporated
into English law) provides that:
in the determination of his civil rights and obligations… everyone is
entitled to a fair and public hearing within a reasonable time by an independent
and impartial tribunal established by law.
In two cases heard together, the Court of Appeal confirmed that arbitration
is not contrary to article 6, unless the agreement to arbitrate was entered
into as a result of duress, undue influence or mistake, or included onerous
or unusual terms that should have been, but were not, brought to the attention
of the other party.
In Stretford v Football Association,11 Paul Stretford was a football agent.
All football agents are required to hold a licence. The licence expressly stated
that the holder agreed to abide by the FA’s rules and regulations, which
included an arbitration clause in rule K. In 2005, the FA issued disciplinary
proceedings against Stretford under rule G in relation to the circumstances
surrounding the acquisition of the right to represent Manchester United footballer
Wayne Rooney. Stretford commenced court proceedings against the FA, alleging
that the disciplinary proceedings were unjustified. The FA applied for a mandatory
stay in favour of arbitration under rule K for the determination of Stretford’s
challenge to the rule G proceedings. Stretford argued that rule K was in conflict
with article 6 and the principles of natural justice, and was therefore null
and void or inoperative.
It was not in dispute that the arbitrators would be determining Stretford’s
civil rights; therefore, article 6 applied. As to whether he would receive a
fair hearing before an independent and impartial tribunal, the court considered
that this entitlement was satisfied by the provisions of the Arbitration Act
1996, which require that an arbitrator be impartial and conduct the proceedings
properly, and by the mandatory provisions ensuring that the court has the power
to correct any want of impartiality or procedural impropriety.
As to having a public hearing by a tribunal established by law, the court concluded
that, as a matter of English law, these requirements could be waived (unless
the party had entered into the arbitration agreement as a result of duress,
undue influence or mistake, or the terms were so onerous or unusual that they
should have been brought to the party’s attention, but were not). The
court concluded that there was no evidence of the arbitration agreement being
entered into under duress or of it containing onerous terms, and that the additional
requirements in article 6 had been waived by Stretford.
The court then considered whether there was any principle adopted by the European
Court of Human Rights that would lead to a different conclusion. After reviewing
the ECHR’s jurisprudence, the court held that the cases supported the
general proposition that, where the parties have voluntarily entered into an
arbitration agreement, they are to be treated as having waived their rights
under article 6. Although Stretford had to agree to rule K in order to become
a licensed agent, it did not follow that the arbitration agreement was compulsory
in such a way as to contravene article 6.
The court noted that arbitration clauses have become standard in the rules of
sporting organisations and that to strike down such clauses would have a far-reaching
and undesirable effect on the use of arbitration in sport generally. Therefore,
Stretford’s application failed and a stay was granted.
In Sumukan Ltd v Commonwealth Secretariat,12 AMS (the predecessor in title to
Sumukan) applied to appeal an arbitral award made against it on a point of law
under section 69 of the Act, but leave to appeal was denied on the ground that
the parties, in the words of section 69(1), had “otherwise agreed”
to exclude the jurisdiction of the court in their arbitration agreement. AMS
appealed that decision, arguing that the clause excluding an appeal on a point
of law had not been incorporated into the arbitration agreement, and that such
a clause would infringe AMS’s rights under article 6.
Regarding the issue of incorporation, the contract provided for disputes to
be settled by arbitration “in accordance with the statute which forms
part of this contract and is available on request”. The statute stated
that the judgment of the tribunal “shall be final and binding on the parties
and shall not be subject to appeal”. The court concluded that this wording
was sufficient to incorporate the words of the statue into the arbitration agreement.
However, as the statute amounted to an exclusion clause (ie, a clause excluding
the jurisdiction of the court), a party seeking to enforce such a clause would
have to show that any particularly onerous or unusual conditions, or conditions
attempting to exclude or take away statutory rights, were fairly brought to
the attention of the other party. AMS argued that the waiver of its article
6 rights had not been drawn to its attention sufficiently and that the waiver
had not been made voluntarily.
The court referred to its decision in Stretford and its findings derived from
the ECHR’s jurisprudence that an arbitration agreement, when freely entered
into, constitutes a valid waiver of article 6. The court concluded that an exclusion
of a right of appeal could validly be agreed as being to the advantage of both
parties, and that mandatory provisions in the Act safeguard a party against
partiality of the arbitrators or some serious irregularity.
It was not alleged that AMS had entered into the agreement under duress. The
court found that the exclusion of the right of appeal was validly incorporated
and that article 6 did not render the clause so onerous or unusual that the
Commonwealth Secretariat was required to do more than it had done to bring the
clause to AMS’s attention, as the arbitration clause referred expressly
to the statute and, if AMS had wished to read what was in the statute, it could
have done so and would not have been surprised to find an exclusion of the right
to appeal an award.
The statements of principle made by the Court of Appeal in these two cases reflect
the ECHR’s jurisprudence that has held that private arbitration is not
inconsistent with article 6, such as Deweer v Belgium.13 Indeed, as Lord Hoffmann
observed in the Fiona Trust case, “the European Convention was not intended
to destroy arbitration. Arbitration is based upon agreement and the parties
can by agreement waive the right to a court.”14
While a waiver of article 6 rights must be voluntary, these two Court of Appeal
decisions indicate that the English courts will not readily decline to give
effect to arbitration provisions found within an agreement that is freely entered
into by competent parties.
Review of BIT award
The English courts have rarely been required to address issues relating to
bilateral investment treaty (BIT) arbitrations. In Ecuador v Occidental,15 the
court was asked whether an arbitral tribunalconstituted pursuant to the BIT
between the US and Ecuador had jurisdiction to determine claims relating to
the refunding of value added tax (VAT) payments, or whether jurisdiction was
excluded by the express terms of the treaty.
At issue in the arbitration was whether the Occidental Exploration & Production
Company was entitled to obtain refunds of VAT payments. Occidental had a contract
with Ecuador and Petroecuador, the state-owned petroleum company, which gave
it exclusive rights to carry out exploration and exploitation of hydrocarbons
in an area in the Amazon Basin. Occidental was required to pay VAT on certain
goods and services, which it paid, but later obtained refunds. Subsequently,
the Ecuadorian authorities changed their position and contended that reimbursement
had already been effected through a price formula in the contract, referred
to as ‘factor X’. Therefore, Ecuador argued, Occidental was not
entitled to additional refunds of VAT.
The dispute was originally raised with Ecuador’s Internal Revenue Service
but when it could not be resolved Occidental invoked the United Nations Commission
on International Trade Law (UNCITRAL) Model Law arbitration procedures of the
BIT. It claimed that the actions of the Inland Revenue Service, for which Ecuador
was responsible, amounted to a breach of the BIT.
The place of arbitration was London. The arbitral tribunal concluded that refusing
to refund the VAT had amounted to a violation of the BIT and awarded Occidental
over $71 million plus interest.
In the arbitration, Ecuador contended that tax disputes were not within the
scope of the BIT, which provided that the provisions of the treaty applied to
matters of taxation only with respect to the “observation and enforcement
of terms of an investment agreement or authorization”.
Although Ecuador accepted that the contract at issue was an investment agreement,
it argued that the dispute did not concern the observance and enforcement of
terms of such an agreement. The arbitral tribunal disagreed and held that it
had jurisdiction. Ecuador challenged the tribunal’s award on the basis
of lack of substantive jurisdiction pursuant to section 67 of the Arbitration
Act 1996. The High Court decided in favour of Occidental. Ecuador appealed.
The Court of Appeal confirmed that the BIT is governed by public international
law and, as a treaty, its construction is governed by the rules on treaty interpretation
set out in the Vienna Convention on the Law of Treaties 1969. Thus, for example,
a letter submitting the BIT to the US Senate was relevant to its interpretation.
Furthermore, it is permissible to resolve uncertainties in the interpretation
of such a treaty in favour of the investor.
The Court of Appeal agreed with the High Court that “observation and enforcement
of terms” encompassed performance and that the dispute involved a matter
of taxation which had reference to the performance of the obligations of the
contract. Occidental’s request for a refund related to the proper determination
of factor X and also to its wider contractual obligations, including the obligation
to do all that was needed to exploit the block, which would necessarily entail
payment of VAT and the contractual obligation to pay all taxes according to
Ecuadorian law.
In disposing of Ecuador’s jurisdictional challenge, the Court of Appeal
was required to interpret a BIT between the US and Ecuador. This is somewhat
unusual in that disputes relating to the sovereign conduct of a friendly foreign
state are largely non-justiciable under English law. The court had previously
held in the same case that issues relating to a BIT award made in England where
the UK is not a party to the treaty are nevertheless justiciable before the
English courts.16
This decision shows that the English courts do not interpret BIT jurisdiction
narrowly.
Security for costs when enforcing award
In Gater Assets Ltd,17 the Court of Appeal was confronted with difficult questions
of substance and procedure concerning applications for security for costs in
proceedings to enforce New York Convention arbitration awards.
Gater Assets was the assignee of a foreign arbitration award against Naftogaz.
Enforcement was resisted by Naftogaz on grounds that the award had been obtained
by fraud (in connection with subrogation by the claimant’s insurer). Naftogaz
applied for an order that Gater Assets provide security for its costs.
In the High Court, Gater Assets was ordered to furnish security in the amount
of £250,000. The Court of Appeal reversed this decision. However, each
of the three judges pursued a different analysis, thus creating some ambiguity
for the future.
After a lengthy analysis of the Arbitration Act 1996, the Rules of Civil Procedure
and the interplay of the rules relating to domestic and foreign arbitral awards,
and the terms of article III of the New York Convention, Rix LJ found the provisions
to be “complex and not without their mystery for present purposes”.
He was prepared to assume, without deciding, that the Court had jurisdiction
to make an order for security for costs. Of concern to the judge was his feeling
that it was counter-intuitive to order security for costs against an award creditor,
in enforcement proceedings that were intended to be “highly summary and
essentially quasi-administrative proceedings”.18 He concluded that the
requirement to furnish security would amount to a “more onerous condition”
contrary to the express terms of article III of the New York Convention. Moses
LJ, on the other hand, was of the opinion that the effect of article III was
that the court did not have jurisdiction to require an award creditor to furnish
security.19 For his part, Buxton LJ would have denied the appeal and upheld
the order that security be provided. He found that the New York Convention recognised
that enforcement had to be in accordance with national rules of procedure, which
in the case of England provided for security for costs in appropriate circumstances.20
One of the goals of the drafters of the Arbitration Act was to make English
arbitration law more accessible and understandable to the lay arbitrator or
foreign lawyer. The goal remains to be achieved in respect of some aspects of
English arbitration law.
Other developments in 2007
2007 also saw the publication of the fourth edition of The Arbitration Act
1996 by Bruce Harris, Rowan Planterose and Jonathan Tecks, and a 23rd edition
of Russell on Arbitration will be published shortly.
The LCIA has had an active year. As of 16 November 2007, it had received 105
requests for arbitration during the year. 2007 also saw the opening of the LCIA’s
first overseas establishment, in the Bahamas. Likewise, the Chartered Institute
of Arbitrators had a busy year, the highlight of which was the publication of
its Practice Guideline 16: The Interviewing of Prospective Arbitrators.
* * *
The decisions summarised above, and in particular the speeches in the House of Lords in Fiona Trust and West Tankers, all evidence the English courts’ strong support for arbitration and demonstrate the determination of the courts to be practical and business-minded in their approach, which augurs well for the next 10 years of the Arbitration Act.
Notes
1 Partner, Clifford Chance LLP; co-chair of the IBA Arbitration
Committee (2006-07); visiting professor, School of Arbitration, Queen Mary,
University of London.
2 Senior associate, Clifford Chance LLP.
3 LAWTEL database from Sweet & Maxwell, available at www.lawtel.com.
4 Fiona Trust & Holding Corp & 20 others v Yuri Privalov
& 17 others, sub nom Premium Nafta Products Ltd & ors v Fili Shipping
Co Ltd & Ors [2007] UKHL 40, affirming [2007] EWCA Civ 20.
5 Ibid, at paragraphs 6-7.
6 Cited by Lord Hoffmann, at paragraph 12.
7 West Tankers Inc v RAS Riunione Adriatica di Sicurta SpA
and others [2007] UKHL 4, [2007] 1 Lloyd’s Rep 391.
8 EC Regulation 44/2001, O J L 12, p1.
9 Case C-185/187, OJ C 155/9, 7 July 2007.
10 Per Lord Hoffmann, at paragraph 12.
11 Paul Stretford v Football Association Ltd [2007] 2 Lloyd’s
Rep 31 (CA)
12 Sumukan Ltd v Commonwealth Secretariat [2007] All ER 342.
13 [1980] 2 EHRR 439.
14 [2007] UKHL 40, at paragraph 20.
15 The Republic of Ecuador v Occidental Exploration & Production
Company [2007] EWCA Civ 656.
16 [2005] EWCA Civ 1116.
17 Gater Assets Ltd v NAK Naftogaz Ukrainiy [2007] EWCA Civ
988.
18 Ibid, per Rix LJ, at paragraph 72.
19 Ibid, per Moses LJ, at paragraphs 92-93.
20 Ibid, per Buxton LJ, at paragraph 116.
Clifford Chance LLP
10 Upper Bank Street
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