Right to apply for freezing injunction excluded by FOSFA Scott v Avery clause (Commercial Court)

Practical Law UK Legal Update Case Report 0-505-4101 (Approx. 5 pages)

Right to apply for freezing injunction excluded by FOSFA Scott v Avery clause (Commercial Court)

by PLC Arbitration

Background

Scott v Avery clauses

A Scott v Avery clause is one which provides that obtaining an arbitral award is a condition precedent to the right to bring legal proceedings. Scott v Avery clauses are commonly included in the arbitration clauses of commodity associations' standard forms, including those of the Federation of Oilseeds and Fats Associations (FOSFA) and the Grain and Feed Trade Association (GAFTA).

The arbitration clause contained in the FOSFA 54 standard form includes, in its second paragraph, a Scott v Avery clause as follows:

"29. ARBITRATION: Any dispute arising out of this contract, including any question of law arising in connection therewith, shall be referred to arbitration in London (or elsewhere if so agreed) in accordance with the Rules of Arbitration and Appeal of the Federation of Oils, Seeds and Fats Associations Limited, in force at the date of this contract and of which both parties hereto shall be deemed to be cognizant.

Neither party hereto, nor any persons claiming under either of them, shall bring any action or other legal proceedings against the other of them in respect of any such dispute until such dispute shall first have been heard and determined by the arbitrators, umpire or Board of Appeal (as the case may be) in accordance with the Rules of Arbitration and Appeal of the Federation, and it is hereby expressly agreed and declared that the obtaining of an Award from the arbitrators, umpire or Board of Appeal (as the case may be), shall be a condition precedent to the right of either party hereto or of any person claiming under either of them to bring any action or other legal proceedings against the other of them in respect of any such dispute."

Court's power to grant freezing injunctions

The English court can grant freezing injunctions in support of arbitration in certain circumstances "unless otherwise agreed by the parties" (section 44, Arbitration Act 1996 (AA 1996)). For further information, see Practice note, Court's supportive powers: interim injunctions and receivers.

The equivalent provision under the pre-1996 legislation provided that the court "shall have" the power to make orders securing the amount in dispute (section 12(6), Arbitration Act 1950 (AA 1950)). This power could not be excluded by the parties' agreement.

In general, the court will be reluctant to construe arbitration clauses as excluding ancillary proceedings, including, for example, applications for orders securing the amount in dispute or for freezing injunctions (Re Q's Estate [1999] 1 Lloyd's Rep 931). However, the position with regard to Scott v Avery clauses is less clear.

In Mantovani v Carapelli [1980] 1 Lloyd's Rep 375, the Court of Appeal considered the effect of the GAFTA arbitration and Scott v Avery clause (which was materially identical to clause 29 of FOSFA 54) on proceedings brought in Italy to obtain security for the claim referred to arbitration. The court held that the Italian proceedings breached the clause, but suggested that an application to the English court under section 12 of the AA 1950 might not have amounted to a breach.

Subsequent case law has taken a restrictive approach to Mantovani v Carapelli and some judgments (notably the first instance judgments of Colman J in Comdel Commodities v Siporex [1997] EWCA Civ 925 and Toepfer International v Societe Cargill France [1997] 2 Lloyd's Rep 98) contained dicta suggesting that ancillary proceedings might not amount to a breach of a Scott v Avery clause.

Facts

Disputes arose under a contract for the sale of sunflower seeds on the FOSFA 54 form. The buyers commenced arbitration and then applied to court, pursuant to section 44 of the AA96, for a worldwide freezing injunction over the seller's assets. The freezing injunction was granted by Gloster J at a without notice application. The seller applied to set the freezing injunction aside, arguing that the court's power under section 44 was excluded by clause 29 of FOSFA 54. The buyer sought to uphold the freezing injunction, arguing that it was well established and commonly understood that the Scott v Avery clause contained in the GAFTA and FOSFA forms did not preclude the court from entertaining ancillary proceedings under (for example) section 44 of the AA 1996.

Decision

Flaux J accepted the seller's argument. He held that, by clause 29 of FOSFA 54, the parties had agreed to exclude the court's power under section 44. The freezing injunction was therefore set aside.

His starting point was his view that, as a matter of construction, the wording of clause 29 was wide enough to exclude applications to court for freezing injunctions. The crucial issue was therefore whether the relevant authorities disclosed any settled understanding to the effect that ancillary proceedings fell outside the scope of the standard Scott v Avery clause.

He noted that the preceding authorities were strictly obiter, as all apart from Re Q's Estate were decided under the AA 1950. Re Q's Estate was a decision under the AA 1996, but in that case, Rix J was concerned only with the first, not the second, paragraph of clause 29. The point was, therefore, open for decision.

Nevertheless, Flaux J conducted a close analysis of the preceding authorities and concluded as follows:

Properly understood, the suggestion in Mantovani v Carapelli that applications to the English court might be permissible, notwithstanding the terms of the Scott v Avery clause, turned on the mandatory nature of the (then applicable) provisions of section 12 of the AA 1950. The Court of Appeal in that case had not said that as a matter of construction, English court applications fell outside the scope of the clause. Rather, their comments reflected the fact that section 12 of the AA 1950 (unlike section 44 of the AA 1996) could not be excluded by the parties' agreement, despite the wide scope of the clause.
Similarly, the comments of Colman J at first instance in Comdel Commodities v Siporex on the question of whether an application for security would amount to a breach of a Scott v Avery clause, were to be understood in the context of the mandatory nature of section 12 of the AA 1950.
Toepfer International v Societe Cargill France was concerned with the slightly different issue of whether an application to the English court for an anti-suit injunction amounted to a breach of a Scott v Avery clause. In relation to the more general issue of the effect of Mantovani v Carapelli, Flaux J noted that the Court of Appeal was clearly unhappy with the distinction implicitly drawn in Mantovani between proceedings in England and proceedings overseas. That distinction could not be upheld as a matter of construction and the Court of Appeal would clearly have preferred to hold that only substantive (rather than ancillary) proceedings (whether in the English court or overseas) fell within the clause. However, they were precluded from reaching this conclusion by the preceding decision in Mantovani. Only the Supreme Court would be able to adopt such a construction.
Re Q's Estate was the only case to have considered the issue before the court in the context of the AA 1996. In that case, Rix J had suggested that Mantovani v Carapelli should be confined to its true ratio, which depended on the very wide wording of the Scott v Avery clause. Rix J had been concerned to construe an arbitration (not a Scott v Avery) clause and, properly interpreted, his obiter comments were to the effect that the Scott v Avery clause in the GAFTA and FOSFA forms would deprive the court of jurisdiction under section 44 of the AA 1996.

Having considered these authorities, Flaux J concluded that there was no settled meaning or construction placed by the English court on Scott v Avery clauses in connection with ancillary proceedings. None of the authorities (apart from Re Q's Estate) were concerned with the position under the AA 1996, where the court's power to grant freezing injunctions could be excluded by agreement. As a matter of construction, the wording of the Scott v Avery clause was broad enough to exclude such applications. This conclusion was supported by the dicta in Re Q's Estate and there was no authority preventing the court from adopting it.

Comment

This is a significant case for practitioners involved in commodity arbitration. The question of whether Scott v Avery clauses exclude the court's jurisdiction to grant relief under section 44 of the AA 1996 has never been directly considered by the court. However, it was a commonly held view that Scott v Avery clauses, properly construed, only precluded the bringing of substantive proceedings concerned with the underlying dispute. That view is no longer tenable in view of the decision of Flaux J.

There was evidence before Flaux J (the admissibility of which he doubted), suggesting there were differing views in the market as to the effect of the standard Scott v Avery clause. The decision raises the question of whether commodity associations will seek to amend their arbitration clauses so as to permit the parties to apply to court for freezing injunctions and similar relief. As Flaux J noted:

"... the fact that a conclusion that the FOSFA/GAFTA Scott v Avery clause does amount to an agreement to exclude the court's powers under section 44 may be surprising to some of those who trade in the commodity markets, is no reason not to give the words of the clause their clear meaning and effect. Any concerns in the market or of individual trading parties can be addressed by amendment of the clause, if that is thought desirable."

Similarly, parties will now wish to consider whether to amend the standard form Scott v Avery clause insofar as it is incorporated in their commodities sale contract.

Case

B v S [2011] EWHC 691 (Comm).

Right to apply for freezing injunction excluded by FOSFA Scott v Avery clause (Commercial Court) | Practical Law