PLC Arbitration Seminar on 7 December 2010: strategies for enforcing and upholding London Arbitration clauses

Practical Law Legal Update 3-504-1635 (Approx. 7 pages)

PLC Arbitration Seminar on 7 December 2010: strategies for enforcing and upholding London Arbitration clauses

by Berwin Leighton Paisner LLP

Background

The Brussels Regulation allocates jurisdiction amongst the courts of EU member states in civil and commercial matters and provides for mutual recognition of judgments, subject to limited exceptions.

At present, arbitration is excluded from the ambit of the Brussels Regulation. However, the scope of this exclusion and the interface between arbitration and the Brussels Regulation has been the subject of some considerable debate. Until recently, the courts of certain member states (in particular, England) had continued to grant anti-suit injunctions to prevent parties from pursuing court proceedings in another member state in breach of an arbitration agreement, in view of the arbitration exception.

However, in Allianz SpA v West Tankers Inc (Case C-185/07) [2009] EUECJ the ECJ reduced the ambit of the arbitration exclusion. It ruled that where the subject-matter of a claim falls within the scope of the Brussels Regulation, any issue as to the existence, scope or validity of an arbitration clause is preliminary or incidental to that matter. The courts at the seat of arbitration are prevented from issuing an anti-suit injunction to restrain proceedings brought elsewhere in the EU in potential disregard of that arbitration clause.

There is, therefore, a tension between the Brussels Regulation and the New York Convention (to which all EU member states are also party), since the latter imposes an obligation on signatories to recognise an arbitration agreement. The effect is an increased risk of parallel proceedings as parties seek to avoid the impact of arbitration agreements by commencing actions in foreign member states.

Problems with upholding arbitration clauses

Vasanti Selvaratnam QC and Tom Whitehead (Stone Chambers) commented upon the current state of the law:

Following the ECJ decision in West Tankers, the English court can no longer restrain foreign proceedings brought in breach of a London arbitration clause in another member state by means of an anti-suit injunction. If all member states applied the law in the same way, a simple answer would be to apply to the foreign court for a stay of the foreign court proceedings. Difficulties arise because of the application of local law giving rise to different answers on a jurisdictional challenge.
The Court of Appeal in The Wadi Sudr recognised and gave effect to a judgment obtained in a member state that there was no arbitration agreement between the parties in circumstances where:
- the member state judgment had been given in answer to a jurisdiction challenge seeking to rely upon an alleged London arbitration agreement;
- there had been no prior determination by the English court of whether the contract contained an arbitration agreement;
- the claim on the merits in the member state fell within the subject matter scope of the Brussels Regulation; and
- the claim in England was for a declaration that there was a binding arbitration agreement between the parties and so fell outside the subject matter scope of the Brussels Regulation.
The Court of Appeal held that the claimant in the English action was estopped from re-litigating the issue of whether the contract incorporated an arbitration agreement notwithstanding that the English court would have reached a different conclusion from the member state court, namely that there was an arbitration agreement between the parties. Under the Brussels Regulation the member state court was competent to decide the issue, and the English court was obliged to recognise and give effect to the member state court's decision:
- under the Brussels Regulation; and
- under the English doctrine of issue estoppel.
These cases create an imbalance in the law. Where a foreign court in a member state finds that there is no binding arbitration agreement, that decision qualifies for recognition under the Brussels Regulation; whereas an English court decision holding that there is a binding arbitration agreement does not qualify for recognition under the Brussels Regulation.
A prior decision in the member state court that there is no arbitration agreement between the parties will give rise to an issue estoppel binding an English court if it has yet to proceed to judgment, and is likely to give rise to an issue estoppel binding on an arbitral tribunal seated in England.
It imperative, therefore, for a party in dispute to act quickly in order to ensure that they do not face a jurisdictional "torpedo".

Strategies to uphold arbitration clauses

Vasanti Selvaratnam QC and Tom Whitehead made a number of observations as to steps that might be taken in support of arbitration once a dispute has arisen:

Timing is critical. If an English court has delivered a prior judgment upholding an arbitration agreement, London arbitration appears to be protected by virtue of Article 34(3) of the Brussels Regulation because a subsequent "irreconcilable" member state judgment need not be recognised, thus avoiding any issue estoppel on the question of whether the contract contains a London arbitration clause. This will not avoid parallel proceedings, since a foreign court in an EU member state can still proceed on the merits. However it may limit the damage in so far as the right to proceed in arbitration is preserved.
If a party can obtain:
- a declaration from the English court upholding the arbitration agreement;
- an arbitral award on the merits; and
- a judgment from the English court enforcing the award, prior to a contrary decision of the member state court,
  it will be in a strong position to minimise the potential effects of the member state judgment, including the possibility of seeking damages for breach of the arbitration agreement so as to recover any sums paid in satisfaction of a subsequent adverse judgment given by the foreign member state court.

Accordingly, in order to best support an arbitration agreement, it may be necessary to take steps before:

The foreign court.
The English court.
The arbitral tribunal.

Steps before the foreign court

An application could be made in any proceedings commenced before a foreign member state court, seeking to challenge jurisdiction and compel London arbitration. If successful, the right to arbitrate will be upheld. However, the challenge will be founded on the national law of the member state, which may be unfavourable. Defeat would enable the foreign proceedings to continue and create a potential issue estoppel if the ruling were given before a decision from an English court on the issue.

Steps before the English court

It may be possible to seek declaratory relief from an English court as to the existence of a binding arbitration agreement, in order to prevent a subsequent contrary decision of a foreign member state court being given effect in England. It is, however, debatable whether such a declaration may be granted on its own under common law rules, in circumstances where the criteria set down in section 32 of the Arbitration Act 1996 (determination of preliminary point of jurisdiction) have not been satisfied.

Consider bringing a claim for damages for breach of the arbitration agreement before the English court, either on the basis of the common law rules or (possibly) under Article 5(1) of the Brussels Regulation on the grounds that the prime obligation, to arbitrate any dispute, falls to be performed in London.

If an award on the merits can be obtained from the arbitral tribunal, consider taking steps before an English court to enforce the award. If such a judgment can be obtained, either under section 66 of the Arbitration Act 1996 (enforcement of an award by the court) where the requirements of that provision are met, or by way of a common law action on the award, it may act as a bar to recognition and enforcement of a subsequent irreconcilable foreign member state judgment.

Steps before the London tribunal

An arbitral award on jurisdiction, whilst sensible, will not qualify for recognition and enforcement abroad under the New York Convention (see Dallah Real Estate v Government of Pakistan [2010] UKSC 46). A judgment on jurisdiction is much to be preferred. An award may, however, assist in persuading a foreign court that there is a binding arbitration agreement.

Consideration should be given to seeking an award or an order from the tribunal restraining a party from commencing proceedings abroad. It is unclear whether West Tankers operates to limit the exercise by a tribunal of the power to issue such an award or order.

Finally, it may be possible to seek an award of damages from the arbitral tribunal for breach of the arbitration agreement. Subject to the wording of the arbitration agreement, the tribunal may award damages for the fact that the underlying dispute was determined by a foreign court decision.

CMA CGM v Hyundai Mipo Dockyard [2009] Lloyd's Rep 213 supports the proposition that damages will be the difference, if any, between the award of the tribunal and the award of the foreign court, together with the costs of the foreign proceedings. This decision does, however, predate both West Tankers and The Wadi Sudr and caution will be needed where there has been no ruling from an English court on the question of whether there is a binding arbitration agreement prior to a foreign member state court's decision on the issue. An issue estoppel may arise so as to preclude the arbitral tribunal from awarding damages for breach of the arbitration agreement.

Non-EU cases

Outside the EU, the anti-suit injunction remedy is still available, applying the traditional principles set out in The Angelic Grace [1995] 1 Lloyd's Rep 87. Applications for anti-suit relief should be brought without delay, and caution must be taken to avoid submitting to the jurisdiction of the foreign court in the interim.

An update on the proposals for change

Nic Fletcher (Berwin Leighton Paisner LLP) provided a summary of the current process of review of the Brussels Regulation and the proposals for change:

A review of the Brussels Regulation has been under way for over three years. Although this began before West Tankers was decided by the ECJ, that decision has thrown into sharp relief the question of whether the arbitration exclusion should be maintained, amended or removed.
The European Commission's Report and Green Paper in April 2009 considered that partial deletion of the arbitration exception might improve the interface between arbitration and court proceedings, particularly if exclusive jurisdiction were given to the courts at the seat of the arbitration. This might prevent parallel proceedings as to the validity of the arbitration agreement and assist with the coordination of such proceedings. It also recognised the potential benefits of a rule allowing courts in member states to refuse to permit enforcement of a judgment irreconcilable with an arbitration award.
Opinion on the Green Paper was strongly divided. Most respondents recognised the difficultly posed by West Tankers, but there was a divergence of opinion as to how that should be remedied. There was support across the spectrum of opinion:
- for the complete removal of the arbitration exception (for example, from France, Spain and the Netherlands);
- for preserving the status quo (Switzerland);
- for maintaining the status quo but giving the courts at the seat of arbitration exclusive jurisdiction over matters affecting the arbitration (Germany); and
- at the other extreme, for expanding the exclusion to remove all aspects of the arbitral process from the scope of the Regulation (United Kingdom).
The European Parliament's Committee on Legal Affairs reported in June 2010. Its report strongly opposed even the partial abolition of the arbitration exclusion. It concluded that the interface between arbitration and the Brussels Regulation was complex and needed a separate and careful review. The Commission should not rush to put in place a system giving exclusive jurisdiction to the courts of the seat. It should, however, endorse the principle of kompetenz-kompetenz and address the problem of West Tankers by making it clear that proceedings in breach of arbitration clauses fall completely outside the Brussels Regulation.
The European Parliament adopted the Committee's report in full on 7 September 2010. The Commission has accepted this and established a group of experts to examine more closely the interface between the Brussels Regulation and arbitration. The Commission will publish proposals generally as to reform of the Brussels Regulation on 14 December 2010. It remains to be seen whether any interim action will be taken in relation to the arbitration exclusion. It is most unlikely.

A judicial perspective

Mr Justice Burton, who has given a number of recent judgments in this area, made the following observations:

London is regarded as an important centre for arbitration. The availability of anti-suit injunctions is a necessary tool where parties have agreed an arbitration clause and the Commercial Court wishes to give efficacy to that decision.
Damages for breach of the arbitration agreement ought to be available where a foreign suit has been brought regardless of whether the foreign judgment is enforceable under the Brussels Regulation. The breach lies in the fact of the foreign proceedings being brought (though the enforceability or otherwise of the foreign court's judgment will directly impact on the level of damages that may be recovered in an action for breach of the arbitration agreement).
Seeking and obtaining a declaration from the English court that there is a binding arbitration agreement may not be a complete answer although it is a useful starting point to obtaining a judgment of the English court upon which reliance may be placed. In AES UST-Kamenogorsk Hydropower Plant LLP v UST-Kamenogorsk Hydropower Plant JSC [2010] EWHC 722, a successful application for declaratory relief was coupled with an application for an anti-suit injunction (although, in Burton J's view, the use of an anti-suit injunction was not a definitive distinction, and declaratory relief may be sought without a corresponding application for an anti-suit injunction).
There was a departure from earlier judgments which had doubted whether declaratory relief is available in circumstances where the applicant has not commenced and does not intend to commence arbitration proceedings, but in normal circumstances that would not arise in any event. A declaration of the English court that there is a binding arbitration agreement may be a way around the issue, but whether or not that strategy is successful will depend upon how the courts interpret the effectiveness of a declaration by the English court against a substantive judgment of the foreign court.
The solution to foreign court proceedings outside the EU remains an anti-suit injunction in the English court restraining the foreign proceedings.

Conclusions

This session highlighted the unsatisfactory consequences of the decisions in West Tankers and The Wadi Sudr. It was suggested that the current state of affairs could be rectified by reform of the Brussels Regulation. This is a matter that has been considered by the EC's own Green Paper (COM(2009)175 Final), in which is was suggested that the arbitration exclusion be partially deleted, to bring arbitral proceedings (and judgments) within the scope of the Brussels Regulation; and granting exclusive jurisdiction for "court proceedings in support of arbitration" to the member state of the seat of arbitration.

Until such time as the decisions in West Tankers and The Wadi Sudr are overturned, the English court may not restrain foreign proceedings in the EU by way of anti-suit injunction, and a party seeking to enforce an arbitration agreement must act quickly. There are various options available, which may or may not be deployed in conjunction with each other. These include challenging the jurisdiction of the foreign court before that court, seeking to obtain an award from the arbitral tribunal on a number of possible bases and/or applications for declaratory or substantive relief from the English courts. In any event, it is imperative that such steps are taken before an adverse judgment of the foreign court on a jurisdictional challenge is obtained.

PLC Arbitration Seminar on 7 December 2010: strategies for enforcing and upholding London Arbitration clauses | Practical Law