Court considers test as to validity of arbitration agreement under section 9(4) Arbitration Act 1996 (High Court)

Practical Law UK Legal Update Case Report 7-520-5644 (Approx. 8 pages)

Court considers test as to validity of arbitration agreement under section 9(4) Arbitration Act 1996 (High Court)

by PLC Arbitration

Background

Stay of proceedings in favour of arbitration

The principal remedy for proceedings commenced in the English court in breach of an arbitration agreement is a stay of those court proceedings. The court derives its principal power to stay from sections 9(1) and (4) of the Arbitration Act 1996 (the Act), which provide:

"(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...

(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed."

Section 9(1) requires a concluded arbitration agreement before the court can order a stay and not merely an arguable case that there was an arbitration agreement (Albon (trading as NA Carriage Co) v Naza Motor Trading SDN BHD (No 3) [2007] EWHC 665 (Ch)).

The burden of proving that any of the grounds in section 9(4) has been made out is on the party asserting them. In Downing v Al Tameer Establishment [2002] EWCA Civ 721, Potter LJ said that a stay should be granted if the defendant could raise an arguable case in favour of validity and cited the decision in Hume v AA Mutual International Insurance Co Ltd [1996] LRLR 19.

For more detailed discussion, see Practice note, Remedies for breach of the arbitration agreement: Stays of English court proceedings.

Brussels Regulation

The Brussels Regulation governs the jurisdiction of the courts of EU member states in civil and commercial matters. The basic rule is that defendants are to be sued in the courts where they are domiciled (Article 2). However, other bases of jurisdiction are also recognised. For example:

Exclusive jurisdiction agreements. If the parties have agreed that the courts of one or more member states have jurisdiction to settle their disputes, and at least one of the parties to the agreement is domiciled in a member state, then the Brussels Regulation recognises that agreement and the agreed court will have jurisdiction. That jurisdiction will be exclusive "unless the parties have agreed otherwise" (Article 23(1)).
Connected claims. Under Article 6(1), a person domiciled in a member state may be sued:
"where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings."
The effect of this provision is that, if one defendant is domiciled in England (anchor defendant), the claimant can join additional defendants domiciled in other European regime states to the English proceedings, in certain circumstances and subject to certain constraints. To show that it is expedient to hear the claims together, it will generally be necessary for the claimant to establish that there is a serious issue to be tried against the co-defendant as well as the anchor defendant.
The 2007 Lugano Convention is in similar terms and governs jurisdiction as between EU member states and Switzerland.

For detailed discussion, see Practice note, Jurisdiction: an overview.

Facts

The dispute arose out of a series of agreements entered into between the claimant (Aeroflot) and the third to seventh defendants, all of which were companies in the Forus group and were domiciled outside the jurisdiction. Aeroflot alleged that the Forus group of companies was controlled by the first defendant (Berezovsky) and the second defendant (Glushkov). Glushkov was also the First Deputy Director General of Aeroflot.

There were three agreements:

An advisory mandate, between Aeroflot and the fifth defendant, EM Finance (formerly Forus Services) (Services).
A credit agreement between Aeroflot and Services, dated April 1996 (First Credit Agreement), amended in May 1997 (Amending Agreement).
A credit agreement between Aeroflot and Services (later substituted by the fourth defendant, Cyprus), dated November 1997 (Second Credit Agreement).

The agreements contained the following dispute resolution provisions:

The advisory mandate contained a clause providing for Swiss governing law and provided that the "place of jurisdiction is Lausanne".
The First Credit Agreement also provided for Swiss governing law and jurisdiction of the Lausanne courts, but was amended by the Amending Agreement to provide for arbitration under the ICC Rules of Arbitration.
The Second Credit Agreement provided for Swiss governing law and arbitration under the ICC Rules in Zurich.

Berezovsky and Glushkov were served in the jurisdiction on the basis that England was their state of domicile. The third defendant (Holding) and Cyprus were served with the proceedings on the basis of Article 6(1) of the Brussels Regulation, and Services was served under the equivalent provision in the Lugano Convention. Aeroflot obtained permission to serve the seventh defendant (Forus Finance) outside the jurisdiction on the basis that there was a real issue between Aeroflot and Berezovsky and Glushkov which it was reasonable for the court to try and that Forus Finance was a "necessary or proper party" to the claim (PD 6B.3.1(3)).

Services, Cyprus, Holding and Forus Finance all challenged jurisdiction. (The sixth defendant did not join in the application.)

Services relied on the Lausanne jurisdiction clause in the advisory mandate or, alternatively, sought a stay of proceedings under section 9 of the Arbitration Act 1996 or under the court's inherent jurisdiction.
Holding and Cyprus argued that, if Services succeeded in preventing the claim against it being heard in England, then it was not expedient for the English court to hear the case against them either. Alternatively, Cyprus relied on the arbitration clause in the Second Credit Agreement to seek a stay of the proceedings against it.
Forus Finance argued that, if Services succeeded in preventing the claim against it being tried in England, the question of "necessary or proper party" needed to be re-examined.

Aeroflot argued that it was not bound by the Lausanne jurisdiction clause because it had not consented to it, as required by Article 23 of the Brussels Regulation. It argued that it was under a misapprehension that the clause had been reviewed by its legal department, and also that one or both of the people who signed it (who did not have good English) did not fully understand it.

In opposing the stay of proceedings in favour of arbitration, Aeroflot argued that the arbitration agreement was null and void or inoperative under Swiss law. It relied on the Swiss doctrines of "double representation" and "abuse of right".

Decision

Floyd J upheld the challenge to jurisdiction by Services, on the ground that there was an exclusive jurisdiction clause in favour of the Lausanne courts. He dismissed the other applications to challenge jurisdiction and to stay the proceedings.

Was there an enforceable exclusive jurisdiction clause in the advisory mandate?

Floyd J concluded that Services had much the better of the argument that the requirements of form in Article 23(1) were met and that it could be established that the clause was the subject of consensus between the parties (meeting the test set out in Bols Distilleries v Superior Yacht Services [2007] UKPC 45). The evidence showed that Aeroflot had agreed to the jurisdiction clause. The fact that its legal department had failed to review the agreement, or that Aeroflot thought that its legal department had reviewed it, did not negate awareness of, or intention to be bound by, the jurisdiction clause.

Therefore, the court did not have jurisdiction over the claim against Services.

Article 6(1) jurisdiction

Floyd J rejected the defendants' argument that if the case against Services was to be heard in Lausanne, proceedings in England would not "avoid the risk of irreconcilable judgments", as envisaged by Article 6(1), but actively promote it. It did not follow from the fact that the English court had declined jurisdiction that a Swiss court would proceed to judgment in parallel with the English proceedings. If proceedings were started in a Swiss court, that court may stay them under Article 28 of the Brussels Regulation, as a "related action" to the English proceedings. In that case, any risk of irreconcilable decisions would be avoided.

The fact that the English court had declined jurisdiction over Services did not affect its assessment of whether it should take jurisdiction over the other co-defendants. The proceedings against Holding and Cyprus remained as closely connected to the claims against Berezovsky and Glushkov as they were before Services was removed as a co-defendant. It would remain expedient to hear those claims together, to avoid the risk of irreconcilable judgments. Therefore, the test under Article 6(1) was satisfied in respect of Holding and Cyprus.

Similarly, Forus Finance remained a proper party to the claim against Berezovsky and Glushkov.

Stay of proceedings under section 9 Arbitration Act 1996

Floyd J first considered how the scheme of section 9 operated. The court must first decide whether there is an arbitration agreement and whether it covers the matters in issue in the litigation (section 9(1)). If there is no assertion that the agreement is null and void, inoperative or incapable of being performed, a stay is mandatory. If any of these matters is asserted, the court will have to decide them and, if satisfied as to any of them, will refuse the stay.

It was common ground that issues concerning the substantive validity of the arbitration agreement fall to be decided under its applicable law. However, the judge queried the comment in Dicey, Morris & Collins, The Conflict of Laws (14th edition) that "in practice, the English court is likely to determine the other matters mentioned [that is, section 9(4)] for itself, uninfluenced by foreign law" (paragraph 16-077). In Floyd J's view, if an agreement is null and void, inoperative or incapable of performance under its applicable law, that is a matter that is properly to be taken into account under section 9(4).

Regarding the standard that must be satisfied for a stay to be refused under section 9(4), Floyd J rejected the defendants' argument that it was sufficient if they could show an arguable case that the agreement was not null and void or inoperative. That argument was not supported by authority. Potter LJ's statement in Downing, that a stay should be granted if the defendant could raise an arguable case in favour of validity, was not necessary for the decision that he reached in that case. Furthermore, the authority referred to by Potter LJ (Hume) did not seem to support that proposition.

In Floyd J's judgment, the correct approach was that the burden of establishing the matters identified in section 9(4) rests on the party asserting them (in this case, Aeroflot). The use of the word "satisfied" in section 9(4) was an indication that the court must come to a "clear conclusion" that the agreement was null and void, inoperative or incapable of performance. However, he could not go as far as accepting that the existence of a "mere" arguable case in favour of validity would be sufficient for the court to give effect to the arbitration agreement.

Turning to the substance of the stay application, Floyd J noted that, as he had decided that the court did not have jurisdiction over Services, the argument regarding a stay of proceedings focused on Cyprus.

Although the parties had agreed that the court could decide the stay applications on the written evidence, Floyd J did not think that would be just in the case of the issue of whether the Swiss doctrine of double representation rendered the arbitration agreement null and void. The extent of Glushkov's continued involvement in the day to day affairs of the Forus group was central to the allegations made in the action. It would be undesirable to decide that question against Aeroflot on that evidence, in the absence of Berezovsky and Glushkov and independently of the trial of the action.

However, the same considerations did not apply to the issue of the Swiss law doctrine of abuse of right. A resolution of that issue did not involve issues of importance that were likely to arise in the action. Given that the parties had agreed that the court could decide the application without oral evidence, the judge proceeded to do so.

The judge agreed with the parties that, if the doctrine of abuse of right applied, it fell within section 9(4), rather than section 9(1). The name of the doctrine demonstrated that a right was presumed to exist. He concluded that it would be an abuse of right under Swiss law for Cyprus to rely on the arbitration agreement in the Second Credit Agreement in circumstances where to do so would cause fragmentation of the dispute. Arbitration clauses were designed to give parties a convenient alternative forum to the courts for resolving their disputes. The exercise of the right in the Second Credit Agreement would not achieve that aim, but would just hive off an arbitrary part of the dispute from the remainder of it.

Therefore, Floyd J refused the application for a stay of proceedings under section 9.

Comment

The judge's approach to the standard of proof required under section 9(4) of the Arbitration Act 1996 is significant, as it disagrees with the statement of Potter LJ in Downing, to the effect that the court should grant a stay where the defendant raises an arguable case in favour of validity of the arbitration agreement. In taking the stance that he did, a relevant factor for the judge was that the defendants had been unable to suggest any reason why the court should accept an arguable case in favour of validity for the purposes of section 9(4), whereas that standard was not sufficient to satisfy section 9(1).

We understand that permission to appeal against the decision has been granted, and the matter is awaiting listing before the Court of Appeal. At this stage, it is unclear which aspects of the decision are being appealed and it will be interesting to see if the section 9(4) point will be considered. In the meantime, there is uncertainty as to the standard of proof required under section 9(4).

Floyd J also commented on paragraph 16-077 of Dicey, Morris & Collins, finding that it was unclear, as it appeared to suggest that the court was likely to determine the existence of any of the factors in section 9(4) uninfluenced by foreign law. However, on reading the relevant passage in full, it is suggested that the authors are differentiating between the question whether the arbitration agreement is null and void (which is a matter of the governing law) and the "other matters" in section 9(4), namely whether the arbitration agreement is inoperable or incapable of being performed. In the case of the latter, the examples cited by Dicey, Morris & Collins suggest that the English courts will often look to the procedural rules or the law of the seat of arbitration.

Case

Joint Stock Company "Aeroflot Russian Airlines" v Berezovsky [2012] EWHC 1610 (Ch)

Court considers test as to validity of arbitration agreement under section 9(4) Arbitration Act 1996 (High Court) | Practical Law