Commercial Court guidance on security pending challenge to award

Practical Law UK Legal Update Case Report 8-504-3161 (Approx. 7 pages)

Commercial Court guidance on security pending challenge to award

by PLC Arbitration

Background

The Arbitration Act 1996 (Arbitration Act) contains various provisions governing the circumstances in which parties may challenge or object to the tribunal's jurisdiction.

Section 67 (challenging the award: substantive jurisdiction)

Section 67 of the Arbitration Act permits an award to be challenged on the basis that it was made without jurisdiction.

(For further discussion, see Practice note, Challenging the award under section 67 of the English Arbitration Act 1996: jurisdiction.)

Sections 32 and 72 (jurisdictional issues determined by court)

Section 32 of the Arbitration Act provides that a party may make an application to the court to determine a jurisdictional issue in certain closely defined circumstances. Section 72 entitles a person "who takes no part in [arbitral] proceedings" to challenge the tribunal's jurisdiction by proceedings in court.

(For further discussion of sections 32 and 72 of the Arbitration Act, see Practice note, Jurisdiction: determination by the court.)

Security under section 70

Certain supplementary provisions set out in section 70 of the Arbitration Act apply when a challenge under section 67 is made.

In particular, the court may order that any money payable under the award is brought into court or otherwise secured pending the determination of the application (section 70(7)). The challenge to the award may be dismissed if the order for security under section 70(7) is not complied with.

Commercial Court judges have taken differing approaches to the circumstances in which the court will grant security under section 70(7).

In Peterson Farms Inc v C&M Farming Ltd [2004] EWHC 121 (Comm), Tomlinson J (as he then was) noted that:

The power to order security under section 70(7) is only applicable to challenges under sections 67 to 69 and does not apply to applications under sections 32 or 72. However, it may be a matter of happenstance whether the objection is made under section 67 as opposed to sections 32 or 72.
In the case of challenges under section 68 (serious irregularity) or section 69 (appeal on a point of law), the award has a presumptive validity unless and until set aside. By contrast, an award challenged under section 67 for lack of jurisdiction is not presumed to be valid, and the jurisdictional challenge is determined by way of a complete rehearing and is not limited to a review of the tribunal's decision.

Tomlinson J indicated that the court should be cautious in exercising the discretion to make an order under section 70(7) where there is a section 67 challenge which might, in other circumstances, have been advanced under section 32 or 72. Where an award is challenged under section 67, it would be a "threshold requirement" for the order of security under section 70(7) that the applicant demonstrates that the challenge is "flimsy or otherwise lacks substance".

A different approach was taken by Morison J in Tajik Aluminium Plant v Hydro AS [2006] EWHC 1135 (Comm), in which he considered the "origin of the subsection", tracing it back to the Arbitration Act 1934, through the Arbitration Act 1950 (section 23(3)) and the Arbitration Act 1979 (section 1(4)). He concluded that no threshold requirement applied under section 70(7):

"In my judgment it is not mere happenstance whether a jurisdiction case arises under section 30-32 or section 72, in the sense used [by Tomlinson J] ... there is a difference between a Tribunal making an award on the merits and jurisdiction which gives rise to an unfettered right to make a section 67 application, and other cases where there has been no trial by consent of the parties of all the issues in the case. The parties will choose to follow the most convenient and acceptable course ... It is not surprising, therefore, that Parliament should have confined section 70(7) to those jurisdiction cases where the parties had elected to have the Tribunal produce an Award after determining the facts and their impact on jurisdiction. The position is different when either there has been a one sided trial by a Tribunal, or where 'merely' preliminary jurisdiction issues are determined ... The statute contains an unfettered discretion. There is no threshold requirement."

Facts

A dispute arose between A and B regarding two contracts for the supply of rapeseed. B contended that the contracts incorporated the Federation of Oils, Seeds and Fats Associations (FOSFA) Form 28, including the FOSFA arbitration clause. A contended that there were no binding contracts, alternatively that any contract incorporated the Grain and Food Trade Association (GAFTA) Form 12.

B commenced two arbitrations against A under the FOSFA rules. A contended that the tribunal lacked substantive jurisdiction, and asked the tribunal to rule on its jurisdiction (under section 30 of the Arbitration Act). Following disagreement amongst the First-tier arbitrators on the issue of jurisdiction, the appointed umpire published awards in both arbitrations concluding that the tribunal had no jurisdiction.

B appealed to the Board of Appeal, which allowed the appeal, concluding that the arbitrators did have jurisdiction, and allowed B's damages claims (Appeal Awards).

A challenged the substantive jurisdiction of the Board of Appeal under section 67 of the Arbitration Act and sought permission to appeal the Appeal Awards under section 69.

B made an application under section 70(7) for security for the sums awarded to B by the Board of Appeal, pending the determination of A's applications.

Decision

Flaux J dismissed B's application. In most cases, there will be a threshold requirement that the party making the section 70(7) application must demonstrate that the counterparty's jurisdictional challenge is flimsy or otherwise lacks substance. On the facts of the case, B had failed to demonstrate this.

Section 70(7): the threshold requirement

Flaux J identified three principal problems with the approach taken by Morison J in Tajik:

Considerable caution was needed as regards the so-called origins of section 70(7) of the Arbitration Act. This was because none of those earlier legislative provisions was seeking to impose conditions on a challenge to the jurisdiction of the arbitrators, after the arbitrators had determined that they had jurisdiction (the situation addressed by section 67). Before the Arbitration Act, there was no legislative provision empowering arbitrators to determine their own jurisdiction.
It was clear that Morison J's view that there was no threshold requirement under section 70(7) was largely influenced by his dislike for the view that a challenge under section 67 is a complete rehearing and not a review. However, this was contrary not only contrary to the views of several other judges of the Commercial Court, but also the recent Supreme Court decision in Dallah Real Estate v The Government of Pakistan [2010] UKSC 46, in which it was conclusively determined that a challenge such as is made under section 67 is indeed a complete rehearing (see Legal update, Dallah Supreme Court decision: full update). As Morison J's approach to section 67 is now in effect contrary to the Supreme Court's decision in Dallah, the court should be extremely cautious before following his related approach to section 70(7).
Morison J's approach (unlike that of Tomlinson J) failed to recognise the differences between section 67 applications on the one hand, and sections 68-69 applications on the other. Morison J treated all three as challenges to awards by arbitrators after determination by the tribunal "by consent of the parties". However, in the case of section 67, the challenging party has not consented in any real sense; rather, he has participated in the arbitration under protest, reserving his position as to jurisdiction.

Because of these problems with the approach of Morison J, the views of Tomlinson J (that in most cases there will be a threshold requirement that the party making the section 70(7) application demonstrates that the challenge to the jurisdiction is flimsy or otherwise lacks substance) was to be preferred.

At this stage of the challenge, it would not be appropriate for the court to say too much about the merits, as there would be a full rehearing at the section 67 application. All the court should do was look at the various points raised to see if the threshold requirement could be met. Here, it was impossible to categorise A's case as flimsy or lacking in substance. It followed therefore, that B failed to demonstrate the threshold requirement and the application failed on that ground alone.

Further requirements under section 70(7)

Flaux J went on to consider the question of what other criteria might apply in determining whether to make an order under section 70(7), assuming the threshold requirement was met.

In Flaux J's view, while it would not be advisable or appropriate to lay down hard and fast rules, as a general principle the court should not order security unless the applicant can demonstrate that the challenge to the award would prejudice its ability to enforce the award. Often this will entail the applicant demonstrating some risk of dissipation of assets, although there may be other ways in which enforcement could be prejudiced.

On the facts, Flaux J was satisfied that there was no evidence that A's application to challenge the award would prejudice the enforcement of the award by B, who had already obtained enforcement orders from the court in Kazakhstan which had immediate effect. The applications under section 67 and 69 therefore would have no impact whatsoever on enforcement in Kazakhstan. In those circumstances, it was not appropriate to order security under section 70(7).

Section 69 application for security

Furthermore, in relation to the application for security in respect of the section 69 appeal, Flaux J noted that in most cases the court will be unlikely to order security as a condition of an appeal, given the stringency of the criteria that have to be satisfied in order to obtain permission to appeal. Orders for security are likely to be limited to cases where the section 69 appeal might potentially be used as a delaying tactic and, in the meantime, assets otherwise available to satisfy the award might be dissipated. There was no such evidence in the present case.

Comment

As Flaux J acknowledged, there are conflicting Commercial Court decisions on the question of whether an applicant seeking security under section 70(7) has to meet a threshold requirement of demonstrating that a jurisdictional challenge (under section 67) is flimsy or otherwise lacking substance.

The case endorses the decision in Peterson Farms on the threshold requirement as to the circumstances in which the court can and should order the respondent to provide security in favour of a successful claimant in arbitration proceedings, pending a jurisdictional challenge.

The decision is a logical one and not unduly surprising (in view of the decision in Dallah on the nature of section 67 challenges), but nevertheless provides welcome clarification of the point.

Flaux J's judgment also clarifies that the grant of security in respect of section 69 challenges is likely to be limited to the most exception cases where the challenge is being used as a delaying tactic and assets are likely to be dissipated in the meantime.

Award creditors should ensure that they are as well placed as possible to demonstrate any weaknesses in the counterparty's challenge and any concerns regarding enforcement of the award. To the extent that the award creditor has concerns about dissipation of assets pending any challenge, he would be advised to explore the avenues for enforcement as soon as possible in the relevant jurisdictions where assets are located.

Case

A v B [2010] EWHC 3302 (Comm) (16 December 2010)

Commercial Court guidance on security pending challenge to award | Practical Law