UK: Trader Who "Took Part" In Arbitration Proceedings Loses Right To Challenge Arbitrators' Jurisdiction

Last Updated: 14 June 2010
Article by Max Cross and Reema Shour

Broda Agro Trade (Cyprus) Ltd v Alfred C Toepfer International GmbH [2009] EWHC 3318 (Comm)

Background to dispute

The parties in this case were in dispute as to whether there was a validly concluded contract between them for the supply of milling wheat. Toepfer had commenced GAFTA arbitration against Broda pursuant to the GAFTA arbitration clause in that contract, claiming damages for breach of contract. Broda maintained that no valid contract had been entered into and therefore that the arbitration clause in the contract was not binding on them.

The GAFTA arbitration tribunal dealt with the question of their own jurisdiction as a preliminary issue. Broda's foreign lawyers disputed GAFTA's jurisdiction in writing but that correspondence was stated to be "without prejudice and with full reservation of rights".

Broda also sought and obtained a declaration from the Russian court that there was no validly concluded contract between the parties. Nonetheless and with knowledge of the Russian court decision, GAFTA issued an Interim Award on Jurisdiction, concluding that there was a binding contract.

Both parties subsequently served submissions in the substantive dispute. Broda's submissions dealt with issues of liability and damages, as well as summarising their reasons for continuing to contend that the GAFTA tribunal lacked jurisdiction. The Tribunal eventually delivered its Final Award, finding that Broda were in breach of contract and awarding Toepfer damages of over US$5 million plus interest and costs. Broda appealed the Final Award to the GAFTA appeal tribunal. However, it also sought to challenge the Tribunal's jurisdiction in the Commercial Court by seeking relief under sections 72 and 67 of the Arbitration Act 1996.

Section 72 of the Arbitration Act 1996 preserves the common law entitlement which allows a person to seek a declaration that an arbitral tribunal lacks jurisdiction, but its application is limited to circumstances where the applicant has taken no part in the arbitration proceedings. Section 67 of the Arbitration Act 1996 allows a person to seek to set aside an arbitration award on the grounds of the tribunal's lack of substantive jurisdiction. However, pursuant to section 70(3) of the Arbitration Act 1996, such an application must be made within 28 days from the date of the award. Broda's application to set aside the Interim Award on Jurisdiction under section 67 was 14 months late so they sought an extension of time under section 80(5) of the Arbitration Act 1996.

Commercial Court decision

Mr Justice Teare had to consider whether it could properly be said that Broda took no part in the GAFTA arbitration pursuant to section 72 of the Arbitration Act 1996. He distinguished between, on the one hand, a submission that the arbitrators should not be acting and, on the other hand, attempting to argue the case against jurisdiction so that the arbitrators can consider it. As the judge put it, "a person may inform a tribunal of his view that the tribunal lacks jurisdiction without being held to have taken part in the arbitration proceedings. But if he makes submissions to the tribunal for it to take into account when exercising its jurisdiction under section 30 of the Arbitration Act 1996 to rule on its own substantive jurisdiction he risks being held to have taken part in the arbitration proceedings".

The judge rejected Broda's arguments that section 72 was only concerned with taking part in the arbitration proceedings for the purposes of challenging the tribunal's jurisdiction. He stated that the wording of section 72 did not restrict its scope in the way suggested, it simply stated that a person wishing to avail himself of section 72 should satisfy the condition that he "takes no part in the proceedings", which the judge interpreted to mean the proceedings as a whole.

Having reviewed Broda's correspondence in the present case, the judge did not consider that they had taken part in the arbitration when they corresponded with the Tribunal prior to the Interim Award on Jurisdiction. However, he held that they clearly took part in the arbitration thereafter, in particular by making submissions on the merits of the claim in relation to liability, breach and damages. They had therefore lost their right to seek a declaration pursuant to section 72.

The judge also refused to extend time for Broda's application to set aside the award under section 67 of the Arbitration Act 1996. He reviewed the authorities on the way in which the court's discretion to extend time under section 80(5) of the Arbitration Act 1996 should be exercised. These authorities highlighted a number of factors which should be taken into account. These factors included the length of delay which, in this case, was "very considerable", according to the judge.

Another factor was whether the applicant acted reasonably in permitting the time limit to expire and the subsequent delay to occur. In this regard, the essential reason that time expired and delay occurred was that Broda were not in receipt of correct advice on English arbitration law and were not aware of the 28 day time-limit applicable pursuant to section 70(3) of the Act 1996. However, the judge was not sympathetic to this argument. In his view, Broda had not acted reasonably in consulting only Russian lawyers until very late in the day. He emphasised that Broda were grain traders concluding contracts with some of the largest and most reputable grain trading companies located all over the world. They knew that there was a claim against them for over US$5 million and it would not have been unreasonable to incur the costs of an English lawyer's advice in connection with the claim at a much earlier stage.

Additionally, the judge had to consider whether it would be unfair to Broda to deny them the opportunity of having their application under section 67 determined. Mr Justice Christopher Clarke concluded that the hardship that Broda might suffer if time was not extended was not disproportionate to their fault in not seeking advice from an English lawyer. His view was that Broda had taken the risk that the advice they received from Russian lawyers in relation to English law and arbitration would not be appropriate or correct. However, the judge did agree to stay enforcement of the Final Award in favour of Toepfer, pending Broda's appeal of that Award to the GAFTA Appeal Tribunal and provisional on Broda providing adequate security.

Comment

Parties to international commercial contracts providing for English law who are faced with arbitration claims against them would be well advised to take English legal advice at an early stage, particularly on their rights and obligations in English arbitration proceedings. As can be seen from Mr Justice Christopher Clarke's decision in this case, ignorance of the law will not be considered a valid excuse for failing to observe the relevant procedure and conforming to the relevant time limits inter alia for challenging the arbitrators' jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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