UK: FOSFA Arbitration Award Entered As English court Judgment

Last Updated: 19 September 2011
Article by Max Cross and Carrie Angell

Sovarex SA v Romero Alvarez SA [2011] EWHC 1661 (Comm)

Background

The original dispute underlying this decision of Mr Justice Hamblen is familiar. Sovarex sold sunflower seeds to Alvarez under a contract which provided for English governing law and FOSFA arbitration in London in the event of a dispute. Alvarez did not perform its obligations as the buyer. Sovarex commenced FOSFA arbitration proceedings against Alvarez for repudiatory breach of contract. Alvarez countered that the contract was in fact never concluded. The tribunal found in Sovarex's favour and ordered Alvarez to pay damages.

The present decision was made in an application by Sovarex to have the arbitration award entered as an English court judgment in the same terms as the award, so that it could be enforced as though it were an English court judgment. Mr Justice Hamblen allowed the application and, in doing so, decided three issues:

1) Alvarez had not lost its right to challenge the substantive jurisdiction of the arbitrators;

2) Sovarex was entitled to bring the application under s. 66 of the Arbitration Act 1996, even though Alvarez's defence raised issues of fact; and

3) in the particular circumstances, the fact that Alvarez had brought related proceedings in Spain, before the FOFSA arbitration was started, did not mean that the English court had to dismiss or stay the application.

1. Alvarez's Right to Challenge the Tribunal's Jurisdiction

The court's power to enter a judgment in the terms of the arbitration award is based on s. 66 of the Arbitration Act. S.66(3) provides that the court shall not make this order if the losing party shows that the tribunal lacked substantive jurisdiction and provided that the losing party had not submitted to the jurisdiction of the tribunal.

S.73 of the Arbitration Act provides that a party will lose its right to object to the substantive jurisdiction of the tribunal if that party does not object before taking part in the arbitration proceedings, otherwise it will have submitted to the tribunal's jurisdiction.

In this case, Alvarez had written to FOSFA a number of times to state that (i) a contract was never concluded; (ii) therefore there was no FOSFA arbitration agreement; (iii) Alvarez had commenced a related action in Spain, which process FOSFA should respect; and (iv) FOSFA should stop the arbitration because the award would be unenforceable as the issue would be decided by the Spanish court. Throughout, Alvarez said that it would not make any submissions to FOSFA because that would amount to recognising the FOSFA arbitration process, which it did not.

The judge held that Alvarez had not taken part in the arbitration. He considered the case law on this point, which draws a fairly narrow distinction between, on the one hand, protesting that the tribunal has no jurisdiction and asserting that the question of jurisdiction should be decided by a court or in some other forum and, on the other hand, asking the tribunal to consider the issue of jurisdiction. The judge found on the facts that Alvarez had protested the jurisdiction of the tribunal and explained why it would not participate in the arbitration. Mr Justice Hamblen decided that inviting the tribunal to decline jurisdiction (for the reasons Alvarez set out in its letters) did not amount to making submissions or asking the FOSFA tribunal to consider its own substantive jurisdiction.

While the judgment goes into some detail as to the test for whether a party has submitted to the jurisdiction of a tribunal, it is plain that the outcome will depend heavily on the facts in each case, and the overall tone of the correspondence with the tribunal.

2. S.66 Arbitration Act – Appropriate Procedure to Decide Issues of Fact?

Alvarez argued that s.66 was a summary procedure, only to be used in clear cut cases and which could not be used where "there is a real ground for doubting the validity of the award". Instead, where there were triable issues of fact in dispute, a judgment could only be entered in the same terms as an arbitration award following a common law 'action on the award'.

The judge disagreed. He held that there was a presumption that the award was valid, which the party challenging the jurisdiction of the tribunal must overcome. If the applicant had to bring an action on the award, he would effectively have to start from scratch to establish the jurisdiction of the tribunal and prove his case on the merits. This reversal of the burden of proof, back onto the winning party in the arbitration, would be contrary to the UN Model Law, the New York Convention and the general ethos of the UK Arbitration Act. Further, although historically s.66 (and its earlier equivalent) was a summary procedure, it had been used more and more over time, in gradually more complex cases. There was no reason why disputed issues of fact (in this case, relatively straightforward issues) could not be dealt with as the court had the necessary case management powers to make directions such that disputes of fact could be heard.

3. Competing Spanish Court Proceedings

Alvarez had commenced an action in the Spanish courts before the FOSFA arbitration was commenced, for a declaration that there was no concluded contract. The Spanish court had refused Sovarex's application to stay the action in favour of the FOSFA arbitration. However, the Spanish court subsequently dismissed the action because it said that it did not have power to issue the negative declaratory relief sought. Alvarez was appealing this decision.

Mr Justice Hamblen was not persuaded by Alvarez's arguments that (i) to hear the application would amount to interfering with the Spanish court's jurisdiction; (ii) the issue had already been decided; and/or (iii) that the English court was not the most appropriate forum.

To the contrary, the judge held that (i) the Spanish court had declined jurisdiction by dismissing the action and the appeal made no difference to this and thus there was no question of interfering with Spain's jurisdiction to hear the dispute; (ii) the question of whether there was a contract had not been previously determined by the Spanish court and so there was no issue estoppel; (iii) the English court was the court of the seat of arbitration, and the agreement (if it existed) was governed by English law and therefore England was the natural forum. In addition, Mr Justice Hamblen held, applying the decision in the West Tankers v Allianz SpA [2011] EWHC 829 (Comm), that a s.66 application should not be stayed or dismissed by reason of competing EC Regulation proceedings in another Member State if the award creditor had a real prospect of establishing the primacy of the award, by its conversion into an English court judgment, over any inconsistent foreign judgment.

Comment

This decision makes it clear that, consistent with the UN Model law and the New York Convention, the English court will place the burden of proving that an arbitral tribunal lacked jurisdiction to make an award on the losing party, and it will carefully consider the argument that it should refuse to recognise an award because related proceedings have been commenced in another Member State court.

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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