UK: Commercial Court Confirms Arbitral Tribunal Can Award Damages For Breach Of The Obligation To Arbitrate

Last Updated: 11 April 2012
Article by Ian Chetwood and Clare Kempkens

West Tankers Inc v. (1) Allianz SpA (formerly known as Riunione Adriatica Sicurta) and (2) Generali Assicurazioni Generali SpA (Front Comor) [2012] EWHC 854 (Comm)

On an appeal from an arbitration award, the Commercial Court was asked to consider whether an English arbitral Tribunal is deprived of jurisdiction, by reason of European law, to award damages (and/or an indemnity) for breach of an obligation to arbitrate. More specifically, the question was whether a Tribunal has jurisdiction to award damages against a party who starts judicial proceedings in breach of an obligation to arbitrate, when those proceedings are commenced before a Court in the EU pursuant to the Brussels Regulation.

In a judgment handed down on 4 April 2012, Mr Justice Flaux has held that the Tribunal did in fact have such jurisdiction.

The background facts

This is yet another chapter in the widely reported Front Comor litigation, which reached the European Court of Justice ("ECJ") in 2009 on the issue of whether it was incompatible with the Brussels Regulation (Council Regulation (EC) No.44/2001) for the Court of one EU member state to grant an anti-suit injunction restraining Court proceedings brought in another EU member state, on the ground that those proceedings were contrary to an arbitration agreement. The ECJ, concurring with the earlier opinion of the Advocate General, held that such injunctions were incompatible with the Brussels Regulation.

The original dispute arose out of a collision between the laden tanker vessel, Front Comor, owned by West Tankers ('the shipowners'), and a pier in Italy belonging to Erg Petroli SpA, the vessel's charterers. Erg Petroli asserted claims for substantial damages arising from the collision and obtained security. Those claims for damages were referred to arbitration in London, pursuant to the arbitration agreement in the charterparty. Notwithstanding the ongoing London arbitration proceedings, the charterers' subrogated insurers (Allianz and Generali) subsequently commenced proceedings in tort in the Italian Court against the shipowners.

The shipowners applied for and obtained an anti-suit injunction from the English Court to restrain the insurers from pursuing their claims in Italy, in the course of which Colman J in the Commercial Court in London (after hearing full argument from the insurers) declared that the insurers were obliged to arbitrate their claims in London. Colman J's declarations were not appealed by the insurers (though his jurisdiction to grant an injunction was), and the declarations were affirmed by the House of Lords, after the ECJ ruling. While the arbitration in London has continued to progress, the Italian Court has not yet determined its own jurisdiction.

The arbitral Tribunal issued an award in 2008 declaring that it had jurisdiction and further that the shipowners were under no liability to the insurers in respect of the collision. In January 2012, the Court of Appeal ruled that the shipowners were entitled to enforce that arbitration award as an English Court judgment and to enter judgment in terms of the award, pursuant to section 66 of the Arbitration Act 1996.

Damages for breach of the arbitration agreement

The majority arbitration Tribunal

Two issues were originally stood over by the arbitration Tribunal pending the ECJ's judgment, these being whether the shipowners were entitled to damages from the insurers for the latter's breach of their obligation to arbitrate and to an indemnity in respect of any future judgment given against the shipowners in Italy.

In April 2011, the Tribunal issued its Award concluding, by a majority, that it did not have jurisdiction, by reason of EU law, to award damages or an indemnity to the shipowners for the insurers' breach. Submissions had been made by the insurers that the arbitration Tribunal's jurisdiction to award damages was constrained by fundamental EU principles 'of effectiveness' and 'of effective judicial protection' that had been referred to by the Attorney General and the ECJ earlier in this case. The majority arbitrators recognised there was a strong argument that an arbitral Tribunal should not be bound by the constraints of the Regulation in the same way as an EU national Court, because arbitration is completely excluded from the Regulation. Nonetheless, the majority arbitrators took the view that the ECJ ruling meant that the insurers had the right under the Regulation to commence proceedings in tort in Italy, being the place where the collision occurred, and that this right was entitled to judicial protection. The majority arbitrators decided that, while they were exercising a parallel jurisdiction, an award by them for damages against the insurers for failing to arbitrate would in effect "punish" that party for pursuing a course that the ECJ itself had to that extent approved. The arbitrators concluded that EU law would not, as a result, allow them to do this and so they did not have jurisdiction to award damages in the shipowners' favour.

The Commercial Court decision

The shipowners appealed and there were three main issues for the Court to consider.

The first issue was that, while EU law principles of effectiveness and of effective judicial protection existed to protect the right of the insurers under the Regulation to commence Court proceedings in Italy, could those principles circumscribe the jurisdiction of an arbitration Tribunal when the Regulation does not apply to arbitration?

The second issue, if the answer to the first question was yes, was whether an award of damages or an indemnity by the Tribunal would in fact interfere with the insurers' rights under EU law.

The third issue was whether, if the Tribunal was right to say that it had no jurisdiction to award damages or an indemnity while the Italian Court proceedings are pending, it should not have dismissed the insurers' claim for damages as the Italian Court has not yet determined if it has jurisdiction.

Mr Justice Flaux has allowed the appeal and has decided that the majority arbitrators erred in law, his conclusion on the three issues being these:

  1. The Advocate General in her opinion recognised that an arbitration Tribunal could reach a different conclusion from that of the Court first seised under the Regulation, both in relation to the scope of the agreement to arbitrate and as to the merits of the case. The Regulation does not apply to arbitration and the Tribunal is not required to apply the principle of effective judicial protection, which is only engaged between Courts of member states. That being so, the Tribunal was wrong to decide that it did not have jurisdiction to award damages (or an indemnity) for breach of the obligation to arbitrate.
  2. In case he was wrong on the first point, the Judge went on to consider whether an award of damages or an indemnity constituted illegitimate interference with the Italian Court proceedings. He concluded that it did not. He commented that were such an award to constitute an illegitimate interference with the Italian Court action, so too would the declaration of non-liability obtained by the shipowners and yet that declaration had been granted. Furthermore, neither the Advocate General nor the ECJ had contemplated that the London arbitral Tribunal should decline jurisdiction altogether until the Italian Court had ruled. On the contrary the Advocate General had expressly recognised that the arbitral Tribunal was free to make an inconsistent award on the merits. The indemnity was a logical consequence of the declaration of non-liability and there was no sound basis for distinguishing between the two types of relief.
  3. On the third issue, Mr Justice Flaux held that by dismissing the claim for damages (rather than, at the very least, deferring a decision on that claim), the Tribunal had shut out a strongly arguable claim in the future. Were the Italian Court to decide in due course that it did not have jurisdiction, there could be no question of an award of damages interfering with the insurers' right of access to the Italian Court. There would be nothing objectionable in the shipowners being allowed to recover any loss sustained as a result, which they were not able to recover in the Italian proceedings.

Comment

Mr Justice Flaux's decision reflects the fact that the Regulation unifies jurisdictional rules only between Courts of EU member states, but has no application to arbitration proceedings since arbitration is completely excluded from the Regulation by Article 1(2)(d). The decision also reflects the fact that it is inherent in the scheme of the Regulation, as was expressly recognised by the Advocate General and by the ECJ in this case, that an arbitral Tribunal is not prevented from ruling on its own jurisdiction. Nor is it prevented from reaching a conclusion that may be inconsistent with a decision reached by a Court first seised under the Regulation.

Permission has been granted for the insurers to appeal to the Court of Appeal.

Mr Justice Flaux's decision that arbitrators, exercising parallel jurisdiction, can award damages in this situation will be welcomed by arbitration practitioners.

Ian Chetwood and Clare Kempkens of Ince & Co LLP represent West Tankers, the successful appellants in this matter.

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