UK: International Arbitration Clause Trumps Local Court Proceedings

Last Updated: 12 July 2013
Article by David McElveney and Leighton Moon

A recent UK Supreme Court decision, Kamenogorsk Hydropower Plant JSC (Appellant) v AES Ust-Kamenogorsk Hydropower Plant LLP (Respondent) [2013] UKSC 35, may offer further protection for international arbitration. The decision supports the proposition that parties should be bound by their agreement to submit disputes to arbitration and may prevent parties pursuing claims through local courts.

The UK Supreme Court decision may offer parties a way to:

  • avoid local court proceedings where there is an arbitration agreement; and
  • resist enforcement of local court orders against assets held in the UK.

A party may be able to obtain an order for an "anti-suit injunction" from a UK court to stop the other party from continuing with local court proceedings - even if an arbitration has not started.

Why do parties use arbitration clauses?

The advantages of arbitration are well known.

Parties often prefer arbitration to litigation:

  • as arbitral awards are more easily enforced in countries covered by the New York Convention,
  • as arbitration can be more confidential than public court proceedings;
  • for perceived neutrality; and
  • to enable greater control over the composition and expertise of the arbitral tribunal compared to a local court (with whom an international party may have little experience).

Local court proceedings versus arbitration clauses

Arbitration agreements are protected under UAE Law. 

Article 203 of the UAE Civil Procedure Code1 provides that parties cannot bring court proceedings regarding a dispute that is covered by a valid arbitration clause.  If a party starts local court proceedings despite the dispute being the subject of an arbitration agreement, the other party can apply to have those proceedings stayed. 

If, however, the local court decides not to stay the proceedings, the parties will lose the benefit of the arbitration agreement.  The court may decide that the arbitration agreement should not be followed if it is poorly drafted and uncertain, the signatories to the arbitration agreement did not have the requisite authority, or the subject matter of the dispute cannot be arbitrated due to public policy.

There is little that can be done under UAE law and procedure to reverse the effects a decision not to stay proceedings. An aggrieved party may, however, be able to take steps in the courts of the jurisdiction that is the "seat" of the arbitration agreement. 

The recent UK Supreme Court decision of Ust-Kamenogorsk Hydropower Plant JSC (Appellant) v AES Ust-Kamenogorsk Hydropower Plant LLP (Respondent) [2013] UKSC 35 suggests that a party could avoid local court proceedings by obtaining an "anti-suit injunction" without even needing to commence arbitration. The Ust-Kamenogorsk decision is most relevant for arbitration agreements that nominate England2 as the seat of the arbitration, however, the reasoning may also be followed in other jurisdictions.  

Anti-suit injunctions can protect arbitration clauses

Anti-suit injunctions restrain a person or company from starting or pursuing proceedings outside of the jurisdiction issuing the injunction (i.e. England for Ust-Kamenogorsk). The injunction is directed against the person or company (rather than the foreign court) and a breach of an anti-suit injunction amounts to a contempt of court and could lead to a fine or even the arrest of an individual. Perhaps more importantly, the English courts can also refuse to recognise or enforce a UAE court order obtained in breach of an anti-suit injunction.

In Ust-Kamenogorsk, the UK Supreme Court upheld an anti-suit injunction issued against the appellant preventing it from continuing with court proceedings in Kazakhstan in relation to disputes arising from a hydroelectric plant concession agreement.  The concession agreement included an arbitration clause that required (certain) disputes to be resolved by way of ICC arbitration conducted in London.

Importantly, the UK Supreme Court found that it was not necessary for there to be arbitration proceedings on foot in order to grant the anti-suit injunction.  Indeed, it was not even necessary for there to be arbitration proceedings planned.  In the UAE context, this means that a party who is forced to accept the jurisdiction of a UAE court can immediately apply for an anti-suit injunction without having to expend time and costs of starting an arbitration.

The UK Supreme Court rejected an argument that, in accordance with the Arbitration Act, it was only permitted to grant anti-suit injunctions when there were arbitral proceedings underway.  Instead, the UK Supreme Court found that it had sufficient power to grant anti-suit injunctions pursuant to section 37 of the Senior Courts Act despite the lack of arbitral proceedings.  This section provides that an injunction could be granted "in all cases in which it appears to the court to be just and convenient to do so".

A what if....?

The terms of the anti-suit injunction in the Ust-Kamenogorsk case was that the party "cannot bring" and is "restrained from bringing... the claim the subject of the [foreign court proceedings], or any other claim arising out of or in connection with the Concession Agreement... otherwise than commencing arbitration proceedings".

This creates a potential issue.  What are the consequences if a party is prevented from commencing anything other than arbitration proceedings, but the arbitral tribunal then finds that it does not have jurisdiction?

Article 203(5) of the UAE Civil Procedure Code

As set out above, Article 203(5) of the UAE Civil Procedure Code states that court proceedings cannot be brought in relation to disputes covered by a valid arbitration agreement.  However, it goes on to say that an arbitration clause will be deemed null and void if a party starts court proceedings and the other party does not object at the very first hearing.  That is, the local court will seize itself of jurisdiction to hear the dispute and the parties will forever lose the right to arbitrate the dispute and the resulting benefits listed above.

In practise, the requirement to raise the objection at the first hearing is frequently overlooked in the flurry of activity that follows the commencement of proceedings.  This is particularly the case with international parties who are less familiar with UAE law and procedure.  Indeed, it is not uncommon for a party to start local court proceedings in the hope that the other party overlooks Article 203(5).

It is less clear whether a UK court will grant an anti-suit injunction when a local court has seized jurisdiction due to the applicant failing to apply for a stay at the first hearing as required by Article 203(5) than for other grounds.  A UK court has the discretion as to whether to issue an anti-suit injunction and will consider all relevant

circumstances when exercising that discretion.  Any delay in making the application is a relevant factor in a court deciding against issuing the injunction.  Similarly, a UK Court may consider that it is relevant that an applicant failed to make an application in the UAE courts at the first hearing as required by Article 203(5).

Applicability to EU jurisdictions

For completeness, it is noted that for court proceedings in EU courts, UK courts will not issue anti-suit injunctions due to the Brussels Regime3  Under this regime, a member state's court is bound to accept earlier decisions of another member state's court that it has jurisdiction.  It has been found that anti-suit injunctions preventing an EU court from hearing a dispute which may be covered by a UK based arbitration clause would be contrary to this regime4.

Practical consequences of obtaining an anti-suit injunction

As the anti-suit injunction is not made against the UAE court but rather the party, it will only be effective if the party is willing (or can be forced) to comply with its terms.  For this reason, it may be of limited use in some circumstances and against some parties.

The anti-suit injunction may be of more practical use in preventing enforcement against UK based assets of any local court order obtained in breach of the injunction.  This is because an English court may find that it would be contrary to public policy to enforce a UAE court order that was obtained in breach of an injunction.  This may offer significant protection for an entity who has a UAE business but whose main assets are based in the UK.

Footnotes

1 Brussels 1 Regulation [Regulation (EC) No 44/2001] and Lugano Convention 2007

2 Allianz SpA and Ors v West Tankers Inc. Case C-185/07; National Navigation Co v Endesa Generacion SA [2009] EWCA Civ 1397

3 Brussels 1 Regulation [Regulation (EC) No 44/2001] and Lugano Convention 2007

4 Allianz SpA and Ors v West Tankers Inc. Case C-185/07; National Navigation Co v Endesa Generacion SA [2009] EWCA Civ 1397 

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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