UK: Pathetically Pathological – A Stumble Through The Maze Of Dispute Resolution Clauses

Arbitration is intended to be a more efficient and commercial alternative to litigating in the courts. As we all know, arbitration is strictly consensual and contractual. The basic principle is that absent agreement, nobody can be compelled to arbitrate, so the arbitration clause is of fundamental importance. In this article, we look at some recent decisions illustrating how far the English Courts will go in helping parties who have signed up to a defective arbitration.

A reminder: what to address in your arbitration clause

In an ideal world, there is a fairly lengthy 'wish list' of procedural or administrative matters that the parties ought to address in their arbitration clause. There are also a number of legal systems (or 'applicable laws') that come into play – and it is here that difficulties can arise. The following may serve as a reminder:

Key procedural matter Options for the parties
What kind of disputes should be referred to arbitration? It generally makes most sense to provide that each and every dispute that relates to the contract, or which arises out of or in connection with the contract, should be referred to arbitration (so including claims in tort, equitable claims and claims about the validity or termination of the contract). English law strives to construe arbitration clauses generously - they cast a very wide net over the types of dispute that may arise.
Should an arbitral institution administer the proceedings? Institutions such as the ICC or the LCIA provide administrative support, and publish their own set of (tried and tested) procedural rules for any arbitration proceedings under their auspices. They can also assist with appointing arbitrators. The involvement of institutions is not, however, compulsory or necessary. Whether you should use one will depend on each case - check with your arbitration lawyer.
How many arbitrators? A tribunal usually consists of either one or three arbitrators. Some institutional rules have a preference in favour of one or the other. The ideal size of the tribunal (or whether to leave this point open in the contract) is something that is best considered in each particular case.
What should be the language of the arbitration proceedings? The parties have complete freedom of choice in this regard.
Where should the arbitration hearings take place? Again, the parties have complete freedom of choice, but they need to choose their words carefully. References to a 'venue' or a 'place' of the arbitration may be taken to amount to a choice of the juridical seat, not just the physical location of the hearing.
Should there be any right of appeal from the tribunal's decision? Arbitration awards are meant to be final and binding, but some seats provide for a (usually limited) right to appeal. If this is not desired, it needs to be expressly excluded. The appeal on a point of law under Section 69 of the English Arbitration Act 1996 is an example of a right that can be excluded by the parties contractually. Note that by adopting the rules of arbitration of a major institution such as the ICC and the LCIA, rights of recourse against an award are likely to be limited to matters that the parties cannot exclude as a matter of law, such as serious procedural irregularities, bias on the part of the tribunal or lack of due process.
Choices implicating a jurisdiction or an applicable law Options for the parties
What is the seat of the arbitration? The choice of the seat of the arbitration brings with it the supervisory jurisdiction of the local courts in that jurisdiction, applying their own local laws governing arbitration proceedings. Those courts, and the local laws, are likely to be the first, or perhaps the exclusive, port of call for key matters such as:
  • Granting interim, provisional or supportive measures that require the backing of the judicial, or state, enforcement mechanism with contempt of court as the ultimate sanction (such as effective freezing injunctions or orders compelling the attendance of witnesses). Welcome court support can sometimes turn into unwelcome court intervention, so the seat should be chosen carefully.
  • Rules safeguarding due process of the arbitration proceedings, including standards of impartiality and fairness required of arbitrators, and the mechanism for challenges to, and removal or disqualification, of arbitrators.
  • Enforcing the arbitration agreement, including the application of any specific formal requirements (i.e. does the arbitration agreement have to be in a particular form in writing?). The courts of the seat may also assist in restraining tactical, or troublesome, litigation that is commenced in breach of the arbitration in another jurisdiction. The parties should investigate whether effective injunctive relief is available from the courts in this regard.
  • Challenging or enforcing the award. The courts of the seat should have the final word in determining any challenges to the award (or purported appeals). They may also be asked to enforce the award.
  • Whether the subject matter of any particular dispute is legally capably of being referred to arbitration. This is called 'arbitrability', and it can give rise to unforeseen complications. By way of example, the national arbitration laws of some jurisdictions may exclude disputes over natural resources or other interests deemed to be of national strategic importance from the jurisdiction of any arbitral tribunal.
What is the governing law of the arbitration clause? The arbitration clause itself is generally understood to be self-standing and separate from the underlying contract. It therefore has its own governing law, which may well differ from the law governing the main agreement between the parties.

Issues relating to the substantive validity, scope and meaning of the arbitration agreement (including issues as to the scope of the tribunal's jurisdiction) are governed by the proper law of the arbitration agreement.

Many arbitration clauses omit to specify this governing law, and so it falls to the courts of the seat or the arbitral tribunal to determine this. For example, the English Court of Appeal has said that absent an express choice governing the arbitration clause, the court will look to see whether there has been an implied choice. They will consider the closest and most real connection between the arbitration clause and any applicable law (Sulamerica CIA Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638). Applying that test can lead to the arbitration agreement being governed by the law of the seat, and not the law of the underlying contract.
What is the governing law of the contract? The governing law of the contract will determine the substantive rights and obligations of the parties, and will be applied to decide the claims on the merits. Again, the parties have freedom of choice, but it is a choice that should not be made lightly. The governing law can have a very real impact on the outcome of any dispute.

How not to draft your dispute resolution clause

In early November 2015, in Exmek Pharmaceuticals SAC v Alkem Laboratories Ltd [2015] EWHC 3158, the Commercial Court had to consider the following dispute resolution provision in a distribution agreement:

"Article 13: PROPER LAW

The proper law of this Agreement is the law of the UK, and the Parties submit to the exclusive jurisdiction of the Courts of the UK and of all Courts having jurisdiction in appeal from the Courts of the UK.

Article 14: ARBITRATION

All disputes and differences whatsoever which will at any time hereafter arise between the parties in relation to this Agreement which the Parties using their best endeavors in good faith cannot resolve shall be referred to arbitration before any legal proceedings are initiated. The arbitration shall be conducted in the UK in accordance with the provisions of the law in the UK in effect at the time of the arbitration and shall be conducted by one or more arbitrators appointed there under."

This is a terrible clause. It provides for two things (exclusive jurisdiction of the courts and arbitration) that are inconsistent and directly contradictory. The decision in Exmek is, however, the latest in a fairly long line of authorities where judges have had to wrestle with such provisions.

Burton J concluded that there was an effective arbitration agreement. Pausing here briefly, the general principles of contractual interpretation under English law will also apply to arbitration clauses (or mangled dispute resolution provisions). In summary, the contractual wording will be given the meaning it would have, objectively, to a reasonable person. If one particular reading of the words is more commercially sensible, then that meaning will be adopted. In the context of arbitration clauses, an additional principle comes into play. It militates in favour of upholding even badly drafted arbitration clauses. In Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, the House of Lords said:

"In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction. ... if any businessman did want to exclude disputes about the validity of a contract, it would be comparatively easy to say so."

This illustrates the wider notion that English law prefers to construe contractual provisions so that they are valid, rather than striking them down.

Saving the parties from their own drafting

Just how far the Commercial Court goes in interpreting the contractual wording in applying these principles can be seen from the following comparisons.

What the defective clause said What it really meant
What is the governing law? "... the law of the UK ..." The law of England and Wales (with apologies to Scotland and Northern Ireland).
Which courts have jurisdiction? "... the exclusive jurisdiction of the Courts of the UK and of all Courts having jurisdiction in appeal from the Courts of the UK ..." The Courts of England and Wales did not really have exclusive jurisdiction.

The Courts of Scotland and Northern Ireland did not have any jurisdiction.
Over what do these courts have jurisdiction? "... exclusive jurisdiction ..." Such matters as the English Courts are entitled to determine under the Arbitration Act 1996, in support of arbitration proceedings.
Do disputes have to be referred to arbitration? "All disputes and differences whatsoever which will at any time hereafter arise ... shall be referred to arbitration before any legal proceedings are initiated." All disputes and differences must be referred to arbitration.
What is the seat of any arbitration? "The arbitration shall be conducted in the UK ..." London (with apologies to the rest of the United Kingdom).
Is the arbitration final and binding? Nothing, beyond suggesting that there might be more 'legal proceedings' to come after a reference to arbitration. Definitely final and binding, because that is what Section 58(1) of the Arbitration Act 1996 says.

Burton J's decision in Exmek is the latest example of the English Courts striving to give effect to arbitration clauses, and construing any references to the courts having jurisdiction as being limited to the supervisory powers given to the court in support of arbitration proceedings under the Arbitration Act 1996 (other decisions include Axa Re v Ace Global Markets Ltd [2006] EWHC 216 and Paul Smith v H&S International Holding Inc [1991] 2 Lloyd's Law Rep).

Arbitration tends to win out where it makes an appearance in the contract, even in the face of references to the jurisdiction, or exclusive jurisdiction, of the Courts elsewhere. No doubt there is legal policy at play here, for it is difficult to justify how such inconsistent clauses can be construed harmoniously by reference to the established principles of contractual interpretation (of which 'rewriting the clause so that it makes sense' is not one).

If certain courts are given exclusive jurisdiction, then it is a leap to say that this exclusivity is meant to apply only to a very limited aspect of what would ordinarily fall within the purview of the courts - be it the supervisory functions in support of arbitral proceedings, or (perhaps even more artificially) only those disputes that arise under the particular provision in which the parties made reference to the courts.

The latter situation arose in Shell International Petroleum Co Ltd v Coral Oil Co Ltd [1999] 1 Lloyd's Law Rep 72. The pathological clause in that case stated:

"13. Applicable law

This Agreement, its interpretation and the relationship of the parties hereto shall be governed and construed in accordance with English law and any dispute under this provision shall be referred to the jurisdiction of the English Courts."

There are no prizes for guessing that Clause 14 went on to state that every dispute had to be submitted to arbitration. The way in which the court construed these two provisions harmoniously was to say that the English Courts had jurisdiction over all disputes concerning the applicable law. On that basis, if a party to this contract wanted to make a hopeless argument that any law other than that of England and Wales applied to anything regarding this contract, they had to go to the Commercial Court to be told 'no'. On this reading of the contract, arbitrators appointed under Clause 14 faced with the same untenable suggestion in an arbitration would have to decline to say 'no', and ask the parties to have the Court decide the point. It just seems implausible that any commercial party would have agreed to this arrangement. One may (perhaps safely) speculate that what really happened is that the parties stopped paying close attention to the contract when they reached Clause 13, and that, consequently, a mistake was made in what is still considered to be a 'boilerplate' clause.

A contrasting approach

Cases resolving conflicts between the courts and arbitration may be in a special category. This seems apparent when considering a recent, contrasting, example of the English Courts construing an arbitration clause that was internally inconsistent. The problem in that clause was that the objective reader did not know which kind of arbitration the parties had wanted, rather than the parties saying that they wanted 'court and arbitration' to apply.

In Shagang South-Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics [2015] EWHC 194, the Commercial Court set aside an arbitration award because the arbitrator had been appointed in the wrong seat. The decision illustrates that while the Courts will strive to uphold an unclear arbitration clause, they are less likely to step in and help a party who has embarked on the 'wrong kind' of arbitration proceedings under an ambiguous clause.

The arbitral seat is the juridical base of the arbitration. By selecting a given state as the seat of arbitration, the parties place their arbitral process within the framework of that state's national laws. The law of the seat (lex arbitri, or curial law) will define many of the procedural aspects of the arbitration. Although the seat is frequently the same as the hearing location, it does not have to be.

Shagang was a dispute concerning a cargo of steel that had been shipped out of China. The cargo was not discharged at the port of destination. The party who was meant to have received the steel incurred substantial costs. A settlement was reached, and the owners of the vessel sought to pass the loss on to the charterers.

The two key clauses of the fixture note for the charterparty (usually a short document) provided:

"23. ARBITRATION: ARBITRATION TO BE HELD IN HONG KONG. ENGLISH LAW TO BE APPLIED.

24. OTHER TERMS/CONDITIONS AND CHARTER PARTY DETAILS BASE ON GENCON 1994 CHARTER PARTY."

The Gencon 1994 form consisted of numbered boxes to be filled in. One such box was intended to deal with the arbitration clause for the charterparty in more detail than one would usually find on the fixture note. It listed out a number of sub-clauses of Clause 19, which all set out different arbitration proceedings. One of the provision was Clause 19 (a), which provided as follows:

"This Charter Party shall be governed by and construed in accordance with English law and any dispute arising out of this Charter Party shall be referred to arbitration in London in accordance with the Arbitration Acts 1950 and 1979 or any statutory modification or re-enactment thereof for the time being in force..."

However, Gencon 1994 also said that Clause 19(a) would apply if the parties did not choose any of these options, which they had not done. The claimants commenced arbitration proceedings in London, and purported to appoint a sole arbitrator under Clause 19(a).

If one were to take the holistic approach, and sought to construe the provision harmoniously, one might say that Clause 23 ("Arbitration held in Hong Kong") meant the place where the hearings were to take place. The expression 'holding a hearing' does not sound particularly odd. It could well be what the parties meant here. One might then go on to say that Clause 19(a) ought to have some meaning as well, as the parties do not lightly include superfluous words (or even entire redundant clauses) in their contracts. This provision also states that it was to apply 'by default', which points towards it being automatically effective. The reference to the precursors of the Arbitration Act 1996 suggests that this clause was intended to choose London as the seat. This would produce a harmonious result, with English law governing both substance and procedure of the arbitration.

That is not how the Court read the clause. Instead, Hamblen J focused on Clause 23, noting that it had two limbs, the first stating where the arbitration was "to be held", and the second what law was "to be applied". Even though the parties had not made reference to the 'place' of the arbitration (which is usually taken to mean the seat), the link they had made between the arbitration and Hong Kong was sufficient to bring with it the choice of Hong Kong law as the law of the seat. As the judge explained at paragraphs 19 to 22:

"It is logical and sensible for a dispute resolution clause to address both the issue of where and how disputes are to be resolved and the law governing such resolution and such clauses commonly do so. Agreeing that an arbitration is "to be held" in a particular country suggests that all aspects of the arbitration process are to take place there. That would include any supervisory court proceedings which might be required in relation to that process. Agreeing that a law is "to be applied" to disputes between parties is a common means of expressing a choice of substantive law, a choice that is frequently made express."

What of Clause 19(a)? The judge found that since the parties had adopted Hong Kong as the seat, Clause 19(a) could have no application as it was simply inconsistent.

While a governing is usually chosen expressly, the parties frequently do not say anything about which curial law (the law of the seat) they have chosen. References to 'holding' an arbitration somewhere, or it 'taking place' may well be taken to amount to a choice of seat. In particular, referring to the 'venue' for an arbitration is particularly likely to mean the seat. In Enercon GmbH v Enercon (India) Ltd [2012] 1 Lloyds Rep. 519, the parties had agreed that:

"The venue of the arbitration proceedings shall be London. The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply."

Applying the Indian Arbitration Act is inconsistent with the seat of the arbitration being in London (which leads to the English Arbitration Act applying). Nonetheless, Eder J found that the word 'venue' settled the question in favour of London as the seat, and so overrode an express reference to Indian legislation. The majority of the provisions of the Indian Arbitration Act would, however, only apply if the seat of the arbitration was India, so there seems to have been little point in making a reference to the whole statute unless it was meant to apply. In this particular case, one may wonder whether London as the seat did not benefit from a home advantage in the Commercial Court.

Conclusion

Badly drafted dispute resolution clauses still abound. The number of cases decided in the English Courts is testament to that. These decisions also show that where the Courts and arbitration clash in conflicting clauses, arbitration is likely to prevail. That bias is likely to reflect policy considerations, as the English Courts are strong supporters of arbitration. In some of the decisions, however, that support has led to the principles of contractual interpretation apparently being thrown overboard. The final word is, as always, pay close attention to your arbitration, and watch out for inconsistencies that will test the sanity of your lawyers creeping in.

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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