Companies in the energy sector make wide use of arbitration agreements. However, they are also well known to be very selective in picking and choosing when to use arbitration agreements and when not to. Normally whether arbitration agreements are used or not depends on the nationality of the parties, the nature of the contract, and the scope and location of the work being performed under it. Often in a project there will be many interlocking contracts. Only some of these contracts may contain arbitration agreements, with the parties deciding that some other contracts should contain another type of dispute resolution clause, either because of the scope of the work being performed or other factors.

A recent dispute in the energy sector provides an important reminder of the modern and liberalising approach of the English courts to the scope and effect of arbitration agreements. Where there was an arbitration on foot covering a dispute under a first contract, but where claims to set-off and counterclaims arose between the same parties from another (separate) contract that did not contain an arbitration agreement, these claims to set-off and counterclaims were held to fall within the jurisdiction of the arbitrator. If this result is a surprise.

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The Facts and the Decision

Over the last few years the wind has been blowing in the English courts towards an approach that arbitration agreements (i.e. arbitration clauses in contracts) should be interpreted widely, having regard to the intention of the parties and their commercial relationship, unless parties expressly provided for the contrary. In other words, a practical and commercially focussed interpretation of any arbitration agreement should be adopted (see Premium Nafta Products Limited & others v. Fili Shipping Company & others - sub-proceedings in the ongoing Fiona Trust proceedings) ( see link to law now dated 18.10.2007 entitled ""Arising under" or "arising out of" - it's all the same in arbitration clauses"). This trend, coupled with the principle that arbitration clauses will be enforced unless the parties clearly state otherwise ( see link to law now dated 08.02.2008 entitled "Arbitration clauses: courts demonstrate support") operates to limit the parties' ability to escape the applicability of an arbitration agreement.

In Norscot Rig Management PVT Ltd ("Norscot") v Essar Oilfields Services ("Essar") [2010] EWHC 195 (Comm), Norscot was appointed as Operations Manager for a semi-submersible drilling rig (the "Rig") by the Rig Owner, Essar, under an Operations Management Agreement ("OMA"). A dispute arose between the two parties and was brought by Norscot before a sole arbitrator pursuant to the arbitration clause contained in the OMA. In response to Norscot's claims, Essar raised claims to set-off and counterclaims which were based on another contract between the same parties ("the BOP Stack contract") and which related to the condition and fitness for purpose of a Blow Out Preventer Stack, an important piece of safety equipment which Norscot supplied to Essar and that Essar had refurbished and fitted to the Rig. The BOP Stack contract did not contain an arbitration clause.

The sole arbitrator concluded that he had jurisdiction to hear and determine Essar's claims to set-off and counterclaims. He stated in his award that "In the instant case it is not merely 'convenient' to have the set-off dispute decided under one roof, it is much more 'practicable' to do so in order to avoid, for example, inconsistent outcomes and increased costs".

Norscot challenged the arbitrator's jurisdiction under s.67 of the Arbitration Act 1996. In its challenge, which was brought before Burton J., Norscot said that Essar's claims for set-off or other counterclaims could only be brought under the BOP Stack contract and as a result did not fall within the scope of the arbitration, which had been commenced pursuant to the arbitration agreement contained in the OMA.

In UBS AG v HSH Nordbank AG [2009] EWCA Civ 585, which related to the construction of a jurisdiction agreement, the Court of Appeal supported the concept of a "one stop shop" for disputes arising between the same parties connected to the same commercial relationship, which the Court of Appeal called "one-stopness". On that basis, and on his analysis of the facts of the case, Burton J held that he had no difficulty agreeing with the arbitrator that the set-off and counterclaims brought by Essar either arose out, or were "related to", the OMA.

Commentary

In the energy sector, key commercial contracts, which are often of significant value, may well be governed by carefully negotiated arbitration agreements. This is particularly the case where the nationality of the parties or the scope and location of the work being performed under the contract make enforcement issues a factor. These key commercial contracts do not always constitute the entire relationship between contracting parties. There are often numerous smaller, ancillary contracts that surround the key commercial contract.

These smaller ancillary contracts often do not contain arbitration agreements, leaving disputes to be governed by local Courts. Where a dispute arises under one of these ancillary contracts, the parties may historically have considered that resolution by arbitration would be impractical. However, Norscot v Essar shows that, where there is a separate, but related, dispute under a key commercial contract containing an arbitration agreement, arbitrators may rightly conclude that the ancillary dispute should be heard as part of the wider arbitration. This can occur where the issues in the two disputes overlap to some degree or other, so that it is practical for the parties to arbitrate the disputes together under the arbitration agreement contained in the key commercial contract.

Such an approach should be welcomed. In the past, minor distinctions in wording of contracts could leave ancillary disputes outside the scope of an arbitration agreement. Whilst this case reflects an increasingly practical and commercially focussed attitude, providing streamlined dispute resolution, parties should proceed with caution as this modern approach may seek to capture any and all disputes between the contracting parties into a wider, all encompassing arbitration, should this situation arise. It is yet to be seen how strong a "relationship" may be needed between the separate disputes for this principle to be applicable. As a result, sector participants should be careful to exclude from any broader arbitration agreement any contract that needs different treatment, and ensure that the dispute resolution provisions in all their contracts accurately reflect how the parties wish any dispute to be determined. Equally, it is important for parties to consider the arbitration institution (if any) and applicable rules under which the parties wish to have their disputes determined when negotiating arbitration agreements, as the choice of rules may have an impact on the likelihood of a consolidation of proceedings.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 25/03/2010.