United States: No Room At The Court - Emergency Arbitrator Provisions

Last Updated: January 24 2017
Article by Ryan S. Deane

Introduction

In the recent case of Gerald Metals SA v The Trustees of the Timis Trust & others [2016] EWHC 2327, the English Commercial Court has considered the effect of emergency arbitrator provisions on the scope of the court's jurisdiction to grant interim relief under section 44 of the Arbitration Act 1996. The decision has important consequences for parties to arbitration agreements incorporating the rules of any arbitral institution, such as the ICC, SIAC or LCIA, which include emergency arbitrator provisions.

Background

The claimant, Gerald Metals, was a Swiss company engaged in commodities trading. It entered into an 'Offtake Contract' with a company called Timis Mining Corp (SL) Limited ("TMC"), which owned an iron ore mine in Sierra Leone called the Marampa mine. The contract was a form of financing arrangement, whereby Gerald Metals advanced US$50 million to TMC to finance the development of the Marampa mine. TMC agreed to sell the iron ore extracted from the mine to Gerald Metals, and to deliver it in monthly shipments. The sum advanced by Gerald Metals was to be repaid, with interest, in monthly instalments which were to be deducted from the price of the iron ore shipments.

TMC was ultimately owned by the Timis Trust, a discretionary trust governed by the law of the Cayman Islands. The main beneficiary was the eponymous Mr Timis, a businessman in the mining industry, and the sole trustee was a Panamanian company called Safeguard Management Corporation ("Safeguard").

Before entering into the Offtake Contract Gerald Metals insisted on two things. First, a letter from Safeguard giving details of the assets held by the Timis Trust. Second, that Safeguard provide a guarantee of all sums due to Gerald Metals under the Offtake Contract up to a maximum amount of $75 million. Safeguard duly complied with both requests. The guarantee was governed by English law and provided for disputes to be referred to arbitration in London under the LCIA Rules.

It wasn't long before there were serial defaults under the Offtake Contract. TCM failed to make both the required shipments of iron ore and the required payments. The amount outstanding quickly surpassed the $75 million cap in the guarantee. Unsurprisingly, Gerald Metals commenced LCIA arbitration proceedings against Safeguard under the guarantee for $75 million.

At the same time Gerald Metals began to suspect that the information it had been provided on the assets held by the Timis Trust was incorrect. In particular there was a dispute about whether the trust assets had ever included an interest in certain offshore oil concessions in Senegal or whether that asset had simply been transferred out of the trust since the Offtake Agreement had been entered into.

Gerald Metals became worried that Safeguard would dispose of the Timis Trust's assets before the arbitral tribunal was constituted. It therefore applied to the LCIA for the appointment of an emergency arbitrator, with a view to seeking an order compelling Safeguard to disclose full details of the trust's assets and preventing Safeguard from disposing of those assets.

Safeguard responded to the application by giving undertakings that it would not dispose of any assets other than for full market value and at arm's length, and would give seven days' notice to Gerald Metals before disposing of any asset worth more than Ł250,000. On the strength of those undertakings the LCIA rejected Gerald Metals' application for the appointment of an emergency arbitrator.

Undeterred, Gerald Metals issued proceedings in the English Commercial Court seeking the same order under section 44 of the Arbitration Act 1996, which provides:

"(3)If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets.

(4)If the case is not one of urgency, the court shall act only on the application of a party to the arbitral proceedings (upon notice to the other parties and to the tribunal) made with the permission of the tribunal or the agreement in writing of the other parties.

(5)In any case the court shall act only if or to the extent that the arbitral tribunal, and any arbitral or other institution or person vested by the parties with power in that regard, has no power or is unable for the time being to act effectively."

The question for the judge, Mr Justice Leggatt, was whether the court had the power to make the requested order in the circumstances described.

Limitations on the court's power to grant urgent relief

Leggatt J began his judgment by noting the common ground between the parties that the test of urgency under section 44(3) was to be assessed by reference to whether the arbitral tribunal has the power and the practical ability to grant effective relief within the relevant timescale. The former is determined by reference to the parties' arbitration agreement, and the latter by reference to whether the members of the tribunal are able to exercise those powers in practice. With this in mind, Leggatt J turned to examine the LCIA Rules to determine whether the tribunal on the current facts could be said to have the necessary power and practical ability.

Article 9A of the LCIA Rules gives parties the right to apply to the LCIA court to expedite the formation of the arbitral tribunal "in cases of exceptional urgency". Article 9B allows a party to apply "in cases of emergency" for the immediate appointment of a temporary sole arbitrator who is to decide any claim for emergency relief within 14 days.

However, Article 9.12 contained a caveat to Article 9B:

"Article 9B shall not prejudice any party's right to apply to a state court or other legal authority for any interim or conservatory measures before the formation of the Arbitration Tribunal; and it shall not be treated as an alternative to or substitute for the exercise of such right."

It was not in contention that there would be certain situations where the need for relief is so urgent that even the power to appoint an emergency arbitrator is insufficient and recourse to the court may properly be had under section 44 of the Arbitration Act. Such situations would include applications for freezing orders where the risk of dissipation of assets is immediate, or indeed any other type of application that is made without notice. Under the LCIA rules each party must be notified of all types of application, which would frustrate the purpose of those sensitive applications.

As Gerald Metals had been refused their application to appoint an emergency arbitrator by the LCIA, it was forced to make a rather contorted argument in the Commercial Court. It argued that there was a gap in the LCIA rules which exists in cases which are not emergencies or of such exceptional urgency as to justify the appointment of an emergency arbitrator for the purposes of the LCIA rules, but which are nevertheless cases of urgency within the meaning of section 44(3) of the Arbitration Act.

Leggett J rejected this argument, and held that such a construction of the LCIA rules would be both uncommercial and unreasonable. The obvious purpose of Articles 9A and 9B was to reduce the need to invoke the assistance of the court in cases of urgency by enabling an arbitral tribunal to act quickly in an appropriate case. In order to make commercial sense of the provisions a similar interpretation of Articles 9A and 9B needed to be adopted as has been given to section 44(3) of the Arbitration Act.

In other words, the test of 'exceptional urgency' in the LCIA rules is also based on whether effective relief could be granted within the relevant timescale, which for these purposes is the time it would take to form an arbitral tribunal. Similarly, under Article 9B the test of what counts as an 'emergency' is based on whether the relief is needed more urgently than the time that it would take for the expedited formation of the arbitral tribunal. It is only in cases where those powers are inadequate, or where the practical ability is lacking to exercise those powers, that the court may act under section 44. The LCIA rules and the Arbitration Act stand back to back; there is no gap in between.

Neither did Article 9.12 in the LCIA rules assist Gerald Metals. That rule made it clear that Article 9B is not intended to prevent a party from exercising a right to apply to the court. It did not follow, however, that those powers of the court could not be themselves limited by Article 9B, as in fact they were pursuant to section 44 of the Arbitration Act. The entire purpose of that section was to respect parties' autonomy to give priority to an arbitral tribunal with respect to emergency interim relief.

Gerald Metals made a final argument that in rejecting the application for an emergency arbitrator to be appointed the LCIA had in fact taken a narrower view of the extent of its own powers. Therefore even if that interpretation of the LCIA rules was correct, there remained a gap in the "practical ability" of a party in the position of Gerald Metals to obtain relief.

Leggatt J dismissed this argument by stating that there was no evidence from which to infer that the LCIA had taken a restrictive view of its own powers. It had, in his view, made an eminently reasonable decision on the facts. The judge held that if he was wrong about the interpretation of the Arbitration Act he would in any event have refused the requested orders on the same grounds that the LCIA had refused to appoint an emergency arbitrator, namely that the undertakings given by Safeguard were sufficient to negative any 'urgency' there might otherwise have been.

Comment

The decision is a welcome clarification on the interaction of institutional rules containing emergency arbitrator provisions and section 44 of the Arbitration Act. The question had been raised, but not answered, by Ramsey J in a case that involved an old version of the ICC rules, which did not include emergency arbitrator provisions: Seele Middle East Fze v Drake and Scull Int Sa Co [2013] EWHC 4350 (TCC).

Since that decision there had been speculation among practitioners about how willing the court would be to limit their own powers to grant urgent interim relief. It is now clear that emergency arbitrator provisions will operate to limit the court's section 44 power to cases that are too urgent to wait for the appointment of an emergency arbitrator. Given that the LCIA rules provide that an emergency arbitrator will be appointed within three days of an application to the LCIA court, it will only be in the most urgent situations that a party should consider applying to the court.

It will be a surprise to many that the court interpreted Article 9.12 of the LCIA rules as restricting the court's power to grant interim relief. It was generally thought that the effect of that clause, and similar clauses, was to provide an additional, rather than an alternative, form of relief (as the clause expressly states). However, the Gerald Metals decision is consistent with the modern approach of the courts in presuming that parties intend for their disputes to be adjudicated in one forum. This "presumption in favour of one-stop adjudication" can be traced back to Azov Shipping Co v. Baltic Shipping Co (No 1) [1999] 1 Lloyd's Rep 68, but the leading modern case is the House of Lords decision in Fiona Trust & Holdings v. Privalov & others [2007] Bus LR 1917.

It remains to be seen what exceptions to this position the courts may carve out in future. Leggatt J was clear that the court could intervene at any time if the tribunal did not have either the power or the practical ability to grant the requested relief. Institutional rules often give wide ranging powers to tribunals to grant interim relief, which suggests that the main limitation will be whether the tribunal has the practical ability to exercise those powers.

There are various circumstances in which parties may seek to argue that the tribunal lacks the requisite practical ability. A request for a freezing injunction which covers assets held by a third party is a prime example, as only a court order will bind the third party. The same reasoning applies to any order the aim of which is to require a third party to act, or desist from acting, in a particular way.

There is a good argument that if a set of institutional rules prevent a party from making a without notice application, as the LCIA rules do, the tribunal does not have the practical ability to make any order that would normally be made without notice in court proceedings. To hold otherwise would be to preclude a party from obtaining such relief effectively in any forum.

Emergency arbitrator provisions are relatively new in the world of arbitration and various teething problems have been emerging, such as the current grey area over the enforceability of an emergency arbitrator's decisions, even if contained in an award. To avoid becoming guinea pigs in future applications to the court, parties entering into an arbitration agreement incorporating institutional arbitral rules may wish to consider opting out of the emergency arbitrator provisions, at least until the dust has settled on the various test cases that will invariably end up in front of a High Court judge.

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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