UK: Should Security Be Available Outside England For GAFTA Arbitration? – The Trade Must Decide

The Domicile Clause in each GAFTA contract states:

All GAFTA contracts also include a Scott- Avery clause which reads:

Scott -v- Avery clauses were subjected to judicial criticism by the Court of Appeal in Toepfer International -v- Societe Cargill, France [1997] 2 Lloyd’s Rep 98, 106 as the court pointed out that they created an anomaly between the right of the Claimant to apply to the English court for ancillary relief, including a freezing order against the English assets of the Respondent, and the prohibition against the Claimant obtaining the very same relief abroad. However, it must be assumed that the trade wished to maintain this anomaly as the Domicile Clause was amended to achieve precisely this purpose.

This raises the question of whether an English court will grant injunctive relief to stop a party, in breach of the Domicile Clause, taking steps abroad to obtain security for their claim (an "anti-suit injunction"). This point has been considered very recently by the Court of Appeal in Through Transport Mutual Insurance Association (Eurasia) Limited -v- New India Assurance Co Limited [2005] 1 Lloyd’s Rep, 67.

Before considering this decision, it is useful to refer to two recent cases of the European Court of Justice ("ECJ") in relation to the Judgments Regulation 2000 ("JR"). This is a revised Convention which was originally entered into between member states of the EU in 1968 and which contains detailed rules for establishing jurisdiction and enforcement of judgments within the EU. It applies to parties who are both resident within and outside the EU provided the proceedings take place within the EU. In Erich Gasser -v- Misat (C – 116/02 ) the ECJ held that if proceedings are brought within the courts of an EU state in breach of an exclusive jurisdiction clause the court first seized of jurisdiction must nevertheless determine the validity of the exclusive jurisdiction clause even though those proceedings may have been brought in a state other than that agreed to in the clause. The Court second seized must stay its proceedings pending the decision of the Court first seized. The rationale for the judgment is that the courts of EU states will have mutual respect for each other’s laws and uphold exclusive jurisdiction clauses.

The second decision is that in Turner -v- Grovit (C – 159/02 (2004)) where the ECJ held that the practice of the English courts in granting anti-suit injunctions restraining a party from continuing with proceedings abroad in breach of an English exclusive jurisdiction clause, must be regarded as being in breach of the principles of comity as set out in the JR and that such injunctions could cause affrontery to the foreign court even though they are directed to the party and not to the foreign court.

The result of the above two decisions is that in proceedings in the EU it is no longer possible to apply to the English court to seek an anti-suit injunction restraining proceedings in another EU state in breach of an exclusive jurisdiction clause.

In Through Transport -v- New India Assurance the court had to consider whether the same principles applied to English arbitrations. In Van Uden Maritime -v- KG in Firma Deco-Line (Case C-391-95), the ECJ held that a court in the EU may have jurisdiction to order provisional or protective measures within the EU under Article 31 of the JR even where the merits of the claim have to be decided in arbitration. The ECJ held that provisional measures are not in principle ancillary to arbitration but are ordered in parallel to such proceedings and are intended as measures in support. The ECJ therefore held that a party could apply for security for his claim within the EU even though such claim was to be brought in arbitration.

Notwithstanding the decision in the Van Uden case, the Court of Appeal held in Through Transport that the JR had no application to arbitration and therefore the decisions in the Erich Gasser and Turner -v- Grovit cases had no application. The court was of the view that, in appropriate circumstances, there was nothing to prevent the English court from granting an anti-suit injunction to restrain court proceedings abroad in breach of a London arbitration clause.

The question remains whether this reasoning applies to a Claimant who attaches the Respondent’s assets within the EU as security for his GAFTA arbitration. On its face, the Through Transport case suggests that the English courts will uphold the GAFTA domicile clause and restrain, by means of an anti-suit injunction, a party who seeks security for his claim in another EU state. However, it is possible that the English courts could be persuaded to interpret the decision in a restrictive fashion and hold that the reasoning in the case applies only to foreign substantive proceedings brought on the merits of the dispute in breach of the arbitration clause and that it does not apply to a party seeking to exercise the right granted to him by Article 31 of the JR to obtain security for his claim in arbitration. This raises the issue of whether parties can contract out of Article 31. The answer will need to await further developments in England. If, in future, the English courts hold that the GAFTA Domicile and/or Scott -v- Avery clauses are contrary to the provisions of the JR, which has the force of law in the UK, then this will create a further anomaly as the English Court would then not be able to grant an anti-suit injunction restraining a party from obtaining security for his GAFTA claim within the EU but they would be able to do so if such proceedings were taken outside the EU.

The Through Transport case raises important questions as to the future of the GAFTA Domicile and Scott -v- Avery clauses. At the present time the arbitration rules of a number of the commodity arbitrations in London contain a Scott -v- Avery provision. The question is whether in modern day trading conditions such clauses have out served their purpose. Today world trade is truly global and the sums involved, particularly if there is a default, are very large. It is well known that in some parts of the world it is extremely difficult or time consuming to enforce arbitration awards. Some unscrupulous Respondents take advantage of such matters and there is a real risk of awards not being enforced, or of prolonged delays in enforcement, when trading with companies in certain jurisdictions. If security could be obtained abroad for GAFTA arbitration such risks would be avoided. The contrary argument is that the parties may spend a considerable amount of time and money in fighting preliminary battles in foreign jurisdictions relating to their assets being attached which deflect from their objective in obtaining a speedy award before GAFTA.

As the heading of this article suggests, in the final analysis (at least as regards proceedings outside the EU) it is for the trade to decide whether or not they wish to exclude a party from bringing court proceedings outside England ancillary to the GAFTA arbitration, including the right to obtain security for their claim.

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.