Practical Law

Two recent decisions of the English High Court have shed welcome light on the applicability and operation of section 67 of the Arbitration Act 1996 (AA 1996), which permits a party to apply to the court to challenge the substantive jurisdiction of an arbitral tribunal.

Republic of Sierra Leone v SL Mining Ltd

The case of Republic of Sierra Leone v SL Mining Ltd is particularly noteworthy. It is the first detailed consideration of the distinction between jurisdiction and admissibility in English law in the context of a jurisdictional challenge under section 67 of the AA 1996.

Key issues under consideration 

The claimant (respondent in the arbitration), the Republic of Sierra Leone, challenged the arbitral tribunal’s decision in the underlying ICC arbitration that it had substantive jurisdiction to decide the matters in dispute, being the claims of the defendant (claimant in the arbitration), SL Mining Ltd, concerning Sierra Leone’s suspension and ensuing cancellation of a large-scale mining licence.

Relevantly, the arbitration clause in the contract, clause 6.9(c), provided that:

“[…] in the event that the parties shall be unable to reach an amicable settlement within a period of three months from a written notice, either party may submit the matter to the exclusive jurisdiction of a board of three arbitrators.“

In short, SL Mining commenced arbitral proceedings by service of the request for arbitration on 30 August 2019, prior to the expiration of three months following the service of the notice of dispute on 14 July 2019. Sierra Leone argued that because of this, the tribunal lacked jurisdiction to determine the dispute. The parties also made submissions with respect to:

• Ancillary issues as to Sierra Leone’s alleged consent or waiver to the issue of the request for arbitration.
• The proper construction of clause 6.9(c) of the contract, and upon that construction, whether or not SL Mining was in breach.

Judgment

The decision was in favour of SL Mining on all issues. With respect to jurisdiction and admissibility, consistent with international authorities, Sir Michael Burton GBE sitting as judge of the High Court (Burton J), held that in the circumstances of the case, compliance with a condition precedent to arbitration in the form of a pre-arbitration negotiation period is a question of admissibility that must be considered by the tribunal, and not one of jurisdiction that can rightly be challenged by way of an application pursuant to section 67 of the AA 1996.

In making this finding, Burton J noted and considered the considerable academic authority addressing the distinction between “substantive jurisdiction” (ordinarily issues relating to whether a claim could be brought to arbitration) and admissibility (ordinarily issues relating to whether a claim should not be heard by the arbitrators at all, or at least, not yet). He ultimately declined to follow long-criticised first instance decisions, namely Emirates Trading Agency LLC v Prime Mineral Exports Ltd and Tang v Grant Thornton International Ltd, in which the threshold admissibility point was not argued by the parties and it was assumed that the points in question related to jurisdiction under section 67.

Black Sea Commodities Ltd v Lemarc Agromond PTE Ltd

In contrast, the decision of Black Sea Commodities Ltd v Lemarc Agromond PTE Ltd, also handed down by Burton J on 15 February 2021, dealt with a more typical jurisdictional issue of whether a valid arbitration agreement existed between the parties.

Key issues under consideration 

This case involved a challenge by the claimant, Black Sea Commodities Ltd, under section 67 of the AA 1996, of an arbitral award on jurisdiction, liability and quantum, in favour of the defendant, Lemarc Agromond PTE Ltd. The key issue for determination was whether the tribunal had jurisdiction to decide that there was a binding arbitration agreement in place between Black Sea Commodities and Lemarc in respect of a sale agreement regarding a consignment of Ukrainian corn FOB Odessa. The tribunal determined that the sale agreement was concluded on 9 March 2018, at which point all key terms had been agreed.

Crucial to this case was the parties’ exchange of numerous iterations of draft conditions containing a Grain and Feed Trade Association (GAFTA) arbitration clause between 12 and 14 March 2018. Black Sea Commodities argued that irrespective of whether there was a binding sale agreement on 9 March 2018, there was no binding arbitration agreement between the parties because the draft conditions (which contained the arbitration clause) were never agreed prior to the breakdown of the parties’ negotiations on 14 March 2018.

In reliance upon the case of Fiona Trust v Privalov (where Lord Hoffmann noted that businessmen frequently want the question of the validity of their contracts and similar issues submitted to arbitration, and the law should not place conceptual challenges in their way), Lemarc’s primary position was that the sale agreement concluded on 9 March 2018 was later varied or supplemented so as to include the GAFTA arbitration provision because, while there was not agreement on all amendments proposed in the draft conditions exchanged by the parties, no objection was raised by either party as to the GAFTA clause, and this constituted agreement to the clause by conduct.

Lemarc also put forward an alternative submission, by late amendment at the hearing, that the contract of sale contained a term implied by trade or custom, namely a GAFTA arbitration clause.

Judgment

The case was decided in favour of Black Sea Commodities. After duly discussing the relevant authorities, Burton J held that no arbitration agreement existed on the facts of the case. Critically, there was no consensus ad idem to the arbitration clause during the parties’ exchanges. Moreover, it was not one of the terms set out in the sale agreement achieved on 9 March 2018, nor was it subsequently agreed in the ensuing exchanges of draft conditions between 12 and 14 March 2018, whether by partial acceptance of terms not rejected (referred to by Burton J as a “pick and mix” approach), progressive supplementation or silent agreement by conduct.

Regarding whether the GAFTA arbitration clause could be implied by trade or custom, Lemarc was unable to persuade Burton J that, in this instance, there was a trade custom or usage binding in the market, in the sense that all contracts regarding the trade of Ukrainian corn FOB Odessa invariably contained such a provision. The evidence was limited to the testimony of one of Lemarc’s lay witnesses, which merely revealed his own practice, but not that of the relevant trade. Burton J described the argument as an “afterthought”, remarking that there was a general absence of the evidence that is normally produced in such trade or custom cases, including evidence from experts, other traders and documentation.

As no arbitration agreement was found to have existed, the section 67 challenge was successful.

Concluding thoughts

The SL Mining case provides welcome clarification on the admissibility and jurisdiction distinction under section 67 of the AA 1996. The decision is not the subject of an appeal and now stands as the key authority on the matter. It reinforces the need to take care when advising clients on the prospects of a jurisdictional challenge, especially with respect to issues relating to the prematurity of arbitral proceedings.

Furthermore, the case of Black Sea Commodities serves as a reminder that should an issue of jurisdiction arise, it should be given prompt and careful consideration. Even after the rendering of a final award in one party’s favour, following the conclusion of potentially costly arbitral proceedings, there may be a real risk that an award could be successfully challenged and set aside, leaving the parties with little option but to re-litigate the matter in court.