As the UK continues to enjoy some of the coldest weather of its winter so far, why not visit the Caribbean? Or, more precisely, the English High Court’s decision last November in Petroleum Company of Trinidad & Tobago Limited v Samsung Engineering Trinidad Co. Ltd, which dealt with a challenge to a tribunal’s partial award under section 67 of the Arbitration Act 1996 (AA 1996).
Section 67(1) provides that a party to arbitral proceedings may apply to the court challenging any award of the arbitral tribunal as to its substantive jurisdiction.
As well as considering whether Petrotrin’s challenge properly arose under section 67, the judgment of Coulson J contains other interesting points for international arbitration practitioners, such as the significance of agreed “Terms of Reference” within International Chamber of Commerce (ICC) arbitral proceedings in defining the tribunal’s jurisdiction, and how those terms can and cannot be extended in the subsequent arbitral proceedings.
The case is of particular interest to those of us advising on cross-border infrastructure projects where construction and engineering contracts are often “split” into separate onshore and offshore portions.
Background: “splitting” onshore/offshore contracts
Broadly speaking, this is normally done to help prevent the contractor from exposing its offshore scope of supply to local taxation onshore in the project site country, thereby achieving tax advantages for the contractor which (in theory) should also benefit the contractor’s client in the form of lower project costs.
Such schemes rely on the parties entering into three main contracts:
- An offshore contract between the client and an engineering contractor (for example, for design, engineering, and supply of equipment from outside the project site country).
- An onshore contract between the client and the contractor’s local affiliate in the project site country (for example, for locally-procured items and possibly site labour to support installation, commissioning and other activities at site).
- A tripartite “umbrella” or “bridge” agreement between the client, the offshore contractor, and the onshore contractor. The client does not want to be prejudiced by the split-contract structure and must ensure that the onshore/offshore contracts will still work together as one coherent whole. For example, the client does not want to allow the onshore contractor to claim extensions of time or more money where the delay/cost is attributable to the offshore contractor’s default.
This case is striking in the way that the split-contract structure led to a dispute over the arbitral tribunal’s findings as to its own jurisdiction.
To procure works at its refinery in Trinidad, Petrotrin signed the “Onshore Agreement” with Samsung, an “Offshore Agreement” with Samsung’s affiliate SECL, and an umbrella/bridge agreement among the three parties, called, in this case, the “Linkage Agreement”.
Disputes arose and Samsung commenced ICC arbitration proceedings for US $10.45 million against Petrotrin, which in turn counterclaimed delay liquidated damages for late completion of the works. There was an issue as to whether the “cap” on Samsung’s liability for delay liquidated damages was 10% of the “Contract Price” for only the onshore portion, as defined in the Onshore Agreement, or instead 10% of the “Total Agreement Price” for the combined total of the onshore and offshore portion as defined in the Linkage Agreement. The Onshore Agreement and Linkage Agreement appeared inconsistent in this regard. As is common practice, the Linkage Agreement contained a priority clause to the effect that the Linkage Agreement prevailed over the Onshore/Offshore Agreements in the event of disputes over interpretation.
The tribunal found Samsung liable for delay and the question of the cap became significant: if the lower (onshore only) liquidated damages cap applied then Petrotrin’s counterclaim was worth US $9.3 million, making Samsung the overall winner of the arbitration, whereas if the higher (onshore plus offshore) cap applied, the counterclaim was worth US $11.6 million and Petrotrin would be the overall winner.
In a partial award, the tribunal decided in Samsung’s favour that the lower delay liquidated damages cap applied:
- The tribunal decided that its jurisdiction arose from the arbitration agreement within the Onshore Agreement only, which was also reflected in the agreed Terms of Reference, pursuant to Article 23 of the ICC Rules, and accordingly the provisions of the Onshore Agreement (not the Linkage Agreement) governed the position on Samsung’s liability cap.
- On the question of construction, the tribunal construed the liability cap in the Linkage Agreement as being consistent (not in conflict) with the liability cap in the Onshore Agreement. This was achieved by reading the Linkage Agreement as a long-stop limit for the aggregate of liquidated damages under all three agreements, which sat above the liability cap for the Onshore Agreement.
Petrotrin’s section 67 challenge in the English High Court (TCC)
In the Technology and Construction Court (TCC), Petrotrin sought to set aside/vary the partial award pursuant to section 67 of the AA 1996. The court held that the tribunal had decided the liability cap point against Petrotrin primarily as a matter of construction (not jurisdiction), which was not something that the court could interfere with on a section 67 application.
Having already rejected the section 67 application by reference to construction, the court went on to consider (in the alternative) whether Petrotrin’s application raised a proper challenge to the tribunal’s decision on substantive jurisdiction. It was held that the tribunal correctly decided that its appointment and jurisdiction arose only under the Onshore Agreement, for the following reasons:
- The agreed Terms of Reference made clear that disputes arose under the Onshore Agreement.
- The commonly included wording in the Terms of Reference, to the effect that the Terms were intended to satisfy Article 23(1) of the ICC Rules and were not an exhaustive list of claims/relief sought (plus specific additional wording in the Terms purporting to reserve Petrotrin’s right to rely on the Offshore Agreement and Linkage Agreement), were not sufficient to vary/extend the tribunal’s jurisdiction beyond the Onshore Agreement, in circumstances where Petrotrin did not subsequently seek to amend or even clarify the Terms of Reference, nor issue a request for arbitration under the Offshore Agreement, and seek to have those proceedings consolidated with the Onshore Agreement dispute.