REUTERS | Ali Jarekji

Preserving the right to arbitrate: where are the boundaries to an arbitration agreement?

Whether it is in the context of a jurisdiction challenge or by way of response to an application to restrain proceedings said to be in breach of an arbitration agreement, the wording of the arbitration clause is the usual starting point for determining the arbitrability of a dispute. The courts will be generous in their construction of an arbitration clause guided by the now well-known principles found in Fiona Trust, namely that:

  • One should assume that rational businessmen are likely to have intended any dispute arising out of the relationship which they have entered or purported to enter to be decided by the same tribunal.
  • An arbitration agreement is a distinct and separable agreement so that an attack on the validity of the main agreement does not necessarily entail the invalidity of the arbitration agreement.

Nevertheless, there remain certain types of dispute which are not arbitrable. In particular, a dispute will not be capable of settlement by arbitration if it involves an issue of public policy, public rights, or the interests of third parties. The difficulty is to determine where the boundaries lie. When does the principle of kompetenz-kompetenz give way to public policy or public rights?

The courts have confirmed that civil law claims which involve allegations of criminality are arbitrable: London Steamship Owners’ Mutual Insurance Association Ltd v the Kingdom of Spain. They have likewise held that disputes among shareholders giving rise to a claim of unfair prejudice are capable of being resolved by arbitration; see Fulham Football Club (1987) Ltd v Richards.

In two recent cases, the issue of arbitrability has come up in the context of claims involving the insolvency law of a foreign state and claims involving the constitutional law of another state. In Nori Holding Ltd v PJSC Bank Otkritie Financial Corporation, Males J (as he then was) had to consider, among other things, whether a final anti-suit injunction could be brought to restrain proceedings brought in accordance with the insolvency law of a foreign state (Russia) to set aside transactions at an undervalue.

The defendant argued that rights created by statutory avoidance provisions exist for the benefit of the general body of creditors in any insolvency or insolvency-related context and that a company’s pre-insolvency management would not ordinarily contemplate including avoidance claims within the scope of an arbitration agreement. Accordingly, the defendant submitted that an arbitration clause in wide general language should not be construed as extending to a claim in insolvency proceedings; alternatively, that the claims were non-arbitrable as a matter of both the governing law and as a matter of Russian law. In support of its arguments, the defendant relied not only on the Fulham FC case but also a decision of the Singapore Court of Appeal, Larsen Oil & Gas Pte Ltd v Petroprod Ltd.

The court rejected the defendant’s arguments, holding that in the absence of any express exclusion of disputes of any kind, wide and general language in an arbitration clause such as “any dispute or disagreement arising under, or in connection with this Agreement” means what it says. Further there is no basis for any implied limitation on the scope of such language whether or not the claim is otherwise arbitrable. Accordingly, the court held that, contrary to the position under Singaporean law, English law does not start from a presumption that avoidance claims made in the context of a party’s insolvency will fall outside the scope of the arbitration clause.

Turning to the question of whether the Russian proceedings went to matters which were non-arbitrable, the court said that what mattered was the substance, not the form, of the claims. In this case, the dispute was a straightforward factual dispute as to whether the transactions constituted a fraud on the bank to replace valuable secured loans with worthless bonds. If so, the bank would have a claim to avoid the transactions and require the claimants to reinstate the position existing before the transactions were carried out.

Whatever label was applied to the proceedings, the essential dispute was the same. The arbitrators could decide whether the claimants had defrauded the bank and, if so, grant any remedy to which the bank might be entitled. Importantly, there was no remedy claimed, such as a winding-up order, which could have affected the status of the bank or the position of third parties in such a manner as to take the case beyond the consensually derived jurisdiction of the arbitrators. The court, therefore, concluded that the claims made in the Russian proceedings were arbitrable and could be restrained by an anti-suit injunction.

Again, the court took a different approach to that of the Singaporean courts. In particular, the court rejected any submission that arbitration in itself represents a deprivation of inalienable rights. Rather, arbitration is merely an alternative method of resolving disputes.

In Nori, the court also rejected the possibility that the dispute was one which had to be decided in two stages, with the arbitrator deciding the factual issues and leaving it to the Russian court to decide the remedy to which the bank was entitled. The possibility of such a two-stage process was one to which the court (Knowles J) returned in Aqaba Container Terminal (PVT) Co v Soletanche Bachy France SAS.

In Aqaba, the claimant sought a permanent anti-suit injunction to restrain Jordanian proceedings in connection with disputes under a construction contract. In those proceedings, the defendant alleged that certain provisions of Jordanian law were unconstitutional and that the construction contract, which had been entered into pursuant to those provisions, was null and void. The claimant sought to restrain the Jordanian proceedings on the basis that the relief sought in relation to the construction contract was a breach of the arbitration agreement. It was common ground between the parties that, as a matter of Jordanian law, the defendant had to claim to invalidate the construction contract in order to have any locus or standing to pursue a constitutional claim.

The court rejected the defendant’s argument that the claim to invalidate the construction contract was not arbitrable. That claim, the court held, was plainly within the language of the arbitration agreement and was governed by the law of the contract, namely English law. What was not arbitrable was the constitutional claim to invalidate the provisions of Jordanian law. The court did not accept the defendant’s argument that the claim to invalidate the construction contract fell within the constitutional claim.

What both Nori and Aqaba highlight is that the English courts continue to embrace the principles laid out in Fiona Trust and carefully scrutinise any claim that a dispute raises issues which are not arbitrable. Simply because a dispute arises in the context of one party’s insolvency will not mean that the dispute falls outside the scope of an arbitration agreement in the absence of a suitably worded express exclusion. Similarly, where elements of a dispute raise issues which are not arbitrable, that does not mean that the dispute as a whole will not be subject to the parties’ arbitration agreement. Where a party is in substance seeking to enforce contractual rights against another party or is seeking to set aside or invalidate the contract, the court will continue to enforce the arbitration agreement. It will do so even if there are related public law issues which are properly the subject of separate proceedings, possibly in another jurisdiction.

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