English High Court rejects ICC arbitral award

J (Lebanon) v K (Kuwait) [29.03.19]

Date published

30/08/2019

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In New York Convention enforcement proceedings, the English High Court rejected a majority ICC arbitral award on the grounds that the tribunal incorrectly determined its jurisdiction.

Background

A dispute arose under a Franchise Development Agreement (FDA) entered into between J and Z. Pursuant to this agreement, J granted Z an exclusive licence in respect of a system of marketing, preparation and sale of food products. The law and jurisdiction clauses of the FDA provided for disputes (with one exception) to be referred to ICC arbitration.

A jurisdictional issue arose as to whether K had become a party to the FDA and to the arbitration agreement contained within it (an arbitration agreement being a separate agreement from the main contract).

Background analysis

The arbitration agreement stated:

14.3 The arbitrator(s) shall apply the provisions contained in the Agreement. The arbitrator(s) shall also apply principles of law generally recognized in international transactions. The arbitrator(s) may have to take into consideration some mandatory provisions of some countries i.e., provisions that appear later on to have an influence on the Agreement. Under no circumstances shall the arbitrator(s) apply any rule(s) that contradict(s) the strict wording of the Agreement.

14.5 The arbitration shall be conducted in the English language, in Paris, France.

15. This Agreement shall be governed by and construed in accordance with the laws of England.

The ICC tribunal determined that the issue of whether or not K was bound by the arbitration agreement was a matter of French law (Paris, France being the seat of the arbitration), but that the issue as to whether there had been a transfer of rights or obligations under the FDA to Z was a matter of English law (as the substantive law of the FDA), supplemented by the express terms of the contract i.e. as to good faith and principles generally recognised in international transactions. By majority decision, as a matter of English law, there had been a novation inferred by conduct so as to add K as a party to the FDA, such that it was bound by the arbitration agreement and an award of substantial damages was then made against it in favour of J.

K challenged the award, which challenge is expected to be heard by the Paris Court of Appeal in early 2020. Z commenced enforcement proceedings in England and on 7 February 2019, Popplewell J ordered ex parte that the arbitral award be enforced as a judgment. J applied for an adjournment of its own enforcement action under section 103(5) of the Arbitration Act 1996 (the “Act”) pending the resolution of K’s challenge to the arbitral award in Paris. K cross-applied to set aside Popplewell J’s order. The English court was asked to determine these two applications in the context of the proceedings concerning whether the award was enforceable in England by virtue of the New York Convention, as reflected in section 103 of the Act.

The law

Section 103(5) of the Act states:

Where an application for the setting aside or suspension of the award has been made to such a competent authority as is mentioned in subsection (2)(f), the court before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the recognition or enforcement of the award.

Section 103(5) permits a complete rehearing by the English court – Dallah Real Estate v The Ministry of Religious Affairs [2010].

Article V(i)(a) of the New York Convention reads:

Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked only if the party furnishes to the competent authority where the recognition and enforcement is sought, proof that…

(a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected It or, failing any indication thereon, under the law of the country where the award was made.

This is reflected in section 103(2)(b) of the Act which provides:

(2) Recognition or enforcement of the award may be refused if the person against whom it is invoked proves –

(b) that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made.”

The judgment

The English court adjourned (rather than set aside) the New York Convention enforcement proceeding pending the outcome of the hearing in Paris where Z is challenging the arbitral award.

In making this determination, the court addressed four preliminary issues:

1. Does the law governing the validity of the arbitration agreement govern the question of whether Z became a party to the arbitration agreement?

Yes. There was no disagreement between the parties on this issue.

2. What is that law?

English law. The Tribunal were wrong to consider the validity of the arbitration agreement and whether K became a party to it as separate questions determined by separate laws (i.e. French and English law respectively); this was one and the same question to be determined by English law. The court applied English choice of law rules and in accordance with well-established precedent (including Sul America v Enesa Engenharia [2012]), it determined that there was an express (alternatively implied) choice of English law as the law governing the arbitration agreement.

3. At English law, has Z become a party to the FDA and (if different) the arbitration agreement?

This was highly unlikely. The tribunal’s determination that K became a party to the FDA via ‘novation by addition’ is a concept that does not exist in English law. What was required was joinder of K as an additional party to the FDA, but there were clear terms in the FDA preventing assignment or a transfer of rights under the FDA, and its amendment or modification, without prior written consent. Such express terms could not be overridden by concepts of good faith and fair dealing in the FDA. Subject to remote possibility of J being able to produce documents evidencing consent in writing to alter the terms of the FDA, the answer was that under English law K did not become a party to the FDA or the arbitration agreement.

4. What is the law governing the capacity of Z to join the arbitration agreement?

This issue only became relevant if K lost on Issue 3. By reference to Section 103(2)(a) of the Act (which reflects Article V.1(a) of the New York Convention), one must look to the personal law of the party said to be under an incapacity. In this case, K was incorporated in Kuwait. As a result, the majority tribunal were wrong to determine that French law applied (the dissenting arbitrator expressing no opinion on this issue). Kuwaiti law applied, but no assessment as to its effect was carried out, which was left as a matter for the Parisian court. It was simply noted that Kuwaiti law requires a special proxy for entering into an arbitration agreement and it does not seem that such existed.

The answers to the above preliminary issues led the court to state that J’s prospects of ever enforcing the arbitral award in England against K under the New York Convention/Section 103 of the Act would be very slim.

The court noted a final comment: a concern as to why J did not just bring its claim against K in the first instance, rather than against Z.

Comment

A rejection by the English High Court of an arbitral award is relatively rare and in keeping with this, this case concerned an unusual set of circumstances.
It is to be remembered, however, that if you disagree with the tribunal’s determination as to its jurisdiction, you can get a second bite at the cherry at the challenge/enforcement stage. Unfortunately, this comes after a great deal of time and expense has already been incurred.

Some lessons to be learned include:

  • Be careful to bring your claim against the right party. Whilst this might seem an obvious statement, it is an issue that still arises. Claiming against the wrong party not only wastes time and cost, but may lead to limitation difficulties in relation to a claim against the right party.
  • Care should be taken in the selection of the arbitral tribunal. In this case, the dissenting arbitrator was the only English qualified arbitrator on the panel. Familiarity of the tribunal as a whole with the applicable law(s) is preferable, but in the absence of this one might expect deference to be accorded to an arbitrator with the appropriate expertise. Only occasionally would one expect that arbitrator to get it wrong.