UK - Court grants stay of proceedings where arbitration option exercised in related finance contract

In Deutsche Bank v Tongkah Harbour, the UK Commercial Court was asked to consider a suite of contracts dealing with the financing of a gold exploration and mining business. The two key contracts (a facility agreement and an export contract) both contained English court jurisdiction clauses, but gave the bank an option to refer disputes to LCIA arbitration.

Background facts

A dispute arose between the parties which gave rise to claims under both contracts. The bank commenced litigation with respect to one contract and arbitration with respect to the other. However, on an application by the borrower, the court held that this was impermissible. In commencing arbitration under one of the contracts, the bank had chosen to refer the matter to arbitration. The court proceedings, although brought under a different contract, related to the same matter, and were therefore stayed under section 9 of the Arbitration Act 1996.

Options to arbitrate

Options to arbitrate are increasingly common in finance contracts, giving a lender ultimate flexibility to bring a dispute either to the courts or to an arbitral tribunal. The latter may be particularly useful if a counterparty or any relevant assets are located in a jurisdiction outside Europe where enforcement of foreign judgments is not guaranteed (as it is within Europe under the Brussels Regulation). They also provide comfort to lenders for the scenario in which a borrower brings court proceedings in breach of an exclusive jurisdiction clause. However, this case is notable as a reminder that care is needed when exercising options to arbitrate in multi-contract situations.

The decision to arbitrate a dispute refers not only the individual claim or claims under the particular contract to arbitration, but all of the factual and legal issues that make up the "matter". In circumstances where that "matter" gives rise to claims under more than one contract between the same or closely related parties (as is commonplace in complex commercial and financial transactions), the choice of arbitration under one contract may mean that claims under the related contracts can no longer be referred to the court. Effectively, the option will be exercised for all closely related contracts at once.

Commercial impact

Aspects of the court's reasoning give guidance on the factors to be considered when assessing whether disputes under separate contracts form part of the same "matter". Of key importance in the Tongkah Harbour decision were the facts that:

• both of the relevant contracts included an option to arbitrate; 
• the same legal entity held the option under both contracts (albeit different branches of the same bank); and 
• the contracts were intrinsically linked as the facility agreement was repaid by sales under the export contract.

If the contracts had not had common parties, it appears that exercise of the option under one would have had no effect on the other. Similarly, if one of the contracts had no arbitration option, any claim arising under that contract could still have been litigated, even if arbitration had been commenced in respect of the other contract.

The Tongkah Harbour case therefore reinforces the need to pay close attention to the identity of the parties to a transaction and to the relationship between the dispute resolution clauses contained in each of the transaction documents. This will ensure that the parties have the desired range of options for resolving any disputes as they see fit and, as importantly, that they understand the impact of any procedural decisions as disputes arise.

Deutsche Bank AG v Tongkah Harbour Public Company Ltd [2011] EWHC 2251 (Comm)

A version of this Herbert Smith briefing has also been published by Practical Law Company.