Exploiting the advantages of an English arbitral seat? Commercial Court confirms the validity of an arbitration agreement and tribunal's substantive jurisdiction whilst parallel proceedings continue in Italy

The English Commercial Court has granted an application under section 32 of the English Arbitration Act 1996 (the Act), determining that a tribunal appointed by the Refined Sugar Association has substantive jurisdiction to hear a dispute that has arisen out of a sugar sale between Toyota Tsusho Sugar Trading Limited (Toyota) and Prolat S.R.L. (Prolat). Section 32 provides that, if certain conditions are satisfied, a court may determine any question as to the substantive jurisdiction of the tribunal.

The application arose because Prolat had brought proceedings against Toyota in the Italian courts contending, among other things, that there was no arbitration agreement. Toyota had started arbitration proceedings in London against Prolat on the basis that the parties had concluded an agreement to arbitrate.

The Court first considered its jurisdiction to consider the question of the existence of the arbitration agreement given that Prolat had commenced proceedings in Italy, and the relevance of the Brussels Regulation (and the Recast Brussels Regulation to take effect on 10 January 2015 – see our blog post). It concluded that the existence of the Italian proceedings did not encroach on its jurisdiction to make a determination on the issue of the tribunal's jurisdiction as arbitration fell outside the Brussels Regulation and it was not being asked to interfere with the Italian proceedings which fell within the Brussels Regulation.

The Court focused on an analysis of the contract and the arbitration clause and found that (a) on the facts, the contract and the arbitration clause were valid and governed by English law; and (b) the dispute between the parties fell within the scope of the arbitration clause.

This case highlights the possibility, provided by section 32 of the Act, of creating a "shield" judgment to try to prevent enforcement in England of a judgment made in Member State court proceedings brought in breach of an arbitration agreement.

Background

Prolat had approached the Claimant with a view to purchasing sugar from it. Following discussions, the parties entered into an agreement for the sale and purchase of sugar, although the terms and binding nature of the agreement were disputed, including a dispute as to whether a certain individual acted as authorised agent of Prolat. Prolat issued proceedings against Toyota in Italy seeking damages for various contractual and tortious wrongdoings. Toyota had started arbitration proceedings in London, in which Prolat objected to the jurisdiction of the arbitral tribunal. With the tribunal's permission, Toyota sought a determination as to the tribunal's substantive jurisdiction in the English Courts under section 32 of the Act. Toyota objected to the jurisdiction of the Italian courts, which had not yet determined the issue before the application was made to the English Court.

The Court's judgment

An application under section 32 of the Act may be considered if made with: (i) written agreement of all the parties; or, (ii) the tribunal's permission, and the Court is satisfied that: (a) the determination of the question is likely to produce substantial savings in costs; (b) the application was made without delay; and (c) there is good reason why the matter should be decided by the court. In this case, the tribunal had granted permission, and the Court adopted the tribunal's reasoning that, as there were factual issues to be resolved in determining jurisdiction and an appeal may well follow a determination by the tribunal anyway, there was a likely saving in costs in the Court making the determination. The Court also drew attention to the involvement of the Italian courts as presenting "an additional good reason" why the Court should decide the application.

As discussed above and below, the Court found that it had jurisdiction to entertain Toyota's application. It thereafter found that the law of the putative contract between Toyota and Prolat was English law and that, on the basis of the facts, there a valid arbitration clause which was sufficiently wide to apply to the present dispute. The Court therefore granted the declaration sought, viz. that the tribunal did have substantive jurisdiction to hear the dispute arising out of the contract for the sale and purchase of sugar between the parties. It further ordered that costs must follow the event and that Prolat should pay Toyota's costs in relation to the arbitration claim before the Court.

Comment

The Court was not asked to interfere with the Italian court proceedings by way of an anti-suit injunction, merely to confirm the substantive jurisdiction of the tribunal. The Brussels Regulation prohibits an anti-suit injunction seeking to effectively halt proceedings in another Member State court which fall within the scope of the Brussels Regulation. The Italian proceedings brought by Prolat may carry on unfettered by the English Court's declaration as to the tribunal's substantive jurisdiction.

However, the value of the Court's judgment in Toyota's hands should not be underestimated. The arbitration proceedings may proceed in parallel to the Italian court proceedings, with no telling as to which will conclude first and of course, there is a risk of conflicting outcomes. If the Italian court finds that it has jurisdiction and reaches a judgment on the merits in favour of Prolat, Prolat may seek to enforce that judgment against Toyota in England (where Toyota is incorporated).

In such circumstances, even though it is not a "Regulation judgment" (neither under the current Brussels Regulation nor the Recast Brussels Regulation), Toyota may nonetheless be able to rely on the judgment issued by the English Court in its section 32 application as a "shield" to enforcement of the Italian judgment.   Article 34.3 of the Brussels Regulation provides that "a judgment shall not be recognised: … if it is irreconcilable with a judgment given in a dispute between the same parties in the Member State in which recognition is sought" (slightly re-worded in Article 45 of the Recast Brussels Regulation: "a judgment shall not be recognised… if it is irreconcilable with a judgment given between the same parties in the Member State in which recognition is sought").

This issue has not yet been tested in the English courts or, indeed, by the CJEU. Past jurisprudence in the English courts does, however, suggest that such an approach could be taken. It may be that the judge's reference to the Italian proceedings providing "an additional good reason" for the Court to determine Toyota's application could be understood as alluding to this possibility.

Indeed, if this approach is correct, it highlights a particular advantage which London has as a seat of arbitration – the possibility of applying to the English Court for a "shield" judgment. Toyota's application was made under section 32 of the Act, and a similar line of reasoning applies in relation to the ability to convert a final award into a judgment under section 66 of the Act. Until the question of interpretation of Article 34(3) (or Article 45 as it will become after 10 January 2015) is referred to the CJEU, parties to a London seated arbitration faced with actual (or threatened) parallel proceedings in the court of another member state in breach of the arbitration agreement are advised to take early steps to seek a "shield" judgment from the English courts under s32 or s66, to try to head off enforcement of a conflicting court judgment.

For further information, please contact Matthew Weiniger, Partner, Maximilian Szymanski, Associate, Hannah Ambrose, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.