English High Court: No inconsistency between exclusive jurisdiction and arbitration provisions

In Exmek Pharmaceuticals SAC v Alkem Laboratories Limited [2015] EWHC 3158 (Comm), the claimant ("Exmek") challenged an arbitral award for want of substantive jurisdiction, on grounds including the validity of the arbitration agreement; tacit abandonment by the defendant of reliance on the arbitration agreement; submission to the jurisdiction of the courts of Peru by the defendant; and the improper appointment of the Sole Arbitrator. The English High Court (the "Court") rejected the challenge, adopting a purposive and highly commercial approach to the construction of the arbitration agreement.

Background

Exmek terminated a Distribution Agreement (the "Agreement"), with Alkem, alleging breaches by Alkem, and initiated an arbitration with Alkem in relation to those breaches. It was indicated to Exmek by "C", a member of the Secretariat of the London Court of International Arbitration (the "LCIA"), that the relevant clauses of the Agreement would not comply with the requirements of the LCIA (on the basis that the Agreement did not refer to and incorporate the LCIA Rules, specify the place of arbitration or that the arbitral award would be final, or clearly set out the law according to which the Agreement would be construed and enforced).

Exmek and Alkem failed to reach agreement as to amendments designed to render the arbitration provisions compliant with the LCIA Rules. Exmek brought proceedings in the Peruvian courts for breach of the Agreement. Alkem challenged the jurisdiction of the Peruvian court on the basis of the arbitration provision, but the challenge was out of time. The Peruvian court held that Alkem had tacitly waived any objection to the jurisdiction of the court, and gave judgment on the merits against Alkem in the amount of approximately US$6 million. The judgment was upheld on appeal to the Peruvian Supreme Court.

Alkem then commenced arbitration in London against Exmek in relation to the dispute, including a number of counterclaims. The sole arbitrator was appointed by a notice given by Alkem under s.17 of the Act, and issued an award on jurisdiction in August 2014, finding he did have jurisdiction to hear the claims. Exmek challenged this award before the Court under s.67 of the English Arbitration Act 1996 (the "Act").

Validity of the arbitration agreement

Exmek argued that the arbitration agreement was invalid. The Court noted that Exmek's objection appeared to stem initially from the fact that C, as a member of the LCIA Secretariat, had advised that the arbitration provisions of the Agreement would be insufficient to render an LCIA arbitration effective. The Court found that the clause had been intended as an agreement to ad hoc arbitration, and it was therefore irrelevant whether or not it was compliant with the LCIA's requirements. In any case, the advice of C did not bind the Court.

Exmek argued that the Agreement contained two conflicting clauses, which could not be reconciled. The first of these was a provision that the governing law of the Agreement would be the "law of the UK", and that "the Parties submit to the exclusive jurisdiction of the Courts of the UK". The second was an agreement that all disputes arising in relation to the Agreement would be referred to arbitration "conducted in the UK in accordance with the provisions of the law of the UK".

The Court held that the exclusive jurisdiction clause did not eliminate the possibility of agreement to refer disputes to arbitration. Taking a common-sense view of the parties' commercial intentions, the clauses should be read together as providing for arbitration as the mechanism of dispute resolution, with "UK law" as the law governing the contract, and for the "UK courts" to have exclusive jurisdiction to supervise the arbitration (or to take substantive jurisdiction in the event of the arbitration agreement becoming "in some manner ineffective", as the judge observed).

The Court also held that the references to "UK" law and courts should be read as references to the law and courts of England and Wales, again on the basis of a "sensible commercial interpretation" of the parties' intentions. Given that international trade contracts regularly provide for dispute resolution under English law and subject to the jurisdiction of the English courts, the Agreement should be read as doing likewise, rather than be understood as referring to the courts of Scotland or Northern Ireland or being found to be entirely ineffective on grounds of impossibility (as the Peruvian courts had held). It was also held that the parties had intended the place of arbitration to be London, and that it was not necessary for there to have been a specific separate provision to this effect, or for it to have been expressly stated that the arbitral award would be final and binding (these matters being covered by the Act).

Waiver of the arbitration agreement

Exmek argued that Alkem had waived its right to rely on the arbitration agreement, having failed to respond adequately to Exmek's initial request for arbitration prior to the issue of the Peruvian court proceedings. This was rejected on the facts, on the basis that mere silence was insufficient to constitute waiver or abandonment of the contract in any event, and that Alkem had given indications in correspondence of its acceptance that the dispute would eventually be decided by arbitration.

Submission to jurisdiction

Exmek submitted that the English courts were bound by the decision of the Peruvian court, under the doctrine of res judicata. However, it was held that this would only be applicable if Alkem had submitted to the jurisdiction of the Peruvian court, and that it would not be considered to have done so on the basis only of it having resisted the claim on the merits after it was determined that its jurisdictional objections were out of time. Rather, it had made submissions on the merits while maintaining and reserving its jurisdictional challenges. Accordingly, Alkem had not submitted to Peruvian jurisdiction, and it was therefore not necessary to decide whether the English courts should recognise the Peruvian judgment.

Validity of the Sole Arbitrator's appointment

Exmek objected to the appointment of the Sole Arbitrator on the basis that there had been no agreement as to the number of arbitrators, and that an application to the English court would therefore be necessary to appoint an arbitrator under s.18 of the Act.

The Court held that the parties had agreed in correspondence that there would be a tribunal of three, although the terms of the Agreement only provided for "one or more arbitrators". This amounted to a clarification of the Agreement. Alkem had accordingly been entitled to the appointment of its nominee as Sole Arbitrator on the basis of Exmek's failure to nominate an arbitrator and in accordance with the terms of the Agreement.

Further, the Court held that there was no rule of English law imposing any nationality restrictions on arbitrators. Exmek's objection founded on the nationality of the arbitrator being shared with Alkem accordingly did not go to jurisdiction. Exmek's case was primarily an objection on grounds of fairness, and should therefore have been brought under s.68 of the Act rather than s.67.

Comment

This case is an example of the English courts taking a practical, common-sense view of imperfectly drafted arbitration provisions. The decision is in keeping with the interpretive presumption in favour of the validity of arbitration arrangements established in Fiona Trust & Holding Corp v Privalov [2007] Bus LR 1719, and clearly indicates that the English courts are prepared to uphold purported arbitration agreements even in the face of apparently significant inconsistencies and ambiguities. Further, it demonstrates that the English courts will not be easily persuaded that a party to an arbitration agreement has waived its right to rely on it, whether by conduct or by appearance before foreign courts. Accordingly, it represents a welcome further confirmation of the positive attitude of the English courts to arbitration provisions.

However, it should be noted that this decision may ultimately give rise to some practical difficulties for the parties, in the event that the Sole Arbitrator finds against Exmek on the merits. This would bring the Sole Arbitrator's award into conflict with the decision of the Peruvian Supreme Court, forcing any court in which the award was sought to be enforced to decide between recognition of the award and recognition of the Peruvian judgment. The final outcome of this arbitration may consequently give rise to considerable interest.

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