Separability and public policy: selecting law of arbitration agreement does not disapply conflicting non-mandatory provisions of English Arbitration Act 1996 and "fresh evidence…is particularly important" for challenging an Award on public policy grounds

An arbitration agreement is understood in most, but not all, jurisdictions to be a separable or distinct agreement from the contract or agreement of which it forms part.  This is confirmed in s7 of the English Arbitration Act 1996 (the Act).

In National Iranian Oil Company (NIOC) v Crescent Petroleum Company International Ltd (CP) & Crescent Gas Corporation Ltd (CG), the English Court rejected NIOC's challenge to an award issued in a London seated arbitration on grounds of jurisdiction and public policy.

NIOC argued that the contract – which was governed by Iranian law – was procured by corruption and therefore invalid.  It also argued that this meant that the arbitration agreement was also invalid (such that the tribunal had no jurisdiction) because: (i) Iranian law applied to the question of whether the arbitration agreement was separable; and (ii) Iranian law did not recognise the separability of the arbitration.

The Court rejected this argument. As the arbitration was seated in London, s7 of the Act applied unless it was disapplied by the parties by "agreement to the contrary". While s7 is not a mandatory provision, the Court commented that an "agreement to the contrary" in relation to the specific provision is required to disapply it. The choice of Iranian law as the proper law of the contract was not an agreement to the contrary in relation to separability. Furthermore, the parties' arbitration agreement made clear that the issue of validity of the contract was to be determined by the tribunal.  The challenge to the award under s67 was rejected.

The Court also struck out NIOC's challenge based on public policy (which it brought under s68(2)(g) of the Act). NIOC argued that, whilst the tribunal found that the contract was not procured by corruption, the Court, considering English public policy, might take a different view. NIOC was found to have no reasonable prospect of succeeding in its challenge because: (i) the arbitrators had made "a very careful analysis" of the issue in question "after full consideration and evidence"; (ii) NIOC had provided no "fresh evidence"; and (iii) this was not a case of "very exceptional circumstances" that would justify the Court intervening with the arbitrators' decision.

This is a robust, pro-arbitration decision from the English court. In practical terms, it serves as a useful reminder for parties to analyse at the transactional stage the interplay between the different laws that might apply to their disputes and the impact that any conflicting provisions of those laws might have on the procedure for quickly and effectively resolving those dispute. Where potential issues are identified, they should be addressed in the drafting of the dispute resolution provisions. The case further highlights the need to disapply non-mandatory provisions of the Act in clear and specific terms.

Background

NIOC and CP entered into a contract (the GSPC). The GSPC was governed by Iranian law and referred all disputes, including in relation to the invalidity of the GSPC, to arbitration. In 2003, CP purported to assign the GSPC to its subsidiary, CG.

In 2009, CP and CG commenced arbitration claiming that, in breach of the GSPC, NIOC had failed to deliver any gas. After lengthy submissions and a 30 day hearing, the tribunal issued an award (of 362 pages). By majority, the tribunal found that NIOC had been in breach of the GSPC since 2005.

NIOC sought to challenge the award on several grounds, including that the alleged invalidity of the GSPC (for reasons of corruption) affected the validity of the arbitration agreement, meaning that the tribunal had no jurisdiction to decide the matter (under s67 of the Act). NIOC also argued that the award was unenforceable at English Law by virtue of s.68(2)(g) of the Act, as having been procured contrary to English public policy (because it enforced a contract procured through corruption). CP and CG applied to strike out the s68 challenge as having no reasonable prospect of success. The Court considered this application and the s67 challenges as preliminary issues.

Decision

1.Separability

The parties had agreed to refer the dispute to arbitration seated in London (after the dispute had arisen). On that basis, s7 of the Act would apply unless there was an agreement of the parties to the contrary. If s7 applies, an arbitration agreement cannot be impeached merely by the invalidity of the main contract.

NIOC argued that s4(5) of the Act operated to disapply the non-mandatory provisions of the Act that were inconsistent with the proper law of the arbitration agreement. NIOC argued that the proper law of the arbitration agreement was Iranian law, being the law of the GSPC, and that Iranian law does not provide for the separability of arbitration agreements. On that basis, NIOC argued that s7 of the Act did not apply.

The Court rejected this argument (regardless of what Iranian law might provide as to separability) on the basis that s4(5) of the Act requires a choice of law in relation to the specific matter provided for by the relevant non-mandatory provision. The Court also concluded that the GSPC had made express provision for separability by providing that disputes regarding the invalidity of the GSPC would be referred to arbitration.

Accordingly, the Court found that the tribunal had jurisdiction to decide on the validity of the GSPC.

2. Public Policy

The Court then considered the application to strike out NIOC's challenge under s.68(2)(g) of the Act, which alleged that "the award or the way in which it was procured [was] contrary to public policy".

Without enquiring into the tribunal's reasoning, the Court found that the tribunal had made a very careful analysis of the facts and concluded that the GSPC was not an illegal contract, that it was not procured by corruption and that any misconduct was of no material consequence to the GSPC subsequently entered into.

The Court placed particular importance on the lack of any "fresh evidence which might have been some justification for refusing to enforce the award" and concluded, in the circumstances, it was not prepared to interfere with the tribunal's award. This reiterates the English Court's pro-arbitration stance and the high hurdle that must be met before the English Court will consider overturning a tribunal's award under the Arbitration Act 1996.

The fact that the Court struck out the challenge on public policy grounds, on the basis that it was "unarguable" and "without reasonable prospect of success" emphasises that the public policy ground for challenging award under s68(2(g) of the Act will be applied very sparingly by the English Courts. This conclusion is consistent with the key findings of the 2015 IBA Report on the recognition and enforcement of awards under the New York Convention public policy exception that the public policy exception is often invoked but rarely granted and that an assessment will be generally limited to the operative part of the award, not to the reasoning behind it.

For further information, please contact Chris Parker, Partner, Charlie Morgan, Associate or your usual Herbert Smith Freehills contact.