English High Court refuses stay of proceedings despite possible overlap with issues subjected to parallel ICC arbitration proceedings.

A consortium of construction companies (the Consortium) was unsuccessful in obtaining a stay of court proceedings pending before the English High Court (the Court), even though parallel related ICC arbitration proceedings are ongoing. The Court rejected the application for a stay under section 9 of the English Arbitration Act 1996 (s9) on the basis that the proceedings, which concerned advance payment guarantees governed by English law and containing exclusive English jurisdiction clauses, concerned a "matter" outside the scope of the arbitration agreements. The Court found further that there was no compelling case for a stay to be granted under its inherent jurisdiction.

This decision illustrates the practical difficulties, costs and delays, caused when parties agree that disputes related to the same construction project are to be determined in different fora.

Autoridad del Canal de Panama v Sacyr SA and others [2017] EWHC 2228 (Comm)

Background

• The contracts

The case arose out of the construction project to widen the Panama Canal.  As is common in large construction projects, performance of the obligations of the main contract (assigned to a locally incorporated entity owned by the Consortium, Grupo Unidos por el Canal S.A. (GUPC)) was secured through a series of financial guarantees. The consortium companies entered into advance payment guarantees with Autoridad del Canal de Panama (the Employer) as beneficiary, to secure advance payments made by the Employer to GUPC under the main contract. Whilst the main contract and certain of the advance payment guarantees (the Associate Guarantees) were governed by Panamanian law and specified that disputes would be resolved by arbitration seated in Miami, certain of the later advance payment guarantees (the APGs) were governed by English law, and provided for the exclusive jurisdiction of the English courts.

• The disputes

Several disputes arose between the Employer, on one hand, and GUPC and the Consortium on the other hand, over advance payments made by the Employer to GUPC, which the Employer sought to have repaid by the Consortium. Parallel proceedings were initiated as follows:

• The Court Proceedings: In 2016, the Employer brought proceedings before the English Courts under the APGs. The Employer sought to have the Consortium repay advance payments paid to GUPC by the Employer under the main contract (the GUPC Repayment Issue). The proceedings were brought under the APGs exclusively.
• The Arbitration: In early 2017, the Consortium commenced arbitration proceedings in Miami. These proceedings were brought under the main contract and several of the Associated Guarantees, but did not include claims under the APGs.

Application for summary judgment and application for a stay of the Court Proceedings

In the Court Proceedings, the Employer argued that the APGs should be treated as automatically enforceable "first demand guarantees" and that, for this reason, the Court could issue summary judgment without considering defences under the main contract or any other arguments related to the Arbitration. The Consortium, on the other hand, sought to have the Court Proceedings stayed pending the resolution of the Arbitration. It relied on: (i) s9, which provides for a mandatory stay in respect of "a matter" which, under an arbitration agreement, is to be referred to arbitration; and (ii) the court's inherent, discretionary power to grant a stay of the proceedings on case management grounds. Whilst the Consortium accepted that the GUPC Repayment Issue fell within the scope of the exclusive jurisdiction clauses in the APGs insofar as it arises in relation to claims under the APGs, it contended that it also was the same "matter" within the arbitration agreements, and so fell within the provisions of s9. The Employer accepted that the GUPC Repayment Issue fell within both the scope of the exclusive jurisdiction clauses in the APGs and within the scope of the arbitration agreements, but contended that this issue was not the "matter" in the Court Proceedings.

With the parties' consent, the Court decided to deal with the application for summary judgment and the stay application together.

Application for Summary Judgment

The Court found that the APGs were not first demand guarantees. A successful defence to a claim under the Main Contract could impact the extent to which the Consortium was liable to repayment under the APGs, and should therefore be considered by the Court before ordering any repayment. Consequently, the Court found that the claim was unsuitable for summary judgment.

The Application for a Stay under Section 9 of the Arbitration Act

The Court's reasoning focused on s9 and the meaning of "in respect of a matter" that should have been referred to arbitration. The Consortium's case was that the issues raised by the APGs overlapped substantially with issues to be determined in the Arbitration. These included questions of liability and of interpretation under the main contract, and whether and for how much GUPC (and thus the Consortium under the APGs) was in fact liable to repay the advance payments made by the Employer.

The test under s9 applied by the Court was as follows:

• What is the "matter" in respect of which the court proceedings are being brought?
• Does that matter fall within the scope of the arbitration agreements under which the arbitration proceedings are brought?
• Are the arbitration agreements manifestly inoperative?

The Court found that the "matter" in respect of which the Court Proceedings were brought was whether there was any liability for the Consortium to repay under the APGs. This "matter" was within the exclusive jurisdiction clauses, and was not one which the parties had agreed to refer to arbitration. The Arbitration, on the other hand, would seek to determine issues of liability under the main contract and the Associate Guarantees.  While there might be an overlap of issues to be discussed in the two fora (and thus a risk of conflicting decisions), the Court consequently refused to grant a stay under s9(1).

The Application for a Stay of Proceeding on Grounds of Case Management

The Consortium argued that the issue of GUPC's liability to repay the advance payments was a matter that would be better decided by the arbitral tribunal, as the forum deciding, among other issues, liability for repayment under the main contract. The Employer, on the other hand, argued that the exclusive jurisdiction clause, "fortified" by the forum conveniens clauses in the APGs, precluded the exercise of the Court's case management powers to grant a stay – the parties' agreement was simply that the only appropriate forum for hearing issues pertaining to the APGs was the English courts, thus excluding all consideration of the Arbitration.

The Court formally rejected this argument on the basis that it would set the bar "too high". Instead, it conceded that "[i]n circumstances in which an international commercial dispute involves arbitration as well as court proceedings, it makes good commercial sense for the court to have regard, where appropriate, to the orderly resolution of the dispute as a whole, if necessary by granting a temporary stay in favour of arbitration". This would, as previous case law confirmed, minimise the risk of inconsistent decisions and avoid unnecessary costs resulting from two proceedings. The Court nevertheless considered that a discretionary stay could only be granted "in rare and compelling circumstances". Among other factors, the Court considered that the Arbitration was still at a very early stage (the arbitral tribunal having not been constituted) and any relevant Panamanian legal issues could be dealt with by the Court with the use of expert evidence. In summary, the Court found that the Consortium had not made a "compelling case" for a case management stay, but hinted at the possibility of the Consortium bringing forward new arguments in a new stay application.

Conclusion

This decision illustrates the difficulty resulting from the inclusion of conflicting dispute resolution provisions in contracts related to the same transaction. While the specificities of each case might vary, parties are encouraged to exercise caution to ensure that the terms of all related contracts work together effectively, with particular attention to the contracts' applicable law and dispute resolution clauses.  This will help to ensure that closely connected merits issues are not decided separately in multiple fora.

The Court has subsequently considered the issues of the Consortium's application for permission to appeal the dismissal of the stay application brought under s9 and the Consortium's application for a stay of the proceedings pending such appeal (or pending an application to the Court of Appeal for permission to appeal if necessary). This judgment will be discussed in a subsequent blog post.

For more information, please contact Craig Tevendale, Partner, Hannah Ambrose, Professional Support Consultant, Caroline Le Moullec, International Arbitration Intern, or your usual Herbert Smith Freehills contact.