Dispute resolution clauses – lessons to be learnt from recent case law

On 23 November Murray Rosen QC, Matthew Weiniger and Pamela Kiesselbach held a webinar on "Dispute resolution clauses - how to avoid pitfalls" which attracted a great amount of interest with almost 400 clients subscribing. For those clients who were unable to sign in on the day and would like to listen to a recording of the webinar please contact Jane Webber. In response to feedback received from clients, we have set out below an overview of and links to recent case law, as well as a summary of lessons to be learnt, under the following headings:

1. Beware of conflicting jurisdiction clauses

Complex transactions will often consist of a number of separate agreements often containing differing dispute resolution clauses. There have been a number of recent decisions which provide guidance on how English courts will deal with situations where a dispute may fall within the scope of more than one agreement.  The cases illustrate the following practical points:

• In transactions which consist of more than one agreement, particular care needs to be taken when drafting jurisdiction clauses.
• If different jurisdiction clauses are required, one needs to bear in mind that there is a danger that disputes that may otherwise have fallen under one jurisdiction clause may fall under another jurisdiction clause contained in a connected agreement (which is at the centre of the transaction), unless the dispute can be clearly attributed to a particular agreement.
• There is an increased risk that inconsistent dispute resolution clauses will give rise to uncertainty and satellite litigation.
• Take care when exercising an option to arbitrate or litigate as this may impact on claims arising under related agreements.

UBS Securities LLC v HSH Nordbank AG [2009] EWCA Civ 585

This case related to a complex financial transaction which involved a number of agreements, most of which contained non-exclusive jurisdiction clauses in favour of New York jurisdiction. However, there was one agreement which was more peripheral to the transaction (the Dealers' Confirmation) which contained an exclusive jurisdiction clause in favour of the English courts. Nordbank took steps to bring proceedings against UBS in the New York courts claiming damages based on negligent/fraudulent misrepresentation and mis-management. However, UBS pre-empted the proceedings by bringing proceedings in England for a declaration that it was not liable. Nordbank applied for a stay of the English proceedings on the basis that the English courts lacked jurisdiction. The question that the Court of Appeal had to decide was whether the dispute properly fell within the ambit of the Dealers' Confirmation and the English jurisdiction clause or within the scope of another agreement.

The court held that assessing the scope of a jurisdiction clause was a question of contractual interpretation which meant that it was necessary to ascertain the parties' intentions. The starting point was to assume that parties acting commercially and rationally did not intend disputes which went to the root of a transaction to be covered by two or more inconsistent jurisdiction clauses. Where parties entered into a complex transaction comprising numerous agreements, it was the dispute resolution clause "at the commercial centre of the transaction" which they must have intended to govern such disputes. In this case the centre of gravity was to be found in the agreements containing the non-exclusive New York jurisdiction clauses; the dispute had little to do with the Dealers' Confirmation which contained the exclusive English jurisdiction clause.

For more on this decision see here.

Sebastian Holdings Inc v Deutsche Bank AG [2010] EWCA Civ 998

In this case the parties had entered into a number of agreements over time relating to equities and foreign exchange trades. The agreements contained a mixture of non-exclusive jurisdiction clauses either in favour of New York or English courts and one agreement contained an exclusive jurisdiction clause in favour of English courts. Deutsche terminated two of the agreements and claimed sums due under those agreements; the two agreements provided for jurisdiction of the English courts. Both Deutsche and Sebastian brought court proceedings: Deutsche in the English courts for payment of the sums due under the two agreements and Sebastian in New York for breach of another related agreement which was at the centre of the transaction, as well as for breach of fiduciary duty and negligent/fraudulent misrepresentation. Sebastian sought a stay of the English proceedings arguing in reliance on the UBS v Nordbank decision that the dispute fell within the New York jurisdiction clause which was at the centre of the transaction.

The Court of Appeal's starting position was that in construing a jurisdiction clause "a broad and purposive construction must be followed" to avoid a multiplicity of proceedings. However, where there was more than one agreement it was also necessary to identify the scope which the parties intended to give each jurisdiction clause to determine whether a dispute fell squarely within one agreement or within more than one agreement, even if this resulted in a "fragmentation" of proceedings. In this case Deutsche's claims were primarily due and brought properly under the two agreements containing the English jurisdiction clauses. The facts that the claims ultimately occurred as a result of the trading under the more central agreement relied upon by Sebastian and/or that Sebastian chose to raise a defence under that agreement did not shift the centre of gravity of the dispute. The parties clearly intended Deutsche to be allowed to pursue claims under the two agreements in the English courts regardless of the defence raised by Sebastian.

For more on this decision see here.

Deutsche Bank AG v Tongkah Harbour Public Co Ltd; Deutsche Bank AG v Tungkum Ltd  [2011] EWHC 2251 (QB)

This matter related to a loan from Deutsche to Tungkum, a Thai gold mining company. Deutsche and Tungkum entered into a loan and a separate export agreement under which Tungkum sold gold to Deutsche at a discount by way of repayment of the loan. Deutsche also entered into a guarantee with Tongkah, Tungkum‘s parent. The two contracts with Tungkum contained dispute resolution clauses which allowed Deutsche to either bring English court proceedings or LCIA arbitration. The guarantee provided by Tongkah contained a non-exclusive English jurisdiction agreement. When Tungkum defaulted on the loan Deutsche (acting through different branches) brought court proceedings under the loan agreement and the guarantee and arbitration proceedings under the export agreement. Tungkum and Tongkah asked for a stay of the court proceedings under section 9 Arbitration Act 1996 which provides that where a matter falls within an arbitration clause, court proceedings in breach of such a clause must be stayed.

The court found that the contracts with Tungkum were so closely connected and that the claims under both contracts were based on the same events of default, and that therefore the referral of one claim to arbitration gave rise to a stay in relation to the related claim. Deutsche had a choice between arbitration and litigation and had chosen arbitration. It could not split the claims regardless of the fact that they arose under different agreements – this did not make commercial sense. However, the guarantee did not allow for arbitration and the court proceedings against the parent could continue – even if this resulted in a fragmentation of proceedings.

PT Thiess Contractors Indonesia v PT Kaltim Prima Coal and another [2011] EWHC 1842 (Comm)

This matter related to the operation of a coal mine. Thiess was engaged by Kaltim to perform mining services under an Operating Agreement (OA) which provided for payment at a rate per tonne produced. The OA contained an arbitration clause. There was a separate Cash Distribution Agreement (CDA) which required Kaltim to pay disputed amounts into an escrow account pending resolution of any dispute as to what was owed to Thiess. The CDA contained a non-exclusive jurisdiction clause in favour of English courts. A dispute over amounts due to Thiess arose and Kaltim referred the dispute to arbitration under the OA and Thiess brought court proceedings under the CDA. Kaltim sought a stay of the court proceedings pursuant to section 9 Arbitration Act 1996.

The court held that the purpose of the CDA was to provide security pending the outcome of any substantive dispute arising under the OA. Although there was clearly some linkage between the two agreements, the claim brought by Thiess was more closely connected with the CDA. Also, it was not unusual in international transactions to submit contractual claims to arbitration while referring matters relating to security to the jurisdiction of the courts.

2. How "non-exclusive" are non-exclusive jurisdiction clauses?

The effect of a non-exclusive jurisdiction clause will be subject to construction by the courts based upon the parties' intention. Depending on the drafting, non-exclusive jurisdiction clauses may not give as much scope to bring proceedings in any competent jurisdiction as one might expect. The key practical points are:

• It is important to ensure that the drafting of the clause does not give rise to ambiguities and achieves the required result. Where a party wants to be in a position to bring proceedings in another unnamed jurisdiction (or to exercise an option to arbitrate) even after the other party has brought proceedings in the named jurisdiction, this should be spelt out in the drafting.
• Also, where a party wants to be able to bring concurrent proceedings in a number of jurisdictions, the drafting should reflect this.
• Although the bringing of concurrent proceedings in different jurisdictions will result in increased costs, there may be situations in which a party may want to have the option of bringing proceedings in different jurisdictions depending upon the location of the defendant's assets and the ease of enforcing foreign judgments in the relevant jurisdictions.

Highland Crusader Offshore Partners LP and ors v Deutsche Bank AG and anor [2009] EWCA Civ 725

This case related to a finance agreement with a non-exclusive jurisdiction clause which contained the following wording:

“Buyer and Seller hereby irrevocably submit for all purposes of or in connection with this Agreement and each Transaction to the jurisdiction of the Courts of England.
(…)
Nothing in this paragraph shall limit the right of any party to take proceedings in the courts of any other country of competent jurisdiction.”

Highland started proceedings first in Texas. Deutsche subsequently brought proceedings in England and applied for an anti-suit injunction in relation to the Texan proceedings.

Generally English courts are amenable to granting an anti-suit injunction in relation to foreign proceedings (as long as they are not commenced in another EU Member State court) where these proceedings can be characterised as being “vexatious and oppressive”. The Commercial Court judge in this matter took the view that where there is a non-exclusive jurisdiction clause, a party will ordinarily act vexatiously and oppressively in pursuing proceedings in an unnamed jurisdiction, unless there are exceptional reasons to commence proceedings in another jurisdiction which were not foreseeable at the time when the non-exclusive jurisdiction of the named court was agreed. The Court of Appeal disagreed and pointed out that this approach elevated a non-exclusive jurisdiction clause to something very close to an exclusive jurisdiction clause. In fact, by choosing the non-exclusive clause the parties must have contemplated at least some possibility of parallel proceedings.

Other case law relating to the meaning of non-exclusive clauses

Depending upon the drafting of the clause there is case law which suggests that a non-exclusive jurisdiction clause may crystallise into an exclusive clause as soon as a party starts proceedings in the chosen jurisdiction (Breams Trustees Ltd v Upstream Downstream Simulation Services Ltd [2004] EWHC 211 (Ch)); or that proceedings brought in an unnamed court would breach the non-exclusive clause if the aim was to prevent the other party from bringing proceedings in the named court (Sabah Shipyard (Pakistan) Ltd v Government of Pakistan [2002] EWCA Civ 1643).

Similar considerations apply in relation to one-way clauses allowing only one party a choice. An example of this can be found in Three Shipping LTD v Harebell Shipping Ltd [2004] All ER (D) 152 which related to a dispute resolution clause which gave one party (Harebell) a unilateral option to arbitrate. Three Shipping “jumped the gun” by starting court proceedings in the chosen court in an attempt to deprive Harebell of its ability to exercise its arbitration option. The court stayed the proceedings and allowed Harebell to exercise its option but stated that it would have been preferable if the parties had spelt out more clearly how the option was to be exercised; ie that it was to be available regardless of whether proceedings had already been started in the chosen jurisdiction.

3. The efficacy of dispute resolution clauses and "torpedo" actions

As a result of the lis pendens rule in Article 27 Brussels Regulation and ECJ case law (Erich Gasser GmbH v MISAT srl Case C-116/02 [2003] and Turner v Grovit Case C-159/02 [2004]) it is possible for a party to undermine the efficacy of an exclusive jurisdiction clause in favour of the courts of one member state (eg England) by bringing proceedings in another member state (eg Italy). The second seised court must stay its proceedings even if it is the named court until the first seised court has determined its jurisdiction, which may take a very long time depending on local procedure. Also, the named court may not grant anti-suit injunctions to protect its jurisdiction.  The key points to remember are:

• Ensure that your dispute resolution clause is drafted clearly making it absolutely clear that the clause has been consented to by any other parties, that it is properly incorporated into the relevant agreement and that it covers the relevant disputes. This should make it easier for any courts seised in breach of the clause to decline jurisdiction allowing the named tribunal to proceed.
• Consider drafting a dispute resolution clause which provides for exclusive jurisdiction with a unilateral right to refer the dispute to arbitration if your counter party brings court proceedings in breach of the jurisdiction clause. Although the ECJ's decision in West Tankers also prohibits anti-suit injunctions in support of arbitration, there is a perception that courts seised in breach of a clearly drafted arbitration clause may be more willing to stay proceedings by way of a quick preliminary decision to comply with the New York Convention 1958.
• Consider including additional language in your dispute resolution clause which provides for (a) an undertaking not to commence proceedings in any unnamed court and (b) an indemnity in the case of proceedings being brought in breach of the dispute resolution clause. Although it is not entirely clear whether these would find favour with the ECJ if it were to decide upon whether they ran counter to the principles of mutual trust, there are indications that the English courts would accept them and they may provide a further deterrent to any party considering bringing proceedings in breach of the dispute resolution clause.
• Where there is a fear that the counter party may bring proceedings in breach of the dispute resolution clause consider bringing proceedings first.

Allianz SpA v West Tankers Inc Case C-185/07 [2009]

This ECJ decision related to a case where there was an arbitration clause providing for arbitration in London and in which Allianz brought proceedings against West Tankers in the Italian courts in breach of the arbitration clause. West Tankers obtained an anti-suit injunction from the English courts which took the view that the restrictions of the Brussels Regulation and the ECJ jurisprudence relating to "torpedo" actions did not apply as the matter fell within the arbitration exclusion provided for in Article 1(2)(d) Brussels Regulation. However, the ECJ disagreed and stated that the same principle of mutual trust applied and that the English courts could not grant an anti-suit injunction in relation to proceedings brought before another member state court even if this was in support of an arbitration agreement.

For more on this decision see here.

National Navigation Co v Endesa Generacion SA [2009] EWCA Civ 1397

This matter also related to an agreement containing a London arbitration agreement. However, Endesa brought court proceedings in Spain, claiming (as an incidental issue) that the arbitration clause had not been properly incorporated into the agreement. Endesa obtained a judgment from the Spanish courts to that effect. National Navigation brought arbitration proceedings under CPR 62 (Arbitration Claims) for a declaration that the arbitration clause had been properly incorporated. The court at first instance took the view that the Brussels Regulation did not require it to recognise the Spanish judgment in so far as it ruled upon the application of the arbitration clause, as the English proceedings were covered by the arbitration exception and therefore fell outside the scope of the Brussels Regulation. The judge declared that the arbitration agreement did apply to the dispute. The thinking behind this was that such a judgment might assist National Navigation in challenging future attempts to enforce a Spanish judgment in England. The Court of Appeal overturned the decision and held that even where English courts are engaged in arbitration proceedings, Article 33 Brussels Regulation requires them to recognise other EU court judgments which rule on the applicability or validity of an arbitration agreement by way of a preliminary issue.

For more on this decision see here.

West Tankers Inc v Allianz SpA and anor [2011] EWHC 829 (Comm) and African Fertilizers and Chemicals NIG v BD Shipsnavo GmbH & Co Reederei KG [2011] EWHC 2452 (Comm)

In both of these cases the Commercial Court considered applications under section 66 Arbitration Act 1996 to enter judgment in the terms of a declaratory arbitral award. In West Tankers the claimant had obtained an award declaring that it was not liable and in African Fertilizers the claimant had obtained an award declaring that the arbitral tribunal had jurisdiction over certain disputes. In both cases the defendant had commenced court proceedings in breach of the arbitration agreement in Italy (West Tankers) or Romania (African Fertilizers) which were still pending at the time. The claimants feared that the defendants might obtain judgments in the foreign EU jurisdictions which they would try to enforce against the claimants in England.

The Commercial Court decided in both cases that it was open to the victorious party in the arbitration to obtain a judgment in terms of the award even if the award was "only" of declaratory nature. The reason given was that by going down this route there was a "real prospect of establishing the primacy of the award over an inconsistent judgment“. In support of this view reference was made to Article 34(3) Brussels Regulation which provides that a judgment from another member state court shall not be recognised or enforced where it is "irreconcilable with a judgment given in a dispute between the same parties in the Member State in which recognition is sought". It was however also acknowledged that there was no determinative authority as to whether Article 34(3) applied to judgments of a member state court enforcing an arbitral award, or whether such a judgment fell outside the scope of the Brussels Regulation. This is a question that will need to be determined if and when the defendants obtain and attempt to enforce an inconsistent foreign judgment in England.

Both West Tankers (heard on 21 or 22 November 2011) and African Fertilizers (window 19 March to 19 July 2012) have been appealed and the Court of Appeal's judgment in West Tankers should be handed down soon.