Case comment: National Iranian Oil Company v Crescent Petroleum Company International & Crescent Gas [2016] EWHC 1900 (Comm)

National Iranian Oil Company v Crescent Petroleum Company International & Crescent Gas [2016] EWHC 1900 (Comm)

Principle: This decision confirms that there is a discretion to set aside a Notice of Discontinuance in proceedings under the Arbitration Act 1996 where there is an abuse of process. This had been suggested, correctly, by Aikens J. in Sheltam Rail Company (Proprietary) Limited v (1) Mirambo Holdings Limited (2) Primefuels (Kenya) Limited [2008] EWHC 829 (Comm). A party cannot invoke the supervisory jurisdiction of the English courts by applying under s.68 Arbitration Act 1996 and then discontinuing its appeal before the conclusion of that process for strategic reasons, without first offering an acceptable undertaking to the Court.

Facts: NIOC and Crescent entered into a gas supply and purchase contract. A dispute arose when NIOC failed to supply gas. The dispute proceeded to arbitration. Crescent was successful and obtained a majority award. NIOC appealed the award under s.68 Arbitration Act 1996. NIOC alleged that there were serious irregularities in the arbitral proceedings. NIOC complained, amongst other things, that its nominated arbitrator was excluded from deliberations between the other two arbitrators, and that the panel failed to control regular discourtesy shown towards it and witnesses by leading counsel for Crescent.

Arguments: NIOC lost on all of its grounds of appeal at a hearing of preliminary issues in March 2016 (see my case comment here). The balance of the grounds of appeal fell to be heard on 18-19 July 2016. Ten days before the hearing, NIOC’s solicitors served a Notice of Discontinuance on Crescent. They abandoned the remainder of NIOC’s appeal under s.68 Arbitration Act 1996. By letter, NIOC’s solicitors explicitly reserved their client’s rights to raise the remaining arguments contained within the grounds of appeal in another forum. Crescent applied to set aside the Notice of Discontinuance. On the eve of the hearing, NIOC through its solicitors offered an undertaking to:

not resist the recognition or enforcement of the Tribunal Award dated 31 July 2014 by raising any argument based upon Grounds II(D), III(C) or III(D) of the Grounds of Appeal

Crescent refused to accept the undertaking and maintained its application to set aside the Notice of Discontinuance. The proposed undertaking did not refer to all of the remaining grounds of appeal.

Decision: Teare J. set aside the Notice of Discontinuance. It appeared to have been served by NIOC for tactical reasons, in order to preserve its ability to frustrate enforcement proceedings in another New York Convention court. The undertaking belatedly offered by NIOC was inadequate. This is because it left open the possibility that NIOC could delay or resist enforcement in another state in future. Whilst NIOC did not require permission to discontinue, under CPR Part 38, the Court had a residual discretion to set aside a Notice of Discontinuance in such circumstances.

Does arbitration depend on the court system?

The DIFC Courts, Dubai

The DIFC Courts, Dubai

Introduction. Arbitration and litigation are traditionally considered as competing dispute resolution processes. International commercial arbitration is often argued to be ultimately reliant on national courts, fostering the view that it is less preferable to litigation as a system of adjudication. This article addresses whether arbitration is dependent on the courts and some of the circumstances in which the two processes interact.

The basis of arbitration is contractual and therefore legal. Parties must agree to refer a dispute to arbitration. They may consent at the time of contracting or after a dispute arises. In either situation, the agreement to arbitrate is a bargain between the parties. This has two main consequences. First, the arbitration agreement must be construed carefully, because it is the source of an arbitrator’s authority. Tricky questions over interpretation are routinely decided by arbitral tribunals, but then often a second time around by a court. Second, if there is a breach or anticipated breach of an arbitration clause, the innocent party may seek relief in a court. The courts in arbitration-friendly jurisdictions will typically grant such relief (for instance an anti-suit injunction under s.9 Arbitration Act 1996) to give effect to the arbitration agreement. In this sense, arbitration defers to litigation and the court system.

Courts may fulfil an active supervisory function. National courts can play a critical role during the course of an arbitration. Much will depend on the institutional rules that govern the particular arbitration proceedings, and how litigious the parties wish to be. If there are no institutional rules (an “ad hoc” arbitration), or where the rules and the parties’ agreement permit, the state courts will have considerable powers to regulate the conduct of arbitration proceedings. A curial court may be asked to give directions on the appointment and removal of arbitrators (s.15 et seq. Arbitration Act 1996), give teeth to a tribunal’s peremptory orders (s.42 Arbitration Act 1996), and decide questions of law (s.45 Arbitration Act 1996). Some of the provisions in the Arbitration Act 1996 are mandatory, while the parties can opt out of others such as the three identified above (s.4 Arbitration Act 1996, and Schedule I). Thus, whilst arbitration may help to resolve a dispute privately, this does not mean that a court will not be involved at several stages of the arbitration process.

Arbitration often depends on the assistance of a court for enforcement. An award would be meaningless if the award debtor failed to voluntarily comply and there were no mechanism for enforcement. National courts do not enforce awards, in the same way that they do not enforce judgments. In England and Wales, an award creditor has the same remedies open available to it as a judgment creditor (s.66 Arbitration Act 1996). The efficacy of a particular national court’s orders may differ. There may be an inconsistency of approach, depending for instance on whether enforcement is sought at a sensible seat or somewhere less predictable. Nevertheless, the power to make orders in aid of enforcement is a significant feature of the relationship between arbitration and the courts.

Parties challenge and seek to set aside awards in court. The laws in most jurisdictions provide for the challenge and appeal of awards on certain similar grounds such as a lack of jurisdiction and serious irregularity (see s.67 and s.68 Arbitration Act 1996). For this reason, the end of an arbitration process and receipt of a final award may not be the end of the journey for the parties, especially if due to political, tactical, or pure financial considerations an award debtor seeks to frustrate the creditor. The law of England and Wales goes a step further by permitting an appeal on a point of law (s.69 Arbitration Act 1996). It is correct to note that such appeals rarely get off the ground, let alone succeed. One has to only look at the stiff requirements in s.69(3) Arbitration Act 1996 to see why. However, these provisions as a whole act as something of a safety net. They lend further legitimacy to the arbitration process, even if they do introduce a level of uncertainty and reliance on the courts.

Arbitration aids the development of the law. A great deal has been written about the historic contribution of arbitration to the development of the common law. It has recently been suggested in a lecture by the Lord Chief Justice, Lord Thomas of Cwmgiedd, that the Arbitration Act 1996 has impeded the further development of the common law by restricting the scope for appealing awards. In this analysis, s.69 Arbitration Act 1996 sets the bar too high. Yet, there are a good number of cases (albeit mostly derived from the maritime industry) which began life as arbitrations and which have established significant legal principles. In time, it may well be that the statutory hurdles to appealing an award are lowered, but this is not a proposal that would sit well with many in the business community.

Relieving the burden from civil courts and fostering healthy competition. It is clear that arbitration has the potential to alleviate some of the increased burden on the civil courts. High Court judges in the Commercial Court are just as qualified and experienced as professional arbitrators to deal with issues that arise in commercial arbitration, but they certainly do not currently enjoy a similar level of resources. Arbitration is justifiably viewed as more streamlined and user-friendly. However, there is a growing trend in the creation and development of international commercial courts, for example in Singapore (SICC) and Dubai (DIFC), with an English-language court in Amsterdam due to open in 2017. The practices in these courts are modelled on the examples set by many arbitral bodies and tribunals. These include the internationalisation and specialisation of the judiciary, the clarity of procedural rules, and the use of new technology. Furthermore, the 2005 Hague Choice of Court Convention – which promotes comity by requiring countries to recognise and enforce forum selection clauses and foreign court judgments – is gradually being ratified in the major jurisdictions. The Hague Convention is conceptually little different from the 1958 New York Convention, which set a universal standard for the recognition and enforcement of arbitral awards. It can only be positive for users to have a wide choice of cross-border adjudication systems.

Conclusion. Overall, it is fair to conclude that arbitration depends on the court system more than the courts benefit from arbitration. But for the analysis to stop there is not particularly helpful. It is more instructive to compare these processes, as well as other forms of ADR, in order to create an effective, widely accessible, and truly global system of dispute resolution.

Niraj specialises in commercial and property litigation & arbitration. He is a Member of the Chartered Institute of Arbitrators, the Young International Arbitrators’ Group, the Young Arbitrators’ Forum, and the Chancery Bar Association.

National Iranian Oil Company v Crescent Petroleum Company International & Crescent Gas [2016] EWHC 510 (Comm)

National Iranian Oil Company v Crescent Petroleum Company International & Crescent Gas [2016] EWHC 510 (Comm)

This is a case with a bit about everything: the nuts and bolts of an arbitration agreement, contractual interpretation, bribery allegations, and the hurdles involved when seeking to challenge an award in the Commercial Court.

Principles established

  1. Where the seat of an arbitration is England and Wales, by default it is the law of England and Wales that governs the arbitration agreement. Often, this may well be different to the law of the substantive contract.
  2. Where a clause provides for a party to obtain prior written consent from another contracting party, that requirement is satisfied where consent is requested, granted, and put into writing. It is unnecessary for the written consent to be supplied to, or received by, the party requiring consent.
  3. A contract procured by bribery is not unenforceable or invalid by reason of public policy. Further, there is no public policy reason to refuse to enforce a contract where it follows a failed attempt at a bribe, where the contract itself is not illegal.

Facts of the case

NIOC and CPCI entered into a gas supply and purchase contract. The contract was governed by Iranian law. It contained an arbitration clause. CPCI sought to assign the contract to a subsidiary, Crescent Gas. Both CPCI and Crescent Gas began arbitration proceedings, alleging that NIOC was in breach of contract for failing to supply gas. The parties chose London as the venue for the arbitration proceedings.

NIOC claimed that the arbitrators did not have jurisdiction to hear the dispute, because of alleged corruption and corrupt arrangements between members of the Board of NIOC and CPCI. NIOC also argued that the assignment of the contract by CPCI to Crescent Gas was invalid, because no written copy of the consent had been provided by NIOC.

The arbitrators found in favour of CPCI and Crescent Gas. They dismissed NIOC’s defence and counterclaim. NIOC applied to the High Court under sections 67 & 68 of Arbitration Act 1996 (“the 1996 Act”) to set aside the award.

Decision of Burton J in the Commercial Court

The principle of separability meant that the agreement to arbitrate and the main contract were to be treated as having been separately concluded. The invalidity of the main gas supply and purchase contract did not invalidate the arbitration agreement. This principle is enshrined in s.7 of the 1996 Act. It was amplified in the House of Lords case of Fiona Trust v Privalov [2008] 1 Lloyd’s Rep 254.

Where the parties choose England as the seat, either in the agreement or subsequently, or the seat is designated by an institution or the tribunal itself (s.3), English law applies to the arbitration agreement. There is no question that Iranian law only applies to the substantive (main) contract. Choosing a different law for the substance of a contract does not disapply s.7 of the 1996 Act. The parties could have chosen that a different law should apply to the arbitration agreement, but they did not. Therefore, the s.67 challenge failed.

The NIOC Board passed and minuted a resolution granting consent to CPCI’s proposed assignment to Crescent Gas. The word “obtaining” did not require physical delivery and receipt by CPCI. The s.67 challenge failed on this ground.

On the third issue, the tribunal found that there was evidence of misconduct, and circumstantial evidence as to corrupt arrangements being discussed by CPCI at the time of the contract. However, the gas supply and purchase contract was not illegal or procured by corruption. The fact that the main contract might have been “tainted” by misconduct was an inadequate reason to set aside the award on the ground of public policy. Therefore, NIOC’s s.68 application was struck out.

Comment

This is a significant decision of the English Commercial Court for three reasons. First, it demonstrates the restrictive approach taken by the Commercial Court in such applications. Public policy is narrowly defined in England and Wales. This is in contrast to the practice in other jurisdictions, where public policy has gained the epithet “unruly horse”. Public policy is a fertile ground for satellite litigation in attempts to avoid recognition or enforcement of arbitration awards. The decision also confirms the reasoning of Ramsey J. in Honeywell International Middle East v Meydan Group [2014] 2 Lloyd’s Law Rep 133. That was also a case arising out of arbitral proceedings. The losing party sought to avoid enforcement of the award in England. It was held that bribery and contracts to bribe are contrary to English public policy, but contracts procured by bribes are not automatically unenforceable. They may not be enforced, at the option of the innocent party.

Second, a court is likely to adopt a sensible approach to the construction of contractual provisions. The case of Arnold v Britton [2015] UKSC 36, which was not cited, re-affirms the principle that a court should interpret words according to their natural and ordinary meaning. It was argued that the word “obtain” denotes physical acquisition. This is even more likely where the clause contemplates written permission, in contrast to oral permission. Yet, the clause also provides that consent could not be unreasonably withheld where the assignment was to a subsidiary, as it was in this case. The Court was probably not enamoured with NIOC’s rather technical argument here, coupled with its refusal to ever provide a copy of the written consent to CPCI and Crescent Gas, even after the conclusion of the arbitration proceedings.

Third, the decision is notable because it draws attention to the latitude afforded to arbitrators generally. The tribunal produced a 362-page award, following a 30-day hearing and lengthy submissions. They had given full consideration to the allegation of corruption. It must be said that no new evidence of corruption was provided to the Court, so it is easier to identify why the arbitrators’ decision was not interfered with. Having said this, arbitrators are “masters of the facts” (per Steyn LJ in The Baleares [1993] 1 Lloyd’s Rep 215). More often than not, on an application under s.68 of the 1996 Act, a High Court judge will be minded to accept without qualification the arbitrators’ findings of fact.