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.