Magoosh GRE

International commercial arbitration

| March 14, 2015

INTRODUCTION

I am asked to advise Global Solutions India Ltd. (“GSI”) and Global Solutions Inc. (“Global”) on the prospects of preventing the enforcement of an arbitral award made by Sir Humphrey Mullis: a sole arbitrator appointed by Deutsche Financial AG (“DF”). I am also asked to include in the advice the prospects of the likelihood of GSI and Global preventing the enforcement of the arbitral award and the steps that need to be taken and when.

The factual matrix to the case is not provided here as the parties are already aware of the background history. The advice commences by providing an ‘assessment of the merits of the case’. The ‘prospects of GSI and / or Global preventing the enforcement of the award’ shall then be given. Finally, the parties shall be advised on the steps that need to be taken.

ASSESSMENT OF THE MERITS OF THE CASE

At the outset, I feel that it would be appropriate to set out a summary of the applicable laws, provisions and rules that apply to this matter.

The Lex Arbitri

Pursuant to s 3 of the Arbitration Act 1996 (“AA 1996”) the “seat of the arbitration” is the “seat” chosen by the “parties to the arbitration agreement” (s 3 (a)). Clause 12 of the Outsourcing Agreement (“OA”) stated, inter alia, that: “All disputes under this contract will be settled by arbitration in London”. Accordingly, the lex arbitri for the purpose the arbitration is the law of England and Wales. Arbitration proceedings in England and Wales are governed by the AA 1996.

The Arbitration Act 1996

The provisions of the AA 1996 apply ‘only’ to those arbitration agreements which have been made in the writing. The AA 1996 therefore applies to the agreement in this case as clause 12 of the OA was made in writing.

Furthermore, s 15 of the AA 1996 sets out that the parties are ‘free to agree on the number of arbitrators to form the tribunal’. In addition, under s 16 the parties are also free to agree on the procedure to be adopted when appointing the members of the arbitral panel. The parties also agreed on these points under clause 12 of the OA.

The law applicable to the arbitral proceedings shall be the law ‘chosen by the parties’ . The parties are therefore, in general, free to make their own agreements in respect of the choice of law and the arbitral rules to be followed in the event of a dispute . This is referred to as the principle of party autonomy.

The agreement between the parties – Outsourcing Agreement (‘OA’)

The OA represented the contractual agreement between the parties. In the OA the parties agreed, inter alia, that: the laws of India shall be the governing law of the agreement in ‘every respect’ (clause 11); three arbitrators shall settle any dispute (clause 12); the parties shall each appoint their own arbitrator and the chairman shall be appointed by the two appointed arbitrators (clause 12); the seat of the arbitration shall be London (clause 12); and the rules of the League of Nations shall govern the arbitration. The parties also included a force majeure clause in the agreement at clause 10, which provided follows:

Neither party will be liable for loss caused by an event of force majeure if the event is beyond the control of the party claiming exemption from liability, after exercising best efforts.

United Nations Commission on International Trade Law (‘UNCITRAL’) Arbitration Rules

The UNICTRAL Arbitration Rules 2010 provide that an arbitral tribunal has general powers to conduct an arbitration in such manner as it ‘considers appropriate‘ in the circumstances , and the tribunal also has specific powers to determine the applicable law , absent the agreement of the parties.

The Remit of an Arbitral Tribunal’s Jurisdiction and Powers

The scope and nature of an arbitral tribunal’s powers can only be ascertained by considering the following sources of law, in order set out below:

i) The arbitration agreement;
ii) Any arbitral rules to which the parties have subjected the arbitration;
iii) The governing law of the arbitration agreement (and contract); and
iv) The law of the place or ‘seat’ of the arbitration (if distinct from point (iii)).

Point i – arbitration agreement

It is clear that the arbitration agreement was not respected by the arbitrator. Firstly, clause 12 clearly stipulated that three arbitrators were to be appointed to settle any dispute and that the laws of India was the applicable law governing the agreement. Despite this, the DF appointed arbitrator proceeded with the arbitration as a sole arbitrator and determined the dispute in accordance with English law in contravention of clauses 11 and 12 of the OA.

Point ii – the arbitral rules

S 34(1) of the AA 1996 provides that the tribunal can decide all procedural and evidential matters, subject the parties agreeing otherwise. The parties agreed at clause 12 of the OA that the rules of the League of Nations were to govern the arbitral proceedings. The arbitrator interpreted this to mean the UNCITRAL Arbitration Rules 2010 (see section titled ‘principle of party autonomy’ set out below for a detailed assessment of point ii).

Point iii – the governing law

In respect of point (iii), in the absence of an express agreement between the parties there is a presumption that the law governing the arbitration agreement is the same law governing the contract (or OA in this case) . Therefore, given that there was no express choice of law in the arbitration agreement per se, the governing law ought properly to have been the laws of India (as stipulated at clause 11 of the OA). Accordingly, the provisions of the Arbitration and Conciliation Act 1996 ought to have been applied to this agreement, subject to the mandatory provisions of the AA 1996 as set out at Schedule 1. Despite this, the arbitrator concluded, following a private meeting with an expert, that in all relevant respects the laws of India were the same as English law and the arbitral award was subsequently issued on this premise. In my opinion, this decision was contrary to the terms of the agreement and was therefore ultra vires the arbitrator’s powers.

Whilst there is a presumption in favour of applying the governing law of the agreement, in the absence of an express choice of law clause in the arbitration agreement , a court could conclude that those words only pertained to the OA and thereby disregard this presumption in favour of deciding that the applicable law is the law of the place or ‘seat’ of the arbitration: see Bulgarian Foreign Trade Bank Ltd v Al Trade Finance Inc, Swedish Supreme Court, 27 October 2000, Case No. T 1881-99, in Yearbook of Commercial Arbitration XXVI (2001), pp. 291-298.

However, given that clause 11 states explicitly that the laws of India shall govern the agreement ‘in every respect’, it is my opinion that a court would conclude that the laws of India were the governing law and, therefore, the arbitrator was acting beyond his powers -ultra vires – and in breach of the agreement between the parties.

Point iv – the seat of the arbitration

S 2(1) of the AA 1996 states that the 1996 Act applies to any arbitration with a ‘seat’ in England and Wales. Therefore, the AA 1996 did apply to this arbitration subject the law expressly chosen by the parties – the laws of India – and in the event that the laws of India conflict with the mandatory provisions of the AA 1996, the AA 1996 ought to prevail.

The principle of autonomy

The arbitrator’s jurisdiction only extends to the remit of the agreement between the parties and not beyond. Any failure by an arbitral tribunal to respect the principle of party autonomy is effectively ultra vires and can result in an award not being recognized and enforced: see Article V(1)(d) of the New York Convention.

Albeit, it ought to be acknowledged that under Article 15(1) of the UNCITRAL Arbitration Rules 2010, there is an early transfer of control from the parties to the tribunal. The rules state, inter alia, that the tribunal ‘may conduct the arbitration in such manner as it considers appropriate’, subject to the rules of natural justice and the other pertinent rules. That gives rise to the following question: were the UNCITRAL Arbitration Rules 2010 the rules chosen by the parties?

The parties’ agreement only stipulates that the rules of the League of Nations apply. The League of Nations never formulated arbitration rules per se. However, the United Nations – the successor of the League of Nations – did formulate the UNCITRAL Arbitration Rules and these rules are the modern rules applied by the Permanent Court of Arbitration sitting at the Hague. It is therefore my opinion that a court would conclude that these rules (or their predecessor) were the appropriate rules to apply to this arbitration in the circumstances. This would effectively mean that the arbitrator had the authority to conduct the arbitration as he considered ‘appropriate’, subject to the applicable law and the rules of natural justice.

The limits to the principle of party autonomy – The overriding principles

The principle of autonomy and the conduct of an arbitral tribunal is restricted by the principles of natural justice, such as: the independence and impartiality of the arbitral tribunal; the equality of treatment and the parties’ right to be heard and to present his / her case ; and public policy. Providing that the parties’ rights to due process have been respected, the courts are reticent to interfere with arbitral awards on the basis of procedural defects. In general, the tribunal must act ‘fairly and impartially’ between the parties under s 33(1) of the AA 1996. A failure by a tribunal to observe any of the rules of due process provides cogent grounds for challenging the recognition and enforcement of an arbitral award.

The arbitrator in this case proceeded to issue the award without hearing from GSI. In my opinion, therefore, this arguably constitutes a breach of GSI’s right to be treated equally and, more specifically, the right to be heard and present their case. This could constitute a breach of Article 15(1) of the UNCITRAL Arbitration Rules, s 33(1)(a) of the AA 1996, and arguably Article 6 of the ECHR.

Appointment of the Expert

Under the AA 1996 a tribunal has general and specific powers, subject to any agreement to the contrary by the parties . Under AA 1996 and Article 15 of the UNCITRAL Arbitration Rules an arbitrator can effectively ‘decide all procedural and evidential matters’, if there is no agreement to the contrary made by the parties. Therefore, in principle, arbitral tribunals sitting in England may, providing the parties do not agree otherwise, appoint experts .

The tribunal is only permitted to appoint its own expert if it considers that such a move is necessary and appropriate. Albeit, in my opinion, this decision was not necessary nor even appropriate. The parties made it explicitly clear that the laws of India were the governing law. Therefore there was no need to appoint an Indian law expert. In any event, the parties to the proceedings must be entitled to question the expert appointed by the tribunal and present their own expert witnesses . In light of the above, it is my opinion that the arbitrator inappropriately appointed the Indian law expert and, in any event, failed to give the parties the opportunity to question the expert.

The arbitrator’s refusal to consider jurisdiction as a preliminary issue

An arbitrator is entitled to consider jurisdiction and liability together because both are often disputed in international arbitration. As such, it does not constitute a breach of the arbitrator’s duty under s 33(1)(b) of the AA 1996 for an arbitrator to consider either jurisdiction as a preliminary point or to consider the issues of jurisdiction and liability together: see Kalmneft JSC v Glencore International AG [2002] 1 All ER 76.

The parties did have the right to apply to the local courts for interim measures addressing the issues raised above in accordance with Article 26(3) UNCITRAL Arbitration Rules and ss 44(3)-(5) of the AA 1996, but given that the tribunal has now closed proceedings and issued its award it is regarded as functus officio.

Questions raised about the arbitrator’s independence and impartiality

The fact that the arbitrator’s former law firm is paid a monthly retainer by Global.

The International Bar Association (‘IBA’) ‘Guidelines on Conflicts of Interest in International Arbitration’ (May 2004) provides guidelines on the correct course of action for an arbitrator to follow when a potential conflict of interest arises.

Clause (2)(a) provides for circumtstances which amount to a “Conflict of Interest” and states as follows: ‘an arbitrator shall decline to accept an appointment or, if the arbitration has already been commenced, refuse to continue to act as an arbitrator if he or she has any doubts as to his or her ability to be impartial or independent’ .

Therefore if an arbitrator (‘tribunal’) has ‘any doubts as to an ability to be impartial and independent’ s/he should decline appointment . Doubts are justified if a ‘reasonable and informed third party would reach the conclusion that there was a likelihood that the arbitrator may be influenced by factors other than the merits of the case’ (clause 2(c)). An arbitrator ought to disclose ‘factors or circumstances’ which exist which may be viewed by the parties to give rise to doubts about the arbitrator’s impartiality or independence (clause (3)(a)). However, included in the ‘Orange List’ of the IBA rules is a situation where:

“The arbitrator’s law firm has within the past three years acted for one of the parties or an affiliate of one of the parties in an unrelated matter without involvement of the arbitrator” .

However, the crucial question here would have been did the arbitrator’s former law firm act for one of the parties within the last three years? If so, the arbitrator would have had a duty to disclose this. However, in the circumstances, given that Global is not a party to these proceedings, there was no obligation on the arbitrator to disclose this matter.

The UNCITRAL Arbitration Rules

Article 11 also provides that an arbitrator shall ‘disclose any circumstances likely to give rise to justifiable doubts as to his or her impartiality or independence’. A party may challenge an arbitrator if ‘circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence’ . A party that wishes to challenge an arbitrator on this basis must send notice of its intention to challenge this issue ‘within 15 days after it has been notified of the appointment of the challenged arbitrator, or within 15 days after the circumstances mentioned in articles 11 and 12 became known to that party’. If an arbitrator does not withdraw within the 15 days from the date of the notice being sent, a party may pursue the challenge within 30 days of the date of the notice by ‘seeking a decision on the challenge by the appointing authority’ (Article 13(4)). However, if GSI did have ‘justifiable doubts’ about the arbitrator’s impartiality and independence on his appointment they failed to act in accordance with the relevant rules set out above to challenge this appointment. Accordingly they have now waived their right to challenge the arbitrator’s appointment under the UNCITRAL Arbitration Rules at least

Arbitration Act 1996

In accordance with s 24(1) of the AA 1996, a party may make an application to a court to have an arbitrator removed on the ground that ‘circumstances exist that give rise to justifiable doubts as to his impartiality….and that substantial injustice has been or will be caused to the applicant’ . However, again, GSI missed their opportunity to challenge the arbitrator’s appointment in the court for failure to pursue the matter at the time he was appointed. Albeit GSI did raise this issue in their preliminary response, and the arbitrator considered the points raised and proceeded with the case as he felt he was competent to act. Given that the allegation concerns an issue about the arbitrator’s former law firm acting for GSI’ s parent company, there are unlikely to be any grounds to allege bias in this case.

Common Law – test of bias

However, at common law, the test applied by the English courts to assess whether or not an arbitrator is bias, or lacks independence and impartiality, is: ‘whether from the viewpoint of a fair-minded and informed observer there is a relevant member of the tribunal in question in the sense that he might unfairly regard (or have unfairly regarded) with favour or disfavour the case of a party under consideration by him’. This test was formulated in the case of Porter v Magill, Weeks v Magill [2001] UKHL 67 .

For the same reasons set out above, there is unlikely to be sufficient evidence to prove bias against the arbitrator on the basis that he used to work for a law firm which is paid a monthly retainer by GSI’s parent company, Global. However, there is another issue that gave rise to concern. GSI’s lawyers overheard the arbitrator saying: ‘These Indians have a very distorted view of how international arbitration operates’. As a result of these comments by the arbitrator there is arguably a case of bias against the arbitrator following the Porter v Magill test. The action that needs to be taken in this respect is set out below under the section titled ‘Steps to be taken’.

The arbitrator’s decision to join Global to the arbitral proceedings

In relation to the arbitrator’s decision to join Global to the proceedings, in my opinion the arbitrator erred in law by making this decision. Generally speaking, parties who are not a party to the arbitration agreement cannot be joined to the arbitral proceedings without first obtaining their prior consent: see Oxford Shipping Co. Ltd v Nippon Yusen Kaisha, The Eastern Saga [1984] 1 All ER 835 . Accordingly, in joining Global to the proceedings, it is my opinion that the arbitrator again exceeded his jurisdiction and powers as it is contrary to the OA, the principle of party autonomy and rule of privity of contract, as Global were not a party to the OA.

THE PROSPECTS OF GSI PREVENTING THE ENFORCEMENT OF THE ARBITRAL AWARD

For the reasons set out above, it is my opinion that the arbitrator has exceeded his powers and jurisdiction. Even if a court finds that the arbitrator was entitled to appoint an expert and proceed under the laws of England and Wales, the incorrect procedure was still followed. Whilst the arbitral proceedings are said to have commenced as soon as DF served notice in writing on GSI requiring them to appoint an arbitrator , the arbitrator proceeded to hear the dispute without giving due consideration to the preliminary points raised by GSI.

The proper approach to have been adopted, in my opinion, was that set out at s 17 of the AA 1996. On GSI’s refusal to appoint an arbitrator, this refusal triggered s 17 of the AA 1996 – under the law of the ‘seat’ of the arbitration – which provides that, unless the parties have agreed otherwise, where one of the parties fails to appoint an arbitrator as provided for in an arbitration agreement, the party who has appointed his arbitrator ‘may give notice in writing to the party’ who failed to appoint his arbitrator that he ‘proposes to appoint his arbitrator to act as sole arbitrator’ . In this case, there is no indication from the evidence that DF provided such notice to GSI. If they had, and GSI failed to appoint their arbitrator and notified the other party of their action, then the sole arbitrator’s award would have been binding on the parties, providing that a court found in favour of the arbitrator on the other outstanding issues (of law and procedure). However, DF evidently failed to follow the required procedure which would have entitled GSI to serve notice on DF that they shall be applying to the court to have the arbitrator appointed by DF set aside . By failing to comply with s 17, DF ought properly to have applied to the court under s 18 to appoint the arbitrators as set out in the agreement. This procedure was not followed and accordingly the arbitral award is, in my opinion, null and void.

Enforcement of the Arbitral Award under the New York Convention

England, India and Germany are all New York Convention Contracting States. The New York Convention shall apply in circumstances where a party seeks the recognition and enforcement of an arbitral award which was made in a Contracting State ‘other than the State where the recognition and enforcement of such awards are sought’ . Therefore, if DF seek to have their arbitral award recognised or enforced in any other New York Convention Contracting States aside from England, then the Convention shall apply. The Convention applies to arbitration agreements made in ‘writing’. Therefore, the Convention shall apply to the OA and, more specifically, the arbitration agreement set out at clause 12.

Pursuant to Article III, each State is required to ‘recognise awards as binding and enforce them’ providing that the requirements set out at Article IV are adhered to. Should DF seek to have the award recognised and enforced under the New York Convention, GSI can raise a number of grounds to challenge the recognition and enforcement of the award.

Article V of the Convention provides that the recognition and enforcement of an award may be ‘refused’ if a party who is challenging the award proves, to the authority where the recognition and enforcement of the award is sought, the following:

– The arbitral tribunal was not composed in accordance with the agreement as set out at clause 12 of the OA ;

– The arbitral procedure adopted by the arbitrator did not accord with the procedure agreed to by the parties (this depends on how a court interprets the League of Nations Rules);

– The party against whom the award was made was not given proper notice of the appointment of the arbitrator or the arbitration proceedings, or was unable to present their case ;

– The tribunal’s failure to comply with the parties’ agreement or the law of the ‘seat’ of the arbitration ; and

– On grounds of public policy, given that the arbitration proceeded contrary to an injunction being granted by the Indian courts .

Steps to be taken by GSI

Court Proceedings

At this stage of the arbitral process GSI is now advised to initiate proceedings in the High Court to challenge the arbitral award on the following grounds:

• Under s 67 of the AA 1996 on the basis that the tribunal did not have the jurisdiction to make the award. Firstly, the tribunal was improperly constituted, as clause 12 of the arbitration agreement clearly stipulated that the dispute shall be settled by three arbitrators. Despite this, DF appointed a sole arbitrator and failed to notify GSI that he proposed to appoint the sole arbitrator to consider the dispute in accordance with s 17 of the AA 1996. Secondly, the arbitrator adopted English law as the governing law of the agreement despite the parties’ choice of Indian law as expressed by the parties at clause 11 of the OA. Although the arbitrator was acting on expert opinion that Indian law was in all relevant respects the same as English law, the arbitrator did not first seek the parties’ consent to appoint the expert and he met with him in private and, in any event, the arbitrator did not give the parties the opportunity to question the expert. Accordingly GSI can seek an order declaring the award to ‘be of no effect’ .

• A challenge can also be under s 68 on the grounds that a serious irregularity resulted which adversely affected the ‘tribunal, the proceedings and the award’ and that the arbitral tribunal exceeded its powers under s 68(2)(b) by failing to apply the law governing the agreement as stipulated at clause 11. The laws of India were the governing laws of the contract ‘in every respect’. Furthermore, in addition to the above grounds, s 69 is also applicable on the basis that the arbitral tribunal erred in law for the following reasons: proceeding with the arbitration as sole arbitrator; failing to give the parties the opportunity to question the expert; the allegations of bias, etc. Overall, the arbitrator failed to conduct the proceedings in accordance with the law and procedure agreed upon by the parties.

CONCLUDING REMARKS

It is noted above that it is my opinion that the arbitral award can arguably be set aside on the grounds that it is contrary to public policy. The arbitrator proceeded to determine the dispute despite a court injunction having been granted by the Indian courts. It was found by the Supreme Court of Indian in the case of Bhatia International v. Bulk Trading (2002) 4SCC 105 that the Indian courts’ jurisdiction extended beyond domestic arbitrations to include offshore arbitrations under the provisions of the Arbitration and Conciliation Act 1996. The Court stated explicitly that unless the parties expressly (or impliedly) excluded the relevant provisions of the Act , then the Indian courts had jurisdiction over the dispute. This would depend very much on whether or not the High Court agrees with my opinion that the proper law to have been applied to this agreement was the laws of India.

Finally, in any event, it is my opinion that should DF seek to enforce the arbitral award it would be of no consequence, as GSI’s assets are located in India and France (Global is not party to these proceedings for the reasons already mentioned). An injunction was granted in India so the arbitral award would be unenforceable there. In France, DF would not succeed in pursuing GSI’s assets because of the force majeure clause set out at clause 10 of the OA.

For the foregoing reasons, it is my opinion that GSI has a very good prospect of preventing the recognition and enforcement of the arbitral award and ought to lodge an application in the High Court as a matter of urgency.

If I may be of further assistance, please do not hesitate to contact me.

Word count: 4417 (not including footnotes)
Bibliography
Text Books:

Alan Redfern and Martin Hunter, Law and Practice of international Commercial Arbitration, (Fourth Edn., Sweet & Maxwell, London 2005)

Claudia Alfons, Recognition and Enforcement of Annuled Foreign Arbitral Awards: An anlaysis of the Legal Framework and its Interpretation in Case Law and Literature, (Peter Lang, Germany 2012)

Gary B. Born, International Commercial Abitration, (Volume 1, Kluwer Law International, The Netherlands 2009)

Jane Jenkins and Simon Stebbings, International Construction Arbitration Law, (Kluwer Law International, The Netherlands 2006)

John Murdoch and Will Hughes, Construction Contracts: Law and Management, (Fourth Edn., Taylor & Francis,, England 2008)

Julian D.M. Lew and Loukas A. Mistelis, Arbitration Insights: Twenty years of the Annual Lecture of the School of International Arbitration, (Kluwer Law International, The Netherlands 2007)

UK Statute:
Arbitration Act 1996

Indian Statute:
Arbitration and Conciliation Act 1996

Case Law:
Bhatia International v. Bulk Trading (2002) 4SCC 105
Bulgarian Foreign Trade Bank Ltd v Al Trade Finance Inc, Swedish Supreme Court, 27 October 2000, Case No. T 1881-99, in Yearbook of Commercial Arbitration XXVI (2001), pp. 291-298
Kalmneft JSC v Glencore International AG [2002] 1 All ER 76
Oxford Shipping Co. Ltd v Nippon Yusen Kaisha, The Eastern Saga [1984] 1 All ER 835
Porter v Magill, Weeks v Magill [2001] UKHL 67; [2002] 1 All ER 465
Sonatrach Petroleum Corp v Ferrell international Ltd [2002] 1 All ER (Comm) 627

International Instruments:
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (‘New York Convention’)
European Convention of Human Rights and Fundamental Freedoms (1950)
The International Bar Association (‘IBA’) ‘Guidelines on Conflicts of Interest in International Arbitration’ (May 2004)
United Nations Commission on International Trade Law (‘UNCITRAL’) Arbitration Rules (2010)

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