Broda Agro Trade (Cyprus) Ltd v Alfred C Toepfer International GmbH

In these proceedings, the Appellant (“Broda”) seeks:

a declaration at common law, or alternatively under section 72 of the Arbitration Act 1996 (“the Act”), that there is no valid arbitration agreement as between it and the Respondent (“Toepfer”) such that the interim arbitration award dated 3 July 2008 by the GAFTA Arbitration Tribunal is not binding on it; or, alternatively,

pursuant to section 80(5) of the Act, an extension of time to make an application under section 67 and an order setting aside the interim award by reason of the arbitration tribunal having lacked substantive jurisdiction.

On 17 December 2009 Teare J dismissed Broda’s claims, but granted permission to appeal.

The appeal raises a short but interesting point on the interpretation and effect of section 72 of the Arbitration Act 1996, which surprisingly has not been the subject of previous judicial authority.

On 31 October 2007 the Respondent (“Toepfer”) commenced GAFTA arbitration proceedings against Broda claiming damages for breach of an alleged contract, which included a GAFTA arbitration agreement providing for arbitration in London, said to have been concluded in February 2007 and varied in July 2007, for the supply by Broda to Toepfer of a quantity of milling wheat.

Broda maintains that no concluded contract was made.

On 3 January 2008, Toepfer presented its Claim Submissions to GAFTA claiming damages against Broda in the sum of US$5,462,668.35. Broda responded on 31 January 2008 by letter of that date from Argyrou & Co, described as Advocates and Legal Consultants, of Larnaca in Cyprus and signed by “Christos Konstantinou LL.B. (Hons), Dipl., Barrister”. It denied there was a contract, and the letter gave brief reasons for that contention. It stated that Broda had its principal place of business in Russia, and had therefore commenced legal proceedings in its courts seeking a declaration that no binding contract had been concluded.

By letter dated 15 February 2008, GAFTA informed Broda and Toepfer that the chairman of the arbitral tribunal had decided that they would make a separate decision on its jurisdiction, and gave directions for submissions on this issue. Toepfer submitted and served its Reply Submissions, addressing Broda’s contentions, on 3 March 2008.

By letter dated 14 March 2008, the chairman of the tribunal offered Broda the opportunity to submit Rejoinder Submissions. Argyrou & Co responded by letter dated 23 March 2008. It emphasised that its letter did not constitute a reply to Toepfer’s submissions; it stated that the Russian Courts were the most appropriate jurisdiction to determine whether the arbitrators had jurisdiction, and requested GAFTA not to accept jurisdiction.

Argyrou & Co wrote again on 7 June 2008. They informed GAFTA that the Court of the Russian Federation had decided that Broda and Toepfer had never entered into a binding contract. In paragraph 5 of the letter they stated that the judgment of the Russian Court would be presented to GAFTA and that the reasoning of the Russian Court “should play an integral part in a decision by GAFTA to decline jurisdiction in this case”.

As mentioned above, on 3 July 2008 the arbitral tribunal issued their Interim Award on jurisdiction. They concluded that there was a binding contract. The tribunal noted the decision of the Russian court but disagreed with it. They therefore ruled that they had jurisdiction to determine the substantive dispute and gave directions for submissions by both parties on the substantive dispute.

On 3 September 2008 Broda served and filed Respondents’ Submissions in Response to those of Toepfer dated 3 January and 3 March 2008. In those Submissions, Broda reiterated its case that there had been no binding contract. Their Conclusions stated:

On 23 September 2008 Toepfer presented Reply Submissions.

On 29 October 2008 Broda wrote to GAFTA seeking removal of the tribunal on the grounds that, since the tribunal had determined in the interim award that there was a contract, “it renders any attempt of Broda to defend the substantive claim futile”. Doubts were also expressed as to the impartiality and competence of the tribunal. GAFTA replied on 31 October 2008 to the effect that the request for removal was denied.

On 10 November 2008 Broda presented a Respondents’ Rejoinder. It again contended that there had been no concluded contract.

As mentioned above, the arbitral tribunal’s Final Award is dated 19 February 2009. In it, the tribunal stated that it had read the judgment of the Russian Court and “having given careful consideration to the judgment … the Tribunal continues to hold that it reached the correct decision on jurisdiction as set out in our Interim Award”. The tribunal addressed the substantive dispute and found that Broda had acted in breach of contract. Damages in the sum of US$5,462,668.25 were awarded together with interest and costs.

On 31 July 2009 Teare J gave permission to Toepfer to enforce the Final Award subject to an application by Broda to set aside his order within 28 days of service.

On 12 August 2009, Argyrou & Co presented Broda’s Appeal Submissions. They included reference to the Act. They contended that there had been no binding contract. They asked the Board of Appeal to set aside the award dated 19 February 2009 and to recognise the contract "as non-concluded and void".

On 7 September 2009 Broda applied to the Commercial Court to set aside Teare J’s order giving permission to enforce the award and wrote to GAFTA requesting a stay of the appeal pending the application to this court. On 17 September 2009 a stay was refused. On 8 and 10 November 2009 Broda and Toepfer served further submissions in the GAFTA appeal.

Meanwhile, on 2 October 2009 Broda issued its application for the relief summarised at paragraph 1 above. As mentioned above, on 17 December Teare J dismissed its claims.

The Arbitration Act 1996 was enacted following the Report on The Arbitration Bill of the Departmental Advisory Committee on Arbitration Law (“the DAC Report”) chaired by Lord Saville (who was then a judge of the Court of Appeal). The Act was intended to modernise our arbitration law in line with modern international practice. The long title of the Act states that its object is “to restate and improve the law relating to arbitration pursuant to an arbitration agreement, …”. The Act is essentially a code of our consensual arbitration law.

Section 67 is as follows:

Section 73, referred to in subsection (1), provides that a party loses the right to object to (among other matters) the tribunal’s lack of substantive jurisdiction if he knew or should have known of that matter but took part in the proceedings without making his objection. It has no application to the present case. Section 70, so far as material to the present case, is as follows:

Section 72 provides:

Section 80 among other things confers power on the Court to extend time limits for legal proceedings:

“Substantive jurisdiction” is defined in section 82(1):

Before the judge, Broda contended that it had never entered into the arbitration agreement for which Toepfer contended. It had expressed its objection to the substantive jurisdiction of the tribunal, but had not taken part in the proceedings of the tribunal in which it considered whether it had substantive jurisdiction and found, by its Interim Award, that it did have such jurisdiction. It had only participated in the tribunal’s proceedings following that award, when it considered whether Toepfer had established a breach of contract on the part of Broda and if so to what relief Toepfer was entitled. On its true construction, the reference in section 72 to a party “who takes no part in the proceedings” is to a party who does not take part in the proceedings in which the tribunal decides whether it has substantive jurisdiction. Broda is such a party, since it only took part in the substantive proceedings. It follows that it was and is entitled to question the substantive jurisdiction of the arbitral tribunal by proceedings under section 72. Alternatively, given that this is a case in which, if Broda’s contentions are well-founded, Toepfer seeks to enforce an award under a non-existent contract, in all the circumstances it was just and appropriate to extend its time to make an application under section 67. It was common ground that the time to make an application under section 67 expired on 31 July 2008, 28 days after the publication of the Interim Award on jurisdiction. The application to extend time was made on 2 October 2009. Thus the required extension of time was approximately 14 months.

Toepfer contended:

Section 72 applies to a party who has taken any part in the arbitral proceedings, whether by way of a challenge to its substantive jurisdiction or in relation to the merits.

In any event, Broda had taken part in the proceedings of the tribunal relating to its decision on its jurisdiction as well as its proceedings on the merits.

It followed from (a) or (b) that Broda could not make an application under section 72.

The Court should not extend Broda’s time to make an application under section 67.

The judge held:

Broda had not taken part in the proceedings of the tribunal leading to its Interim Award on jurisdiction so as to exclude its right to make an application under section 72.

However, the requirement in section 72 that the person had taken no part in the proceedings applied to the proceedings of the tribunal on the merits as well as its proceedings in relation to its substantive jurisdiction. Since it was common ground that Broda had participated in the proceedings on the merits, it followed that it could not make an application under section 72 to challenge the arbitrators’ awards.

Broda was not entitled to an extension of time in which to make an application under section 67.

It followed that the tribunal’s awards were binding on Broda.

Before this Court, Broda contended that the decision of the judge as to the effect of section 72 was wrong, and that the judge had wrongly exercised his discretion in refusing to extend time for the purposes of its application under section 67. Toepfer challenged decision (i).

For Broda, Mr Flynn QC submitted that section 72 is concerned with challenges to the jurisdiction of the arbitrators, not with the exercise of their substantive jurisdiction. Its terms mirror those of section 30, which brought into English law the doctrine of kompetenz kompetenz, i.e., that the arbitral tribunal has jurisdiction to determine its own jurisdiction. It follows that the reference in section 72 to a person taking part in the proceedings is a reference to its taking part in the proceedings relating to its substantive jurisdiction. He submitted that interpretation of the section is supported by the commentary in the DAC Report, and by the judgment of Clarke J, as he then was, in Caparo Group Ltd v Fagor Arrasate Sociedad Cooperative [2000] ADRJ 254. In addition, he pointed out that submission to arbitration involves a waiver by a party of its rights under Article 6 of the European Convention on Human Rights to a public hearing; such a waiver requires informed and unequivocal conduct by that party, which, if there was no arbitration (which must be the hypothesis for determining the effect of section 72), there had not been.

For Toepfer, Miss Masters submitted that the words of section 72 are clear, and that Broda was seeking to introduce an unjustified limitation on them.

In relation to the extension of time for an application under section 67, Mr Flynn submitted that the judge had erred in the exercise of his undoubted discretion by failing to have regard to Broda’s rights under Article 6, by failing to apply the criteria set out in Kalmneft v Glencore [2002] 1 Lloyd’s Rep 128 or to give proper weight to the facts of the case, had failed to apply the criteria in CPR Part 3.9 and failed to apply the overriding objective.

Miss Masters submitted that Broda had not shown that the judge had made any error of law in exercising his discretion, had taken all relevant considerations into account and reached a decision that was open to him and justified in the circumstances of the case.

Finally, Miss Masters submitted that the correspondence on behalf of Broda with the tribunal amounted to its taking part in the arbitral proceedings relating to jurisdiction, so that even if its contentions as to the effect of section 72 are well-founded, it was nonetheless precluded from making an application under that section.

Mr Flynn submitted that the judge had correctly concluded that Broda had not taken part in the proceedings as to the jurisdiction of the tribunal.

There are three issues before this Court:

What is the scope of the requirement for an application under section 72 that the person has taken no part in the proceedings?

Did Broda take part in the arbitral proceedings in which the arbitral tribunal considered and determined its substantive jurisdiction?

Did the judge err in his exercise of his discretion by refusing to extend time for Broda’s application under section 67?

Mr Flynn is of course correct that section 72 is concerned with the jurisdiction of the arbitrators. But in my judgment, its wording is clear. I see no basis for an implied restriction of the words “takes no part in the proceedings” to the proceedings relating to the determination of the substantive jurisdiction of the arbitrators. The purpose of the requirement is clear. A person who considers that he has not entered into an arbitration agreement is entitled to ignore its proceedings. He is entitled to say, in effect, that the arbitral proceedings are nothing to do with him. If he takes that course, his rights to claim relief from the court cannot be restricted because he did not participate in those proceedings. If, on the other hand, he participated in the proceedings, whether in relation to the jurisdiction of the arbitrators or in relation to the exercise of their asserted substantive jurisdiction, and is disappointed by their decision, he can fairly be required to bring proceedings to challenge their award within the limited time applicable to an application under section 67, which in any event may in an appropriate case be extended by the court.

I would more readily understand a provision restricted to limiting the rights of a party who participated in the substantive proceedings of the arbitrators than a provision restricted to limiting only the rights of a party who participated only in their jurisdictional decision. The principle in favour of not limiting the rights of a party who challenges the jurisdiction finds expression in section 33 of the Civil Jurisdiction and Judgments Act 1982, which provides that a person who appears before a foreign court for the purpose only of contesting its jurisdiction is not to be regarded as having submitted to the jurisdiction. A party who contests the merits before arbitrators will, in practice, dispute the substantive award only because he is aggrieved or disappointed by their decision on the merits. I see no reason why such a party should not be required to challenge the validity of the award within a limited time.

Mr Flynn is wrong in suggesting that the principle of kompetenzkompetenz was introduced into English law by section 30 of the Act. Arbitrators have always had the jurisdiction (perhaps more accurately a power), subject to any contrary provision in the arbitration agreement (which would be very unusual) to decide whether they have jurisdiction; but their decision as to whether or not they had jurisdiction was never binding on the parties. It was always open to a party to apply to the court for a declaration that the tribunal did have, or did not have, the contested substantive jurisdiction. The DAC Report stated, in relation to Clause 30 of the draft Bill, which became section 30 of the Act:

In my judgment, the reason that section 72 is concerned with jurisdictional issues is that it is only in relation to such issues that the Court has unqualified jurisdiction. A decision of a tribunal as to the existence or scope of its jurisdiction, or as to the regularity of its constitution, is not binding on the court. If an application under section 72, or under section 67, is made by a party to an arbitration, the court determines the issue raised by that party on the basis of the facts and law as found by the court. Thus, in principle, a decision by an arbitral tribunal in the exercise of its kompetenz-kompetenz jurisdiction is subject to unqualified review by the court. It is necessary to contrast such issues with those determined by an arbitral tribunal in the exercise of its substantive jurisdiction, i.e. in its award on the merits. In the absence of any serious irregularity, the parties are bound by the tribunal’s findings of fact, and there can be an appeal to the court only on a point of law subject to the restrictions set out in section 69.

I do not think that the DAC Report or the judgment of Clarke J in Caparo Group Ltd v Fagor Arrasate Sociedad Cooperative bear the weight Mr Flynn seeks to put on them. Paragraph 295 of the Report is as follows:

My view as to the effect of section 72 is supported by Lord Mustill and Stewart Boyd QC in Commercial Arbitration, which is I think generally recognised as the leading textbook. In their commentary on section 72, at page 361, they state:

It is significant that the learned authors put the matters this way round: c.f. my comment in paragraph 38 above. The text refers to footnote 11:

Similarly, Merkin, Arbitration Law at paragraphs 9.30 to 9.33, draws no distinction between participating in the arbitral proceedings as to jurisdiction and as to its substantive award.

In Caparo Group Ltd v Fagor Arrasate Sociedad Cooperative the ICC arbitration agreement was contained in a contract between Fagor and CML, an indirect subsidiary of Caparo. Fagor commenced ICC arbitration proceedings against Caparo and CML. Caparo’s solicitors wrote to the ICC as follows:-

Caparo played no further part in the arbitration. It sought a declaration that it was not subject to the arbitral jurisdiction. Not surprisingly, Clarke J held that it had not participated in the arbitral proceedings. He said:

Mr Flynn pointed to the difference between the wording of section 67 and that of section 72. Section 72 refers to “A person alleged to be a party to arbitral proceedings”, whereas section 67 refers to “A party to arbitral proceedings …” I think there is nothing in this. Section 72 refers to a person alleged to be a party to arbitration proceedings because, ex hypothesi, he has not taken part in them. A person who has taken part in the arbitral proceedings, albeit that he disputes the jurisdiction, can sensibly be referred to as a party to them, and such a person must make his application under section 67.

Moreover, it is not to be assumed that arbitrators will always have separate proceedings and hearings, and give separate awards, on jurisdiction and substance. It would at least in some cases be difficult to distinguish between participation as to jurisdiction and participation as to the substance. Furthermore, the only real issue may be whether there was any binding contract between the parties. In such a case, the issue of jurisdiction and the merits may be inseparable. Indeed, to my mind the submissions of Broda in the present case in the arbitration, following the making of the tribunal’s Interim Award, in which they disputed that there was any binding contract containing an arbitration agreement, demonstrate how artificial it may be to distinguish between participation as to jurisdiction and as to the merits.

I do not think that Article 6 helps Broda. It has the right of access to the court, under section 67, in proceedings in public resulting in a reasoned decision. Reasonable limitation periods, which of necessity if not complied with may preclude a person from establishing his rights, have always been recognised as compatible with Article 6. The time limit applicable to section 67, coupled with the power of the court in an appropriate case to extend time, in the context of arbitration, is in my judgment clearly compatible with Article 6. That power of the court means that the right of a party to challenge an arbitration award under section 67 is real, practical and not illusory.

My decision on the construction of section 72 makes it unnecessary to consider this issue, which is not straightforward. It may be difficult to distinguish between a letter that does no more than inform the arbitral tribunal, as a matter of courtesy, that the respondent does not accept its jurisdiction, and a submission that it has no jurisdiction. This is such a case. I say no more about it.

In order to succeed on this issue, Broda must show that the judge erred in the exercise of his undoubted discretion. It is certainly a strong thing to shut a party out of making an application under section 67, since in a case such as the present the consequence is that that party is bound by an arbitration award under a contract that no court has decided was ever concluded.

The judge dealt with Broda’s application for an extension of time in paragraphs 46 to 68 of his judgment. He referred to the guidance given by Colman J in Kalmneft v Glencore and addressed each of the considerations listed in paragraph 59 of the judgment in that case. In paragraph 51 of his judgment, Teare J said:

Paragraph 57 of Teare J addressed the issue of unfairness to Broda:

Broda’s submissions on this issue do not come close to showing that the judge made any error of law or principle in the exercise of his discretion. In my judgment, the judge carefully considered the relevant matters and reached a conclusion that was open to him. Indeed, it is difficult to see the practical point of a time limit if an extension as long as that required in the present case should be given to a commercial organisation such as Broda, which, faced with a very substantial claim in London, did not see fit to consult an English lawyer. I assume, in its favour, that Mr Konstantinou did not have access to a copy of the Act, to which reference was made in Broda’s Appeal Submissions to GAFTA. But it must have been obvious that if the Interim Award was to be challenged, that had to be done in London.

Mr Flynn submitted that the judge’s failure to refer to and to take into account Article 6 was an error of law. The judge was well aware that the effect of his decision was to preclude Broda from establishing before the court that it had not concluded the contract alleged by Toepfer and was therefore not liable to it. A reference to Article 6 would have added nothing.

I would uphold the decision of the judge refusing to extend time.

Broda seeks a declaration at common law that it was not bound by the arbitration agreement relied on by Toepfer. The restrictions in sections 67 and 72 on challenges to the jurisdiction of an arbitral tribunal cannot be circumvented by making a claim at common law: the jurisdiction of the court to make a declaration is subject to those restrictions. It follows that the claim for a common law declaration adds nothing.

For the above reasons, I would dismiss Broda’s appeal.

I agree that the appeal should be dismissed for the reasons given by Stanley Burnton LJ, and that it is unnecessary and inappropriate, as he says at paragraph 50, to deal with the issue raised by the Respondent’s Notice.

I also agree.