JSC Zestafoni G Nikoladze Ferroalloy Plant & Ors v Ronly Holdings Ltd

There is before the court an application under Section 67 of the Arbitration Act 1996 whereby the applicant (“Zestafoni Plant”) invites the court to set aside an interim arbitration award by Mr Ian Kinnell Q.C. dated 12^th May 2003 on the grounds that he had no jurisdiction to make the award. He held that he did have jurisdiction by reason of an ad hoc agreement to appoint him as sole arbitrator reached between the defendant, Ronly Holdings Ltd. (“Ronly”) and Zestafoni Plant and that the claims advanced by Ronly fell within the scope of that jurisdiction.

There is also before the court an application by Zestafoni Plant under section 69 of the 1996 Act, in case it is concluded that the arbitrator did have jurisdiction, for permission to appeal against so much of his award as concluded that Ronly had title to sue for the amounts claimed in its own name.

The disputes between Ronly and Zestafoni Plant relate to or arise out of an agreement dated 30^th September 1997 (“the Agreement”) which was entered into by Ronly, an English company, and Fapet International Commercial Trading Inc, a British Virgin Islands Company, (“Fapet”) together jointly and severally referred to as “Faronly”, with Zestafoni Plant, incorporated in the Republic of Georgia and Redwater Overseas Ltd, a Republic of Ireland company, together jointly and severally, referred to in the Agreement as “Zestafoni”.

Under that Agreement, which was for a period of two years, Faronly was to sell and supply to Zestafoni raw materials and electricity and Zestafoni was to sell and supply to Faronly ferroalloys manufactured at its plant in Georgia.

Under the terms of the Agreement, Faronly also made a loan of US$ 1.5 million to Zestafoni.

There was also a Law and Jurisdiction clause which provided that the Agreement should be governed by English law and that disputes should be referred to arbitration in the City of London with one arbitrator to be appointed by each of Faronly and Zestafoni and a third arbitrator by the two so appointed.

In the event, Ronly, having advanced a claim for amounts due to Faronly under the Agreement, purported to agree with Zestafoni Plant through its General Director, a Mr. Ambokadze, that the claims advanced by Ronly should be referred to Mr. Kinnell as sole arbitrator. After he had accepted his appointment and had entered on the reference and after pleadings had been exchanged Zestafoni Plant, then represented by Norton Rose, took the point that in the face of the Law and Jurisdiction clause it was not open to Ronly and Zestafoni Plant to agree between themselves to ignore that provision of the Agreement and to proceed to refer the claims to Mr. Kinnell as sole arbitrator. It was also asserted on behalf of Zestafoni Plant that Ronly had no standing to claim in its own name amounts due to Faronly under the Agreement.

Both those issues were the subject of a hearing before Mr. Kinnell and he issued an award in favour of Ronly on both issues.

Zestafoni Plant now applies to set aside that award on the three grounds that (i) by reason of the terms of the Law and Jurisdiction clause it was not open to Ronly and Zestafoni Plant alone to create a binding sole arbitrator agreement, (ii) alternatively on its proper construction the correspondence never gave rise to an agreement because Ronly and Zestafoni Plant were never ad idem and (iii) that Zestafoni Plant acted illegally under the law of Georgia in entering into such an agreement without the authorisation of the Georgian Ministry of Justice and that therefore it would be contrary to public policy for the English courts to give effect to it by giving effect to the arbitrator’s award.

Before considering whether Ronly and Zestafoni Plant were ad idem and thereby entered into an agreement to refer the dispute under the Agreement to the arbitration of a sole arbitrator it is necessary to investigate what powers, if any, they had under the terms of the Agreement to enter into such an arbitration agreement and, if they had none, what was the consequence of their purporting to do so.

The Agreement is expressed to be made between Fapet and Ronly “jointly and severally”. Those two parties are stated to be “hereinafter jointly referred to as Faronly”. Redwater and Zestafoni Ferroalloy Plant (“Zestafoni Plant”) are also described as contracting “jointly and severally” and both are stated to be “hereinafter referred to as ‘Zestafoni”. Under Clause 1, the Definition clause, by clause 1.1.4 Faronly is defined as follows:

“1.1.4

“Faronly” shall mean Fapet and Ronly, both companies jointly and severally being liable for obligations of Faronly under this Agreement. No document signed for and on behalf of Faronly under or pursuant to this Agreement shall have any legal effect unless it is signed either by Fapet and Ronly jointly or by Ronly alone. Fapet has no separate legal right of signature.”

Under clause 2.1 it is provided as follows:

“2.1

Faronly shall supply and sell Raw Materials and Electricity to Zestafoni and Zestafoni Ferroalloy Plant shall produce and supply Ferroalloys to Faronly on and subject to the terms of this Agreement.”

Throughout the Agreement the mutual supply obligations are expressed to be those of Faronly and Zestafoni Ferroalloy Plant respectively. There are, however, several references to “the parties”. Thus, for example, if under clause 4.1 Zestafoni requires for its production process Raw Materials not referred to under clause 3 and Faronly agrees to supply such Raw Materials, the specifications, quantity and price are to be “set out in an annexure to this Agreement and signed by the Parties”. Further, under clause 5.2 after the initial six month period of the Agreement and thereafter after each subsequent quarter of the Agreement “the parties are to meet and agree” upon the quantities and unit price of electricity to be supplied by Faronly to Zestafoni, the shipment schedule for Raw Materials and any additional requirements which Zestafoni may have for Raw Materials which Faronly agrees to supply. Under clause 6.1, which relates to the survey of Raw Materials, the results of the Survey as to weight by an independent surveyor “jointly appointed by the parties” (clause 1.1.8) is to be final and binding “on both parties” at the discharge port. The results of the Surveyor’s analysis of the quality of Raw Materials are to be “final and binding on the Parties” (clause 6.3). The costs of the Survey are to be “for the joint account of the Parties” and to be shared equally.

Further, under clause 8 “Faronly” assumes an obligation to lend US 1.5 million to “Zestafoni” for the purpose of carrying out furnace and roof repairs at the Zestafoni Plant. The loan is expressed by clause 8.2 to be repayable by Zestafoni Ferroalloy Plant to Faronly by the delivery by the latter of three monthly shipments of Ferroalloys of a value of US$500,000 each. By clause 8.3 any unused part of the loan is to be immediately repaid to Faronly.

By clause 9.4 it is provided:

“9.4

Where the Parties agree to any variation in the specification of the said Ferroalloys an addendum detailing the said variation shall be signed by the Parties and annexed hereto.”

By clause 10.2 there is a provision similar to that in clause 5.2 for the parties to meet periodically and agree the type, quantity and unit price of Ferroalloys to be supplied, the shipment schedule and the type, quantity and unit price of any additional quantities of Ferroalloys offered by Zestafoni and accepted by Faronly. Clause 10.3 provides that the terms of the Agreement reached following each meeting referred to in clause 10.2 are to be recovered in writing and attached as an annexure to the Agreement and “signed by the parties”.

Clause 10.6 provides:

“It is expressly agreed that if Zestafoni fails to ship the Ferroalloys within the 45 day period after each delivery of Raw Materials and Electricity as aforesaid, then Zestafoni shall be obliged to repay immediately to Faronly any outstanding costs or expenses of Raw Materials and Electricity supplied by Faronly. Faronly shall have the right to enforce Zestafoni’s payment obligations immediately.

Clause 11.5 provides:

“11.5

In the event that the Surveyor’s Quality Report shows that the Ferroalloys do not fall within the specifications set out in Schedule 3 or 4 and are beyond the Rejection Limits identified therein Faronly will be entitled to reject part or all of the shipment by giving written notice to this effect to Zestafoni Ferroalloy Plant. Faronly shall thereafter be entitled to recover from Zestafoni Ferroalloy Plant their damages, costs and expenses arising from Zestafoni Ferroalloy Plant’s failure to comply with the required specifications. In the event that Faronly rejects the shipment pursuant to the provisions of this Clause then the Parties shall use their best endeavours to negotiate a reduction in the unit price such as to permit Faronly to accept delivery of the shipment. Zestafoni shall always remain ultimately responsible for the quality of the Ferroalloys that have been shipped under this contract. The legal representative of the inspection company used at the port of loading shall carry out a quality surveillance at the discharge port. In the event of any dispute as to the quality then the discharge port results will be final and binding for all the parties.”

Under clause 13.3, if additional quantities of Ferroalloys are produced by Zestafoni and offered to and taken up by Faronly, the following provision applies:

“In the event that any additional quantities of Ferroalloys are produced then Zestafoni shall offer in writing those qualities for sale to Faronly at the then market price and shall hold open this offer for a period of 7 days from the date of notification. Should Faronly take up the additional quantities then the terms of any such sale shall be negotiated agreed and recorded in an annexure to this Agreement and signed by Ronly and Redwater.”

As to the title to and insurance of Raw Materials and Ferroalloys clause 14 provides:

“14.1

It is agreed by the parties that at all times the Raw Materials supplied by Faronly to Zestafoni Ferroalloy Plant and Ferroalloys produced by Zestafoni Ferroalloy Plant using those Raw Materials for the purposes of this Agreement shall remain the sole property of Ronly whether the Raw Materials and/or the Ferroalloys are within Georgia or not.

14.2

On delivery of the Raw Materials by Faronly to Zestafoni, the risk but not the ownership of the Raw Materials shall pass to Zestafoni who will arrange for the Raw Materials to be insured in United States dollars at the CIF value of those Raw Materials plus 10% on all risks terms at their cost with a first class insurance company in Georgia that is reinsured in England or USA. Ronly and any bank nominated by Ronly are to be named as co-assureds and loss payees on all policies of insurance and Ronly are to be provided with copies of all insurance policies placed by Zestafoni.

14.3

All Ferroalloys produced by Zestafoni pursuant to this Agreement are to be owned by Ronly but are to be at the risk of Zestafoni from the time of production to the date of delivery to Faronly. Zestafoni shall arrange for the Ferroalloys produced to be insured in United States dollars at the FOB value of the Ferroalloys plus 10% on all risk terms at their cost from time of production to the date of delivery to Faronly with a first class insurance company. Ronly and any bank nominated by Ronly are to be named as co-assureds and loss payees on all policies of insurance and Ronly are to be provided with copies of all insurance policies placed by Zestafoni.”

Clause 16 is a force majeure clause and provides:

“16.1

If either Party should be prevented or restricted directly or indirectly by an event of force majeure as hereinafter defined from performing all or part of their obligations under this Agreement other than any obligation to make monetary payments then the Party so affected (“the affected Party”) will be relieved from performance of their obligations hereunder during the period that such event and its consequences will continue, but only to the extent so prevented, and will not be liable for any delay or failure in the performance of any of its obligations hereunder or loss damage whether general, special or consequential which the other Party (“the unaffected Party”) may suffer due to or resulting from such delay or failure, provided always that notice will be given by the affected Party to the unaffected Party at the earliest possible opportunity by telefax, telex, or cablegram of the occurrence of the event constituting the force majeure, together with details thereof and an estimate of the period of time for which it will endure.”

Clause 16.6 provides:

“If either Party is prevented by force majeure from complying with its obligations (other than any obligation to make monetary payment) for a continuous period in excess of six months, the Parties shall enter into bona fide discussions with a view to alleviating its affects or to agreeing such alternative arrangements as may be fair and reasonable, failing which, within one month, the unaffected Party shall be entitled to terminate this Agreement forthwith by giving notice to the affected Party whereupon an account shall be taken between the Parties and any balance due paid by the debtor Party to the creditor Party.”

The default clause is clause 17 and provides:

“17.1

Should either Party (“the defaulting Party”)

17.1.1

be wound up or placed under judicial management, whether provisionally or finally and compulsorily or voluntarily; or

17.1.2

enter into any arrangement or compromise with any of its creditors; or

17.1.3

have a receiver appointed over any of its assets or undertakings; or

17.1.4

have a change of ownership or management; or

17.1.5

breach any terms and conditions of this Agreement and fail to remedy such breach within a period of 14 (fourteen) days after receipt by the defaulting Party of written notice from the other Party (“the aggrieved Party”) requiring it to remedy the breach;

17.1.6

anything analogous to any of the foregoing under the law of another jurisdiction occurs to the defaulting Party.

then the aggrieved Party shall be entitled, without prejudice to such other rights as it may have including the right to claim damages, to claim immediate payment and/or performance by the defaulting party of all the defaulting Party’s obligations. In the even that payment and performance by the defaulting Party is not made within 20 days of a written notice by the aggrieved Party to do so, then the aggrieved Party shall have the right to immediately terminate this Agreement without prejudice to the aggrieved Party’s right to claim damages.”

Clause 18 provides as follows:

“No addition to, variation or deletion of any Clause of this Agreement, including this Clause, consensual cancellation or novation of this Agreement and no waiver of any right arising from this Agreement or its breach or termination will be of any force or effect unless reduced to writing and signed by the duly authorized representatives of the Parties.”

Clause 19 provides:

“It is expressly understood and agreed that all the monies due and payable by Zestafoni arising our of or in connection with this agreement shall be paid by Zestafoni to Ronly who are to be deemed as the sole authorized representative for receipt of pledges, assignments and monies due and owing to Faronly.”

Under clause 20 it was provided:

“Neither Party to this Agreement will be entitled to assign any of its rights or obligations hereunder without the prior written consent of the other Party and subject to the assignor becoming the guarantor of the assignee’s obligations hereunder.”

Clause 22 – the Law and Jurisdiction Clause – provided as follows:

“22.1

This Agreement shall be governed in all respects by English law.

22.2

Any and all differences and disputes of whatsoever nature arising out of or in connection with this Agreement shall be referred to arbitration in the City of London in accordance with the Arbitration Acts 1950-1996 before a tribunal of three persons consisting of one arbitrator to be appointed by Faronly, one by Zestafoni and one by the two so chosen. The decision of any two of the three arbitrators on any point or points shall be final.

22.3

Judgment upon the Award rendered may be entered in any Court having jurisdiction or an application may be made to such Court for a judicial acceptance of the Award and an order of enforcement as the case may be.

22.4

Pending the obtaining of any arbitral award on any question or difference arising between them neither Faronly nor Zestafoni will be relieved or excused from the performance of any obligation by which they are bound under the terms of this Agreement.”

As appears from these terms, the Agreement is drafted on a fairly consistent basis as follows:

It is against this background that it is necessary to investigate whether under the Agreement it was open to Ronly to agree with Zestafoni Plant separately from the other parties, to enter into an arbitration agreement which gave jurisdiction to a sole arbitrator. This gives rise to two preliminary questions:

As to (i), although Mr Trace QC for Zestafoni Plant did not rely on clause 18, it is to be observed that clause 18 refers to “variation --- of any Clause of this Agreement”. The argument that the doctrine of separability of agreements to arbitrate gives rise to a free-standing agreement capable of conferring rights and imposing obligations in circumstances where the underlying agreement may be said to be voidable, illegal or no longer of continuing effect does not, in my judgment, necessarily prevent all terms of the underlying agreement having any effect on the arbitration agreement which is included in the overall contract document. In the present case, the question arises whether on the proper construction of clause 18 the mutual intention of the parties was that the words “any Clause of this Agreement” should include the Law and Jurisdiction clause.

There is nothing in the intrinsic character of an arbitration agreement as having an attribute of separability which prevents it from being included in that phrase. The fact that in substance it may have that attribute does not prevent it being aptly described as a “Clause of this Agreement”. The phrase simply refers to any one of the clauses collected together in the document which all the parties have signed. The function of clause 18 in regulating the means of waiver or variation of the terms in that document is in no sense inconsistent with the separability principle: it is simply a term which on its proper construction is overtly directed to all the clauses in the document, including the clause containing the agreement to arbitrate.

As to (ii), there is no doubt, in my judgment, that clause 1.1.4 is not wide enough to clothe Ronly with authority to give legal effect to a document, signed by or on its behalf, but not signed by Fapet, varying the agreement to arbitrate. Such a document would not be signed for and on behalf of Faronly “under or pursuant to this Agreement”. It would not be a document, such as that under clauses 9.4 or 16.1, which had the function of in some way giving effect to the Agreement. It would instead be a document brought into being to vary the arbitration agreement.

Further, the reference in clause 18 to the requirement that such a document should be “signed by the duly authorised representatives of the Parties” must, in my view, refer to the representatives of all the Parties, and not merely to those of one party acting in its several capacity for its group. The nature of those matters listed in clause 18 which must be expressed in writing and signed by the duly authorised representatives of the Parties is fundamental to the integrity and continuing existence of the Agreement and the rights accrued under it. Although it is open to a party, who contracts jointly and severally, to enforce without joining his co-contractor an agreement into which he has entered on a joint and several basis, including an agreement to arbitrate, it would be quite another thing for him to be able to vary it or to terminate it without the agreement of the other group member unless the agreement so provided. As a matter of construction I conclude that when clause 18 refers to the “authorised representatives of the parties” it is not referring to the two opposite groups, but to all four parties, the representatives being those who are authorised by each of the four to sign on behalf of that party. I have been able to find no authority on this question, but, in principle, I consider that this analysis accords with the scope of the function of joint and several participation in a multi-party contract.

It follows that the agreement to appoint a sole arbitrator, being a variation of the arbitration agreement, was outside the scope of the powers available under the agreement to Ronly acting alone.

It is therefore necessary to consider against this background the effect of the conduct of the parties, particularly the correspondence passing between Ronly and Zestafoni Plant, to ascertain whether by the purported appointment of Mr. Kinnell as sole arbitrator, they did effectively vest any jurisdiction in him in that capacity and, if so what the scope of that jurisdiction was.

On 16^th April 2002 Ronly sent a letter to Zestafoni marked for the attention of Mr. Shalikashvili and Mr. Ambokadze in which it stated that US$ 17,352,462.02 was due to Faronly under the Agreement as at 31^st December 2001 and called upon Zestafoni formally to confirm and acknowledge that such debt was due by no later than 26^th April 2002 together with proposals for payment. If a satisfactory response were not received, Ronly stated that it would immediately commence arbitration in London. The letter was signed by Ronly “for and on behalf of Faronly”. Zestafoni Plant did not confirm and acknowledge that debt. Nor did it make proposals for payment. On 8^th May 2002 Ronly’s solicitors, Ince and Co, therefore appointed Mr. Ian Kinnell Q.C. to be Ronly’s arbitrator under clause 22 of the Agreement. On the same day they gave notice by fax, courier and e-mail of Mr. Kinnell’s appointment to Zestafoni Plant for the attention of Mr. Ambokadze and invited Zestafoni to appoint its “own arbitrator” within 14 days, failing which Ronly would proceed in accordance with section 17 of the Arbitration Act 1996.

On 27^th May 2002 Ince and Co received a fax signed by Mr. Ambokadze, as General Director of Zestafoni Plant, in these terms:

“Following on your letter ‘SCF/8212 ‘dated 08.02. concerning the appointment of Mr Ian Kinnell QC of Woodside House, The Maypole, Monmouth, Gwent NP5 3QH, as arbitrator on behalf of your side to consider the claim against us under the Contract dated 30^th September 1997, we deem it advisable to express our consent to the above mentioned person’s appointment.

Please, in the shortest time we reconsider all disputable matters and documentation, then we’ll send you all necessary ones.”

Mr. Ambokadze had clearly understood that Ince’s letter had stated that Mr. Kinnell had been appointed as arbitrator for Ronly. As such an expression of consent to the unilateral appointment was irrelevant. It would only be relevant to consent if such consent were related to Mr. Kinnell acting as sole arbitrator, but that is not how the message is expressed. The last sentence faintly suggests that Zestafoni Plant are going to send documents after re-considering the disputes and the documents. The message leaves it in doubt whether Zestafoni Plant was indeed consenting to Mr Kinnell acting as sole arbitrator.

On 28 May 2002 Ince sent the following message by fax and email to Mr Ambokadze:

“Thank you for your fax dated 27 May 2002 confirming your agreement to the appointment of Mr Ian Kinnell QC as sole arbitrator in connection with the above. Since this agreement involves an amendment to the Arbitration Agreement as set out in clause 22 of the contract, for the sake of good order please sign, stamp and fax back to us a copy of this letter re-confirming that agreement.

Following receipt of your response we shall let you have our client’s Points of Claim in the near future.

Signed and stamped Mr N Ambokadze General Director of JSC “Zestafoni Ferro-Alloy Works” 9 Sakarkhno Street, 383900 Zestafoni, Georgia.”

On 30 May 2002 Ince received a fax showing Zestafoni Plant’s stamp and Mr Ambokadze’s signature on their letter of 28 May.

In my judgment, this response could have only one possible meaning and that was that Zestafoni Plant re-confirmed that their message of 27 May did indeed agree to the appointment of Mr Kinnell as sole arbitrator. There was therefore at that point, on the face of it, an agreement that Mr Kinnell should be appointed as sole arbitrator in respect of all disputes under the Agreement, including Ronly’s claim for the amount said to be due to Faronly.

On 30 May 2002 Ince sent by fax to Mr Kinnell the following message together with a copy of their 28 May letter showing Zestafoni Plant’s stamp and Mr Ambokadze’s signature:

“Further to our earlier correspondence regarding the above, please find attached for your information a copy of a fax received by us from the Respondent, together with our response. As you will see, for the avoidance of doubt we asked the Respondent to confirm our understanding of their fax and that they were indeed agreeing to your appointment as sole Arbitrator in connection with the above matter. Our fax dated 28 May 2002 has been signed and stamped by the Respondent (who is reading this fax in copy), thus confirming that our understanding was indeed correct.

In the circumstances, we would be grateful if you would confirm to both parties that you are happy to proceed as sole Arbitrator in this matter. In case it is difficult to read on the attached copy, the Respondent’s fax number is as below.”

On the same day Mr Kinnell confirmed by fax to Ince and to Zestafoni Plant that he was willing to act as sole arbitrator. On 25 June 2002 he sent a message both to Ince and to Zestafoni Plant confirming that the arbitration had begun before him as sole arbitrator and stating that he awaited details of Ronly’s claim after which he would expect to receive Zestafoni’s response. Ince sent their clients’ Points of Claim and documents to Zestafoni Plant on 5 August 2002. On 10 September 2002 Zestafoni Plant asked the arbitrator for an extension of time for their response until the end of October 2002, the letter being signed by one Geno Shareidze, “Director General”. By message dated 26 September 2002 the arbitrator extended time for the defence submissions to 31 October.

In the course of October 2002 Fapet raised objections to Ronly representing Faronly in the arbitration. When on 2 November 2002 Zestafoni Plant served its defence it questioned the right of Ronly to claim in the arbitration for money due under the Agreement to Faronly. This submission was reiterated in Zestafoni Plant’s much expanded submissions of 14 November 2002.

In order to attempt to resolve the related issues of jurisdiction and title to sue, Mr Kinnell invited the parties to the arbitration to attend a meeting on 6 March 2003. By that time Norton Rose were the solicitors representing Zestafoni Plant and in the course of conversations before the meeting between Miss Blanch of Norton Rose and Ronly’s solicitor (Mr Steven Fox of Ince) and counsel, Mr Timothy Brenton QC, it is said to have been stated by Miss Blanch that Zestafoni accepted that … “Mr Kinnell had jurisdiction to determine disputes arising under the Agreement but that she did not accept that all of the claims set out in the Points of Claim arose under the Production Agreement, nor did she accept that Ronly had “title to sue” in their own name for monies allegedly payable by Zestafoni under the Agreement.”

No agreement was reached as to how the arbitration ought to proceed and in the event Mr Kinnell determined that he should hold a hearing to decide whether he had any jurisdiction as arbitrator in relation to the claims advanced and, if so, whether Ronly had title to sue.

The hearing of the arbitration covering those issues took place on 2 May 2003 and by his Award dated 12 May 2003 Mr Kinnell decided as follows:

In reaching those conclusions the arbitrator rejected the submission advanced by Zestafoni that, although there had been an agreement to appoint him as sole arbitrator, the jurisdiction conferred by that agreement extended no further than to determine his own jurisdiction in respect of substantive claims and that he should determine that he had no jurisdiction to determine any substantive claim, such as Ronly’s title to sue.

An application under section 67 of the Arbitration Act 1996 challenging any award as to the arbitrator’s jurisdiction confers on the court a strictly limited jurisdiction which is confined to determining whether an award as to jurisdiction should be confined, varied or set aside in whole or in part. If and to the extent that an award covers both jurisdiction and substantive issues as to the merits the court has power to declare to be of no effect the whole or part of that part of the award which is on the merits depending on the court’s conclusion on jurisdiction.

In the present case the arbitrator’s award covered both jurisdiction and merits. To the extent that the arbitrator determined that Ronly had title to sue Zestafoni Plant to recover the amounts claimed the arbitrator’s award went to the merits. The issue under section 67 is confined to whether he had jurisdiction to make that award. I shall now consider each of the grounds for challenging jurisdiction advanced on behalf of Zestafoni Plant.

Mr Anthony Trace QC, on behalf of Zestafoni, submits that because clause 22.2 expressly provided for any arbitration to be constituted by the appointment of two arbitrators, one by Faronly and one by Zestafoni and a third arbitrator appointed by those two so chosen, it was not open to Ronly and Zestafoni to abandon that structure and to agree, without the assent of the other parties to the Agreement, to the appointment of a sole arbitrator. Mr Trace did not rely on clause 18 as such but he did submit what was in substance analogous to an argument based on that clause, namely that the alleged agreement for a sole arbitrator was intrinsically incapable of vesting any jurisdiction in anyone appointed under it to determine any issue which was a difference or dispute arising out of or in connection with the Agreement.

I am unable to accept this submission. If four parties enter into an agreement to refer to the arbitration of three arbitrators disputes arising out of an underlying agreement and, such disputes having arisen between two of the parties, those two parties agree between themselves to appoint a sole arbitrator to resolve those disputes, there is no reason in principle why (i) that bipartite agreement should not be ad hoc agreement to arbitrate the disputes defined in it binding upon the two parties who have entered into it and (ii) an arbitrator appointed pursuant to that agreement should not have jurisdiction to determine those disputes as between those two parties. Obviously, if the two parties have the express or implied authority to bind to the sole arbitrator agreement the other two parties to the underlying agreement, those other two parties will be bound by it and will normally be bound also by the appointment of the arbitrator and his award. If, however, the other two parties gave no such authority, they would be bound neither by the agreement to arbitrate before a sole arbitrator nor by his award.

The problem with Zestafoni’s argument is that it confuses two distinct concepts: (i) whether there was a valid appointment of a sole arbitrator under clause 22.2 and (ii) whether there was a binding agreement to appoint a sole arbitrator outside the main Agreement. Mr Kinnell’s jurisdiction to determine the issues referred to him by Ronly and Zestafoni Plant does not depend on (i). It would be enough to clothe him with some jurisdiction if there were an agreement under (ii), but in the absence of authority for Ronly and Zestafoni Plant to bind the other two parties – Fapet and Redwater – only Ronly and Zestafoni Plant would be bound by the award.

I have no doubt that it did.

Although the message sent by Zestafoni Plant on 27 May 2002 and signed by Mr Ambokadze, then the General Director, was somewhat obscurely expressed (see paragraph 37 above), what followed on 28 May and thereafter could leave the matter in no doubt. Ince’s letter of that date (paragraph 39 above) made express reference to “your agreement to the appointment of Mr Ian Kinnell QC as sole arbitrator”. In response to the request to Zestafoni to fax back a signed and stamped copy of the letter confirming such agreement Mr Ambokadze did just that. There was in English law at that point a binding agreement to appoint Mr Kinnell as sole arbitrator. It may be that either or both of the parties believed that it was open to them to take this course consistently with the terms of the main Agreement. That, however, is irrelevant, there being no suggestion that their agreement was void for mistake.

If there were any doubt about the parties being ad idem which was not resolved by Zestafoni Plant’s conduct in signing, stamping and faxing back the 28 May letter, that doubt could not survive the letter dated 10 September 2002 from Zestafoni Plant to Mr Kinnell and signed by its new Director General, Mr Shareidze. That letter asked for an extension of time for service of the defence. It is headed “SOLE ARBITRATOR IAN KINNELL QC”.

A further point relied on by Mr Timothy Brenton QC on behalf of Ronly is that at the preliminary hearing before the arbitrator on 6 March 2002 those representing Zestafoni conceded that Mr Kinnell had jurisdiction as sole arbitrator at least to determine his own jurisdiction. This refers to the pre-hearing discussion between Miss Blanch and those representing Ronly in the course of which she is said to have accepted that the arbitrator had jurisdiction to determine disputes between Ronly and Zestafoni arising under the Agreement but not to have accepted that all the claims fell within that scope. Nor did she accept that Ronly had title to sue in their own name. In the course of that hearing Miss Blanch is said to have confirmed those points to the arbitrator. At paragraph 24 of the Award the arbitrator said this:

“Looking again in my note of that meeting, I do not think that what was then said was quite so clear as to form a sound basis for the Claimants’ later assertion.”

In these circumstances I do not consider it to be appropriate that I should take a view of the facts which differs from that of the arbitrator who was present at the time listening to and noting what was said by the parties’ representatives. I therefore base my conclusion as to the existence of an agreement on the correspondence which passed before the hearing.

The issue arises in the following way.

It is submitted on behalf of Zestafoni that even if there were a concluded and otherwise binding agreement to appoint Mr Kinnell as sole arbitrator it is unenforceable in the English courts as a matter of public policy because under the law of Georgia, contracts containing arbitration clauses entered into by companies in which the Georgian government owns a majority shareholding must be specifically authorized by the Georgian Ministry of Justice. Mr Trace QC relies on the proposition that, even if the agreement be governed by English law it should not be enforced because that would involve a contravention of the law of a foreign friendly state. He argues by reference to Regazzoni v. K C Sethia 1944) Ltd [1958] AC 301, that if it is contrary to public policy to enforce an English law contract that involves doing an illegal act in a foreign friendly state, the entering into of the contract must equally be contrary to public policy.

There are two distinct areas to this point:

As to the first point, section 73(1) of the Arbitration Act 1996 provides

“(1)

If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part, any objection –

(a)

that the tribunal lacks substantive jurisdiction,

… he may not raise that objection later, before the tribunal or the court unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection.”

In Rustal Trading Ltd v. Gill & Duffus SA [2000] 1 Lloyd’s Rep 14 Moore-Bick J. drew attention to the function of section 73(1) in these words:

“… the subsection as a whole is designed to ensure that a party who believes he has grounds for objecting to the constitution of the tribunal or the conduct of the proceedings raises that objection if he wishes to do so, as soon as he is, or ought reasonably to be, aware of it. He is not entitled to allow the proceedings to continue without alerting the tribunal and the other party to a flaw which in his view renders the whole arbitral process invalid. That could often result in a considerable waste of time and expense which is no doubt something which the legislation seeks to avoid. There is, however, a more fundamental objection of principle to a party’s continuing to take part in proceedings while at the same time keeping up his sleeve the right to challenge the award if he is dissatisfied with the outcome. The unfairness inherent in doing so is, of course, magnified if the defect is one which could have been remedied if a proper objection had been made at the time. Once arbitration proceedings have been commenced there may well be many periods during which no formal step is required of one or other party, but it would not be right as a matter of ordinary usage to say that during such periods either party is not taking part in the proceedings.”

With those observations I entirely agree. But I would go further. The principle of openness and fair dealing between the parties to an arbitration demands not merely that if jurisdiction is to be challenged under section 67 the issue as to jurisdiction must normally have been raised at least on some grounds before the arbitrator but that each ground of challenge to his jurisdiction must previously have been raised before the arbitrator if it is to be raised under a section 67 application challenging the award. This was conceded by counsel and accepted by Mr Richard Field QC then sitting as a Deputy High Court Judge in Athletic Union of Constantinople v. National Basketball Association [2002] 1 Lloyd’s Rep 305 at p311. That concession was, in my judgment, clearly correct. Were it otherwise, the policy of the sub-section could be frustrated by introducing at the last minute grounds of challenge not hitherto raised and thereby potential causes of delay and disruption of the application to the prejudice of the opposite party.

The only qualification to this requirement is to be found in the words of the sub-section which follow “unless he shows that ….”.

Accordingly, the question which arises is whether at all times when Zestafoni took part in the arbitration before Mr Kinnell it did not know and could not with reasonable diligence have discovered the grounds of objection.

The relevant grounds of objection are that the agreement for a sole arbitrator had been entered into in breach of Georgian law.

The burden of proof in respect of knowledge of the grounds of objection rests on the party who challenges jurisdiction. The Award is dated 12 May 2003. It is therefore knowledge on the part of Zestafoni before that date which is relevant. In order to discharge that burden of proof one would expect to see a witness statement from Zestafoni explaining why this point had not been raised before the arbitrator. In fact, it was raised for the first time in a letter sent by fax to the arbitrator on 23 May 2003, eleven days after the award. The letter is signed on behalf of Zestafoni Plant by the General Director, Mr Geno Shareidze. However, that person had been the General Director since, at the latest, 10 September 2002, for it was he who signed in that capacity the letter of that date to Mr Kinnell as “sole arbitrator” to which I have referred in paragraph 56 above. So to all outward appearances the factual issue is very simple. The General Director was aware from 10 September 2002 that there was an agreement to appoint a sole arbitrator because he had access to all the relevant documents, including Ince’s letter of 28 May 2002, and he subsequently signed all the pleadings in the arbitration. It could be inferred that he knew what Georgian law required by way of the obtaining from the Ministry of Justice of a license for a contract which included a private arbitration agreement. Yet there is no witness statement from him or from any other director or manager of the company by which evidence is adduced to bring Zestafoni Plant within the section 73(1) “unless” words. Instead, what has been done is to attempt to inject into this application a significant number of documents first provided to Ince on 31 December 2003. Since these documents were provided long after the deadline for the service of evidence identified in Arbitration Practice Direction CPD 62.7 and barely two working weeks before a hearing which had been fixed for 13 January 2003 some six months earlier, Ince not unnaturally objected to the admission of these documents and Mr Brenton QC for Ronly insisted that a formal application should be made for them to be admitted in the course of the hearing.

The documents are deployed by Zestafoni to establish that Georgian criminal proceedings were brought against Mr Ambokadze leading to his conviction on 24 November 2003 for offences to which he pleaded guilty, involving false accounting for the purpose of the ultimate misappropriation of moneys belonging to Zestafoni Plant, the false accounting being in respect of the accounts under the agreement with Faronly. He was fined a total of 250 days wages. There is also a Georgian civil judgment dated 2 December 2003 declaring to be unlawful the making of an agreement of 24 May 2002 with Ronly on the grounds that the Ministry of Justice had not approved the agreement in it to arbitrate. Included in the documents was also a further expert opinion on Georgian law.

On the basis of this material Mr Trace QC argued on behalf of Zestafoni that it should be found that the directors of Zestafoni would never have been told about the agreement for a sole arbitrator because Mr Ambokadze who signed it as General Director was in the process of attempting to perpetrate a fraud on the company and, also for that reason his knowledge of the agreement and its invalidity could not be imputed to the company.

I decline to admit these documents because not only are they tendered at the last minute but they also take the issue under section 73(1) no further. The proposition that they provide evidence which suggests that Zestafoni Plant was not sufficiently aware of the existence of the sole arbitrator agreement and that it had been entered into without the authorization of the Georgian Ministry of Justice or could not with reasonable diligence have discovered those facts presents itself to me as hopeless when viewed alongside the knowledge of Mr Shareidze, the successor to Mr Ambokadze as General Director. The contents of those documents go nowhere near displacing the inference to be drawn from the evidence about his knowledge.

Accordingly, I conclude that Zestafoni Plant has failed to bring itself within the “unless” words of section 73(1) and that it is therefore not open to it to advance this ground for challenging jurisdiction.

Had I taken the view that Zestafoni Plant had discharged the burden of proof on this matter, it would have been necessary to consider the effect of the Georgian legislation on the effect of which there is conflicting evidence. It would also have been necessary to consider whether, if the effect of such legislation were to render illegal the conduct of Zestafoni Plant entering into an arbitration agreement, it would have been contrary to public policy for the English courts to recognize or enforce that agreement by determining that the sole arbitrator appointed under it had jurisdiction to decide the disputes referred to him.

As to the effect of the Georgian legislation, there is conflicting evidence in the form of witness statements from Georgian lawyers consulted by Ronly and Zestafoni Plant respectively. There is, however, also the decision of the Georgian civil court of 2 December 2003 which appears to support the view expressed by Zestafoni Plant’s Georgian lawyer. It is sufficient to say that, were it necessary to decide the point, I would prefer that view. However, for the reasons which I have already given and, for the reasons that follow, the point does not arise.

Even if Georgian law provided that this ad hoc agreement was void, this was an agreement impliedly governed by English law since it was made in the course of the relationship created by the Agreement and provided for London arbitration. Further, it was made by means of the fax message sent by Zestafoni Plant on 30 May 2002 showing that Mr Ambokadze signed and stamped Ince & Co’s letter of 28 May 2002 (see paragraph 39 above). A fax is a form of instantaneous communication: if a message has not been received, the sender is informed by his machine. Most machines also indicate to the sender whether the message has been effectively as distinct from only partly received. Accordingly, by analogy with telegrams and telex messages (see Entores Ltd v. Miles Far East Corporation [1955] 2 QB 327 as approved by the House of Lords in Brinkibon Ltd v. Stahag Stahl v. und Stahlwarenhandelsgesellschaft mbh [1982] 1 Lloyd’s Rep 217) the agreement to appoint Mr Kinnell as sole arbitrator was made when on 30 May the fax was received in England. That was the place where the contract was made. It was to be performed by participation of the parties with the arbitrator in the arbitration in England. So here was an agreement impliedly governed by English law, made in England and which was to be performed only in England. It follows that not only was the contract not made in Georgia but it did not fall to be performed in Georgia. Regazzoni v. Sethia, supra, does not support the proposition that, if the making of a contract in England which involves the performance exclusively in England of acts entirely lawful under English law is illegal and/or void by the law of a foreign friendly state, it is contrary to public policy for the English courts to enforce it. Indeed, the decision in that case was founded on the basis that what was contemplated was the act of acquiring in and exporting from India jute bags for shipment to South Africa which would be contrary to the law of India. The application by the House of Lords of the reasoning in Foster v. Driscoll [1929] 1 KB 470 to the facts in Regazzoni turned substantially on the fact that the underlying illegality involved was the carrying out of an illegal act in India: see also Ispahani v. Bank Melli Iran [1998] Lloyd’s Report Bank 1333. English public policy was thus only engaged because performance involved the commission of an illegal act in India. In my judgment, public policy would not ordinarily be engaged merely because one party to the contract was a corporation incorporated subject to the law of the foreign state and having its principal place of business in that state if the contract were governed by English law and not made within that state or such as could be anticipated to be performed within it or otherwise to involve conduct within that state which was contrary to the law of that state.

The third ground of challenge to the arbitrator’s jurisdiction therefore fails.

It follows that all three grounds of challenge to the arbitrator’s jurisdiction fail and the application under section 67 of the Arbitration Act 1996 must therefore be dismissed.

This goes to the question whether the arbitrator was obviously wrong in concluding that the effect of clause 19 of the Agreement was to entitle Ronly to sue for the amounts claimed in the arbitration in its own name and without joining or having the consent of Fapet.

In my judgment, not only was the arbitrator not obviously wrong or his decision open to serious doubt, but he was obviously correct. When clause 19, set out in paragraph 25 above, is read against the background that the parties each contracted jointly and severally as explained earlier in this judgment, the clear meaning of the clause is that Ronly alone is entitled to be paid the amounts due as against Zestafoni and therefore entitled to sue for such amounts in its own name. Given that Zestafoni Plant was jointly and severally liable for amounts due, Ronly could bring the claim against it alone.

Accordingly leave to appeal on the proposed point of law is refused.