Metal Distributors (UK) Ltd. v ZCCM Investment Holdings Plc

The tribunal’s ruling and order dated 9 September 2004 was in the following terms:

“The parties, having agreed to submit the matter of the Panel’s jurisdiction over the Respondents Counterclaim for ruling by the Panel prior to dealing with the merits of the Claim and having further agreed to the Panel determining this preliminary matter on the basis of the documents submitted, the Panel, having considered the extensive evidence and arguments submitted by the parties has determined that it does not have jurisdiction over the Counterclaim.

As the issue has been thoroughly briefed by both parties, it is not necessary here to restate the facts on which the Counterclaim relies nor the arguments submitted to the Panel. Suffice to say here that it is common ground that there is and was no agreement between the parties to arbitrate disputes arising out of the efforts at debt restructuring which are the foundation of the Counterclaim. Similarly, it is not disputed that the parties did agree to arbitrate matters, under LME Rules, arising out of six sales contracts for copper and cobalt on which the claim is premised. Finally, it is evident from the submissions of both parties, that the issue of the Panel’s jurisdiction turns on the scope of “counterclaims” as used in the LME Arbitration Rules (see Rule 6). The Rules themselves do not provide any guidance in this respect.

The Claimant has argued and we think persuasively, that the scope of appropriate counterclaims under the LME Arbitration Rules is not the same as the scope of counterclaim subject to determination by a court of general jurisdiction. In the absence of an agreement to arbitrate matters related to the efforts at debt restructuring (whether or not a restructuring agreement was ever reached), the Respondents argues that the Panel, once constituted, has the jurisdiction to hear and determine any matter arising between the parties regardless of the subject-matter or relation to the underlying claim. The Panel does not agree. In the Panel’s view, which it believes is supported by the weight of legal authority; arbitration is fundamentally a matter of and is limited by, the mutual consent of the parties. In this it is fundamentally different from both the personal and subject-matter jurisdiction of the courts which is determined by statute.

In this case the scope of consent between these parties is set out in the arbitration provisions of the sales contracts. In the Panel’s view the intention of the parties is clearly expressed in those contracts four of which refer specifically to disputes “under this contract” and two of which refer to “these arrangements” meaning the specific sales of metal. In the Panel’s view there is no credible evidence that the Claimant ever consented to arbitrate either the broad commercial matters arising out of debt restructuring efforts or any other disputes between the parties to the sales contracts. It is also the view of the Panel that the arbitration clauses which form the premise of its jurisdiction here do not imply any intention by the parties to submit other matters to arbitration by it and that in the absence of any evidence of such an intention the word “counterclaim” as used in the LME Rules does not further extend its jurisdiction to such matters”.

Mr. Thomas on behalf of MDL submitted as follows:

Where a party has brought a claim in an English court in general, that person (as a matter of English law) gives the court jurisdiction to entertain a counterclaim against him (even if the court would not have jurisdiction to entertain the relevant counterclaim if it had been brought as a claim in separate proceedings).

the counterclaim is transactional, ie the counterclaim arises under the same contract or a closely related contract, even if the counterclaim arises under a separate contract which contains an exclusive jurisdiction clause in favour of another court or tribunal, or

the counterclaim is independent (and not transactional) provided the counterclaim does not arise under a contract containing an exclusive jurisdiction clause in favour of another court or tribunal.

Mr. Shackleton on behalf of ZCCM submitted as follows.

ZCCM say that the debt rescheduling proposal referred to in the counterclaim never evolved into a legally binding agreement. It involved nothing more than discussion and a proposal by the government of Zambia which was not subsequently formalised.

The jurisdiction of any arbitral tribunal is derived from the agreement of the parties: without that agreement there can be no arbitration. Any agreement to arbitrate is to be construed narrowly. The jurisdictional powers of the courts and arbitral tribunals are fundamentally different. Case law as to the territorial jurisdiction of the courts is not authority for the jurisdiction of an arbitral tribunal. Submission to the jurisdiction of an arbitral tribunal does not result in the broadening of that jurisdiction beyond the scope of the agreement to arbitrate. A counterclaim is subject to the same formal requirements as any other claim brought before an arbitrator.

Arbitration agreements should be carefully and narrowly construed in order to give effect to the objective intentions of the parties (see National Boat Shows Limited & Anor v Tameside Marine, unreported, 1 August 2001, His Honour Judge Michael Kershaw, QC).

The jurisdiction of courts differs fundamentally from arbitral jurisdiction. Authorities as to the territorial jurisdiction of the courts of England and Wales provide no assistance in the present case. Arbitral tribunals do not have general or territorial jurisdiction.

the DRP never evolved into a concluded or legally binding agreement;

there is no evidence that any of the parties to the alleged DRP, including Ramcoz, ever considered that it was legally binding;

the courts have consistently ruled that an arbitration agreement is inoperative where the underlying contract is not concluded;

there is no agreement by any of the parties to the alleged DRP (the Zambian government, Ramcoz, ZCCM, and various Zambian state owned enterprises Zanaco, CEC and Zesko) to submit disputes arising out of the DRP to arbitration;

MDL is not alleged to be a party to the DRP and cannot rely on its subsidiary Ramcoz in this regard;

there is no reasonable relationship between the subject matter of the disputes under the DRP and the subject matter of the sales contracts.

The sales contracts and the DRP involve a completely different subject matter;

the sales contracts and the DRP involve different parties;

MDL is not a party to the DRP;

there is no evidence that the DRP ever involved into a legally binding agreement, nor has MDL sought to establish its existence, beyond informal discussions, before the arbitrators;

the amount claimed by MDL is unliquidated and

ZCCM was only one of the alleged parties to the DRP and the contribution, if any, by ZCCM to losses allegedly suffered by MDL is altogether uncertain.

a transaction set-off; and

an independent set-off.

Section 30 of the 1996 Act provides as follows:

– (1) Unless otherwise agreed by the parties, the arbitral tribunal may rule on its own substantive jurisdiction, that is, as to-

– (1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court –

A challenge to jurisdiction under s.67 involves a re-hearing, not a review (see Peterson Farms Inc v C & M Farming Limited [2004] EWHC 121 (Comm) [2004] 1 Lloyd’s Rep 603 at 607 Langley J and the cases there cited).

The Rules and Regulations of the London Metal Exchange: Part 8. The Rules and Regulations of the London Metal Exchange so far as material provide as follows:

“6.4: Within 21 days of receipt of the points of claim, or of the appointment of the Tribunal if later, the Respondent shall send to the Tribunal and to the Claimant written points of defence stating in sufficient detail which of the facts and contentions of law in the points of claim it admits or not, or denies, on what grounds, and on what other facts and contentions of law it relies. Any counterclaims shall be submitted with the points of defence in the same manner as claims are set out in the points of claim”.

“10.2: The Tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement, or of the existence of validity of the contract of which the arbitration clause forms part. For this purpose, an arbitration clause which forms part of a contract and which provides for arbitration under these Arbitration Regulations shall be treated as an agreement independent of the other terms of the contract. A decision by the Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause”.

1 In civil proceedings before the courts of England and Wales a person who begins proceedings in general gives the court jurisdiction to entertain a counterclaim against him or her which may extend to cases in which, if separate proceedings were to be brought, permission to serve process out of the jurisdiction might not be obtainable (Dicey & Morris on the Conflict of Laws 13^th Ed, Vol 1 at para.11-108 and the cases there cited).

2 In civil proceedings in England and Wales, it is necessary to distinguish between independent set-off and transaction set-off. In his judgment in Aectra (supra) at p.1648 and following, Hoffman LJ said

“... it is necessary to distinguish between what Mr. Philip Wood, in his valuable book on ‘English and International Set-off’ 1989 calls ‘independent set-off’ and ‘transaction set-off’. Independent set-off, as its name suggests, does not require any relationship between the transactions out of which the cross claims arise ... Transaction set-off, on the other hand, is a cross-claim arising out of the same transaction or one so closely related that it operates in law or in equity as a complete or partial defeasance of the plaintiff’s claim ... The question of actionability or jurisdiction can arise in different ways, of which the most common will be where, as in this case, the cross-claim is subject to an arbitration clause or where, by reason of a foreign jurisdiction clause, it is subject to the jurisdiction of the courts of another country ... In the case of transaction set-off, the authorities are in favour of allowing the set-off to be pleaded, notwithstanding its submission to arbitration or a different jurisdiction ... In cases of transaction set-off, this obviously makes good sense ... This argument is not nearly so strong in the case of independent set-off, which is not a substantive defence to the claim but a procedure for taking an account of the balance due between the parties ... It entitles the defendant to require that the merits of an unrelated cross-claim be tried in the same action and converts the plaintiff’s original cause of action into the right to a balance due on the taking of an account ... it is of the essence of independent set-off in English law that the defendant should be entitled to have the merits of his cross-claim tried by the court in which he has been impleaded. The machinery of the Statutes of Set-off simply cannot operate unless this is possible”.

Philip Wood, in his admirable and monumental work on ‘English and International Set-off’ defines a transaction set-off (abatement, equitable set-off and United States recoupment) as follows: at para.1-20

“Transaction set-off arises where the reciprocal claims flow out of the same transaction or closely connected transactions in circumstances, generally, where the creditor claiming his primary claim has defaulted in performance of the very obligation for which he is seeking payment. Unlike independent set-off, the remedy is self-help and neither claim need be liquidated. The seller who claims the price of goods can be required to bring into account damages for defective goods. A shipowner claiming charter-hire can be required to bring into account losses caused to the charterer by reason of the owner’s wrongful withholding of the vessel. A landlord claiming rent can be required to bring into account damages for breaches of the tenancy agreement”.

Arbitration is a consensual process and this will usually prevent the introduction into the arbitration of claims or parties which were not within the scope of what the contracting parties agreed to (Russell on Arbitration, 22^nd Ed, para.3-034 p.91).

Whether in any particular case a dispute falls within an agreement to arbitrate depends primarily upon the wording of the agreement (Mustill & Boyd, Commercial Arbitration, 2^nd Ed, p.108).

Thus the jurisdiction of arbitrators depends upon what matters have been submitted to arbitration in accordance with the particular arbitration agreement (see s.30(1)(c) of the 1996 Act) and the true construction of the particular arbitration agreement.

6 An award should not deal with a dispute not contemplated by or not falling within the terms of the submission to arbitration or contain decisions on matters beyond the scope of the submission to arbitration (see s.103(2)(d) of the 1996 Act in relation to Recognition and Enforcement of New York Convention Awards and Article 34(a)(iii) of the UNCITRAL Model Law).

7 As

the jurisdiction of arbitrators depends upon what matters have been submitted in accordance with the particular arbitration agreement and the true construction of the particular arbitration agreement and

any attempt at statements of general principle must always be subject to the caveat that regard must be had to the true construction of the particular arbitration agreement in question.

8 Where the claimant has a disputed claim which falls within an arbitration agreement, and the respondent raises a cross-claim which lies outside the clause, the arbitrator does not have jurisdiction to entertain the cross-claim unless it provides a true defence, Mustill & Boyd (supra) at pp.130 and 131 and E.D. & F. Man v Société Anonyme Tripolitaine des Usines [1970] 2 Lloyd’s Rep 416 Donaldson J.

9 As Redfern & Hunter, Law and Practice of International Commercial Arbitration, 4^th Ed, at p.310 observe:-

“Jurisdiction in relation to a counterclaim is occasionally contested by a claimant on the grounds that the respondent’s claims do not fall within the contract that contains the arbitration clause. If this is so, the arbitral tribunal has no option but to exclude it. The arbitral tribunal may not exercise jurisdiction over claims that do not come within the scope of the arbitration clause. The position is similar for claims of set-off, under which a respondent may resist payment of a debt on the basis that the claimant is in arrears with respect to contractual payments owing to the respondent. However, if the set-off is in relation to the same contract, or a contract with a sufficiently close connection to the main contract, then the arbitral tribunal may well have jurisdiction to consider the claim. This is a question of construction of the arbitration clause”.

10 In “A Guide to the New ICC Rules of Arbitration”, Yves Derains and Eric A. Schwartz when commenting on ICC Article 5(5) (“Any counterclaim (s) made by the Respondent shall be filed with its answer and shall provide: ...) say -

“the Respondent has the right in the same arbitration proceedings to pursue its own claims against the Claimant, provided, of course, that the arbitration clause covering the Claimant’s claims also extends to those of the Respondent”.

11 At para.33 of his judgment in Ronly, Gross J observed obiter:

“i)

Questions of some intricacy arise as to the classification of set-offs and the correct approach to be followed when a claim before an arbitrator is met by an argument that there is a set-off available arising under some separate transaction over which the tribunal does not have jurisdiction. Provisionally, I would be minded to think that an arbitrator does or should have jurisdiction to allow a ‘transaction’ set-off, in effect amounting or akin to a defence, to be raised to reduce or extinguish a claim, even though that set-off arises under another contract, outside the tribunal’s jurisdiction: see: Aectra Refining, at pp.1648 and following and Glencore v Agros, at pp.416-417 ... As it seems to me, the investigation and determination of the availability and amount of such a set-off do not involve the arbitrator arrogating to himself a jurisdiction over separate contracts which he does not have (albeit that considerations of issue estoppel may well arise); instead, these steps form part of the process of arriving at a conclusion of whether a defence is properly available in respect of the contract as to which the arbitrator alone has jurisdiction. However, all these observations are provisional only, given that ... such questions do not arise for decision in this matter.

ii)

Where a decision is called for in respect of a set-off said to arise under a separate contract, then, absent agreement: (1) the point must be properly in issue before the arbitrator; (2) the arbitrator must necessarily investigate the position prevailing in respect of that separate contract; (3) if need be (and unless the arbitrator is proceeding by way of interim award, for example pending a decision on the separate contract by another court or tribunal and with an appropriate reservation of jurisdiction) the arbitrator must make a determination as to the position prevailing in respect of that separate contract; (4) in the light of any such determination, the arbitrator must come to a conclusion as to whether the alleged set-off is indeed available or whether, if not a transaction set-off, it faces a procedural bar, of the nature discussed in the two authorities referred to above”.

As to (i) it seems that Gross J was referring to transaction set-off in the sense defined by Lord Hoffman, drawing on the definition set out by Mr. Philip Wood supra. The report does not set out the terms of the arbitration clause in Ronley. It may well be that Gross J intended in paragraph (ii)(4) to include after the words “whether the alleged set-off is indeed available”, the words “under the terms of the particular arbitration agreement”. In any event, the observations of Gross J are in my view subject to (7) above.

The counterclaim is concerned with an alleged agreement to reschedule Ramcoz’s debts.

The alleged agreement was made in about September 1999.

Ramcoz’s key creditors were said to be Zesco, CEC, Zanaco and ZCCM.

It is alleged that ZCCM agreed (orally) with all the proposals approved by the Minister of Finance.

It is alleged that RAMC Trading (Ireland) Limited (“RAMC”) the majority shareholder in Ramcoz agreed with ZCCM that it would arrange for the provision of a US $5 million loan to Ramcoz in exchange for and on the basis that ZCCM would (a) not immediately charge Ramcoz for tolling and refining of copper and (b) agree that all current outstandings together with tolling and refining charges for September 1999 to March 2000 would be deferred by a year.

“On the basis of ZCCM’s undertaking to abide by the Debt Re-scheduling agreement and upon placing reliance on ZCCM’s representation to abide by the Debt Re-scheduling agreement, Mr. Gokul Binani of RAMC procured [MDL’s] agreement to lend US $1.5 million to Ramcoz as its working capital. [MDL] placing reliance upon ZCCM’s representation made to [MDL], RAMC and to the Government of the Republic of Zambia that ZCCM itself will fully abide by the terms of the Debt Re-scheduling agreement, agreed to make an advance of US $1.5 million to Ramcoz” (para.25).

“ZCCM however failed to abide by its representation that it will fully comply with the Debt Re-scheduling agreement. In breach of its representation that it will abide by the terms of the Debt Re-scheduling agreement, ZCCM withheld delivering finished copper to Ramcoz from January 2000 and onwards and from April 2000 ZCCM threatened to withhold all copper out-turns “against settlement of debts” which was clearly in breach of its agreement and representation to abide by the Debt Re-scheduling agreement. ... Such delay in the delivery of copper out-turns and the withholding of such delivery caused substantial liquidity problems for the struggling company. As a result of the withholding of delivery and the seizure of the copper out-turns, [Ramcoz] suffered severe cash flow shortage which meant that it became unable to meet its electricity charges in time. The electricity supply was cut off and thereby causing further shortfall in its production and impeding its objective of regenerating income and cash flow for the company. Indeed, ZCCM’s refusal to abide by the terms of the Debt Re-scheduling agreement substantially increased Ramcoz’s financial liabilities and losses”. (para.27)

“[MDL] suffered loss as a result. It lent US $1.5 million to Ramcoz on the basis of clear representation made by ZCCM that it will fully comply with its obligations under the Debt Re-scheduling agreement which included its representation that it will not insist on payment of the existing liabilities [of Ramcoz] until after the expiry of the first year from the date of the Re-scheduling agreement. [MDL] advanced the monies pursuant to and placing reliance upon representation made by ZCCM or alternatively on the basis of a collateral agreement made between [MDL] and ZCCM to the effect that ZCCM will fully perform its undertaking and abide by its representation that it will fully comply with the terms of the Debt Rescheduling Agreement and therefore not seek the payment of the outstandings until after the expiry of 1 year as said above”. (para.28)

“Although RAMC was subsequently put under pressure to secure further financial support for Ramcoz, and partly it was forced to do so on the basis that a little more investment may help it to recover its previous investments, it is evident that the event which caused damage to Ramcoz’s ability to survive as a going concern was the disconnection of electricity which was caused by ZCCM’s withholding of the copper out-turns. The news of the disconnection of electricity spread fast and damaged Ramcoz’s financial credibility. ZCCM, not only refused to secure agreement from other para-statal companies including the company supplying electricity to Ramcoz to accept debt re-scheduling, ZCCM itself failed to comply with its own undertaking and representation”. (para.30)

As a consequence, [MDL] suffered loss. Ramcoz went into receivership in November 2000. [MDL] has not received the repayment of the sum of US $1.5 million advanced to Ramcoz on the basis of ZCCM’s representation. ZCCM is therefore obliged to compensate [MDL] for all losses suffered by [MDL] as a consequence of ZCCM’s breach of its collateral agreement with [MDL]. Such loss is quantified by the sum by which [MDL] is out of pocket, ie US $1.5 million plus interest at a commercial rate. Alternatively, [MDL] lost the chance of recovering US $1.5 million from Ramcoz. [MDL] will set off against any sums due to ZCCM its counterclaim for damages and losses caused by ZCCM’s breach of its own representation as set out above”. (para.31)