Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE BURTON
Between :
Norscot Rig Management PVT Ltd | Claimant |
- and - | |
Essar Oilfields Services Ltd | Defendant |
Mr Stewart Boyd QC and Mr Chirag Karia (instructed by Davies Johnson & Co) for the Claimant
Mr Timothy Young QC (instructed by Vinson & Elkins RLLP) for the Defendant
Hearing dates: 26 & 27 January 2010
Judgment
Mr Justice Burton :
This has been the hearing of a challenge under s67 of the Arbitration Act 1996 by the Claimant, Norscot Rig Management PVT Ltd, to the jurisdiction of the Arbitrator, Sir Philip Otton, to adjudicate certain set-offs and counterclaims by the Defendant, Essar Oilfields Services Ltd, in an arbitration commenced by the Claimant by Request dated 15 August 2008. It is clear, from Azov Shipping Co v The Baltic Shipping Co [1999] 2 Lloyd’s Rep 39 that this constitutes a rehearing by the Court of the decision of the Arbitrator, although in this case neither side has sought to adduce, to any material extent, evidence other than the witness statements and documents which were before the Arbitrator. The Arbitrator concluded, by an Award dated 26 May 2009, that he had jurisdiction to hear and determine the issues raised by the Defendant in their Re-amended Answer and Counterclaim (the “Answer”). The same Counsel who appeared before the Arbitrator, Mr Stewart Boyd QC and Mr Chirag Karia, for the Claimant, and Mr Timothy Young QC, for the Defendant, have appeared before me, and the Claimant seeks that I should reach the contrary conclusion.
As will be seen, it is not all the matters raised by way of set-off and counterclaim with which the Claimant takes issue, but only those relating to the condition and fitness for purpose of a Blow Out Preventer Stack (“BOP Stack”), acquired by the Defendant from the Claimant, refurbished and fitted to a semi-submersible Drilling Rig (“the Rig”), also purchased (but not from the Claimant, who merely obtained a finder’s fee in regard to it), to be used in a drilling contract which the Defendant obtained with Gujarat State Petroleum Corporation (“GSPC”). The Defendant asserts (but the Claimant denies) that the BOP Stack so acquired and refurbished for fitting to the Rig was, when fitted, wholly defective and had to be replaced. The Claimant asserts that, if, which it denies, the Defendant has any such claim, it is a claim for breach of a contract of purchase, or purchase and refurbishment, which did not itself contain an arbitration clause. The Claimant contends that the arbitration, in which it is the claimant, relates only to disputes under a different contract, the Operations Management Agreement (“OMA”) between the Defendant, as Owner of the Rig, and the Claimant, as Operations Manager of it, which agreement did contain an arbitration clause. The arbitration clause in question is Clause 12 of the OMA which reads as follows:
“Law and Jurisdiction
This agreement shall be governed and construed under the English law and the Courts in England alone shall have the exclusive jurisdiction. Any dispute, controversy or claim arising out of or relating to this agreement, or the breach, or invalidity thereof, shall be settled by binding arbitration by one or more arbitrators in accordance with the … ICC Rules … The place of arbitration shall be London, England. The arbitration shall be conducted in English.”
I deal first and briefly with the contractual history, leaving aside at this stage any of the background, to which I shall refer below:
The Defendant placed purchase orders with the Claimant for various items of equipment, including the BOP Stack, in December 2006. The Claimant does not accept that the purchase orders (which, as it happens, if they had become contractual, would have incorporated a jurisdiction clause by reference to the Court of Mumbai) were ever sent, and relies rather on its own invoices rendered in January 2007. There was plainly a contract of purchase, and it is common ground that the BOP Stack so acquired, which was not new, required considerable work of refurbishment and repair before it could be in a position to be fitted to the Rig. As I have indicated above, there was no arbitration clause in such agreement. There is also an unresolved issue as to whether such contract or contracts was or were on a fixed price basis. There is no doubt however that both parties knew that the BOP Stack and other equipment were to be fitted to the Rig, that it was to perform to 15,000 psi and that the Rig, once fitted to the BOP Stack, was itself to operate to 15,000 psi, and for the purpose of the drilling contract referred to above.
On 1 January 2007 (i.e. simultaneously with the purchases described above), the Claimant and the Defendant entered into a Memorandum of Understanding (“MOU”), which recited that the Defendant was the owner of the drilling unit “Essar Wildcat”, had been awarded the drilling contract for a firm period of 2 years, and wished to appoint the Claimant as “Operations Manager” for carrying out such drilling operations of the drilling unit: by Clause 3 of the MOU they agreed to convert the MOU into a proper “Operations Management Agreement” prior to commencement of drilling operations. The MOU contained detailed terms, many of which were subsequently incorporated into the OMA, but did not contain an arbitration or jurisdiction clause.
The OMA was entered into on 14 August 2007. This provided (by Clause 2.1(a)) that:
“The Operations Manager shall assist the Owner in reactivating the Drilling Unit and also assist the Owner in carrying out various repairs/refurbishment activities during the reactivation phase. The Operations Manager shall assist the Owner in getting the said drilling unit inspected and approved by GSPCL …”
By Clause 5 of the OMA, a monthly management fee was payable, backdated to 1 January 2007, by the Defendant to the Claimant. As set out above, it contained the material arbitration clause.
The parties fell out, as more particularly described below, and the OMA was terminated in circumstances in which both sides allege repudiation, on 5 July 2008. In August 2008, the Defendant proposed to call on the performance guarantee in the sum of $200,000, provided for by Clause 8 of OMA, and the Claimant brought proceedings in the English Commercial Court, which led to a Consent Order before Blair J, to which further reference will be made below, dated 13 August 2008, the result of which was that the Defendant undertook that the sum, the subject of the performance bank guarantee, would be paid into Court, and the Claimant agreed to commence arbitration between the parties under Clause 12 of the OMA. The Request for Arbitration dated 15 August 2008 set out the Claimant’s claims under the OMA, reciting that it had “rendered … services from and prior to the date of the said agreement”, and including “an amount to be determined on account of reimbursement … for crew wages” and $968,310 for management fees and catering costs and expenses payable under the OMA. The next step taken, before the service by the Defendant of its (unamended) Answer and Counterclaim (on 29 September 2008), and the appointment of Sir Philip Otton as sole Arbitrator (4 November 2008), was the issue of proceedings by the Claimant by way of an Admiralty Action in the High Court of Singapore, on 29 August 2008. The Indorsement of Claim on the Writ of Summons recited as follows:
“The Plaintiffs’ claim against the Defendants is for the sum of US$8,356,427.91 and/or alternatively damages to be assessed, being sum due to the Plaintiffs under an Operations Management Agreement (“Management Agreement”) between the Plaintiffs and the Defendants dated 14 August 2007 for ship management services rendered to the Defendants’ ship or vessel “Essar Wildcat” of the Port of Liberia (“Vessel”) pursuant to the Management Agreement and/or for goods or materials supplied to the Vessel for her operation or maintenance at the request of the Defendants, their servants or agents, together with interest thereon and costs.”
This sum of $8,356,427.91, not broken down in the Writ of Summons, was in fact based upon an “Outstanding Statement for [the Defendant] as on July 21st 2008”, and consists of four subtotals, one amounting to $6,413,148.00 in respect of crews’ salaries and expenses, the second and third together being management fees and catering costs, totalling the same sum of $968,310 as recited in the Request for Arbitration, and the fourth being the sum of $974,969.91 for “Equipment and Supply”. This Writ of Summons was then the jurisdictional basis for the obtaining by the Claimant of an arrest of the Wildcat, which was released upon provision by the Defendant of a bank guarantee. On 7 January 2009, there was a partial stay of the Singapore action, leaving unstayed the claim for $974,969.91, said by the Claimant to relate to sums due to it in respect of the BOP Stack. The Claimant would not stay the balance of those proceedings and, in the event, an order was made requiring the Claimant to stay the entirety of the Singapore proceedings pending the resolution of the issue of jurisdiction in the arbitration by Sir Philip Otton on 13 January 2009.
The unamended Answer and Counterclaim, to which I have referred above, has subsequently been amended and re-amended (most recently on 10 February 2009) by the Defendant, and it is the reamendment to which I will refer as the Answer in this judgment. There is much of the pleading (I shall call it such, notwithstanding that it may not precisely have that status under the ICC Rules) to which the Claimant can take no exception, in that it is addressed on any basis to a defence, set-off and counterclaim in respect of the OMA. In particular, at paragraphs 68-73 of the pleading, it is asserted that the Claimant was in repudiatory breach of the OMA, accepted by the Defendant. Paragraphs 98(c) and 113(c)(iii) on any basis relate to set-offs and counterclaims for alleged breach by the Claimant of the OMA. However, the breaches and counterclaims asserted by the Defendant in paragraphs 98(a), (b) and (d)-(g), with the companion pleading in paragraph 113, save for the subparagraph referred to above, are those which give rise to the Claimant’s case that such disputes do not fall within the arbitration clause, because they are not breaches of the OMA. Sir Philip Otton found that they do fall within Clause 12, concluding, as set out in paragraph 1 above, that he had jurisdiction to deal with all the matters pleaded in the Answer.
In order for the issue before me to be properly understood, and in order to flesh out the brief history to which I have referred, it is necessary for me to set out the material parts of the Defendant’s pleading, although emphasising that much of it is controversial as between the parties, and, of course, that it is the Defendant’s case that is there pleaded.
The material parts of the Answer are as follows: as it is a pleading in the Arbitration, the Defendant is of course referred to as the Respondent:
“7. During 2006 the Respondent decided to re-enter the deepwater drilling business after almost a decade of focusing its efforts elsewhere. Given its absence from the drilling market, the Respondent was keen to get assistance with its reintegration into the market. The Claimant’s Managing Director, Mr. Ola Tollefsen (“Mr. Tollefsen”) had worked for a number of years in the semi-submersible market and offered to assist the Respondent.
8. The Respondent bid for a drilling contract to be awarded by the Gujarat State Petroleum Corporation Limited (“GSPCL”) for drilling operations in Exploration Block KG-OSN-2001/3 off the coast of Andhra Pradesh in India for a firm 2 year period.
9. Mr. Tollefsen was involved in the GSPCL tender process and personally participated in all of the technical discussions. Along with another representative of the Respondent, he negotiated and finalised the list of required equipment and had detailed knowledge of GSPCL’s technical requirements.
10. One such requirement was that any rig to be employed under the proposed drilling contract was to be equipped with, inter alia, a Subsea Blow Out Preventer Stack (a “BOP Stack”) of 15,000 psi rating along with other associated equipment (namely risers and slip joints).
11. The Respondent was successful in its tender for the drilling contract. On 16 December 2006, GSPCL and the Respondent entered into a drilling contract for a firm 2 year period (the “Drilling Contract”).
12. The Respondent approached Mr. Tollefsen for advice on purchasing a suitable rig. Mr. Tollefsen located a second-hand rig and recommended that the Respondent buy and refurbish it.
13. The Respondent purchased the rig recommended to it by Mr. Tollefsen from a subsidiary company of Mike Mullen Energy Equipment Resources Inc for a total of US$219 million (the “Rig”) and paid the Claimant a US$500,000 finder’s fee. ...
15. Since the Drilling Contract required a BOP Stack of 15,000 psi rating whereas, on purchase, the Rig had a BOP Stack of 10,000 psi rating only, the Respondent enlisted Mr. Tollefsen’s assistance in locating a BOP Stack of 15,000 psi rating as well as the other associated equipment required by the Drilling Contract.
16. In light of the tight mobilisation schedule under the Drilling Contract and the full order books of original equipment manufacturers at the time, Mr. Tollefsen advised the Respondent against ordering a new BOP Stack with a 15,000 psi rating and new associated equipment. He recommended a second-hand BOP Stack and associated equipment should instead be purchased and refurbished.
17. By its Purchase Order No. OR1/PO/140002/06-7 (the “BOP Stack Purchase Order”) the Respondent placed an order for a fully refurbished BOP Stack with a 15,000 psi rating.
18. In addition the Respondent placed a second purchase order with the Claimant (Purchase Order OR1/PO/140003/06-07) instructing it to procure other second hand equipment (the “Associated Equipment”) also required in order to equip the Rig to meet GSPCL’s requirements under the Drilling Contract (the “Associated Equipment Purchase Order”).
19. The BOP Stack Purchase Order was for US$11 million payable in 3 tranches (US$3 million immediately, US$3 million by 31 January 2007 and US$5 million by 28 February 2007) and provided that the BOP Stack would be delivered in mid July 2007.
20. The Associated Equipment Purchase Order was for US$2.59 million and provided for the purchase of 29 risers on an as is basis and 1 slip joint and 2 riser pup joints (which were all to be upgraded to 15,000 psi work pressure).
…
24. Shortly thereafter, a Memorandum of Understanding was entered into dated 1 January 2007 (the “MOU”) by which the Respondent agreed to appoint the Claimant as Operations Manager of the Rig. The MOU provided that the Claimant’s duties included, inter alia, crewing the Rig and assisting the Respondent in reactivating the Rig and carrying out repair and refurbishment activities during the Rig’s reactivation phase.
25. In particular, Clause 4.3(a) of the MOU provided that the Operations Manager was to assist the Respondent in reactivating the Rig and in carrying out repairs and refurbishments activities during the reactivation phase.
26. Clause 4.5 of the MOU provided that the Claimant was to be paid a US$50,000 management fee each month (effective of 1 January 2007) and to be reimbursed for its actual documented cost of provided personnel together with a 5% administrative fee on such amount (effective from the acquisition of the Rig until 31 December 2006).
27. The MOU further provided that the Parties would convert the MOU into an operations management agreement (the “OMA”) prior to the commencement of drilling operations under the Drilling Contract. This was duly done when the OMA was entered into on 14 August 2007.
28. During the course of 2007 it became apparent to the Respondent that, notwithstanding the Claimant’s various assurances that the refurbishment works were on schedule and that all equipment would be delivered in time for commencement of drilling operations under the Drilling Contract, the refurbished BOP Stack was not in fact likely to be delivered on time thereby exposing the Respondent to, inter alia, liquidated damages liability under the GSPCL.
…
30. The Claimant pushed back the delivery date of the BOP Stack and Associated Equipment on more than one occasion and intimated to the Respondent that there were significant cost overruns (in excess of US$10 million) which it was looking to the Respondent to pay.
31. The Claimant sent the Respondent a table outlining these cost overruns ... and made it clear that unless the increased costs were paid by the Respondent, the Claimant would not deliver the BOP Stack and Associated Equipment.
32. On 9 November 2007, the Parties met at the Respondent’s offices in Mumbai to discuss the BOP Stack delays and the cost overruns (the “Meeting”).
33. The Claimant continued to push the Respondent to pay the cost overruns and, since the Rig was already more than 3 months behind schedule under the Drilling Contract and the Respondent had already become liable to pay substantial liquidated damages to GSPCL, the Respondent felt that it had no practical option other than to pay the additional costs. The Respondent agreed to pay the additional costs claimed. It was agreed, however, that such payment of such cost overruns was to be on a reimbursement only basis and furthermore that payment would only be made against production of documentary proof of (i) the cost escalation and (ii) prior payment of such increased cost by the Claimant.
34. The Respondent further agreed to pay the Claimant a 10% service charge on the cost of refurbishment of the risers only. No agreement was reached as to whether a 10% service charge would be paid on the amount of the BOP Stack cost overruns.
…
37. Given the urgent need to complete the refurbishment works so that the Rig could be mobilised, the Respondent had no practical option but to release a further US$10.35 million in 6 instalments between November 2007 and January 2008 as on account advances towards the alleged cost overruns in order to ensure the Claimant did not stop work.
...
41. In addition to the BOP Stack, issues concerning the delay in the provision of the BOP Stack and the Associated Equipment and the cost overruns, the Parties experienced frictions over operational and control issues. In response to such issues, Mr Tollefsen sent the Respondent an email on 28 March 2008 stating, inter alia, “I have cancelled our O&M Contract” ...
42. On 19 April 2008, GSPCL accepted the Rig into service and allowed the Respondent to commence drilling operations under the Drilling Contract subject to the BOP Stack being tested.
43. During such tests a number of serious faults were identified in particular the BOP Stack was not holding pressure as required and leaks were observed from several bonnet sealing cases. The Claimant (as Operations Manager) was fully aware of these faults. The original manufacturer of the BOP Stack, Cameron International Corporation (“Cameron”), was commissioned in order to carry out further tests.
44. On 20 May 2008, a Cameron representative boarded the Rig, supervised further testing and advised that in order to identify the cause of the pressure leaks, he needed to take the BOP Stack to Cameron’s authorised workshop in Singapore for disassembly and inspection.
45. Since the entire BOP Stack would require rebuilding and then onboard testing before being accepted by GSPCL under the Drilling Contract, the entire Rig was taken to Singapore.
46. Cameron was not able to estimate when (or indeed if) the BOP Stack would be ready to be reinstalled on the Rig. Faced with this uncertainty and mounting pressure from GSPCL to start operations under the Drilling Contract, the Respondent was required to purchase a substitute BOP Stack from Aker at the cost of US$31,253,171 and works to install the new BOP Stack (which included some parts from the defective BOP Stack) were commenced.
47. By that date, the Respondent’s liquidated damages liability for delayed mobilisation of the Rig had reached US$1,500,000 under the Drilling Contract which amount has been paid to GSPCL by the Respondent.
...
58. The report made by Cameron on the defective BOP Stack ... concludes that the pressure leaks occurred as a result of “dimensional deviations”. The evidence suggests that these “dimensional deviations” occurred when the Claimant failed to refurbish the BOP Stack in accordance with the required machining tolerances and manufacturer’s detailed specifications.
…
61. During testing by West Engineering (GSPCL’s experts), it was discovered that the choke and kill lines on the risers which should have been upgraded to 15,000 psi were in fact rated for 10,000 psi only.
62. In short, the Claimant has tried to pass off 10,000 psi risers with choke and kill lines stating that they were rated to 15,000 psi working pressure. The use of non-conforming lines could have proved fatal to the lives of those on board the Rig and disastrous to the Rig and other surrounding property.
…
89. The Claimant failed to procure the provision of a properly refurbished BOP Stack with a 15,000 psi rating and Associated Equipment as it had agreed to do and otherwise failed to carry out its refurbishment activities in the manner provided for in the MOU and OMA.
90. Instead, the Claimant procured the provision of a defective BOP Stack as a result of the operation of which the Respondent has suffered loss.
91. In this respect, the Respondent will contend that:
(a) even had the BOP Stack not failed, the Rig would still not have been able to perform under the Drilling Contract on account of the under-rated risers; and
(b) by supplying under-rated risers, the Claimant put at risk the lives of the crew of the Rig. A failure of the choke and kill lines attached to the risers due to high well to bore pressure might have led to loss of life on board the Rig and damage to, or the loss of, the Rig.
92. The Claimant knew that the installation of a 15,000 psi rated BOP Stack was necessary in order for the Rig to be able to operate under the Drilling Contract. The Claimant breached its obligation under the MOU and later the OMA when it failed to refurbish the BOP Stack in accordance with the requirements of the Drilling Contract.
93. Furthermore, the Claimant has breached its obligations under the OMA including Clause 2.1(c) (obligation to keep the Respondent fully and currently informed of all matters related to the operation of the Rig), Clause 2.3(i) (“prior to any equipment being sent to the drilling unit, take all appropriate measures to ensure that all equipment is fit for immediate service”) and Clause 2.3(g) (obligation to make every effort to produce a certificate from all manufacturers stating any repairs to all or any part have been carried out in accordance with the manufacturer’s specifications).
…
95. In the event, the BOP Stack and Associated Equipment procured by the Claimant were deficient and unusable and required to be replaced in order to make the Rig suitable and safe to be operated under the Drilling Contract.
…
98. As a result of the breaches mentioned in paragraphs 89–97 above, the Respondent has suffered the following losses:
(a) US$24,130,916 being the total sum paid by the Respondent to the Claimant for the defective BOP Stack as thrown away or, alternatively, US$31,253,171 being the sum paid by the Respondent to Aker for the new BOP Stack;
(b) US$2,265,851 being the total amount paid by the Respondent to replace the Choke and Kill lines (being part of the Associated Equipment supplied by the Claimant) with equipment meeting the Drilling Contract requirements;
(c) US$728,417 being the sum which the Respondent paid to discharge the crew claims made against the Rig;
(d) US$1,500,000 being the liquidated damages which the Respondent has paid to GSPCL under the Drilling Contract on account of the Rig’s delayed mobilisation;
(e) US$5,500,000 being the sum demanded by GSPCL on account of the standby costs paid by GSPCL to third parties service providers up until April 2008 by reason of the delayed commencement of drilling operations;
(f) US$14,469,000 being the Respondent’s loss of profit during the period between 20 May and 18 November 2008; and
(g) US$5,000,000 being the expenses incurred by the Respondent for having the rig towed from Kakinada to carry out the repairs and charges for technical consultants and agencies appointed to make the necessary investigations in respect of the defective BOP Stack.”.
Mr Young submits that it is clear that all these claims arise, not only by way of consequential loss and damage for breach of the original purchase agreements, but also for breach of the OMA. As described in the detailed paragraphs of the Answer, which I have recited above, the Defendant’s case is that
the BOP Stack (and associated equipment) was defective as sold, but, in any event, defective when fitted, after months of refurbishment or upgrade carried out by subcontractors for whom the Claimant was responsible:
as from January 2007, first under the MOU and then under the OMA, the Claimant was acting as Operations Manager, receiving the fee provided by Clause 5 of the OMA (referred to in paragraph 3(iii) above):
the Claimant’s task of refurbishing the BOP Stack, and of rendering it suitable to be fitted, with the appropriate psi, to the Rig, once it arrived in Singapore in January 2007 - and until (7 months late) it was eventually, in February 2008, delivered to the Rig - was part of its responsibility under the OMA:
the purchase contracts were fixed price contracts, and consequently
all and any sums charged by the Claimant thereafter for the refurbishment can only be in respect of the Claimant’s services under the OMA.
This is, Mr Young submitted, in fact manifestly admitted by the inclusion of the sums claimed by the Claimant to be outstanding in respect of the BOP Stack as “Equipment and Supply” in the sum of $974,969.91 as part of the running account which formed the basis of the Singapore proceedings referred to in paragraph 5 above. The Rig could not work without the BOP Stack (described by Mr Tollefsen of the Claimant, in paragraph 17 of his witness statement, as an “essential integral component of the proposed offshore drilling operations of the Rig”), and so its refurbishment, and the putting of it into a condition in which it was fit for purpose, was a fundamental part of the reactivation of the Rig within Clause 2.1(a) of the OMA. I am only required to be satisfied that the Defendant’s claims (in this case counterclaims) amount to a dispute falling within the Clause (see Halki v Sopex Oils [1998] 1 Lloyd’s Rep 49), and it is submitted to be plain that, as pleaded, all the claims in paragraph 98 of the pleading, set out above, arise out of the OMA.
Mr Boyd submits that, in order for me to resolve the issue pursuant to s67, I must be satisfied that the claims made in the Answer, sought to be brought into the Arbitration, do arise out of the OMA, and that I cannot be so satisfied. He submits as follows:
Neither the MOU nor the OMA makes any reference to the BOP Stack or its acquisition.
The main clause of the OMA, upon which the Defendant relies, Clause 2.1(a), spells out an obligation to assist the Defendant in reactivating the Drilling Unit, and to assist the Defendant in carrying out various repairs/refurbishment activities during the reactivation phase. He does not accept that such activities refer to the refurbishment of the BOP Stack with reference to its being connected to the Drilling Unit, and, in any event, such references to assisting are, in his submission, inconsistent with the obligation under the purchase contract, which was to supply the BOP Stack fit for its purpose.
None of the other clauses of the OMA, some of which are referred to expressly in the Answer, as set out above, spell out an obligation, such as is relied upon, to take steps in relation to the BOP Stack to repair, upgrade, refurbish or render it fit for connection to the Rig. The other subclauses of 2.1 all relate to the responsibilities of the Claimant as Operations Manager in respect of the operation of the Drilling Unit. Clause 2.2 particularises the broad scope of work of the Operations Manager, by reference to Annexures 1 and 1-A, and the responsibilities nearest to those alleged by the Defendant are “overall responsibility for Operation of the Drilling Unit” and “overall responsibility for maintaining the equipments in good working condition”. From neither of these is it easy to spell out the asserted obligation, while it is provided that “procurement of the equipment” is at the responsibility and cost of the Owner. Clause 5 provides for the Operations Management Fee which, again, although retrospective to January 2007, makes no reference to the BOP Stack. I should not, submits Mr Boyd, simply take the Answer at face value, but should consider the terms of the OMA itself, which must be the foundation for any claim.
The correspondence between the parties in 2007-8, to which he refers, regularly makes mention of the ‘BOP project’, as if it was a separate project, even though all issues between the parties were discussed, and an attempt at resolution of them made, in the Mumbai meeting in November 2007, referred to in paragraphs 32-34 and 35 of the Answer, set out above.
Mr Tollefsen’s explanation in paragraph 17 of his witness statement (set out in paragraph 9 above) and his description of the BOP Stack in paragraph 18 as a “natural adjunct of the Rig acquisition project” does not mean that it is part of the Drilling Unit (and hence within Clause 2.1(a) of the OMA), indeed the contrary.
The apparent oddity that there was undoubtedly work carried out by sub-contractors on behalf of the Claimant in respect of the BOP Stack and its associated equipment, long after the purchase contracts in December 2006-January 2007 and the delivery of the BOP Stack to Singapore, is explained by the fact that, on the Claimant’s case, the price was not fixed. Mr Tollefsen of the Claimant asserts, in paragraph 24 of his witness statement, that the Defendant agreed to pay for the second-hand BOP Stack and associated spare parts and elements, and, additionally, for the invoiced costs of the refurbishment works to be carried out by Singapore-based specialist contractors.
I can see that there will be many cases where a s67 challenge can and must be resolved straightforwardly – where the issue is that there was no arbitration agreement, or no arbitration clause incorporated into the agreement, or that the claimant or defendant was not a party to the agreement. There will be cases, hopefully rare, where, as Rix J appears to have ordered in Azov, oral evidence would be called, perhaps additionally to what was before the arbitrator. But such is not this case. The issue here falls to be resolved on the documents before me, and by reference, not only to the Answer, but to all the evidence. If their pleaded case in the Answer is unclear, Mr Boyd invites me to say that the Defendant must fail, as it cannot establish that the challenged counterclaims arise out of the OMA, and thus establish jurisdiction. However Mr Young submits that if, and since, the issue depends upon the construction of the very contract which is the source of the Arbitration, I should not decide that issue, particularly if it requires a full understanding of the facts, but that, if I am in doubt, I should leave it as a dispute to be resolved by the Arbitrator.
I agree with Mr Young that the issue before me is whether, upon a true and proper construction of the very contract which will, in any event, be before the Arbitrator, the challenged counterclaims fall within it, but it seems to me that I should grapple with the question of jurisdiction in this case.
The pleaded Answer, the material parts of which I have set out above, and to which I expressly refer, makes persuasive reading. However, I accept the submissions of Mr Boyd that it is difficult to see how the asserted claims in respect of the BOP Stack arise out of any of the clauses of the OMA, for the reasons he gives. To the submissions of Mr Boyd, which I accept, a further matter could be added which further casts doubt upon the assertion that the claims in relation to the BOP Stack arise out of the OMA. At paragraph 73(iii)(a) of the Award, the Arbitrator concluded that “whether or not [the Defendant was] entitled to repudiate must involve a detailed consideration of what [the Claimant] did or did not do with regard to the BOP Stack. In my judgment, it would not be possible to determine properly and fairly whether a party is in repudiation without a fair and full consideration of the reasons why [the Defendant] terminated the contract.” This point, although not renewed orally before me, did also appear at paragraph 19 of Mr Young’s skeleton. However, at least as at presently pleaded in the Answer, in paragraphs 70-73, it does not appear to be asserted that the problems with the BOP Stack and the breaches of the Claimant’s obligations in regard to them, constituted a, or the, repudiatory breach, which was accepted by the Defendant.
I am not satisfied therefore that the challenged set offs and counterclaims arise out of the OMA. However I can turn the more briefly, in the light of what I have set out above, to consider the issue upon which, in fact, the Defendant succeeded in front of the Arbitrator, namely whether they constitute a dispute, controversy or claim … relating to [the OMA] or the breach … thereof”.
There was not, in the event, much difference between the parties as to the law in this regard, with both in the end recognising that the decision was one of fact and impression. There were slightly different nuances and emphases between the Counsel in argument as follows:
Fiona Trust (Fiona Trust v Privalov [2008] 1 Lloyd’s Rep 254 (HL)). This decision, together with the earlier Court of Appeal decision in Ashville Investments Ltd v Elmer Contractors Ltd [1989] QB 488, which it approved, definitely marked a sea-change in the liberalising of the approach of the courts to the construction and ambit of arbitration clauses. Mr Boyd submitted that, given that the facts of that case related to one contract, and whether allegedly tortious activities prior to that contract fell within it, it had particular relevance to cases where such issue arose in respect of one contract, and the relationship being considered by Lord Hoffmann at paragraph 6 was the relationship of having entered into that one contract. The significance of the decision would thus be less great where the issue related to two or more contracts, i.e., as here, to whether claims under an earlier contract between the parties related to a later contract between them. Mr Young however submitted that Fiona Trust was in no way limited, and that the references to relationship in Lord Hoffmann’s speech were not restricted to one contract, as appears in particular from his statement, in paragraph 13 of his speech, that “in my opinion the construction of the arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal”.
Retroactivity. This was a rather broadbrush word, adopted in his argument by Mr Boyd by reference to its use in Merkin Arbitration Law (1st Ed Service Issue 48-17 March 2008) at paragraph 5.39, where Merkin contends that “the reluctance of the English courts to recognise retroactivity means that in the latter situation the clause is unlikely to be taken as referring to disputes which arise between the parties out of some earlier agreement”. Mr Boyd gave only lukewarm support to such proposition. Mr Young pointed, as he had before the Arbitrator, to words of Borins JA in the Canadian case of Huras v Primerica Financial Services Ltd [2001] 55 O.R.3d (Court of Appeal for Ontario) in which he had referred (at paragraph 19) to authorities in the United States which had “overwhelmingly held that arbitration clauses may apply to [contractual] disputes arising prior to the signing of a contract containing an arbitration clause”: and before me he referred to one of those authorities, namely Drews Distributing Inc v Silicon Gaming Inc 245F. 3d 347 (US Court of Appeals 4th Circuit 2001). Mr Boyd did not encourage reliance upon such US cases, but he had to recognise that US authorities played an influential part in the conclusions of Lord Hope in Fiona Trust (see paragraph 31). Mr Boyd in fact accepted that there was no question of a ‘jurisdictional bar’ to considering whether a dispute under an earlier contract would sufficiently relate to a later contract as to fall within an arbitration clause within that contract. Such examples as there are in the reported English decisions (whether concerning arbitration clauses or the related questions on jurisdiction clauses) were considered, including CMA CGM SA v Hyundai Mipo Dockyard Co Ltd [2009] 1 Lloyd’s Rep 213. As was the case in Huras, the two contracts in X Ltd v Y Ltd [2005] BLR 341 (an arbitration case) were concluded by Jackson J to be remote or different from each other – any links were tenuous and the suggestion of a relatedness bizarre (paragraphs 39(3)-(4)). A similar conclusion that an earlier joint venture agreement and two subsequent sales contracts were “quite distinct from one another” was reached by Field J in Choil Trading SA v Addax Energy SA [2009] EWHC 2472 (Comm) (at paragraph 18 (a jurisdiction case)). In Satyam Computer Services Ltd v Upaid Systems Ltd [2008] 2 AER (Comm) 465 (CA) (a jurisdiction case) Collins LJ did not consider that the Fiona Trust case was of assistance, because it was clear in that case, by reference to the express terms of the second (settlement) agreement, that certain matters remained governed by the earlier agreement. This, I suggest, is the kind of contra-indication to which the Arbitrator may have been referring when, in a passage with which Mr Boyd took issue, he referred to discharging the presumption of relatedness by an express term (paragraph 77 of the Award). In UBS AG v HSH Nordbank AG [2009] 2 Lloyd’s Rep 272 (CA) the now Lord Collins, giving the judgment of the Court of Appeal, came to a different conclusion, again in relation to a jurisdiction clause :
“83. But the essential task is to construe the jurisdiction agreement in the light of the transaction as a whole. As I suggested in [Satyam] at [93], whether a dispute falls within one or more related agreements depends on the intention of the parties as revealed by the agreements …
84. … in my judgment, sensible business people would not have intended that a dispute of this kind would have been within the scope of two inconsistent jurisdiction agreements.”
Set-Off. Mr Young refers to the disconcerting result, if the Defendant’s counterclaims could not be resolved in this Arbitration, that the Defendant would thus be deprived of a defence of set-off, and one based upon transaction set-off, and not simply independent set-off. He refers to Aectra Refining and Manufacturing Inc v Exmar NV [1994] 1 WLR 1634, referring to the words of Hoffmann LJ at 1650 A-C, that “In cases of transaction set-off … it would be quite unreasonable for a plaintiff who has chosen to sue in one forum to rely upon an arbitration … clause to confine the court to the facts which he chooses to prove and prevent it from examining related facts as well.” He points to the 2001 Companion volume to the Second Edition of Mustill & Boyd at paragraph 130, which appears to be to similar effect. The decision of Field J in Econet Satellite Services Ltd v VEE Networks Ltd [2006] 2 Lloyd’s Rep 423 is not relevant because of the precise words of the UNCITRAL Rules, which he was construing. Consideration of obiter remarks in paragraph 33 of Gross J’s judgment in Ronly Holdings v JSC Zestafoni G Nikoladze Ferroalloy Plant [2004] EWHC 1354 (Comm) and of Cresswell J’s judgment in Metal Distributors (UK) Ltd v ZCCM Investment Holdings plc [2005] 2 Lloyd’s Rep 37 at paragraph 18(7)-(11) would support the proposition that an arbitrator would have jurisdiction to entertain a defence of transaction set-off, but subject to Cresswell J’s natural caveat that “regard must be had to the true construction of the particular arbitration agreement in question”. Mr Young relies upon the seminal definition of a transaction set-off most recently set out in the judgment of Potter LJ in Bim Kemi AB v Blackburn Chemicals Ltd [2001] 2 Lloyd’s Rep 93, by reference to the words of Lord Brandon in Bank of Boston Connecticut v European Grain and Shipping Co Ltd [1989] 1 Lloyd’s Rep 431, namely:
“For myself, I consider that Lord Brandon’s formulation, [of the test for transactional set-off] is to be preferred because on the one hand it emphasises that the degree of closeness required is that of an “inseparable connection”, while on the other it makes clear that it is not necessary that the cross-claim should arise out of the same contract; all that is required is that it should flow from the dealings and transactions which gave rise to the subject of the claim.”
Whereas Mr Boyd understandably emphasises that there are still two questions and two tests, one as to whether there is a transaction set-off and the other as to whether a claim, controversy or dispute under an earlier contract, can be said to relate to a subsequent contract, nevertheless I agree with Mr Young’s submission (and I do not, in the event, think that Mr Boyd substantially differed from it), that if there is a sufficient connection between a claim under an earlier contract and a dispute under a later one for the former to amount to a defence of transaction set-off, then it seems likely, if not inevitable, that it will satisfy the relating to test as well.
Convenience/practicability. The learned Arbitrator, at paragraph 78, indicated that he “[did] not base [his] conclusions on ‘convenience’ alone, but on the broader concept of practicability. In the instant case it is not merely ‘convenient’ to have the set-off disputes decided under one roof, it is much more ‘practicable’ to do so in order to avoid, for example, inconsistent outcomes and increased costs”. With regard to this passage, neither Counsel before me was able to put his finger on a distinction between convenience and practicability, and both were agreed that there was no place for any doctrine close to “forum non conveniens” in the resolution of what is, in fact, a jurisdiction question arising out of the construction of an arbitration clause. In that paragraph, the Arbitrator stated:
“It would be open to a party to show that separate proceedings would be more cost effective than a combined process or that it would be less problematic to keep them separate. [The Claimant] does not so argue.”
As it happens, there was evidence put in by the Claimant before me, by reference to which Mr Boyd asserted that, if the question arose, Singapore would be a more convenient forum (though Mr Young suggested that at least some of any problems could be resolved by holding the Arbitration in Singapore if such could be agreed). However, as I have said, in the event neither Counsel rested their case upon any such arguments, and indeed both accept that in law they are not open to a party on a s67 application. What there is, as recognised by the Arbitrator at paragraph 74, is the underlying guidance, to be derived not only from Fiona Trust, but also from the words of Lord Collins in UBS (themselves derived from Bingham LJ in E.I du Pont de Nemours & Co v Agnew [1987] 2 Lloyd’s Rep 585 at 589), cited in subparagraph (ii) above. The issue which the Arbitrator described as practicability, but which rather less elegantly but, in my judgment, more accurately, could be summarised as one-stopness or togetherness, derives from paragraph 27 of Lord Hope’s speech in which, after deprecating “fussy distinctions”, he refers to arbitration as being, preferably, a “one-stop method of adjudication for the determination of all disputes”.
Against this background, I set out my conclusion in this case. I have no difficulty in agreeing with the Arbitrator that the challenged counterclaims in relation to the BOP Stack do relate to the OMA, even if they do not arise out of it:-
They concern the equipment which was to be, and was, purchased for the express purpose of fitting to the Rig, and as part of the upgrading of the Rig, and, enabling its operation, at 15,000 rather than 10,000 psi, with the intention of the Rig being used for operations in respect of which the Claimant was to be, and was, the manager under the OMA.
The BOP Stack, if not a part of the Drilling Unit, about which I remain insufficiently certain, is, nevertheless, as Mr Tollefsen said in paragraphs 17 and 18 of his witness statement, an “essential integral component” of the drilling operations of the Rig and a “natural adjunct” to the acquisition of the Rig.
The purchase contract only marginally, if at all, antedated the MOU which was to, and did, become the OMA, and the work on the BOP Stack ran in tandem with all and any management of operations and supervision by the Claimant (including services prior to the OMA – see the Request for Arbitration) involving or in respect of the Drilling Unit, whether under the MOU or the OMA or otherwise.
The Claimant was only incorporated on 5 January 2007, and then, as it was put by Mr Tollefsen in paragraph 34 of his witness statement, it “assumed responsibility of the conduct of the BOP acquisition project”, in parallel with its assumption of responsibility under the MOU, and subsequently the OMA. The Arbitrator found, in paragraph 62 of his Award, that “the relationship and status of the parties remained constant throughout”. Mr Boyd objects that the status of the Claimant under the purchase contract was as vendor (but then, on its own case – see paragraph 11(vi) above – as provider of services in respect of the BOP Stack) and then under the MOU/OMA as the provider of services as Operations Manager. But what is quite clear is that there was a seamless continuum of contact between the parties from 2006 through to 2008.
The present Answer seemingly suggests that the counterclaims arise both out of the purchase contracts (and any contracts for services resulting therefrom) and further or in the alternative out of the OMA. I have presently concluded that I am not sufficiently certain, on the present pleadings and evidence, that such is the case. However, what is certainly the case is that the alleged serious failures by the Claimant are an important part of the factual history leading up to the alleged repudiatory and other breaches of the OMA, which will be required to be considered in the Arbitration as part of the history.
The BOP Stack was, as set out above, referred to in correspondence between the parties by the Claimant as a separate project, but that does not mean that it was an independent one – and it plainly was not. All the matters between the parties were being dealt with as necessary simultaneously, and often in the same correspondence, including the BOP Stack, and the Mumbai meeting is simply one example of that.
The Arbitrator referred in paragraph 73(iv) to the fact that “the parties operated a running account and it would not be possible to consider the running account and assess the balance due without considering a significant part of the entries appearing in the running account in respect of the BOP Stack entries”. Mr Boyd does not accept that a running account is a fair description of the statement of account to which I have referred in paragraph 5 above, but the fact remains that:
The Claimant kept that account, in which all the items and their totals appear. The claimed entitlement of the Claimant in respect of the BOP Stack was included alongside, and as part of, the totalling of the sums claimed for crew salaries and expenses, for operation and management and for catering costs, the latter all plainly being referable to the OMA and of course to the same time period.
The indorsement in the Singapore action, which I have set out in full at paragraph 4 above, is a clear indication of the connection, indeed the inter-connection, between the contracts and the claims.
I have no doubt that the set-offs and counterclaims in the Answer all either admittedly arise out of the OMA (those referred to in paragraph 6 above) or, for the reasons that I have set out above, relate to the OMA: and that this challenge to the jurisdiction of the Arbitrator under s67 must be dismissed.
Ad Hoc Agreement.
I shall deal briefly with the Defendant’s fallback argument, which was before the Arbitrator, although he did not address it in his Award. This was a case made by the Defendant that there was an ad hoc Arbitration Agreement, said to arise by virtue of the Consent Order before Blair J dated 13 August 2008, referred to in paragraph 4 above. It is certainly the case that in its attempt to prevent the drawdown on the performance guarantee the Claimant emphasised the claims it had against the Defendant, and listed the entirety of the $8,356,427.91, which subsequently became the subject matter of the Singapore proceedings, exhibiting the Statement of Account referred to in paragraph 5 above. This of course included the claims in respect of the BOP Stack as well as those relating to management fees etc. It was agreed to refer the disputes to arbitration, as a result of which the Defendant agreed not to take the money from the performance guarantee, and the Defendant submits that there was thereby an agreement to submit all such disputes, thus including that relating to the BOP Stack, to such arbitration.
However, the agreement is set out in the Consent Order, and, although I am satisfied, contrary to Mr Boyd’s submission, that the Consent Order is not limited to containing an undertaking to the Court but also records an agreement between the parties, that agreement is limited by the express words of the relevant part of Schedule 1 to that Order, whereby the Claimant undertook to the Court:
“... forthwith to take all necessary steps to refer to arbitration in accordance with clause 12 of the [OMA] and the ICC Rules all of its claims which are the subject matter of dispute thereunder between the parties.”
Accordingly, all that the Claimant agreed to refer by its promise/undertaking in the Consent Order is those claims which are the subject matter of dispute under the OMA, which is no better and no worse than the argument on which, so far as relates to arising out of, the Claimant has succeeded. However, in the light of my decision in paragraph 18 above in favour of the Defendant, it does not require the assistance of success on this argument.