Integral Petroleum SA v Melars Group Ltd

This is my judgment on an application under section 67 of the Arbitration Act 1996. The applicant is Integral Petroleum SA, a Swiss trading company based in Geneva, Switzerland, who is represented by Mr Stephen Cogley QC. The respondent is Melars Group Ltd (“Melars”), a company incorporated in the British Virgin Islands, who is represented by Mr Sergey Kodenkov, its legal manager. Although he is not a qualified English lawyer and English is not his first language, Mr Kodenkov ably presented Melars’ arguments, including its case on English law. I am also grateful to Mr Cogley not only for his skilful presentation of Integral’s case, but also for the assistance that he fairly provided about arguments available to Melars.

The challenge is to an award (the “Award”) dated 13 November 2013 and made by Mr W Laurence Craig in a reference conducted under the rules of the London Court of International Arbitration (“LCIA”). The claimant in the reference is Integral, who complains about debt collection proceedings brought by Melars in Switzerland and criminal proceedings brought that are said to involve Integral’s managing director, Mr Murat Seitnepesov, and it seeks injunctive and declaratory relief in respect of them, the costs of defending them and damages for harm to Integral’s reputation resulting from them. In the Award, Mr Craig declared that the claims are not within the arbitration agreement under which the reference was brought, and therefore failed. In these proceedings Integral seeks an order setting aside the Award and remitting the claims for determination on the merits.

On an application under section 67, the court conducts a re-hearing of the issue(s) about the tribunal’s jurisdiction, and does not merely review the decision. Accordingly, it hears oral evidence: Azov Shipping Co v Baltic Shipping Co (no 1), [1999] 1 Lloyd’s Rep 68. In this case I heard oral evidence from four witnesses, all of whom were cross-examined. Integral called Mr Akhmed Bechedov, an employee of LLC EWL-Transhipping, a subsidiary of East-West Logistics LLP (“EWL”), and Mr Nikolay Tsymlyakov, the Master of the MT “Optimaflot”. Melars called Mr Daniel Richard, a partner in the Swiss law firm of Python and Peters, its Swiss lawyers, and Mr Dmitri Palivoda, who worked for it in 2011/2012 as a “trade agent” (to use the expression in his witness statement as translated from the Russian). In the event, the evidence of the witnesses was, at most, of only marginal importance to what I have to decide.

The background to the dispute is a contract dated 14 December 2011 (the “December agreement”) whereby Integral agreed to sell and Melars to buy 300 mt of gasoil (plus or minus 10% at the seller’s option) for delivery FOB Makhachkala, Russia, or any other sea port on the Caspian Sea at Integral’s option. The price was $881 per mt, and Melars was to make, and did make, an advance payment of $264,300. The December agreement contained this clause under the heading “Law and Jurisdiction”:

I explain something of the circumstances in which the December agreement was made and later events, but only by way of background: much is in issue, and in giving this explanation I do not intend to decide anything that is controversial between the parties. At around time of the December agreement, Melars entered into three other contracts:

On 13 December 2011 it made a contract with a third party to sell some 2,400 to 2,900 mt of diesel oil for delivery at Okarem in Turkmenistan.

On 14 December 2011 Melars, as charterer, and EWL, as owner, entered into a voyage charter of MT “Valeriy Kalachev” to carry a cargo of a minimum of 2,500 mt of oil to Okarem.

On 15 December 2011 Melars made a contract with Trafigura Baheer BV (“Trafigura”) to buy 2,200 to 2,300 mt of hydro-purified gas oil.

According to Mr Bechedov, the plan was for the cargo supplied by Trafigura to be carried from Turkmenbashi in Turkmenistan to Makhachkala on the MT “Valeriy Kalachev”, where it was to be transhipped onto MT “Optimaflot”; and the parcel supplied by Integral was to be loaded at Makhachkala onto the MT “Optimaflot” and mixed with the larger parcel. The MT “Optimaflot” was then to carry the whole cargo to Okarem. Integral says that it came to understand that purpose was to avoid shipping cargo directly from Turkmenbashi to Okarem because a shipment from one Turkmen port to another would have incurred taxes, and Melars avoided them by shipping the cargo to a foreign port and blending it with oil of different quality and origin.

Thus, Integral says that the cargo that it supplied was blended with the parcel supplied by Trafigura. That is not accepted by Melars: Mr Palivoda explained that he and Melars do not know whether the 300 mt was ever shipped, and have not been provided with evidence that it has been. I do not consider that anything turns on that as far as the application under s.67 is concerned, and therefore reach no final decision. Had it been necessary, I would have concluded that the parcels were mixed on the MT “Optimaflot”, and that Melars as well as Integral knew this by 16 April 2012, when, as I shall explain, they entered into a so-called cancellation agreement. Captain Tsymlyakov’s evidence was that the parcels were so mixed, and I see no good reason to reject it: he said that the “top-up” cargo was loaded, and that the configuration of the tanks on the MT “Optimaflot” would not have allowed it to be segregated from transhipped cargo. Mr Palivoda accepted in cross-examination that he did not know whether the cargoes were mixed or not, but I could not accept that, throughout the subsequent events that I shall describe, nobody in Melars was aware of the loading and mixing of the “top-up” cargo.

I add Integral also relied on a letter from Mr Richard to the Swiss Debt Collection Office (or Office des Poursuites) (“DCO”) dated 12 September 2012 in which he stated (according to the English translation in evidence) that “The diesel purchased from Integral had to be mixed with the diesel that had been purchased from Trafigura. This contract had been cancelled, however”. To my mind, it is not clear that Mr Richard meant that the two purchases had in fact been mixed, rather than that this was intended: the translation is not specific, and the original is not before me. (I recognise that neither interpretation would be consistent with the evidence of Mr Palivoda in his witness statement that Melars did not have any “specific intention to mix the two cargoes”, but I need not explore that further.)

However, apparently the sale of 13 December 2011 to the third party did not proceed, and it was cancelled by the buyer on 17 January 2012. Mr Bechedov’s evidence was as follows: that the MT “Optimaflot” was delayed by bad weather and technical problems, and Melars threatened to bring a legal claim against EWL for the delay. On 19 January 2012 the vessel arrived at Okarem, but Melars ordered EWL not to discharge the cargo, and the MT “Optimaflot” waited for eight days awaiting instructions. She then returned to Makhachkala, the plan being to tranship the cargo back to the MT “Valeriy Kalachev”, but she did not arrive until 14 April 2012. Faced with potential liability because of the delays, EWL sought to assist by finding a new buyer for the cargo and introduced Melars to Dartex Trade Ltd (“Dartex”). On 15 April 2012, Melars entered into a contract (the “Dartex agreement”) to sell to Dartex 2,420.8664 mt of hydro-purified gasoil from the Turkmenbashi oil refinery in Turkmenistan.

The Dartex agreement included a “law and jurisdiction” clause, providing for the “contract in its entirety, all transactions executed hereunder and all relationships between the parties arising out of or in connection herewith” to be construed under and governed by the laws of England, and for arbitration of “any dispute arising out of or in connection with” it under the LCIA rules by a tribunal of three arbitrators, the seat of the arbitration being Geneva.

On 16 April 2012 Integral and Melars entered into a further agreement headed “Agreement on Cancellation of [the December agreement]” (the “cancellation agreement”). According to the Award, Melars entered into it because it did not need the 300mt in order to fulfil the Dartex agreement. It recorded that the parties had agreed to cancel the December agreement with immediate effect upon specified terms and conditions, including that Integral agreed to return to Melars $237,870, together with interest of $3,154.22, and what Mr Craig described in the Award as a “broad release of liability and indemnification clause” (the “settlement clause”). By it the parties confirmed that, on receipt by Melars of $241,024.22, “all claims and demands of [Melars] against [Integral], their property, group companies, Managers, Agents, their administrators, their successors, assignees, and/or Underwriters and/or Insurers, which [Melars: the agreement reads “the Seller”, but this is clearly an error for “the Buyer” and is intended to refer to Melars] may have on any of them in connection with and/or as a result of the [December agreement] and/or in tort, will become fully and finally settled. The Parties have agreed as well not to make any claims or demands of any nature or kind whatsoever against each other and indemnify each other if any such cases will arise out in connection with [sic] the [December agreement]”. Melars received the $241,024.22 on 2 May 2012.

By a letter dated 7 May 2012 Melars confirmed to Integral that it did not have “any claims, demands or further unresolved business with [Integral] with regard to [the December agreement] and [the cancellation agreement] which are considered by them as duly and finally settled”. According to Mr Palivoda, Integral had sought a confirmation with wider wording to the effect that Melars had no claims “including but not limited to” such claims, but Melars refused to provide that because it would not have reflected the cancellation agreement or subsequent discussions.

According to Melars, it was paid only $200,000 on 16 May 2012 under the Dartex agreement: otherwise the price of $2,170,432.53 is outstanding. By a letter to Mr Seitnepesov dated 30 July 2012 Mr Richard demanded payment of this by 2 August 2012 of Dartex, EWL, Integral and Mr Seitnepesov personally: it contends that Mr Seitnepesov organised that Dartex agreement, as is explained in a letter dated 12 September 2012 from Mr Richard to the DCO, in which he wrote, “… it is apparent that Dartex was being used as a shell company by Mr Murat Seitnepesov, so that his company, Integral, could without being legally linked to Melars and without paying take possession of the cargo in order to resell it [sic]”. These allegations are disputed, and neither the merits of Melars’ claims nor the basis for them is for me to decide. On 9 August 2012 Melars asked the DCO to issue debt proceedings against Integral and Mr Seitnepesov. On 4 September 2012 the DCO issued a “Commandement de Payer” in the sum of CHF equivalent of $1,970,432.53, which is said to be unpaid price under the Dartex contract. (I was told that a “commandement de payer” is analogous to a statutory demand, but its precise nature is not important.) The commandement was notified to Integral on 11 September 2012 and to Mr Seitnepesov on 17 September 2012. On 23 January 2013 Mr Seitnepesov was interviewed by the Swiss police following a criminal complaint by Melars. Meanwhile on 30 August 2012 Integral had begun the LCIA reference.

In the Award the arbitrator referred to Lord Hoffmann’s speech in Fiona Trust Holding Corpn v Privalov, [2007] UKHL 40, and observed that “Recent case law from the highest courts in England make it quite clear that arbitration clauses should be interpreted liberally so as to give business efficacy to the agreement and to avoid, when the language of the contract permits, dividing claims so as to require recourse to multiple jurisdiction to resolve a business dispute under a contract”. He recorded that Melars did “not attempt to put in issue the right of arbitral tribunals broadly to take jurisdiction over disputes arising under or relating to the [Contract] in which an arbitration clause is found. Rather, it asserts that there has been no allegation or proof of any dispute that relates to the [December agreement] at all”. Accordingly he identified as the first issue whether he had “jurisdiction to consider any of the substantive claims of [Integral]”. Without making a final disposition of the issues, he accepted Integral’s submission about “the factual background of related sales transactions” for the purpose of deciding his jurisdiction: the submission was broadly that the transactions were as I have described them.

The arbitrator observed that in the December agreement itself the arbitration provision covered only “disputes hereunder”, and neither the fact that the buyer had it in mind to use the oil with other purchases or anything else in the factual context of the December agreement justified a broader interpretation of it. He then considered whether this remained the position after the parties entered into the cancellation agreement with its “particularly broad ‘hold harmless’ clause”, which he describes as “broaden[ing] the scope of the obligations under the [December agreement]”. He continued as follows: “Nevertheless, a closer look reveals that the claims being made, and threatened, against [Integral] by [Melars] are not made “in connection with” the promised purchase and sale of 300 mt of gasoil…. Rather, [Integral’s] theoretical liability relates to obligations between [Melars] and Dartex under the Dartex agreement”. He then reasoned as follows:

Two observations on this reasoning: first, it is directed to whether “claims” are covered by the arbitration agreement, and the arbitrator examined whether Integral’s claims were within his jurisdiction. However, by the arbitration agreement the parties agreed that certain disputes were to be arbitrated. It might be that some issues (or potential issues) about the claims made by Integral were covered by the arbitration agreement and not others: specifically, the question whether an argument that the Swiss proceedings contravened the cancellation agreement might be covered by the arbitration agreement even if other complaints against the Swiss claims were not. (As things stand, it is unclear what issues might arise in the Swiss proceedings: Mr Richard was most insistent when he was cross-examined that he could not tell what issues might arise in them: “I can’t foresee the future”.)

Secondly, it was common ground before me, and I understand that it was common ground in the reference, that (to cite Mr Kodenkov’s skeleton argument) “the Cancellation Agreement, covering all claims between the parties arising out of/relating to the [December agreement] would be referred to LCIA arbitration in London”. As it was put by Mr Palivoda in his witness statement, “It is accepted by Melars that the arbitration clause in the [December agreement] applies equally to the Cancellation Agreement”. When I explored the implication of this with Mr Kodenkov, he accepted that therefore a dispute about the ambit of the settlement clause is covered by the arbitration agreement and that the tribunal had jurisdiction to decide whether it was a breach of the settlement clause and so of the cancellation agreement for Melars to have brought the Swiss proceedings. If this is so, it necessarily follows, as it seems to me, that the tribunal also had the jurisdiction to determine what relief should be awarded (whether by way of injunction, or declaratory relief or damages) in the event of breach. Equally, as it seems to me, it is implicit that Melars accepts that the arbitration agreement covers any dispute about whether a claim has been “fully and finally settled” under the first sentence of the settlement clause: I find it impossible to suppose that the arbitration agreement covers disputes about the application of the second sentence of the settlement clause (whereby the parties agreed not to make claims and demands), but not disputes about the application of the first sentence (whereby claims are settled). To adopt the terminology of Longmore LJ in Starlight Shipping Co v Allianz Marine Aviation Versicherungs AG, [2014] EWCA Civ 1010 at para 8, “”it is the obvious intention of the parties that the settlement provision and the indemnity provision should march together and complement one another …”.

This leads to two questions:

is there a dispute referred to the arbitrator about the application of the settlement clause? and

if so, should the court exercise its jurisdiction under clause 67 of the Arbitration Act, 1996 to grant relief?

The first question requires an examination of Integral’s statement of case in the reference. I have explained in general terms the nature of their claims. When they were first brought, it was not alleged that the Swiss claims have been settled or that it is a breach of the settlement clause to bring them. The eight documents annexed to the statement of case include the December agreement and the Dartex agreement, but not the cancellation agreement. The pleading does not refer to it. The declaration claim is put as follows: “[Integral] seeks a declaration that as to its subsisting right, i.e. that there is no basis on which [Melars] could have brought the Swiss debt collection and criminal proceedings based on the facts of this case. It also seeks a declaration as to its future rights, i.e. that it is not liable to [Melars] under the [December agreement] or otherwise and [Melars] is not entitled to start some new proceedings against [Integral] in some other forum …”. There was no suggestion that a declaration was sought because the Swiss proceedings contravened the cancellation agreement. Nor was injunctive relief on this basis: it is pleaded that they “are both vexatious and in breach of contract”, but the alleged breach of contract is breach of the arbitration clause in the December agreement, the complaint being that it was a breach to “circumvent this clause by bringing proceedings elsewhere”.

It was Melars who first referred to the cancellation agreement in its defence submissions, and it annexed it to its pleading. It did so in order to support its jurisdictional argument that its claims could not be under the December agreement because it had been cancelled consensually. It stated that, “Whilst [Integral] has breached that agreement by bringing these proceedings, [Melars] has not”. In its reply pleading, Integral rejected that submission as “quite misconceived”, and asserted “it is not [Integral] that stands in breach of the Agreement on Cancellation. It is [Melars]. Clause 3 of the Agreement on cancellation provides: ‘The parties have agreed as well not to make any claims or demands of any nature or kind whatsoever against each other and indemnify each other if any of such cases arise out of or in connection with the Contract’. That clause was breached when [Melars] filed the debt collection and criminal proceedings in Switzerland. Hence [Integral] is entitled to maintain this action on an independent footing for breach of [the settlement clause], for breach of this undertaking and pursuant to the indemnity”.

Thus, eventually Integral made a claim in the arbitration that the Swiss proceedings were in breach of the second sentence of the settlement clause (but still did not plead that the claims or demands were settled under the first sentence). As I have explained, at the hearing Melars agreed that the application of this second sentence to particular claims or demands is covered by the arbitration agreement. This being so, in that the tribunal concluded that it had jurisdiction over none of the disputes before it, it was in error.

However, Mr Cogley contended that the tribunal’s jurisdiction was wider than this, and that the arbitration agreement, in the context of the cancellation agreement, or (if it be preferred) the arbitration agreement in December agreement as varied by the cancellation agreement, covers disputes about the claim made by Melars in the Swiss proceedings generally. He made three main points. First, in his letter of 21 September 2012 to the DCO, Mr Richard stated that Melars claim arises from “a complex set of facts”, including that the parties made the December agreement, that the oil supplied under it was mixed with the oil from Trafigura, and the cancellation agreement. That is true so far as it goes, although the “complex set of facts” described by Mr Richard include much more. However, it by no means follows that the claims give rise to a dispute under the December agreement or the cancellation agreement or are otherwise covered by the agreement to arbitrate.

Secondly, I was referred to the judgment of Longmore LJ in the Court of Appeal and the speech of Lord Hoffmann in the Fiona Trust case. The courts recognise that generally contracting parties who make arbitration agreements intend claims arising from their contract to be decided by the same tribunal and do not intend to have different disputes decided by different tribunals. Given, therefore, that ex concessu the arbitration agreement covered a dispute about whether a claim was within the settlement clause, this indicates that the parties intended other disputes about such a claim to be covered by it.

Thirdly, Mr Cogley submitted that the terminology of the settlement clause informs the intention evinced by the parties in the cancellation agreement about the ambit of the arbitration clause. Mr Cogley cited the judgment of Longmore LJ in the Starlight Shipping case (cit sup), and his observation (in para 8) that “settlement clauses are analogous to both arbitration and jurisdiction clauses”, and fine distinctions of language should not be permitted to derail a commercially sensible application of them. In this case, he submitted, the context in which the parties agreed upon the settlement clause was that the December agreement was to be cancelled and so they could not have expected claims to arise under it, and they knew that the oil supplied under it had been mixed with that supplied by Trafigura and was to be supplied to Dartex. This being the context, if the settlement agreement was to have any real role, it should be understood to apply to claims or demands arising from or in connection with that supply. Given that the settlement clause was introduced into the contract for which the parties chose LCIA arbitration in London, they are to be taken to have intended their arbitration agreement to cover all such claims or demands.

While paying tribute to Mr Cogley’s arguments, I cannot accept them. In the end, and consistently with the principles explained in the Fiona Trust case, the ambit of the arbitration agreement depends on its wording. It refers to disputes under the December agreement. Even if it be supposed that in the context of the cancellation agreement the terminology should be understood to cover disputes under the cancellation agreement, Mr Cogley’s submission demands an interpretation that goes way beyond any permissible interpretation of the expression “hereunder”. I conclude that the arbitration agreement covers any disputes relating to the Swiss proceedings that depend on the application to them of the settlement clause, but no other disputes about them.

I therefore come to the question whether the court should grant relief under section 67, and if so what relief. Section 67(3) confers on the court a jurisdiction to confirm the award, to vary it or to set it aside in whole or in part. It is discretionary: the court is not obliged to make any order on an application under section 67. Here, for reasons that I have explained, I consider that the Award was in error in that it did not recognise that the tribunal had jurisdiction over the dispute introduced in the reply submissions as to whether the Swiss proceedings were brought and pursued in breach of the settlement clause, and if so whether they should therefore be restrained. However, I have decided that I should not give relief under section 67. It is clear from the Award that the arbitrator concluded that the settlement clause does not cover the Swiss proceedings, and while he might have been wrong not to recognise his jurisdiction over this dispute, he would in any case have rejected Integral’s contention about it. Nor could Integral have challenged this result under section 69 of the 1996 Act: the right to appeal is excluded by the LCIA rules, and in any case I see no proper basis for such a challenge. Nor, as I see it, would there have been any realistic chance of a challenge under section 68. Indeed, in my judgment he was right, for the reasons that he gave.

I therefore conclude that the error in the Award about jurisdiction is inconsequential, and the tribunal was entitled, and consistently with reasoning in the Award which cannot properly be challenged, was bound to reject all Integral’s claims in the reference. I refuse the section 67 application.