Chalbury MccOuat International Ltd v PG Foils Ltd

In this international arbitration claim the Claimant seeks the assistance of this court to exercise its powers under section 18 of the Arbitration Act 1996 (“the 1996 Act”) in circumstances where there has been a failure of the procedure for the appointment of the arbitral tribunal.

The relevant arbitration clause in this case was in the following terms:

“In case if there is any dispute between the parties of this contract the same will be sorted out by mutual discussion, But in case if the issue is not resolved even after discussions the same will be referred to arbitration as per prevailing laws of European Union in the Europe. The decision of the Arbitrator is final and binding on both parties.”

The Claimant is an English company which also has its principal place of business in England. It is engaged in the business of dismantling and then reassembling and installing industrial units. The Defendant is an Indian company listed on the Mumbai Stock Exchange operating in Rajasthan. It is a manufacturer of aluminium foils and laminates for the packaging of pharmaceuticals and food products in India.

The Defendant decided to purchase a manufacturing plant in Vaassen in the Netherlands. The plant consisted of two foil mills, two separators, six furnaces and ancillary equipment. By an agreement in writing dated 8 February 2008 (“the Contract”) and made between the Claimant and the Defendant, the Claimant agreed to dismantle the plant for a price of €272,914 with completion by 28 May 2008. I understand there is also a further agreement between the parties to reassemble the plant in India but I am told that this agreement is entirely separate from the present agreement.

A dispute has arisen in relation to payment under the Contract. The Claimant has alleged that it is entitled to be paid further instalments which remain unpaid. By a letter dated 22 October 2008 the Claimant’s Solicitors, Singhania & Co, wrote to the Defendant seeking payment of €95,524. When that sum was not paid, Singhania & Co gave notice to the Defendant by letter dated 11 November 2008 stating that the failure to pay had led to a dispute. They said they were invoking the arbitration clause and sought the Defendant’s consent to the appointment of the arbitral tribunal.

By letter dated 5 December 2008 Mr Ramit Mehta, an advocate instructed by the Defendant, responded to the two letters from Singhania & Co. That letter indicated that there was a counterclaim of €300,790 arising from an alleged breach of contract in the use of open top rather than box containers for packaging, loading and shipping the dismantled plant. In relation to the arbitration clause Mr Mehta declined to give the Defendant’s consent to the Claimant’s proposal but sought consent to refer the dispute to “the Arbitral Tribunal in India” and said that, failing that consent, the Defendant would be applying for the appointment of an Arbitrator under the provisions of the Indian Arbitration and Conciliation Act 1996. He said that the cause of action on the counterclaim arose in India since the performance of the Contract was to be completed in India and that the Contract was signed and executed by the parties in India.

The Claimant subsequently issued an arbitration claim form and applied for and obtained permission to serve the claim form outside the jurisdiction pursuant to CPR62.5(1)(c).

The relevant provision under CPR Part 62 relating to Arbitration provides as follows:

In this case it is clear that the Claimant seeks a remedy under section 18 of the Arbitration Act 1996 affecting an arbitration and an arbitration agreement. In considering whether to give permission to serve the arbitration claim form out of the jurisdiction I had to consider the question of whether the seat of the arbitration is or would be within the jurisdiction or whether the conditions in section 2(4) of the 1996 Act were satisfied.

The general provisions as to service of the claim form and other documents out of the jurisdiction are dealt with in CPR 6.30 to 6.47. It is evident that the provisions of CPR 62.5 provide a freestanding set of rules for service of an arbitration claim form out of the jurisdiction. They make it clear where the provisions of CPR 6.30 to 6.47 apply in relation to the service of an arbitration claim form out of the jurisdiction: see CPR 62.5(3) which applies CPR 6.40 to 6.46 to the service of an arbitration claim form out of the jurisdiction.

Under CPR 6.37 where a party applies for permission to serve out of the jurisdiction under the provisions of CPR 6.36 and the grounds in paragraph 3.1 of PD 6B, the party applying for permission must show that there is a good arguable case that the claim falls within the relevant ground within paragraph 3.1: see Seaconsar Far East Limited v Bank Markazi Jomhouri Islam Iran [1994] 1 AC 438 (HL). Whilst the test is the same whether the question is to be revisited by the court on the substantive hearing or decided only one on the application for permission, the approach has to be flexible having regard to those circumstances: see Canada Trust Company v Stolzenberg (No 2) [1998] 1 WLR 547 at 553 to 559 and [2002] 1 AC 1 at 13.

In this case the substantive remedy claimed under section 18 of the 1996 Act requires me to consider whether or not the seat of the arbitration is or will be within the jurisdiction or whether the conditions in section 2(4) of the 1996 Act are satisfied. In those circumstances, the test which I applied in considering whether there should be service out of the jurisdiction was whether there was a good arguable case in relation to those matters, which I held there was.

At this hearing of the substantive claim it follows that I now have to decide whether the seat of the Arbitration is or will be within the jurisdiction or whether the conditions in section 2 (4) of the 1996 Act are satisfied.

In this case there has been no Acknowledgement of Service by the Defendant. Under CPR 6.47 in cases falling within the provisions as to service outside of the jurisdiction in CPR Part 6, there is a provision in the following terms, concerning proof of service:

“Where

In this case, no hearing was fixed when the arbitration claim form was issued and, in any event, the provisions of CPR 6.47 do not apply to service outside of the jurisdiction under CPR Part 62. However, before the court proceeds to deal with the substantive claim in the absence of the Defendant it must be satisfied that there has been proper service out of the jurisdiction.

Under CPR 6.40(3)(c) service may be “by any other method permitted by the law of the country in which it is to be served”. I have been provided with evidence and submissions which satisfies me that the Claimant served the Defendant in person and by registered post and that despite the Defendant’s refusal to accept service they were properly served in accordance with Indian law. In particular, I was referred to Order V Rules 9, 9A, 16 and 17 of the Indian Civil Procedure Code 1905 and the decision of the Supreme Court of India in Jagdish Singh v Natthu Singh AIR 1992 SC 1604. I also received evidence to show that notice of this hearing had been served on the Defendant. On that basis, it was appropriate to proceed in the absence of the Defendant.

Under section 2 (1) of the 1996 Act it is stated that the provisions of Part I of that Act “apply where the seat of the arbitration is in England and Wales”. In this case the arbitration clause is silent as to the seat of the arbitration. There is, however, also the provision in section 2 (4) which provides that the court may exercise the power conferred by any provision of Part I for the purpose of supporting the arbitral process where:

“(a)

no seat of the arbitration has been designated or determined, and

(b)

by reason of a connection with England and Wales...the Court is satisfied that it is appropriate to do so.”

In this case, I can only exercise the power to make an appointment under section 18 of the 1996 Act if the provisions of section 2 (4) are satisfied. Whilst the wording of the arbitration clause in this case leaves much to be desired and evidently did not have the benefit of proper legal advice, what is clear from the clause is that there was an intention that, if disputes between the parties to the contract could not be resolved after discussion, those disputes should be referred to arbitration. When parties have agreed to arbitrate then I consider that the court should strive to give effect to that intention and should seek to support the arbitral process.

In this case no seat of the arbitration has been designated or determined and, where there is an arbitration clause, I do not consider that it is any part of this court’s function to designate or determine the seat of arbitration. That is a matter which, if disputed by the parties, will have to be determined by the arbitral tribunal once appointed. It follows that under section 2(4) of the 1996 Act I have to determine whether, by reason of a connection with England and Wales, I am satisfied that it is appropriate in this case for the court to exercise its powers under section 18 of the 1996 Act for the purpose of supporting the arbitral process.

There is no statutory guidance as to the degree or type of connection required under section 2(4) of the 1996 Act. I observe that the provisions of section 2(4) were not initially included in the Arbitration Bill which was commented on in the report of the Departmental Advisory Committee on Arbitration Law (“DAC”) of February 1996. Rather, as set out in the supplementary DAC report of January 1997, the provisions of section 2(4) were added to the Bill during its passage through Parliament. The supplementary report explains the basis for Section 2 (4) at paragraphs 16, 17 and 18 in the following terms;

“16.

Section 2(4) deals with those cases where a seat has still to be designated or determined, but where recourse to the Court is necessary in the meantime. For example, an arbitration agreement may provide that the tribunal, once constituted, will designate the seat of the arbitration. The agreement may also provide that any arbitration must be commenced within a specified time period. If that time period is exceeded, could a party make an application to the English Court pursuant to Section 12 of the Act for an Order extending time for the enforcement proceedings (eg in order that a seat may be designated)? See eg International Tank & Pipe S.A.K. v Kuwait Aviation Fuelling Co. K.S.C.[1975] QB 224 (CA). Clearly this would not be possible under Section 2(1), as long as the arbitration was without an English or Northern Irish seat. It was our view, however, that the English Court should be able to exercise supportive powers if there is a sufficient connections with England and Wales or Northern Ireland such that this is appropriate (ie the requirement in Section 2(4)(b)), and if there will be no clash with a foreign jurisdiction. For example, there will be cases where it is extremely likely that once a seat is designated, that seat will be England and Wales or Northern Ireland.

17

Section 2(4) therefore gives the English Courts powers where that Court is satisfied as a matter of English Law, that the arbitration in question does not have a seat elsewhere. As long and there is no seat elsewhere, there could be no possible conflict with any other jurisdiction.

18

Both sections 2(3) and 2(4) are based on a very clear policy: the English Courts should have effective powers to support an actual or anticipated arbitration that does not fall within Section 2(1). However, such powers should not be used where any other foreign Court is already, or is likely to be, seized of the matter, or where the exercise of such powers would produce a clash with any more appropriate forum.”

Those provisions indicate that there must not be a clash with a foreign jurisdiction of the type there would be if there is a seat of arbitration elsewhere. The court therefore has to consider where the seat of the arbitration is likely to be. In many international arbitration cases one party may apply to a court in one jurisdiction and the other party to a court in another jurisdiction. In my judgment, that, in itself, is not the type of clash which the DAC report had in mind. Rather, the principle is that a party should not generally bring proceedings in relation to an arbitration except in the courts of the jurisdiction of the seat of arbitration: see Channel Tunnel Group v Balfour Beatty Ltd [1993] AC 334 at 357H and 368 B to C where the application should have been made to the Belgium court as Belgium was the seat of the arbitration.

The reference to the decision of the Court of Appeal in International Tank & Pipe S.A.K. v Kuwait Aviation Fuelling Co. K.S.C. [1975] QB 224 indicates that there will be sufficient connection if the proper law of the contract is English law. In that case, there was an agreement between the parties made in Kuwait which included an arbitration clause. That agreement was to be construed and operated in conformity with English law but disputes referred to arbitration were to be settled under the ICC rules, with no place of arbitration having been stated. There was a provision in the agreement which barred claims not referred to arbitration within a fixed time. The Court of Appeal held that the arbitration clause and the right to apply for an extension of time for the arbitration were matters arising out of the contract itself and to be determined by English law, even though some other law might govern any subsequent arbitration procedure. As a result the English courts had jurisdiction to extend time for commencing an arbitration under section 27 of the Arbitration Act 1950 and did extend time on the ground of undue hardship. The seat of arbitration had not been agreed but was a matter for the ICC Court under the ICC Rules.

At 232 Lord Denning said this:

“English law governs the interpretation and effect of the contract. But the Kuwait law, or some other law, governs the arbitration procedure. This sort of difference is well known. It is recognised by the decision of the House of Lords in Whitworth Street Estates (Manchester) Ltd. v. James Miller and Partners Ltd. [1970] A.C. 583. Viscount Dilhorne, at p. 612, and Lord Wilberforce, at p. 616, expressed the opinion that the law is correctly stated in Dicey and Morris, The Conflict of Laws, 8th ed. (1967), p. 1048. Lord Wilberforce cited the passage:

"It cannot however be doubted that the courts would give effect to the choice of "procedural" law other than the proper law of the contract. Thus, if parties agreed on an arbitration clause expressed to be governed by English law but providing for arbitration in Switzerland, it may be held that, whereas English law governs the validity, interpretation and effect of the arbitration clause as such (including the scope of the arbitrators' jurisdiction), the proceedings are governed by Swiss law." ”

In concluding that the provisions of the Arbitration Act 1950 should apply Lord Denning said at 233:

“It seems to me that English law governs a great deal of the arbitration clause. Take the interpretation of it. Suppose the arbitration clause had said that the claim had to be made within three months, and then there was an argument as to whether "months" meant lunar months or calendar months. That dispute would have to be solved according to English law. Take next the very question here, that is, whether a sufficient "communication" had been made to the engineer within 90 days. That, too, would have to be decided by English law. Similarly it seems to me that it is for English law to say whether or not section 27 of the Arbitration Act 1950 can be invoked. That section says that when the terms of the agreement contain a time bar:

"... the High Court, if it is of opinion that in the circumstances of the case undue hardship would otherwise be caused, ... may, on such terms, if any, as the justice of the case may require, ... extend the time for such period as it thinks proper."

I look upon section 27 as being, in effect, an additional statutory term written into the arbitration clause. As such, its interpretation, its application and effect are to be governed by English law. It may be that some other law will govern the procedure in the arbitration itself. It may be Kuwait law, or some other law. But that procedural law does not take effect until the arbitration has actually started, that is to say, not until the arbitrator has been properly appointed and is able to rule upon the procedure to be adopted in the arbitration.”

In the present case there is no express choice of law clause stating what law (lex causae) is to be applied to the substance of the dispute. The only indication of any choice of law is the inaptly worded provision in the arbitration clause that the dispute is to be referred to “arbitration as per prevailing laws of European Union in the Europe”. That strongly indicates that the parties had chosen, as the law to be applied to the procedure of the arbitration (lex fori), the laws of the European Union. In those circumstances, I consider that one of the matters relevant to the exercise of this court’s jurisdiction under section 2(4) of the 1996 Act is the law which is likely to be applied to the substance of the dispute.

The preliminary question is which system of law is to be applied in deciding the question of conflict. As stated in Dicey, Morris and Collins: The Conflict of Laws (fourteenth edition) at 1-080, “Since the determination of the lex causae depends on the determination of the connecting factor, it is no longer controversial amongst learned writers that the connecting factor should be determined by the lex fori.” This strongly suggests that in this case the question of the proper law to be applied to the dispute should be determined under the laws of the European Union which are conveniently set out in the Rome Convention signed by the Member States and enacted in English Law by the Contracts (Applicable Law) Act 1990.

In this case the relevant provisions are those of Article 4 of the Rome Conventionwhich provides for the applicable law in the absence of choice, as follows:

“1.

To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.

2.

Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration. However, if the contract is entered into in the course of that party's trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.

....

5.

Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.”

In this case the performance which is characteristic of the performance would, I consider, be the performance of the work of dismantling the plant. The party who is to carry out that performance is theClaimant which is an English Company with its principal place of business in England. This is not a case where Article 4(2) provides for any different place or where Article 4(5) applies. The characteristic performance can be determined and it does not appear from the circumstances as a whole that the contract is more closely connected with another country. The only performance by the Defendant was payment and that is not the characteristic performance: see Guiliano-Lagarde at p.20.

On this basis, I consider that the arbitral tribunal are likely to find that the proper law is English law. So far as the seat of the arbitration is concerned, the reference to “arbitration as per prevailing laws of European Union in the Europe” means that the seat of arbitration is likely to be in Europe, possibly England, and is unlikely to be in India. It follows that in this case there is no clash of jurisdiction of the type which gave rise to the concerns expressed in the DAC Report. The further connection with England is the fact that payment under the Contract was to be by way of payment in England. The connection with India is the fact that the Defendant is an Indian Company operating in India and a contention by the Defendant’s lawyer that the Contract was entered into in India.

Returning to the test under section 2(4) of the 1996 Act, is there a sufficient connection with England for this court to be satisfied that it is appropriate to exercise the powers under section 18 of the 1996 Act? In my judgment the links through the likely proper law, the closer connection to the seat of arbitration and the payment provision, provide sufficient connection for the court to act under the 1996 Act.

I take into account the fact that the Defendant may, as its lawyer has stated, apply to the Indian courts for some relief which may include the appointment of an arbitrator. In the light of my conclusion that English law would be likely to apply and that an English seat of arbitration is possible but an Indian seat is unlikely, I consider that this court should use its powers to have an arbitral tribunal appointed and thus enable the disputes to be referred to arbitration, as was clearly intended.

Accordingly, I am satisfied that because of the connection with England it is appropriate for the court to exercise its powers to support the arbitral process in this case.

In this case there has been a failure of the procedure for the appointment of the arbitral tribunal because the parties have failed to agree on an arbitral tribunal. What is apparent is that there is no difference between the parties as to the fact that there should be sole arbitrator and, in the absence of any agreement that there is to be an arbitral tribunal of two or more arbitrators the default mechanism for arbitration must be a sole arbitrator, as reflected in section 15(3) of the 1996 Act.

In this case it is clear that the contract has an international element. In such circumstances I do not consider that, as proposed by the Claimant, the President of the Law Society of England and Wales is the appropriate person to nominate an arbitrator in the context of this international dispute. Rather, the appointment of the arbitral tribunal should be made by one of the well-respected, independent international arbitration institution experienced in the appointment of arbitrators in cases such as this. On that basis, there are a number of such institutions but I consider that, in this case, the President, or in his absence a Vice-President, of the London Court of International Arbitration (LCIA) should make the necessary appointment of an Arbitrator and that the arbitral tribunal shall be constituted by that appointment.

I summarise my conclusions as follows: