“But you weren’t going to perform anyway!”: A new hurdle when invoking Force Majeure

Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102

Simon Rainey QC and Andrew Leung

Is it necessary when a party seeks to rely on a force majeure or exceptions clause to show that it would have performed “but for” the force majeure or excepted event? And if the party is liable for failing to perform, but performance would have been impossible in any event, is the innocent party entitled to damages?

These important questions were considered by the Court of Appeal in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102. The judgment, which is the sequel to the first instance decision discussed here, clarifies that:

  1. Contrary to what textbooks such as Chitty and Treitel on Frustration and Force Majeure suggest, there is no general principle that it is not necessary to show “but for” causation in order to invoke a force majeure or exceptions clause.
  • The innocent party is entitled to substantial damages even if it would never have received performance in any event.

The dam burst and the COA

The litigation was fuelled by the Samarco dam burst on 5 November 2015. The charterer under a COA, Limbungan, claimed it was prevented from supplying cargoes for shipment as a result and was excused from having to perform under Clause 32 of the COA, which provided in material part:

“Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be responsible for…failure to supply, load…cargo resulting from: Act of God…floods…landslips…accidents at mine or production facility…or any other causes beyond the Owners’, Charterers’, Shippers’ or Receivers’ control; always provided that such events directly affect the performance of either party under this Charter Party.”

The first instance decision

At first instance, Teare J held that though the dam burst had rendered performance impossible, Limbungan could not rely on Clause 32 as it required the charterer to prove that it would have performed but for the collapse of the dam, and Limbungan would have defaulted anyway. However, the owner, Classic, was only entitled to nominal damages. Even if Limbungan had been able and willing to perform, the dam burst would inevitably have prevented performance. The compensatory principle would be breached if Classic was awarded substantial damages when it would never have received freight in any event.

The Court of Appeal’s decision

The Court of Appeal upheld Teare J’s decision that Clause 32 required Limbungan to prove but for causation and reversed his decision in relation to damages.

Limbungan had submitted that the House of Lords decision in Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 laid down the general principle that a party relying on force majeure need not show it would have performed but for the force majeure event.

However, the Court of Appeal, like Teare J, treated Bremer v Vanden as a case concerning a “contractual frustration” clause (Clause 21 of the GAFTA 100 form), i.e. a clause which automatically discharged the parties from an obligation to perform in the future, much like the common law doctrine of frustration. The automatic cancellation effected by Clause 21 meant it was not necessary to meet the test of but for causation.

Starting from first principles, it was open to the parties to agree a clause which only excused non-performance if that test was met. The Court of Appeal considered that Clause 32 was just such a clause. Unlike the “contractual frustration” clause in Bremer v Vanden, it was an exemption clause which relieved a party of liability for a past breach. It was hard to see why the dam burst should make any difference to Limbungan’s liability when it was never going to perform anyway.

On the issue of damages, what Teare J thought was an orthodox application of the compensatory principle the Court of Appeal viewed as a “sleight of hand”. When assessing Classic’s loss, the Judge should have compared the freights Classic would have earned with the actual position it was in due to Limbungan’s breach. Teare J had instead drawn a comparison between Classic’s actual position and its position if Limbungan had been ready and willing to perform.

The Court of Appeal distinguished the present case from two cases in which events occurring after a breach of contract were taken into account:

  1. In The Golden Victory [2007] 2 A.C. 353, the House of Lords held that the owners could not recover hire for the full-term of a charterparty prematurely cancelled by the charterers. The charterparty would not have run its full course anyway as the charterers would have lawfully cancelled due to the Second Gulf War.
  • In Bunge v Nidera [2015] 3 All E.R. 1082, the Supreme Court held that a buyer had suffered no loss despite the repudiation of a sale contract by the seller. A subsequent embargo would however have prevented the sale from taking place in any event.

Both cases were however concerned with assessing damages for an anticipatory breach. Contrastingly, the present case was concerned with an actual breach. Since Clause 32 gave Limbungan no defence to liability, Limbungan had to pay damages for failing to perform.

Comment

The Court of Appeal has underlined the fact that, whatever the current understanding of Bremer v Vanden in the textbooks,there is no default position whereby it is unnecessary to prove but for causation in order to rely on a force majeure or exceptions clause. The specific Force Majeure remedy afforded by Clause 21 of GAFTA 100 was held to be the reason that clause did not import a requirement of but for causation. Why this remedy should determine the test for causation is not entirely clear, when the effect of contractual cancellation and an exemption from liability is for practical purposes the same: the non-performing party cannot be successfully sued.

In other respects, this case presents a number of novelties:

  1. The Court of Appeal held that Clause 32 was not even a force majeure clause, but an exemption clause. It was not previously clear that these categories were mutually exclusive (see e.g. Lewison, Interpretation of Contracts, 13.02).
  • Both Treitel and Lewison suggest in the light of the authorities that a clause which makes provision for the consequences of supervening events which occur without the fault of either party and are beyond their control (i.e. Clause 32) defines the parties’ obligations rather than operating as an exemption clause. This now needs to be reconsidered.
  • The Court of Appeal’s take on The Golden Victory and Bunge v Nidera is that subsequent events and their potential effect on the parties’ rights and obligations are only relevant when assessing damages caused by an anticipatory breach accepted as terminating the contract. They are not relevant in the case of an actual breach. This is arguably a new development and suggests there is not one compensatory principle, but two.

Permission to appeal was refused by the Court of Appeal but an application for permission to appeal is being made to the Supreme Court. The authors are Counsel for Limbungan and appeared below and in the Court of Appeal.

Force Majeure, Alternative Modes of Performance and “Eggs in one Basket” – Simon Rainey QC and Andrew Leung

Classic Maritime v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm)

Introduction

A contract contains two modes of performance, A or B. Historically, the obligor has used mode A which becomes unavailable due to a natural disaster. If the obligor can show that it is also impossible to use mode B for reasons beyond its control, can it rely on a force majeure provision to excuse non-performance? Does it need to show it would have performed using mode A but for the mode A-disabling event? Classic Maritime v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm) addresses these questions and others in an area of law that is perhaps not as well-settled in all respects as some might think.

Simon Rainey QC, leading Andrew Leung, represented the successful Defendants, instructed by Julian Clark, Winnie Mah and Trudie Protopapas at Hill Dickinson LLP. 

The dam burst and the COA

At 3.45pm on 5 November 2015, the worst environmental disaster in Brazilian history unfolded. A tailings dam operated by Brazilian mining company Samarco Mineracao SA (“Samarco”) collapsed. A tidal wave of 32 to 40 million cubic metres of mining waste swept across green valleys, villages and farmland.

Iron ore production at Samarco’s mine was brought to an abrupt halt. Shipments of Samarco’s iron ore pellets, hitherto shipped through Ponta Ubu in Brazil, were suspended.

Ponta Ubu was one of two ports from which the charterers, Limbungan Makmur SDN BHD (“Limbungan”), had the option to load iron ore pellets on the vessels of Classic Maritime Inc., under a COA for 59 shipments of iron ore pellets from Brazil to Malaysia between 2009 and 2017. The other load port was Tubarao, from which another Brazilian mining company, Vale SA (“Vale”), shipped iron ore pellets.

The parties’ rival positions

In the Samarco aftershock, it was Limbungan’s case that Vale experienced a surge in demand, earmarked its supply to existing customers, and left newcomers such as itself wanting. Limbungan was therefore prevented from shipping from Ponta Ubu and Tubarao due to circumstances beyond its control. This excused its failure to perform post-5 November 2015 under Clause 32 of the COA, a fairly typical force majeure or exceptions clause, which stated inter alia:

“Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be responsible for…failure to supply, load…cargo resulting from: Act of God…floods…landslips…accidents at mine or production facility…or any other causes beyond the Owners’, Charterers’, Shippers’ or Receivers’ control; always provided that such events directly affect the performance of either party under this Charter Party.”

Classic countered that Limbungan had an absolute and non-delegable obligation to provide cargo and had no arrangements to do so. Instead, it hoped to perform with the gratuitous support of two companies within the same broad corporate family, Lion DRI or Antara. Those companies had asked Limbungan to ship their iron ore pellets to their steel-making plants in Malaysia from Ponta Ubu since 2011, but without any contractual nexus existing between them. The bursting of the dam was thus of no legal relevance. The problem was that the now sole supplier, Vale, would not supply Limbungan or its affiliates, although matters would have been different if Limbungan had made proper efforts and pushed for a long-term supply contract.

What is more, Classic argued that Limbungan would not have performed anyway. It had failed to perform two pre-dam burst shipments as Lion DRI and Antara had not required Limbungan to carry iron ore pellets in a weak market, a state of affairs which would have continued irrespective of the dam burst. The dam burst was not a force majeure event and Classic was entitled to US$20.5 million in damages to compensate it for lost freight.

Against this, Limbungan argued that it had put its eggs in the Samarco/Ponta Ubu basket as it had exclusively shipped Samarco pellets since August 2011. Whether it had enforceable agreements with Samarco, Lion DRI or Antara was not determinative; its settled practice was clear. The obligation after the dam burst was to make new arrangements ex Tubarao, provided it was possible to do so. Clause 32 applied because it was not possible. This was an alternative modes of performance case per Warinco v Mauthner [1978] 2 Lloyd’s Rep 151, 154 in that Limbungan had opted for one mode of performance which had become unavailable. As it could not avail itself of the one remaining mode, it was excused.

Further, it was sufficient that Limbungan was prevented from performing by the dam burst. It was contrary to authority to insist that Limbungan had to show it would have performed had the dam not burst and contrary to the compensatory principle to award damages to Classic in respect of shipments which would never have occurred given the dam burst.

The judgment of Teare J.

The Court rejected Classic’s claim, and in the process made findings of wider legal significance.

  1. First, Classic’s reliance on the principle that a charterer who has been let down by a particular supplier cannot plead force majeure per The Mary Nour [2008] 2 Lloyd’s Rep and The Kriti Rex [1996] Lloyd’s Rep 171 was not on point. Those cases were not concerned with alternative modes of performance, where the required performance was from Port A or Port B, but with performance from a single port (albeit one possibly served by many suppliers).
  2. Second, for the alternative modes of performance principle to apply, it was not necessary for Limbungan to show it had legally binding arrangements to perform from Pontu Ubu rather than Tubarao when the dam burst. What the Court had to assess were Limbungan’s “intentions or arrangements” per Moccatta J in European Grain & Shipping v J.H. Rayner [1970] 2 Lloyd’s Rep. 239, which did not need to display the element of fixity posited by Classic.   
  3. Third, Limbungan had to show that it would have performed but for the dam burst. The House of Lords decision in Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 and a string of other cases, which Limbungan said supported the general proposition that a party relying on force majeure need not show it would have performed but for the force majeure event were, in Teare J’s judgment, cases about contractual frustration provisions, which are intended to mimic the effect of common law frustration. They had no bearing on Clause 32.
  4. Fourth, the Court concluded that neither Limbungan nor its affiliates could have sourced cargoes from Vale ex Tubarao – a topic on which the parties’ market experts spilt much ink. That said, Limbungan could not show it would have performed but for the dam burst: Lion DRI’s steel-making business had effectively been mothballed due to weak demand, Antara had a cheaper COA of its own, and the arrangement whereby Antara had used the more expensive COA and been compensated for the freight differential by Lion DRI was moribund. 
  5. Fifth, though Limbungan could not rely on Clause 32 and was therefore liable under Clause 32, Classic was not entitled to recover damages. This was because even if Limbungan had been able and willing to perform, the dam burst would have supervened and prevented performance, and Limbungan would have been excused by Clause 32. It would violate the compensatory principle, to award substantial damages to Classic when it would never have received performance in any event.
  6. Sixth, the Court rejected Classic’s case to the effect that if the dam burst was due to faulty construction or maintenance by Samarco, it was an event within the “Shipper’s [i.e. Samarco’s] control”, and thus not within Clause 32. No part of the charterers’ obligation to supply and load cargo extended to responsibility for the dam, making it unlikely the parties intended  poor dam construction or maintenance (if proved) to debar Limbungan from relying on Clause 32. This is an important decision on the typical ‘beyond the control of’ provision, analysed in the sometimes misunderstood decision in The Crude Sky [2013] EWCA Civ 905.

Conclusions

The case is believed to be the first authority since the Bremer line of authorities from the 1970s and early 1980s to consider whether the party relying on a force majeure or exceptions clause has also to show it would have performed but for the event relied upon to be excused from non-performance. The answer given in those cases was “no”. For the time being, the textbooks may need to be rewritten to reflect the affirmative answer to this question given by Teare J.

This gives pause for thought. Had Ponta Ubu and Tubarao both been wiped out by a meteor, so that any performance was unquestionably prevented, on one view, asking whether Limbungan could or wanted to perform would be academic. It might be said the parties intended Clause 32 to excuse Limbungan from liability in precisely such a case, particularly since Clause 32 is intended to deal with frustrating and force majeure events, and in the context of frustration, but for causation has always been irrelevant. Not only that: asking whether Limbungan would have performed but for the dam burst is conducive to a doubtful and speculative examination of what Limbungan’s intentions and arrangements would have been in a counter-factual setting, which Megaw LJ Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1977] 2 Lloyd’s Rep 329 cautioned against.

This also appears to be the first case where the argument has been made (by Classic) – and rejected – that the arrangements necessary to activate the alternative modes of performance principle need to be legally binding. They do not: the arrangements can have a looser, more informal character.

Finally, this case exemplifies the compensatory principle at work: if Limbungan had performed instead of breaching the COA, it would have performed with Samarco out of Ponta Ubu. The problem from Classic’s perspective is that with the intervention of the dam burst, Limbungan would have been able to claim force majeure under Clause 32 (as on this hypothesis it would have performed but for the dam burst). The outcome in both the breach and non-breach positions is therefore that Classic would not have enjoyed the benefit of contractual performance. Classic cannot be put in a better position than if the breach had not occurred.

Teare J refused permission to appeal on the ground that Classic’s proposed appeal on the application of the compensatory principle (or perhaps more accurately Classic’s case that the principle allowed it to recover substantial damages to represent loss of charter freights which in fact it could never have earned assuming Limbungan performed rather than breached the COA) had no realistic prospect of success.

A copy of the Judgment, can be found here

Clarifying / Correcting an Award …. and the Effect on the 28 days for Challenge: Clarity at last

Daewoo Shipbuilding & Marine Engineering Company Ltd v Songa Offshore Endurance Ltd [2018] EWHC 538 (Comm)

Overview

Where a party seeks correction or clarification of an arbitral award as a precursor to challenging the award either under s.67 or 68 or 69 of the Arbitration Act 1996, when does the Act’s 28 day time period for the challenge start? From the date of the award? Or of the correction or clarification? And does that apply to any correction or clarification or only to certain types? If the latter, what types and why? And what happens if the tribunal declines to correct?

The decision of Bryan J. (handed down on 16th March 2018) in Daewoo Shipbuilding & Marine Engineering Company Ltd v Songa Offshore Endurance Ltd [2018] EWHC 538 (Comm) brings welcome and definitive clarity to the position. It sets out what should now be regarded as the settled practice of the Court to these problems and to the correct construction of the 28 day time limit provisions in s.70(3). It resolves an apparent conflict in other first instance decisions once and for all.

In summary, after a thorough analysis of the authorities, the Court held:

  • The arbitral process of correction and clarification of an award by the tribunal under s.57 of the Act is not “any arbitral process of appeal or review” under s.70(3) for the purposes of the running of the 28 days.
  • Accordingly, simply applying for a correction will not, of itself, push back the start date for the running of time: the decision in Surefire Systems Ltd v Guardian ECL Ltd [2005] EWHC 1860 (TCC) to the contrary effect was wrong.
  • But where a correction or clarification must necessarily be sought in order to be able to bring the challenge to the award itself (pursuant to section 70(2)), then time runs from the date of that type of correction or clarification being made (a ‘material’ correction).
  • To give effect to that, the “date of the award” in section 70(3) is to be read as “the date of the award as corrected” by a correction of this kind, but this kind only.
  • The submission that the decision in K v S [2015] EWHC 1945 (Comm) was wrong would be rejected.

Leave to appeal was refused.

Simon Rainey QC, leading Tom Bird, represented the successful applicant.

The Background

DSME contracted with Songa to build a series of drilling rigs. The hull design (including the front-end engineering design (“FEED”) documentation) was to be provided by a third party design consultancy. Construction proved to be very protracted and DSME claimed in respect of delays and cost over-runs, alleging that the cause was defects in the FEED. It alleged that under the contracts, responsibility for design, including the FEED, was with Songa not DSME and DSME was entitled to recover all costs and expenses and was not responsible for delay. This was contested by Songa.

The question of design responsibility under the contracts was determined as a preliminary issue in two arbitrations. The Tribunal (Sir David Steel, John Marrin QC and Stewart Boyd QC) held that Songa was correct and that DSME bore full responsibility for the design, including for the FEED.

The Awards were published on 18th July 2017.

Under section 70(3) of the Arbitration Act, DSME had 28 days in which to apply for permission to appeal, expiring on 15th August. Section 70(3) provides:

“Any application or appeal must be brought within 28 days of the date of the award or, if there has been any arbitral process of appeal or review, of the date when the applicant or appellant was notified of the result of that process.”

On 4th August, DSME applied to the Tribunal for the correction of what it itself described as four “clerical errors in the Awards arising from accidental slips” such as transposing Songa for DSME, etc. The corrections were unopposed.

The Tribunal issued a Memorandum of Corrections on 14th August (27 days after the Awards).

On 8th September, 24 days late, DSME issued an Arbitration Claim Form seeking permission to appeal the Awards under section 69, on the basis that the Tribunal’s construction of the contract as to design responsibility was obviously wrong in law.

Songa applied to strike the application out as being out of time.

DSME responded that the 28 days ran from the date of the Memorandum of Corrections and so was brought in time; alternatively it sought an extension of time under s. 80(5) because its management structure and intervening holidays meant that a decision to appeal could not reasonably have been taken any sooner. (Given the 24 day delay and this ‘justification’, unsurprisingly this application was dismissed on ordinary principles.)

The Issues Raised by Songa’s Application

Section 70(3) contains only two express start dates for the running of the 28 days for any challenge to the award: (a) “the date of the award” and (b) the date when the parties are notified of the outcome of “any arbitral process of appeal or review”.

How does this work in the context of a request for the correction or clarification of an award? Section 70(3) is silent on the topic and there is prima facie a lacuna in the drafting of the Act.

A connected issue is the so-called ‘Catch 22’ inherent in section 70(2) which requires a party to exhaust all available arbitral routes of recourse (including under s.57) before being entitled to challenge the award. In relation to corrections, if these are ones which have to be sought before a challenge can be made, then how can time run from the date of the original, uncorrected, award if this date is what has to be taken for s.70(3) purposes?

Question (1): Can the correction / clarification process under s.57 be regarded as an “available process of appeal or review” under section 70(3)?

DSME’s primary argument was that the term “any available process of appeal or review” covered a correction or clarification process carried out by a tribunal itself. It argued that the process of correction involved, in one sense, a process of ‘reviewing’ the award and accordingly this was enough. It also relied upon the definition of a different term (“available arbitral process”) in s. 82(1) as one which “includes any process of appeal or review by an arbitral or other institution or person” as showing that “appeal or review” did not just mean appeal or review by some other arbitral body (such as common forms of ‘two-tier’ arbitral procedures in commodity arbitration under GAFTA or FOSFA Rules) but must be wider and therefore had to cover an ‘internal’ corrective review.

DSME relied heavily on an unreported decision of Jackson J. in Surefire Systems Ltd v Guardian ECL Ltd [2005] EWHC 1860 (TCC), noted in the textbooks. In that case, Jackson J. baldly stated; “In my view, the arbitrator’s clarification issued on 2nd May 2005 constitutes “an arbitral process of … review” for the purposes of section 70(3) of the Act”.

Bryan J rejected DSME’s argument for three reasons.

(1) First, on the plain meaning of the statutory language.

The construction was contrary to the plain and ordinary meaning of the term “appeal or review” as used in section 70(3) which had to be viewed in the light of s.70(2). Section 70(2) requires an applicant seeking to challenge any award to have first exhausted, as a pre-requisite to the right of challenge, all routes of recourse to the arbitral process. It distinguishes in this context between “any available arbitral process of appeal or review” (s.70(2)(a)) and “any available recourse under section 57” (s.70(2)(b)). The Judge held that this was “a clear, and indisputable, distinction” [52]. He considered that the “ordinary and natural meaning” of the reference to “appeal or review”, in the context of a statutory provision that draws a delineation between an appeal or review and a correction, “is that it is a reference to a process by which an award is subject to an appeal or review by another arbitral body”.

(2) Secondly, on the better view of previous decisions

The Judge regarded this as being as the settled approach which had been taken in the previous cases (Price v Carter[2010] EWHC 1451 (TCC); K v S [2015] EWHC 1945 (Comm) and Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm) as well as the commentaries. He regarded the view of Jackson J. in Surefire as wrong. [53]

(3) Thirdly, as contrary to the founding principles of the 1996 Act.

The Judge held the questions of construction of the Act before him had to be approached in the light of the guiding principles in s.1(1)(a) of the Arbitration Act. One of these is that “the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense”.

“The principles of speed and finality of arbitration are of great importance. These would be undermined if the effect of making any application for a correction is that time for appealing runs from the date the appellant is notified of the outcome of that request. This is not simply a “concern” (nor is it one that has been over-stated as alleged by DSME) rather it is contrary to the whole ethos of the Act. It would be open to parties who have freely agreed to arbitrate their disputes to frustrate and delay that agreed mechanism of dispute resolution by relying upon completely irrelevant minor clerical errors. This cannot have been the intention of Parliament …” [55].

Question (2): Is the term “the date of the award” in section 70(3) to be read as meaning the date of the award as and when corrected, irrespective of the nature of the correction?

DSME argued next that an award could not be regarded as final for the purposes of time running until and unless any process of correction started in respect of the award had been fully completed; that applied as much to a material correction impinging upon a potential ground of challenge as to an immaterial textual or other clerical correction. The date when the process was completed was the “date of the award” for s.70(3) purposes.

DSME contended that there was no warrant for treating “the date of the award” as running from a corrected award where the correction was ‘material’ (whatever that meant) but not where it was a purely typographical correction. The date was either affected by corrections for all purposes or none. The Court having previously held that it was affected for material ones, then this applied equally to all other corrections.

Songa argued that the key to the resolution of the lacuna was to recognise the inter-relationship between section 70(3) and section 70(2). Under the latter, a party had to seek a correction or clarification of the award where this affected the challenge which it intended to make against the award as a pre-condition to challenging the award. This need to exhaust arbitral recourse to the tribunal under section 57 identified a class of corrections and clarifications which were indeed ‘material’, because if they were not sought, then the challenge would be barred. It was in relation to these and these only that the lacuna arose. Therefore the distinction between ‘material’ and non-material corrections was inherent in the Act itself and the term “date of the award” would be construed accordingly.

The Judge accepted that argument. He stated at [63] (original emphasis):

“The purpose is to ensure that before there is any challenge, any arbitral procedure that is relevant to that challenge has first been exhausted. Thus if there is a material ambiguity that is relevant to the application or appeal you have first to go back to the arbitrators, however if what you are doing is seeking correction to typos then that is not a bar to you pursuing your application. Materiality is inherent within section 70(2). It is only where a matter is material that you first have to exhaust the available remedies specified in section 70(2), so that it is only in those circumstances that it is necessary for time only to run after those available remedies have been exhausted. There is no reason or necessity for time not to run, or be extended, in the context of immaterial corrections – these are not matters that have to be corrected before an appeal can be brought. This illustrates that the test of materiality is inherent in the structure of section 70(2) and 70(3).”

Again deploying the ethos of the Act and section 1(1(a), he held that it was contrary to any sensible construction of “the date of the award” to treat it as accommodating trivial or irrelevant corrections [56]. As the Judge held (and as DSME accepted) “these are classic clerical and typographical errors. They are not connected in any way, shape or form with DSME’s subsequent appeal.” [10]

Conclusions: “Materiality” and Unanswered Questions?

The decision is to be welcomed as laying to rest the ‘Surefire argument’ once and for all.

The Court, in refusing permission to appeal, considered the point to have no realistic prospect of success on appeal and stated in terms that it was “high time to draw a line under the debate” given the “consistent and continuing practice of this Court which has particular expertise in the construction of the act, and its application.”

Materiality? The Judge saw no difficulty with a ‘materiality’ test which is “clear and easy to apply” [65]. With the section 70(2) concept in mind, it is submitted that the Judge is plainly right: a party can usually easily tell the difference between points which it has to investigate under s.57 before it can make a challenge under s. 67, 68 or 69 at all and all other corrections or clarifications.

If in doubt however, as the Judge said “[one] could always issue an application for an extension of time before the 28 day time period expired, and indeed seek permission to appeal to the extent that it was able to do so at that time. No doubt in many cases (based on the content of the application for a correction showing materiality) such an application for an extension of time would not even be opposed, or if opposed, would be resolved in the applicant’s favour should any point be taken.” [65]

Refusal to correct? An unanswered question (which the Judge did not have to address) is as to the position if a material correction is sought under s.57 but the tribunal refuses to make any correction. How is the “date of award as corrected” test then to be applied? In Maclean, the Judge thought it would be the date of the notification of the refusal to correct [19]. The same view was implicitly suggested in K v S where Teare J referred to the grounds of challenge being “dependent on the outcome of the application for clarification” [24]. Given Bryan J’s general endorsement of the reasoning in these cases, the same approach to this question must follow.

This seems right. If a material correction is (and has to be) sought in the exercise by an applicant of all available recourse to satisfy the s.70(2) requirement, then the applicant’s fate cannot sensibly be dependent on the whim of the tribunal and whether it is an expansive one, happy to explain better what it has done or, as is not infrequently the case, one which is resentful of the temerity of a suggestion of the need for clarification and whose approach is the ‘nil return’.

A copy of the judgment can be found here

Commencing LCIA Arbitration: The Perils of Non-Observance of the LCIA Rules

A v B [2017] EWHC 3417 (Comm)

The Requirements for (a) Valid and Effective Commencement of LCIA Arbitration and (b) When a Challenge to Jurisdiction Must be Made under the LCIA Rules

Summary: The LCIA Arbitration Rules (currently the 2014 revision) provide for a simple and well drafted procedure for the commencement of arbitration.

The recent decision of A v B [2017] EWHC 3417 (Comm), handed down on 21st December 2017 (and therefore perhaps escaping attention in the immediate Christmas rush), illustrates that failure to follow this simple procedure will result in a purported commencement of arbitration being wholly ineffective. This may have potentially highly significant consequences where the soi-disant “commencement” takes place hard up against the date of the expiry of a limitation period, statutory or contractual.  The decision demonstrates that appeals to the ‘flexibility’, which may have a place in the very different context of arbitration where there are no rules or requirements as to how the arbitration is to be commenced (as in Easybiz Investments v Sinograin (The Biz)[2011] 1 Lloyd’s Rep. 688), have no traction where the manner of commencement is defined by institutional arbitration rules, which have either been complied with or not.

The decision also sheds valuable light on when (i.e. how early) a challenge to jurisdiction must be made under the LCIA Rules and the correct construction of Article 23.2 of the LCIA Rules.

Simon Rainey QC is counsel in the separate contested LCIA sub-arbitration by A against C, referred to in the judgment, and in applications currently before the Commercial Court related to that purported arbitration.

How the Issues in A v B Arose

B was party as seller to two separate contracts, one concluded in September 2015 and the second in October 2015, for the sale of parcels of crude oil on FOB terms. Each separate contract was subject to an LCIA arbitration clause. A, as buyer, on-sold the parcels by two separate sub-contracts on substantially identical terms save as to price. A failed to pay the price and B sought to commence arbitration to recover the price.

Article 1 of the LCIA Rules provides that “Any party wishing to commence arbitration under the LCIA Rules … shall deliver to the Registrar of the LCIA Court … a written request for arbitration (the “Request”) containing or accompanied by” and then setting out the basic core details relied upon as giving rise to the claim or dispute and as supporting the submission of that claim or dispute to LCIA arbitration.

Inexplicably B filed a single Request on 23rd September 2016 against A under Article 1 by which B purported to commence a single arbitration for the amounts claimed under the two separate contracts as if under a single contract and, in particular, as if under arbitration agreement. A single arbitration registration fee was paid under Article 1.1(vi) of the LCIA Rules.

A in its turn commenced a separate LCIA arbitration against C) on 31st October 2016), adopting an equally single form Request on the same ‘single claim and arbitration agreement’ basis. C challenged the jurisdiction of the Tribunal in the A vs C reference on the basis that A’s purported Request for Arbitration was invalid and ineffective to commence arbitration.

A sought to adopt the same argument against B. However, by this stage, A had already served its Response under Article 2 of the LCIA Rules (on 31st October 2016). That contained a generic reservation of rights (summarised by the Judge as “(i) stating that the Response should not be construed as submission to any arbitral tribunal’s jurisdiction to hear the claim as currently formulated; and (ii) reserving A’s rights to challenge the jurisdiction of the LCIA and any arbitral tribunal appointed” [6]). But no specific challenge to the Tribunal’s jurisdiction on the basis that B’s Request was invalid and ineffective to commence arbitration was made by A in the Response. That specific challenge, passing on the point taken by C against A, was not made by A vis-à-vis B until shortly before A was due to serve its Statement of Defence and therefore well after the Response.

B argued that under Article 23.3 of the LCIA Rules A’s challenge to jurisdiction on the grounds of an ineffective Request for Arbitration came too late.

The LCIA Tribunal (Ian Glick QC; David Mildon QC and William Rowley QC) agreed, holding that A should have raised its challenge in its Response, at the latest, and that it was too late to raise that challenge in its Statement of Defence.

A applied under section 67 of the Arbitration Act 1996 on the basis that the B’s Request was ineffective; that the Tribunal had no jurisdiction and that its determination was invalid.

Issue 1: Was B’s Request for Arbitration Effective to Commence Arbitration?

This, the threshold question as to whether the Tribunal enjoyed jurisdiction over A at all, turned on Article 1.1 of the LCIA Rules. Given the parties’ arbitration agreement was on the basis of arbitration under the LCIA Rules, the Rules governed the manner in which arbitration was to be commenced.

Article 1 provides that a party wishing to commence arbitration is to file a Request for Arbitration which is to be accompanied by (a) “the full terms of the Arbitration Agreement (excepting the LCIA Rules) invoked by the Claimant to support its claim, together with a copy of any contractual or other documentation in which those terms are contained and to which the Claimant’s claim relates” (Article 1.1(ii)) and (b) “a statement briefly summarising the nature and circumstances of the dispute, its estimated monetary amount or value, the transaction(s) at issue and the claim advanced by the Claimant” (Article 1.1(iii)). In addition under Article 1.1(vi) “the registration fee prescribed in the Schedule of Costs” is to be paid the LCIA with the submission of the Request.

B accepted (inevitably) that an arbitration can only encompass a dispute arising under a single arbitration agreement (recorded at [16]).

As there were two separate contracts and two separate arbitration agreements forming part of each contract, albeit in identical form, two separate Requests were therefore necessary, one under each contract and arbitration agreement.

Phillips J. had little difficulty in dismissing B’s case that its single Request was to be read as a Request validly commencing two separate arbitrations, one under the September and the other under the October contract; in other words that while the Request was expressed in the singular, it could be and should be read as a double Request.

The problem for B was that its Request was, as the Judge summarised at [22], specifically drafted on the basis of a single Request referring a single dispute under a single contractual regime and, critically, under single arbitration agreement, to a single arbitration, with B as claimant thereby being entitled to pay a single arbitration fee. 

The Judge summed up the ordinary objective interpretation of the Request and its language (drafted, as he pointed out, by lawyers) in these terms: “In my judgment, and given the analysis of the LCIA Rules and their effect above, a reasonable person in the position of the recipient would have understood the Request as starting one single arbitration. The Request makes no reference to the commencement of more than one arbitration, but refers throughout to “the Arbitration Agreement”. The Request also claims one single amount of damages, refers to “the seat of the arbitration”, “the language of the proceedings”, “the governing law of the arbitration agreement” and payment of “the fee prescribed by the Schedule of Cost”, being a reference to the fee for a single arbitration. It is entirely clear that the intention was to commence a single arbitration and no reasonable reader would conclude otherwise. Indeed, the LCIA itself regarded it as commencing just one arbitration.”

B’s ambitious argument that a Request for Arbitration under Article 1.1 of the LCIA Rules was nevertheless to be read in the light of section 61(c) of the Law of Property Act 1925 which provides that “in all deeds, contracts, wills, and other instruments […] the singular includes the plural and vice versa” was rejected by Phillips J. as having “no merit whatsoever” [19]. 

As the Judge pointed out, this would mean that multiple different arbitrations could be commenced under one registration and one registration fee. Further, the language of Article 1.1 made it clear that a Request was singular and that the arbitration commenced by it was equally singular, not multiple or permitting the commencement in the Claimant’s sole option of as many concurrent or consolidated arbitrations in one Request as it wished.

In seeking to remedy deficiencies in the commencement of arbitration, resort was made by B to the decision of Hamblen J. in The Biz [2011] 1 Lloyd’s Rep. 688.

This was a very different case in which claims under 10 different contracts (10 separate bills of lading), each with its own identical arbitration agreement, were the subject of one notice of appointment of an arbitrator under each agreement in respect of each claim. There were no rules or requirements as to how arbitration was to be commenced and, accordingly, the default regime in section 14 of the Arbitration Act 1996 governed the position. Hamblen J held that the requirements of section 14 had to be construed broadly and flexibly concentrating on the substance and not the form of the notice.

Phillips J. held at [22] that, while that approach was unimpeachable per se, it could not assist B in the different context where detailed arbitration rules defining the way in which arbitration had to be commenced were in place and governed now a claim was to be referred to arbitration.

Issue 2: How Quickly Must a Party Challenge Jurisdiction under the LCIA Rules?

Even if B’s Request was ineffective such that the Tribunal could have no jurisdiction, B contended in any event that A had lost its right to challenge jurisdiction.

Its case rested upon Article 23.2 of the LCIA Rules which provide in so far as material that: “An objection by a respondent that the Arbitral Tribunal does not have jurisdiction shall be raised as soon as possible but not later than the time for its Statement of Defence […].” [Emphasis added.]

B relied on the Tribunal’s view that this required an “as soon as possible” response in all cases, such that if a party receiving a Request for Arbitration considered it to be misconceived in jurisdictional terms, then it had to raise that objection “immediately”. This would require a challenge to jurisdiction to be made under the LCIA Rules potentially earlier even than the filing under Article 2 of the Response to the Request for Arbitration but in any event certainly no later than taking the challenge in and as part of the Response, such that a Respondent could not leave the taking of a challenge to the Tribunal’s jurisdiction to its Statement of Defence.

Even leaving to one side the relevant statutory background, the Court found this to be a difficult argument simply on the wording of Article 23.3 itself which refers expressly to the Statement of Defence in terms as being the final cut-off point.

As the Judge stated at [40]: “the better construction of Article 23.3 is that it excludes “untimely objections”, that phrase relating back to the requirement that an objection shall be not later than the time for its Statement of Defence. Whilst the Article stipulates that objections shall be raised as soon as possible, it does not state a sanction for non- compliance, the sanction for untimely objections being provided by or implicit in the words “not later than” which apply to the time for the Statement of Defence. Had the intention, in 2014, been to introduce a new and much stricter requirement, complete with heavy sanction, it would surely have been done with far clearer words”.

The Judge supported that construction by the approach taken to a similar type of clause (: “as soon as reasonably practicable and in any event within 30 days”) in AIG Europe (Ireland) Ltd v Faraday Capital Ltd [2006] 2 CLC 770.

The Court’s view was further supported by the statutory context in which Article 23.3 was to be construed.

The Court recorded the fact that the Tribunal had cross-checked its construction of Article 23.3 against section 73(1) of the Arbitration Act 1996 which provides that where a party takes part in the arbitral proceedings “without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part” any objection to jurisdiction, the right to object is lost. The Tribunal viewed the requirement of “as soon as possible” as meaning just that with this being consistent with the “forthwith” element in section 73. It was therefore not open to a party to reserve jurisdiction at the response stage and then take it at the defence stage: it had to take it immediately but at the latest in and by the Response.

Phillips J. noted that the Tribunal had however not considered section 31(1) of the 1996 Act which specifically addresses when an objection to jurisdiction must be taken as the default position and which is referred to in section 73(1) (:“without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part”, emphasis added). Section 31(1) provides that an objection to jurisdiction “must be raised … not later than the time he takes the final step in the proceedings to contest the merits of any matter in relation to which he challenges the tribunal’s jurisdiction.” This follows Article 16(2) of the UNCITRAL Model Law save that the reference to it being not later than the statement of defence in the Model Law was replaced by a reference to the final contesting of the merits. As the Departmental Advisory Report on the Arbitration Bill records, the only reason for this change was the avoidance of the impression “that every arbitration requires some form of formal pleading or the like”.

The Judge held that, reading Article 23.3 of the LCIA Rules in its proper context, it was highly unlikely (indeed the Judge put it thus: “it is inconceivable”) that the LCIA had intended some new and stricter regime departing dramatically from section 31 and requiring a challenge even before Response or appointment of an arbitrator, even though both of those steps could not by themselves amount to a waiver of the right to challenge jurisdiction and even though the LCIA Rules provide that the omission to serve any Response does not affect the respondent’s position as to the denial of any claim (Article 2.4).

Conclusions

Permission to appeal was refused by the Judge and so the decision is effectively final on the points it determines.

The Judge’s decision on both issues should therefore be carefully noted.

First, it makes it clear that commencement of arbitration under the LCIA Rules is a straightforward process as defined in Article 1.1 where a claim or set of claims under one contract governed by an LCIA arbitration agreement is referred to arbitration by a Request and that if there are separate contracts and separate arbitration agreements, separate arbitrations must be commenced. Subsequent consolidation of the separate arbitrations is a different matter, with the necessary consents: the LCIA Rules provide for this in terms in Article 22.1(ix).

Secondly, it now clarifies the correct construction of Article 23.3 of the LCIA Rules (newly amended in the 2014 revision). While jurisdictional challenges must be made at an early stage in arbitral proceedings, the long-stop approach of requiring them to be made no later than the contesting of the merits and the time for the Statement of Defence which amounts to a step in the proceedings is consistent with the provisions of the Arbitration Act 1996 and similarly worded provisions.

Time to stop trying? Attempting to sidestep the ‘rehearing’ nature of a s.67 jurisdiction challenge

GPF GP S.à.r.l. v Republic of Poland [2018] EWHC 409 (Comm)

Overview

The recent decision of the Commercial Court in GPF GP S.à.r.l. v Republic of Poland [2018] EWHC 409 (Comm) reinforces what should, by now, be well-known to be the unassailable position that a challenge to jurisdiction under section 67 of the Arbitration Act 1996 takes place as a full rehearing of that challenge and not as a review of the arbitral tribunal’s prior decision on the same issue of jurisdiction.

The patent unpopularity of that position in many quarters of the arbitral community is illustrated by the most recent hard-fought attempt in this case to argue that this approach is not justified and should be restricted wherever possible. The decision demonstrates however that attempts to pick away at the position, post the Supreme Court in Dallah Real Estate v Pakistan [2010] UKSC 46, or to seek by other routes to sidestep the effect of a rehearing will be unavailing.

The decision of Bryan J unsurprisingly but usefully confirms that:

(a) that there is no difference between a question of jurisdiction ratione personae or ratione materiae: both are subject to a rehearing;

(b) that the position is no different where a party fails to raise issues in the arbitration and seeks to raise wholly new points on the s.67 challenge, irrespective of the nature of the jurisdictional aspect in play; and

(c) that resort by a party to ‘waiver’ to preclude the other party from raising such new points on the rehearing

The decision also contains a useful analysis of the concept, in the context of a BIT, of creeping expropriation qualifying as an expropriation in aggregate effect and the application of a BIT arbitration clause in that context (not addressed in this case note).

The Background

In a dispute between GPF (Griffin) and Poland under a BIT between Belgium, Luxembourg and Poland, Griffin claimed that a Polish court judgment constituted an expropriation measure. Griffin financed a property group seeking to invest in the redevelopment of ex-State properties for commercial and residential use. It claimed for violation of the fair and equitable treatment standard in the BIT and for indirect or creeping expropriation, similarly in breach of the BIT, relying on a series of acts or course of conduct by authorities and the court, attributable to Poland. A distinguished tribunal (Prof. Gabrielle Kaufmann-Kohler, Prof. David Williams QC, Prof. Philippe Sands QC) held that aspects of Griffin’s claim fell outside the arbitration clause in the BIT and could not be pursued, effectively tying Griffin to reliance solely on the court judgment and not the “prior measures” on which it also relied in support of its FET / expropriation claims.

Griffin challenged the Award under section 67 and, in so doing, supplemented in material aspects its case with new evidence as to the drafting history of the BIT and the “prior measures” and developed additional and different arguments. Poland contended that this was not permissible.

Poland’s Two Points and Bryan J’s Decision

Poland took two points, against the background of the general undesirability of the rehearing rule as eroding the efficacy of international arbitration, buttressed with reference to what the Judge referred to as “the spirited attack on the re-hearing approach undertaken by the editors of Arbitration Law 5th edn” (Robert Merkin and Louis Flannery QC).

(1) A difference between identity of party and scope of dispute jurisdictional issues?

First, Poland argued that the rehearing approach, enshrined in Dallah, was on analysis only applicable in a case which involved a question of jurisdiction ratione personae, i.e., a fundamental issue concerning a claimant who claimed not to be party to the arbitration agreement, and not where the issue arising is one of jurisdiction ratione materiae, or the scope of disputes referred to arbitration.

It argued that the seminal decision of Rix J. in Azov Shipping Co. v Baltic Shipping Co. [1999] 1 Lloyd’s Rep 68, on which Lord Mance’s speech in Dallah was said to hinge, concerned only a substantial issue of fact as to whether a party had entered into an arbitration agreement, not a scope of disputes issue. Reference was also made to a s.67 decision of Toulson J in Ranko Group v Antarctic Maritime SA [1998] ADRLN 35 (post Azov) in which, he held that it would be wrong for the courts to rely on new evidence which “could perfectly well have been put before the arbitrator, but was not placed before him, and with no adequate explanation why it was not”. Toulson J based his decision, in part, on the reduced role of the courts under the Arbitration Act 1996. With that in mind, Poland argued that the Court should not seek to extend the rehearing principle any further than was strictly justified, i.e. to ratione personae issues only.

Bryan J’s decision was an emphatic rejection of any distinction either in the cases or in principle and a vigorous endorsement of the validity of the Dallah principle [70]:”In each case, where it is said the tribunal has no jurisdiction, it is on the basis that either there is no arbitration agreement between the particular parties, or that there is no arbitration agreement that confers jurisdiction in respect of the claim made. In each case if the submission is proved, the Tribunal has no jurisdiction as no jurisdiction has been conferred upon it by the parties in an arbitration agreement. In such circumstances it is for the Court under section 67 to consider whether jurisdiction does or does not exist, unfettered by the reasoning of the arbitrators or indeed the precise manner in which arguments were advanced before the arbitrators.”

(2) Waiver by Griffin of its Right to Raise New Points / New Evidence

Secondly, Poland argued that the doctrine of waiver applied, because Griffin could have advanced the new materials and arguments before the arbitrators but failed or chose not to do so and should therefore be taken to have waived them or to be precluded from running them, even at a rehearing. The argument is, unfortunately, only shortly summarised in the judgment.

The difficulty with this argument, as explained by the Judge, is that once it is recognised that a rehearing is an entirely de novo determination, it is difficult to see how and where waiver will arise.

He put it this way [72]: “it is difficult to see how a waiver could arise in circumstances where it is well established that there can be a re-hearing under section 67, a fact parties are taken to know), and in the context of no restriction being set out in section 67 itself restricting what arguments may be re-run, no question of any loss of a right to advance particular arguments on a re-hearing under section 67 can arise”.

However, while conceivably some form of formal abandonment of a point in the arbitral jurisdiction hearing on which the other relied to its prejudice and detriment and which could not be redressed at the rehearing might amount to a waiver, in the present case (as in most if not all) Poland dealt with the ‘new’ points in detail and could not point to any prejudice.

Conclusion

While the logical underpinning, the justifications and the demerits of a Dallah approach will doubtless and understandably continue to be discussed in the arbitral community (as illustrated by an entertaining debate between Sir David Steel and Louis Flannery QC at the recent Quadrant Chambers International Arbitration Seminar), in practical ‘practitioner’ terms it has been a wholly sterile one since 2010, and perhaps it is time to recognise that fact.

Arguing ‘retroactive deprivation’ of arbitral jurisdiction …and how not to make your s67 challenge

Overview

Close upon the heels of the decision in A v B [2017] EWHC 3417 (Comm) (see Commencing LCIA Arbitration: The Perils of Non-Observance of the LCIA Rules) which considered when a challenge to arbitral jurisdiction must be made in an arbitration under the rules of the LCIA and considered the impact of section 73 of the Arbitration Act 1996 upon the interpretation of the relevant LCIA provision, the recent Commercial Court decision in Exportadora de Sal SA de CV v Corretje Maritimo Sud-American Inc [2018] EWHC 224 (Comm) emphasises the need to act swiftly in raising an objection to substantive jurisdiction under section 67.

The context was a highly unusual one: namely, where arbitral jurisdiction existed when the arbitration was commenced under an admitted contract and arbitration agreement but where it was argued that it had been removed subsequently by a supervening governmental act which declared the contract (and arbitration agreement) null and void ab initio.

Does that argument give rise to a section 67 challenge to jurisdiction at all? If so, how do sections 31 and 73 apply to it?

The decision gives stringent guidance on the test under section 73(1) of the Arbitration Act 1996 which is to be applied where a party  contends that it “did not know and could not with reasonable diligence have discovered the grounds for the objection” to jurisdiction.

Further, the Court’s decision is important in emphasising that on any section 67 (or indeed section 68) challenge, the purpose of the witness statement is to set out evidence and not argument. The habit, into which most practitioners have fallen, of setting out one’s case in full in the witness statement was disapproved by the Court. This reflects the Commercial Court’s increasing insistence upon the proper (and therefore much more limited) deployment of factual witness statements.

The Factual Background to the Section 67 Challenge

Exportadora de Sal is a Mexican salt mining company owned 51% by the Mexican Government and 49% by Mitsubishi Corporation. By reason of the majority state ownership, it was viewed in Mexican law as a state entity and was therefore subject to Mexican administrative law governing the tender and contracting procedures contained in a local Mexican law (the Law of Procurement, Leasing and Public Sector Charges).

Exportadora contracted as buyer with a shipbuilder, Corretje Maritimo, for the construction and sale of a specialist salt barge on 3rd July 2014. The shipbuilding contract and arbitration agreement were governed by English law.

The builder (as the arbitrator held) lawfully terminated the contract on 27th May 2015 leaving a substantial instalment owing from Exportadora. The builder commenced arbitration against the buyer in August 2015.

Initially the buyer took no part in the arbitration. However, a hearing date having been fixed by the arbitrator for September 2016, in July 2016 and shortly before the hearing the buyer appointed solicitors who came on the record stating that they would “contest both liability and quantum (and possibly jurisdiction)”. Jurisdiction as a separate issue was not then pursued but other defences (including one of illegality) were raised. The hearing of liability and quantum was adjourned to 5th December 2016.

Separately, Exportadora’s Órgano Interno de Control (OIC) carried out an audit on 10th August 2016 to ascertain whether Exportadora had complied with the requirements of the Mexican law in question. The OIC audit led to various interventions by the OIC, culminating in a decree by the OIC on 16th November 2016 that the tender process had been irregular and that the award of the contract to the builder was and had been a nullity. Exportadora issued an ‘early termination declaration’ in respect of the contract, as directed by the OIC.

Surprisingly, Exportadora than participated fully in the December 2016 hearing on the merits. Its counsel, taxed by the tribunal with the need to explain matters if it was being alleged that the arbitral process was irregular in some way by reason of the OIC ruling, confirmed that this was “a separate matter” and recognised the validity of the arbitral process.

Shortly after the hearing, on 22nd December, Exportadora then raised the issue and made a jurisdictional challenge. The arbitrator allowed further submissions and then rejected the challenge as raised too late.

Exportadora lost the arbitration.

It then commenced a section 67 challenge, contending that the effect of the OIC decree under Mexican law was to deprive the tender of validity, with the result that it did not have power or capacity to enter into the contract and that as from 16th November 2016 the contract was null and void.

The three points dealt with by the Court

(1) ‘Retroactive deprivation’: a matter going to substantive jurisdiction at all?

While there was contested evidence of Mexican law as to the effect of the OIC decree, the highest that Exportadora could put its case was that, while the arbitrator had not lacked substantive jurisdiction at the outset of the proceedings, “this became so after the OIC Resolution” and that from that time on the arbitrator did not have substantive jurisdiction to decide any of the matters in the arbitration.

Andrew Baker J. held that the section 67 claim failed at the first hurdle, because the effect of Exportadora’s Mexican law argument as to ‘invalidity’, even if correct, was a matter going to the subsequent discharge of an existing contract and not a matter of initial and original capacity to contract and therefore arbitral jurisdiction.

As he put it at [39]: “A doctrine that accepts and acknowledges that a valid and binding contract was concluded, including a valid and binding arbitration agreement, but requires by reason of the act of an administrative body over two years later that it thereafter be treated as if it had never been validly concluded is, by nature, not a doctrine concerning capacity to contract.” Accordingly a ‘retroactive deprivation’ of authority to contract could not impugn the arbitrator’s substantive jurisdiction to make the award.

(2) How does Section 31 apply to a ‘retroactive deprivation’ case?

Section 31 deals with objections to the substantive jurisdiction of the arbitral tribunal at two stages: (a) under section 31(1), lack of jurisdiction “at the outset of the [arbitral] proceedings” and (b) under section 31(2), “during the course of those proceedings” where the tribunal “is exceeding its substantive jurisdiction”.

Objectively, Exportadora was to be taken to know that it was contracting with the builder in contravention of Mexican law and (if true) in an unauthorised manner. Accordingly, any objection on that ground, even if it went to jurisdiction, was one which had to have been raised by Exportadora before taking any step in the arbitration. Under section 31(1) of the 1996 Act “must be raised by a party not later than the time he takes the first step in the proceedings to contest the merits”. The time for raising that jurisdictional issue was long past.

For this reason, Exportadora had to put its case as one founded on the OIC decree and on the contention that that decree, as from 16th November 2016, deprived the arbitrator of substantive jurisdiction. In other words, it was a matter which arose “during the course of the arbitral proceedings”. In these circumstances, Exportadora sought to put itself within the “as soon as possible” requirement under section 31(2) (: “Any objection … must be made as soon as possible after the matter alleged to be beyond its jurisdiction is raised”), arguing that its raising of the point on 22nd December shortly after the hearing and before the award met this requirement.

The builder argued that section 31(2) was inapplicable and that only section 73(1) applied, which thereby imposed a more exacting timescale for raising an objection as to jurisdiction than simply “as soon as possible”, namely “forthwith”. It was argued that continuing to act as arbitrator where the arbitrator had jurisdiction initially but then has lost it was not a case of “exceeding” jurisdiction as such, and that section 31(2) deals only with going beyond a jurisdiction which the tribunal has, not a case of subsequent loss of all jurisdiction.

It might be said that this was a hair-splitting argument in that it sought to distinguish “forthwith” from “as soon as possible”. However, the language of section 31(2) does not sit very happily with a “retroactive deprivation of all jurisdiction” argument. This is not surprising since the framers of the Model Law and then the 1996 Act were unlikely to have such a possibility in mind as a bar to arbitral jurisdiction.

The Judge approached the matter on the robust basis that section 31 should be read so as to avoid any gap in coverage, stating at [45]: “That may make the case unusual. But if it were nonetheless viable, I find it entirely natural to describe an arbitrator who continues to act after his temporally limited jurisdiction has expired as exceeding his jurisdiction. This reading of section 31(2) avoids a lacuna in section 31 that seems to me unlikely to have been intended.”

(3) Section 73(1) and the exception for late challenges to jurisdiction

Section 73(1) bars a late objection “unless [the party] shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection”.

The obvious problem for Exportadora was that it had known about the matters on which it relied since, at the latest, 16th November 2016 when the OIC made its decree of nullity or, at the earliest, August 2016 when the OIC carried out its audit and instituted its ‘intervention’ for breaches of the Mexican law in respect of tender procedures. It then took part in the December hearing.

In those circumstances, there was little doubt as to the outcome.

But the Court usefully stressed that given the importance of jurisdiction, a party had to act very quickly indeed, and within a timescale of days not weeks, treating the investigation of any potential jurisdictional argument as one of “the highest priority”. The Judge explained the rational for this as follows at [48]: “The general context in which that question of reasonable diligence falls to be assessed is that when faced with a legal claim asserted through arbitration, logically and practically the first question any respondent can fairly be expected to consider and keep under review throughout is whether it accepts the validity of the process.”

The Court held that Exportadora should have taken “urgent advice” as soon as it learnt of the OIC decree and “treated with appropriate priority” should have objected within one week. The Court would have gone further if necessary and said that with the background since August, it should have objected “within a working day or two” of receiving the decree.

Witness Statements in section 67 (and section 68) challenges: the Correct Approach?

The general guidance to witness statements in the Commercial Court Guide (at Part H1.1(a) of the 10th Edition) is that “the function of a witness statement is to set out in writing the evidence in chief of the witness”. The Court is increasingly hard on statements that argue the case or recite documentation with strict page limits.

No specific guidance on witness statements is given in Part O, dealing with Arbitration Claims, (beyond in relation to section 68 challenges, that these “must be supported by evidence of the circumstances on which the claimant relies as giving rise to the irregularity complained of and the nature of the injustice which has been or will be caused to the claimant”: O8.4). Generally the place to argue the case is in the Claim Form which “must contain, among other things, a concise statement of the remedy claimed and, if an award is challenged, the grounds for that challenge”: O3.1.

However, as the Judge noted in this case, on section 67 (and 68) applications, a practice has grown up of serving a very full witness statement with the Arbitration Claim Form. He saw as this as having arisen because of “the perceived convenience in a section 67 claim of setting out the claimant’s detailed case as to the material facts, with explanatory comment or an outline of the proposed argument, in a single, main supporting witness statement from the claimant’s solicitor.” [25].

Andrew Baker J. in the course of his judgment disapproved of this practice.

He laid down some ‘reminders’ which practitioners will do well to bear in mind for the future: see at [25] to [27].

  • “Where the material facts will be proved by contemporaneous documents, whether generated by the original transaction or by the arbitral proceedings, the proper function of a witness statement may well be only to serve as the means by which those documents can be got into evidence by being exhibited.”
  • “The claimant’s case as to what those documents prove, and as to the conclusions to be drawn, can and should be set out in the Arbitration Claim Form as part of the statement of the “Remedy claimed and grounds on which claim is made“, a statement often produced in the form of a statement of case attached to the Claim Form.”
  • “The content of any witness statement, beyond a bare identification of exhibited documents, can and should be limited to matters of fact intended to be proved, if disputed, by calling the maker of the statement as a factual witness at the final hearing of the claim.”

Where (as is likely) this approach has not been taken or ‘old-style’ statements are being considered, then a further requirement was stressed:

  • “If a witness statement served with the Arbitration Claim Form has not been properly limited in that way, … it is essential, if the maker of the statement is to be called as a witness at the final hearing of the claim, that proper thought is given to which parts of the statement it is necessary or appropriate to take as their factual evidence in chief. That should preferably be done well ahead of the hearing. Any dispute over what should be allowed as evidence in chief can then be identified and resolved, by the court if necessary; the parties can then prepare cross-examination limited accordingly; and the hearing can then be listed upon the basis of a time estimate that is better informed.”

In cases where the underlying facts are not in reality contentious but how they are to be argued is, this restatement of approach is likely to see the disappearance of any proper need for a full witness statement. The case can be summarised in pleading form in the Claim Form (and argued at fuller length in the skeleton, which witness statements often seek to foreshadow) and the accompanying statement limited to a vehicle for appending the relevant underlying documentation.

Arbitral Appeals under s.69…No Second Bites? – Simon Rainey QC and Peter Stevenson

Agile Holdings Corporation v Essar Shipping Ltd [2018] EWHC 1055 (Comm)

Overview: second bites at s.69(3)?

The English statutory regime for appeals against arbitration awards on questions of law under s.69 of the Arbitration Act 1996, as is well known, applies a two stage process: (i) the application of permission to appeal and, (ii), if permission is granted the appeal itself.

Section 69(3) sets out the matters on which the Court is required to be satisfied as pre-conditions for granting permission to appeal. Where a party unsuccessfully resists permission on the basis that some or all of the requirements are not met, can it nevertheless reargue the point or points all over again on the appeal proper? 

The position and the few cases in this area were recently considered by the Commercial Court in Agile Holdings Corporation v Essar Shipping Ltd [2018] EWHC 1055 (Comm).

The answer is: “it depends”.

How the issue arose

The claimant sought permission to appeal against an arbitration award on a question of law arising from the Award. The defendant opposed permission on various grounds including a submission that the tribunal had not been asked to decide the relevant question (and therefore that the threshold requirements of s.69(3) of the Arbitration Act were not met). It was contended that the argument now being sought to be run had never been argued in that way before the arbitrators. The claimant disputed that and put in evidence of the written submissions and the transcript of the oral submission. The Judge granted permission, rejected the submission and held that the point had been argued. He refused an application by the defendant for an oral hearing on the point.

On the full appeal, the defendant sought to re-open the issue and re-argue its original submission.

The Commercial Court’s decision

The Judge (HHJ Waksman QC, sitting as a deputy Judge of the High Court) allowed the appeal in full. On the s69(3)(c) point, he held that:

(i) the exercise undertaken by the judge granting leave to appeal involves a detailed consideration of the threshold questions;

(ii) once leave has been granted, there is every reason to move onto the merits of the question without the distraction of re-litigating tangential points which have already been decided;

(iii) a party cannot resist the appeal on the basis that the threshold requirements of s.69(3)(a) and (d) are not met. Those issues arise exclusively at the leave stage and the decision of the judge at that stage is final;

(iv) the position is different in respect of the requirements of s.69(3)(c) because, whether a point was put to the tribunal is tied to the issue of whether there is a question of law arising out of the award at all;

(v) however, while the Court hearing the appeal may not be bound as to whether the question arises from the award, it should give considerable weight to the decision of the judge granting leave.

Simon Rainey QC, leading Peter Stevenson, represented the successful appellant.

The Detailed Reasoning of the Court

The defendant submitted that the Court did not have jurisdiction to entertain an appeal because the threshold requirements of s.69(3) were not met.

In support of that proposition it relied upon two authoritiesMotor Image v SCDA Architects [2011] SGCA 58, a decision of the Court of Appeal of Singapore, and The Ocean Crown [2010] 1 Lloyd’s Rep. 468 a decision of Gross J (as he was).

(1) In Motor Image v SCDA Architects, the Singaporean court considered identical appeal provisions in s.49 of the Singapore Arbitration Act 2002. The judge at first instance (Prakash J., as she was) had granted permission to appeal a question of law under those provisions. When the same judge heard the appeal she decided that the question did not arise on the facts as decided by the tribunal. She took the view that as a result the appeal should be dismissed. The Court of Appeal agreed. It held that this sort of point could be reargued on appeal because it went to the very jurisdiction of the court to hear the appeal in the first place. In other words, the grant of leave was a finding that the court had the relevant jurisdiction. So if on further analysis, one of the threshold conditions was not made out, the court was actually deprived of jurisdiction and could not hear the appeal.

HHJ Waksman QC rejected that analysis. He held that once leave has been granted, the question of whether the Court has jurisdiction to determine the appeal has been determined. Subject to any challenge to that decision, the Court has jurisdiction to determine the appeal. The effect of this finding is that it is not open to a party to meet an appeal under s.69 by re-arguing points which relate exclusively to the threshold requirements for permission. Specifically the Judge held that a party cannot re-argue (i) that the determination of the question will not substantially affect the rights of the parties (s.69(3(a)); or (ii) that it is not just and proper for the court to determine the question (s.69(3)(d)).

(2) The decision The Ocean Crown was of a different nature. In that case there were three separate questions of law for appeal for which permission had been granted. The third question involved the allegation by the appellant that the tribunal had sought to restrict the ambit of a well-known legal principle concerning salvage remuneration and had thereby committed an error of law. The respondent argued that the tribunal had done no such thing but was merely dealing with how that principle was to be applied on the particular facts of the case. On that analysis there was no error of law at all.

Gross J. held that, in determining whether a question of law arises out of the award (a pre-requisite of allowing an appeal) the court is not bound by the decision of the judge granting leave.

As HHJ Waksman QC noted, Gross J’s decision not concerned with the threshold requirements of s.69(3) of the Act. It is concerned with whether s.69 is engaged at all: s.69 only permits appeals on questions of law arising from an award (s.69(1)). The Judge described this as ‘the Law Question’ which he distinguished from the issue of whether the question of law was actually put to the tribunal (which he described as ‘the Determination Question’).

However, although not addressing the point head on, the Judge appears to have accepted that the Determination Question is connected to the Law Question and is therefore not merely a threshold requirement for obtaining leave, but may also be considered as part of the substantive appeal.

Having drawn this distinction the Judge held that he was not prohibited from reconsidering whether the question of law raised in the appeal was one that the tribunal had been asked to determine. But he emphasised that the Court should give ‘considerable weight’ to the decision of the judge granting leave to appeal, particularly if (i) the decision was made after an oral hearing; and/or (ii) the materials before the judge granting permission are the same or substantially the same as those before the appeal court.

Adopting that approach the Judge reviewed the material advanced by the defendant and held that he was in no doubt that the question of law was one that the tribunal had been asked to determine.

Conclusions

The decision of the Judge is helpful in three respects.

First, it clarifies that the decision of the judge granting permission to appeal is final and determinative of that issue. It is not open to a party to meet an appeal by arguing that the threshold requirements for leave to appeal were not met and leave should not have been granted. In that respect it drew a clear distinction between the position under English law and the approach taken by the Singaporean Court of Appeal in Motor Image v SCDA Architects.

Second, it confirms that when determining whether the question of law arises from the award, the Court hearing the appeal is not bound by the decision to grant leave and, as part of that process, can reconsider whether the question was one that the tribunal was asked to determined.

Third, it provides clear guidance as to the weight that should be given to the decision of the judge granting leave to appeal. If the judge granting leave considered the issue and had the same material before him/her, ‘very considerable weight’ should be given to the original decision.

It is to be hoped that this robust approach discourages defendants who are unsuccessful at the permission stage from re-opening such points thereby rendering the s.69 process more time-consuming and more costly.

Primacy of Language in the Construction of (Commercial) Contracts in Recent Cases

SIMON RAINEY QC

Gard Shipping v Clearlake Shipping [2017] EWHC 1091 (Comm) Sir Jeremy Cooke 12 May 2017

Persimmon v Ove Arup [2017] EWCA Civ 373 Court of Appeal (Jackson, Beatson, Moylan LJJ) 25 May 2017

In this update, attention is drawn to two recent cases addressing the correct approach to the construction of contracts.

The Gard Shipping case is of interest, as it is the first application in a first instance decision, of the recent Supreme Court decision in Wood v Capita Services, which rejected the suggestion that there was any tension between the Supreme Court’s earlier decisions in Rainy Sky v Kookmin Bank and Arnold v Britton.  It also considers the application of the Supreme Court decision on the implication of terms in Marks & Spencer v BNP Paribas.

The decision in Persimmon is striking, not so much for what it decides, as to the doubt it casts on the continuing relevance in commercial contracts, of the principle of contra proferentem and the rule in relation to exemption clauses flowing from the Canada Steamship case.

Gard Shipping v Clearlake
The Supreme Court decision Rainy Sky in 2011 opened the floodgates: no case on construction could be argued without it being asserted or, indeed, “trumpeted” (per Eder J in Aston Hill Financial) by each side that its interpretation made more commercial sense.

This development was not embraced with enthusiasm by most first instance judges. How could advocates or judges discern what, objectively, made commercial sense in myriad different circumstances?  And even if they could, construing a contract in accordance with objective commercial sense risked rewriting the bargain actually struck by the parties.

Such doubts seemed to be reflected in the subsequent Supreme Court judgment in Arnold v Britton in June 2015.  This was widely seen as being a “rowing back” from the free-for-all of Rainy Sky.  Although there was no criticism of Rainy Sky per se, the Supreme Court emphasized the importance of the language of the provision which was to be construed.  Commercial common sense was not to be invoked to undervalue the importance of the language.

Then, in March of 2017, came the Supreme Court decision in Wood v Capita Services. Giving the only judgment, Lord Hope emphatically rejected the submission that Arnold was a rowing back from or recalibration of Rainy Sky.  What the court has to do, in any case, is, in the unitary exercise of construction, balance the indications given by the language and the commercial implications of competing constructions.  The balancing exercise is key to the approach.

As to how that balance is to be struck, Lord Hodge identified 3 factors (which must be viewed as non-exhaustive): (1)  the quality of the drafting – the poorer the drafting the more the balance may tip away from a strict semantic reading;  (2) the court should bear in mind that one party may simply have made a bad bargain; and (3) the court should bear in mind that the drafting may be a negotiated compromise, with the parties unable to agree more precise terms.

Gard shows the first application of Wood in a first instance decision.

A voyage charterparty based on BPVOY4 contained standard laytime/ demurrage provisions. It also contained specifically agreed terms that the charterers had the liberty to order the vessel to stop and wait for orders.  If they exercised that liberty, waiting time was to count as laytime and demurrage was to be payable at enhanced and escalating rates.  The charterers did not give a “stop and wait” order.  Instead, after the vessel tendered a Notice of Readiness (NOR) at the discharge port, the charterers simply gave no discharge orders at all for over 2 months.

The owners argued that it was clear that the commercial purpose of the clause was to make the charterers pay at the enhanced rates, where they used the vessel as floating storage. They had used the vessel as floating storage at the discharge port.  It could make no commercial sense if the charterers could avoid the enhanced rate by the tactic of giving no orders, after NOR, rather than giving a “stop and wait” order.  Commercially the two amounted to the same thing, and should attract the same consequences.

Sir Jeremy Cooke had no hesitation in rejecting this argument. The wording of the specially agreed terms required a “stop and wait” order to trigger the enhanced rates.  There was no such order.  Therefore, the enhanced rates were not triggered.  The ordinary demurrage rate applied.  He also firmly rejected the owners’ alternative argument based on an implied term on the grounds of lack of commercial necessity.

This case, therefore, provides an early indication that in charterparties, which are indeed often a negotiated compromise, in carrying out Lord Hodge’s balancing exercise judges will give more weight to the words the parties have actually used, rather than arguments based on supposed commercial common sense. Notwithstanding Lord Hodge’s assertion that Arnold did not recalibrate Rainy Sky, the post-Arnold focus on the actual words of the contract is likely to be maintained.

Persimmon v Ove Arup
The correction of approach to the relevance and utility of the so-called “commercial” approach to construction of commercial contracts post Arnold v Britton and the current emphasis on the primacy of the language used by the parties as usually the best and surest guide to what they intended to achieve has found an echo in the rather different field of exemption clauses. The traditional approach that an exclusion or exemption clause is to be construed contra proferentem (once one has decided who the proferens is) in the event of any ambiguity has ruled the field for many years, although there have been many statements to the effect that it is not to be deployed where the words are themselves sufficiently clear. But the trend has increasingly been to give effect to exclusion clauses in commercial contracts without resort to maxims of hostile construction where the wording is subjected to some special linguistic threshold or a more demanding need for clarity.

An early indication of the new approach was given by Lord Neuberger MR in K/S Victoria Street v House of Fraser [2011] EWCA Civ 904, although was perhaps lost sight of. The position was reviewed more clearly and emphatically in the context of the mutual indemnities and exclusions in Transocean Drilling v Providence Resources (The Arctic III) [2016] EWCA Civ 372 where the Court of Appeal ruled that the principle had no role to play in the case of a mutual clause “especially where the parties are of equal bargaining power”, and stressed the parallels with Arnold v Britton. The Court distinguished the sort of mutual exclusion clause before it from what it described as “a typical exclusion clause, by which a commercially stronger party seeks to exclude or limit liability for its own breaches of contract.” The decision raised a number of questions in particular as to equality of bargaining power and the consistency of the Court’s approach in the light of a case decided by the Court of Appeal just shortly before (: Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128) in which the contra proferentem approach appeared to receive restatement and approval. However the Court was clear that it was not intending to cast any doubt on the allied principle of construction that clear words were required to exclude liability for negligence and the ‘Rule’ in Canada Steamship.

The recent decision in Persimmon Homes v Ove Arup appears to continue the trend towards minimising the scope for a contra proferentem approach generally, and not just in the context of mutual exclusion or exemption clauses. The case raised issues of construction under a contract for consultancy and surveying services rendered by Ove Arup to Persimmon and other parties relating to a redevelopment project for the Barry Docks. Asbestos was found in more than expected quantities for which it was alleged that Ove Arup was responsible by negligently failing to detect and manage that risk. A number of issues arose as to the application of exclusion and limitation clauses. In particular a clause which read “Liability for any claim in relation to asbestos is excluded”.

The Court of Appeal re-endorsed in terms the approach in K/S Victoria Street to the effect that the language used should be and usually is enough to resolve the meaning without resort to “rules” of construction and the approach taken in The Arctic III.  But more importantly it went a step further and doubted the relevance and applicability of the Canada Steamship principles (by which a clause must either expressly refer to negligence or some synonym of it or, if it does not, must indicate that it covers negligence with general words being read as covering non-negligent liability if possible to do so and unless such liability is fanciful).

The Court stressed that it was necessary to distinguish between a simple exclusion of liability and an indemnity clause requiring a party to hold the other harmless from the consequences of that party’s negligence and that, at least in the former case, the Court’s “impression” was that Canada Steamship guidelines “in so far as they survive” are “now more relevant to indemnity clauses than to exemption clauses” and that in commercial contracts between sophisticated parties, such as a large construction contract, it should all turn on the language. The Court made it clear that the wording in question (referred to above) was clear enough to cover liability for negligence and that Canada Steamship was simply not of assistance. As belt and braces the Court then applied Canada Steamship and held that any liability other than liability for negligence was indeed fanciful.

The case represents a further cutting back of the application of technical canons of construction to exclusion clauses in the commercial context in favour of simply giving ordinary language its effect. It also states, perhaps more clearly than before, that the same approach applies generally and that Canada Steamship is not exempt from the process.

Although the Court was at pains to stress that the issues before it were not such as to merit a general review of Canada Steamship, its words will be likely to be cited generally as building on an Arnold v Britton approach, even to exclusion clauses: “Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down.”

 

Coincidentally Collateral or Causally Connected? Dancing around Post-Breach Benefits.

The New Flamenco (Globalia Business Travel SAU v Fulton Shipping Inc) [2017] UKSC 43

 SIMON RAINEY Q.C.

A Short Question of Fact?

An owner of an elderly cruise ship lets her on time charter, extended by two years. The charterer redelivers in 2007 the vessel two years early, in repudiatory breach of the charter. The owner accepts the breach and terminates the charter. The time charter market for an old lady like the ‘New Flamenco’ is non-existent. The owner decides to sell the vessel rather than to continue to trade her. The arbitrator finds variously “it would not have been possible for the Owners to conclude an alternative substitute two year time charterparty. The need to sell the vessel was clearly caused by the breach” and “in this case it was clear that the necessity for the sale had been brought about by the refusal to perform the two year extension”.

When the owner sells the vessel he (perhaps surprisingly) finds a buyer for her willing to pay US$23.7 million. Had the charterer performed the charterparty, the vessel would have been worth much less at the end of the two years in 2009: had the owner wanted to sell her then, it would have received only in the region of US$ 7 million.

Should the owner have to give credit to the charterer for the difference in value (23.7 – 7) against its claim for damages for loss of profit over the two years (based on the difference between the charter rate and spot and other employment)?

The dance (a minuet, rather than a flamenco perhaps) then began. The arbitrator held that the owner did have to give credit, in the light of his findings of fact. Popplewell J held that it did not. A strong Court of Appeal was of the same view as the arbitrator. A strong Supreme Court this week unanimously rejected that view and restored Popplewell J’s approach, holding that to oblige the owner to give credit was wrong in principle and wrong on the facts as found by the arbitrator.

The short answer of the Supreme Court (expressed succinctly in six paragraphs) was that while the breach and early redelivery was the occasion or ‘trigger’ for the owner’s sale of the vessel, it was not the legal cause of the sale taking place nor could the sale sensibly be described as a step taken by the owner in mitigating the loss of charter earnings over the two years.

The decision is important in focussing on what needs to be shown in terms of legal causation in the breach and mitigation contexts, rather than pointing simply at acts which are factually connected. It is also noteworthy in the way it demonstrates the tension on a section 69 Arbitration Act 1996 appeal between “findings of fact” and findings, which while expressed as ones of fact, are on proper analysis ones of law.

The To-and-fro of the Decisions Below

At first instance, Popplewell J had distilled no fewer than eleven principles after an extensive review of the cases: see [2014] EWHC 1547 (Comm) at [64]. Of these perhaps the most important are the first four, which stressed that for a benefit to be taken into account, the critical test was one of legal causation linking the reception or creation of the benefit with the breach, so that the breach is the actual legal cause of the benefit being conferred. The Judge regarded mitigation as governed by the same principles. As his fifth to eighth principles, he therefore analysed how the requirement of legal causation applies to mitigation, pointing out “The fact that a mitigating step, by way of action or inaction, may be a reasonable and sensible business decision with a view to reducing the impact of the breach, does not of itself render it one which is sufficiently caused by the breach. A step taken by the innocent party which is a reasonable response to the breach and designed to reduce losses caused thereby may be triggered by a breach but not legally caused by the breach” (citing The Elena d’Amico [1980] 1 Ll. Rep 75.)

The Judge disposed of the case on the basis that the difference in value of the vessel between the date of the sale and the date of the expiry of the two years had nothing to do with the breach: it was simply caused by the drop in the market which would have occurred anyway. Similarly, the effect of fluctuating market values for the capital value of the vessel was only produced by a decision to sell the vessel, which decision the owner could take and could have taken at any time, irrespective of the breach. If the owner could not be criticised if it had decided not to sell the vessel but chose to sit tight for two years, on the basis of a failure to mitigate, how could the sale which it chose to make be treated as “mitigation” caused by the breach? If it could not, then the benefit was not a benefit accruing from mitigation but was entirely collateral.

The Court of Appeal (Longmore, Christopher Clarke, Sales LJJ) approached the matter from a different standpoint. Its starting point was that “It is notoriously difficult to lay down principles of law in the realm of mitigation of loss particularly when it is said that a benefit received by a claimant is to be brought into account as avoiding the loss. The judge is to be commended for having tried to do so but his use of the word “indicative” is itself indicative that hard and fast principles are difficult to enunciate. In appeals from an arbitrator’s award a court has to be particularly respectful of the boundaries between fact and law which the parties, by their choice of tribunal, have created.” [20]

Thereafter, the Court of Appeal based itself on the arbitrator’s decision of the factual connection between the owner’s decision to sell the vessel as being a sufficient legal connection: “Viscount Haldane’s formulation in British Westinghouse that the benefit must ‘arise from the consequences of the breach’ remains, in my view, entirely apposite. The issue of mitigation arises when the breach has had harmful consequences which the injured party has taken steps to ameliorate … the finding of fact made by the arbitrator was in effect that the benefit did arise from the consequences of the breach” (Christopher Clarke LJ at [47-48].

The Reasoning of the Supreme Court

In the Supreme Court, Lord Clarke (with whom Lords Neuberger, Mance, Sumption and Hodge agreed) preferred the reasoning of Popplewell J. While, perhaps unhelpfully, the Court did not comment expressly on the ‘eleven point’ guide set out by the Judge, the Court’s adoption of the reasoning and result arrived at by him is likely to mean that parties are likely to go back to them as a stepped approach to similar post-breach benefit problems.

The Court stressed, as had the Judge, that the question was simply one of legal causation: was the post-breach benefit in law to be regarded as having been caused by the breach or by mitigation of the loss caused by the breach? It rejected the argument that to be legally relevant the benefit had to be ‘of the same kind’ as the loss. This was too vague and arbitrary a test. Causation alone is key.

Lord Clarke dealt first with the argument that the difference in value (23.7 – 7) was to be treated as a benefit to the owner because it was “the benefit of having avoided a loss” by the owner selling the vessel in 2007 rather than on redelivery in 2009.

The obvious fallacy in this way of putting the argument might be thought to be that the owner did not need to sell the vessel at any time, including at the end of the charter term. It was simply a matter of the owner’s commercial decision-making as to how and when it ran its capital book.  As Lord Clarke explained, the owner could not have claimed from the charterer as damages for its breach if the vessel would have been worth more in 2009 than in 2007. Further, why take 2009 as the date of comparison simply because it represented the end of the charter period when the owner could have continued to trade? The owner might not have sold then. While a premature termination might lead an owner to sell earlier than it would otherwise have done, that had nothing to do with the charterer: it was “the disposal of an interest in the vessel which no part of the subject matter of the charterparty and had nothing to do with the owners” [32].

Lord Clarke dealt next with the mitigation argument based on the sale being an act taken by the owner to mitigate the loss of hire resulting from the breach.

Here, rather than analyse the matter as the Judge did, from the starting point that the owner could not be faulted for not mitigating if he had chosen not to sell the vessel, therefore any sale he chose to do was not ‘mitigation’ properly understood, Lord Clarke focussed on the precise nature of the loss. The loss was the loss of an income stream under the charter. Realising the capital value of the vessel did not and could not mitigate the loss of that income stream which, irrespective of the sale, remained lost [34]. While it might be thought that the Court here looked at the nature of the benefit and the nature of the loss (having deprecated just such a test), the nature of the loss and the benefit may be relevant in a causation enquiry. As Popplewell J, who had similarly rejected the ‘of the same kind’ argument, pointed out: “There is no requirement that the benefit must be of the same kind as the loss being claimed or mitigated … but such a difference in kind may be indicative that the benefit is not legally caused by the breach” [64(8)] (emphasis added; this proposition was expressly approved by the Supreme Court at [30]).

The Court pointed out that a sale of the vessel might be relevant to the compensatory principle if it could be shown, for example, that the owner would have sold the vessel during the two years had the charterer performed, because then that would on Golden Victory principles cut down the period of loss. But that had nothing to do with a collateral decision by an owner, post breach, to sell his vessel on a poor trading market.

Conclusions

The decision, and the procedural history, shows the difficulty that may lie in distinguishing between an act taken post-breach from which the claimant benefits and an act which is legally to be viewed as caused by that breach.

Where mitigation is concerned, if the claimant was not obliged to take such a post-breach step at all, then it seems clear that if he does take it, the defendant cannot seek to bring the benefits of so doing into account.

Coda: the Arbitral Context

It was strongly argued that, as causation was a question of fact, to be approached in a commonsense way, the decision of the arbitrator (extracts from which as reported are cited above) was one which was not open to challenge. Popplewell J. accepted that “whether a benefit is caused by a breach is a question of fact and degree which must be answered by considering all the relevant circumstances in order to form a commonsense overall judgment on the sufficiency of the causal nexus between breach and benefit” [64(9)] but considered that the arbitrator had simply gone wrong in treating things as sufficiently ‘caused’ when in law they could not be so regarded. Lord Clarke endorsed this approach at [24].

This gives rise to the apparent oddity of an arbitrator finding that the sale of the vessel was in consequence of and resulted from the breach and was a step taken by the owner to prevent loss from not being able to trade the vessel but this “not [being] legally sufficient to establish the necessary causative link between breach and benefit”.

“Consequential Loss” Exclusions: Context is Everything.

Star Polaris LLC and HHIC-PHIL Inc [2016] EWHC 2941 (Comm)

Recent Guidance from the English Court illustrates that tried-and-tested phrases can mean something very different depending on the nature of the contract and the context.

SIMON RAINEY Q.C.

The words “consequential loss” in an exclusion or indemnity provision frequently give rise to argument. This is despite the fact that, following a long line of decided cases dating back to 1934 (: Millers Machinery v David Way (1934) 40 Com. Cas. 204), the term (and common variants or combinations of it, e.g. ‘”consequential or special” or “indirect or consequential”) have acquired a well-settled meaning in the most common context in which they are used, namely as part of a free-standing unilateral exclusion clause or as a form of mutual exclusion clause (as, for example, in the suite of BIMCO marine and offshore industry forms, the LOGIC offshore forms and many construction contracts).

Well-settled it may be, but that does not necessarily make it a popular or well-accepted settled meaning.

The English Courts have construed the concept of “consequential loss” as not covering loss which directly and naturally results in the ordinary course of events from the breach and which would be ordinarily foreseeable but as applying only to loss which is not ordinarily foreseeable and which would be recoverable only if the special circumstances out of which it arises were known to the parties when contracting. In lawyer-speak, it covers Hadley v Baxendale ‘Limb 2’ but not ‘Limb 1’ losses: see the locus classicus in Croudace Construction Ltd v. Cawoods Products Ltd [1978] 2 Lloyd’s Rep. 55. Such a clause will often therefore cover only what would not be recoverable in any event, because it was not ordinarily foreseeable and there was no knowledge of the special circumstances out of which the loss arises.

That highly technical meaning has been criticised as very unlikely to be one which commercial parties ever really intended: see the recent comments of the Court of Appeal in Transocean Drilling UK Ltd v Providence Resources Plc [2016] EWCA Civ 372 per Moore-Bick LJ at [15] and Leggatt J. in Scottish Power UK Plc v BP Exploration Operating Co. Ltd [2015] EWHC 2658 (Comm). Other common law jurisdictions such as Australia have effectively ditched the English law approach.

The recent decision of the Commercial Court in Star Polaris LLC v HHIC-PHIL Inc [2016] EWHC 2941 (Comm) illustrates that the fact that the wording has a well-settled meaning will not always provide the answer. One cannot simply fall back on the way in which the phrase has previously been interpreted in stand-alone contexts and expect to arrive at the same result.

The case concerned a shipbuilding contract. As is common in such contracts, the builder gave a twelve month warranty and guarantee (Article IX). The builder undertook to be responsible during that period for any defects, due to matters for which it was contractually responsible, such as bad design or workmanship, and to carry out all necessary repairs. As is similarly common, Article IX stated that the builder was to be under no other responsibility or liability whatsoever in connection with the vessel or under the contract once the vessel had been delivered to the buyer other than under Article IX. Any implied conditions, for example, under statute (such as the Sale of Goods Act 1979) were similarly excluded. Article IX was therefore understandably described by the arbitrators and by the Judge as “a complete code for the determination of liability” as between builder and buyer.

It was in this special context that Article IX went on to exclude “liability or responsibility … arising for or in connection with any consequential or special losses, damages or expenses unless otherwise stated herein”.

During the guarantee period, the vessel, a Capesize bulker, suffered a serious main engine failure. The buyer alleged that this was due to bad workmanship in breach of contract (weld spatter left in the piping). It took the vessel to a Korean yard for repair and then claimed damages under three heads: the costs of the repair; various incidental towage, survey and other expenses and off-hire; a claim for the diminution in value of the vessel as a new bulker given the engine failure.

It was argued forcefully by the buyer that, objectively, and given the settled meaning, it was to be presumed that the parties would use the term “consequential loss” in accordance with that well-known meaning and the losses in question were not excluded as they were all ‘direct’, ordinarily foreseeable and ‘limb 1’. Reliance was placed by the buyer on the decision in Ferryways v. Associated British Ports [2008] 1 Lloyd’s Rep 639, where the Judge held that a Court should not lightly depart from that meaning, now that it had become settled and effectively a term of art. However, Ferryways dealt only with the typical form of stand-alone exclusion.

The arbitrators (a very experienced panel: Michael Collins QC, Richard Siberry QC and Sir David Steel) found for the buyer on liability and defective workmanship and allowed the claim for costs of repair (which were expressly recoverable under Article IX if the buyer elected to carry out repairs elsewhere than at the builder’s yard). They however held that the other two claims were excluded as “consequential loss” because they were consequences of the defect covered by the Article IX guarantee which was what the exclusion was directed at.

The Court (Sir Jeremy Cooke) upheld the Tribunal’s reasoning.

(1) While, importantly, the Judge recognised and sought to emphasise that he was not intending to cast doubt on the well-settled meaning of that term (referring to the usual line of cases with approval at [18]), he held that the specific context in which the wording was used, namely as part of a ‘complete code’ of builder’s responsibility, was crucial to a proper understanding of the term and of “fundamental importance in considering the ambit of Article IX” [10].

(2) The structure of Article IX was viewed by the Court as one of repair obligations expressly undertaken by the builder, coupled with the exclusion of everything else in terms of liability and responsibility. The clause differentiated between the cost of repair or replacement, on the one hand, and the broader financial consequences occasioned by the need for a repair or replacement on the other [36].

(3) The Court agreed with the arbitrators that “in such circumstances, the word ‘consequential’ had to mean that which follows as a result or consequence of physical damage, namely additional financial loss other than the cost of repair or replacement” [36]. In other words, the clause extended to all loss and damage which was a consequence of the defect covered under the guarantee and the word ‘consequential’ was used by the parties in this agreement in its cause-and-effect sense, as meaning ‘following as a result or consequence of’ [6].

(4) In the context of a guarantee and warranty clause which imposed a scheme of responsibilities on the builder, it was held to be unrealistic and strained to read the exclusion as saying that the builder accepted responsibility under the complete ‘code’ for all direct losses (limb 1) while excluding responsibility only for indirect ones (limb 2): [35].

The meaning given to the phrase “Consequential Loss” taken by the Court (and by the arbitrators below) mirrors that taken in the Australian cases where “consequential” has been construed as looking at losses which are simply consequential upon the breach and gives effect, in the specific context of Article IX of the particular contract under consideration,  to the dissenting view in the English textbooks that the English Court’s construction has robbed the phrase of its natural meaning which businessmen should be taken more realistically to have had in mind: see e.g. Macgregor on Damages, (19th Edn) at paras. 3-013 to 3-016, where the Australian cases are referred to. As an example, see Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49, a decision of the Supreme Court of South Australia, where the Court held that unless qualified by its context, “consequential loss” would normally extend to all damages suffered as a consequence of a breach of contract.

While confined to the particular contractual context, the implications of the Star Polaris decision are potentially wider, particularly for the use of a ‘consequential loss’ type exclusion in similar shipbuilding contract guarantee provisions.

In addition, the decision is a salutary lesson that a mechanistic application of the settled meaning of this phrase is inappropriate: the context and purpose may show that the parties used the term in a different and simpler sense. Given the expression of dissatisfaction in certain quarters with the Croudace meaning long given to the wording, it will be interesting to see if Star Polaris is henceforth used to try to press other different contexts as reasons for taking a different meaning. Negotiation of shipbuilding contracts by buyers may now need to be approached with some attention to the boilerplate of the standard form guarantee/ warranty provision (cf. the arguments in Star Polaris as to the amendment of the standard SAJ Article IX wording)

However, in the ordinary unilateral or mutual exclusion clause situation, the position remains, it is suggested, firmly the same: the Court was itself concerned to stress ‘no change’, expressly endorsing the Ferryways presumption that the words have been used in the settled sense understood in the English cases.