Brexit for beginners. A primer.

 

Now that Mrs May has seen off the challenge to her leadership of the Conservative Party, it may prove fruitful for all parties to take stock with where we are with the process of the UK leaving the EU – what some have called ‘Brexit’.

There are two stages in this process. There is the withdrawal from the EU itself and there is the negotiation of a new trade agreement between the UK and the EU. The latter cannot commence until after the UK has exited the EU but the parties can give some indication of their future intent. This is what the framework declaration does. The document that is intended to have legally binding effect is the Withdrawal Agreement which governs the terms on which the UK exits the EU. If there is no agreement, then there is a ‘cliff edge’ Brexit – with all that entails by way of possible shortages of food and medicine, lorry parks in Kent, uncertainty around the rights of UK citizens living and working in EU Member States.

The Withdrawal Agreement provides for an implementation period from exit day to 31.12.2020 during which time the UK will remain subject to all the rules and legislation of the EU but will not be able to participate in EU institutions – so no UK MEPs. In this period the UK and the EU will attempt to negotiate a trade deal. The UK will be free to negotiate trade deals with third party states but will be unable to implement them. The implementation period may be extended provided notice is given before 1 July 2020.

The three salient elements of the withdrawal agreement. (1) Reciprocal guarantees for the rights of UK citizens living and working in EU Member States and for citizens of EU Member States living and working in the UK. (2) Financial settlement of the UK’s accrued obligations as a Member of the UK, such as pensions for EU employees, in the period prior to exit day. This is to be paid as the obligations would have accrued had the UK remained a Member. Further financial payments will be required for the implementation period, including any extension. (3) A backstop in the event that no trade agreement has been reached by the end of the implementation period. This is contained in the Northern Ireland Protocol.

The third element is what is causing all the problems. At the end of the implementation period the UK as a whole would remain in a customs union with the EU and in addition Northern Ireland would be subject to some of the rules of the single market which would necessitate checks being carried out in the EU on certain classes of goods going into Northern Ireland.

The backstop is intended to be temporary and the Protocol states that it is not intended that it should form the basis of a permanent arrangement between the UK and the EU. On entering the backstop the UK would be no longer subject to the EU’s four freedoms, notably free movement of workers. The UK would no longer make payments to the UK other than in respect of its responsibility for accrued liabilities incurred during its period of membership. The UK would be constrained in acting on any trade deals with third party states as it would be prohibited from lowering tariffs below the EU’s common external tariff, and would also be prevented from obtaining a competitive advantage with the EU by lowering environmental standards[1], or labour and social standards[2], below those of the EU.

The backstop could be terminated by joint agreement of the UK and the EU or by reference to the arbitration proceeding established to deal with disputes arising under the agreement. It could not be unilaterally terminated by the UK. Although the technology for this does not currently exist, it is possible that in the future ‘maximum facilitation’ would be available to enable the necessary border checks without the creation of any hard border infrastructure. In this event, the rationale for the backstop would go and it would become possible for it to be terminated by either party either by reference to arbitration under the backstop procedure or by reference to the provisions of the Vienna Convention on the Law of Treaties 1969 that deal with the termination of treaties. It should be noted that the EU is unlikely to want the backstop to last for very long as it may give Northern Ireland, which will remain in the EU single market, an advantage over the Republic of Ireland. See paragraphs 20 and 21 of the Attorney General’s advice to the Prime Minister of 13 November 2019.

The question for any Prime Minister, whether they be Conservative, Labour, Liberal Democrat will be the same. Is there any alternative to the Withdrawal Agreement concluded by Prime Minister May? Absent any such alternative or agreement to the Withdrawal Agreement, the legal position is that there will be an abrupt exit from the EU at 23.00 on 29 March 2019 – with all the attendant chaos of trade disruption, shortages of food and medicines, lorry parks on the M20, chaos as to citizens’ rights.

Let us consider some of these alternatives.

– Norway plus. This cannot be negotiated now but could be on the table in the implementation period. It would require acceptance of freedom of movement of workers and continued financial contributions to the EU,  albeit at a lower level than the UK’s contributions as a member of the EU, and would constrain the UK’s ability to conclude trade deals with third party states. To quote the last words of Kenneth Williams ‘Oh, what’s the bloody point?’ We might as well remain in the EU.

–  Stay in the European Economic Area. We might argue that the UK remains a party to the European Economic Area Agreement on leaving the EU, but under article 126 this will have no effect. This provides: “The Agreement shall apply to the territories to which the Treaty establishing the European Economic Community is applied and under the conditions laid down in that Treaty, and to the territories of Iceland, the Principality of Liechtenstein and the Kingdom of Norway.” The Agreement would not apply in the territory of the UK. Furthermore, without a customs agreement there would still be the problem of the border in the Northern Ireland between the UK, a non-member state, and the Republic of Ireland, a member state.

– Revocation of the notice of withdrawal under article 50. The UK could stay in the EU either permanently or temporarily to buy time to renegotiate, although the latter option would seem to be ruled out by the caveat in the AG’s opinion that such withdrawal of the notice of withdrawal should not be ‘abusive’.

– Suspend the article 50 notice to allow more time for negotiation. Fine, if every other EU Member State agrees.

– Renegotiate the withdrawal agreement. The EU Member States have indicated that this will not happen. The most that seems likely is an insertion into the Framework Declaration of an intention to continue negotiating a trade agreement when the UK enters the backstop.  Maybe some encouraging words about maximum facilitation when it comes into existence. However, who knows, Prime Minister May, might be able to pull a unicorn out of the hat –  or Prime Minister Corbyn? This is what the Prime Minister has come back with today after her meeting with the EU>

“The EU made clear:

  • that it is their firm determination to work speedily on a future relationship or alternative arrangements which ensure no hard border by 31 December 2020 so that the backstop will not need to be triggered.
  • If the backstop was ever triggered, it would apply only temporarily and the EU would use its best endeavours to negotiate and conclude expeditiously a subsequent agreement that would replace the backstop.
  • That the EU stands ready to embark on preparations so that negotiations on the future partnership can start as soon as possible.

As formal conclusions, these commitments have legal status and therefore should be welcomed.”

– Run a second referendum. This would require agreement on the questions to be asked (three or two?) and on the voting system to be used (first past the post or single transferable vote or alternative vote?). Time is tight, as the old song goes, so an extension to article 50 would be required, but not too long otherwise there is the problem of the scheduled elections to the European Parliament on 23 May 2019.

 

Parliament has to act. If it fails to do so, we have the ‘Thelma and Louise’ Brexit of crashing out without an agreement with the EU, as surely as the sun will rise on 30 March 2019.

 

[1] Ireland /Northern Ireland Protocol. Annex Four. Article 2.

[2]  Ireland /Northern Ireland Protocol. Annex Four. Article 4.

The backstop and the 1969 Vienna Convention on the Law of Treaties.

Two pieces of good news for Prime Minister May yesterday. She survived the ’48 Crash’ which precipitated a vote of confidence in her by Conservative MPs – which she won convincingly. Ouseley J threw out the application for judicial review of the article 50 notification brought by Susan Wilson. However, the problem of the backstop still remains and the Prime Minister is now attempting to secure an amendment to the Draft Withdrawal Agreement from the EU on this issue.

This blog’s attention now turns to the public international law implications of the ‘backstop’ in the Northern Ireland Protocol. Sir Edward Leigh MP is of the view that the 1969 Vienna Convention on the Law of Treaties will enable the UK to terminate the backstop on the ground of a fundamental change of circumstances under article 62.

https://www.edwardleigh.org.uk/news/full-stop-backstop

This is disputed by https://policyexchange.org.uk/wp-content/uploads/…/How-to-Exit-the-Backstop.pdf which states:

“In international law, a fundamental change of circumstances is normally understood as relating to something external to the treaty. Moreover, the party invoking fundamental
change of circumstances must also show that the change “was not foreseen by the parties” (Article 62(1), VCLT). In this case, the possibility of the backstop becoming permanent is already foreseen and is indeed already causing concern. On the other hand, this foresight is also in tension with the stated intention that the Protocol is to apply only temporarily.”

It is possible that if a technically feasible system of maximum facilitation for frictionless border checks comes into existence, the backstop would be terminable without agreement with the EU under this article.

It would also be terminable under Article 60(1) of the VCLT  which provides:
“A material breach of a bilateral treaty by one of the parties entitles the other to invoke the breach as a ground for terminating the treaty or suspending its operation in whole or in part.”
Article 60(3)(b) of the VCLT provides that a material breach consists in “violation of a provision essential to the accomplishment of the object or purpose of the treaty”.  Article 2(1) of the Northern Ireland Protocol to the Draft Withdrawal Agreement provides for parties to use their “best endeavours”  to conclude “an agreement which supersedes this Protocol in whole or in part”. This obligation is fundamental to the object and purpose of the Protocol and a refusal by the EU to accept a maximum facilitation system could be regarded as a ‘material breach’.

 

Remedies for delivery without production of the bill of lading

A case in the CA of some interest today. Imagine carriers or forwarding agents have delivered goods to a buyer without getting payment for them. No point in suing the buyer in 99% of such cases: and often carriers and forwarding agents will be men of straw too (remember in addition that P&I clubs won’t sub up for this sort of thing). But had you thought of suing the rich man behind the buyer who sweet-talked the forwarding agent or carrier into letting the goods go without payment? You hadn’t? It’s actually a classic case, in most situations, of inducing breach of contract: a point confirmed by the Court of Appeal in Michael Fielding Wolff v Trinity Logistics [2018] EWCA Civ 2765, upholding Sara Cockerill QC at first instance. Happy hunting.

Ship arrest: no undertaking in damages exigible from arresting party

The Court of Appeal declined yesterday to upset the ship arrest apple-cart. In The Alkyon [2018] EWCA Civ 2760 it upheld the decision of the Admiralty Judge, Teare J, noted here on this blog, that a bank could hold an arrest over a mortgaged ship without having to give any undertaking to pay damages for loss of use should it turn out that its claim was ill-founded. The owners of the MV Alkyon, a 36,000 dwt bulker, had argued that there was no default justifying her arrest in Newcastle; that they could not afford to bail her; that her immobilisation by arrest would cause them big losses; and that it was only fair that if the bank was indeed wrong, it should carry the can for those losses.

Despite the fact that there is theoretically no restriction on the court’s discretion to release an arrested vessel (see CPR 61.8(4)(b)), Teare J disagreed; and the Court of Appeal agreed with him. Although there was much in common between ship arrest and freezing orders, where an undertaking in damages was emphatically the rule, for the court to demand such an undertaking in arrest cases would  cut across the idea that arrest was available as of right, and also the established principle that liability for wrongful arrest could not be imposed unless the claimant proved bad faith or possibly gross negligence. This was not something for the judiciary — barring possibly the Supreme Court — to do.

In the view of this blog, the Court of Appeal was quite right not to draw the analogy with freezing orders. For one thing not all arresters are plutocratic banks: think crewmen seeking wages or damages for injury on board, or for that matter suppliers of canned food and water for those crewmen to eat and drink. For another, the right to arrest is there for a purpose, namely to assure people that they will be paid by the owners of peripatetic pieces of maritime machinery: to allow a threat to arrest to be met with a threat to claim damages would not further this end. For a third, damages for arrest may well bear no proportion to the amount of the claim: the losses caused by the arrest of a large bulker or reefer would be likely to dwarf a straightforward $100,000 bunkers debt. And lastly, it’s all very well saying a single arrester ought to carry the can for immobilisation losses: but what if cautions against release then pile on? Which of the undeserving claimants should have to pay how much? Nice work for lawyers, maybe: less good news for shipping claimants who want to get on with their commercial lives.

Insurable Interest in Insurance- Adopting A Commercial Solution

Broadgrain Commodities Inc v. Continental Casualty Company [2017] ONSC 4721

Does a CIF seller still have an insurable interest in a cargo policy after the goods are delivered to the carrier (i.e. risk of loss or damage to the goods is transferred to the buyer under the CIF contract)? This was the main debate in the case before the Ontario Superior Court of Justice (Canadian Marine Insurance Act 1993 is similar to the unamended version of the UK Marine Insurance Act 1906).

Here,a cargo of 26 containers of sesame seeds were sold by the claimant (Broadgrain) on CIF basis and insured by the insurers under an open policy which intended to insure the claimant and its property as well as the property of others in respect of which the claimant had an obligation to insure under various contracts entered into during the insurance period. The cargo was loaded on board the carrying vessel in Nigeria in October. It was common ground that the risk had passed to the buyer at that stage. The full contract amount was paid by 12 December by the buyers. Under the sale contract, the title in the good was to pass upon payment and the buyer granted the seller a security interest in the cargo until all amounts had been paid. When the vessel arrived at its destination, Xingang, on 17 December, it was discovered the goods had been damaged during transit and the claimant sought indemnity under the insurance policy from the underwriters.                    

The insurers moved for a summary judgment to dismiss the action on two grounds: i)the claimant did not have “insurable interest” in the goods at the time of the loss; and ii) the claimant did not sustain any loss as, despite the damage to the goods, it was paid in  full by the buyer for the shipment in question.

On the first point, the insurers sought to rely on two Federal Court decisions(Green Forest Lumber Ltd v. General Security Insurance Co of Canada [1977] 2F.C. 351 (F.C.T.); aff’d [1978] 2 F.C. 773 (F.C.A), aff’d [1980] 1 S.C.R. 176 and Union Carbide Corp v. Fednav Ltd [1997] F.C.J.No. 665 (F.C.T)) which contained statements made in obiter to the effect that, where goods are shipped on CIF terms and the goods are loaded on board the ship, the seller no longer has an insurable interest and cannot claim under a policy of insurance. 

The court, rightly so, indicated that the Supreme Court of Canada in Kosmopoulosv. Constitution Insurance [1987] 1 SCR 2 has adopted a non-technical definition of “insurable interest” pointing out that any real interest of any kind in a marine adventure should qualify as an insurable interest. It was stressed that a contrary solution would act to the detriment of international trade. On that basis, it was held that in the present case even though the risk passed upon loading in October, and the title passed upon payment, the seller’s retention of security interest would qualify as an equitable relation to the adventure such as to give the seller an insurable interest that subsisted throughout the voyage.

However, judge’s finding on the insurable interest point was not adequate to secure victory for the claimant.  The summary judgment for insurers was granted on the second ground. Accordingly, it was held that the claimant had suffered no loss as payment had been made by the buyer in full and the assertion that the buyer had reduced payments on subsequent cargoes was dismissed for lack of evidence.

The case is a yet another illustration of the fact that when defining insurable interest, courts are taking a more liberal stance as advocated in various English judgments (e.g. The Moonacre [1992] 2 Lloyd’s rep 501; National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep 380 and The Martin P [2003] EWHC 3470 (Comm)) and not likely to follow the lead of Macaura v. Northern Assurance Co Ltd (1925) 21 LIL Rep 333 to insist that a legal or equitable relation must exist between the policy and the subject matter insured. It is safe, therefore, to say that courts are likely to find insurable interest in cases where they are convinced that the assured has not entered into the policy as an act of wager or is not attempting to make an illegitimate gain from the insurance transaction and as long as some kind of connection (even merely economic) between the insured property and the assured exists.             

More Lex Brexitaria. CJEU OKs AG’s opinion.

The Court of Justice has just announced its decision in Wightman. It confirms the opinion of the Attorney General published last week that the UK is free to withdraw its article 50 notice before 29 March 2019.

In today’s Press Release it is stated.

“In today’s judgment, the Full Court has ruled that, when a Member State has notified the
European Council of its intention to withdraw from the European Union, as the UK has
done, that Member State is free to revoke unilaterally that notification.
That possibility exists for as long as a withdrawal agreement concluded between the EU
and that Member State has not entered into force or, if no such agreement has been
concluded, for as long as the two-year period from the date of the notification of the
intention to withdraw from the EU, and any possible extension, has not expired.
The revocation must be decided following a democratic process in accordance with
national constitutional requirements. This unequivocal and unconditional decision must be communicated in writing to the European Council. Such a revocation confirms the EU membership of the Member State concerned under terms that are unchanged as regards its status as a Member State and brings the withdrawal procedure to an end.”

Another instalment in the Lex Brexitaria is expected later today in the judicial review application concerning article 50 in the Administrative Court which was heard last Friday.

 

In the light of the judgment, the current Prime Minister Mrs May has made  a statement at 15.30 in which she  announced a delay to tomorrow’s meaningful vote in the House of Commons on the Draft Withdrawal Agreement. The Prime Minister hopes to use this delay to address the concerns of MPs regarding the backstop. She could start by getting them to read paragraphs 20 and 21 of the Attorney General’s advice which points out that Northern Ireland will be in a more advantageous position with the EU than the rest of the UK in the event the UK enters the backstop.

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.