Today Arbitration Commentaries welcomes Nic Fletcher as its newest foreign correspondent. Nic will report for Arbitration Commentaries, from time to time, on UK law and practice developments. He is the Head of International Arbitration in the Litigation and Dispute Resolution team of Berwin Leighton Paisner, resident in the Firm’s London office. Nic is a member of the ICC Task Force on the New York Convention, is the rapporteur for England and Wales of the Institute for Transnational Arbitration, and is on the executive committee of the Foundation for International Arbitration Advocacy. Nic can be reached at email@example.com, and biographical information can be found on the Berwin Leighton Paisner website (www.blplaw.com).
In today’s post, Nic discusses the latest installment from the UK judiciary in the West Tankers anti-suit injunction saga, a ruling that US readers will regard as distinctly “pro-arbitration” – that an arbitral tribunal sitting in the UK is not prevented by European Law – even if a UK court is so constrained — either from enjoining a party to the arbitration from pursuing judicial proceedings abroad in breach of the arbitration clause, or from hearing a claim against that party for damages consisting of the costs of defending those foreign judicial proceedings.
The West Tankers saga continues. Seldom can one case have thrown up so many instalments and provided so many talking points for arbitration practitioners and European law specialists alike. Two recent English decisions, one of the Court of Appeal and one from the Commercial Court, have added to the complexity and ensured that the saga will continue to rumble on for a while yet.
Readers will recall that the dispute initially arose from a collision between a ship owned by West Tankers and a pier in Sicily owned by Erg Petroli S.p.A., which had chartered the vessel. Erg sought to recover its losses. It was insured and its insurers paid Erg up to the policy limits. In August 2000 Erg referred a claim for its uninsured losses to arbitration in London pursuant to the arbitration clause in the charterparty. The insurers then commenced court proceedings against West Tankers in Sicily, seeking to recover the sums paid to Erg, in reliance on their rights of subrogation under the Italian Civil Code.
West Tankers sought and obtained an anti-suit injunction from the Commercial Court in England restraining the insurers from pursuing their claim in Italy, on the basis that the Italian court action was in breach of the arbitration clause. The insurers objected and appealed directly to the House of Lords. The House of Lords referred to the European Court of Justice the question of whether the injunction was consistent with EU Council Regulation 44/2001, which lays down rules governing the jurisdiction of courts in EU member states.
In the meantime the arbitration continued, with the insurers declining to participate. The Tribunal granted declarations that the question of whether the insurers had become transferees of a bare right in delict or whether that right of action was only enforceable in arbitration was itself to be determined by arbitration and that the obligation to arbitrate was an inseparable component of the subject matter of the claim transferred to the insurers by subrogation. The Tribunal also ordered the insurers to refrain from taking further steps before the Italian courts – a ruling the insurers ignored.
In due course, the Advocate General to the ECJ issued her Opinion, in which she concluded that EU Regulation 44/2001 did preclude the courts of one member state (in this case the United Kingdom) from restraining a person from pursuing proceedings before the courts of another member state, which courts were first seised of the dispute, on the grounds that the court purporting to issue the restraining order considered the foreign judicial proceedings to be in breach of an arbitration agreement.
The Tribunal, which had been considering Erg’s claim for damages as well as West Tankers’ counterclaim, at that point decided that it had to hold over certain matters for decision, pending the final judgment of the ECJ (the Advocate General’s Opinion only being advisory). The Tribunal did however issue an award declaring that West Tankers was under no liability to Erg in respect of the collision which had set the whole chain of events in motion. The English Court of Appeal has now confirmed that, notwithstanding that that Award is simply declaratory, judgment may now be enforced in the terms of the Award.
On 10 February 2009, the ECJ handed down its decision, agreeing with the Advocate General (albeit on narrower grounds) and concluding that it was incompatible with Regulation 44/2001 for the Commercial Court to have granted an anti-suit injunction to prevent proceedings before the court in Sicily and that it was for the Italian court to rule on its own jurisdiction.
The House of Lords, having the answer to the question it had referred to the ECJ, therefore discharged the anti-suit injunction, but it confirmed the declarations issued by the Commercial Court that the claims raised in the Italian proceedings arose out of the charterparty and fell to be determined in London arbitration.
The arbitration Tribunal then proceeded to consider the claims it had held over. These included claims by West Tankers (a) that the insurers were liable to them in damages for the legal fees reasonably incurred by them in connection with the Italian proceedings and (b) that the insurers were liable to indemnify them in respect of any award made against West Tankers in the Italian proceedings greater than the liability of West Tankers as established in the arbitration.
By a majority of 2:1, the Tribunal concluded on 14 April 2011 that the answer to both those questions was negative. They considered that the principle of effective judicial protection under European Law was a free-standing right which operated to protect the right of the insurers under Article 5(3) of Regulation 44/2001 to sue a tortfeasor in the courts of the place where the harmful event occurred. The key question was whether that principle bound the Tribunal in the same way that it would bind an English Court, so as to proscribe its jurisdiction to award damages or an indemnity for a breach of the obligation to arbitrate. With evident reluctance, the Tribunal concluded that it did and that although Regulation 44/2001 does not apply to arbitration, EU Law would not allow an arbitral tribunal to ‘cross the divide’ and effectively punish a party for pursuing proceedings in Italy which the ECJ had expressly approved.
West Tankers was granted leave to appeal to the Commercial Court on the specific question of whether, by reason of EU Law, the Tribunal was indeed deprived of its jurisdiction to award equitable damages for breach of the obligation to arbitrate.
Mr Justice Flaux considered that the Tribunal had got it wrong – the Tribunal had, he considered, identified the underlying philosophy of the ECJ’s decision to be that the right to bring proceedings in the court first seised under the Regulation should take precedence not only over any proceedings (including proceedings related to arbitration) in another national court, but also over any proceedings before an arbitral tribunal. That could not be right. Mr. Justice Flaux opined, observing that the Advocate General had expressly recognised in her Opinion that an arbitral tribunal could reach a different decision to that issued by the Italian court, both as to the scope and effectiveness of the agreement to arbitrate and as to the overall merits. The insurers could not possibly argue therefore that the Advocate General’s philosophy was that the provisions of the Regulation could circumscribe the Tribunal in the jurisdiction it could exercise. Nor was there any qualitative difference between a decision of a tribunal on the merits which was inconsistent with any approach that the Italian court might adapt and a decision by the Tribunal to grant a declaration that the insurers should indemnify West Tankers in respect of any liability the Italian court might impose upon them. Even an award of damages for breach of the obligation to arbitrate would follow from inconsistent decisions and not be precluded by the Advocate General’s reasoning.
Nor did the Commercial Court consider that there was anything in the decision of the ECJ that required the Tribunal to decline jurisdiction to grant damages. The principle of effective judicial protection was simply not engaged in relation to arbitration proceedings, given that the Regulation has no application to arbitration. The grant of an anti-suit injunction by the courts of a member state is contrary to the mutual trust which member states accord to one another’s legal systems. Critically, however, there is no such wider principle of European Law which requires a private arbitral tribunal in one member state to repose mutual trust in any system of law other than that of the national court of the seat of the arbitration. The Tribunal in the present case was required to recognise some principle of mutual trust in respect of the English Commercial Court, as its own supervisory court, but not beyond.
Although this might have the effect of depriving the Italian court of its jurisdiction to consider the validity of the arbitration agreement, there was nothing in the ECJ’s decision to suggest that its reasoning applied to arbitral tribunals, and not just to national courts. Arbitration falls outside the Regulation and an arbitral tribunal is not bound to give effect to the principle of effective judicial protection.
The court further held that even if it was wrong on the obligation to give effect to the principle of effective judicial protection, an award of damages could still not constitute illegitimate interference. There was no legitimate distinction between an award of damages and a declaration of non-liability and the Advocate General had recognised the right of an arbitral tribunal to make an inconsistent award on the merits. Neither the Advocate General nor the ECJ itself contemplated that the Tribunal should decline jurisdiction altogether until the Italian court had ruled.
The Commercial Court is to be applauded for trying to unlock the process and allow further progress to be made in arbitral proceedings which were commenced some 11½ years ago. It is of course highly likely that the insurers will seek to appeal this decision, perhaps once again leapfrogging over the Court of Appeal to the UK Supreme Court directly, and a further reference of the involved issues of European law to the ECJ cannot be ruled out.
Regulation 44/2001 is currently the subject of discussion as to whether and how it should be amended. There is concern in some quarters that the arbitration exception is being emasculated. It is understood that the current state of play is that the UK and France would like to see the Regulation amended so that it is clear that the task of regulating the conduct of the arbitration and of assessing whether the dispute falls within the ambit of the arbitration clause is a matter solely for the national courts of the seat of the arbitration (a proposal advanced by the Heidelberg study commissioned by the European Commission in September 2007). In the present case, this would have meant the Commercial Court deciding whether the dispute was properly referable to arbitration, and the ‘Italian torpedo’ exemplified by the commencement of proceedings in Sicily would be a thing of the past. Other EU Member States have expressed different views. These range from the position that the Regulation should be left as it is in this regard, for fear that changes would cause more problems than they solve and would increase rather than reduce the number of parallel proceedings, to the suggestion that the arbitration exception should be removed from the Regulation entirely. If no change is made, however, the present uncertainty will continue. The Tribunal in the West Tankers arbitration will be free to issue an award of damages, with the potential that that will conflict with a decision of the Court in Sicily, if and when that is finally forthcoming. The English Commercial Court, as things stand, would give leave to enforce such an award as a judgment.
Given the present state of the law, if a party is seriously concerned that its opponent will seek to commence proceedings in another EU jurisdiction in breach of an arbitration clause, one solution would be to commence immediate proceedings in the national courts at the seat of the arbitration, seeking a declaration as to the arbitrability of the dispute. That court would be first seised, giving it primacy under Regulation 44/2001 and preventing the ‘torpedo’ from exploding elsewhere.