In the recent Commercial Court case of Shell Egypt West Manzala GmbH & anor v Dana Gas Egypt Ltd (formerly Centurion Petroleum Corporation) [2009] the Court held that a provision in an arbitration clause that ‘the decision of the arbitrators… shall be final, conclusive and binding’ was not sufficient to exclude the parties’ right of appeal to the court as set out in s69 of the Arbitration Act 1996 (the 1996 Act).
This article discusses the decision in Shell Egypt and the wider issues to consider when drafting and negotiating arbitration clauses, with reference to two recent decisions on the construction of competing jurisdiction clauses.
Shell Egypt: Facts
A dispute arose between Shell and Centurion concerning an agreement relating to two concessions for crude oil and gas exploration in the Nile Delta, Egypt. Under the agreement Shell was to acquire a 50% interest in the concessions.
The dispute was submitted to arbitration pursuant to a mandatory arbitration provision of the agreement. The clause provided for arbitration in London under the United Nations Commission on International Trade Law (UNCITRAL) Rules and governed by English law. It also stated that ‘the decision of the arbitrators… shall be final, conclusive and binding’ (emphasis added).
The tribunal made an award against Shell, rejecting all of its claims. Shell applied to the High Court for permission to appeal the award on a point of law pursuant to s69 of the 1996 Act. Centurion in turn cross-applied, arguing that the combination of the words ‘final, conclusive and binding’ showed that the parties had agreed in unequivocal terms that there would be no ability to appeal an award and, accordingly, that the Court had no jurisdiction to hear the appeal.
Section 69(1) provides:
‘Unless otherwise agreed by the parties, a party to arbitral proceedings may (upon notice to the other parties and to the tribunal) appeal to the court on a question of law arising out of an award made in the proceedings.’
It was not in dispute that s69 permits the parties to an arbitration agreement to exclude any right of appeal to the court under the section. The argument focused on whether the clause adopted by the parties did in fact exclude the right of appeal under s69.
parties’ submissions
Centurion submitted that the plain intent and meaning of the words ‘final, conclusive and binding’ was that any award should be final and binding on the parties, and conclude all matters in issue between them without further argument or recourse.
Referring to Essex County Council v Premier Recycling Ltd [2006], where Ramsay J considered the words ‘final and binding’ to be insufficient by themselves to amount to an exclusion of the right of appeal, Centurion submitted that where the word ‘conclusive’ was also used that plainly was intended to add to the words ‘final and binding’ and on its natural meaning made it clear that any right of appeal was excluded.
Shell referred to the fact that s58(1) of the 1996 Act provides that, unless otherwise agreed by the parties, an award made by a tribunal pursuant to an arbitration agreement was ‘final and binding’ on the parties, and that s58(2) expressly provides that this does not affect the right of a person to challenge the award in accordance with the provisions of Part 1 of the 1996 Act (including s69).
Use of the words ‘final and binding’ merely indicated that an award made by an arbitral tribunal should be res judicata between the parties. Accordingly, it only made sense for s69 to apply to an award that was final and binding.
Also, relying upon Essex County Council, where it was held that any agreement to exclude the effect of that section should be clear, Shell submitted that the word ‘conclusive’ added nothing and was synonymous to the phrase ‘final and binding’. The addition of such words did not achieve the level of clarity that would be needed to exclude the parties’ statutory rights pursuant to s69, such as those that are to be found in the International Chamber of Commerce (ICC) and London Court of International Arbitration Rules (LCIA).
decision
The Court agreed with Shell and held that the words ‘final, conclusive and binding’, within the context of the arbitration agreement, could not be construed as an agreement excluding the parties’ right of appeal.
The words ‘final and binding’ had long been used in the context of arbitration to convey that an award is res judicata between the parties, such that the parties were precluded from raising in later disputes questions of fact or law that had already been decided by the award.
Furthermore, for the addition of the word ‘conclusive’ to amount to an exclusion of the parties’ statutory right of appeal on points of law would ‘require the word conclusive to work too hard’. Shell was given leave to appeal the questions of law arising out of the award.
Implications
While the meaning or effect of a particular clause will always depend on the context, it is unlikely that the phrase ‘final, conclusive and binding’ will, of itself, be sufficiently clear to exclude section 69 rights of appeal. Clear words are required to exclude rights of appeal but it is not, however, necessary to expressly refer to s69. Exclusions are either explicitly set out in the arbitration agreement or incorporated by reference to institutional rules (Sukuman Ltd v The Commonwealth Secretariat [2006]).
For examples of sufficiently clear wording parties may wish to consider wording such as that used by the ICC (Art 28(6)) and LCIA (Art 26.9), as set out below:
The ICC Rules (Art 28(6)) state that:
‘Every award shall be binding on the parties. By submitting the dispute to arbitration under these Rules, the parties undertake to carry out any award without delay and shall be deemed to have waived their right to any form of recourse in so far as such waiver can validly be made.’
The LCIA Rules (Art 26.9) state that:
‘All awards shall be final and binding on the parties. By agreeing to arbitration under these Rules, the parties undertake to carry out any award immediately and without any delay…; and the parties also waive irrevocably their right to any form of appeal, review or recourse to any state court or other judicial authority, in so far as such waiver may be validly made.’
Section 69: to preserve or exclude the right of appeal?
An agreement to arbitrate does not of itself involve a decision to wholly exclude the court from involvement in the resolution of a dispute. Section 69 of the 1996 Act preserves the parties’ right of appeal to the court on a point of law unless the parties agree otherwise. This can be beneficial. The court’s power to review an arbitration decision protects against the risk that arbitration awards might otherwise be free from appeal or judicial review. It also provides some protection where the same or similar points of law come before different arbitral tribunals and inconsistent decisions are rendered.
Equally, appeals to the court pursuant to s69 are public and parties may often have elected arbitration over litigation to benefit from the confidentiality that generally shrouds arbitration proceedings. There might also be a risk that an appeal to the court could be deployed by one party as a tactic, for example to delay satisfaction of an award.
When considering s69 it is important to balance the need for finality of commercial disputes against preserving the parties’ ability to appeal to the Court if necessary on a significant point of law.
Drafting and negotiating arbitration agreements
Shell Egypt demonstrates that it is essential to focus on the arbitration clause in some detail at the negotiation stage. The arbitration clause is often perceived as falling within the ‘boiler plate’, with little regard afforded to tailoring it to the individual parties and their requirements. Too often this results in a protracted dispute over the interpretation of the arbitration clause itself, resulting in delay and expensive satellite litigation.
When drafting it is important to balance the ability to retain flexibility once a dispute has arisen against the need for a clearly defined and effective clause. It will almost always be easier for the parties to agree an arbitration clause when they are not in dispute. By the time a dispute has arisen the parties’ relationship may have deteriorated to the extent that trying to agree on matters, such as the number of arbitrators, becomes a tactical battle that can seriously hinder progress.
Essential points to consider when drafting arbitration clauses
An arbitration clause must adhere to the same rules as any commercial clause and be both clear and certain. To the extent that arbitration forms part of an escalation of the dispute resolution provisions in the agreement, a clear point must be defined when arbitration can be initiated. Specific reference should be made to:
- the seat of the arbitration;
- whether institutional rules are to apply;
- the number of arbitrators; and
- the language of the arbitration.
Simplicity often gives rise to the most effective clause, provided the required components are satisfied. A long or complex clause that tries to plan for every eventuality in advance is likely to result in an unworkable clause that is subject to dispute. Model clauses, such as those set out in the LCIA, ICC or UNCITRAL Rules have been tried and tested and offer a good starting point. Thereafter they will need to be amended to focus on the particular requirements of the parties. For example, if you are using the rules of the LCIA or ICC and the parties want to include section 69 rights of appeal you will need to do so expressly. If the seat of the arbitration is to be outside of England, it is important to check whether the law applicable to the seat imposes any requirements on the form of the arbitration agreement. Local advice should be taken.
Finally, it is important to ensure in advance that an award rendered by the tribunal will be enforceable. Consideration must be given to whether the country where the award will most likely be enforced recognises and enforces arbitral awards.
Complex arbitration and jurisdiction agreements
Complex clauses, including hybrid, multi-tiered, multi-party and multi-contract relationships, require further consideration. Multi-contract and multi-party situations are discussed below.
Multi–contract relationships
UBS AG & anor v HSH Nordbank AG [2009] and Deutsche Bank AG v Sebastian Holdings Inc [2009] highlight that where parties have entered into multiple contracts care must be taken to ensure that the jurisdiction clauses in each agreement work together.
In UBS and Deutsche Bank the agreements under scrutiny by the court contained conflicting clauses, comprising of arbitration, English-exclusive and non-exclusive jurisdiction, and non-exclusive New York jurisdiction clauses. This resulted in simultaneous court proceedings in England and New York with the parties arguing before the English courts, which was the correct forum for their dispute.
In UBS the court held that whether a jurisdiction clause applies to a dispute is a matter of construction. Where numerous jurisdiction provisions overlap: ‘the parties must be presumed to be acting commercially, and not to intend that similar claims should be the subject of inconsistent jurisdiction clauses’ (reflecting the reasoning in Fiona Trust Holding Corp & ors v Privalov [2007]). The court identified the contract to which the claim was most closely related and applied the dispute resolution clause in that contract.
Applying UBS, the court in Deutsche (where the parties’ contractual relationship had developed over time) looked to the initially agreed position and then considered chronologically whether the subsequent clauses had altered this. The court held that the jurisdiction clauses were not inconsistent because the parties had contemplated the possibility of parallel proceedings.
Both cases demonstrate the practical importance of clear drafting of arbitration and jurisdiction clauses to avoid costly drawn out litigation on the correct dispute resolution forum.
Multi-party relationships
Where a contract has several parties, or several contracts with different parties inter-relate, it is important to provide for equal treatment of the parties. A mechanism for joinder of third parties to arbitration and consolidation of separate arbitral proceedings should also be considered and included as appropriate to avoid inconsistent awards or inconsistent fora for the resolution of related disputes.
Summary
Disputes are generally better avoided or settled before formal dispute resolution proceedings. However, where a formal mechanism cannot be avoided, efficient resolution of the dispute is essential. This can only be achieved through careful focus at negotiation to dispute resolution provisions. ‘Boiler plate’ dispute resolution provisions are a trap for the unwary. It is key that these clauses are tailored to the individual parties, and their commercial requirements.
By Anna Maxwell, partner, and Davina Watson, associate (practice development lawyer), Bond Pearce LLP.
E-mail: anna.maxwell@bondpearce.com;
Deutsche Bank AG v Sebastian Holdings Inc [2009] EWHC 2132 (Comm)
Essex County Council v Premier Recycling Ltd [2006] EWHC 3594 (TCC)
Fiona Trust Holding Corp & ors v Privalov & ors [2007] EWHC 1217 (Comm)
Sukuman Ltd v The Commonwealth Secretariat [2006] EWHC 304 (Comm)
UBS AG & anor v HSH Nordbank AG [2009] EWCA Civ 585
In these complex relationships more detailed arbitration clauses may be required, particularly when considering consolidation and joinder issues. However, these should not be overly long or complex. When drafting these clauses further points to consider include:
- Do jurisdiction clauses in different agreements contradict each other?
- Is it clear what clause would cover a particular dispute?
- Having one ‘umbrella’ arbitration agreement that all parties sign, each contract referring to a global arbitration agreement, or including substantially identical jurisdiction clauses in each contract.
- Whether consolidation provisions are required to avoid multiple proceedings and inconsistent decisions.
- Whether joinder provisions are required to enable third parties to be joined to, or to intervene in, an existing arbitration. If so, time limits for third-party intervention should be considered to avoid delay.
Every arbitration clause should include the following:
- clear agreement to arbitrate disputes;
- seat of the arbitration;
- number of arbitrators, appointment, replacement and default provisions (unless institutional rules apply);
- language of the proceedings; and
- arbitral rules, if any, that are to apply to the arbitration.
