Mediation September 2008

Volume 8 . Number 8
The European Union Directive
On 21 May 2008, the European Union adopted Directive 2008/52/EC of the 1 Mediation
European Parliament and of the Council on certain aspects of mediation in civil and The European Union
commercial matters.This measure forms a part of the programme for the free movement of Directive
persons within the EU, to be fostered by promoting and simplifying access to justice.
3 Anti-arbitration
Recital 6 to the Directive identifies mediation as a cost-effective and quick method of
resolving disputes in civil and commercial matters, producing settlements more likely to be injunctions
complied with voluntarily and allowing the parties to maintain an amicable relationship. Jurisdiction and discretion of
It is to be implemented by member states (other than Denmark, which is exempted, art the English courts
1.3) by 11 May 2001 (art 12).
6 Jurisdiction
Scope of the Directive Validity of the arbitration
The objective of the Directive ‘is to facilitate access to alternative dispute clause
resolution and to promote the amicable settlement of disputes by encouraging
the use of mediation and by ensuring a balanced relationship between mediation 8 The law applicable to
and judicial proceedings’ (art 1.1). Its terms are confined to cross-border arbitration proceedings
disputes, ie, those where, at the time mediation is agreed, required, invited or Significance of the seat
ordered, the parties are domiciled or habitually resident in two different member
states (arts 1.2 and 2.2), although member states are free to extend its terms to
purely domestic disputes.
Mediation is defined as ‘a structured process, however named or referred to,
whereby two or more parties to a dispute attempt by themselves, on a voluntary
basis, to reach an agreement on the settlement of their dispute with the assistance
of a mediator.This process may be initiated by the parties or suggested or ordered
by a court or prescribed by the law of a Member State. It includes mediation
conducted by a judge who is not responsible for any judicial proceedings
concerning the dispute in question. It excludes attempts made by the court or the
judge seised to settle a dispute in the course of judicial proceedings concerning the
dispute in question’ (art 3(a)). Recital 9 contemplates various different forms of EDITOR
Professor R Merkin, LLB, LLM
mediation, including online mediation. Lloyd’s Law Reports
A mediator is ‘any third person who is asked to conduct a mediation in an Professor of Commercial Law
Southampton University
effective, impartial and competent way, regardless of the denomination or Consultant, Barlow, Lyde & Gilbert
profession of that third person in the member state concerned and of the way in
which the third person has been appointed or requested to conduct the mediation’
art 3(b)). In order to ensure the quality of mediation, member states are to
encourage development of voluntary codes of conduct by mediators and providers
of mediation services, and are also to encourage the training of mediators (art 4).
Recital 12 contemplates that the process may be conducted by a judge.
Arbitration Law Monthly • September 2008 • Mediation

Encouraging the use Member states are to encourage the promulgation of information on mediation, including
of mediation how to conduct mediators and organisations providing mediation services (art 9). In the
absence of any voluntary agreement to mediate,‘a court before which an action is brought
may, when appropriate and having regard to all the circumstances of the case, invite the
parties to use mediation in order to settle the dispute.The court may also invite the parties
to attend an information session on the use of mediation if such sessions are held and are
easily available’ (art 5.1).The Directive permits national legislation under which mediation
is compulsory or subject to incentives or sanctions before or after the judicial proceedings
have started, ‘provided that such legislation does not prevent the parties from exercising
their right of access to the judicial system’ (art 5.2). Ultimately, therefore, there has to be a
right of recourse to the courts so that a court cannot refuse to hear an action if mediation
has been refused, and by recital 13 the court may impose time limits upon the mediation
process. It would seem that the English principle that costs orders may, in limited cases, be
modified to take account of the use or otherwise of mediation is preserved by art 5.2.

Settlements In English law, a settlement agreement following a successful mediation is legally binding in
the same way as any other contract. Specific provision is made for this matter by art 6, under
which domestic law is, subject to the rules of the general law of the member state in question
(eg, in family law matters), to permit the parties to request that the content of a written
settlement agreement is to be made enforceable (art 6.1). The parties may instead obtain a
consent judgment embodying the settlement (art 6.2). In either case, the resulting agreement
is to be enforceable within the EU, under Council Regulation 44/2001.

Confidentiality An important aspect of pre-trial or pre-arbitration mediation is the need to maintain the
confidentiality of what has gone on in the mediation: concessions and the like which may
have been made in the interests of reaching a settlement are clearly to be disregarded in the
later proceedings. Article 7.1 thus provides that member states are required:

‘ ... to ensure that, unless the parties agree otherwise, neither mediators nor those
involved in the administration of the mediation process shall be compelled to give
evidence in civil and commercial judicial proceedings or arbitration regarding
information arising out of or in connection with a mediation process, except:

(a) where this is necessary for overriding considerations of public policy of the
Member State concerned, in particular when required to ensure the
protection of the best interests of children or to prevent harm to the
physical or psychological integrity of a person; or

(b) where disclosure of the content of the agreement resulting from mediation
is necessary in order to implement or enforce that agreement.’

Stricter confidentiality rules are permitted to be adopted by member states, by art 7.2.

Limitation of actions Prolonged mediation and negotiation may lead to the risk of the expiry of the claimant’s
limitation period for making a claim against the defendant.That risk is particularly acute where
the limitation period is shorter than the present six-year statutory period by reason of some
agreement between the parties, or as the result of the operation of an international convention:
the one-year limitation period for cargo claims under the Hague-Visby Rules is the obvious
example. In practice, the matter is dealt with by standstill agreement, but problems may arise
if no such agreement is made and the limitation period drifts past without the claimant
realising that the defendant intended to rely upon it despite continuing negotiations.

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 Anti-arbitration injunctions . September 2008 . Arbitration Law Monthly

Article 8.1 provides that:

‘Member States shall ensure that parties who choose mediation in an attempt to settle
a dispute are not subsequently prevented from initiating judicial proceedings or
arbitration in relation to that dispute by the expiry of limitation or prescription periods
during the mediation process.’

Under art 8.2, however, this is without prejudice to the operation of limitation provisions
in international agreements. The wording of 8.1 appears to contemplate that there is to
be legislation waiving the limitation period. Article 8.2 preserves the limitation periods
in international conventions and the like, so to that extent standstill agreements will
remain necessary.

Anti-arbitration injunctions
Jurisdiction and discretion of the English courts
In a series of recent cases, the English courts have recognised that, in exceptional circumstances, it may
be appropriate to restrain a person by injunction from continuing arbitration proceedings if to do so
would be vexatious, oppressive or unconscionable. At first sight it might be thought that this should be
a matter for the arbitrators themselves and not the courts, although there are exceptional circumstances
where judicial intervention may be appropriate. Republic of Kazakhstan v Istil Group Inc (No 3)
[2007] EWHC 2729 (Comm) illustrates that one such case is where the person to be restrained is
seeking to reopen issues resolved in earlier proceedings.

Kazakhstan: the facts This much-litigated action has in the past featured in the pages of Arbitration Law Monthly.
The background must nevertheless be recapped here. Between June 1994 and July 1995,
Metalsrussia Corp Ltd, later to become Istil, entered into three contracts for the purchase of
rolled steel, one with Sauda and two with Oltex. Both Sauda and Oltex were asserted by
Istil to have been the agents of a steel mill, Karmet, in Kazakhstan. All three contracts
contained a London arbitration clause requiring disputes to be resolved in London under
the rules of the London Court of International Arbitration.
No steel was ever delivered. In October 1995, in the light of severe financial difficulties
encountered by Karmet, the claimant, ROK, passed a decree that suspended all exports of raw
materials. Metalsrussia commenced judicial proceedings against ROK in Paris in November
1997.The claim was based on the assertion that ROK was not a party to the original contracts
(as that argument would have engaged the arbitration clause) but rather that ROK was
responsible for Karmet’s debts because Karmet was an emanation of ROK. ROK pleaded by
way of defence that the Paris court had no jurisdiction, that the arbitration clause was binding
on ROK, and that ROK was entitled to sovereign immunity.The Paris court decided that it
did not possess jurisdiction and ordered the parties to litigate before a court of competent
jurisdiction in Kazakhstan. Metalsrussia appealed, and on 1 March 2000, the Paris Court of
Appeal, in dismissing the appeal, ruled that the lower court had, by directing the parties to
litigate in Kazakhstan, decided that the arbitration clauses were not binding on ROK.

Subsequent proceedings Metalsrussia did not, in fact, do as directed by the Paris court, but instead commenced an
arbitration against ROK in London. ROK disputed the jurisdiction of the arbitrators, and
by a partial award dated 15 January 2003, the arbitrators held that they did possess
jurisdiction over ROK: the arbitrators held that they were not estopped by the decision

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Arbitration Law Monthly • June 2008 • Anti-arbitration injunctions

of the Paris court because the ruling on the arbitration clause had not been essential to its
decision. That award was nevertheless problematic, because by the time it was handed
down Metalsrussia had merged into Istil and had ceased to exist. The award in favour of
Metalsrussia was thus in favour of a person who did not exist.
On 11 June 2004, the arbitrators issued a final award in which they ruled that the earlier
partial award on jurisdiction was a nullity by reason of the merger, so that the point had to
be revisited.The arbitrators nevertheless concluded that Istil was entitled to be substituted
as the claimant in the arbitration, and also held that ROK was liable to Istil in the sum of
US$5,937,213.69 plus interest, and costs of US$202,159.94.
On 13 July 2004, ROK commenced an action in England to set aside the award under
s67 of the Arbitration Act 1996, on the ground that the arbitrators had not possessed
jurisdiction to make their award. The application relied on the assertions that neither
ROK nor Istil had been a party to the arbitration clauses. As to Istil’s position, ROK
argued that the ruling of the French court gave rise to an issue estoppel and precluded
Istil from going to arbitration. Istil’s response was that ROK could not challenge the final
award because it had not sought to challenge the earlier partial award in favour of
jurisdiction: Istil’s argument was that the effect of s73(2) of the 1996 Act, which prevents
a party to the arbitration proceedings from raising a jurisdictional challenge unless he has
objected to jurisdiction at the first available opportunity. The dispute came before Mr
Justice David Steel in Republic of Kazakhstan v Istil Group Inc (No 2) [2006] EWHC 448
(Comm), and he conducted a complete rehearing of the jurisdictional issue. The learned
judge held that ROK was not a party to the contracts with Istil, that Istil was estopped by
the ruling in the French action from arguing that ROK was a party to the arbitration
proceedings, and that ROK had not at any stage entered into an ad hoc agreement to
allow the dispute to be arbitrated. In the result, therefore, the final award was set aside for
want of jurisdiction. Permission to appeal against that decision was refused by David Steel
J, and the Court of Appeal subsequently held, [2007] EWCA Civ 471, that it had no
jurisdiction to give permission to appeal once this had been refused by the trial judge.

The present proceedings This curious sequence of events gave Istil an unexpected opportunity. It will be
remembered that the final award declared the partial award in favour of jurisdiction over
ROK to be null and void. David Steel J had in turn overturned the final award, however,
and that allowed Istil to contend that the partial award had in some way become
reinstated. Thus, on 2 May 2007, Istil wrote to the arbitrators pointing out to them that
the partial award was perfectly valid and could no longer be challenged, and accordingly
that the arbitrators possessed jurisdiction over ROK. Istil further pointed out that the
effect of the English proceedings was to confirm that the merger was effective to confer
upon Istil the rights under the original contracts. Istil thus asked the arbitrators to proceed
to an award on liability and also for the costs of the partial award.
ROK’s response was to seek an injunction against Istil preventing it from pursuing its
claims in the arbitration. Istil, in defending its position, argued that the partial award had
become binding long before the publication of the final award: the award was binding
under s58 of the 1996 Act and ROK had lost the right to object to it under s73. It was
accordingly not open to the arbitrators in their final award to overturn the partial award,
but in any event the final award had itself been overturned and was of no effect.With the
removal of the final award, ROK had no ground for arguing that the partial award was
invalid, and, although there were comments to that effect in the judgment of Lord Justice
Longmore, those comments were not material to the decision and in any event were
wrong. Finally, Istil claimed that, following the partial award, the parties had entered into
an ad hoc agreement to submit the merits of their dispute to the arbitrators so that no
question of jurisdiction could arise in the future.

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 Anti-arbitration injunctions . September 2008 . Arbitration Law Monthly

The ruling Mr Justice Tomlinson rejected Istil’s arguments and held that the effect of David Steel J’s
judgment, and the Court of Appeal’s subsequent refusal to give permission to appeal, was
that the partial award itself was of no effect.There were a number of separate points made
by Tomlinson J. First, there was no evidence of any ad hoc agreement between the parties
in the wake of the partial award, that the merits of the dispute would be submitted to the
arbitrators. Further, the ruling of David Steel J that the arbitrators did not have jurisdiction
was incompatible with the existence of any such agreement: given that the point had not
been argued before David Steel J, Istil could not argue it at the present stage. Second, it was
clear from the judgment of David Steel J that the effect of the annulment of the final award
on the partial award was central to his decision. The learned judge had ruled that ROK’s
failure to challenge the partial award did not remove its right to challenge the final award
by reason of the waiver principle in s73(2), and that the arbitrators had determined to
revisit the partial award by reason of the stances of the parties in their arguments after the
partial award had been given: their decision to do so may have amounted to a procedural
irregularity under s68, but no attempt had been made to challenge that decision and it was
binding on the parties.Third, the challenge by ROK to the final award under s67 amounted
to a complete rehearing of all jurisdictional issues between the parties, so that the partial
award had been overtaken by events: David Steel J’s decision implicitly removed the right
of Istil to rely upon the partial award.
All of that meant that the partial award could no longer be relied upon. Tomlinson J
declined to consider whether David Steel J had been correct, although he noted that an
application under s67 that considered the jurisdiction of the arbitrators related to their
power to make any award and not simply the final award. Had the arbitrators not themselves
set aside their partial award, any subsequent challenge to the final award could have been
accompanied by an application under s79 to challenge the partial award out of time, an
application which Tomlinson J would have regarded as ‘irresistible’.

The appropriate relief Tomlinson J held that it was appropriate in the circumstances to grant an injunction
against Istil preventing it from proceeding with the arbitration. The learned judge was
unclear whether he possessed jurisdiction under the 1996 Act to grant an injunction,
noting that s1(c) precluded intervention unless otherwise expressly permitted by the Act
but doubting whether the circumstances fell within the Act at all. In the event, however,
Istil conceded that the court did possess jurisdiction to grant an injunction under its
general powers in s37 of the Supreme Court Act 1981, a principle confirmed by Intermet
FZCO v Ansol Ltd [2007] EWHC 226 (Comm), Elektrim SA v Vivendi Universal SA (No
2) [2007] 2 Lloyd’s Rep 8, J Jarvis & Sons Ltd v Blue Circle Dartford Estates Ltd [2007]
EWHC 1262 (TCC) (Jackson J), Albon v Naza Motor Trading Sdn Bhd [2007] EWHC 1879
(Ch) affirmed [2007] EWCA Civ 1124, Cetelem SA v Roust Holdings Ltd [2005] 2 Lloyd’s
Rep 494 and Weissfisch v Julius [2006] 1 Lloyd’s Rep 716.
On the merits of the case, Tomlinson J recognised that the effect of the decision of the
House of Lords in Fiona Trust and Holding Corporation v Privalov [2007] UKHL 40 was that
jurisdictional matters should normally go to the arbitrators in the first instance, but held that
the present circumstances were different in that there had been a successful challenge to a
jurisdictional ruling and there was, in effect, an attempt to reopen an arbitration after a court
ruling that the arbitrators did not possess the relevant jurisdiction.While it could be left to
the arbitrators to strike out the claim, it would be invidious to do so given that it was clear
that no jurisdiction existed.The proceedings by Istil were thus to be regarded as oppressive,
vexatious and unconscionable, and an injunction was the appropriate remedy.

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Arbitration Law Monthly • September 2008 • Jurisdiction

Jurisdiction
Validity of the arbitration clause
After much uncertainty, it is now settled law that if there is a challenge to the validity of the substantive
contract between the parties, the arbitration clause survives such a challenge and the arbitrators are free
to determine the validity or otherwise of the contract. It is only where there is an independent challenge
to the arbitration clause that the court itself is empowered to step in.The point is made yet again by
Mr Justice Tomlinson in El Nasharty v J Sainsbury plc (No 2) [2007] EWHC 2618 (Comm),
where the assertion that the main agreement was tainted by duress was held not to affect the arbitration
clause contained in it, so that, in accordance with s9 of the Arbitration Act 1996, a stay of judicial
proceedings asserting duress was all but inevitable.

El Nasharty: the facts In 1999, the parties entered into four agreements under which EN was to transfer to JS
a majority shareholding in a company, Edge, which was effectively controlled by EN.
Under the agreements, all disputes were to be referred to arbitration in Paris under the
rules of the International Chamber of Commerce (ICC). Disappointingly, Edge did not
flourish under JS’s management. In February 2001, JS entered into an agreement with
EN for the purchase of the remaining shares in Edge, although that agreement was not
carried into effect. On 8 April 2001, JS sold its shareholding in Edge back to EN and
also transferred back to EN all management functions in Edge. From that point onwards,
JS had no further interest in Edge. The 2001 agreement was governed by English
law. The parties agreed to submit to the jurisdiction of the English courts and the
Egyptian courts (at the discretion of JS), as regards any claim by JS against EN in respect
of disputes relating to the ‘further purchase payment’ to be made under the 2001
agreement, but any other dispute was to go to arbitration in the same manner as under
the original 1999 agreements.
EN asserted that the April 2001 agreement had been entered into by him under duress,
in that JS had threatened to liquidate Edge and to dismiss all 5,000 of its employees and
that EN had been ‘requested’ by the Egyptian Government to repurchase from JS his
interest in Edge failing which he might be subjected to one or other form of penalty. In
the event, EN was declared bankrupt in Egypt in February 2003 and Edge was wound
up in December 2003.

The proceedings Arbitration proceedings were commenced by JS against EN in September 2003, seeking
damages for breaches of warranties in the 1999 agreements, and the parties agreed to
transfer the seat of the arbitration to London. EN counterclaimed in reliance on the 2001
agreement, and also asserted that that agreement had been induced by misrepresentation
by JS as to the value of Edge or that the agreement was vitiated by mistake, in that EN
had not appreciated that Edge was close to insolvency. No mention of duress was made
at that stage: that allegation was not made until September 2004. On 1 April 2005, the
arbitrators ruled that EN was not entitled to be a party to the arbitration because his
rights had passed to his trustee in bankruptcy in Egypt, and, in December 2005, the
trustee indicated that he would be participating in the arbitration in substitution for EN.
Following a decision by the ICC, however, to require advances on costs, so that the
trustee was to pay US$740,000 up front, it became clear that the trustee would not
appear: the counterclaims were thus treated as withdrawn by the ICC in directions dated
22 February 2006.The trustee nevertheless maintained the mistake and duress arguments
as defences to JS’s claim in the arbitration. In December 2006, JS made it clear that it was
not proceeding with its claims in the arbitration as it had by then become apparent that
the trustee would not be appearing.

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 Jurisdiction . September 2008 . Arbitration Law Monthly

In the light of these developments, EN commenced his own proceedings in England

against JS. EN asserted that the 2001 share sale agreement was voidable, although it was
not apparent whether EN was also claiming that the agreement had been avoided. JS’s
response was to apply for a stay of the action under s9 of the Arbitration Act 1996, on the
ground that there was a valid arbitration clause. Indeed, there had been arbitration
proceedings even though they were no longer being pursued. EN argued that the
arbitration clause in the 2001 agreement was not binding on him. EN’s approach was that
the 2001 agreement had been the result of duress so that the agreement itself was not
binding and the arbitration clause in it was ‘inoperative’ within the meaning of s9(4) of
the 1996 Act, so that the court was empowered to refuse a stay. EN also pleaded the right
to a full and fair hearing in a court conferred by art 6 of the European Convention on
Human Rights (ECHR), in that if the 2001 agreement was the result of duress then it
could not be said that EN had validly waived his right to a full and fair judicial hearing.
The argument was supported by the consideration that the cost to him of participating in
an ICC arbitration was far greater than participating in a Commercial Court action,
particularly because the ICC was demanding advances on costs.

The ruling Tomlinson J held that the proceedings had to be stayed. It was not disputed that the
arbitration clause, if it was valid, by its terms applied to the dispute between the parties,
so the question was how its validity was to be determined. Tomlinson J turned to the
principle of separability set out in s7 of the 1996 Act, under which an arbitration clause
is distinct from the main contract to which it relates. It was decided by the Court of
Appeal in Stretford v Football Association Ltd [2007] 2 Lloyd’s Rep 31 that duress, mistake
or misrepresentation is capable of undermining an arbitration clause and preventing it
from operating as waiver of rights under art 6 of the ECHR, but the duress must relate
to the arbitration clause itself and not to the agreement to which it relates.The mere fact
that the main contract was attacked did not, therefore, necessarily amount to an
independent attack on the arbitration clause.The question in every case was whether the
alleged invalidity extended to the arbitration clause. As the court pointed out, the
argument could not survive the ruling of the House of Lords in Fiona Trust Holding
Corporation v Privalov [2007] UKHL 40.
What was required to render the arbitration clause inoperative was, therefore, proof
that the arbitration clause itself had itself been imposed on EN by duress.That could not
be shown.The arbitration clause had been the result of negotiations between the parties’
solicitors in London, and, while there may have been duress in respect of the main
agreement, that did not extend to the arbitration clause. Even if that was wrong,
Tomlinson J held that EN had waived his right to challenge the arbitration clause on the
ground of duress, in that, although the JS had commenced its arbitration under the 1999
agreements, EN had counterclaimed by praying in aid the 2001 agreement, so EN
himself had himself accepted the arbitrators’ jurisdiction over disputes arising under that
agreement. The fact that EN was subsequently held not to be a party to the arbitration
by reason of his bankruptcy did not in any way preclude a finding of waiver.

The ICC’s costs order The final matter was whether the arbitration clause had been rendered inoperative by
reason of the ICC’s imposition of a requirement for costs to be paid in advance. It was
common ground that the decision in Paczy v Haendler and Natermann [1981] 1 Lloyds
Rep 302 was authority for the proposition that an arbitration clause was not inoperative,
simply because one party could not meet his financial obligations under it. EN sought to
rely in the alternative on the right to a fair hearing conferred by art 6 of the ECHR,
however.Tomlinson J rejected this suggestion.The learned judge pointed out that a party
who agreed to go to arbitration had no access to public funding, and it was a feature of

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Arbitration Law Monthly • September 2008 • The law applicable to arbitration proceedings

arbitration that arbitrators were entitled to demand security for payment of their fees and
expenses.The ICC Rules so provided. By agreeing to go to arbitration there was a waiver
of art 6 rights, as a matter of contract EN was required to pay the costs, and there was
nothing inconsistent between art 6 and the contract, given that the ICC Rules were
proportionate and appropriate.

The law applicable to

arbitration proceedings
Significance of the seat
In C v D [2007] EWCA Civ 1282 an application was made to the English court for an anti-
suit injunction to restrain the losing party to an arbitration conducted under the Arbitration Act
1996 from challenging the award in New York on the basis that New York law was the law
applicable to the substantive agreement between the parties. Mr Justice Cooke, at first instance,
[2007] EWHC 1541 (Comm), in granting the injunction, analysed the relationship between the
curial law, the law applicable to the procedure, the law applicable to the substantive agreement, the
law applicable to the arbitration clause and the law applicable to the agreement to submit the dispute
to arbitration.The reasoning was approved by the Court of Appeal. What emerges from the decision
is the key significance of the seat.

C v D: contractual The defendants, insurers incorporated in the US but with a branch in England, issued a
provisions policy to the claimant, also a US corporation. The policy was a claims made liability
policy on the Bermuda Form, but governed by the law of New York.The policy provided
indemnity for the assured and its subsidiaries, affiliates and associates, for personal injury
liabilities arising from one occurrence up to US$100m subject to a deductible of
US$190m. The arbitration clause in the policy stated that any dispute arising under the
policy would be resolved in England under the Arbitration Act 1950. Each party was to
appoint an arbitrator, and the two were to appoint a third, any default being remedied by
the English courts, although in the event of default the English court could make an
appointment. The arbitrators were required to construe:

‘ ... the provisions, stipulations, exclusions and conditions of this policy … in an

evenhanded fashion as between the Insured and the Company; without limitation,
where the language of this policy is deemed to be ambiguous or otherwise unclear, the
issue shall be resolved in the manner most consistent with the relevant provisions,
stipulations, exclusions and conditions [without regard to authorship of the language,
without any presumption or arbitrary interpretation or construction in favour of either
the Insured of the Company and without reference to parol evidence].’

Any arbitration award was to be final and binding, with no possibility of appeal on a
point of law.
In addition to the arbitration clause, the policy contained a Service of Suit clause under
which the insurers agreed to submit to the jurisdiction of a court of competent jurisdiction
within the US in the event of the insurers’ failure to pay a claim.

The dispute Claims were made against the assured and a subsidiary during the currency of the policy.
The assured made payment and sought to an indemnity from the insurers, which was

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 The law applicable to arbitration proceedings . September 2008 . Arbitration Law Monthly

refused. On 2 May 2005, the assured commenced arbitration in London. The submission
agreement between the parties confirmed that the policy was governed by the law of New
York and that the arbitration was governed by the Arbitration Act 1996. In the arbitration
proceedings the insurers raised four defences:
(1) the scope of an endorsement to the policy;
(2) late notification of claims;
(3) alleged misrepresentation and non-disclosure prior to inception; and
(4) a ‘paediatric defence’, consisting of an allegation by the insurers that the assured had
promoted its products to children in a manner which contravened public policy so that
claims for injuries to children should fall outside the scope of the indemnity.

The arbitrators directed that they would hear the first three defences first, on the basis that
if the limit of indemnity of US$100m was reached for claims in respect of adult use then it
would not be necessary to determine the recoverability of claims for child use as the policy
would not cover them anyway. By a partial award issued on 13 March 2007 the arbitrators
dismissed the insurers’ first three defences and held that it would be necessary to hear the
paediatric defence if the policy limits were not exhausted by adult use claims. Applications
by the insurers to the arbitrators to amend the partial award on the ground that there had
been ‘a manifest disregard of New York law’ were rejected, the arbitrators stating that they
had no power to amend their substantive award.
The insurers proposed to challenge the award in the courts of New York. The assured
sought and obtained an interim anti-suit injunction without notice against the insurers,
subsequently replaced by undertakings. The present application to the court was by the
insurers for release from their undertakings. The assured for its part sought a permanent
injunction under either s44 of the Arbitration Act 1996 or s37 of the Supreme Court Act
1981, restraining the insurers from challenging the award both in England and elsewhere,
and the assured also sought a declaration as to the validity of the award.
The assured’s argument was that the award could be challenged only in England. The
insurers’ assertion was that there had been serious errors of New York law in the
determination of the substantive dispute and that, even though the curial law of the
arbitration was English law, the insurers were entitled to have the express choice of New
York law honoured. Cooke J and the Court of Appeal proceeded on the assumptions, that
the insurers had a seriously arguable case that the arbitrators had acted in manifest
disregard of New York law, and also that New York law would permit a challenge in the
circumstances, in that, under the Federal Arbitration Act, a foreign award arising out of a
legal relationship entirely between citizens of the US and without any reasonable relation
with a foreign state, was to be treated by the New York courts as outside the New York
Convention and thus capable of challenge irrespective of agreement to the contrary.
Neither Cooke J nor the Court of Appeal dealt with these points, and indeed there was
considerable dispute particularly as to the latter, but in effect a best case scenario was
adopted in favour of the insurers.
In determining the applications it was necessary to ascertain the law applicable to the
arbitration agreement, the law applicable to the agreement to refer the dispute to
arbitration and the law applicable to the arbitral procedure. English conflict of laws rules
were necessarily to be applied, given that the issue had come before the English courts.

The curial (procedural) As far as English law is concerned, the seat of the arbitration is the key consideration. If the
law of the arbitration seat of the arbitration is England, the parties thereby accept the mandatory provisions of
Part I of the Arbitration Act 1996 and also the default provisions of the Act insofar as the
parties have not agreed to vary them. This is the case whether or not the law applicable
to the arbitration agreement itself is English law. If the seat is England, then it is almost

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Arbitration Law Monthly • September 2008 • The law applicable to arbitration proceedings

inevitable that the procedural law governing the arbitration will also be English law,
although it was recognised by Mr Justice Aikens in Dubai Islamic Bank PJSC v Paymentech
Merchant Services Inc [2001] 1 Lloyd’s Rep 65 that the seat of the arbitration might be
England even though the parties had expressly chosen a different applicable law to
govern their arbitration. If that occurred, however, the mandatory provisions of the 1996
Act would continue to apply, whereas the non-mandatory provisions would be subject
to the default rules of the chosen curial law. These comments were echoed by Cooke J
in C v D, the learned judge adding that ‘the seat of the arbitration and the choice of
procedural law will almost invariably coincide, apart from the possibility, provided for in
section 4(5) of the parties choosing another procedural law in relation to the matters
covered by the non-mandatory provisions of Part I, which will take effect’.
In the present case, the parties had agreed that the curial law would be English law, and
Cooke J concluded with little difficulty that they had thereby agreed that the seat of the
arbitration should be England (as held in A v B [2007] 1 Lloyd’s Rep 237) and that such
agreement incorporated Part I of the 1996 Act, including the rules on appeals on points
of law. As the parties had agreed that any award was to be final and binding, they had
thereby ousted the right of appeal on point of law under s69. Cooke J pointed out that
it was clear from recent authorities, in particular, Weissfisch v Julius [2006] 1 Lloyd’s Rep
716 and A v B, that the power of the English court to intervene in an arbitration was
confined to an arbitration with its seat in England.
These authorities led Cooke J to the conclusion that the English courts had exclusive
curial jurisdiction over the arbitration, and that any application by the insurers to a
foreign court for relief was a breach both of the principle set out in s58 of the 1996 Act
that an award is final and binding on the parties, and also a breach of the implied
agreement (recognised in Associated Electric and Gas Insurance Services Ltd v European
Reinsurance Company of Zurich [2003] 1 WLR 1041 and in A v B) that the parties would
honour the award. Cooke J rejected the insurers’ arguments that an express choice of
New York law overrode the 1996 Act, in that the parties had agreed to a possible
challenge where the Federal Arbitration Act was applicable, and that for the same reason
s58 had been excluded by agreement. The learned judge held that what would be
required was an express agreement to allow a challenge to the award other than in
England, and the choice of New York law to govern the policy did not amount to an
agreement to oust the 1996 Act in any way. Cooke J noted that s4(5) of the 1996 Act,
which states that if the seat is England then the choice of an applicable law other than
English law removes the non-mandatory provisions of the 1996 Act, was referring to the
choice of an applicable law of the arbitral procedure and not the choice of an applicable
law of the underlying contract. That had earlier been held to be the correct meaning of
s4(5) in XL Insurance v Owens Corning [2000] 2 Lloyd’s Rep 500.
This reasoning was confirmed on appeal by the Court of Appeal. By choosing London
as the seat of the arbitration, the parties were to be taken to have agreed that any
challenge to the award could only be on the grounds permitted by the Arbitration Act
1996. The suggestion by the insurers that New York judicial remedies were also to be
permitted was regarded by the Court of Appeal as ‘a recipe for litigation and (what is
worse) confusion which cannot have been intended by the parties’. It followed that a
choice of seat was also a choice of forum for remedies, as held in A v B [2007] 1 Lloyds
Rep 237 and A v B (No 2) [2007] 1 Lloyds Rep 358.The choice of New York law as the
law applicable to the main policy did not amount to an agreement to exclude the
non-mandatory provisions of the 1996 Act and to permit a challenge in New York on
the ground of error of law. The correct construction of s4(5) was that a non-mandatory
provision of the 1996 Act had to be specifically excluded by agreement for it to
be disapplied.

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 The law applicable to arbitration proceedings . September 2008 . Arbitration Law Monthly

The law applicable to Cooke J and the Court of Appeal regarded the reasoning on the seat of the arbitration as
the arbitration and conclusive of the issue.Thus, it was irrelevant whether the law applicable to the arbitration
submission agreements clause and the law applicable to the submission to arbitration was English law or some
other law: what mattered was whether the arbitration had its seat in England.The learned
judge and the Court of Appeal nevertheless chose, in deference to the detailed argument
put to them, to consider whether the arbitration clause and the submission agreement
were also governed by English law.
Turning first to the relationship between the arbitration clause and the submission
agreement, Cooke J accepted that the law applicable to each of them would normally be the
same. He also accepted that it was generally the case that the law applicable to the substantive
agreement and the law applicable to the arbitration clause were the same, although this was
not inevitably so, and that if the law of the substantive agreement does differ from the curial
law then the law applicable to the arbitration clause and the submission agreement was more
likely to be the same as the curial law.These starting points aside, Cooke J held that in every
case it was necessary to see exactly what had been agreed.The learned judge had little doubt
that the arbitration clause was governed by English law, given the references to English
legislation in the clause. In so deciding, Cooke J followed the reasoning of Mr Justice
Toulson in XL v Owens Corning in which it had been held that the curial law and the law
applicable to the arbitration clause coincided. Cooke J’s analysis was that:

‘When the parties agreed to arbitrate in a particular place under particular laws,
they plainly had in mind the effect of so doing and chose the law and seat of the
arbitration with a view to achieving particular results in that respect. I cannot see
that the law of the agreement to arbitrate and the law of the agreement to refer can
here differ from the curial law.’

The Court of Appeal once again agreed with this analysis.Where there was no choice of the
law applicable to the arbitration agreement, it was more likely that the law would follow the
chosen seat rather than the chosen law applicable to the main contract.The principle that was
adopted at one time, that of a presumption that a choice of the place of the arbitration was also
an implicit choice of the law applicable to the main contract (and vice versa), as set out in
Tzortzis v Monark Line [1968] 1 WLR 406, was rejected by the House of Lords in Compagnie
Tunisienne De Navigation SA v Compagnie D’Armement Maritime SA [1971] AC 572 in favour
of the ‘closest and most real connection’ test for determining applicable law: that meant that it
was no longer right to assume that the law applicable to an arbitration clause was the law
applicable to the main contract. That point was also made by Mr Justice Mustill in Black-
Clawson v Papierwerke [1981] 2 Lloyds Rep 446, where it was said that while the law applicable
to the arbitration clause and the main contract could differ (as in Compagnie Tunisienne), it
would be a rare case that there was any difference between the law applicable to the seat of
the arbitration and the law applicable to the arbitration clause itself (a point made in Miller &
Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583). In C v D, the Court of
Appeal held that Mustill J’s comment on this point remained good law, and that the comments
of Lord Mustill in the subsequent decision of the House of Lords in Channel Tunnel Group Ltd
v Balfour Beatty Construction Ltd [1993] AC 334 had simply made the point that although it was
exceptional for the law applicable to the underlying contract to be different from the law
applicable to the arbitration agreement, it was less exceptional for the law applicable to the
underlying contract to be different from the seat of the arbitration.

The outcome It was accordingly held by both Cooke J and the Court of Appeal that that the insurers
would, by commencing proceedings to challenge the award in New York, be in breach
of contract and also in breach of their statutory obligations under s58 of the 1996 Act.

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Arbitration Law Monthly • September 2008 • The law applicable to arbitration proceedings

The New York proceedings amounted to a direct attack on an award which was binding
in England, and also constituted an abuse of process. In the circumstances, it was
appropriate to issue an anti-suit injunction to restrain the insurers from bringing such
proceedings.The New York proceedings were not far advanced, there had been no delay
and damages would not be an adequate remedy to the assured. It was irrelevant whether
the New York court would assert jurisdiction under its own conflict of laws rules: the
injunction was not directed against the New York court but rather was designed to
prevent the insurers from breaking their own obligations. Also, it was irrelevant that the
parties were both US corporations.

Costs The question of costs was not a live one at the trial. In the Court of Appeal it was noted
that there were authorities which held it appropriate for a costs order to be made on an
indemnity basis, rather than on the standard basis where the action was to restrain breach of
an arbitration clause (see Kyrgyz Mobil v Fellowes International [2005] EWHC 1314 and A v
B (No 2) [2007] 1 Lloyds Rep 358) or a clause which prevents proceedings from being
brought (National Westminster Bank v Rabobank Nederland RV [2007] EWHC 1742
(Comm)). In the present case, the Court of Appeal refused to engage in a lengthy debate on
this point, and was content to hold on the facts that costs on the standard basis were
appropriate: there was no actual breach of the arbitration clause in the present case; and
there were legitimate differences of view on the effect of the Bermuda Form.

Privacy In the Court of Appeal, the present proceedings were held in private at the request of
the parties. The Court of Appeal simply noted that appeals and other arbitration
applications were generally to be held in public and that in the present case, although
anonymity would be maintained, the judgment would be made public. The Court of
Appeal added, on procedural grounds, ‘any future application for privacy or anonymity
(for arbitration appeals) should be supported by written evidence at the time such
application is made in the form of a statement from someone at managerial level
explaining the need for privacy or anonymity’.

Editor: Professor Robert Merkin, LLB, LLM

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