By Prof Jonathan Hill, Professor of Law (University of Bristol Law School).
A previous blog addressed certain problems surrounding the interpretation of arbitration clauses, particularly in relation to a lack of transparency concerning the parties’ choice of the seat of arbitration. This blog continues the same theme – albeit in the context of different interpretative questions.
Although the notion of the ‘pathological’ arbitration clause has been part of the international arbitration literature for nearly half a century, difficulties generated by poor drafting continue to bedevil both arbitral tribunals and the courts. Notwithstanding the availability of a wealth of clear and helpful advice (see, for example, Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (4th edn, 2014), a surprising number of those who draft commercial contracts seem to be either unaware of the available advice or incapable of heeding it.
The recent decision of the English High Court in Exmek Pharmaceuticals SAC v Alkem Laboratories Ltd [2016] 1 Lloyd’s Rep 239 is the latest in a long line of reported cases in which the English courts have had to try to make sense of dispute-resolution clauses in which the parties failed to state clearly what was meant to happen in the event of a dispute. Among the various issues thrown up by the case, two in particular merit discussion. First, how should the parties’ choice of ‘UK law’ or the ‘UK courts’ be interpreted? Secondly, where a contract includes not only a clause purporting to confer exclusive jurisdiction on the courts of a particular country but also a clause agreeing to refer disputes to arbitration, how should these apparently inconsistent clauses be interpreted? Before turning to these two questions, the discussion should start with an outline of the essential facts of the case.
The facts
A, an Indian company, and E, a Peruvian company, entered into a distribution agreement which included two seemingly inconsistent dispute-resolution clauses: under clause 13, the parties chose ‘UK law’ as the law applicable to the agreement and submitted to the exclusive jurisdiction of the courts of the United Kingdom; in clause 14, however, the parties agreed to refer all disputes to arbitration, any such arbitration to be conducted ‘in the UK in accordance with the provisions of the law in the UK’. When a dispute arose between the parties, they exchanged correspondence which indicated that they assumed that the dispute would be arbitrated. In the context of this correspondence, A sought to give greater specificity to clause 14 by proposing an addendum to the distribution agreement to the effect that arbitration would take place in England under the auspices of the London Court of International Arbitration. E, however, did not agree to the suggested addendum; instead, E commenced court proceedings against A in Peru. Unsurprisingly, A sought to challenge the Peruvian court’s jurisdiction on the basis of clause 14 of the contract.
A appointed N as arbitrator and, when E failed to make an appointment, A purported to designate N as sole arbitrator (in accordance with section 17 of the Arbitration Act 1996). As might have been expected, E next challenged N’s jurisdiction. N decided to determine his jurisdiction as a preliminary issue and, in due course, rendered an award in which he decided that he did have jurisdiction. E then applied to the High Court under section 67 of the Arbitration Act 1996 to have the award set aside on the basis that the arbitrator lacked substantive jurisdiction.
What was the effect of the choice of UK law and UK courts?
In the Peruvian court proceedings, E argued (and the Peruvian court appeared to have accepted) that, because the United Kingdom comprises three legal systems (England and Wales, Scotland and Northern Ireland), a reference to ‘UK courts’ and ‘UK law’ is meaningless. Burton J, however, rejected E’s argument. Notwithstanding the fact that, as regards matters of private law, there is no such thing as ‘UK law’ or ‘UK courts’, it is highly likely that, in international trade, when two parties, neither of which is resident in the United Kingdom, refer to ‘UK courts’ and ‘UK law’ their intention is to refer to ‘English courts’ and ‘English law’. Although there may be something slightly unattractive about the English court’s assumption that when foreigners say ‘UK’ they mean ‘England’, one cannot hide from the fact that the role that London plays in the world of international trade and commerce simply is not replicated in any city in Scotland or Northern Ireland. According to Bingham LJ in The Komninos S [1991] 1 Lloyd’s Rep 370, 374, in which the parties had agreed to the jurisdiction of the ‘British courts’, it is ‘far-fetched’ to suppose that contracting parties intend to refer to any courts other than the English courts; only the English courts have widespread experience of dealing with cross-border commercial disputes.
Can clauses 13 and 14 be reconciled and, if so, how?
It is not uncommon for a commercial contract to contain apparently conflicting jurisdiction and arbitration agreements. There are, at least, five ways in which such seemingly inconsistent clauses may be interpreted: (i) the clauses may be treated as cancelling each other out, neither being effective: (ii) the jurisdiction clause may prevail over the arbitration clause; (iii) the arbitration clause may prevail over the jurisdiction clause; (iv) on the basis that disputes of certain types fall within the scope of one of the clauses and disputes of other types fall within the scope of the other clause, it may be decided that there is no conflict between them; (v) the clauses may be reconciled by treating the arbitration clause as binding and effective (so that the arbitral tribunal has jurisdiction over the substance of the parties’ dispute) and interpreting the jurisdiction clause as a choice of the courts with supervisory jurisdiction over any arbitration. Which solution is the correct one depends, primarily, on the exact words adopted in the dispute-resolution clauses in question; it all turns on the wording of the terms agreed by the parties.
There is, however, one general point that should be emphasised. As far as possible, the court should be guided by the maxim ut res magis valeat quam pereat (which can be roughly translated as ‘it is better for a thing to have effect than to be made void’.) Accordingly, the first solution (that the clauses cancel each other out) is rarely the appropriate one. By including dispute-resolution clauses in their contract, the parties can be assumed to have intended something. The judge’s task is to try to work out what that was most likely to have been.
In Exmek Pharmaceuticals SAC, Burton J followed H & S International v Paul Smith [1991] 2 Lloyd’s Rep 127 (in which Steyn J had adopted the fifth of the possible approaches outlined above); he considered that clause 14 was an effective and binding arbitration clause and that clause 13, primarily, identified the English courts as those with supervisory jurisdiction over any arbitration falling under clause 14, but also nominated the courts with substantive jurisdiction in the event that, for any reason, clause 14 proved to be legally ineffective.
Conclusion
In Exmek Pharmaceuticals SAC, E’s application to have the arbitrator’s award (on jurisdiction) set aside on the basis that clause 14 was not a valid and binding arbitration clause and that, as a result, N lacked substantive jurisdiction was rather weak. Burton J correctly identified the judge’s task as being not to frustrate the parties’ agreement, but rather to try to divine (and give effect to) what, in all probability, the parties intended. If possible, the judge should arrive at a holistic interpretation that reconciles seemingly conflicting clauses of the contract, rather than treating one or more of the contractual provisions as pro non scripto. From this perspective, Exmek Pharmaceuticals SAC was not really a ‘hard case’; ultimately, there were no plausible alternatives to the solutions arrived at by Burton J.