Two recent decisions of the Commercial Court have highlighted the power of the courts in relation to section 67 of the Arbitration Act 1996 (the “Act”). 

Section 67 of the Act allows a party to arbitration proceedings to challenge an award of an arbitral tribunal on the basis that the tribunal lacked substantive jurisdiction and to seek a declaration to set aside the award. In particular, the Court has the discretion to (i) confirm the award; (ii) vary the award; or (iii) set aside the award in whole or in part. 

In Integral Petroleum SA v Melars Group Ltd [2015] EWHC 1893 (Comm) (“Integral Petroleum”) andHellenic Petroleum Cyprus Limited v Premier Limited [2015] EWHC 1894 (Comm) (“Hellenic Petroleum”), the Commercial Court has clarified, affirmed and restated the principles, ambit and the implications of making an application to challenge an arbitral tribunal’s substantive jurisdiction under section 67 of the Act.

1.  PRINCIPLES UNDERPINNING SECTION 67 OF THE ACT

In both Integral Petroleum and Hellenic Petroleum, the court reminded the parties that under section 67 of the Act, the Court conducts a re-hearing of the issues concerning the tribunal’s jurisdiction and does not merely review the award of an arbitral tribunal.

Further, upon re-hearing of the jurisdictional issues, the Court is not limited to reviewing the evidence which was adduced before the arbitrator. The Court hears the evidence afresh and reaches its own conclusion as to whether the arbitrator had substantive jurisdiction to determine the dispute. The court is not in any way bound by what the arbitrator has decided, either on the facts or as to the law.  This proved to be of particular significance in the Hellenic Petroleum case.

2.  HELLENIC PETROLEUM

In Hellenic Petroleum, the Claimant had applied to set aside the Award of a sole arbitrator which was in favour of the Defendant. 

The basis for the Claimant’s claim was that the parties had never agreed and/or accepted the terms of a draft agreement which contained an arbitration clause. Accordingly, the Claimant submitted that the arbitrator had lacked substantive jurisdiction to consider the dispute.

The judge confirmed that a re-hearing allows the court to hear the evidence afresh and to reach its own decision as to whether the arbitrator had substantive jurisdiction to determine the dispute.  As mentioned above, this proved to be of particular importance. 

The judge did not find the arbitrator’s assessment of the witnesses to be of any real assistance and instead commented: “In my judgment, the position is different here, both because I have been able to assess for myself the credibility of all the witnesses who gave evidence before the arbitrator, as they have also given evidence before me and because, as appears in the next section of the judgment, in a number of critical respects, I have formed a different view as to the credibility of certain witnesses than the view which the arbitrator evidently formed.  It is also apparent that the cross-examination, particularly of Premier’s witnesses, was much more searching before the Court than it had been before the arbitrator.  Neither counsel in the hearing before me acted before the arbitrator.  In the circumstances, I have not found the arbitrator’s assessment of the witnesses of any real assistance and have formed my own view of their demeanour and credibility”. 

Indeed, based on the evidence presented to the Court, the judge held that there was no agreement in principle concerning the draft agreement between the parties. As there was no binding agreement between the parties, the arbitrator had no substantive jurisdiction. As a result, the court held that the arbitrator’s award was of no effect and that the award should be set-aside.

Interestingly, the Court did not discuss difficulties in relation to future enforcement of an award where the arbitration agreement is not in writing under Article II (1) and (2) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “NYC”). In this case, the draft agreement was not binding on the parties as it was not executed by the parties and therefore, there existed no agreement between the parties to submit all disputes to arbitration. In order to enforce an award, Article II (1) and (2) of the NYC requires an arbitration agreement to be in writing.

3.  INTEGRAL PETROLEUM

In Integral Petroleum, the Claimant challenged the Arbitral Tribunal’s award concerning an arbitration conducted under the LCIA Rules and asked the Court to set aside the award and to remit the claims for determination on the merits.

It was common ground that:

  1. The parties had entered into an agreement containing an arbitration agreement (“exclusive jurisdiction of the arbitration court in London”) concerning sale and purchase of gasoil (the “Original Agreement”);
  2. Subsequently, the Defendant had entered into a separate sale and purchase agreement of gasoil with a third party (the “Second Agreement”). The Second Agreement contained an arbitration agreement subject to LCIA Rules and the seat of arbitration was Geneva.
  3. Following on, the parties had subsequently entered into another agreement to cancel the Original Agreement (the “Cancellation Agreement”). Pursuant to the Cancellation Agreement, the Defendant was returned the monies paid by it to the Claimant under the Original Agreement. The Cancellation Agreement provided that:

all claims and demands of [Melars] against [Integral], their property, group companies…[Melars] may have on them in connection with and/or as a result of the…[the Original Agreement] and/or in tort, will become fully settled [the “First Sentence”]. The Parties have agreed as well not to make any claims or demands of any nature or kind whatsoever against each other and indemnify each other if any such cases will arise in connection with ...[the Original Agreement]” [the “Second Sentence”] (the “Settlement Clause”).

Instead, the issue in dispute in the arbitration was whether court proceedings commenced by the Defendant in Switzerland were in breach of the Original Agreement and in breach of the Second Sentence of the Cancellation Agreement.

In his award, the sole arbitrator had observed that the arbitration agreement in the Original Agreement only concerned “all disputes hereunder to the exclusive jurisdiction of the arbitration court in London” and did not cover any claims under the Cancellation Agreement. Further, according to the sole arbitrator, the Cancellation Agreement only provided for indemnification “if any such cases will arise or in connection with the Contract [the Original Agreement]”. As a result, he had concluded that the issues arising out of the Cancellation Agreement were not subject to the arbitration agreement in the Original Agreement and/or the Second Contract and had stated that the Claimant’s “claims are outside the scope of his jurisdiction…and its claim and request for relief fails”.

Following a hearing, the Court held that the arbitrator had made an error because a dispute about the ambit of the settlement clause in the Cancellation Agreement was covered by the arbitration agreement in the Original Agreement. Therefore, the tribunal had indeed had the requisite jurisdiction to determine what relief should be awarded in the event of breach.

However, of particular interest is that having come to this opinion the judge then commented that notwithstanding the error made by the arbitrator concerning the jurisdiction of the tribunal, “the arbitrator concluded that the settlement clause does not cover the Swiss proceedings, and while he might have been wrong not to recognise his jurisdiction over this dispute, he would have in any case rejected Integral’s contention about it”. As a result, the judge considered “the error in the Award about jurisdiction to be inconsequential”.

4.  COMMENT

These cases provide a reminder to parties to a London-seated arbitration that any substantive disagreements concerning jurisdiction of an arbitral tribunal may result in the award being challenged for lack of substantive jurisdiction of the tribunal under section 67 of the Act.  Should that happen then the following should be kept in mind:

The Court:

  1. will re-hear witness evidence and legal submissions afresh to decide on jurisdictional issues;
  2. will not be limited to reviewing the evidence which was adduced before the arbitrator; and
  3. will not be bound, in any way, by what the arbitrator had decided, either on the facts or as to the law.

Further, it is important to note that a failure to challenge a jurisdictional award (whether partial or final) within the time limit stipulated under section 70 of the Act may lead to an award becoming final and binding, potentially creating an issue estoppel and prohibiting a party from raising the same challenge under section 67 of the Act.

In addition, both of these cases demonstrate that parties need to be careful how they draft their dispute resolution clauses (especially arbitration agreements) in commercial agreements and/or in any related agreements, structuring them in a manner to conform to the same dispute resolution mechanism. Also, care should be taken to ensure that dispute resolution provisions are sufficiently clear and unequivocal in their effect and intent.

Finally, for an enforcement of an award, under Article II of the NYC, it is essential that the parties agree to an arbitration agreement that is in writing.