The Commercial Court has found[1] that an arbitration clause in a consultancy services agreement was superseded by a dispute resolution clause in a later settlement agreement; and that the dispute resolution clause should apply to disputes arising from both agreements.  The court applied the presumption for “one-stop adjudication”: the presumption that rational business people will wish to resolve all disputes in one forum.

Blog by Emma Bullock and Simon Hart

Facts

The Applicant, WesternZagros Ltd (WZL), entered into a consultancy services agreement (the CSA) with the Respondent, Monde Petroleum S.A. (Monde), by which Monde was to assist WZL in concluding and maintaining an exploration and production sharing agreement (EPSA) which WZL was negotiating.  The CSA contained an arbitration clause providing for London as the forum.  In early 2007, WZL stopped paying the monthly fee to Monde and in March 2007 purported to terminate the CSA.  In April 2007, the parties entered into a settlement agreement (the Termination Agreement), which terminated the CSA and contained an exclusive jurisdiction clause in favour of the courts of England and Wales and an entire agreement clause.

Monde subsequently challenged the validity of the Termination Agreement, which it said it was induced to enter by misrepresentation and/or duress. Monde claimed sums that it alleged it would have earned under the CSA, including what it would have earned on a 3% option to which it argued it was entitled under that agreement.  In 2013, Monde issued proceedings in the Commercial Court pursuant to the dispute resolution clause in the Termination Agreement.  Monde also commenced ICC arbitration proceedings against WZL in order to protect the arbitration claim from being time-barred if the Commercial Court declined jurisdiction, notwithstanding that Monde's case was that the Commercial Court did indeed have jurisdiction in relation to the dispute.  Monde sought an immediate stay of the arbitration.

WZL made counterclaims for declaratory relief in the arbitration, including a declaration that Monde had no further entitlement under the CSA and so had lost no benefit by entering into the Termination Agreement.  WZL also claimed damages for an alleged breach of confidentiality under the CSA, which had been caused by Monde disclosing the existence of the dispute by issuing proceedings in the Commercial Court.  WZL disputed Monde’s application to stay the arbitration proceedings, and claimed that the arbitral tribunal (the Tribunal) had jurisdiction.  Monde then withdrew its own claims which were before the Tribunal but defended WZL’s counterclaims while continuing to maintain that the Tribunal did not have jurisdiction.

The focus of the dispute was, therefore, on whether it was the Tribunal or the Commercial Court which had jurisdiction.  WZL argued that the Tribunal was the correct forum on the grounds that the CSA contained a valid and binding arbitration clause and that the counterclaims for declaratory relief fell squarely within its scope.  Monde contended that on a true construction of the dispute resolution clause in the Termination Agreement, it was intended to supersede the CSA's arbitration clause in its entirety.  What was peculiar was that the positions adopted by both parties were at odds with their respective positions about the agreements: WZL claimed that the CSA had been validly terminated, and Monde disputed the validity of the Termination Agreement on which it sought to rely.

The Tribunal found that the Termination Agreement was binding on the parties; and that the language in the dispute resolution clause of the Termination Agreement was not sufficiently clear to bring about the complete termination of the distinct arbitration clause in the CSA.  Nevertheless the scope of the arbitration clause was very significantly reduced by the Termination Agreement with the net effect was that the arbitration clause was “inoperative”.  As a result, the Tribunal found in favour of Monde, dismissed WZL’s claim in relation to breach of confidentiality and accepted that it had no jurisdiction to make the declarations sought. 

Decision 

The judge held that the Commercial Court had jurisdiction pursuant to the exclusive jurisdiction clause in the Termination Agreement, for the following reasons:

Applying Fiona Trust & Holdings v Privalov & Others[2] and Harbour Assurance Co (U.K.) Ltd v Kansa Genera International Assurance Co[3], it is to be presumed that rational businessmen who are parties to a contract intend all questions arising out of their legal relationship to be determined in the same forum; and that presumption is a strong one, and requires words to the contrary if it is to be displaced.  This is characterised as the “presumption in favour of one-stop adjudication”.

The judge noted that the presumption in favour of one-stop adjudication is particularly potent where an agreement is entered into for the purpose of terminating an earlier agreement between the same parties or settling disputes which have arisen under such an agreement.  Applying the approach of a rational businessman, he concluded that where a settlement agreement contains a dispute resolution clause that is different from, and incompatible with, a dispute resolution clause in the earlier agreement, the parties are likely to have intended that it is the dispute clause in the settlement agreement which is to govern all aspects of any future disputes, and to supersede the clause in the earlier agreement.

The question as to which dispute resolution provision took precedence will depend upon the proper construction of the clause in the settlement agreement in all the surrounding circumstances.  The judge summarised that the circumstances in question in this case were:

  • The Termination Agreement came second in time and was agreed by the parties in the light of the specific circumstances which had given rise to the disputes being settled and/ or the circumstances leading to the termination of the CSA.  The fact that dispute resolution clauses are not often heavily negotiated provided evidence that this was the purpose of the Termination Agreement;
  • The language of the Termination Agreement was supportive of the presumption that the parties intended the dispute resolution clause to supersede the arbitration clause: it was expressed to be an exclusive jurisdiction clause and should therefore be construed as excluding, rather than sitting alongside, any other dispute resolution clause between the parties.  Further, although the exclusive jurisdiction clause was silent on the subject matter of what was to be submitted to the exclusive jurisdiction of the courts of England and Wales, there was an entire agreement clause, which suggested that what the parties had in mind was at least as wide as the disputes with respect to the subject matter of the Termination Agreement.
  • The Termination Agreement contained an operative clause governing issues concerning the validity or effect of the settlement agreement and is therefore the only clause capable of applying to disputes arising out of or in connection with that agreement.

WZL raised arguments about the severability of the arbitration clause from the CSA, arising from section 7 of the Arbitration Act 1996, and relied on the decision in DDT Trucks of North America Ltd v DDT Holdings Ltd[4]  as an authority for the proposition that an agreement which terminates an earlier agreement will not terminate the operation of the arbitration agreement in the earlier agreement in the absence of clear and specific language to that effect.   The judge rejected those arguments and distinguished DDT Holdings on the basis that it was not a case in which there was a new dispute resolution clause in the settlement agreement, or any risk of fragmentation of issues.  Where the settlement agreement contains a new dispute resolution clause which differs from that in the agreement that it terminates, different considerations arise and it is likely that the parties would wish the earlier dispute resolution provision to be superseded.  This will depend on all of the surrounding circumstances, but the judge rejected that this could only have that effect by making express reference to the termination of the arbitration clause.

Comment

This case shows the importance of giving consideration to the consistency of jurisdiction provisions in related documents and the best choice of forum when entering into settlement agreements.  There may be strong commercial rationale for the choice of forum: in this case, as WZL emphasised, the preference for confidentiality, and this should be borne in mind.

While in this case, the dispute resolution provision in the Termination Agreement overrode the arbitration clause in an earlier agreement; this is a case that turns on its facts.  The judge based his approach on the commercially rational interpretation of the Termination Agreement based on the circumstances in order to avoid the fragmentation of disputes, inconsistent decisions and increased costs and delay.