The English Commercial Court has found that an arbitration clause in a consultancy agreement was superseded by a jurisdiction clause in a later settlement agreement. The court emphasised the “presumption in favour of one-stop adjudication“, and that, given the sequence in which the agreements were entered into, the parties intended that the jurisdiction clause would replace the earlier agreement to arbitrate. As a result, the court found that the arbitral tribunal correctly declined jurisdiction.

Factual history

WesternZagros Limited (“WZL“) entered into a consultancy agreement with Monde Petroleum S.A. (“Monde“) (the “CSA“) which included an arbitration agreement. Under the CSA, Monde was to provide consultancy services to WZL relating to oil exploration in Kurdistan in exchange for monthly payments and milestone payments when certain events occurred.

WZL stopped the monthly payments in January 2007 and purported to terminate the CSA in March 2007. In addition, WZL disputed that unpaid amounts invoiced by Monde were due.

On 18 April 2007, WZL and Monde entered into a termination / settlement agreement (the “TA“) which, in contrast to the arbitration agreement in the CSA, included an English court exclusive jurisdiction clause.

Subsequently Monde commenced proceedings in the Commercial Court alleging that its entry into the TA was procured by misrepresentation and / or duress. As a protective measure, it also initiated arbitration proceedings (to avoid its arbitration claims becoming time-barred), but immediately applied for a stay, since its intention was for the principal action to be heard in the Commercial Court. WZL sought counterclaims for declaratory relief in the arbitration. The Tribunal declined jurisdiction and ordered WZL to pay Monde’s costs of the arbitration proceedings. WZL made four applications to the Commercial Court:

  • to challenge the tribunal’s decision to decline jurisdiction under section 67 of the Arbitration Act 1996;
  • to set aside an order granting Monde permission to enforce the award in respect of the order for costs;
  • to challenge the jurisdiction of the Commercial Court; and
  • to apply for security for costs to be given by Monde in the event the first three applications fail.

The outcome on applications (ii) and (iii) depended upon the court’s decision on application (i), while application (iv) only needed to be considered if application (i) failed.

The court refused to grant applications (i), (ii) and (iii) and granted application (iv).

The court’s approach to application (i) is the focus of this blog post.

The relevant provisions

The CSA provided for English law as the governing law and contained the following dispute resolution (“DR“) clause:

13.1 If any dispute, controversy or claim arises between the Parties in relation to, or in connection with this Agreement, or in connection with the interpretation, performance or non-performance hereof, including any questions regarding the payment of fees, (the “Dispute”), the Parties shall promptly meet to discuss the Dispute in an attempt to resolve such dispute amicably through negotiation.

13.2 If the Dispute has not been resolved within sixty (60) days…, then either Party may, by notice in writing to the other, refer the Dispute to arbitration to be fully settled.” (emphasis added)

Clause 13 provided for ICC arbitration to be held in London.

The TA provided for the following DR mechanism in clause 3.3:

This Agreement shall be governed by and construed in accordance with the laws of England and Wales. The parties herein irrevocably attorn to the exclusive jurisdiction of the courts of England and Wales.” (emphasis added)

Clause 3.5 of the Termination Provision provided:

This Agreement constitutes the entire agreement between the parties with respect of the subject matter hereof and shall supersede any and all prior negotiations and understandings.” (emphasis added)

The decision

A section 67 challenge involves a full rehearing of the tribunals’ jurisdiction, i.e. a review of whether the tribunal reached the correct decision, not merely whether it was entitled to reach the decision it did reach. [1] The court summarised the tribunal’s reasoning before embarking upon its own assessment.

The court’s analysis and conclusion

There is a “presumption in favour of one-stop adjudication“.[2] This strong presumption that parties intend their disputes to be resolved in one forum will only be displaced by clear wording to the contrary.[3] The presumption applies as much to a jurisdiction clause as it does to an arbitration clause.[4] Conflicting DR provisions will, if possible, be construed on the basis that they are mutually exclusive rather than overlapping,[5] but fragmentation is still possible if there is clear wording to that effect.

In the court’s view, the presumption may have “particular potency[6] in the context of a principal agreement and a related settlement agreement, since the issues in question often relate to both agreements. A rational businessman would intend that all aspects of a dispute should be resolved in a single forum.  The approach taken by the Court in this case is entirely consistent with the ‘one stop shop’ principle of adjudication endorsed by the House of Lords in the Fiona Trust case of 2007.

Where there are conflicting DR provisions, “the parties are likely to have intended that it is the settlement / termination agreement clause which is to govern all aspects of outstanding dispute, and to supersede the clause in the earlier agreement“.[7] Popplewell J. advanced three reasons as to why the settlement / termination agreement DR clause should prevail:

  • It came later in time and was agreed by the parties in light of the specific circumstances giving rise to the dispute being settled;
  • It was the operative clause governing the validity and effect of the termination / settlement agreement and was therefore the only clause capable of applying to disputes relating to the termination / settlement agreement; and
  • Doing so eliminates the risk of inconsistent findings.

However, the question of whether this later clause can be constructed to supersede the earlier one will also depend on the language of the clause and other surrounding circumstances.

In this case, clause 3.3 of the TA stated that it was “exclusive” and the entire agreement clause 3.5 gave further weight to the conclusion that the earlier arbitration clause had been superseded. In addition, the meaning of the word “attorn” suggested a transfer of jurisdiction.[8] The court therefore concluded that the DR clause contained in the CSA had been replaced, in its entirety, by the DR clause contained in the TA.

The court also held that, even if Monde sought rescission of the TA, it would still find exclusive jurisdiction to decide any dispute, as the jurisdiction agreement in clause 3.3 was as separable from the TA as an arbitration agreement. This analysis did not undermine the doctrine of the separability of the arbitration clause; instead, it recognised that the later clause addressed the earlier (separated) clause and superseded it in this instance.

Comment

There is a common plea from dispute resolution lawyers to take particular care when drafting DR clauses. As Lord Hope observed in Harbour Assurance,[9] however, these provisions are often dealt with as an afterthought in  contractual negotiations. It is often the case that more careful drafting of these clauses at an early stage of negotiating agreements would have prevented protracted forum disagreements ‘further down the track’.

As this case demonstrates, it is of course possible to change the choice of forum by agreement. However, if this is not done precisely and completely, there is a risk of fragmentation, with the result that the prior DR clause is not entirely superseded. The consequences can be expensive and highly complex, with the potential for lengthy jurisdictional disputes between the parties as to which issues fall within which DR clause, or, indeed, both. Equally important is the risk that the different fora could reach inconsistent decisions on the same issues.

If the intention is to effect a clean and complete forum switch, the already existing DR clause should be superseded expressly using clear and unambiguous wording. The inclusion of express words terminating the prior DR clause is the preferred and recommended option. Where the prior DR clause is not addressed directly for whatever reason, then using wording such as “exclusive” and “entire agreement” will assist, particularly where there is a significant risk of subject-matter overlap between the two DR clauses (for instance, a derivative agreement (e.g. settlement / termination) related to a principal agreement).

Finally, where there is the potential for a dispute over which more than one DR provision applies and there is a risk that claims may become time-barred in one forum, it may still be wise (as was done in this case) to commence proceedings in the disputed forum, followed by an immediate stay.  This will typically ‘stop the clock’ for the purposes of any limitation period which might bar the bringing of claims, and this may prove to be a valuable protection if, in due course, the preferred forum declines jurisdiction.