The Court of Appeal has overturned the Commercial Court's judgment earlier this year in National Navigation v Endesa in a decision which, although more consistent with principles of comity, and with the reasoning of the ECJ in West Tankers, may be considered to highlight some of the unsatisfactory effects of that decision.
National Navigation agreed to deliver coal to Endesa by a bill of lading which expressly incorporated the terms of the charterparty. The head charter and the voyage charter contained provision for disputes to be referred to arbitration in London, and the head charter was expressed to be subject to English law.
National Navigation's ship sustained damage which resulted in its alleged failure to fulfil its obligation to deliver the coal. Endesa commenced proceedings against National Navigation in Spain in order to recover the cost of obtaining an alternative supply of coal and National Navigation commenced a claim in the English Commercial Court for a declaration of non-liability to Endesa (National Navigation was not at that time in possession of a copy of the voyage charter and was uncertain of its terms as regards dispute resolution).
Each party challenged the jurisdiction of the court chosen by the other. The courts in Almeria determined that Spanish law applied to the dispute and that the charterparty arbitration clause had not been incorporated in the bill of lading. Prior to any decision as to jurisdiction in the Commercial Court claim, National Navigation commenced arbitration proceedings in London seeking disclosure of the voyage charter, a declaration that the arbitration clause was incorporated in the bill of lading and an injunction to restrain Endesa from proceeding with its claims other than by arbitration.
A number of applications were thus heard by Mrs Justice Gloster in the Commercial Court in autumn 2008. The judge's task was further complicated by the fact that, after preparing her decision on these applications in draft, the ECJ handed down its judgment in the West Tankers case.
Decision at first instance
National Navigation prevailed in its application for a declaration as to the applicability of the arbitration agreement but did not, in the wake of West Tankers, succeed in obtaining an anti-suit injunction.
In Gloster J's judgment, although the determinations of the Almeria courts were Brussels Regulation judgments, they were not required to be recognised under Article 33 of the Regulation in proceedings in another member state which were not Regulation proceedings. The application before her fell within the arbitration exception in Article 1(2)(d) of the Regulation and the Almeria courts' decisions did not, therefore, apply.
In the alternative, Gloster J determined that it would be contrary to public policy in the UK to recognise a judgment, such as the Almeria court decision, obtained in breach of an arbitration agreement that was valid by its proper law. On the facts, the court held that English law applied and that the arbitration agreement was incorporated in the bill of lading.
The appeal, which was heard in early November this year, dealt with three key questions:
- Were the judgments of the Almeria Court Brussels Regulation judgments? In this regard, the Court of Appeal rejected Endesa's argument that judgments can be severable and, to the extent that they deal with a point outside the Regulation (ie, arbitration), that element of a judgment need not be recognised in accordance with the Regulation regime. Although it acknowledged that the result may be unsatisfactory, the Court of Appeal considered that the effect of West Tankers was that a judgment on a preliminary issue (including in respect of incorporation of an arbitration clause) will be a Regulation judgment if it forms part of proceedings the main scope of which falls within the Regulation.
- Was Gloster J correct to find that the Almeria judgments were not binding on the arbitration proceedings as the latter fell outside the Regulation? The Court of Appeal overturned the judge's finding in this regard. It held that a "[R]egulation judgment can...give rise to an issue estoppel as much in Arbitration proceedings excluded from the [R]egulation as in any other proceedings in an English court".
- Was the judge's alternative rationale for granting a declaration on the basis of public policy arguments correct? The Court of Appeal held that, given following West Tankers: (a) Endesa was entitled to challenge the incorporation of the arbitration clause in the Almeria courts; and (b) the English courts were bound to recognise the decisions of that court; there was no room for an argument that public policy was infringed and no entitlement for the English courts to examine the question of incorporation themselves.
This decision is unlikely to be considered surprising as, to a greater degree than the decision at first instance, it is in keeping with the case law leading up to and including the ECJ decision in West Tankers. Lord Justice Moore-Bick provided a detailed examination of that case law, which he said provided a consistent line of authority. The principle that emerged from his examination is that, for the purposes of determining the applicability of the Regulation, proceedings are to be characterised by reference to their subject matter, ie, the nature of the rights which the proceedings serve to protect. Where a dispute as to the existence of an arbitration agreement arises, that will fall outside or within the Regulation depending on whether it forms the main subject matter of the proceedings or it is merely ancillary to a substantive dispute which itself falls within the Regulation.
The more unsatisfactory lack of reciprocity which may result from this line of authority was perhaps best expressed by Lord Justice Waller in his portion of the judgment. Namely:
- a court in member state A, where proceedings on the merits of a dispute have been commenced, is free to ignore a judgment in arbitration proceedings in state B, the seat of the arbitration (because the latter would fall within the arbitration exception to the Regulation);
- a preliminary ruling in the proceedings in state A, invalidating the arbitration agreement, will bind the courts in state B if obtained prior to the matter being brought before them.
It remains to be seen whether the Commission's Green Paper published earlier this year proposing revision of the Brussels Regulation, including in respect of the scope of the arbitration exception, will lead to amendments which may resolve difficulties such as that set out by Waller LJ.
(National Navigation Co v Endesa Generacion SA  EWHC 1397 (Comm); overturning National Navigation Co v Endesa Generacion SA  EWHC 196 (Comm))