This case concerns a claim under s.67 of the Arbitration Act 1996 (the Act) whereby the claimant sought to argue that the arbitrator had been deprived of substantive jurisdiction as a result of a decree made in Mexico stating that the tender process leading to the shipbuilding contract relating to the underlying dispute was a nullity. For the reasons set out below the challenge was dismissed.

Factual background

This claim concerned a written shipbuilding contract dated 3 July 2014 (the SBC) entered into between the claimant (ESSA) as buyer and the defendant (CMSA) as seller for the design, construction and sale of a self-unloading salt barge for US$27,240,000, payable in four instalments.

ESSA was a Mexican company and a state entity, subject under Mexican administrative law to regulatory requirements, in particular the Law of Procurement, Leasing and Public Sector Services (LAASSP). ESSA’s Organo Interno de Control (the OIC) had particular functions under LAASSP.

On 27 May 2015, following ESSA’s failure to pay the second instalment and to respond to a notice of default, CMSA terminated the SBC and in August 2015 commenced arbitration proceedings. ESSA played no part in the proceedings until 25 July 2016. In coming on the record ESSA’s solicitors reserved their clients’ right to challenge jurisdiction, though these tentative indications were not pursued.

On 16 November 2016 an OIC resolution decreed the tender process under which CMSA had won the business for the SBC to be a nullity.

On 6 December 2016, one day after the final arbitration hearing had commenced, ESSA’s solicitors sent CMSA a statutory early termination notice, as required by the OIC resolution. CMSA brought this to the attention of the arbitrator who made clear his concern, which was to be told if anything was being done in Mexico that sought to undermine the arbitral process, given that ESSA was playing a full part and was itself seeking substantive relief, on the basis that the process was valid.

At no stage during the period of ESSA’s activity in the arbitration, up to and including the completion of the final hearing on the merits, did ESSA object to the arbitrator’s jurisdiction.

However, on 16 December 2016 ESSA’s solicitors wrote to CMSA saying that the termination notice raised issues as to the arbitrator’s jurisdiction. This was followed by a further letter on 22 December making a challenge to jurisdiction. Under directions given by the arbitrator, written submissions followed and on 7 April 2017 the arbitrator issued the arbitration award (the award), stating that the SBC was lawfully terminated by CMSA, leaving ESSA with a liability to pay US$6,810,000 plus contractual interest. At issue 8 of the award the arbitrator asked himself whether he should admit ESSA’s late objection to his jurisdiction. He concluded that there had been delay that ESSA had not justified in raising the objection and that ESSA had taken part and continued to take part in the arbitration when it should with reasonable diligence have been aware of the grounds upon which it had later sought to object to jurisdiction. The arbitrator therefore refused to admit ESSA’s objection.

ESSA sought to set the arbitration award aside pursuant to s.67 of the Arbitration Act 1996, claiming that it was of no effect as the SBC and arbitration agreement were deprived retrospectively of efficacy by the OIC resolution. [NB: for the relevant sections of the Act please refer to the end of this article]

Legal issues

To be successful, ESSA had to show that the OIC resolution deprived the arbitrator of the substantive jurisdiction he had hitherto enjoyed. Specifically:

If the tender process requirements were not satisfied there might have been an argument that ESSA lacked the legal power to conclude the SBC at the outset, however, as counsel for CMSA submitted, no such argument could be open to ESSA now as ESSA was in a position to know of any failure on its part to comply with LAASSP and of the legal consequences thereof at all material times. Therefore, and as counsel for ESSA accepted, the foundation of ESSA’s claim had to be an allegation that the OIC resolution deprived the arbitrator of substantive jurisdiction.

CMSA argued that s.73(1) of the Act debarred ESSA’s claim because ESSA first objected to jurisdiction only five weeks after the OIC resolution. CMSA further argued that ESSA’s claim was not sound in any event because the effects of the OIC resolution under Mexican law did not go to the arbitrator’s jurisdiction.

The judge considered the relevant expert evidence as to Mexican law and held that ESSA’s s.67 claim failed in limine because ESSA’s case on Mexican law did not go to the arbitrator’s substantive jurisdiction to make the award. The judge said that on no view did ESSA’s expert’s evidence support the proposition that the arbitration agreement ceased to be valid and binding on 16 November 2016. Further to this, ESSA’s expert acknowledged that the OIC had not by its resolution decreed the nullity of the SBC, let alone the arbitration agreement in particular. Further according to the expert, whilst the Mexican administrative law provisions could create an administrative law obligation on the part of ESSA to treat the tender process as nullity, the SBC was nonetheless a contract within ESSA’s capacity to bind itself as a matter of contract.

The judge went on to say that if, contrary to the foregoing, ESSA had a viable claim that the OIC resolution had deprived the arbitrator of substantive jurisdiction, he would agree with CMSA in any event that the claim was barred by s.73(1) of the Act as ESSA did not raise its objection before the arbitrator, under s.31(2) of the Arbitration Act 1996, as soon as possible after the resolution, when it failed to do so within a working day or two of receiving it.

It followed that ESSA did not raise the objection to jurisdiction upon which it later sought to challenge the award under s.67 either forthwith or within the time allowed by the 1996 Act or by the arbitrator. The s.67 claim was precluded by s.73(1), therefore, unless ESSA when continuing to participate in the arbitration after receiving the OIC resolution could not with reasonable diligence have appreciated that its ground of objection to jurisdiction existed.

Had it been otherwise, it would have been possible, expecting of ESSA only that it act with reasonable diligence, for the objection to jurisdiction later raised to have been made a month or so earlier. During that month or so when ESSA reasonably could have raised but did not raise its objection, it continued to participate in the arbitration, on the merits, defending CMSA’s claim and pursuing its counterclaim, in particular playing a full part in the five-day final hearing. The (supposed) objection to jurisdiction said to found the s.67 claim brought by ESSA was therefore not open to it to raise in any event, by operation of s.73(1). ESSA’s challenge to jurisdiction therefore failed.

Case comment

This case serves as a strong reminder that if a party to an arbitration wishes to challenge the arbitrator’s jurisdiction they need to do so as quickly as possible in order not to lose their right to object, Mr Justice Andrew Baker stating in this case that ESSA should have acted within a working day or two of receiving the resolution, though presumably the period will also depend on the factual circumstances of each case.

Relevant sections of the Act

31.— Objection to substantive jurisdiction of tribunal.

(2) Any objection during the course of the arbitral proceedings that the arbitral tribunal is exceeding its substantive jurisdiction must be made as soon as possible after the matter alleged to be beyond its jurisdiction is raised.

67.— Challenging the award: substantive jurisdiction.

(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court:

(a) challenging any award of the arbitral tribunal as to its substantive jurisdiction; or (b) for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part, because the tribunal did not have substantive jurisdiction

A party may lose the right to object (see s.73) and the right to apply is subject to the restrictions in s.70(2) and (3).

73.— Loss of right to object.

(1) If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this part, any objection:

(a) that the tribunal lacks substantive jurisdiction (b) that the proceedings have been improperly conducted (c) that there has been a failure to comply with the arbitration agreement or with any provision of this part; or (d) that there has been any other irregularity affecting the tribunal or the proceedings, he may not raise that objection later, before the tribunal or the court, unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection.

This article originally appeared in the May 2018 edition of shipping case digest