A recent decision of the United Kingdom Supreme Court (the Court) in Ust-Kamenogorsk Hydropower Plant JSC v. AES Ust-Kamenogorsk Hydropower Plant LLP (the Decision) illustrates that court's willingness to enforce an arbitration agreement in circumstances where a foreign court has refused to do so. While courts are generally reluctant to interfere with the conduct of proceedings in a foreign court, the Decision confirms that courts will exercise their jurisdiction to protect the rights provided under an arbitration agreement in certain circumstances.

The Decision analyzes when it will be appropriate for a court to issue an injunction to enforce an arbitration agreement in the face of a foreign court proceeding. A unique feature of this case was that the party seeking injunctive relief had not commenced, and had no intention of commencing, arbitration proceedings at that time.

The Supreme Court's analysis focused on two fundamental "aspects" that arise from an arbitration agreement. First, the court highlighted the positive obligation flowing from arbitration agreements in which the parties agree to only seek relief (within the scope of the arbitration agreement) in the prescribed arbitral forum. Second, the court noted that there is a negative (and often silent) concomitant obligation where the parties agree not to seek relief in any other forum (akin to an exclusive choice of forum clause).

Background

The appeal arose from a dispute between the grantor, Ust-Kamenogorsk Hydropower Plant JSC (JSC), and grantee, Aes Ust-Kamenogorsk Hydropower Plant LLP (AESUK), of a hydroelectric energy concession in Kazakhstan. The concession agreement was governed by the laws of Kazakhstan but contained a broad arbitration clause requiring that, subject to two exceptions, "any dispute or difference arising out of or in connection with ... the concession agreement ... that cannot be resolved by negotiation should be settled by arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce...."

The parties agreed that arbitral proceedings would be held in London, England, and that English law would govern the interpretation of the arbitration clause itself.

Injunction Application to Enforce Arbitration Agreement

The Kazakh courts had, on several occasions, rejected AESUK's attempts to rely on the arbitration clause on grounds, later rejected by U.K. courts, that the arbitration clause was invalid. This led to AESUK seeking declaratory and injunctive relief in England. Following an interim injunction order, the English Commercial Court eventually granted AESUK a declaration that JSC could not bring any claim arising out of the concession agreement (save certain claims excepted by the agreement) otherwise than by commencing arbitration proceedings in the ICC in London and pursuant to its Rules, along with an injunction against JSC to that effect.

An appeal by JSC was dismissed by the Court of Appeal. Both the English Commercial Court and the Court of Appeal held that that they were not bound by the Kazakh courts' conclusions in relation to the validity of an arbitration agreement that was subject to English law, and that neither of the grounds under which the Kazakh Supreme Court had held the arbitration clause invalid was sustainable.

JSC appealed to the Supreme Court on a number of grounds, including that the English courts did not have jurisdiction to enforce the arbitration agreement in circumstances where no arbitral proceedings had been commenced by the AESUK. JSC argued that the negative aspect of an arbitration agreement was only an ancillary right to a current or intended proceeding.

The Court dismissed the appeal and granted the injunction, holding that English courts had the power to grant an injunction to restrain foreign proceedings brought in breach of an arbitration agreement (subject to a restriction against enjoining a party from commencing or continuing proceedings in the court of a European state within the Brussels Regulation and Lugano Convention regime relating to enforcement and recognition of foreign judgments – that restriction did not apply in this case and would not be relevant to proceedings commenced in Canada). In its reasons, the Court stated that the negative aspect of an arbitration agreement is as fundamental as the positive aspect. The Court found that there was no reason why a party should be permitted to commence an action in a different forum simply because neither party had commenced arbitral proceedings in the agreed forum. The Court concluded that there was no basis to find that the negative aspect was only enforceable if arbitral proceedings were contemplated or commenced.

The Court also rejected the argument that it was contrary to the Arbitration Act 1996 for an English court to determine that foreign proceedings involved a breach of an arbitration agreement or issue declaratory or injunctive relief on that basis other than when arbitral proceedings were underway or proposed, and other than under the provisions of that Act. Among other things, the Court held that the source of the power to grant an injunction restraining foreign proceedings in breach of an arbitration agreement stems from the power to grant injunctive relief under the Senior Courts Act 1981 and not the Arbitration Act 1996. It held that such an injunction is for the purposes of and in relation to the negative promise contained in the arbitration agreement not to bring foreign proceedings, which applies and is enforceable regardless of whether or not arbitral proceedings are underway or proposed.

The Court acknowledged that there is a strong judicial reluctance to refrain from granting injunctive relief where foreign proceedings have been commenced on the basis that it is up to the foreign court to enforce the arbitration agreement. However, where, as in the present case, the foreign court refused to do so, on a basis which the English courts were not bound to recognize and on grounds which were unsustainable under the English law that governed the arbitration agreement, there was reason for the English courts to intervene. The Court held that the power to stay domestic legal proceedings and the power to determine that foreign proceedings are in breach of an arbitration agreement and to enjoin their commencement or continuation are "opposite and complementary sides of a coin."

Implications

The Decision has direct implications for parties to arbitration agreements governed by U.K. law or specifying a U.K. forum as the seat of arbitration. It confirms that U.K. courts will exercise their discretion to enforce an arbitration agreement where the agreement is not respected by foreign courts for reasons the U.K. courts find invalid. This may have the effect of restricting Canadian parties to such agreements from bringing proceedings in Canadian courts where to do so is arguably in contravention of the underlying arbitration agreement. This may also be a concern where a party wishes to seek injunctive relief in a Canadian court to protect its rights or maintain the status quo under a contract, pending arbitration of a dispute. Parties who want to retain the ability to obtain injunctive relief outside of the arbitration clause may want to consider inserting a provision in their contract in which they explicitly maintain their ability to obtain injunctive relief from a court of competent jurisdiction.

While on the one hand the Decision provides additional certainty to parties with arbitration agreements governed by English law that their contractual bargain will ultimately be respected, it may also create uncertainty if it encourages courts to interfere in foreign court determinations as to arbitrability. More generally, the Decision provides yet another example of the increasing deference courts are according to arbitration clauses and the measures which they will employ to ensure such clauses are given full force and effect.