In CMA CGM SA v Hyundai Mipo Dockyard Co Ltd – Butterworths Law Direct 17.11.08 the Commercial Court held that arbitration clauses in novated shipbuilding agreements applied to disputes which arose before the date of the novation.  

In this case the Defendant built four container vessels pursuant to four shipbuilding contracts. The contracts provided that any dispute arising in connection with the interpretation and fulfilment of the contracts should be decided by arbitration in the City of London and that neither party should be entitled to transfer any or all of his rights and obligations under the contract to a third party without the prior written consent of either party, such consent not to be unreasonably withheld or delayed.  

The Claimant subsequently wanted to take over the contracts from ERS, and in April 2004, ERS requested the Defendant's consent to a novation to the Claimant of the four then existing contracts. The Defendant refused. The Claimant, as a third party (ERS had taken no steps), issued a claim in the Marseilles Commercial Court on 2 March 2005 (the French proceedings) by way of a tortious claim for substantial damages, brought under art 1382 of the French Civil Code (the Code), which provided for a fault-based liability in tort, alleging that the Defendant had unreasonably withheld its consent to a transfer of ERS's rights under the contracts, that that was a breach of those contracts which constituted fault under art 1382, and that the Claimant was therefore able to recover damages for the losses which it had suffered. Those proceedings were still extant when the parties carried out negotiations to attempt to resolve the issue of the novation.  

By a series of four novation agreements the parties resolved their dispute. The terms of the agreements provided, inter alia, that in each case the novation only took effect after construction work on the vessel had been completed, at a transfer date. The Claimant was to be substituted on and with effect from the transfer date in place of ERS as a party to the contracts, and the contracts should thereafter be construed and treated in all respects as if the Claimant was named in the contract instead of ERS. The contract also provided that on and with effect from the transfer date, the Claimant 'shall duly and punctually perform and discharge all liabilities and obligations whatsoever from time to time to be performed or discharged by it or by virtue of the Shipbuilding Contract in all respects as if the Claimant was named in the Shipbuilding Contract instead of [ERS]'. There was no express provision in the novation agreements as to what should occur in relation to the French proceedings.  

The Marseilles Commercial Court delivered its judgment on 30 September 2006, concluding that it had jurisdiction to hear the Claimant's claim. The court held that the Defendant had unreasonably refused to consent to a novation, in breach of the contracts, such breach constituting 'fault' within the meaning of art 1382 of the Code, entitling the Claimant to its full damages. The Defendant appealed to the Cour de Cassation, which appeal was still pending. The Defendant paid sums in satisfaction of the judgment.  

The Defendant claimed that it was entitled to recover the sums it had paid on the basis that the claimant had been in breach of the arbitration clauses, and each of the contracts, by bringing, pursuing and continuing the French proceedings. The Defendant referred that matter to arbitration. Although the arbitrators decided that by bringing the French proceedings in March 2005, the Claimant had not been in breach, they held that they had been in breach of contract by continuing to pursue, and not discontinuing, the French proceedings after the respective transfer dates.  

The Claimant appealed.  

The two questions of law arising for determination were: (i) whether the arbitration clause in the contracts applied to the pre-existing dispute between the parties which had already been referred to the French court, and was pending before it at the time of novation; and (ii) if so, whether the arbitrators were bound by the French court's determination of the same issues between the same parties.  

The appeal was dismissed, the Commercial Court holding that the Claimant, on a proper construction of the contracts as novated, came under an obligation to arbitrate an arbitrable dispute, once it owed obligations under those contracts, i.e. on and after the transfer date, and thereafter had been obliged to arbitrate such dispute not litigate it, refraining from any fresh, and terminating any existing, proceedings. It further held that if the contract had not been breached, the parties would have both complied with their obligations to have the matter resolved by arbitration, and there would have been no French judgment: the arbitrators had in fact resolved the issue in the Defendant's favour, paying no regard to the French judgment. Accordingly, as the parties had been obliged to go to arbitration, it was only the outcome of the arbitration which was of any relevance.