In this recent decision the High Court was asked to determine an application for permission to serve an arbitration claim form against third parties outside the jurisdiction. The Court agreed with the obiter comments made by Males J in Cruz City and held it did not have the jurisdiction to do so.
The underlying arbitration concerned Steel Mont Trading S.A. (as the seller) and DTEK Trading (as the buyer). The buyer had refused to make final payment to the sellers on the basis that the cargo of coal, the subject of the contract, was not in accordance with contractual specifications as regards its calorific content.
Incolab Services Ukraine LLC (Incolab), the second defendant in these proceedings, had provided a number of reports relating to the cargo’s calorific value. The first of these, produced at the point of sale (the discharge certificate), stated that the calorific values were within the contractual parameters. Subsequent tests of the same cargo by Incolab produced rather different, non-contractual results (the non-contractual tests).
During the course of the arbitration DTEK had served evidence of a settlement agreement between it and Incolab (the DTEK settlement agreement). This provided that Incolab should pay compensation of US $215,000 for the incorrect indication of the coal quality indicators in the discharge certificate.
In opposition to this, the sellers in the underlying arbitration had served a witness statement from Mr Sergey Morozov - the first defendant in these proceedings - which directly contradicted DTEK. The witness statement defended the accuracy of the original discharge certificate and appended a settlement agreement between DTEK and Incolab with alternative wording (the Morozov settlement agreement). This settlement agreement instead stated that Incolab should pay compensation of US $215,000 for the incorrect indication of the coal quality indicators in the non-contractual tests.
The buyer, in wanting to question the integrity of the Morozov settlement agreement, made an application pursuant to s.44 of the Arbitration Act 1996 to ensure the buyer was allowed to inspect the Morozov settlement agreement and that the original version of this was preserved as evidence.
However, due to the fact the defendants were not a party to the arbitration, and the fact they were resident in the Ukraine, meant that the buyer had to make an application to serve out of the jurisdiction.
The question to be determined was purely procedural, and concerned the scope of the Court’s power and discretion to order service of proceedings against third parties outside the jurisdiction.
Relevant provisions – s.44 Arbitration Act 1996 and CPR 62.5
Section 44 of the Arbitration Act refers to the powers of the court exercisable in support of arbitral proceedings. Among these, at s.44(2)(b), is the ability to make orders relating to the preservation of evidence.
The powers of the Court to serve proceedings out of the jurisdiction in relation to an arbitration claim form are set out in CPR 62.5. This provides that:
- The court may give permission to serve an arbitration claim form out of the jurisdiction ifa) [...]b) the claim is for an order under section 44 of the 1996 Act
Jurisdiction of the Court
The issue before the Court was a controversial one and both parties put forward a number of cases in which obiter comments of various judges had discussed the matter in support of their respective positions. However, much emphasis was placed upon the decision of Males J in Cruz City 1 Mauritius Holdings -v- Unitech Ltd  EWHC 3704 (Comm)  1 Lloyd’s Rep. 191, in which the judge held, obiter, that orders under s.44 of the Act cannot be made against non-parties to the arbitration agreement, and hence that permission to serve out cannot be given against non-parties outside the jurisdiction.
The buyer had tendered arguments before the Court that either the decision in Cruz City was wrong or, at the very least, it had a good arguable case that entitled it to serve the claim form out of the jurisdiction and that was all that was required.
The buyer put forward a number of submissions that the reasoning of Males J was faulty. These included that:
- the learned judge had read too much into the wording of s.44 (the wording argument);
- s.44(1) grants the same power of making orders about matters listed in s.44(2) as it has for the purposes of and in relation to legal proceedings and the court obviously has power to make orders in relation to property held by non-parties (the legal proceedings argument);
- certain powers in s.44(2) necessarily involve the imposition of Court orders on third parties (the necessity argument);
- s.44(2)(c) limits its powers to be exercisable only by the parties to the arbitration agreement which is suggestive that the remaining powers were not intended to be so limited (the limitation argument);
- if s.44 applications cannot be made against non-parties to the arbitration agreement, a non-party would be able to take steps to seek to thwart the arbitration agreement with no right to obtain injunctive relief against that party (the lacuna argument);
- that s.2(3) of the Arbitration Act indicates that s.44 can be used in support of arbitral proceedings generally, and that the Court’s powers do not depend on any consensual agreement that there be an arbitration agreement (the consensual argument);
- whether or not the Court should be making orders against non-parties to arbitrations is a matter going to the Court’s discretion (the discretionary argument).
The judge in this case dismissed each of these arguments in turn, asserting either that the arguments were misplaced or that they were too heavily reliant on isolated points. Although the lacuna argument appeared to hold water, the judge held that ‘the fact there would be a lacuna is not a reason to find a jurisdiction which is not justified on the wording of the relevant sections against the relevant background.’
The discretionary considerations
Although the judge determined the application on the question of jurisdiction, she went on to highlight the discretionary grounds that were of relevance. These included that:
- S.44 is designed to cover applications between the parties to an arbitration agreement and applications against a third party would therefore be the exception, not the rule.
- There is parallel with CPR 6, which requires not only the jurisdictional gateway but also a reasonable prospect of success on the substantive claim. This element is missing from CPR 62.5.
- There is an alternative route for the relief as the Morozov settlement agreement could be obtained by way of a letter of request under s.44.
The application was consequently dismissed.
This case provides useful clarification on the fact that the Court does not have the power to grant an application for permission to serve an arbitration claim form against third parties outside the jurisdiction, laying to rest the conflicting obiter comments set out in a number of cases.