A recent decision of the United Kingdom Supreme Court in Ust-Kamenogorsk Hydropower Plant JSC v. AES Ust-Kamenogorsk Hydropower Plant LLP (the Decision) illustrates the court’s willingness to enforce an arbitration agreement even 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).
The appeal arose from a dispute between the grantor and grantee 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.
In 2004, the grantor commenced proceedings in Kazakhstan against the grantee that resulted in a judgment from the Kazakh Supreme Court invalidating the arbitration clause. In subsequent proceedings, the English courts ultimately held that the Kazakh court’s conclusions regarding the arbitration agreement were not binding on the parties for a number of reasons, including due to the fact that the disputes at issue were outside the arbitration agreement.
On June 12, 2009, the grantor commenced proceedings in a Kazakh economic court alleging that the grantee had failed to supply information pursuant to the concession agreement. The grantee’s application to stay those proceedings on account of the arbitration clause was dismissed because the clause had been invalidated by the 2004 decision of the Kazakh Supreme Court.
Injunction Application to Enforce Arbitration Agreement
Following those proceedings, the grantee initiated proceedings before the English Commercial Court seeking a declaration that the arbitration clause was valid and enforceable, as well as an interim injunction restraining the grantor from pursuing its claim in Kazakhstan.
An injunction was granted by the Commercial Court and upheld by the Court of Appeal. The grantor 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 grantee. The grantor 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. 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 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 a foreign court refuses to recognize and enforce the parties’ agreement, and has done so on a basis that is not supportable in law, it is appropriate for the court to intervene to protect the prima facie right of the grantee to enforce the negative aspect of its arbitration agreement with the grantor. The court held that the power to stay domestic legal proceedings and the power to determine that such proceedings are in breach of an arbitration agreement are “opposite and complementary sides of a coin.”
The Decision confirms that courts will exercise their discretion to enforce an arbitration agreement where the agreement is not respected by foreign courts without valid justification. 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. On the other hand, the Decision may create additional 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 in which they will employ to ensure they are given full force and effect.