Two recent cases, one English and the other Canadian, concern arbitration and the granting of Mareva injunctions/freezing orders.

Section 44 of the English Arbitration Act 1996 sets out the court’s powers exercisable in support of arbitral proceedings, including the power to grant freezing orders over assets, formerly known as Mareva injunctions. The interplay between the courts and the tribunal is dealt with in detail by Gee: Commercial Injunctions (5th Ed) 6.026-6.040.

In B v S [2011] EWHC 691(COMM), Flaux J held that the standard Scott v Avery clause found in the Federation of Oils, Seeds and Fats Association (FOSFA) and Grain and Feed Trade Association (GAFTA) forms of sale contract has the effect of excluding the court’s power to grant relief under section 44 of the Arbitration Act 1996 including, in particular, freezing/Mareva injunctions. The clause contained in FOSFA 54 includes a Scott v Avery clause as follows:

“29. Arbitration:

Any dispute arising out of this contract, including any question of law arising in connection therewith, shall be referred to arbitration in London (or elsewhere if so agreed) in accordance with the Rules of Arbitration and Appeal of the Federation of Oils, Seeds and Fats Association Ltd, in force at the date of this contract and of which both parties hereto shall be deemed to cognizant.

Neither party hereto, nor any person claiming under either of them, shall bring any action or other legal proceedings against the other of them in respect of any such dispute until such dispute shall first have been heard and determined by the arbitrators, umpire or Board of Appeal (as the case may be) in accordance with the Rules of Arbitration and Appeal of the Federation, and it is hereby expressly agreed and declared that the obtaining of an Award from the arbitrators, umpire or Board of Appeal (as the case may be), shall be a condition precedent to the right of either party hereto or of any person claiming under either of them to bring any action or other legal proceedings against the other of them in respect of any such dispute.”

Somewhat surprisingly, this is an issue which has not been dealt with directly by the English courts hitherto. In the current economic climate, when security for claims is all the more important, those advising traders may now wish to amend their contracts accordingly.

In Ontario, Canada, the Superior Court of Justice handed down an equally important case concerning Mareva injunctions in Farah v Sauvageau Holdings Inc 2011 ONSC 1819 (CANL II). In that case, Perell J dismissed an application for enforcement of a Mareva injunction awarded by a sole arbitrator. This was on the grounds that the arbitrator did not have jurisdiction to grant a Mareva injunction to the extent that it might impact on third parties who were strangers to the arbitration agreement, such as financial institutions.

The parties signed an arbitration agreement appointing the Hon Robert S Montgomery as arbitrator. Under the arbitration agreement, the parties agreed that the Canadian ADR Chambers Arbitration Rules applied to the arbitration. The arbitrator granted Sauvageau Holdings an interim Mareva injunction restraining the defendants from, inter alia, dissipating assets. The terms of the order purported to make the Mareva injunction applicable to “all persons with notice of this injunction”. In handing down his decision, the Learned Judge said:

“In my opinion, there is nothing in the [Canadian] Arbitration Act 1991 that empowers arbitrators to grant Mareva injunctions or for that matter to appoint receivers, grant Anton Pillar orders, or grant Norwich orders. Granting an interlocutory injunction that requires financial institutions to prevent the removal of monies and assets and to disclose and deliver up records and report to a litigant, is not an order in which the arbitrator is ruling on the scope of the arbitration agreement or on the scope of his or her jurisdiction; it is an order in which the arbitrator purports to enjoin or direct the conduct of strangers to the agreement to arbitrate who are not bound by the jurisdiction of the arbitral tribunal … I conclude that while Mr Montgomery had the jurisdiction to make an injunctive order or arbitral award against [the defendants] as parties to the agreement to arbitrate, he did not have the jurisdiction to grant a Mareva injunction [a]ffecting persons who did not sign the agreement to arbitrate … It is my view that Mr Montgomery erred in allowing the arbitration to proceed ex parte.”

The power of an arbitration tribunal to make an order for interim measures and in particular an order for a preaward attachment, such as a freezing order or Mareva injunction, varies from country to country and from institution to institution. In Germany, an order can be granted by the the tribunal but actual attachment is reserved for the courts. See also the LCIA Rules, Article 25, Interim and Conservatory Measures.

Even if a tribunal has the power to grant such an order its effectiveness is dependant on enforceability, and from a practical point of view, where available, seeking the assistance of the court in aid of the arbitral process may well be the better course, given most courts have greater powers in relation to enforcement: the court is better placed to enforce the freezing of a bank account or arresting a ship, and to require undertakings in damages from a claimant backed by security if necessary to protect a party who may be harmed and suffer damages as a result of the granting of the order.

But returning to the present Canadian case, the decision by the court that the arbitrator did not have jurisdiction to grant a Mareva injunction affecting persons who did not sign the agreement to arbitrate, is unsurprising.

[With thanks to Ellyn Law LLP , Toronto, Canada for providing the Canadian case]