​This case is a salutary reminder of the need for a party to raise a jurisdictional challenge in arbitration quickly. The losing party in this application should have acted urgently – within “a day or two” – on discovering facts that could have given rise to a legitimate challenge. Its failure to do so meant that it lost its right to object: Exportadora de Sal S.A. de C.V. v Corretaje Maritimo Sud-Americano Inc [2018] EWHC 224 (Comm), [2018] All ER (D) 93, 9 February 2018

The claim concerned a 2014 shipbuilding contract (the Contract) between the claimant, Exportadora de Sal SA (Exportadora) – a majority Mexican-state owned entity – as buyer, and Corretaje Marítimo Sud-Americano (CMSA), as designer, builder and seller of a salt barge. Exportadora was to pay CMSA in four instalments. The Contract contained a London seated arbitration clause and was governed by English law.

Exportadora failed to pay the second instalment, so in May 2015, CMSA gave notice to terminate the Contract. CMSA subsequently commenced arbitration proceedings against Exportadora in August 2015. A sole arbitrator, Mr Lionel Persey QC, declared in April 2017 (the Award) that such termination was lawful, leaving Exportadora liable to pay USD 6 million plus contractual interest.

A reluctance to engage with the arbitration

At first, following CMSA’s commencement of arbitration, Exportadora refused to engage and ignored the notice to arbitrate. Almost a year later, in July 2016, Exportadora’s solicitors finally came onto the record, declaring in correspondence that “both liability and quantum (and possibly jurisdiction)” would be contested. A Defence and Counterclaim was submitted in October 2016. No jurisdictional objections were raised.

A parallel regulatory investigation declares the contract to be void

At the same time, the Órgano Interno de Control (the OIC) in Mexico commenced a regulatory investigation into the tendering of the Contract. In England, Baker J remarked that the evidence suggested that this was no coincidence.

That investigation resulted, in November 2016, in a resolution declaring that under Mexican administrative law, the Contract tender process was null and void (and thus, so too was the Contract) (the OIC Resolution). As such, Exportadora was required to declare early termination of the Contract and it did so shortly thereafter.

But the arbitration still goes ahead

The arbitration proceeded, with a hearing on the merits in December 2016. Again, Exportadora did not raise an objection to the tribunal’s jurisdiction.

A very late jurisdiction challenge

It was only after this hearing that Exportadora finally raised a jurisdictional challenge. This was rejected by the arbitrator on the basis of delay, and that Exportadora had taken part, and continued to take part, in the arbitration when it should have been aware of the grounds upon which it had later sought to object to jurisdiction. The arbitrator delivered the Award in April 2017.

Shortly thereafter, Exportadora brought a claim under s67 Arbitration Act 1996 (the AA 1996), seeking a declaration that it did not have proper power to enter into the Contract, or the Arbitration Agreement, because of the OIC Resolution. As a consequence, Exportadora argued, the Award was of no effect.

Retroactive deprivation of authority to contract – a matter for substantive jurisdiction?

Exportadora’s position was somewhat unusual since it argued that the tribunal had jurisdiction at the start of the arbitration, but this was subsequently retroactively removed by the OIC Resolution on the basis this had removed its capacity to contract.

The court observed, however, that even if the Contract was invalid under Mexican law, this was only relevant to the discharge of the Contract, and not to the original capacity to contract. The retroactive deprivation of authority to contract could not, therefore, affect the tribunal’s substantive jurisdiction under the arbitration agreement.

Alternative basis for challenge too late

Secondly, while Baker J had already decided that the OIC Resolution did not affect jurisdiction, he nevertheless considered the parties’ arguments regarding s31 AA 1996 (Objection to substantive jurisdiction of tribunal).

In principle Baker J agreed with Exportadora’s view that the present circumstances fell within the scope of s31(2), which deals with objections raised during the course of the arbitral proceedings, where the tribunal is said to be exceeding its substantive jurisdiction. In the present circumstances, however, Exportadora had failed to raise its jurisdictional objection as soon as possible after the OIC Resolution.

Too late, and no excuse

The judge also ruled that there was no excuse for the lateness of the objection. Section 73(1) AA 1996 bars a late objection unless the party shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with “reasonable diligence” have discovered the grounds for the objection.

On the facts, it was clear that Exportadora knew about the OIC investigation from at least August 2016, and at the latest November 2016 when the OIC Resolution was issued. Despite this, Exportadora participated in the hearing on the merits in December 2016, raising no jurisdictional objections.

Baker J remarked that, following the OIC Resolution, Exportadora should have taken urgent advice and acted “within a working day or two”, regarding the investigation into a potential jurisdiction argument. This is because the context in which the question of reasonable diligence under s67 must be assessed is that, when faced with a legal claim asserted through arbitration, “logically and practically the first question any respondent can fairly be expected to consider and keep under review throughout is whether it accepts the validity of the process”.

Comment

This ruling perfectly demonstrates the importance of a party raising a jurisdictional objection as quickly as possible during proceedings. If a party becomes aware of such an objection, or facts that might give rise to an objection, it should act promptly – potentially within a matter of days. It also serves as a reminder, therefore, that parties should not hold such objections in reserve.

The judgment also underscores the sanctity of arbitral awards. The court will not entertain a party looking to circumvent the consequences of an otherwise enforceable contract by invoking s67, particularly where those circumstances arise through “understandable suspicion” and where the objecting party “may be guilty of gamesmanship or worse”.