Overview

Close upon the heels of the decision in A v B [2017] EWHC 3417 (Comm) (see Article - Commencing LCIA Arbitration: The Perils of Non-Observance of the LCIA Rules) which considered when a challenge to arbitral jurisdiction must be made in an arbitration under the rules of the LCIA and considered the impact of section 73 of the Arbitration Act 1996 upon the interpretation of the relevant LCIA provision, the recent Commercial Court decision in Exportadora de Sal SA de CV v Corretje Maritimo Sud-American Inc [2018] EWHC 224 (Comm) emphasises the need to act swiftly in raising an objection to substantive jurisdiction under section 67.

The context was a highly unusual one: namely, where arbitral jurisdiction existed when the arbitration was commenced under an admitted contract and arbitration agreement but where it was argued that it had been removed subsequently by a supervening governmental act which declared the contract (and arbitration agreement) null and void ab initio.

Does that argument give rise to a section 67 challenge to jurisdiction at all? If so, how do sections 31 and 73 apply to it?

The decision gives stringent guidance on the test under section 73(1) of the Arbitration Act 1996 which is to be applied where a party contends that it “did not know and could not with reasonable diligence have discovered the grounds for the objection” to jurisdiction.

Further, the Court’s decision is important in emphasising that on any section 67 (or indeed section 68) challenge, the purpose of the witness statement is to set out evidence and not argument. The habit, into which most practitioners have fallen, of setting out one’s case in full in the witness statement was disapproved by the Court. This reflects the Commercial Court’s increasing insistence upon the proper (and therefore much more limited) deployment of factual witness statements.

The Factual Background to the Section 67 Challenge

Exportadora de Sal is a Mexican salt mining company owned 51% by the Mexican Government and 49% by Mitsubishi Corporation. By reason of the majority state ownership, it was viewed in Mexican law as a state entity and was therefore subject to Mexican administrative law governing the tender and contracting procedures contained in a local Mexican law (the Law of Procurement, Leasing and Public Sector Charges).

Exportadora contracted as buyer with a shipbuilder, Corretje Maritimo, for the construction and sale of a specialist salt barge on 3rd July 2014. The shipbuilding contract and arbitration agreement were governed by English law.

The builder (as the arbitrator held) lawfully terminated the contract on 27th May 2015 leaving a substantial instalment owing from Exportadora. The builder commenced arbitration against the buyer in August 2015.

Initially the buyer took no part in the arbitration. However, a hearing date having been fixed by the arbitrator for September 2016, in July 2016 and shortly before the hearing the buyer appointed solicitors who came on the record stating that they would “contest both liability and quantum (and possibly jurisdiction)”. Jurisdiction as a separate issue was not then pursued but other defences (including one of illegality) were raised. The hearing of liability and quantum was adjourned to 5th December 2016.

Separately, Exportadora’s Órgano Interno de Control (OIC) carried out an audit on 10th August 2016 to ascertain whether Exportadora had complied with the requirements of the Mexican law in question. The OIC audit led to various interventions by the OIC, culminating in a decree by the OIC on 16th November 2016 that the tender process had been irregular and that the award of the contract to the builder was and had been a nullity. Exportadora issued an ‘early termination declaration’ in respect of the contract, as directed by the OIC.

Surprisingly, Exportadora than participated fully in the December 2016 hearing on the merits. Its counsel, taxed by the tribunal with the need to explain matters if it was being alleged that the arbitral process was irregular in some way by reason of the OIC ruling, confirmed that this was “a separate matter” and recognised the validity of the arbitral process.

Shortly after the hearing, on 22nd December, Exportadora then raised the issue and made a jurisdictional challenge. The arbitrator allowed further submissions and then rejected the challenge as raised too late.

Exportadora lost the arbitration.

It then commenced a section 67 challenge, contending that the effect of the OIC decree under Mexican law was to deprive the tender of validity, with the result that it did not have power or capacity to enter into the contract and that as from 16th November 2016 the contract was null and void.

The three points dealt with by the Court

(1) ‘Retroactive deprivation’: a matter going to substantive jurisdiction at all?

While there was contested evidence of Mexican law as to the effect of the OIC decree, the highest that Exportadora could put its case was that, while the arbitrator had not lacked substantive jurisdiction at the outset of the proceedings, “this became so after the OIC Resolution” and that from that time on the arbitrator did not have substantive jurisdiction to decide any of the matters in the arbitration.

Andrew Baker J. held that the section 67 claim failed at the first hurdle, because the effect of Exportadora’s Mexican law argument as to ‘invalidity’, even if correct, was a matter going to the subsequent discharge of an existing contract and not a matter of initial and original capacity to contract and therefore arbitral jurisdiction.

As he put it at [39]: “A doctrine that accepts and acknowledges that a valid and binding contract was concluded, including a valid and binding arbitration agreement, but requires by reason of the act of an administrative body over two years later that it thereafter be treated as if it had never been validly concluded is, by nature, not a doctrine concerning capacity to contract.” Accordingly a ‘retroactive deprivation’ of authority to contract could not impugn the arbitrator’s substantive jurisdiction to make the award.

(2) How does Section 31 apply to a ‘retroactive deprivation’ case?

Section 31 deals with objections to the substantive jurisdiction of the arbitral tribunal at two stages: (a) under section 31(1), lack of jurisdiction “at the outset of the [arbitral] proceedings” and (b) under section 31(2), “during the course of those proceedings” where the tribunal “is exceeding its substantive jurisdiction”.

Objectively, Exportadora was to be taken to know that it was contracting with the builder in contravention of Mexican law and (if true) in an unauthorised manner. Accordingly, any objection on that ground, even if it went to jurisdiction, was one which had to have been raised by Exportadora before taking any step in the arbitration. Under section 31(1) of the 1996 Act “must be raised by a party not later than the time he takes the first step in the proceedings to contest the merits”. The time for raising that jurisdictional issue was long past.

For this reason, Exportadora had to put its case as one founded on the OIC decree and on the contention that that decree, as from 16th November 2016, deprived the arbitrator of substantive jurisdiction. In other words, it was a matter which arose “during the course of the arbitral proceedings”. In these circumstances, Exportadora sought to put itself within the “as soon as possible” requirement under section 31(2) (: “Any objection … must be made as soon as possible after the matter alleged to be beyond its jurisdiction is raised”), arguing that its raising of the point on 22nd December shortly after the hearing and before the award met this requirement.

The builder argued that section 31(2) was inapplicable and that only section 73(1) applied, which thereby imposed a more exacting timescale for raising an objection as to jurisdiction than simply “as soon as possible”, namely “forthwith”. It was argued that continuing to act as arbitrator where the arbitrator had jurisdiction initially but then has lost it was not a case of “exceeding” jurisdiction as such, and that section 31(2) deals only with going beyond a jurisdiction which the tribunal has, not a case of subsequent loss of all jurisdiction.

It might be said that this was a hair-splitting argument in that it sought to distinguish “forthwith” from “as soon as possible”. However, the language of section 31(2) does not sit very happily with a “retroactive deprivation of all jurisdiction” argument. This is not surprising since the framers of the Model Law and then the 1996 Act were unlikely to have such a possibility in mind as a bar to arbitral jurisdiction.

The Judge approached the matter on the robust basis that section 31 should be read so as to avoid any gap in coverage, stating at [45]: “That may make the case unusual. But if it were nonetheless viable, I find it entirely natural to describe an arbitrator who continues to act after his temporally limited jurisdiction has expired as exceeding his jurisdiction. This reading of section 31(2) avoids a lacuna in section 31 that seems to me unlikely to have been intended.”

(3) Section 73(1) and the exception for late challenges to jurisdiction

Section 73(1) 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”.

The obvious problem for Exportadora was that it had known about the matters on which it relied since, at the latest, 16th November 2016 when the OIC made its decree of nullity or, at the earliest, August 2016 when the OIC carried out its audit and instituted its ‘intervention’ for breaches of the Mexican law in respect of tender procedures. It then took part in the December hearing.

In those circumstances, there was little doubt as to the outcome.

But the Court usefully stressed that given the importance of jurisdiction, a party had to act very quickly indeed, and within a timescale of days not weeks, treating the investigation of any potential jurisdictional argument as one of “the highest priority”. The Judge explained the rational for this as follows at [48]: “The general context in which that question of reasonable diligence falls to 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.”

The Court held that Exportadora should have taken “urgent advice” as soon as it learnt of the OIC decree and “treated with appropriate priority” should have objected within one week. The Court would have gone further if necessary and said that with the background since August, it should have objected “within a working day or two” of receiving the decree.

Witness Statements in section 67 (and section 68) challenges: the Correct Approach?

The general guidance to witness statements in the Commercial Court Guide (at Part H1.1(a) of the 10th Edition) is that “the function of a witness statement is to set out in writing the evidence in chief of the witness”. The Court is increasingly hard on statements that argue the case or recite documentation with strict page limits.

No specific guidance on witness statements is given in Part O, dealing with Arbitration Claims, (beyond in relation to section 68 challenges, that these “must be supported by evidence of the circumstances on which the claimant relies as giving rise to the irregularity complained of and the nature of the injustice which has been or will be caused to the claimant”: O8.4). Generally the place to argue the case is in the Claim Form which “must contain, among other things, a concise statement of the remedy claimed and, if an award is challenged, the grounds for that challenge”: O3.1.

However, as the Judge noted in this case, on section 67 (and 68) applications, a practice has grown up of serving a very full witness statement with the Arbitration Claim Form. He saw as this as having arisen because of “the perceived convenience in a section 67 claim of setting out the claimant's detailed case as to the material facts, with explanatory comment or an outline of the proposed argument, in a single, main supporting witness statement from the claimant's solicitor.” [25].

Andrew Baker J. in the course of his judgment disapproved of this practice.

He laid down some ‘reminders’ which practitioners will do well to bear in mind for the future: see at [25] to [27].

  • “Where the material facts will be proved by contemporaneous documents, whether generated by the original transaction or by the arbitral proceedings, the proper function of a witness statement may well be only to serve as the means by which those documents can be got into evidence by being exhibited.”
  • “The claimant's case as to what those documents prove, and as to the conclusions to be drawn, can and should be set out in the Arbitration Claim Form as part of the statement of the "Remedy claimed and grounds on which claim is made", a statement often produced in the form of a statement of case attached to the Claim Form.”
  • “The content of any witness statement, beyond a bare identification of exhibited documents, can and should be limited to matters of fact intended to be proved, if disputed, by calling the maker of the statement as a factual witness at the final hearing of the claim.”

Where (as is likely) this approach has not been taken or ‘old-style’ statements are being considered, then a further requirement was stressed:

  • “If a witness statement served with the Arbitration Claim Form has not been properly limited in that way, … it is essential, if the maker of the statement is to be called as a witness at the final hearing of the claim, that proper thought is given to which parts of the statement it is necessary or appropriate to take as their factual evidence in chief. That should preferably be done well ahead of the hearing. Any dispute over what should be allowed as evidence in chief can then be identified and resolved, by the court if necessary; the parties can then prepare cross-examination limited accordingly; and the hearing can then be listed upon the basis of a time estimate that is better informed.”

In cases where the underlying facts are not in reality contentious but how they are to be argued is, this restatement of approach is likely to see the disappearance of any proper need for a full witness statement. The case can be summarised in pleading form in the Claim Form (and argued at fuller length in the skeleton, which witness statements often seek to foreshadow) and the accompanying statement limited to a vehicle for appending the relevant underlying documentation.