Background

Article 4.1 of Council Regulation (EU) No 1346/2000 of 29 May 2000 on Insolvency Proceedings (the "Regulation") states: "Save as otherwise provided in this Regulation, the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened..."

Article 4.2 of the Regulation sets out a non-exhaustive list of the matters which the law of the state of the opening of insolvency proceedings is to determine, including:

"(e) the effects of insolvency proceedings on current contracts to which the debtor is party;

(f) the effects of insolvency proceedings on proceedings brought by individual creditors".

Articles 5 to 15 of the Regulation identify matters excluded from Article 4 which include: third parties' rights in rem, set-off, reservations of title, contracts relating to immovable property and effects of insolvency proceedings on lawsuits pending. In relation to the latter, Article 15 provides that the "effects of insolvency proceedings on a lawsuit pending concerning an asset or right of which the debtor has been divested shall be governed solely by the law of the Member State in which that lawsuit is pending".

Article 142 of the Polish Bankruptcy and Reorganisation Law provides that "Any arbitration clause concluded by the bankrupt shall lose its legal effect as at the date the bankruptcy is declared and any pending arbitration proceedings shall be discontinued".

Facts

Elektrim S.A. ("Elektrim"), a Polish company, at one time owned a substantial portion of PTC, a Polish mobile telephone company. In 2001, Elektrim entered into an agreement with two Vivendi companies ("Vivendi") pursuant to which Vivendi was to acquire an interest in PTC. The agreement contained a disputes clause providing for arbitration in London under the LCIA Rules. It was common ground between the parties that, while the agreement itself was governed by Polish law, the arbitration clause was subject to English law.

In 2003 Vivendi commenced arbitration against Elektrim claiming 1.9 billion Euro for breach of the obligation to secure Vivendi's interest in PTC. In August 2007, some two months prior to the liability hearing in the arbitration, Elektrim was declared bankrupt by the Warsaw District Court and wrote to the arbitral tribunal and Vivendi asserting that, as a result, the arbitration agreement had been annulled.

At the arbitral hearing in October 2007, the tribunal heard arguments from both parties as to whether the arbitration agreement had been annulled, and from Vivendi on the merits of the case. In an interim partial award the following spring, the tribunal, by a majority, rejected Elektrim's challenge to jurisdiction and found for Vivendi on the merits.

Vivendi applied under section 67 of the Arbitration Act 1996 for an order to set aside the award on the basis that the arbitration agreement ceased to have effect as and from the date of its bankruptcy. Mr Justice Christopher Clarke, finding that there was a conflict between the general provisions of Article 4 of the Regulation and the particular provision of Article 15, held that the latter provision prevailed and that English law should determine the effect of the insolvency on the arbitration. There was no provision under English law annulling the arbitration agreement and the award stood.

Vivendi appealed contending that: the judge erred in finding that Articles 4 and 15 were in conflict; that Article 4 was the primary article both chronologically and as a matter of construction of the Regulation; and that Polish law therefore determined the effect of the insolvency on the arbitration, which effect was the annulment of the arbitration agreement and the end of the tribunal's jurisdiction.

Decision

The Court of Appeal, although agreeing with counsel for Vivendi that the judge erred in finding that Articles 4 and 15 of the Regulation are in conflict, rejected the appeal. The arbitration fell within Article 15 which was an exception to Article 4 and English law consequently applied to the question of the effect of Elektrim's bankruptcy on the proceedings. The majority of the tribunal was correct to find it had jurisdiction and the judge was correct to decline to set aside the award.

Comment

In relation to the supposed conflict, Lord Justice Patten stated that the boundaries of a general rule are necessarily set by the scope of the exceptions to it and in this case Article 15 was the relevant exception to Article 4 and therefore not in conflict with it.

However, the Lord Justices of Appeal did not dwell on this question but, amongst other sources, looked to the recitals to the Regulation for guidance as to the intention behind the regime. Citing the phrase from the recital "to protect legitimate expectations and certainty of transactions", Lord Justice Longmore held that if a lawsuit (including arbitration) has begun before the insolvency occurs, the natural expectation of a businessman would be that the law of that suit will apply to determine whether it should continue. Until a claim pursued in such a lawsuit is found to be valid, it has no relevance to the insolvency proceedings. If it is valid, it will then be permitted to participate in the insolvency proceedings. If, however, no lawsuit is initiated prior to the insolvency, it is entirely appropriate that the law of the insolvency should apply to determine how such a claim may be pursued.

In the context of the recent global financial crisis, the question determined in this case is important. As reported elsewhere in this bulletin, the Swiss Federal Supreme Court recently reached a decision contrary to that of the English Court of Appeal in respect of the effect of the same Polish bankruptcy proceedings on a Swiss arbitration. When considering whether to initiate arbitration against a party that may be on the verge of insolvency, practitioners should give thought to the likely effect of such an insolvency on the arbitration or on the underlying claim if arbitration is not commenced.

(Syska (Elektrim SA) v Vivendi Universal SA & Ors [2009] EWCA Civ 677)