Clauses allowing a party to unilaterally elect to have a dispute resolved by either arbitration or litigation have become increasingly popular in finance documents in recent years. They give the party with the benefit of the option (in a loan transaction, typically the lender) the flexibility to decide the best forum for a dispute at the time it arises.

However, as shown in the case of Deutsche Bank AG v. Tongkah Harbour Public Company Limited/ Deutsche Bank AG v. Tungkum Limited [2012] 1 All ER 194 (the Tungkum case), if a party enters into several linked agreements at the same time, each with a unilateral election clause, it may lose the intended flexibility when exercising the option under one agreement.

The Tungkum case – the facts

Deutsche Bank AG (Deutsche Bank) entered into a facility agreement and an export contract with a gold mining and exploration company, Tungkum Limited (Tungkum). At the same time, Tungkum’s parent company, Tongkah Harbour Public Company (Tongkah), gave a guarantee to Deutsche Bank. All three agreements contained dispute resolution clauses that allowed the parties to refer disputes to court. The facility agreement and the export contract also gave Deutsche Bank the option to refer disputes to arbitration.

A dispute arose concerning the three agreements. Deutsche Bank brought proceedings against Tungkum in an arbitration under the export contract and in court under the facility agreement. The same Deutsche Bank entity was party to both agreements, but different branches were responsible for exercising the rights under the two agreements. Deutsche Bank also brought court proceedings against Tongkah under the guarantee.

Tungkum and Tongkah applied for a stay under s.9 of the Arbitration Act 1996 of the court proceedings brought under the facility agreement and the guarantee while the arbitration took place. The claims under each contract arose from the same event of default and the defence to each claim would be essentially the same. On that basis, the High Court held that they were "aspects of the same matter" and accepted that Deutsche Bank could not simultaneously arbitrate and litigate the same matter. The judge emphasised that there was a close link between the agreements; sales under the export contract would repay sums due under the facility agreement. The judge noted that the position may have been different had the export contract acted by way of security only. The judge considered it irrelevant that different branches of Deutsche Bank had decided whether to litigate or arbitrate the agreements. The same contracting party had brought claims under all three agreements.

The court therefore decided that, once Deutsche Bank had referred the matter to arbitration under the export contract, the proceedings under the facility agreement should be stayed. The judge emphasised the presumption in commercial cases that the parties intend the same forum to deal with related disputes. However, the High Court refused to stay the court proceedings against Tongkah as there was no arbitration agreement between Tongkah and Deutsche Bank.

Commentary

It is unusual to want to refer different aspects of a dispute to litigation and arbitration, but there may be good reason to do so in particular cases. For example, it may be easier to enforce an arbitration award. Other obligations may lend themselves to enforcement following summary judgment through the courts. It is therefore important to ensure the chosen strategy for resolving a dispute works across the relevant agreements.

How can you mitigate the risk of a decision such as that in the Tungkum case? We recommend including express drafting in unilateral election clauses that an election under one agreement should not amount to an election under any other agreement between the parties.

Law stated as at 27 November 2012.