In Syska and another v Vivendi and others – Butterworths Law Direct 3.10.08 the parties had entered into an agreement providing for arbitration in London under LCIA rules with English law to apply to the arbitration, although the rest of the agreement was governed by Polish law.
A dispute arose and in early 2007 the LCIA tribunal fixed a hearing on liability issues for October 2007. In August 2007 the second Claimants had been adjudged bankrupt under Polish law. The question was whether an interim partial arbitration award made after the bankruptcy was declared should be set aside.
It was common ground that if the relevant Polish law applied, Article 142 of which provided that any arbitration clause concluded by the bankrupt should lose its legal effect as at the date bankruptcy was declared and that any pending arbitration proceedings should be discontinued, it had the effect of annulling the arbitration agreement. However, that was subject to the provisions of Council Regulation (EC) 1346/2000 (on Insolvency Proceedings) particularly arts 4.1, 4.2(e), (f) and 15.
On the day after its bankruptcy was declared, the second Claimant wrote to the tribunal and the Defendant companies stating that, as a result of the bankruptcy, the arbitration agreement had been annulled. On 15 October 2007, the arbitration hearing began in London.
The tribunal, by a majority, rejected the second Claimant's objections to the tribunal's jurisdiction, taking the view that the reference was a 'lawsuit pending' and that art 15 required it to apply English law to determine the effect of the bankruptcy on the reference. Having decided that it had jurisdiction, the tribunal issued its Interim Partial Award on the relevant issues in favour of the Defendant. The Claimant issued an application under s67 of the Arbitration Act 1996 seeking to set aside the award on the grounds that the arbitration agreement ceased to have effect as from its bankruptcy.
This gave rise to issues under the Regulation, which provides:
'4 (1) 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, hereafter referred to as the 'State of the opening of proceedings'...
(2) The law of the State of the opening of proceedings shall determine the conditions for the opening of those proceedings, their conduct and their closure. It shall determine in particular...
(e) the effects of insolvency proceedings on current contracts to which the debtor is party;
(f) the effects of the insolvency proceedings on proceedings brought by individual creditors, with the exception of lawsuits pending...
15 The effects of insolvency proceedings on a lawsuit pending concerning an asset or a 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'.
The issue for determination was what law governed the effects of the Polish bankruptcy order. In dismissing the application, the Commercial Court held that:
(2) Where arbitration proceedings were pending at the date of the insolvency, arts 4.2 (f) and 15 of the Regulation applied, so that the effects of the insolvency on the reference contract, and on the arbitration agreement insofar as it concerned the pending reference, were governed by the 'law of the Member State in which the lawsuit [i.e. the arbitration] was pending'. There was no reason why art 15 should be limited to the question of whether there should be a stay and did not also apply to provide that the law of the state in which the arbitration was pending should determine all questions which affected whether the arbitration should remain pending, including any question as to whether the effect of the insolvency was to annul the arbitration agreement, or the reference contract, and hence the reference.
It was clear that there was a conflict between art 4.2(e) and arts 4.2(f) and 15, but given the countervailing policy of the Regulation regarding the protection of legitimate expectation and security of transactions it was appropriate to apply lex fori processus (including arbitration) in accordance with the exception of art 4(2)(f).