The English High Court held the tribunal lacked jurisdiction as the defendant ceased to exist.
In Ga-Hyun Chung v. Silver Dry Bulk Co Ltd,[i] the English High Court upheld a challenge to an award under Section 67 of the Arbitration Act (the Act). The award was made in favour of Silver Dry Bulk Co Ltd (SDBC) against Homer Hulbert Maritime Co Ltd (HH). The claimant, Mr Chung (trustee of HH), successfully challenged the jurisdiction of the tribunal on the grounds that there was not a valid arbitration agreement, and the tribunal had therefore not been properly constituted, because HH had ceased to exist at the time the notice of arbitration was filed.
This case serves as a useful reminder of the importance of carrying out due diligence on defendants prior to commencing arbitration proceedings, especially if they are incorporated in a foreign jurisdiction. If one of the parties to an arbitration agreement has ceased to exist, then a tribunal cannot be properly constituted and the arbitration proceedings cannot produce a valid and enforceable award.
HH, an entity incorporated under the laws of the Marshall Islands, entered into an agreement for the sale of a ship to SDBC. The agreement provided for London seated arbitration. A dispute arose, and a notice of arbitration was filed on 29 October 2014, under which SDBC alleged fraud and/or bribery by HH. Mr Chung, as trustee of HH, claimed never to have received the notice of arbitration. Subsequently, the notice of arbitration was sent to Sinokor Merchant Marine Co Ltd (Sinokor), which, according to SDBC, was part of the HH corporate group. Sinokor did not participate in the arbitration. The tribunal found that certain payments by HH constituted a bribe and that SDBC was entitled to damages.
In February 2011, prior to the commencement of arbitration, HH filed articles of dissolution under Marshall Islands law. Under the Business Corporations Act (Marshall Islands), which was the applicable law:
- The life of a dissolved company is extended for three years, so that the entity can prosecute and defend suits, enabling it to settle and close its business.
- The life of a dissolved company is further extended if claims that had been brought within the three-year period were not concluded by the end of it.
- If a company is dissolved, the directors become trustees, with the power to settle the affairs of and prosecute and defend all suits of the dissolved company, as necessary for the final settlement of unfinished business.
The Section 67 Challenge
Mr Chung challenged the award on the basis that the tribunal did not have jurisdiction as there was not a valid arbitration agreement and the tribunal was therefore not properly constituted. Mr Chung argued that no arbitration was ever properly commenced against HH, as HH had been dissolved and wound up prior to the purported commencement of arbitration.
SDBC argued that HH had waived its right to challenge the substantive jurisdiction of the tribunal by virtue of Section 73 of the Act. SDBC also argued that the challenge did not fall within the meaning of Section 67 of the Act because it related to a question of Marshall Islands law and did not fall within the scope of the concept of “substantive jurisdiction” under the Act.
The High Court allowed the challenge to the award. In reaching its decision, the court held:
Section 73 — loss of right to object: There was no representation by HH that it was accepting the jurisdiction of the tribunal. Further, although Sinokor did appear before the tribunal, Sinokor made clear it was not accepting the jurisdiction. Accordingly, Section 73 did not preclude Mr Chung from challenging the award under Section 67.
Section 67 challenge: A party may apply to the court to challenge an award of the tribunal as to its substantive jurisdiction. “Substantive jurisdiction” includes whether there is a valid arbitration agreement and whether the tribunal is properly constituted. If HH did not exist, the arbitration agreement could no longer operate, which meant that HH could not appoint an arbitrator, no notice of arbitration could be sent to HH, and no arbitrator could be appointed in default. Accordingly, the challenge fell within Section 30 (1) (b) as to “whether the tribunal is properly constituted”. The fact that the finding as to the interpretation of Marshall Islands law was itself a finding of fact did not mean the issue did not fall within Section 67. The tribunal could not give itself jurisdiction by relying on a finding of fact as to HH’s status if there was no jurisdiction. In the alternative, the challenge also fell under Section 30(1)(a): “whether there is a valid arbitration agreement”. If HH had ceased to exist, then SDBC was no longer a counterparty to the agreement, and so from the outset there was no valid arbitration agreement.
Did HH cease to exist? The Business Corporations Act (Marshall Islands) allows a company to exist for a further three years after filing articles of dissolution, to allow it to wind up. If claims are brought within the three-year period, then the company’s life will be extended. However, the life of the company is not indefinite by virtue of the fact that on dissolution, the directors of the company become trustees to settle the affairs and prosecute and defend suits as necessary for the final settlement of unfinished business of the corporation. The trusteeship does not extend the life of the company to dispose of potential claims in the future. In contrast, Delaware law allows a company to be revived after the three-year period by application to court and the appointment of directors as trustees. There was no exception for fraud claims. Accordingly, pursuant to Section 105 of the Business Corporations Act (Marshall Islands), HH had ceased to exist at the time the notice of arbitration was filed.