Case Update: (1) Lack of substantive jurisdiction in respect of one respondent affects award as against the other respondent; (2) Substantive jurisdiction not affected by finding of liability under a different agreement

The English High Court in Arsanovia Ltd & Ors v Cruz City 1 Mauritius Holdings, [2012] EWHC 3702 (Comm) has delivered a relatively short but dense decision dealing with a number of issues revolving around the issue of different governing laws and (substantive) jurisdiction arising out of three LCIA (London Court of International Arbitration) arbitrations between 4 parties under various agreements.

Executive Summary

The key issue in this case involved the question of whether the tribunal had jurisdiction over the parties. This necessitated an examination of which law governed the arbitration agreement and whether parties had validly submitted to arbitration.

The key findings and holdings of the High Court were:

  1. Parties had actually made an implied choice that Indian law was the governing law of the arbitration clause. Were this not the case, the law with the closest and most real connection to the arbitration agreement would be English law.
  2. Under Indian law (and English law), a non-signatory is not party to an arbitration agreement and therefore the tribunal had no jurisdiction over that party. The relevant portions of the underlying agreement which were relied upon by the claimant to the arbitration could not be construed as the non-signatory respondent having submitted to arbitration.
  3. Under Indian law, an award could not be bifurcated i.e. if it is found that the tribunal did not have jurisdiction over one of the respondents, that award could not be enforced against the other respondent. The award had to be set aside in its entirety.
  4. A tribunal did not exceed its jurisdiction by making a finding against a non-party to the arbitration under a different contract in order to determine whether the respondent’s secondary liability arose. This was akin to determining whether a party’s (secondary) liability had arisen under a guarantee.

The arbitrations and awards

This decision involved:

(i) An award in an arbitration between Cruz City 1 Mauritius Holdings (“Cruz City“), a Mauritian company, as claimants and Arsanovia Limited (“Arsanovia“), a Cypriot company, and Burley Holdings Limited (“Burley“), a Mauritian company, as respondents (“Arbitration 1” and “Award 1“).

(ii) An award in an arbitration between CruzCity as claimants and Burley and Unitech Limited, (“Unitech“), an Indian company, as respondents (“Arbitration 2” and “Award 2“).

(iii) An award in an arbitration between Arsanovia and Burley as claimants and Cruz City as respondents, in which Cruz City made a counterclaim against Arsanovia (“Arbitration 3” and “Award 3“).

The High Court noted that although the three arbitrations were separate and were never formally consolidated, they had been heard together by the same Tribunal. The claimants (Arsanovia, Burley and Unitech) disputed the jurisdiction of the Tribunal(s) to determine Arbitrations 1 and 2 and the counterclaim in Arbitration 3. In Awards 1 and 2, the Tribunals determined that they had jurisdiction and in Award 3, the Tribunal, without making findings on jurisdiction, had dismissed the claim and the counterclaim (see paragraph [5]).

The agreements and background

The disputes arose out of two agreements entered into variously by the parties in respect of a joint venture to redevelop certain properties in India through a special purpose vehicle company called Kerrush Investments Limited (“Kerrush“). Unitech was the parent company of Arsanovia and Burley. Kerrush’s shareholders were Arsanovia and Cruz City. Arsanovia, Cruz City and Kerrush entered into a Shareholders’ Agreement (“SHA“) dated 6 June 2008, and other persons and companies, including Burley, subscribed to parts of the SHA.

Unitech, Burley and CruzCity also entered into a Keepwell Agreement, also dated 6 June 2008, under which Unitech agreed to put Burley in funds so that it could make the necessary payments under the SHA.

On 14 July 2010, Arsanovia served a Management Approval Termination Notice and a Buy-Out Notice on Cruz City on the grounds that a “Bankruptcy/Dissolution Event” (as defined in the SHA) had occurred in respect of the “Affiliate which controls Cruz City” i.e. Lehman Brother Holdings Inc, which had filed for Chapter 11 Bankruptcy in the USA. If these notices were valid, Arsanovia would get management control over Kerrush and could require CruzCity to sell its interest in Kerrush to Arsanovia under a formula in the SHA. However, on 13 September 2010, CruzCity purported to exercise a put option under the SHA on the basis that certain preconditions in the project had not been met, and thereby required Arsanovia to purchase City Cruz’s interest in Kerrush.

The key to understanding the dispute was that the terms of the put option were much more favourable to CruzCity than the buy-out formula. The main issue in the arbitration was whether Arsanovia’s notices were valid because that would disentitle CruzCity to exercise the put option (see paragraph [2]).

The 3 Arbitrations

  1. In Arbitration 1, CruzCity sought damages and specific performance against Arsanovia and Burley under the SHA.
  2. In Arbitration 2, CruzCity sought damages against Unitech and Burley under the Keepwell Agreement.
  3. In Arbitration 3, Arsanovia sought a declaration that its notices had been validly issued and specific performance of CruzCity’s obligations under the SHA or damages for CruzCity’s breach or both. In turn, CruzCity brought a counterclaim that sought relief against Arsanovia and Burley similar to that sought in Arbitration 1.

The SHA and Keepwell Agreement – Arbitration agreement

The SHA and the Keepwell Agreement both contained arbitration agreements in materially the same terms. Clause 21.1 of the SHA provided for the following:

“LCIA Arbitration. Any dispute arising out of or in connection with the provisions of this Agreement, including any question regarding its validity, existence or termination, shall be referred to and finally settled by arbitration under the London Court of International Arbitration Rules (“Rules”), which rules are deemed to be incorporated by reference into this Clause. The number of arbitrators shall be three. The seat or legal place of the arbitration shall be London, England. The language to be used in the arbitral proceedings shall be English. … Notwithstanding the above, the Parties hereto specifically agree that they will not seek any interim relief in India under the Rules or under the Arbitration and Conciliation Act, 1996 (the “Indian Arbitration Act”), including Section 9 thereof. The provisions of Part 1 of the Indian Arbitration Act are expressly excluded. For the avoidance of doubt, the procedure in this Clause 21 shall be the exclusive procedure for the resolution of all disputes referred to herein.”

The SHA and the Keepwell Agreement were both governed by Indian law.

Decision of the High Court

The High Court held that the Tribunal lacked substantive jurisdiction over Burley in Arbitration 1 as Burley was not a party to the arbitration agreement in the SHA. Notably, the High Court determined that this was the case regardless of whether the arbitration was governed by Indian or English law (see paragraph [34] and [36]).

Standard of Review

The High Court held that it was not bound by the tribunal’s determination of its jurisdiction in the arbitrations. Instead the English courts must determine the matter afresh (de novo), following the UK Supreme Court decision in  Dallah Real Estate and Tourism Holding Co v The Ministry of Religious Affairs, Government of Pakistan[2010] UKSC 46 (see paragraph [1]).

This should be contrasted with the position with respect to errors of fact or law made by the tribunal, which the English courts will not disturb (assuming the right to appeal on a question of law has been excluded), see Lesotho Highlands Development Authority v. Impregilo SpA and others, [2005] UKHL 43; see also Atkins Ltd v Secretary of State for Transport, [2013] EWHC 139 (TCC) (error of fact or law on the part of the arbitrator did not constitute a “serious irregularity” for purposes of seeking aside under the UK Arbitration Act 1996).

Applicable Law to the Arbitration Agreement

The preliminary issue was the applicable governing law of the arbitration agreement in the SHA (see paragraph [8]). The High Court held at paragraph [8] that,

“…They [the applicable governing law] are determined by reference to the English common law conflict of law rules, and so the court first decides whether the parties expressly or impliedly chose a law applicable to the arbitration agreement; if they did, the court gives effect to the parties’ choice; and if they did not, the court identifies the system of law with which the arbitration agreement has its closest and most real connection. …”

However, as the learned judge also pointed out, the essential dispute (with respect to Arbitration 1) was about whether Burley was party to an arbitration agreement with CruzCity. This would in turn determine if the Tribunal in Arbitration 1 had substantive jurisdiction. The law governing this issue (reference to arbitration) was not necessarily identical to the law governing the arbitration agreement. Nonetheless, absent exceptional circumstances, these would be governed by the same law (see paragraph [9]).

The High Court closely reviewed the Court of Appeal cases of C v D[2007] EWCA Civ 1282 and Sulamérica Cia Nacional de Seguros SA and ors v Enesa Engenharia SA and ors[2012] EWCA Civ 638 (see paragraphs [9] to [24]). These two cases similarly dealt with a situation in which parties had chosen a law that was different from the curial law (i.e. the law of the forum with supervisory jurisdiction over the arbitration) to govern the underlying contract.

For the same reasons as identified by Moore-Bick LJ in the Sulamérica case (see paragraph [18] and [19]), the High Court held that parties had implicitly chosen Indian law as the law governing the arbitration agreement.

“It has long been recognized that in principle the proper law of an arbitration agreement which itself forms part of a substantive contract may differ from that of the contract as a whole, but it is probably fair to start from the assumption that, in the absence of any indication to the contrary, the parties intended the whole of their relationship to be governed by the same system of law. It is common for parties to make an express choice of law to govern their contract, but unusual for them to make an express choice of the law to govern any arbitration agreement contained within it; and where they have not done so, the natural inference is that they intended the proper law chosen to govern the substantive contract also to govern the agreement to arbitrate”.

The High Court also identified the reference to the Indian Arbitration Act as another relevant factor which pointed to Indian law as the governing law of the arbitration clause. The learned judge agreed with the claimants that “where parties have expressly excluded specific statutory provisions of a law, the natural inference is that they understood and intended that otherwise that law would apply” (see paragraph [20]).

Interestingly, the High Court indicated its willingness to go as far as to hold that the parties had made an express choice of Indian law to govern the arbitration agreement, notwithstanding that the arbitration agreement was separable from the underlying contract (see paragraph [22]).

“Mr Hirst’s submission was that the parties’ choice of Indian law was implied: he felt unable in light of authority to contend at first instance that the parties made an express choice, but he reserved that argument should the case go to superior courts. It seems to me that Mr Hirst might have been too diffident: that a case for an express choice might have been available even before me. When the parties expressly chose that “This Agreement” should be governed by and construed in accordance with the laws of India, they might be thought to have meant that Indian law should govern and determine the construction of all the clauses in the agreement which they signed including the arbitration agreement. Express terms do not stipulate only what is absolutely and unambiguously explicit, and it seems to me strongly arguable that that is the ordinary and natural meaning of the parties’ express words (notwithstanding relatively recent developments in the English law about the separability of arbitration agreements from the substantive contract in which it was made and assuming that these foreign companies are to be taken to have known about the developments in 2008 when they concluded the SHA). …”

Finally, if the High Court had not determined that parties had made an implied choice as to the governing law of the arbitration agreement, then the court would have held that English law applied as the law with “the closest and most real connection with the arbitration agreement” (see paragraph [24]).

For more information on this topic, see our previous posts on here  and here, which deal the issue of the multiple applicable laws to a contract and how a different law could govern the arbitration clause in contrast to the underlying agreement.

Burley did not become a party to the arbitration agreement in the SHA

The SHA was made between CruzCity, Arsanovia and Kerrush, and the SHA defined “parties” asthose three parties. However, Burley had signed a signature page to the SHA and thereby agreed to be bound by certain identified clauses in the SHA. The arbitration agreement was not one of those identified clauses.

The High Court held that the natural conclusion was that Burley only agreed to be bound by the identified clauses and no other (see paragraph [27]). Furthermore, the High Court considered that:

“…

ii) On the contrary the Arbitration Agreement referred to “the Parties” agreeing not to seek interim relief. Had it been intended that Burley was bound by the arbitration agreement, Burley as well as the parties would have been said to agree to this. (Of course, if Burley were party to the arbitration agreement, there might well be scope for the wording to be manipulated to deal with this, but my point is about what the wording of the clause indicates as to the parties’ intention.)

iii) The signature page referred to Burley being “bound” by obligations imposed on it. It was not suggested, and I cannot conceive, that the Parties and Burley intended to make a one-sided arbitration agreement: that the Parties should have a right to bring a reference against Burley, but Burley has no right to bring arbitration proceedings. If Burley were party to the arbitration agreement, they would have had that right and the Parties (or at least Cruz City) would have undertaken corresponding obligations to Burley, but on its face the signature page does not reflect an agreement of this kind”.

The High Court also considered that, by analogy to cases involving incorporation of an arbitration agreement from one contract to another (related) contract, the English courts would be slow to incorporate the arbitration agreement into the second contract absent express words of incorporation (see paragraph [28]).

Cruz City sought to argue that such an approach which involved having to proceed against related parties over similar issues in different dispute forums would lead to “uncommercial results” (see paragraph [32]). The High Court saw the commercial sense in Cruz City’s argument, but ultimately rejected the argument because that was “the bargain that [parties] made” (see paragraph [33]).

Furthermore, even if the arbitration agreement were governed by English law, the High Court would have held that Burley was not a party to the arbitration agreement (see paragraph [35]). Insofar as the High Court had determined that Indian law applied as the governing law of the arbitration agreement, Burley was not a party to the arbitration agreement (see paragraph [35]). On that basis, Award 1 as against Burley had to be set aside (see paragraph [36])

No-Bifurcation of Arbitral Award

If Award 1 could not be sustained against Burley, could Award 1 nonetheless still be enforceable as against Arsanovia (the other respondent) under Indian law? The High Court held that it could not and that the award had to be set aside in its entirety (see paragraph [46]).

The claimants argued that as a matter of Indian law, an arbitration award could not be “bifurcated” such that if the subject matter of an arbitration did not fall within the arbitration agreement or if the dispute concerned a person or persons were not party to the arbitration agreement, that dispute could not be arbitrated. In other words, under Indian law, an award against two respondents could not be sustained against one respondent, but not another respondent (see paragraph [37]). The relevant case cited was the decision of the Supreme Court of India in Sukanya Holdings (P) Ltd v Jayesh Pandya and anor, (2003) 5 SCC 531, [2003] INSC 223.

“…According to Mr Misra, this principle is demonstrated by the decision of the Supreme Court of India in Sukanya Holdings (P) Ltd v Jayesh Pandya and anor, (2003) 5 SCC 531, [2003] INSC 223, a case that was itself concerned with the dissolution of a partnership and a petition by one of the partners that the court should refer the parties to arbitration under section 8 of the IACA, which provides that “A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies [in time], refer the parties to arbitration”. The petition was opposed inter alia on the grounds that relief was claimed not only against parties to the arbitration agreement but other partners who were not. The High Court refused the petition and the Supreme Court upheld the decision. The Supreme Court said:

“The next question which requires consideration is even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act? In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action that is to say the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, if follows that bifurcation of the subject matter of an action brought before a judicial authority is not allowed.”

Such “bifurcation” would also cause delay and the risk of conflicting decisions.”

However, CruzCity argued that the correct proposition to be extracted from Sukanya Holdings was that,

“[the prohibition was] directed to the powers of the court under section 8 of the [Indian Arbitration Act] to refer matters to arbitration where this would [have led]  to the “bifurcation” of a cause of action, and not with whether a tribunal [wa]s competent to adjudicate under an arbitration agreement; and further the underlying rationale [wa]s to avoid delay in resolving disputes and the risk of irreconcilable judgments, reasons that [the Indian law expert for the respondent] considered weigh[ed] in favour of both Burley and Arsanovia being bound by the arbitration agreement and Award 1, not against either of them being so bound”. (see paragraph [39])

In the end, however, the English High Court considered that Sukanya Holdings was applicable and that under Indian law, an award could not be bifurcated (see paragraph [46]).

“I therefore accept [the claimant’s Indian law expert’s] evidence that the Sukanya principle (i) is based on a concept of arbitrability and is not confined to applications for the court to refer the parties to arbitration, and (ii) applies to international as well as domestic arbitrations. Because the Tribunal in Arbitration 1 did not have jurisdiction over Burley, the whole matter before them, viz the claims against Arsanovia and Burley, was not arbitrable. It follows, to my mind, that they therefore did not have substantive jurisdiction over the claim against Arsanovia within the meaning of section 67: it was not a matter “submitted to arbitration in accordance with the arbitration agreement”. …”.

Award 2 – the Keepwell Agreement

The first issue involved two sub-issues. First, whether the claim by CruzCity in Arbitration 2 was premature seeing as it required a determination of liability under the SHA in order for Unitech’s secondary liability under the Keepwell Agreement to accrue. Second, if the claim was in fact premature, did that mean that the tribunal did not have substantive jurisdiction (see paragraph [49])?

For the same reasons as those in respect of the SHA, the High Court held that the arbitration agreement in the Keepwell Agreement was governed by Indian law (see paragraph [47] and [48]).

The High Court was not persuaded that the claim was premature (see paragraph [56]). But in any event, the High Court considered that any error by the tribunal would be an error of fact and/or law which did not go to the substantive jurisdiction of the tribunal. In other words, the tribunal had not exceeded its jurisdiction simply because it decided wrongly (see paragraph [57]).

The second issue was whether a determination of Burley’s primary liability under the SHA in order to determine Unitech’s secondary liability under the Keepwell Agreement fell within the scope of the arbitration clause in the Keepwell Agreement. The High Court considered that it was and that it was in practice no different from determining secondary liability under a guarantee (see paragraph [62]).

Conclusion

Readers who are curious about the somewhat peculiar drafting of the arbitration clause and in particular, its exclusion of Part 1 of the Indian Arbitration Act, should have regard to the fact that it was drafted at a time before the decision of the Indian Supreme Court of Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc, Civil Appeal No. 7019 of 2005 (the “BALCO case“).

A summary of the BALCO case can be found here and a fuller treatment of the arguments and the decision of the Indian Supreme Court made can be found here.

In summary, prior to the BALCO case, the Indian courts had taken the position that Part 1 of the Indian Arbitration Act applied to foreign arbitrations. This was significant because the Indian courts had also decided that Part 1 of the Indian Arbitration Act permitted the courts to set aside or refuse the recognition and enforcement of an arbitral award on the basis of “patent illegality” i.e. an error of law. Such an approach amounts to an appeal on the merits of a foreign award and is considered to be against the intent of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. India is a signatory to the New York Convention and the Indian Arbitration Act deals with such awards. See also the brief summary of the state of Indian law as set out by the English High Court at paragraph [20].

As mentioned earlier, this is a remarkably dense decision involving the more subtle, but by no means purely academic, issues of jurisdiction and governing law(s) in arbitration. Parties and their counsel should always keep in mind that an arbitration agreement is separable from the underlying contract and can therefore be governed by two or more laws. The most prudent course, especially where the arbitration is to be seated outside of the state whose law governs the underlying contract, should be to explicitly set out which law should govern the arbitration agreement.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
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2 Responses to Case Update: (1) Lack of substantive jurisdiction in respect of one respondent affects award as against the other respondent; (2) Substantive jurisdiction not affected by finding of liability under a different agreement

  1. Pingback: How a Dispute Resolution Clause Works | Singapore International Arbitration Blog

  2. Pingback: Case Update: Seat of Arbitration and Implied Choice of Governing Law of Arbitration Agreement | Singapore International Arbitration Blog

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