Do more than just belong: ensure you participate

International parties are often confronted with jurisdictional issues. At the heart of the arbitration model is a contractual consent of parties to submit to a tribunal’s jurisdiction. Nevertheless, the correct forum is not always clear-cut. Arbitrability issues are varied, ranging from the validity of an arbitration clause to whether arbitration can unwittingly bind third parties.

Section 5 of the Arbitration Act 1996 ensures that most
of the Act, and associated remedies, apply only to written agreements to arbitrate. A party knows, or should know, which agreements it is a party to
and, consequently, which
ones are arbitrable.

The Act does not invalidate oral agreements to arbitrate,
but these bring complications both in terms of evidence and enforcement abroad.

A defending party has two main options:

• Participate in the arbitration. Before the award a defending party may challenge the tribunal’s jurisdiction either before the tribunal (sections 30 and 31) or before the court (subject to consent, section 32). If a party does not object, it may lose its right of challenge at a later stage (section 73). After an award, a defending party may apply to court to set aside the award on the grounds of jurisdiction (section 67, provided not lost under section 73), serious irregularity (section 68) or for error of law (section 69).

• Refuse to participate. A defending party may challenge an award for lack of jurisdiction (section 67) or serious irregularity (section 68), but not for an error of law (section 69). Instead of challenging the award itself, a party may challenge enforcement on the grounds of lack of substantive jurisdiction (sections 66 and 67). In addition, a non-participant is entitled to apply for other remedies, including declarations, injunctions and damages (section 72), which a participant is not entitled to do. 

Whichever strategy a party adopts depends on its particular circumstances. For many, the most important issue is the additional costs of participating.

Non-participation is a risky strategy, increasing the risk of
an unfavourable award, but the upside is the availability of unlimited remedies under section 72.

If cost is secondary, a participant who has unsuccessfully challenged jurisdiction can have its day in court under section 67. The main advantage here is the court will conduct a complete re-hearing on jurisdiction and may accept new evidence.

Parties facing a notice of arbitration must carefully consider their strategy from
the outset. Failure to act early can have dire consequences
for the unwary, as Spain
recently found.

Following a massive oil spill on the Spanish coastline in 2002, Spain brought criminal and civil actions against a ship’s owners and their UK insurers (the Club). The Club refused to participate in the litigation, arguing the actions were an attempt to enforce the insurance contract, which was arbitrable. In 2012, the Club initiated arbitration
in London.

Spain in turn declined to participate. The tribunal
decided in the Club’s favour.
In March 2013, the Club issued enforcement proceedings in
the High Court.

First decision

Spain issued a late application to challenge enforcement in July 2013. Walker J affirmed Spain’s right to rely on the Dallah principle (which broadly states that a non-participating party is under no obligation to participate in arbitration while preserving its right to challenge enforcement) and vitiated Spain’s lateness on the basis that relief under section 72 is discretionary.

Second decision

The substantive hearings in October 2013, however, dramatically reversed Spain’s fortunes (The Prestige [2013] EWHC 3188). Hamblen J threw out Spain’s jurisdictional challenge on two grounds.

First, the direct action taken by Spain against the Club was in substance a contractual right of recovery (Through Transport (The Hari Bhum) (No 1) [2005] 1 Lloyd’s Rep. 67 (CA)). Second, by issuing the claims against the Club, Spain had waived its immunity from arbitration defence under section 9 of the State Immunity 1978 Act.

In other words, by simply issuing the claims against the insurer, Spain became subject to the arbitration clause. The fact that Spain had not signed the contract was insufficient to avoid the tribunal’s jurisdiction.

Clearly not enough weight had been given to arbitrability from the outset. A wiser decision might have been to participate in the arbitration. SJ

Thierry de Poerck is a solicitor at Burges Salmon

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