Key English law developments for international arbitration

We look back at three decisions of the English courts which made headlines in the international arbitration community in 2016.

The English Commercial Court has exercised its power under section 79 of the English Arbitration Act 1996 (the Arbitration Act) to extend the time limit under Article 27.1 of the LCIA Rules, six years after the award was rendered in a London-seated LCIA arbitration (Xstrata Coal Queensland Pty Ltd & Ors v Benxi Iron & Steel (Group) International Economic & Trading Co Ltd [2016] EWHC 2022 (Comm)).

The unsuccessful party did not pay the US$27.8 million award, leading the award creditors to seek recognition and enforcement of the award under the New York Convention in China, the place of incorporation of the losing party.

Almost three years after the application for recognition and enforcement was made, the Chinese court refused enforcement, accepting the award debtor’s assertion that one of the award creditors was not a party to the underlying contract and arbitration agreement. The Shenyang Intermediate People’s Court found that the entire award was “without merit because of a lack of supporting legal argument or factual bases”.

The award creditors approached the tribunal and requested it to use its power under Article 27 of the LCIA Rules to correct an ambiguity in the award. However, as the 30 day time limit for making such an application had expired, the LCIA confirmed that “while sympathetic to the [award creditors’] position,…absent agreement of the parties or an order from a competent court extending time for the application” the arbitral tribunal was “functus officio”.

The award creditors therefore applied to the Commercial Court, asking it to extend the deadline under the LCIA Rules using its powers under section 79 of the Arbitration Act, by which the court may “extend any time limit agreed by [the parties] in relation to any matter relating to the arbitral proceedings…”.

The court granted the extension, finding that a substantial injustice would be done if it were refused (one of the section 79 grounds). Mr Justice Knowles held that “… continuing uncertainty over the Award serves no worthwhile end, and more generally undermines the arbitral process. It reinforces the point that it would be unjust not to allow the available opportunity in the present case to allow the arbitral tribunal to consider whether the uncertainty can be removed”.

The court’s decision is notable in that, realistically, the 30 day time limit under Article 27 of the LCIA Rules (and similar provisions in other institutional rules) will almost always expire before the outcome of a challenge to recognition/enforcement in another jurisdiction is known.

The English Commercial court has held that the emergency arbitrator provisions in Article 9B of the LCIA Rules limit the court’s power, under section 44 of the Arbitration Act, to grant interim relief, at least in situations where the emergency arbitrator provisions have already been unsuccessfully invoked (Gerald Metals SA v The Trustees of the Timis Trust and others [2016] EWHC 2327(Ch)).

Gerald Metals and Timis Mining had entered into an offtake contract, whereby Gerald Metals had advanced US$50 million to Timis Mining to finance the development of a mine in Sierra Leone. The contract provided for LCIA arbitration. A dispute arose and Gerald Metals commenced arbitration, claiming that Timis was in default. Gerald Metals also applied to the LCIA for the appointment of an emergency arbitrator.

The LCIA rejected Gerald Metals’ application for the appointment of an emergency arbitrator on the basis that Timis Mining had given certain undertakings i) not to dispose of any assets other than for full market value and at arm’s length and ii) to give seven days’ notice to Gerald Metals before disposing of any asset considered to be worth more than £250,000.

Gerald Metals subsequently sought urgent relief in the courts under section 44 of the Arbitration Act, arguing a “gap in the LCIA Rules which exists in cases which are not emergencies or of such exceptional urgency as to justify the expedited formation of the tribunal but which are nevertheless cases of urgency within the meaning of section 44(3) of the Arbitration Act”.

Mr Justice Leggatt, dismissing Gerald Metals’ application, held that “a similar functional interpretation of Articles 9A and 9B [of the LCIA Rules] needs to be adopted as has been given to section 44(3) of the Arbitration Act”.

Mr Justice Leggatt further held that it was “only in cases where [the powers contained at Articles 9A and 9B of the LCIA Rules], as well as the powers of a tribunal constituted in the ordinary way, are inadequate, or where the practical ability is lacking to exercise those powers, that the court may act under section 44”.

The decision in this case appears to suggest that the court’s powers are precluded where an application is made to a tribunal/arbitral institution and either deems itself to be empowered to act. Mr Justice Leggatt held that it would be “uncommercial and unreasonable to interpret the LCIA Rules as creating … a gap” in cases which are not of sufficient urgency as to justify the appointment of an emergency arbitrator but which are nonetheless deemed “of urgency” under section 44(3) of the Arbitration Act.

This decision may also have an impact on arbitrations under the ICC, HKIAC or SIAC Rules, as they each contain emergency arbitrator provisions. Parties may seek to agree to opt out of these in order to maintain the possibility of recourse to the courts for emergency relief.

The English High Court recently held that a foreign arbitration award should be enforced in its entirety, despite it including a sum awarded pursuant to a penalty clause (Pencil Hill Ltd v US Citta di Palermo SpA (Case No. BA40MA109) (unreported)).

The contracts between the parties related to the sale of financial rights deriving from registration rights of a football player. Pencil Hill had acquired these from a Spanish football club and sold them on to an Italian football club (Palermo) for a total price of €10 million.

Palermo had agreed, in an April 2012 contract, to pay Pencil Hill a total of €6,720,000 in two equal installments, with a further €1 million pursuant to an August 2012 agreement.

Clause 4 of the April 2012 contract specified that “In the case [Palermo] fails to pay any of the installment agreed, then, all the remaining amounts shall become due and as penalty [Palermo] will have to pay an amount equal to the amount pending IE [Palermo] will pay the double of the pending amount at the moment of the fail on the payment”. Palermo duly missed an installment.

In July 2013, Pencil Hill filed a request for arbitration with the Court of Arbitration for Sport (CAS), claiming €6,720,000 under the April 2012 contract, with a penalty of a further €6,720,000 and the €1 million due under the August 2012 agreement.

In its award of August 2014, CAS awarded Pencil Hill €9.4 million, comprising the €1 million due under the August 2012 agreement, the €6,720,000 due under the April 2012 contract, and €1,680,000 representing 25 per cent of the penalty claimed by Pencil Hill.

Palermo appealed to the Swiss Supreme Court, which upheld the penalty awarded by CAS, after which Pencil Hill applied to the English High Court to enforce the award, where the judge held that it would not be contrary to public policy to enforce the award, indicating that “there is a strong leaning towards the enforcement of foreign arbitral awards and the circumstances in which the English Court may refuse enforcement are narrow”. In the judge’s view, the “public policy of upholding international arbitral awards […] outweighs the public policy of refusing to enforce penalty clauses. The scales are tipped heavily in favour of enforcement”.

Many will be heartened to note the pro-arbitration stance taken by the English High Court. However, it is important to note that the contract in this instance was governed by foreign law (Swiss law), under which penalty clauses are not prohibited. Moreover, on appeal the curial court had upheld a reduction of the payment obligation, made in accordance with Swiss law – as the English court noted, that variation arguably changed the payment obligation from a penalty to a non-penalty. Accordingly, this case cannot be taken as a blanket approval by the English courts of arbitral awards awarding sums pursuant to penalty clauses. Such clauses must still be carefully drafted, particularly if enforcement is to be sought in England or other jurisdictions where penalty clauses are contrary to domestic public policy.