Privy Council warns against issue arising from hybrid arbitration clauses

In Flashbird Ltd v Compagnie de Sécurité Privée et Industrielle SARL [2021] UKPC 32, the Privy Council upheld the refusal of the Supreme Court of Mauritius to set aside an arbitral award made against the appellant, Flashbird Ltd, arising from a contractual dispute with Compagnie de Sécurité Privée et Industrielle SARL (CPSI).  The report highlights the necessity for clear drafting and the complexities associated with the use of hybrid arbitration clauses.

Background

An arbitral award was granted to CPSI on 24 October 2017 by a sole arbitrator elected by the Secretariat of the Arbitration and Mediation Center (MARC) under the MARC Rules for arbitration. Flashbird did not participate on the premise that the arbitration should have been determined by three arbitrators.

In December 2017,  Flashbird applied to the Supreme Court of Mauritius to set aside the arbitral award under section 39(2)(iv) of the International Arbitration Act 2008 (Mauritius), on the basis that the arbitral procedure had not been followed in accordance with the agreement of the parties. Flashbird contended that the arbitration clause provided for the International Chamber of Commerce (ICC) Rules for arbitration rather than the MARC Rules, meaning that (as argued by Flashbird) a panel of three arbitrators was required.

Initial Arbitration

According to the MARC Rules, where MARC is elected as the arbitral institution, parties are bound by the MARC Rules (MARC Rules, article 1.2). Similarly, the ICC is the only arbitral institution that can administer arbitrations according to the ICC Rules (ICC Rules, article 1.2).  This causes a clash if a contract selects contrasting arbitration centres and rules.

The arbitration clause in question clearly identified MARC as the institution, but whether or not the ICC Rules applied was a question of construction – was the clause a hybrid one? This depended on the interpretation of the following paragraph:  “according to the arbitration Rules of the international Chamber of commerce”. Specifically, did “international” refer to the ‘International’ ICC, or did it mean international arbitration centres more generally, of which MARC is one?  The arbitrator elected the MARC Rules, blaming the confusion on poor drafting.

Supreme Court of Mauritius

The Supreme Court dismissed Flashbird’s appeal on the primary basis that Flashbird had failed to show that the appointment of one arbitrator was not in accordance with the agreement of the parties.  In particular, contrary to Flashbird’s contention, the ICC Rules did contemplate disputes being decided by a sole arbitrator and there was no reason to think that the ICC would not have appointed a sole arbitrator in the circumstances.  Flashbird was therefore “unable to show that the constitution of the tribunal would have been any different if the number of arbitrators had been determined in accordance with [the ICC Rules]”.

The Supreme Court further determined that Flashbird was unable to meet the “substantial prejudice” threshold required for the Court to justify exercising its discretion to set aside an arbitral award under section 39(2)(a)(iv) of the International Arbitration Act 2008 (Mauritius).

The Privy Council dismissed the appeal on the basis that Flashbird had failed to show that the application of the ICC Rules would have resulted in the election of three arbitrators, and in doing so had not shown that the procedure was not in accordance with the agreement of the parties. As such, Flashbird had not suffered substantial or “material prejudice” as a result of the procedure.

The board gave one caveat – if the clause was a hybrid arbitral institution clause, the Supreme Court should have considered whether three arbitrators would have been appointed under the ICC Rules.

Key Takeaways

The report highlights the importance of careful drafting to ensure that arbitration clauses are set out clearly and accurately so that the parties elect one arbitral institution and procedure.

The Privy Council emphasised the following disadvantages of hybrid arbitration clauses:

1. possible jurisdictional disputes and consequential costs;
2. procedural uncertainty and difficulties for arbitration institutions arising from having to act within an unfamiliar framework;
3. a “patchwork” of rules, reflecting the best efforts of the arbitration institution rather than the parties’ choice; and
4. a dependence on the willingness of the arbitration institution to act in accordance with different institutional rules and uncertainty if the arbitration institution is not prepared to do so.

The author would like to thank Esme Malley for her assistance in preparing this post.