England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
(MR JUSTICE ANDREW SMITH)

		Royal Courts of Justice Strand London, WC2A 2LL
		20 January 2016

1. LORD JUSTICE LONGMORE: This was originally an application for permission to appeal the order of Andrew Smith J sitting in the Commercial Court dated 10 July 2015, by which he ordered that an application of Integral Petroleum SA made pursuant to section 67 of the Arbitration Act 1996 be dismissed. He refused permission to appeal.
2. Integral then applied for permission to appeal to the Court of Appeal. I refused permission on the papers by an order dated 9 November 2015 because I considered this court had no jurisdiction to entertain the appeal. I further directed that any oral renewal hearing be listed as an application that the court has jurisdiction to hear an appeal under section 67 of the Arbitration Act 1996 if the judge has himself refused leave to appeal. The present hearing before two Lords Justices is that application to determine whether this court has jurisdiction; this court has now had the benefit of oral argument.

Background facts

3. Integral Petroleum SA ("Integral") is a Swiss oil and petroleum trading company based in Geneva, Switzerland. The defendant is Melars Group Limited ("Melars"), a company incorporated in the British Virgin Islands.
4. By an agreement dated 14 December 2011 ("the December Agreement"), Integral agreed to sell to Melars 300 metric tons of gasoil for delivery FOB Makhachkala, Russia at US$881 per metric ton. Melars was to make, and did make, an advance payment of US$264,300. The December Agreement contained an Arbitration Clause under the heading "Law and Jurisdiction":

"This contract shall be governed by and construed in accordance with English law. The parties hereby agree to submit all disputes hereunder to the exclusive jurisdiction of the arbitration court in London."

5. At around the same time, Melars entered into three further agreements:

i) On 13 December 2011, Melars contracted with a third party to sell 2400-2900 metric tons of diesel oil for delivery in Turkmenistan.

ii) On 14 December 2011, Melars, as charterer, and EWL, as owner, entered into a voyage charter of the Valeri Kalachev to carry a cargo of a minimum of 2500 metric tons of oil to Turkmenistan; and

iii)On 15 December 2011, Melars contracted with Trafigura Baheer BV ("Trafigura") to buy 2200-2300 metric tons of hydro-purified gasoil.

6. On 17 January 2012, the 13 December sale agreement to the third party was cancelled by the third party buyer. This was due to a series of delays relating to the transport of the cargo which resulted in Integral threatening legal action against the shipowners, EWL. EWL consequently sought to find a new buyer for the cargo and introduced Melars to Dartex Trade Limited ("Dartex"). On 15 April 2012, Melars and Dartex entered into an agreement whereby Melars would sell 2420 metric tons or so of hydro-purified gasoil to Dartex ("the Dartex Agreement"). The Dartex Agreement also included a law and jurisdiction clause, which provided that disputes arising thereunder be resolved by way of arbitration under the LCIA rules by a tribunal of three arbitrators, the seat of the arbitration being Geneva.
7. On 16 April 2012, Integral and Melars entered into a subsequent agreement whereby the December Agreement for the sale of the 300 metric tons of gasoil was cancelled with immediate effect ("the Cancellation Agreement") since Melars no longer required the 300 metric tons of gasoil from Integral in order to fulfil the Dartex Agreement. The Cancellation Agreement recorded that Integral would return the advance payment plus interest to Melars. Pursuant to a further clause in the agreement, the parties agreed that on receipt of the said monies all claims and demands of Melars against Integral in connection with or relating from the December Agreement were to be fully and finally settled ("the Settlement Clause"). The monies due were paid in full on 2 May 2012.
8. Thereafter, Melars contends that it only received some US$200,000 due to it under the Dartex Agreement, leaving some US$2.1 million outstanding. A series of letters were sent by Melars to the managing director of Integral, a Mr Seitnepesov, contending that he organised or orchestrated the Dartex Agreement and that it was his intention to use Dartex as a shell company so that his company, Integral, could take possession of the cargo and resell it, without having paid for it or being legally linked to Melars. These allegations are disputed, and form the basis of a substantive claim by Melars against Integral, which could not be the subject of an arbitration under the December Agreement. On 9 August 2012, proceedings were issued by Melars against Integral and Mr Seitnepesov in Switzerland and a further criminal complaint was made to the Swiss authorities by Melars against Mr Seitnepesov.
9. On 30 August 2012, Integral responded by beginning the arbitration with which this claim is concerned, claiming that the Swiss proceedings were a breach of one (or more) of the agreements between them.

Arbitration

10. The sole arbitrator was Mr W. Laurence Craig.
11. At the arbitration, Melars asserted that the reference had been made under the December Agreement but there had been no allegation or proof of any dispute which related to the December Agreement. Accordingly, Mr Craig identified jurisdiction as an issue he was required to resolve.
12. He observed that the arbitration provision in the December Agreement related only to disputes arising thereunder, and was not affected by the fact that the buyer intended to use the gasoil in connection with other agreements. The arbitrator then considered that the scope of the obligations under the December Agreement was broadened by the Cancellation Agreement but went on to conclude that the claims brought by Melars in Switzerland were not made in connection with the purchase of 300 metric tons of gasoil, but rather in connection with the obligations arising between Melars and Dartex under the Dartex Agreement.
13. He stated that it was not sustainable that the claims made by Melars against Integral and Mr Seitnepesov were claims arising in connection with the December Agreement, nor that an arbitration claim between different parties under a different contract, relating to a sale of dramatically different amounts of gasoil, could be made under an arbitration clause in the December Agreement. Consequently, the arbitrator found that Integral's claims in the reference fell outside his jurisdiction and the claim and request for relief therefore failed.

The law

14. Section 67 of the Arbitration Act 1996 is the section which deals with challenges to an arbitral award on the grounds of substantive jurisdiction. It provides:

"Challenging the award: substantive jurisdiction.

(1)A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court—

(a)challenging any award of the arbitral tribunal as to its substantive jurisdiction; or

(b)for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part, because the tribunal did not have substantive jurisdiction.

A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).

(2)The arbitral tribunal may continue the arbitral proceedings and make a further award while an application to the court under this section is pending in relation to an award as to jurisdiction.

(3)On an application under this section challenging an award of the arbitral tribunal as to its substantive jurisdiction, the court may by order—

(a)confirm the award

(b)vary the award, or

(c)set aside the award in whole or in part.

(4)The leave of the court is required for any appeal from a decision of the court under this section."

Decision appealed

15. Andrew Smith J considered that two key questions arose:

i) Was there a dispute referred to the arbitrator about the application of the Settlement Clause?; and

ii) If so, should the court exercise its jurisdiction under section 67 of the Arbitration Act 1996 to grant relief?

Nature of the dispute

16. The judge firstly observed that in its reference to the arbitrator, Integral had not suggested that the Swiss proceedings were a breach of the Cancellation Agreement; indeed, that agreement was not referred to at all by Integral in initially bringing its claim.
17. The judge observed that the second sentence of the Settlement Clause read as follows:

"The Parties have agreed as well not to make any claims or demands of any nature or kind whatsoever against each other and indemnify each other if any such cases arise out of or in connection with the Contract."

At the hearing, Melars appears to have conceded that the question of the application of this second sentence to particular claims or demands was covered by the arbitration agreement. The judge held, therefore, that the tribunal had fallen into error in concluding that it had jurisdiction over none of the disputes before it.

18. The judge concluded that the ambit of the arbitration clause depended on its wording - it referred to disputes under the December Agreement. Accordingly, he held that the arbitration clause covered disputes relating to the Swiss proceedings that depended on the application to them of the Settlement Clause, but no other dispute about them, such as the dispute whether the right to make the Swiss claims was a breach of the wider relationship between the parties.

Relief

19. The judge decided not to grant any relief under section 67(3). Whilst he recognised that the tribunal was in error to decline jurisdiction over the dispute as to whether the Swiss proceedings were brought in breach of the Settlement Clause, it was clear from the award that the arbitrator concluded that the Settlement Clause did not cover the Swiss proceedings, and therefore he would have rejected the claim in any event (see paragraph 26) because the claim of Melars was made under the different and subsequent agreement, namely the Dartex Agreement.
20. Furthermore, Integral would not have any realistic bases of challenge under sections 68 or 69 of the 1996 Act. Accordingly, he held that the jurisdiction error was inconsequential, and the tribunal was entitled to reject Integral's claims. The section 67 application was therefore refused.

Grounds of appeal

21. The claimant has advanced the following grounds of appeal:

First, upon a section 67 application the court's jurisdiction under section 67(3) is confined to confirming the award, varying the award or setting aside the award in whole or in part. The learned judge did none of these things. Rather, he simply refused to grant any relief. The learned judge ruled that the tribunal's jurisdictional award was made in error, but refused to set it aside even in part. This was something that the learned judge had no jurisdiction to do because he only had jurisdiction to set aside, vary, or confirm the award. He had no jurisdiction to engage with the merits and should have remitted the award to the arbitrator to determine the matter which he had held was within the arbitrator's jurisdiction.

22. As Miss Parry, who has appeared for the claimant on this application, has submitted in her oral argument today, absent any confirmation or setting aside of the award as envisaged by the section, there was no judicial decision. Effectively, the judgment of Andrew Smith J was just a comment on the proceedings as they appeared before him.
23. Secondly, Miss Parry submits that the claimant should have been given an opportunity to make submissions to the arbitral tribunal on the issue if the judge indeed did have a discretion but the court decided the issue itself without inviting any submissions from the parties and the court had no jurisdiction to do that either.
24. Thirdly, she submits that, in the light of the residual jurisdiction that exists in relation to applications of this kind, as set out in CGU International Insurance PLC v Astrazeneca Insurance Company Limited [2006] EWCA Civ 1340, [2007] 1 Lloyd's Rep 142 1, the fact that proceedings are pending in the British Virgin Islands in relation to a default judgment obtained by the claimant in that jurisdiction, and the fact that Melars say that those proceedings should not be before the court because they are subject to an LCIA arbitration clause means that Melars are taking exactly the opposite position to that taken by them in these proceedings, that they are playing games and therefore the matter should be remitted to Andrew Smith J to consider that situation.
25. The trouble with all these argument, in my judgment, is that the judge refused permission to appeal and this court cannot give permission to appeal to itself, as set out in section 67(4) of the Act. See further Henry Boot Construction (UK) v Malmaison Hotel (Manchester) Ltd [2001] QB 388, CGU v Astrazeneca itself and also Michael Wilson & Partners Ltd v Emmott [2015] EWCA Civ 1285, in which we had the benefit of argument from Mr Stephen Cogley QC, who was originally instructed in this very matter.
26. In refusing permission to appeal on the papers, I pointed to the fact that the relief element in section 67 is discretionary, as indicated by the permissive nature of the word "may" in section 67(3). Miss Parry submits that that permissive word only relates to permission to the court to make one or other of the three possible orders mentioned in the subsection. But it seems to me that that is an impossible construction of the subsection. It must always be open to a judge to decide, for good reason, to make no order on any application, including an application under section 67 of the Arbitration Act.
27. That rationale is supported by the current 24th edition of "Russell on Arbitration" at paragraph 8-171, where that learned work says:

"In respect of ss. 67-69 relief is discretionary. The court is not required to make any order at all even if the application is well-founded, although cases of no relief being granted following a well-founded application are rare."

It is true that the only authority that is cited for that proposition is the judgment below of Andrew Smith J, which Miss Parry is anxious to have permission to appeal against. But it seems to me that the subsection prevents any appeal unless the judge has himself given permission to appeal. It would be absurd to suppose that if the arbitrator had expressly held that, if he had had jurisdiction, he would still have dismissed the claim, the court still had to either confirm or set aside the award.

28. Pendent to that observation, even Miss Parry says that the right order for the judge would have been to remit the award to the arbitrator so that he could consider what the right result was in light of Andrew Smith J's determination that he had no jurisdiction. But one observes that even remission is not mentioned in section 67(3) and there must obviously be a power in the court to direct a remission. Likewise, there must obviously, in my judgment, be a power in the court in an appropriate case to make no order.
29. It is no doubt the case that, as stated in the case of Cetelem SA v Roust Holdings Ltd [2005] 1 WLR 3555 paragraph 25, if a judge makes a decision which he has no jurisdiction to make and then refuses permission to appeal, this court has jurisdiction to declare that the judge acted without jurisdiction. But, for the reasons I have given, Andrew Smith J did not act outside his jurisdiction in making no order on the section 67 application.
30. As far as the submission that the judge ought to have entertained argument about how he should exercise his discretion, if he had one, it seems to me that it is far too late for that point to be made now for the first time. Any argument about the exercise of discretion to make no order should have been made to the judge in the course of argument or at least just after he gave his judgment.
31. So far as concerns the position in the British Virgin Islands, it is obviously a complicated position. It is by no means obvious that the respondent is just playing games on the matter. But whether they are or not cannot assist the question as to whether this court has jurisdiction to grant permission to appeal in the circumstances which have occurred. The residual jurisdiction exemplified by CGU v Astrazeneca is only a residual jurisdiction where the judge himself has made no "true" decision on the question of granting permission to appeal. It is clear that the judge did make a true decision in that sense.
32. I conclude, therefore, despite Miss Parry's helpful arguments, that there is no jurisdiction in this court to grant permission to appeal and this court should therefore so declare.
33. LORD JUSTICE KITCHIN: I agree.
34. LORD JUSTICE LONGMORE: I will add that since this is not a traditional permission to appeal application, the case can be put on BAILII, can be reported, if it is thought worthwhile reporting it, and can be referred to in subsequent cases.