England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		10/07/2013

Judge Mackie QC :

1. The Claimants ("NRE" and "the Guarantor" respectively) and the Defendant ("Coeclerici") each apply to challenge an arbitration award dated 14 February 2013 ("the Award") under Section 68 of the Arbitration Act 1996 ("the Act"). Coeclerici's application has been wisely abandoned. This has been the consolidated hearing of the Claimants' applications. As the issue is relatively urgent but a written judgment is required to limit the scope for further confusion I dismissed the Claimants' applications on Monday and said that I would give reasons in writing later. These are those reasons. Essentially the arbitrators were entirely correct in issuing a prompt Award requiring the Claimants to honour their bargain.

Background and undisputed facts

2. The First Claimant ("NRE") agreed on 15th September 2011 to sell metallurgical coke to Coeclerici. Under the contract, Coeclerici was required to make a pre-payment of US$10,000,000 ("the Prepayment") to NRE's bank account in India. If NRE failed to perform its obligations under the sale contract, it was obliged to repay the money to Coeclerici. By a guarantee dated 15th September 2011, the Second Claimant ("the Guarantor") agreed to guarantee specified sums payable by NRE under the sale contract. Both the contract and the Guarantee were governed by English law and provided for LMAA arbitration in London.
3. NRE did not deliver metallurgical coke to Coeclerici within the contractual delivery period of the first three calendar months of 2012. Coeclerici claimed repayment of the Prepayment but NRE repaid only US$2,000,000. On 17th August 2012, Coeclerici commenced arbitration proceedings against each of NRE and the Guarantor claiming amongst other things, US$8,000,000, being the balance of the Prepayment. The arbitrations were consolidated in September 2012. The Tribunal was appointed. Coeclerici appointed Mr David Martin-Clark, NRE and the Guarantor jointly appointed Mr Mark Hamsher and Mr Christopher Moss was appointed the third arbitrator.
4. On 30th November 2012, NRE and the Guarantor filed a defence denying liability. The arbitration hearing was fixed to take place on 21st January 2013 but a settlement was reached. On 17th January 2013, the parties entered into a Payment Agreement which provided in relevant part as follows:

"1. NRE and the Guarantor fully acknowledge and admit that the Principal Sum is due and payable to Coeclerici and which amount is final and is not subject to any set off, counterclaim or other deduction whatsoever…

2. NRE and the Guarantor shall make the following payments to Coeclerici (the "Settlement Payments"):

(a) payment of US$600,000 within 15 days of the date of this Payment Agreement;

…

3. The current arbitration proceedings shall be suspended from the date of signature of this Payment Agreement and for as long as NRE and the Guarantor continue to perform their obligations hereunder… Upon full and punctual payment of all of the Settlement Payments in accordance with the terms of this Payment Agreement, the Parties shall be discharged from all obligations and liabilities under the Agreement and the Guarantee and will take steps to terminate the arbitration proceedings…

4. In the event that NRE and the Guarantor fail to pay any of the Settlement Payments in accordance with this Payment Agreement, Coeclerici shall be entitled to resume the suspended arbitration proceedings and/or commence new arbitration proceedings in accordance with this Payment Agreement and the settlement in clause 3 shall be null and void. In that event, NRE and the Guarantor expressly and irrevocably agree that Coeclerici will be entitled to an immediate consent award, without the need for any pleadings or hearings, for the following:

(a) the Settlement Payments [set out at Clause 2 and amounting to US$8,500,000] less any sums paid after the date of this Payment Agreement;

(b) all reasonable costs and expenses incurred after the date of default, including but not limited to legal costs, the costs of the Tribunal, arbitration costs and any legal or other costs and expenses incurred in enforcing this Payment Agreement and any costs and expenses incurred in obtaining such an award; and

(c) interest at 7% from the date of default compounded quarterly until payment in full."

5. The Payment Agreement was signed by the parties' solicitors. NRE and the Guarantor have been represented by the same solicitors throughout and there has never been any suggestion that they did not have authority to commit their clients.
6. NRE and the Guarantor did not pay the sums in accordance with the schedule specified in the Payment Agreement.
7. On 4th February 2013, Coeclerici's solicitors, Holman Fenwick Willan ("HFW"), sent an email to the Tribunal requesting it to "proceed immediately to make an award in its favour on the terms set out" in clause 4 of the Payment Agreement. HFW attached a draft award for use by the Tribunal. An hour or so later, the Tribunal acknowledged receipt of HFW's email and stated that "If there is any reason why the tribunal should not now proceed as requested by the Claimant, the Respondent should make any such reason clear by close of business Tuesday 5th February at the latest". At the time of this email, NRE's and the Guarantor's solicitor, Mr William Chetwood of Bentleys, was travelling and NRE and the Guarantor were attending a conference in India. Mr Chetwood explained this in emails to the on 4^th and 5th February 2013 stating that he was unable to obtain instructions.
8. By email on 6th February 2013, HFW requested the Tribunal to proceed to make an award in Coeclerici's favour, noting that NRE and the Guarantor had not identified any reason why the Tribunal should not proceed with the award "within the timeframe set by the Tribunal". Within the hour, the Tribunal stated that "it is now proceeding to an Award in this matter as requested by the Claimant".
9. By an email sent at 22.06 hours on 6th February 2013, Bentleys claimed to the Tribunal that NRE and the Guarantor were not in breach of the Payment Agreement and submitted that the Tribunal did not have the power to proceed to an award, stating that "Our clients have a right to present their case and are in breach of no peremptory order" and that "Our clients are … entitled to a reasonable time to properly develop" their submissions. In this email, Bentleys identified two issues:

(1) whilst it was accepted that the first payment under the Payment Agreement had not been made, "it was an implied term of the agreement that payment of the sums by the due dates was conditional upon the Reserve Bank of India granting exchange control by the due dates"; and

(2) alternatively, if there was no such implied term "the respondents [NRE and the Guarantor] lacked capacity to enter into the payment agreement, such capacity being a matter of Indian law…"

10. Bentleys invited the Tribunal to "confirm that they will not be proceeding to an award until our clients have had a reasonable opportunity to present their opposition".
11. HFW replied on 7 February 2013 rejecting these claims on these grounds:

(1) If approval from the Bank of India had been required, NRE and the Guarantor should and would have raised this when negotiating the terms of the Payment Agreement. Instead they had only raised it after they were already in breach of the Payment Agreement.

(2) No implied term was required to give business efficacy to the Payment Agreement, and in any event the Payment Agreement contained an entire agreement clause which precluded the implied term.

(3) No point as to capacity could arise in relation to the Guarantor who is an individual.

(4) No point had been taken as to NRE's capacity to enter into the Sale Contract or the arbitration proceedings. The Payment Agreement was merely the function by which NRE had agreed to settle its obligations under the Sale Contract and the arbitration proceedings.

(5) NRE and the Guarantor had been represented in the arbitration proceedings and in the negotiation of the Payment Agreement by the same London solicitors.

(6) Coeclerici had only agreed to suspend the arbitration proceedings because of the Payment Agreement: had the Payment Agreement not been entered into, the arbitration proceedings would have, in the intervening period, proceeded to an award.

12. Bentleys responded, without detail, that these points were 'spectacularly bad'. Following an email exchange between the parties' solicitors, copied to the Tribunal, on 10th February 2013, the Tribunal sent an email to the parties' solicitors stating that it would proceed to make an award if Coeclerici so requested and added that the issue seems to be "whether it is appropriate for the respondents [NRE and the Guarantor] to be permitted to serve any submissions over and above those they have already served … The respondents appear to us to be in breach of the terms of the Payment Agreement and if we are correct in that conclusion then it seems to us that the claimants are entitled to the Award which they now seek …". The Tribunal concluded that there was no implied term as alleged and did not comment on the capacity issue. On 10 February 2013, the Tribunal issued its ruling by email on those arguments, stating:

"…The arbitrators are in no way doubting the explanations given for to [sic] the slightly delayed response of the respondents. However, the issue seems to them to be whether it is appropriate for the respondents to be permitted to serve any submissions over and above those they have already served.

As the arbitrators see it, the Payment Agreement was a freestanding agreement made by sophisticated commercial parties who must / should have been aware of any possible complications arising from the need to obtain exchange control permission and who should therefore have made provision for any such contingency in that Agreement.

The Agreement itself appears to have been an ad hoc arrangement and not simply an aspect of the arbitration.

The respondents appear to us to be in breach of the terms of the Payment Agreement and if we are correct in that conclusion then it seems to us that the claimants are entitled to the Award which they now seek…"

13. On 11th February 2013, HFW informed the Tribunal that its client wished to proceed with its application. In an email 30 minutes or so later, Bentleys informed the Tribunal that "the tribunal cannot come to a definitive conclusion that our clients are in breach of the terms of the Payment Agreement in circumstances where our clients have not been given an opportunity to develop their arguments why they are not" and urged the Tribunal to reconsider its decision.
14. By an email dated 12th February 2013, the Tribunal replied to Mr Chetwood's email stating that it was now proceeding to its Award and that "We must make it clear that in deciding to follow this course, we have not simply ignored the protests registered by Bentleys on behalf of the Respondents. We have considered these carefully. However, we are satisfied that if the Respondents were allowed additional time to substantiate the reasons which Bentleys have given as to why we should not proceed to an Award, the Payment Agreement itself and the circumstances in which it was concluded would still lead us inexorably to conclude that the Claimants are entitled to the Award that they seek".
15. On 14th February 2013, the Tribunal made its Award holding that Coeclerici was entitled to rely on clause 4 of the Payment Agreement and to the relief specified in that provision and directed NRE and the Guarantor to pay the sum of US$8,500,000 to Coeclerici. The Award was essentially in the terms of the draft Award provided to the Tribunal by HFW in its email dated 4th February 2013. Neither NRE nor the Guarantor have paid any part of the sums due under the Award.

The law

16. Section 68(2)(a) and (c) of the Act provide as follows:

"Serious irregularity means an irregularity of one or more the following kinds which the court considers has caused or will cause substantial injustice to the applicant –

(a) failure by the tribunal to comply with section 33 (general duty of tribunal);

…

(c) failure by the tribunal to conduct the proceedings in accordance with the procedure agreed by the parties"

17. Section 33(1) provides:

"The Tribunal shall –

(a) act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent…"

18. Both parties set out helpful and detailed submissions about the relevant tests but do not disagree about the legal approach. I can therefore take this from the helpful summary of the principles to be drawn from the leading cases set out by Popplewell J in Terna Bahrain-v-Al Shamsi [2012]EWHC 3283(Comm) at paragraph 85:

"(1) In order to make out a case for the court's intervention under s 68(2)(a), the Applicant must show:

(a) a breach of s 33 of the Act; ie that the tribunal has failed to act fairly and impartially between the parties, giving each a reasonable opportunity of putting his case and dealing with that of his opponent, adopting procedures so as to provide a fair means for the resolution of the matters falling to be determined;

(b) amounting to a serious irregularity;

(c) giving rise to substantial injustice

(2) The test of a serious irregularity giving rise to substantial injustice involves a high threshold. The threshold is deliberately high because a major purpose of the 1996 Act was to reduce drastically the extent of intervention by the courts in the arbitral process.

(3) A balance has to be drawn between the need for finality of the award and the need to protect parties against the unfair conduct of the arbitration. In striking this balance, only an extreme case will justify the court's intervention. Relief under s 68 will only be appropriate where the tribunal has gone so wrong in its conduct of the arbitration, and where its conduct is so far removed from what could be reasonably be expected from the arbitral process, that justice calls out for it to be corrected.

(4) There will generally be a breach of s 33 where a tribunal decides the case on the basis of a point which one party has not had a fair opportunity to deal with. If the tribunal thinks that the parties have missed the real point, which has not been raised as an issue, it must warn the parties and give them an opportunity to address the point.

(5) There is, however, an important distinction between, on the one hand, a party having no opportunity to address a point, or his opponent's case, and, on the other hand, a party failing to recognise or take the opportunity which exists. The latter will not involve a breach of s 33 or a serious irregularity.

(6) The requirement of substantial injustice is additional to that of a serious irregularity, and the Applicant must establish both.

(7) In determining whether there has been substantial injustice, the court is not required to decide for itself what would have happened in the arbitration had there been no irregularity. The Applicant does not need to show that the result would necessarily or even probably have been different. What the Applicant is required to show is that had he had an opportunity to address the point, the tribunal might well have reached a different view and produced a significantly different outcome."

Serious irregularity

19. The Claimants say that there was obvious and serious irregularity. On 4th February 2013, the Tribunal allowed NRE and the Guarantor little more than 24 hours in which to state their reasons why an Award should not be made. On 6th February 2013, the Tribunal decided that it would proceed to an award, even though Bentleys were unable to obtain instructions. After the Claimants had explained in the barest terms the issues which arose for the Tribunal concluded that NRE and the Guarantor were in breach. The Tribunal issued the Award, on 14th February 2013, without having received any developed submissions and without hearing any argument. The Tribunal therefore deprived NRE and the Guarantor of a reasonable opportunity to put forward their case and to meet Coeclerici's case. This could not have been done within the maximum window of 10 days available to NRE and the Guarantor. Even for interlocutory applications, the LMAA Terms 2012 themselves contemplate at least a 3 day period in which the parties can agree relevant directions.
20. Mr Macdonald Eggers QC and Mr Happe for the Claimants submit that Clause 4 of the Payment Agreement, which provided that Coeclerici is entitled to an "immediate consent award, without the need for any pleadings or hearings" in the event of a breach of the Agreement does not assist:

(1) The relief obtainable under clause 4 depends on a finding that NRE and the Guarantor were in breach of the Payment Agreement. However, the Tribunal could not have concluded that there had been a breach of the Agreement, without allowing NRE and the Guarantor to advance a defence and to present their case in support of that defence. NRE and the Guarantor were afforded no such opportunity.

(2) The provision cannot be relied upon to short-circuit or circumvent the Tribunal's general duty to afford a reasonable opportunity to NRE and the Guarantor to present their case, because section 33 of the Arbitration Act 1996 - which imposes a general duty of fairness on the Tribunal - is a mandatory provision and cannot be contractually excluded by the parties.

21. Mr Quirk for Coeclerici submits that the Tribunal did comply with section 33 of the Act. The time between Coeclerici's application for an Award and publication of the Award was 10 days. Had NRE and the Guarantor truly believed in their case, they could have put together detailed submissions in that time. The Claimants' position was no more than a cynical attempt on the part of NRE and the Guarantor to delay the inevitable. A hearing had been fixed for 21 January 2013, and therefore the Tribunal would have been proceeding to an award by early February in any event. The underlying case was for failure to make payments when due: the hearing had been fixed by mutual agreement between the parties without exchange of factual or expert witness evidence. The Payment Agreement was signed by London solicitors representing NRE and the Guarantor. The tribunal carefully considered the points raised by NRE and the Guarantor and had reached the conclusion that, even if NRE and the Guarantor were allowed additional time to substantiate the reasons why the tribunal should not proceed to an award, that would not affect the tribunal's decision. The application to the tribunal to proceed to an immediate award was not made without discussion with NRE and the Guarantor. It had plainly been discussed in the context of the negotiation of the Payment Agreement, and NRE and the Guarantor were very well aware that the consequences of a failure to pay would mean that Coeclerici would ask the tribunal to proceed to an immediate award.

Serious irregularity- Decision

22. If the Tribunal had been considering a new case in which NRE sought to put forward its defences to a claim then the procedure adopted would of course have been irregular and unfair. But that is not this case. NRE, guaranteed by Mr Jagatramka, entered into a contract with Coeclerici, obtained a prepayment of $10 million, broke the contract and also failed to repay the $10 million. Facing an imminent arbitration hearing NRE entered into another contract, the Payment Agreement, and then again failed to pay the money it had promised to pay. In the Payment Agreement "NRE and the Guarantor expressly and irrevocably agree that Coeclerici will be entitled to an immediate consent award, without the need for any pleadings or hearings".
23. Upon failing to make the payment NRE and the Guarantor came under an immediate obligation to consent to the issue of an award. Both failed to comply with that obligation too. The proper construction of this default provision is obvious and is also informed by the general principles in Section 1 of the Act. This explicit provision to enforce a promise in the event of further default did not, as the Claimants now contend, entitle them to put forward and then develop, on their case at great further expense and delay, new defences as though they were in the early stages of a legal process. Neither is there any arguable breach of Section 33. It is correct that the parties cannot contract out of Section 33 but they did not seek to do so. That duty is owed to both parties, not just the Claimants, and operates in context. Given what the parties had agreed in the Payment Agreement, the Tribunal gave them a reasonable opportunity of putting their case and adopted a suitable procedure.
24. For similar reasons there is no breach of any LMAA rules, particularly when these are read as a whole.
25. That is the context in which the Tribunal had to approach its task. In my judgment the approach of the Tribunal was neither irregular nor unfair, in fact it was impeccable. But that is not the test. The Court has to ask itself the questions summarised in Terna which in essence boil down to this. Is this an extreme case which justifies the court's intervention? Has the tribunal gone so wrong in its conduct of the arbitration, and is its conduct so far removed from what could be reasonably be expected from the arbitral process, that justice calls out for it to be corrected?
26. The answer is certainly not. So the Claimants' claim fails.
27. The question of substantial injustice does not arise unless the Claimants establish the requisite irregularity. It is therefore unnecessary for me to consider the arguments about substantial injustice but, these having being argued briefly, I will do so.

Substantial injustice-submissions of the parties

28. The Claimants contend that if the Tribunal had allowed NRE and the Guarantor a reasonable time in which to present their written submissions, it, at the very least, might well have come to a significantly different decision.
29. The Claimants say that the "principal" defences to Coeclerici's claim arise out of the following facts. Coeclerici made the Prepayment to NRE's bank account in India, as required by the sale contract. If NRE was obliged to return the Prepayment to Coeclerici, and if the refund was to take place more than one year after NRE's receipt of the Prepayment funds, it required the prior approval of the Reserve Bank of India, in accordance with Regulation 16 of the Exchange Regulation made pursuant to the Foreign Exchange Management Act 1999 (India). As the Payment Agreement required the moneys to be paid more than a year after receipt by NRE, any such payment could be made lawfully only with the prior approval of the Reserve Bank of India. Although NRE has applied for such approval, it has not yet been granted.
30. The Claimants say that these facts give rise to two related defences:

(1) It must have been obvious and certainly necessary for the business efficacy of the Payment Agreement that the payment of the Principal Sum was to be made out of India (bearing in mind that the Prepayment was made into India) and that therefore any such payment could be lawfully made only in accordance with the Indian Exchange Regulation. Accordingly, a term should be implied to the effect that payment was conditional on the obtaining of the relevant prior approval of the Reserve Bank of India.

(2) Further or alternatively, ( This is a new point raised for the first time in Counsel's skeleton argument for the hearing on 1st July 2013) as the Payment Agreement required the Prepayment to be returned from India, and as NRE could not lawfully pay the funds in accordance with the schedule set out in the Payment Agreement without the prior approval of the Reserve Bank of India, any contractual term requiring a payment to be made in a manner which was unlawful by the law of the place of performance, in this case India, is unenforceable. It is recognised that, in cases of a contractual obligation to pay money, the general rule is that that obligation is to be performed at the place where the creditor resides or carries out business. Nevertheless, that rule does not apply where the parties intend the obligation to be performed in a different or additional country or in a particular manner. In this case, the Payment Agreement required payment to be made to Coeclerici in Singapore, but it also required the moneys to be paid out of India, because the moneys to be paid under the Payment Agreement were the "Principal Sum", which represented the "Prepayment" made by Coeclerici to NRE, an Indian company, in India. The relevant payments could be made only insofar as they could be lawfully made from India. As exchange control approval was required and has not yet been forthcoming, it follows that there has been no breach of the Payment Agreement.

31. The Claimants point out that these issues will necessarily require evidence of Indian law and of the factual background to the conclusion of the Payment Agreement for consideration by the Tribunal.
32. Mr Quirk's skeleton does not engage with the issue of implied term but in oral submission his response was concise and as I see it entirely right. Despite the assertions in the Guarantor's witness statement it is fanciful to suggest that both parties to an obligation to make a payment of US$ in Singapore, in the context of international trade, would implicitly agree to make it conditional on the vagaries of Indian exchange control. The Defendant would obviously never have agreed to that. That is the position regardless of the Indian Exchange Control implications of the original contract which preceded the Payment Agreement.
33. The new defence of unenforceability is inconsistent with existing principles of long standing- see Dicey, Morris & Collins on The Conflicts of Law , 15^th edition Rule 264-

"37R-061

A contractual obligation may be invalidated or discharged by exchange control legislation if-

(a)

such legislation is part of the law applicable to the contract; or

(b)

it is part of the law of the place where a payment obligation arising out of the contract has to be or has been performed, insofar as the overriding mandatory provisions of that law render the performance of the contract unlawful; or

(c)

the exchange control legislation is part of English law and the relevant statute or statutory instrument is applicable to the contract."

and in particular 37-065. "Rule 264(1)(b) is concerned solely with the place where the legal obligation to make payment arises. As a matter of the English conflict of laws, the place of payment is the place where the debtor is obliged to tender payment, being also the place where the creditor is contractually entitled to receive payment. Thus, it is immaterial whether one party has to equip himself to make payment by an act in another country, including his home country. For this reason, a defence to non-performance of a payment obligation based upon exchange control restrictions imposed in the home country of one of the parties to a contract will normally fail unless there is a contractual obligation to make payment in that country." There is no such obligation in this case.

34. Nothing has been heard of the proposed defence of incapacity. No reason has been advanced why NRE lacked capacity to entered into the Payment Agreement but not the original contract. The Guarantor, Mr Jagatramka, has given evidence in the Australian enforcement proceedings so he plainly has capacity.
35. I therefore do not consider that, had the Tribunal had the opportunity to be addressed about these points, it might well have reached a different view and produced a significantly different outcome.

Conclusion

36. The Claim is dismissed. The very able and courteous submissions of their Counsel should not be allowed to disguise the fact that the Claimants have repeatedly, deplorably and without justification failed to pay money which is plainly due to the Defendants.
37. I shall be grateful if Counsel will let me have, not less than 48 hours before hand down of this judgment, corrections of the usual kind, preferably agreed, and a note of any points to be raised at the hearing. If the parties are able to agree remaining matters their attendance is not required at the hand down.