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English court confirms strict approach against jurisdictional challenges to arbitral awards

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The English High Court, in rejecting a jurisdictional challenge to an arbitral award under s.67 of the Arbitration Act 1996 (the Act), has reaffirmed the longstanding principle that a jurisdictional challenge cannot be used to indirectly attack the merits of a tribunal’s decision.  

JV dispute leads to transfer of equity and jurisdictional challenge

The dispute arose out of a joint venture between Port de Djibouti SA (PDSA) and DP World Djibouti FZCO (DP World) to build and operate a container terminal in Djibouti. PDSA and DP World were parties to a Joint Venture Agreement and Articles of Association, which contained arbitration agreements covering any disputes “between the Shareholders”.

Subsequently, DP World commenced an arbitration against PDSA in England after PDSA purported to terminate the JVA. Days later, a Djiboutian Presidential Ordinance was issued transferring all of PDSA’s shares in the JV company to the Republic of Djibouti (the Republic).

During the course of the arbitration, PDSA alleged that it ceased to be a “Shareholder” following the Ordinance and therefore that the arbitrator had no jurisdiction over issues post-dating the Ordinance. The arbitrator disagreed, finding that PDSA did not cease to be a “Shareholder” after the Ordinance, and holding that she did have jurisdiction to determinate the dispute. 

PDSA brought a jurisdictional challenge under s.67 of the Act contesting the tribunal’s findings.

Court rejects jurisdictional arguments

The court considered, amongst other issues, whether the tribunal had jurisdiction to decide:

  • a claim that PDSA remained a shareholder notwithstanding the purported transfer of shares from PDSA to the Republic (the Share Transfer Claim); and
  • a claim that PDSA had committed various breaches of the JVA/Articles following the Ordinance (the Breaches Claim).

Share Transfer Claim

In respect of the Share Transfer Claim, PDSA argued that the arbitrator lacked jurisdiction to decide that PDSA remained a Shareholder after the Ordinance. The court disagreed, giving the following key reasons:

  1. Regardless of whether it was also a jurisdictional issue, the question of whether PDSA remained a Shareholder had to be a substantive issue. It underpinned a number of DP World’s substantive claims that PDSA remained contractually liable for actions taken after the Ordinance. The arbitrator also (correctly) treated the question as a merits issue.
  2. PDSA must have been a Shareholder at the exact moment in time when the Ordinance was issued, even if the effect of the Ordinance was to end its shareholder status. That meant that the question of whether PDSA remained a Shareholder was a dispute “between the Shareholders” for the purposes of the arbitration agreements. 
  3. The “natural reading” of both arbitration agreements indicated that they were “of general application” to matters that arose while the parties were Shareholders. This included the dispute over whether PDSA remained a shareholder after the Ordinance. 
  4. The principle in Fiona Trust v Privalov provides that “rational business entities” generally intend for any dispute arising out of their relationship as co-shareholders to be decided by the same tribunal. Applying this principle, there was a presumption that the parties intended for the arbitration agreements to apply to any disputes over matters arising when they were alleged to be Shareholders. “Rational businessmen” would not have intended for a dispute over whether one party remained a Shareholder to be validly subject to arbitration if the ultimate conclusion was that the party was a Shareholder, but not if the ultimate conclusion were the converse. 

Breaches Claim

In respect of the Breaches Claim, PDSA argued that the tribunal lacked jurisdiction to determine whether PDSA was in breach for its failings after the issue of the Ordinance, as the relevant events occurred after it ceased to be a Shareholder. The court, again, disagreed.

Of particular note, the judge held that the finding of a breach that began on or before the date of the Ordinance and continued thereafter was still a “dispute between the Shareholders”, regardless of whether one party ceased to be a Shareholder as a result of the Ordinance. The court observed that a “rational businessman” would not expect a claim relating to the breach’s initial occurrence to be subject to arbitration, but not a claim regarding its continuation.

On present facts, the breaches in question arose from PDSA’s failure to procure a deed of adherence by the time of the Ordinance. In the court’s view, these breaches began on the date of the Ordinance and continued thereafter, and were therefore considered a “dispute between the Shareholders”. On that basis, the court rejected the s.67 challenge and held that the arbitrator did have jurisdiction to decide all the issues before her.

Commentary

This judgment reaffirms two important principles of English arbitration law: first, that a s.67 jurisdictional challenge cannot be used to mount an indirect attack on the merits of a tribunal’s decision; and secondly, that there is a strong presumption that the same tribunal should decide all disputes arising out of the same business relationship (the Fiona Trust principle).