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Competing dispute resolution clauses between settlement agreement and underlying contract

05 June 2015

There is a presumption that parties intend for all disputes arising out of a particular relationship to be resolved in a single forum, and, as Monde Petroleum SA v WesternZagros Ltd [2015] EWHC 67 (Comm), 22 January 2015 shows, a particularly strong presumption where a settlement agreement’s dispute resolution clause differs from the dispute resolution clause in the underlying contract. Where the parties intend differently, clear and express wording is needed to displace this presumption.

WesternZagros Ltd (WZL) entered into a consultancy services agreement with Monde Petroleum SA (Monde) with a dispute resolution clause stating that any dispute would be referred to arbitration in London under ICC rules.

WZL purported to terminate the consultancy services agreement and disputed that the unpaid amounts invoiced by Monde, which included a milestone payment, were due. No arbitral proceedings were started at this stage.

The parties entered into a settlement agreement under which WZL was to pay Monde’s disputed invoices in full and for there to be a mutual release and waiver of all claims by each party in respect of the consultancy services agreement. The settlement agreement contained a clause conferring exclusive jurisdiction on the courts of England and Wales.

Monde commenced proceedings in the English commercial court claiming that it had been induced to enter the settlement agreement under misrepresentation and/or duress. Monde also started arbitration proceedings as a protective measure notwithstanding its primary case that the English court had jurisdiction. WZL made counterclaims for declaratory relief  in the arbitration in respect of the consultancy services agreement, but the arbitral tribunal held that it had no jurisdiction to determine the counterclaims.

WZL applied to the English court, in part, seeking to overturn the arbitration award that the tribunal did not have jurisdiction over WZL’s counterclaims.

WZL argued the arbitration clause in the consultancy services agreement remained valid and binding and that WZL’s counterclaims fell within the scope of that arbitration agreement. The settlement agreement did not terminate, supersede or otherwise render the arbitration clause ineffective or inoperative. This was because the settlement agreement did not show express agreement between the parties that it would terminate or supersede the arbitration clause, contrary to the requirements of s7 Arbitration Act 1996 which requires such express wording.

Monde argued that on the true construction of the jurisdiction clause in the settlement agreement, it was intended to supersede the arbitration clause in the consultancy services agreement. Monde argued, in part, that this was the correct construction because of the presumption in favour of one-stop adjudication and the fragmentation which would otherwise arise between claims which would be required to be brought in separate fora.

Decision

Popplewell J held in favour of Monde that the settlement agreement’s dispute resolution clause superseded the one contained in the consultancy services agreement, and the arbitration tribunal had not had jurisdiction.

Fiona Trust & Holdings v Privalov & ors [2007] Bus LR 1917 that there is a strong presumption that rational businessmen who are parties to a contract intend all questions arising out of the relationship in question to be determined in the same forum and this would require clear words to the contrary if it was to be displaced.

It is possible for a dispute resolution clause in an underlying contract to remain valid and binding despite the underlying contract being terminated. This is because the termination affects the substantive rights in the underlying contract and, depending on the wording, not the agreement as to how disputes should be resolved. However, Popplewell J observed that there are a number of reasons why there is a particularly strong presumption in favour of one-stop adjudication where there are conflicting dispute resolution clauses in a settlement agreement and the underlying agreement:

  • First, where parties to a dispute enter into a settlement agreement, the disputes often give rise to issues which relate both to the settlement agreement and to the underlying agreement. In such circumstances, it would be rational that the parties would intend that all aspects of such a dispute should be resolved in a single forum.
  • Secondly, the settlement agreement comes “second in time” and has been agreed in light of the specific circumstances which have given rise to the dispute regarding the underlying contract.
  • Thirdly, there is a risk of inconsistent findings if the disputes arising under the settlement agreement and underlying agreement are determined in different fora.

Popplewell J also noted that even if disputed issues can be separated neatly, it is unlikely that the parties intended the increased costs, inconvenience and delay in having to litigate separate aspects of the same dispute in two different fora.

However, Popplewell J noted that there are occasions where parties will favour fragmentation of issues, so that different disputes are resolved in different fora. Whether this applies depends on the circumstances and wording of the settlement agreement.

COMMENT

This case clarifies that where inconsistent dispute resolution clauses are contained in a settlement agreement which settles a dispute between two parties arising out of an underlying commercial contract that has been terminated, there is a strong presumption in favour of one-stop adjudication, ie that the parties intended for any disputes arising between them relating to the contract and the settlement of the relevant relationship to be heard in one place.

There are occasions where parties will require different dispute resolution clauses. It is possible for parties to have multiple relationships, each governed by multiple contracts. The drafting of the dispute resolution clauses in these contracts will depend on both the nature and purpose of the relevant relationship and contract, as confirmed in the Court of Appeal decision Deutsche Bank AG London Branch v Petromena ASA [2015] EWCA Civ 226 (discussed in the Litigation Review, April 2015).

Popplewell J noted Lord Hope’s observation in Harbour Assurance Co (UK) Ltd v Kansa General International Assurance Co [1993] QB 701 that dispute resolution clauses are often not focused on by parties during negotiations, so the court is wary of placing too much weight on particular forms of words so as to exclude certain disputes from its scope. However, as this case shows, dispute resolution clauses in subsequent agreements can have a significant impact on how disputes are resolved. In practice, parties need to pay close attention to the content and consistency of dispute resolution clauses in the main agreements, as well as in any settlement agreements, to ensure that any disputes that do arise are resolved in the forum and manner the parties intended.