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West Tankers: Damages for breach of arbitration agreement

15 May 2012


In West Tankers Inc v Allianz SpA & anr [2012] EWHC 854 (Comm) the Commercial Court held that EU law does not deprive an arbitral tribunal of its jurisdiction to award damages against a party who has commenced judicial proceedings in breach of an obligation to arbitrate, even when such proceedings are brought in the courts of an EU Member State.

The underlying dispute arose out of a collision between the vessel, Front Comor, owned by West Tankers (the appellant), and a pier in Italy belonging to Erg Petroli SpA, the vessel’s charterers. The charter party between Erg Petroli and the appellant contained an arbitration agreement which provided for all disputes arising out of the charter to be referred to arbitration in London with English law to apply.

Following the collision, Erg Petroli commenced arbitration in London against the appellant. As the London arbitration was proceeding, the charterers’ subrogated insurers, Allianz and Generali (the respondents) commenced proceedings in tort in the Italian court against the appellant.

In response to the Italian proceedings, the appellant obtained an anti-suit injunction from the English court to restrain the respondents from taking any steps to prosecute their claims except by way of arbitration in London1. An appeal against this anti-suit injunction was made straight to the House of Lords who subsequently referred to the European Court of Justice (ECJ) the question of whether it was consistent with EC Regulation 44/2001 (the Brussels Regulation) for a court of a Member State to make an order restraining another person from commencing or continuing proceedings in another Member State on the ground that such proceedings are in breach of an arbitration agreement2. Their Lordships made it very clear that they thought that this question should be answered in the affirmative 3.

In November 2008, the arbitral Tribunal published a Partial Award in which it declared, inter alia, that the appellant was under no liability to the respondents in respect of the collision4. Two issues, however, were stood over by the Tribunal pending the ECJ’s judgment, these being whether the appellant was entitled to damages from the respondents for the latter’s breach of their obligation to arbitrate and to an indemnity in respect of any future judgment given against the appellant in Italy.

In February 2009, the ECJ answered the question referred to it by the House of Lords in the negative, holding that an anti-suit injunction enforcing an arbitration agreement was incompatible with the Brussels Regulation5.

Arbitral Tribunal’s Final Partial Award

On 14 April 2011, the arbitral Tribunal, consisting of Sir Brian Neill, Professor Santa Maria and Mr Baker-Harber (dissenting), issued an award with respect to the outstanding issues, concluding that it did not have jurisdiction, by reason of EU law, to award damages or an indemnity. The Tribunal was mindful of the express exclusion of arbitration from the Brussels Regulation, which meant that it was not circumscribed by EU law in the same way as a national court. Nevertheless, according to the Tribunal, awarding damages to the appellant for failure to arbitrate would effectively "punish [the respondents] for pursuing a course that the European Court itself had approved" and therefore it was required by EU law, in particular, by principles of "effectiveness" (ie that national remedies must secure the effectiveness of Community rights) and "effective judicial protection" (national courts must ensure full effectiveness of Community law), to decline jurisdiction.

Commercial Court decision

The appellant appealed the Tribunal’s decision to decline jurisdiction. The appeal involved three main questions: (1) whether EU law circumscribed the jurisdiction of the Tribunal, given that the Brussels Regulation does not apply to arbitration; (2) whether an award of damages or an indemnity would in fact interfere with the insurers’ rights under EU law; and (3) whether the Tribunal should have dismissed the claim for damages, given that the Italian court has not yet determined its jurisdiction.

Flaux J allowed the appellant’s appeal and held that the Tribunal was not deprived of jurisdiction by reason of EU law. Specifically, with respect to the first issue, the judge concluded that, because arbitration falls outside the Brussels Regulation, an arbitral tribunal is not bound to give effect to the principle of effective judicial protection. That principle only applies between courts of Member States. As such, an arbitral tribunal could reach a different conclusion from that of the court first seised, a possibility that was also recognised in the Opinion of the Advocate General.

As to the second issue, Flaux J concluded that an award of damages, were such an award to be issued, would not constitute an illegitimate interference with the Italian court action. If it did constitute illegitimate interference, then so would the declaration of non-liability that was granted to the appellant by the Tribunal in November 2008 (there being no sound basis for distinguishing between the two types of relief). However, neither the Advocate General nor the ECJ contemplated that the Tribunal should decline jurisdiction altogether until the Italian court had ruled; on the contrary, as mentioned above, they expressly contemplated that inconsistent decisions were possible.

Finally, as to the third issue, Flaux J noted that, instead of dismissing the claim for damages, the Tribunal should have, at the very least, adjourned the issue pending the Italian court’s determination as to its jurisdiction. If the Italian court decides that it does not have jurisdiction and that the respondents were required to arbitrate, then the appellant would arguably have a strong claim for damages due to the respondents’ breach of obligation to arbitrate.

Flaux J gave permission to appeal to the Court of Appeal.

Comment

This decision reaffirms the principle, as was expressly recognised by the Attorney General and the ECJ in this case, that the Brussels Regulation provides for the allocation of jurisdiction only between national courts of Member States, not private arbitral tribunals. EU law therefore does not prevent an arbitral tribunal from ruling on its own jurisdiction. Nor is an arbitral tribunal prevented from reaching a conclusion that may be inconsistent with the decision of a national court first seised of the matter.

The decision will be welcomed by the arbitration community, especially in light of the concerns raised by the ECJ’s ruling on anti-suit injunctions and the resulting potential for foreign "torpedo" proceedings to derail arbitrations. The Brussels Regulation is currently under review and it is hoped that, following such review, priority will be given to the arbitral tribunal or court of the chosen seat of the arbitration to decide jurisdiction, and that the court of any other Member State must stay its proceedings in the meantime. However, until then, it must come as a relief to arbitration practitioners that an arbitral tribunal, exercising parallel jurisdiction, can at least award damages.

Previous decisions in this long running litigation have been reported in the April 2005, March 2007, March 2009 and May 2011 Litigation Reviews.

Footnotes

  1. See Litigation Review April 2005.
  2. [2007] UKHL 4.
  3. See Litigation Review March 2007.
  4. It was in respect of this award that Simon J had granted leave to enforce the Partial Award as a judgment under s66 of the Arbitration Act 1996.
  5. The Respondents applied to set aside that Order. Field J, however, refused to set aside the Order ([2011] 2 Lloyd’s Rep 117) and the Court of Appeal recently upheld his decision ([2012] EWCA Civ 27). See Litigation Review May 2011, pp. 3-4.
  6. [2009] 1 Lloyd’s Rep 413.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.