- West Tankers - The Latest Twist
- May 7, 2012
- Law Firm: Norton Rose Canada LLP - Montreal Office
The West Tankers saga is a long-running and well documented one. The facts of the initial dispute have given rise to numerous legal proceedings and the latest instalment in the protracted legal process introduces a further twist to the tale. In this briefing, we consider the recent developments in the matter and how you may protect yourself if your contract counterparty sues you in another EU jurisdiction, in breach of an agreement to refer all disputes to arbitration in England.
The facts of the original case are remarkably simple. Erg Petroli SpA (Erg) chartered a vessel, the Front Comor, from West Tankers Inc (West Tankers). The charterparty was governed by English law and contained an agreement to arbitrate, with London as the seat of the arbitration. The vessel collided with a pier (which was owned by Erg Petroli) in Syracuse in Italy in 2000. Erg claimed on its insurance policy but then commenced an arbitration against West Tankers in London to recover the uninsured portion of its loss. In the meantime, Erg’s insurers (Allianz SpA (formerly Riunione Adriatica di Sicurta) and Assicurazioni Generali SpA) exercised their subrogation rights against West Tankers and brought a claim against West Tankers in the court of Syracuse to recover the sum paid out by them.
West Tankers sought and obtained an anti-suit injunction from the English court to prevent the insurers from pursuing the proceedings in Italy, in breach of the arbitration clause, and a declaration that disputes were subject to arbitration. However, a leapfrog appeal by the insurers went to the House of Lords and was subsequently referred to the European Court of Justice (ECJ) on the question of whether an anti-suit injunction could be granted to restrain proceedings in another EU member state or whether such an order was precluded by the EU jurisdiction rules set out in Council Regulation 44/2001 (the Brussels Regulation).
Meanwhile the London arbitration continued (with the insurers joined to the proceedings as co-claimants) and in May 2008 the tribunal declared West Tankers was not liable to Erg. Other issues that had been referred to the tribunal were adjourned until the ECJ ruling was given.
The ECJ decision, handed down on 10 February 2009, stated that anti-suit relief was unavailable. The result of this was that West Tankers had the benefit of an English arbitral award which exonerated them from any liability but nonetheless was embroiled in court proceedings in Italy which could not be injuncted.
In January this year, the English Court of Appeal held that an order could be made under section 66 of the Arbitration Act 1996 enforcing the arbitral award by way of a court judgment even though it was only in declaratory form. The order would then preclude enforcement by the insurers of any favourable judgment obtained from the Italian courts in England on the basis that the English courts would not be required to recognise and enforce a judgment from an EU court which conflicted with an earlier English judgment.
Following the ECJ decision, the arbitral tribunal dealt with the two further matters which had been postponed. West Tankers claimed:
a. damages from the insurers for breach of the arbitration clause; and
b. a declaration as to West Tankers’ right to an indemnity against any damages that the Italian courts might award.
The arbitrators’ award
The tribunal (by a 2-1 majority) dismissed both claims, holding that its jurisdiction to award damages for breach of the arbitration agreement was precluded by the Brussels Regulation and the ECJ decision. The rationale for the tribunal’s view was that the ECJ had made it clear that the right of a party to have access to a national court with jurisdiction under the Brussels Regulation was a fundamental right in EU law and that denial of that right was contrary to the principle of “effective judicial protection.” Under article 5(3) of the Brussels Regulation the insurers had a right to bring proceedings against West Tankers in Italy, as that was the place where the harmful event occurred. According to the tribunal, that was a fundamental right, and it followed that the arbitrators did not have jurisdiction to award damages in circumstances where the insurers were merely seeking to rely upon their fundamental right. The tribunal recognised that although the Brussels Regulation does not apply to arbitration, the reasoning of the ECJ went wider and set out a right protected by EU law to bring proceedings in Italy.
The further arguments
West Tankers appealed to the English Commercial Court on the basis of the following three arguments:
i. Article 5(3) of the Brussels Regulation did confer a right upon the insurers to sue in Italy, but the right did not apply where the issue of jurisdiction was before the tribunal because arbitration was outside the Brussels Regulation. West Tankers argued that the Regulation affected the interface between EU courts and not between courts and arbitrators. The principle of effective judicial protection was not free-standing and its effect was limited to protecting specific rights e.g. the right to commence court proceedings, but if arbitration was outside the Brussels Regulation then there was no legal right to which it could attach. The insurers countered that arbitrators were required to apply EU law and that obligation overrode the exclusion of arbitration from the Brussels Regulation.
ii. West Tankers’ second argument was that even if the arbitral tribunal did have to apply the principle of effective judicial protection, the award of damages did not interfere with the insurers rights under the Brussels Regulation because the exclusion of arbitration inevitably gave rise to the possibility that there could be conflicting judicial and arbitral decisions. The insurers argued that an award of damages would amount to an interference with the Italian proceedings on a par with an anti-suit injunction by the English courts.
iii. Finally, West Tankers argued that the tribunal’s dismissal of the claim was premature. The arbitrators should have waited for the outcome of the Italian proceedings as if the Italian court were to rule that there was a valid arbitration clause, there would be no conflict.
The High Court held, in a decision handed down by Flaux J on 4 April 2012, that the majority of the arbitral tribunal was wrong; the arbitrators did have jurisdiction to award damages for breach of the arbitration clause.
Flaux J’s decision to allow the appeal was based on the first submission advanced by West Tankers. He drew on the reasoning of the ECJ, namely the entitlement of the court first seised to rule on jurisdiction and the principle of mutual trust between member states. According to the judge, the principles identified by the ECJ extended to member states’ legal systems, but did not extend to private arbitral tribunals. The arbitrators were bound to apply EU law, but there was nothing in EU law which prevented the arbitrators from reaching a conclusion different from that reached by an EU court. If the arbitrators were not required to give effect to Article 5(3) of the Brussels Regulation, then they were not deprived of jurisdiction to award damages for breach of an arbitration clause which involved invoking Article 5(3).
Flaux J said that “there is no qualitative difference between a decision by an arbitral tribunal on the merits, which is inconsistent with the approach that the Italian court might adopt in due course as to the merits, and a decision by the arbitral tribunal to grant a declaration that the Respondents [the insurers] should indemnify the Appellant [West Tankers] in respect of any liability the Italian court, having considered the merits, might in due course conclude the Appellant was under.”
This reasoning meant that it was unnecessary for Flaux J to consider West Tankers’ second and third submissions. However, in recognition of the fact that the case may be pursued further still, he did consider them, and found in West Tankers’ favour with respect to both arguments.
Implications and practical steps
So what should you do if you become the unwilling defendant to proceedings in another EU jurisdiction commenced in violation of the London seated arbitration clause that you have negotiated in your contract? The English court is unable to issue an anti-suit injunction to prevent those proceedings from continuing. If you are already involved in an arbitration with the relevant party and have obtained a favourable award or declaration, you should seek to enforce it pursuant to section 66 of the Arbitration Act by obtaining a court order recognising the award. This means that if the court proceedings commenced elsewhere in the EU result in a conflicting decision with the arbitral award, those proceedings will not be recognised in England on the basis that the English courts are not required to recognise and enforce a judgment from an EU court which conflicts with an earlier English judgment.
This may not, however, afford sufficient protection where assets are held outside England, since the party who commenced proceedings in breach of the arbitration agreement may seek to enforce a judgment obtained from the foreign court against such assets, notwithstanding that the judgment is contrary to an English arbitral award. Moreover, unless there is an English arbitral award to enforce on the issues that form the substance of the foreign proceedings, there can be no enforcement order by the English courts and therefore no protection against the enforcement of a judgment obtained from another EU member state’s court.
As a practical measure, therefore, parties should consider whether a declaration from the tribunal should be sought in any future arbitration that if foreign proceedings are commenced in breach of the arbitration agreement, damages should be payable by the party at fault. This is the case even if foreign proceedings have not yet been commenced and there is no indication that they will be.
Parties should also consider conferring express powers on the arbitral tribunal in their arbitration agreements to grant anti-suit relief and to make awards or declarations in respect of damages for breach of the arbitration agreement and/or an indemnity in respect of any damages awarded by a court in proceedings commenced in breach of the arbitration clause where such damages are inconsistent with the arbitral tribunal’s award.