Moral: don’t arbitrate in Russia if you can help it

Decided eight weeks ago but just up on Bailii, the arbitration decision in Maximov v Open Joint Stock Company “Novolipetsky Metallurgichesky Kombinat” [2017] EWHC 1911 (Comm) is worth a brief note. Having sold a company to a buyer and faced a dispute as to the price, Nikolai Maximov got an arbitral award from a Russian tribunal for some 8 billion roubles (then about $250 million). A Russian court then proceeded at the buyer’s request to annul the award on very doubtful grounds, including those not raised by the parties. Two appeals failed. The seller sued in England under the New York Convention and at common law to enforce the award: to the buyer’s plea that the award had been set aside, the seller asked the court not to enforce that judgment on the basis that it must have been biased. Despite very grave suspicions about the propriety, let alone the correctness, of the Russian judgment, and despite evidence that the Russian judicial system left a great deal to be desired, especially when (as here) the Russian government had a strong interest in reducing or eliminating the award, the judge, Sir Michael Burton, was clear that this was not enough. Perverse and very suspicious it might be, but even here his Lordship was unable to draw the inference that the only explanation was bias.

Two further points for future reference. At [16] the judge expressed the view that a judgment given on one point out of evident bias would probably not be upheld even if there was another ground for the judgment that was not successfully challenged on that ground. And at [64] he strongly doubted a subsidiary argument by the defendant that once a court with jurisdiction had annulled an award that was an end of the matter however biased the court, since there would simply be nothing to enforce. And rightly so, we suggest: apart from anything else, the moral hazard that such a rule would engender is fairly obvious.

As we said at the beginning, arbitrate in Russia very much at your own risk.

 

Compensation for the unlawful arrest and detention of the Arctic Sunrise and its crew

Arbitral Tribunal orders the Russian Federation to pay a little under 5,4 million euros to the Netherlands

On 18 July 2017, almost two years after that an Arbitral Tribunal (Tribunal) found that the Russian Federation must compensate the Netherlands following the wrongful arrest of the Arctic Sunrise and its crew, the Tribunal handed down its Award on the issue of compensation.

Background

Before looking at this recent decision in more in depth, the history of the dispute will be laid out. Starting on 18 September 2013, when Greenpeace activists tried to enter the Russian offshore oil platform (the Prirazlomnaya) in order to protest against attempts to begin exploiting oil and gas resources in the Arctic. One day later, the Russian Federation boarded and arrested the Arctic Sunrise and detained its crew. Subsequently, the vessel was brought to the port of Murmansk and the crew was charged with having committed a range of administrative and criminal offences, including acts of terrorism and hooliganism.

The Netherlands initiates Proceedings before an Arbitral Tribunal 

Some two weeks later, on 4 October 2013, The Netherlands, being the flag State of the Arctic Sunrise, started proceedings before an Arbitral Tribunal that was established pursuant to Annex VII of the 1982 Law of the Sea Convention. The Russian Federation refused to participate in the Arbitral proceedings that were initiated by the Netherlands. The position of the Russian Federation was, that this type of dispute was beyond the jurisdiction of an international court or tribunal, due to a declaration it had made at the time of becoming a party to the 1982 Law of the Sea Convention. However, the proceedings went ahead, despite the non-participation of the Russian Federation.

The Netherlands requests Interim Measures from the ITLOS

On 21 October 2013, the Netherlands requested interim measures from the International Tribunal for the Law of the Sea (ITLOS). According to the Netherlands, the Russian Federation had to immediately release the Arctic Sunrise and its crew, after the posting of a bond, upon which they would be free to leave Russian territory as well as any maritime areas under its jurisdiction. ITLOS gave an Order on interim measures on 22 November 2013. Initially, the Russian Federation did not comply with the Order of the ITLOS – eventually, however, the vessel and crew were released in late November 2013. The Russian release of vessel and crew was based on its national laws, the Order of the ITLOS played no decisive role in this, according to the Russian Federation  – as it happened, the effect of the national laws and regulations on which the Russian Federation relied, coincided with what was set out by the ITLOS in its Order containing interim measures.

Arbitral Award on the Merits

One of the main substantive issues on which the Arbitral Tribunal was asked to rule during the merits phase, was the (un)lawfulness of the response of the Russian Federation to the presence of the Arctic Sunrise and its crew. The gist of the argument of the Netherlands was that, as the flag State, it had sole jurisdiction over the ship and the crew on-board during the entirety of this incident (Article 58 of the 1982 Law of the Sea Convention). On 14 August 2015, the Tribunal released its Award on the merits. The Arbitral Tribunal found that the Netherlands had exclusive jurisdiction over the Arctic Sunrise whilst it was operating in the exclusive economic zone of the Russian Federation. This means that the Russian Federation could have only lawfully initiated steps against the vessel that was flagged to the Netherlands and its crew with the latter’s consent. After coming to this conclusion, the Tribunal went on to state that the Netherlands had to be compensated.

Arbitral Award on Compensation

In its recent Award on compensation, the Tribunal set the total amount of compensation owed by the Russian Federation to the Netherlands at a little under 5,4 million euros. This sum was arrived at by adding up the damage that was done to the Arctic Sunrise (EUR 1,695,126.18); compensation related to the unlawful arrest, prosecution and detention of its crew (EUR 600,000); a variety of other damages incurred by the Netherlands, including the failure to release the vessel and crew in a timely manner (EUR 2,461,935.43); costs made by the Netherlands in issuing a bank guarantee (EUR 13,500); and lastly, the Netherlands had to be reimbursed for paying the full amount of deposits required by the Tribunal (EUR 625,000) – meaning that the Russian Federation had to pay the half it owed of the costs that were needed for the proceedings to be initiated. Although the Russian Federation is required under international law to abide by the ruling on compensation, whether it will actually do so remains to be seen.

 

Arbitration post-Brexit

The Lord Chief Justice a couple of days ago gave a bullish speech in Beijing about London as an arbitration centre post-Brexit. Despite the self-serving nature of the speech, one suspects he may well be right. At least post-Brexit we should with a bit of luck get shot of the ECJ control over jurisdiction; be able to abandon The Front Comor [2009] EUECJ C-185/07, [2009] 1 AC 1138 and go back to issuing anti-suit injunctions against Euro-proceedings that infringe London arbitration agreements; and possibly get rid of tiresome Brussels I provisions that make life difficult for P&I clubs which want to insist on arbitrating here (see, for details, this post). But as usual, to know the details we have to wait and see.

A matter of construction. Conflicting arbitration and jurisdiction clauses in time charter.

 

In London Arbitration 12/17 the tribunal considered a conflict as to law and jurisdiction arose under two clauses in a time charter. Clause 31, headed ‘Law and Arbitration’ provided for mediation and, if the dispute could not be resolved within sixty days, by reference to a single arbitrator, with arbitration to be “[h]eld at London, UK and…conducted in accordance with relevant acts and rules there under excluding any laws, opinions, or regulations that would require application of the laws of any other jurisdiction.” The parties appointed their own arbitrators and a third was appointed by the President of the London Maritime Arbitrators Association (LMAA). Charterers then raised the point that the contract was not subject to arbitration but rather to Egyptian law and jurisdiction pursuant to cl. 21, headed, APPLICABLE LAW, which provided: “This Contract and the relationship of the parties hereunder shall be governed by and interpreted in accordance with the laws of Egypt and parties hereby agree to submit to the jurisdiction of the Egyptian Courts in Cairo.”

The tribunal had to decide, under its general power to make a finding on its own jurisdiction, which clause, as a matter of construction  more closely expressed the intentions of the parties. The tribunal found in favour of cl.31 which appeared under the more all-embracing heading: “Law and Arbitration”, whereas Clause 21 appeared under the heading “Applicable Law”, no reference being made in the heading to jurisdiction. Further the reference in clause 31 to   attempts at settlement as a prelude to arbitration did not sit with an intention for the Egyptian courts to have jurisdiction.

Arbitrating against a dead defendant. Section 18 to the rescue?

Silver Dry Bulk v Homer Hulbert Maritime [2017] EWHC 44 (Comm) involved an arbitration where the defendant had ceased to exist by the time arbitration was commenced. Silver Dry Bulk Company Ltd, a Maltese company and a 100% subsidiary of General National Maritime Transportation Company (“GNMTC”), the Libyan national maritime company had bought a vessel from Homer Hulbert Maritime, a Marshall Islands company, which was a 100% subsidiary within the Sinokor group of companies, a Korean ship owner and operator. Silver Dry claimed that part of the purchase price represented a secret commission to one of Colonel Gaddaffi’s sons who at the time had complete control over GNMTC.

Shortly after completion of the sale Homer Hulbert filed articles of dissolution. Under the law of the Marshall Islands a dissolved company is kept alive for three years for the puposes of prosecuting suits by or against them. After expiry of that time Silver Dry commenced arbitration against Homer Hulbert. The arbitration clause in the sale contract provided:  “On the receipt by one party of the nomination in writing of the other party’s arbitrator, that party shall appoint their arbitrator within fourteen days, failing which the decision of the single arbitrator appointed shall apply.” Receiving no response from the dead company, after 14 days Silver Dry constituted their arbitrator as sole arbitrator. They claimed  that Homer Hulbert continued  to survive sufficiently for the purpose of being the defendant to a claim in arbitration, an issue which it wanted to be decided by the sole arbitrator, applying the principle of kompetenz-kompetenz.  The ultimate intent behind the proceedings seems to have been to go against the Korean parent company

To avoid wasting time and expense of arbitrating if the arbitration were subsequently turn out to be a nullity, Silver Dry asked the court the court should make an order under section 18(3) of the Arbitration Act 1996 directing that the arbitral tribunal has been validly constituted.  The provision gives the Court power to (a) give directions as to the making of any necessary appointments;(b) direct that the tribunal shall be constituted by such appointments (or any one or more of them) as have been made; (c) to revoke any appointments already made;(d) to make any necessary appointments itself

Teare J refused to make such an order.  When there is an issue whether a tribunal would have jurisdiction, it has been held that the court has power to make the orders listed in section 18(3) if the claimant can satisfy the test of showing a good arguable case. However, these powers can only be exercised if there has been “a failure of the procedure for the appointment of the arbitral tribunal”. That will not be the case if the procedure has operated in the way that it was supposed to, albeit without the cooperation of one of the parties. Here the appointment procedure had worked as contemplated by the parties’ agreement, with the claimant’s nominee automatically becoming sole arbitrator after 14 days, for which no assistance from the court was required.

Silver Dry also applied under section 44 for the issue of Letters of Request directed to the Korean courts for the production of emails between specified individuals or email accounts, connected with the negotiation of the sale, for a limited period. Teare J refused to make such an order. The issue of a Letter of Request would require him  to make a representation to the foreign court that (1) there was, or at the very least there probably was, an arbitration in existence for the purpose of which production of the documents is requested and (2) the documents were required for the purpose of the arbitration. He was not able to do so as the issue of the continued existence of Home Hulbert remained to be decided.  The position might be different if the sole arbitrator had expressed a view that production of the documents was necessary in order for there to be a fair resolution of the issues in the arbitration, but this was not the case.

 

Upcoming in the Supreme Court

Among the all-too-numerous public law cases slated for hearing in the Supreme Court this coming term, three solid commercial appeals beckon. IPCO (Nigeria) Ltd v Nigeria National Petroleum Corp [2015] EWCA Civ 1144 is about arbitration and security for costs (hearing 2 Feb).  Wood v Capita Insurance [2015] EWCA Civ 839 (7 Feb) is yet another case on interpretation of contracts to add to the burgeoning jurisprudence which almost every  judge faced with an interpretation issue now feels constrained to mention in his judgment. And, for financial law buffs, there is Taurus Petroleum Ltd v SOMO [2015] EWCA Civ 835 (21/22 March) on the situs of a L/C debt (and an incidental question of who the creditor is). Happy days.

Arbitration -a small addition to the boilerplate called for?

Three years ago, under s.44 and s.46 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, a terror was removed from court litigation in accordance with the theme of the Jackson reforms. Since 2013, although a lawyer can agree a success uplift in fees, costs recoverable from the other side are limited to the amount of the “ordinary” fee: the amount of the uplift cannot be recovered.

Not so, it seems, with arbitration. A couple of weeks ago, in Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd [2016] EWHC 2361 (Comm), the Commercial Court held that costs awardable by ICC arbitrators could include such figures under the general costs power in s.59 of the Arbitration Act 1996. As a result, where the successful party had agreed to borrow money for the arbitration from a litigation funder and had agreed to repay the greater of 300% of the sum advanced, or 35% of the damages, the whole sum payable was recoverable from the losing side. This being arbitration on a grand scale, the sum in question was, as near as makes no difference, a far-from-paltry £2 million.

The decision is noted here, among other places (it was briefly on BAILII but then pulled for some undisclosed reason). It has raised a very large stir. The point is controversial (can the extra costs of getting access to the money to pay one’s lawyers really count as a legal or similar expense?), and there must be a distinct prospect of the decision being disowned on appeal. Meanwhile, risk-averse parties with arbitration clauses to draft might well care to take pre-emptive action. They should remember that the powers possessed by arbitrators are themselves a matter for agreement, and could well consider introducing a standard term in any arbitration clause to the effect that any power in the arbitrators to award costs shall not extend to anything other than monies paid to one’s lawyers and other direct expenses of the litigation (e.g. expert witness fees).

The Award of the Arbitral Tribunal in the South China Sea Arbitration (The Republic of the Philippines v. The People’s Republic of China): the legitimacy of China’s position takes a heavy (at least symbolic) blow

On 12 July 2016, the Arbitral Tribunal, established pursuant to Annex VII of the 1982 Law of the Sea Convention (LOSC or LOS Convention), delivered its award in the South China Sea Arbitration (The Republic of the Philippines v. The People’s Republic of China). In 2013, the proceedings were unilaterally initiated by the Philippines concerning the relevant disputes in the South China Sea between the Philippines and China. Having declared under Article 298(1)(a) LOSC its non-acceptance of arbitration with respect to maritime boundary disputes or those involving historic titles, China has refused to participate in the proceedings. Irrespective of the refusal of China to participate – which, in hindsight, seems to have not worked to its advantage – the Tribunal found in 2015 that it had jurisdiction to proceed to deal with the matter on the merits.

A critical aspect for the Tribunal to assess was whether the declaration made by China pursuant to Article 298(1)(a)(i) LOSC would prohibit it from considering the case on the merits, because the submissions of the Philippines were concerned with categories of disputes that China has excluded from the jurisdictional reach of an international court or tribunal: those concerning a historic title or maritime delimitation. The Tribunal concluded that the matters brought to its attention did not bear on the issue of delimitation (para. 214), since disputes over whether certain maritime features have entitlements to maritime zones are separate from the issue of delimitation, which is essentially concerned with dividing overlapping entitlements that have been established. On the matter of a historic title, the Tribunal went to analyse the meaning of ‘historic title’. In this context, it was deemed critical that reference was made to ‘title’, which means in legal jargon the complete ownership over something. The word ‘sovereignty’ only surfaces in the LOSC in connection with the territorial sea, where the coastal State has sovereignty up to a point that is 12 nautical miles (nm) removed from its coast. Given the Chinese reliance on that it has certain historic rights over the South China Sea, its claim was interpreted as not being concerned with the claiming of a historic title (paras. 225-226, 229).

There are a number of critical substantial findings of the Tribunal to be found in the award, some aspects which may have more wide-reaching implications. The following four findings will be briefly discussed in this blog post:

  1. One of the main findings of the Tribunal is that it dismissed the validity under international law of the Chinese ‘nine-dash line’. The specifics of the nine-dash line have never been really elaborated on by China, and have given risen to different interpretations (see e.g. here, here, here and here). One interpretation is that China has claimed to have some sort of a ‘special’ historic right over the relevant areas of the South China Sea that are within the nine-dash line, by virtue of a long and consistent practice of where some measure of authority was continuously exercised. A second interpretation is that the maritime features located within the nine-dash line are all under the sovereignty of China and, at least some of them, could project maritime zones up to at least the 200 nm limit. According to the Tribunal, the extent of maritime entitlements of States in the South China Sea are regulated by the LOSC, and the nine-dash claim of China, as far as it goes beyond the limits imposed by the LOSC, is superseded by the LOSC. Although the Tribunal found the alleged Chinese historic rights to be fully incompatible with the LOS Convention, basically, the rights China claimed to have are in fact assigned to other coastal States in the area under the concept of the Exclusive Economic Zone (EEZ). However, the door was left open for that under certain circumstances – and following, amongst others, the judgment in the Chagos Marine Protected Area Arbitration (Mauritius v. United Kingdom) – a historic title and right might be brought under the regime set out in the LOS Convention (para. 238).
  2. Another critical finding was that none of the maritime features China claims to have sovereignty over, including those that are part of the hotly contested Spratly Islands, have entitlements to an EEZ or continental shelf. Therefore, according to the Tribunal, there was no overlap of the entitlements of China and the Philippines to the same maritime space, given that China has no territory from which it is entitled to claim maritime zones up to at least 200 nm, which would have otherwise created an overlap with the entitlements and claims of the Philippines. As regards the hotly contested Spratly Islands, the reasoning of the Tribunal suggests that these have at best an entitlement to a territorial sea. According to the Tribunal, none of the disputed maritime features that are part of the Spratly Islands meet, without human assistance, the conditions set out under Article 121(3) of the LOSC, that is that they can sustain human habitation or economic life of their own. The threshold concerning when isolated maritime features would be entitled to an EEZ and continental shelf seems to have been set high by the Tribunal. Its approach as to how to define a ‘rock’ within the meaning of Article 121(3) of the LOSC may have more widespread consequences, and may raise some concerns on the part of other States that are faced with similar issues.
  3. Pursuant to the LOS Convention, different types of maritime features have different entitlements to generate maritime zones, ranging from those that can claim zones up to the 200 nm mark to those that due to their characteristics have no entitlements to maritime zones at all. Falling into this latter group are so called low-tide elevations. These can, assuming they are located in close proximity to the coasts of States, be relevant in the measuring of the baseline, but have no entitlements to maritime zones of their own. In contrast, islands are principally treated similarly to land and have entitlements to a territorial sea, EEZ and continental shelf. Rocks, on the other hand, may only be accorded part of the treatment that islands receive: that is, whenever they fall within the paragraph 3 exception of Article 121 LOSC, that they are unable to sustain human habitation or have an economic life of their own, the most they can generate in terms of maritime zones is a territorial sea. For example, Scarborough Shoal, which has been the venue for various incidents between China and the Philippines, was classified by the Tribunal as a rock that is unable to meet the two conditions set out in Article 121(3) of the LOS Convention. Further, the Tribunal found that Mischief Reef is a low-tide elevation, which is thus unable to generate any maritime zones of its own. As a result of this classification, and given that low-tide elevations cannot be appropriated by States, there could be no sovereignty dispute over Mischief Reef, and more generally between China and the Philippines. The Tribunal went on to state that Mischief Reef is firmly placed in what can be regarded to be the EEZ of the Philippines. Therefore, amongst others, fishing activities that have been performed by Chinese fishermen at Mischief Reef infringed on the sovereign rights the Philippines has over the EEZ, pursuant to the LOS Convention. This same reef was also used by China to construct a large artificial island on top, whilst proceedings before the Tribunal were already set in motion. Given that this happened without the consent of the Philippines, which would have been required because Mischief Reef is a low-tide elevation located within its EEZ and continental shelf, China infringed on the sovereign rights that the Philippines has in this regard.
  4. More generally, and in addition to the actions undertaken concerning Mischief Reef, the land reclamation works and construction of artificial islands that China conducted on a broader scale, and in relation to a number of other maritime features (e.g. Cuarteron Reef, Fiery Cross Reef) in the South China Sea, were heavily condemned by the Tribunal. The Tribunal found that China aggravated the existing dispute between China and the Philippines through the reclamation works it conducted, whilst the dispute was brought to the consideration of the Tribunal. It also found that the Chinese actions aggravated the existing dispute between the parties over the Spratly Islands – however, it needs to be noted that this dispute figures, besides China and the Philippines, four additional players (i.e. Taiwan, Malaysia, Vietnam and Brunei). The Chinese reclamation works and building of artificial islands were also condemned for not being in line with the obligations that States have under the LOSC, particularly under Article 192 and 194(5) LOSC, in relation to the protection of the marine environment.

Directly after the award on the merits was handed down, China sought to brush over the validity of the award as being farcical in the extreme. In a further – undeniably weak – attempt to challenge the value of the award, a government sanctioned press release resorted to attacking a number of the individual members of the Arbitral Tribunal for exhibiting a perceived lack of consistency between the decision that the Tribunal arrived at and their earlier pronounced views in literature. In support of its position that the Arbitral Tribunal wrongly found to have jurisdiction over the dispute, in its view essentially by misconstruing what lies at the core of the dispute, China in this same press release cited heavily from an article previously published by Talmon, who expressed his misgivings over the Tribunal assuming jurisdiction over the dispute.

Given that the award was dismissed with a significant measure of exaggeration by China, and that it already indicated earlier, and subsequently reinforced its intentions to not follow the final outcome of the award, the question remains as to what effect the award might have on the (sometimes volatile) situation in the South China Sea. The position that China finds itself in is not an easy one. However, contrary to the ad hominin arguments aimed against individual members of the Tribunal, and the perceived biased composition it was argued to have according to the Chinese side, there is no doubt that the Tribunal was impartial and constructed in conformity with the LOS Convention – which not unimportantly, China is a party to. Although the award of the Tribunal is not enforceable, it carries substantial (diplomatic) weight. The fact that its legal position concerning the South China Sea was overwhelming rejected by the Tribunal will necessitate a rethinking on the part of China of its legal arguments, if it wants to pursue an amicable solution through diplomacy. Entering into negotiations with other claimant States bordering the South China Sea, on the basis of a position that has been essentially rejected by an independent Tribunal that has been constructed in accordance with the LOSC, is unlikely to bear much fruit.

Know your defendant when commencing arbitration.

In London Arbitration 13/16, reported in LMLN, the claimants commenced arbitration against X and Y under a Conline booking form containing a London arbitration clause. The form evidenced a contract between X, as merchants, and the claimant. The claimants alleged that during the voyage an accident occurred due to alleged misdescription of the cargo by X and Y at the port of loading. A claim under the booking note could clearly be made against X, but what about Y? They were described in the booking note as the merchant’s representative at the loading port and were also named as the shipper in the bill of lading that was eventually issued. Y objected to the jurisdiction of the tribunal as they were not a party to the booking note, an objection  accepted by the tribunal who declared that it had no jurisdiction and ordered the claimants to bear Y’s costs and the costs of the award.  Claims against Y might exist in tort or under the bill of lading, but Y was not a party to the booking note. The position was not changed by the contemplation of the claimants and X that the booking note was an interim contract which would be superseded by the bill of lading.

Loading illegal cargo by ‘Stealth’. Charterer’s libaility for the wrongs of sub-charterers.

In The CV Stealth [2016] EWHC 880 (Comm) time charterers sought permission to appeal against the award of an arbitrator who had found them liable to the shipowners in respect of the consequences of the vessel’s detention following an attempt by the sub charterer to load a cargo of oil from Venezuela without the necessary export permission. The finding was on the basis of an indemnity under cl. 13 of Shelltime 4 form, off hire under cl. 21, and for breach of cl.28 which provided …  No voyage shall be undertaken, nor any goods or cargoes loaded, that would expose the vessel to capture or seizure by rulers or governments.” The appeal was on the basis that the arbitrator had committed an error of law in not construing cl.28 as having prospective effect at the time the relevant order was given by the charterer. Popplewell J found that the arbitrator had construed the clause prospectively and found that the risk of loading the unauthorised cargo had existed at the date the order was given. He also expressed the view that by analogy with the charterer’s obligation to nominate safe ports, if the risk arises whilst the vessel is en route, the owners would be entitled to refuse to continue to comply with the order, if they were aware of it. In the event of continued compliance, the charterers would be in breach of provided that the risk arose before it became impossible for the charterers to give fresh orders which could be complied with in time to avoid the risk.

Permission to appeal was refused because the statutory criterion in s. 69(3)(a) of the Arbitration Act 1996 was not fulfilled.

The case also raised a procedural issue as to the effect of cl. 41 of the charter which provided “The parties hereby agree that either party may –(a) appeal to the High Court on any question of law arising out of an award;”  The clause  was clearly drafted with the terms of section 69 of the 1996 Arbitration Act in mind. It scope was limited to a question of law whose determination by the Court may serve a useful purpose for the parties, on a question that will substantially affect the right of the parties.