Saturday, October 22, 2011

'Matter which is the subject of an arbitration agreement'

The English High Court, in August this year, has decided an important point on the scope of an arbitration agreement, which, given the similarities in language between section 9 of the English Arbitration Act and section 8 of the Indian Act, is of significance in the Indian context too.

The claimant in Deutsche Bank v Tongkah Harbour had provide a financing arrangement to the Tungkum Limited, which was a gold exploration and mining company based in Thailand. It was a subsidiary of another Thai company, Tongkah, which was the second respondent. Under the financing arrangement, the Bangkok branch of Deutsche Bank entered into a Facility Agreement, by which it lent funds to Tungkum. At the same time, Tungkum entered into an Exports Contract with Deutsche Bank’s London branch, under which it was to sell gold at a price calculated in accordance with a given formula. The net result of this arrangement was that Tungkum would repay the loan given by the Bangkok branch to the London branch. Tungkum’s performance under this arrangement was secured by way of a guarantee provided by Tongkah to Deutsche Bank’s Amsterdam branch. Due to a state of emergency declared subsequently in Thailand, and other difficulties, Tungkum was unable to perform its obligations under the Exports Contract, leading to the London branch granting it a ‘Holiday Period’ in consideration for a revision of the financing agreements. However, taking the stance that these pricing arrangements were unfair, Tongkah and Tungkum refused to revise the agreements, leading to ‘Events of Default’ occurring under the agreements.

The Facility and the Export Contracts entered into between Deutsche Bank and Tungkum granted jurisdiction to English Courts, but in addition, also granted Deutsche Bank the option to pursue their claims in arbitral proceedings. This option was available only to Deutsche Bank and not to Tungkum in either case. The Guarantee Contract did not have any such option for either party. Deuteche Bank began proceedings against Tungkum in relation to the Facility Agreement, and against Tongkah in relation to the Guarantee, in the English Courts. However, it sought arbitral proceedings against Tungkum for the breaches under the Exports Contract. Tungkum and Tongkah challenged the jurisdiction of the English courts on the basis that once Deutsche Bank had begun arbitral proceedings under the Exports Contract, given the strong nexus between the different contracts, and the fact that they performance thresholds in each were calibrated with respect to the others, the ‘matter’ in respect of which the English court proceedings had been brought had been referred to arbitration, leading to a mandatory stay under section 9 of the Arbitration Act.

Section 9(1) of the Act reads-

Stay of legal proceedings.

(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

Before moving on to the respective contentions and decisions in this case, it is instructive to compare the language with section 8(1) of the Indian Act, which provides-

Power to refer parties to arbitration where there is an arbitration agreement.

A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

While the language of the clauses is not identical, the concept of a matter ‘which is the subject of an arbitration agreement’, and ‘which under the agreement, is to be referred to arbitration’ is sufficiently similar.

Deutsche Bank argued that although the substance of the claim in the two cases may be similar, the primary issue in the arbitral proceedings was the breach of the Export Contract, which was different from the breach of the Facility Agreement being litigated in the court proceedings. Rejecting the contention, and granting a stay of the judicial proceedings, Blair J held that this reading of section 9 was flawed. Relying on Fiona Trust v Privalov for the presumption in favour of parties wanting only on tribunal to decide all disputes arising out of their relationship, and basing his decision of the substance of the claim rather than its formulation, he held that the parallel proceedings could not be allowed to continue.

What is interesting in this decision is the extent to it was influenced by the fact that the different branches of Deutsche Bank were not separate entities. While section 9 does mention the party against whom the legal proceedings are brought, it does not contain any requirement that the claim be brought by the party who has referred the same matter to arbitration. In most cases, however, the requirement that the ‘matter’ be the same will also mean that the party bringing the claims is the same in both proceedings. However, in the case of inter-connected contacts like the ones here, would the decision have been different if the different branches had in fact been subsidiaries, and hence independent legal entities?

In ¶ 27, dealing with Deutsche Bank’s contention that since different branches of Deutsche Bank brought the different proceedings, Blair J observes that,

It seems to me however that the fact that different divisions of the bank are concerned adds nothing to the legal analysis. Deutsche Bank is a single contracting party. Nor does it matter that different branches of the bank are concerned, this not being a situation analogous (for example) to a bank's liability to repay deposits, where for some purposes its branches are treated as separate entities. In any case, on the facts the point has limited force, because the Export Contract (the province of global commodities) provided the mechanism by which the loans extended under the Facility Agreement (the province of structured commodity trade finance) were to be repaid. It is the connection between the contracts which is at issue.

In this passage, while he does seem to base his decision on the branches not being separate entities, he ends by saying that it is the connection between the contracts (and not the connection between the claimants) that is the issue. However, two observations later in the judgment suggest that had the branches been subsidiaries, the decision may have been different. In ¶ 29, he observes,

What it comes to is that whereas in the Commercial Court action, the bank claims the outstanding loan amount, in the arbitration it claims the early termination amount. It is correct that these are different claims, but they arise out of the same breach of the same contractual arrangements. They are (in my judgment) aspects of the same matter. I fully agree that Deutsche Bank bargained for the right of access to this court, and should not be deprived of it. But it is not being deprived of it. It could have referred the matter to the court, or it could have referred it to arbitration.

This finding that no deprivation of a contractual right had occurred would possibly (though by no means necessarily) have been different, had the branches been independent legal entities. More crucially, in deciding whether the claims against Tongkah under the Guarantee Contract should also be stayed, he observes (¶ 30),

The more substantial point argued by Tongkah is that since its liability under the Guarantee is of a secondary nature, the court should stay the proceedings under its inherent jurisdiction, and/or under its case management powers, pending the arbitration. I reject that submission also. A claim under a guarantee may raise similar or even the same issues as the claim against the principal debtor, but the covenant to pay is given by a different party, here the parent company. Deutsche Bank is entitled to enforce the Guarantee if it can make good its claim, regardless of the claim against the principal debtor. The fact that there may be (as the defendants say) substantial overlap between the claims does not affect this conclusion.

Given the rationale adopted in this passage, it appears that mere overlapping between the contentions is not sufficient to meet the requirements of section 9, unless the party bringing the claim in arbitration is the same as that which also sues in court. However, since Blair J was not explicitly referring to the Arbitration Act, and was rejecting the exercise of the Court’s inherent jurisdiction and its case management powers, this passage is not conclusive of the section 9 question.

Returning again to section 8 of the Indian Act, the difference between ‘which under the agreement is to referred to arbitration’ and ‘which is the subject of an arbitration agreement’ means that this issue arises in the Indian context as well. As discussed here, when dealing with section 9 of the Act, Indian Courts have been undecided on the extent to which third parties to the arbitration can be affected by interim measures granted under section 9. Whether a similar stance is adopted with reference to section 8 is an open question.

[Note: While I am not aware of an Indian case conclusively deciding this issue on the interpretation of section 8, inputs from readers on possible authorities on the point are most welcome].

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