The English Examine Multiple Dispute Resolution Clauses

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1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: The English Examine Multiple Dispute Resolution Clauses Law360, New York (March 20, 2015, 11:23 AM ET) -- Parties often enter into multiple agreements, either at the same time or over a period of time, to govern and regulate various legal relationships with each other. When the agreements between the same parties do not contain similar dispute resolution clauses, which clause should control when a dispute arises and more than one agreement is implicated? In Monde Petroleum SA v. WesternZagros Ltd., the High Court of Justice in England had to decide whether the parties to a dispute had to arbitrate or litigate their claims where the parties first entered into an arbitration agreement but thereafter into a different contract providing for litigation of disputes.[1] Specifically, the parties second contract was a termination agreement terminating the earlier contract and providing that the parties irrevocably attorn to the exclusive jurisdiction of the courts of England and Wales. The High Court of Justice concluded that this later-in-time litigation clause was Elliot E. Polebaum sufficiently clear to supersede the parties earlier arbitration agreement; the litigation clause controlled and, therefore, the arbitral tribunal had no jurisdiction. The High Court of Justice s decision answered a question of first impression under English law, whether an arbitration clause survives a subsequent litigation clause. The High Court of Justice s decision demonstrates that parties are free to alter their dispute resolution agreement and agree to a different dispute resolution method. However, the parties must do so with sufficient clarity. The parties should also consider the implications of separability doctrine and other potentially applicable legal principles and presumptions. Summary The High Court of Justice applied the one-stop adjudication assumption that parties normally intend to resolve all disputes arising out of their relationships in one forum. Therefore, the High Court of Justice reasoned that when the parties agreements contain different dispute resolution provisions, only one of them can prevail to avoid the fragmentation of disputes, inconsistent decisions and increased costs and delay. To determine which dispute resolution provision prevailed, the High Court of Justice had to consider the

2 effect of the separability of the arbitration agreement. Pursuant to the separability doctrine, the termination of the underlying contract in which the arbitration agreement is contained does not necessarily result in the termination of the arbitration agreement. The arbitration agreement is separate and is presumed to survive the termination of the underlying contract, unless the contrary is clearly and specifically demonstrated. The High Court of Justice recognized that the separability presumption applies in cases where the second contract is silent and does not contain any dispute resolution clause. However, in this case, the parties termination agreement contained a specific dispute resolution clause that was different and incompatible with the parties earlier arbitration clause. Therefore, the separability presumption did not apply and did not result in the application of the arbitration clause. Moreover, examining the specific provision, the High Court of Justice concluded that the language used in the litigation clause of the termination agreement was sufficiently clear to demonstrate that the parties intended to supersede and render inoperative the arbitration clause in the earlier agreement. Specifically, the High Court of Justice noted that the litigation clause gave exclusive jurisdiction to the courts, thereby excluding any other dispute resolution agreement between the parties. The High Court of Justice also noted that the scope of the clause was broad enough to cover disputes arising from or relating to both the parties earlier agreement and termination agreement. Further, the High Court of Justice reasoned that the use of the verb attorn suggested a transfer or a turnover of jurisdiction from arbitration to court litigation. Monde Petroleum v. WesternZagros Conflicting Dispute Resolution Clauses In 2006, Monde Petroleum and WesternZagros entered into a consultancy services agreement. Under the CSA, Monde was to assist WZL in its ongoing negotiations with the Kurdistan Regional Government in Iraq over an oil exploration agreement, and was to receive monthly fees for its services.[2] Article 13.2 of the CSA contained an arbitration clause stating that any disputes arising under the agreement shall be resolved by arbitration to be held in London under the arbitration rules of the International Chamber of Commerce.[3] In 2007, WZL stopped paying the monthly fees to Monde and sought to terminate the CSA, claiming that it had the right to terminate under the terms of the CSA because an agreement with the KRG had not been finalized within six months of executing the CSA. The parties reached an agreement to terminate the CSA. As a result, in April 2007, the parties entered into a termination agreement, in which WZL agreed to pay Monde outstanding invoices which amounted to $700,000, and both parties released and waived any future claims against each other with respect to the CSA.[4] The termination agreement included a dispute resolution clause giving exclusive jurisdiction to the English courts. Specifically, Clause 3.3 of the termination agreement provided: The parties herein irrevocably attorn to the exclusive jurisdiction of the courts of England and Wales. [5] Further, Clause 3.5 of the termination agreement provided that [t]his Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and shall supersede any and all prior negotiations and understandings. [6] English Commercial Court and ICC Arbitration Proceedings In March 2013, Monde initiated proceedings in the Commercial Court in England, arguing that it was wrongfully induced by WZL to enter into the termination agreement, seeking rescission of the

3 termination agreement and claiming damages for misrepresentation and duress and for wrongful termination of the CSA. Shortly thereafter, Monde also initiated an ICC arbitration proceeding, claiming damages for the wrongful termination of the CSA (but not including claims relating to the termination agreement). Monde initiated the arbitration proceeding as a protective measure to avoid having its claims time-barred in the event that the Commercial Court would not hear its claims.[7] WZL, on the other hand, argued that many of Monde s claims were, in fact, within the ICC tribunal s jurisdiction by virtue of the arbitration clause in the CSA. WZL counterclaimed for declaratory relief, as well as for damages for Monde s alleged breach of confidentiality provisions under the CSA. Monde withdrew its claims from the arbitration proceeding, maintaining that the ICC tribunal had no jurisdiction over the dispute. However, WZL continued to pursue its counterclaims before the ICC tribunal. WZL sought the ICC tribunal s declaration that the arbitration agreement in the CSA was severable and survived termination of the CSA, and that Monde, having withdrawn its claims, was now time-barred from reviving any claims under the CSA.[8] In July 2014, the ICC tribunal issued its award declaring that it did not have jurisdiction over WZL s claims.[9] The tribunal ordered WZL to pay Monde s arbitration costs, amounting to 381, and $470,000, which represented the majority of the tribunal s arbitration costs.[10] When Monde obtained the court order of enforcement of the ICC award, WZL appealed under Section 67 of the Arbitration Act of 1996, contending that the ICC tribunal mistakingly concluded that it lacked jurisdiction.[11] Decision of the High Court of Justice The High Court of Justice had to decide whether the jurisdiction clause in the termination agreement rendered inoperative the arbitration clause in the CSA. The High Court of Justice emphasized and applied the presumption in favor of one-stop adjudication, meaning that rational business people normally intend that all disputes arising out of their legal relationship are to be determined in the same forum, and not fragmented in different forums which would result in increased cost, inconvenience, delay and the possibility of inconsistent findings.[12] The High Court of Justice noted that this presumption is a strong one and only clear words to the contrary could displace it. Consequently, the High Court of Justice stated that when there is more than one agreement between the same parties and they contain conflicting dispute resolution provisions, the parties will not be understood to have intended the disputes to fall within the scope of both dispute resolution provisions. Rather, the dispute resolution provisions will be construed to be mutually exclusive. Based on the one-stop adjudication presumption, the High Court of Justice reasoned that where an agreement and a subsequent termination agreement contain incompatible dispute resolution provisions, the parties are likely to have intended that the dispute resolution provision in the later termination agreement supersedes the earlier agreement and applies to all disputes arising out of both agreements.[13] According to the High Court of Justice, the clear and specific language of Clause 3.3 in the termination agreement supported this presumption. The High Court of Justice found that Clause 3.3 sufficiently demonstrated that the parties intended to supersede and render inoperative the arbitration clause in the CSA.[14]

4 Clause 3.3 stated: The parties herein irrevocably attorn to the exclusive jurisdiction of the courts of England and Wales. The High Court of Justice noted that by providing for exclusive jurisdiction to the courts of England and Wales, this clause excluded other dispute resolution agreements between the parties. Further, the High Court of Justice stated that the scope of the clause covered the broadest range of disputes that may arise between Monde and WZL under the agreement, including any disputes relating to the CSA.[15] And, finally, the High Court of Justice noted that the specific use of the verb attorn in the clause was indicative of the parties intent to transfer jurisdiction away from the arbitration and into the courts of England and Wales.[16] WZL argued that pursuant to the doctrine of separability of arbitration agreements, the termination of an agreement did not terminate the operation of the arbitration clause in the agreement.[17] The High Court of Justice disagreed. It noted that the separability doctrine would apply where the subsequent agreement did not contain a dispute resolution clause. However, here, the subsequent agreement contained a different and incompatible dispute resolution provision, and the separability doctrine did not dictate that the earlier arbitration clause survived where the litigation clause clearly and specifically indicated that the arbitration clause was superseded.[18] In sum, the High Court of Justice held that the ICC tribunal was correct in concluding that it lacked jurisdiction to hear WZL s counterclaims because the arbitration clause was rendered inoperative by the later in time jurisdiction clause. Therefore, WZL s appeal failed. By Elliot E. Polebaum and Helene Gogadze, Fried Frank Harris Shriver & Jacobson LLP Elliot Polebaum is a partner and Helene Gogadze is an associate in Fried Frank Harris Shriver & Jacobson's Washington, D.C., office. Polebaum leads the firm's international arbitration practice group and is chairman of the firm's litigation department. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] Monde Petroleum SA v. WesternZagros Ltd., [2015] EWHC 67 (Comm) (Jan. 22, 2015). [2] Id. at 1, 3. [3] Id. at 10. [4] Id. at 5, 11. [5] Id. at 15. [6] Id. at 16. [7] Id. at 19. [8] Id. at 20. [9] Id. at 23. The tribunal found that it only had jurisdiction to determine the issue of breach of confidentiality, but dismissed that claim on the merits.

5 [10] Id. at 24. Monde had to pay the balance of the arbitration costs of $50,000. [11] Id. at 25. Section 67 of the Arbitration Act of 1996 provides that a party may apply to the court to challenge any award by the tribunal ruling on its jurisdiction. [12] Id. at 33 (citing Harbour Assurance Co. (U.K.) Ltd. v. Kansa Gen. International Assurance Co. [1993] Q.B. 701 [726B] (Eng.) and Fiona Trust & Holdings v. Privalov [2007] Bus LR 1917 [2008] 1 Lloyd s Rep 254). [13] Id. at 38. The High Court noted that a number of considerations supported this conclusion. First, the termination agreement came second in time and thus, was agreed by the parties in the light of the circumstances giving rise to their dispute and the termination of the their earlier agreement. Second, only the litigation clause would apply to disputes related to the termination agreement. And, thirdly, the tribunal considering the dispute arising out of the settlement agreement would have to consider the disputes relating to the previous agreement as well, increasing the risk of fragmentation if the same tribunal could not consider both. [14] Id. at 45. [15] Id. at 46. [16] Id. at 47. [17] Id. at 41 (citing DDT Trucks of North America Ltd. v. DDT Holdings Ltd. [2007] 2 Lloyd s Rep 213). [18] Id. at All Content , Portfolio Media, Inc.