Author: Inside Arbitration
Russia has responded to sanctions imposed by the US and EU, among others, with legislation and presidential decrees designed to restrict, control, and potentially seize foreign-owned assets. For investors with stakes in Russian assets, these retaliatory measures pose a significant risk of loss. Investors may have a path to recoup such losses, however, in an arbitration action brought pursuant to a Bilateral Investment Treaty (BIT) with Russia.
BITs are agreements between states whereby the states promise that investments made in their state will be afforded a certain level of protection. These agreements are governed by international law and may be enforced, in most cases, through binding international arbitration. While there is no US-Russia BIT, Russia has over 60 BITs with other states, including many EU member states, the UK, Japan, South Korea, and Switzerland. To seek relief under a BIT, an investor must be a national of or incorporated in a jurisdiction with an active BIT. Investors in a jurisdiction without a BIT with Russia may gain the protection of another jurisdiction’s BIT by investing through a foreign subsidiary or joint venture in that jurisdiction. Clients should be aware, however, that there is a recognized objection to arbitration jurisdiction on the basis of “treaty shopping”—entities may not restructure solely for the purpose of falling under the jurisdiction of a particular BIT in order to arbitrate a claim with Russia.
While the specifics of Russian BITs vary, they typically share similar terms, definitions, and remedies for disputes. As a starting point, Russia’s BITs generally afford investors protection against unfair and inequitable treatment; there is a strong argument that this promised protection disallows retaliatory measures against investors based on their relationship to an unfriendly nation. Furthermore, most of Russia’s BITs provide protections against the nationalization, expropriation, or dispossession of foreign investments. Foreign investments may be seized only for a lawful reason—that is, for public necessity, in accordance with Russian law, with just compensation, and not for any arbitrarily discriminatory reason. By discriminating against certain investors on the basis of nationality, forcing them to receive payment in Rubles, Russia may be substantially reducing the value of loan receivables, and would arguably be subject to an unlawful expropriation claim under its BITs. Finally, most Russian BITs prohibit the restriction of the free transfer of convertible currency payments made in connection with investments, including: the amount of the initial investment, income from the investment, and proceeds from the partial or complete sale of the investment. Russia’s restriction of funds transferred out of the country to unfriendly nations would arguably violate these free transfer obligations.
Most BITs hold that, in the event a dispute cannot be settled amicably between the parties within a certain time, either party to the dispute may refer the matter to an international arbitral tribunal, such as the International Centre for Settlement of Investment Disputes (ICSID). The tribunal is to be composed of an arbitrator chosen by each party, and one arbitrator—a national of a third state—chosen by mutual agreement of the parties. If an investor claimant is successful at arbitration, the resulting award is binding and enforceable in numerous countries pursuant to other international treaties to which Russia is party. The award can then be satisfied by moving the domestic courts of these countries to seize assets within that court’s jurisdiction.
Determining the best path toward recouping a company’s losses stemming from Russia’s retaliatory actions will require an analysis of the precise terms of each relevant BIT and the available fora for their enforcement. For US investors without a corporate structure allowing them to take advantage of another nation’s BIT, domestic remedies are limited, barring congressional authorization for the Foreign Claims Settlement Commission to adjudicate claims against Russia. Investors may also be able to bring claims based on individual investor agreements with Russia, if applicable. ICSID data shows that about 10% of all new cases are based on an agreement between the investor and host state, rather than a BIT. These separate investment agreements may control the investor’s rights and available remedies, and may even supersede the rights and remedies available under a BIT, depending on their language.
Investors affected by Russia’s actions should actively take stock of the geography of their investments and assets to determine which BITs, or investment agreements, with Russia may be applicable and seek to secure and maintain documents relating to their losses for use in potential future arbitration.
In DHL Project & Chartering Ltd v Gemini Ocean Shipping Co., Ltd [2022] EWHC 181 (Comm), the Commercial Court has set aside an arbitral award under s67 of the Arbitration Act 1996 (the “Act“) on the basis that the arbitral tribunal lacked substantive jurisdiction.
The case concerned a “subjects” provision which required “shipper/receiver’s approval“. The Court found that:
- the “subjects” provision was a pre-condition to the effectiveness of both the contract and the arbitration agreement contained within it;
- as “shipper/receiver’s approval” was not in fact obtained, the “subjects” provision was not satisfied, and so neither the contract nor the arbitration agreement became binding on the parties; and
- the arbitrator therefore had no jurisdiction to decide the dispute, and the Award was set aside.
Background
DHL Project & Chartering Ltd (the “Charterers “) and Gemini Ocean Shipping Co. Ltd (the “Owners“) negotiated the terms of a fixture for a proposed voyage of the Owners’ vessel MV Newcastle Express (the “Vessel“) from Newcastle, Australia to Zhoushan, China in late September 2020.
After the parties concluded negotiations, a recap email was circulated reflecting the points of agreement. The recap contained 20 clauses, governed by English law, and arbitration in London as the dispute resolution mechanism. The 20 clauses were preceded by a critical “subjects” provision, which noted as follows:
“SUBJECT SHIPPER/RECEIVERS APPROVAL WITHIN ONE WORKING DAY AFTER FIXING MAIN TERMS & RECEIPT OF ALL REQUIRED CORRECTED CERTIFICATES/ DOCUMENTS
- RIGHTSHIP INSPECTION WILL BE CONDUCTED ON 3RD/SEPT. OWNERS WILL PROVIDE REQUIRED CERTIFICATES LATEST BEFORE VESSEL SAILING (INTENTION 5/SEP). OWNERS WILL ENDEAVOR TO PROVIDE ALL REQUIRED CERTIFICATES/DOCUMENTS EARLIEST POSSIBLE. “
Other relevant clauses in the recap included: (i) Clause 2, which provided that the Vessel should be “Rightship approved” for the duration of the voyage, and referred to the Charterers “lifting their subjects“; (ii) Clause 20, which noted that the terms were “otherwise as per attached Charterer’s proforma C/P with logical alteration”; and (iii) Clause 20.1.1 of the proforma, which stated, “[…] and the vessel name along with its particulars, for shipper’s and receivers approval, which is not to be unreasonably withheld, within two working day”.
At no point did the Charterers provide confirmation to the Owners that there had been approval by the shipper or the receiver i.e. the “subjects” had never been “lifted “. On the contrary, on 3 September 2020, the Charterers indicated that shipper approvals had not been obtained since rightship inspections had not been carried out satisfactorily. As a result, the Charterers released the Vessel and the deal fell through. The Owners treated this as a repudiatory breach of the charter party, and referred the matter to arbitration.
Arbitrator’s Award
A sole arbitrator in London decided in favour of the Owners and directed that the Charterers pay damages for repudiating the charter party (the “Award “). In particular, the arbitrator decided that:
- the “subjects” clause was qualified by Clause 20.1.1, such that the “shipper/receivers’ approval” was “not to be unreasonably withheld”; and
- in circumstances where there was no obligation to obtain the results of the rightship inspection before the Vessel sailed, the Charterers acted unreasonably by releasing the Vessel before the intended date of sailing “due to RightShip” issues.
Charterers’ challenge to the Award
The Charterers challenged the substantive jurisdiction of the arbitrator under s67 on the basis that the agreement was “subject” to obtaining “shipper/receivers’ approval “, which had never been obtained. The Charterers’ claimed that the parties had therefore not concluded a binding contractual agreement, there was no arbitration agreement for the resolution of disputes, and the arbitrator accordingly had no jurisdiction to make the Award.
In the alternative, the Charterers sought leave to appeal under s69 of the Act on the ground that, if the arbitrator did have jurisdiction to decide the dispute between the parties, his decision that the parties had concluded a binding contract amounted to an error of law. This was because he failed to give proper effect to the “shipper/receivers approval” subject by wrongly construing it as qualified by other contractual terms (i.e. Clause 20.1.1).
Since the Charterers’ submissions under s67 and s69 were closely connected, both being linked to the “shipper/receivers approval” subject, the Court heard them together.
Court’s decision
The Court accepted the Charterers’ submissions, and held that the “subjects” provision which was positioned at the very beginning of the recap qualified everything that followed, including the arbitration clause itself. The commercial purpose of the provision was “obvious“: the Charterers did not wish to make a binding contract “unless and until both shipper and receiver have approved the vessel which the charterer is proposing to use “. This was, in fact, a “well-recognised practice in the chartering market “.
Therefore, as the receiver/shipper approval had not been obtained, and the Charterers did not communicate to the Owners that the “subjects” provision had been lifted, the contract remained a non-binding putative contract from which the Charterers were free to withdraw.
The Court also concluded that the “subjects” provision precluded the arbitration agreement from coming into existence in its own right for the following reasons:
- The effect of the “subjects” clause was to negate the Charterers’ intention to enter into any contract at all, including any contractual commitment to arbitration, unless and until the “subjects” were “lifted.
- This conclusion was reinforced by the positioning of the “subjects” provision in bold at the start of the recap, before any other clause. The natural interpretation of this was that the “subjects” clause would qualify everything that followed, including the arbitration clause.
- While the separability doctrine under s7 of the Act was important, relying on the Supreme Court’s decision in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 (see our post on this decision here), the Court held that an arbitration agreement was not a “mini-agreement which is in some way divorced from the ‘main’ agreement which the parties were negotiating“. Instead, an arbitration clause was part of the bundle of rights and obligations under negotiation, all of which were subject to the “subjects” provision here.
- The fact that the recap and the arbitration agreement were contained in the same document reinforced the conclusion that in this case they would stand and fall together.
- The Court followed the decision in The Leonidas [2020] EWHC 1986 (Comm) and held that a “subjects” clause of this nature created a pre-condition to the conclusion of the contract as a whole.
Therefore, since the “subjects” condition precedent had not been met – i.e. the Charterers had not “lifted their subjects” – there was no binding contract, and no operative arbitration agreement. In addition, contrary to the arbitrator’s findings, the Court held that the “subjects” condition at the start of the recap was unqualified, and that as a matter of interpretation, there was nothing to suggest that the Charterers’ approval was constrained by a requirement of reasonableness under Clause 20.1.1.
As the parties had not entered into contractual relations of any kind, including a contract to arbitrate, the Award was set aside under s67 for lack of substantive jurisdiction.
Given its findings on s67, the Court did not need to consider the s69 application. The Court, however, remarked that, if it did have to do so, it would have granted permission to appeal, and set aside the Award under s69 given that the Award contained an error of law as to the construction of the “subjects” clause which was decisive to the award of substantial damages to the Owners.
Conclusion
This judgment is a rare example of a successful challenge to an award in the English courts under s67 of the Act.
The judgment also provides helpful guidance for the shipping industry by providing an analysis of “subjects” clauses commonly found in the charter party context. Importantly, the decision confirms that the effect of a “subjects” clause is that no binding enforceable contract comes into existence until the said “subjects” are fulfilled or lifted.
This decision could potentially have an impact beyond the shipping sector as well: where conditions precedent to a contract have not been satisfied, the main contract and the agreement to arbitrate could both fall away completely – depending, of course, on the drafting. Accordingly, parties including conditions precedent in their contracts should consider whether they would like the arbitration clause to be binding even if the conditions precedent are not satisfied. If they do, they would be well advised to make this clear in the drafting.
In a French-language decision, the Swiss Supreme Court rejected an application to set aside a procedural order (PO) issued by an ICC tribunal made under article 190(2)(a) of the Swiss Private International Law Act (PILA), which allows parties to challenge awards where the arbitral tribunal is not properly constituted.
X Inc and Mr C had initiated arbitration against company A. A claimed that X Inc did not exist, that the request for arbitration should therefore be declared inadmissible and the arbitration terminated. The tribunal rectified the designation of the claimants to “B Corp (formerly X Inc) and Mr C” and dismissed A’s request in the PO. The ICC dismissed A’s challenge that one of the arbitrators lacked independence.
In support of its application to have the PO set aside, A renewed its arguments of inadmissibility and lack of independence.
The Swiss Supreme Court underlined that a formal inaccuracy in the designation of a party can be rectified when there is no real doubt as to the identity of that party. Only if the party cannot be identified at all, or if a claim is brought by a non-existent party, must the claim be declared inadmissible. In this case, it could not be argued that the claimant did not exist, as the claim had also been brought by Mr C.
A’s other argument was that one of the arbitrators, Mr Hirth, had failed to disclose that a partner in his law firm had been honorary consul to the Philippines. An alleged that the Filipino government had an interest in the dispute and that Mr C was sitting as a Filipino congressman. The court recalled its settled case law under which grounds for challenge may exist where a judge or arbitrator, or a member of their law firm, is acting for, or regularly acts for, one of the parties, by carrying out “typical activities of a lawyer”. In the present case, the court noted that the activities of the honorary consul were not comparable to the “typical activities of a lawyer”, that he had provided them privately and pro bono, that he had stopped providing them before the arbitration commenced and that the Philippines were not party to the arbitration.
Case: Decision 4A_404/2021 (Swiss Supreme Court)
