Martrade Shipping: choice of law means that law can decide the limits to which it wishes to be applied. Including to promote forum shopping.

In [2014] EWHC 1884 (Comm) Martrade Shipping v United Enterprises Corporation, the High Court considered the appeal against an arbitration award in relation to the applicability of the Late Payment of Commercial Debts (Interest) Act 1998 to charterparties providing for English law and London arbitration.

The vessel was owned by the Defendant, a Marshall Islands company. The vessel was registered in Panama and managed by a Liberian company registered in Greece. The vessel was chartered by the Owners to the Claimant charterers for a time charter trip via the Mediterranean/Black Sea under a charterparty on an amended NYPE form dated 2 July 2005. The Charterers are a German company. The vessel was to be placed at the disposal of the Charterers on passing Aden, and was to be redelivered at one safe port or passing Muscat outbound/Singapore range in Charterers’ option. In the event the vessel loaded cargoes of steel products at Tuapse (Russia), Odessa (Ukraine) and Constanza (Romania) and discharged them at Jebel Ali (UAE), Karachi (Pakistan) and Mumbai (India). Hire was payable in US$ to a bank account in Greece. The broker named in the charterparty as entitled to commission was Optima Shipbrokers Ltd who arre Greek. The charterparty recorded that it was made and concluded in Antwerp.

Consequently, contact with England other than the governing law and arbitration clause was non-existent.

A number of disputes between the parties were referred to arbitration, including a claim by the Owners for unpaid hire, in respect of which the Charterers claimed to be entitled to deduct sums for alleged off-hire, bunkers used during off-hire, and a bunker price differential claim. By the Award the tribunal held that Owners were entitled to an award in respect of hire in the sum of US$ 178,342.73. The tribunal further held that the Owners were entitled to interest on that sum calculated at the rate of 12.75% per annum from 23 September 2005 until the date of payment under the 1998 Act.

The appeal is against the award of interest under the 1998 Act. The Charterers contended before the tribunal, and contend on the appeal, that the 1998 Act has no application by reason of s. 12(1) which provides:

“This Act does not have effect in relation to a contract governed by a law of a part of the United Kingdom by choice of the parties if –(a) there is no significant connection between the contract and that part of the United Kingdom; and (b) but for that choice, the applicable law would be a foreign law.’

Section 12 of the Act therefore provides that where parties to a contract with an international dimension have chosen English law to govern the contract, the choice of English law is not of itself sufficient to attract the application of the Act. Section 12 mandates the application of the penal interest provisions only if one or both of two further requirements are fulfilled. There must be a significant connection between the contract and England (s. 12(1)(a)); or the contract must be one which would be governed by English law apart from the choice of law (s. 12(1)(b)). Either is sufficient. Popplewell J suggests this provision has two objectives:

– the Act reflects domestic policy considerations which are not necessarily apposite to contracts with an international dimension. What is required by the significant connecting factor(s) is something which justifies the extension of a deterrent penal provision rooted in domestic policy to an international transaction. And

– subjecting parties to a penal rate of interest on debts might be a discouragement to those who would otherwise choose English law to govern contracts arising in the course of international trade, and accordingly does not make such consequences automatic.

 

The s.12(1)(a) criterion of “significant connection” must connect the substantive transaction itself to England. Whether they provide a significant connection, singly or cumulatively, will be a question of fact and degree in each case, but they must be of a kind and a significance which makes them capable of justifying the application of a domestic policy of imposing penal rates of interest on a party to an international commercial contract. They must provide a real connection between the contract and the effect of prompt payment of debts on the economic life of the United Kingdom. (at 17).

‘Such factors may include the following:

(1) Where the place of performance of obligations under the contract is in England. This will especially be so where the relevant debt falls to be paid in England. But it may also be so where other obligations fall to be performed in England or other rights exercised in England. If some obligations might give rise to debts payable in England, the policy considerations underlying the Act are applicable to those debts; and if some debts under the contract are to carry interest at a penal rate, it might be regarded as fair and equitable that all debts arising in favour of either party under the contract should do so.

(2) Where the nationality of the parties or one of them is English. If it is contemplated that debts may be payable by an English national under the contract, the policy reasons for imposing penal rates of interest may be engaged; and if only one party is English, fairness may again decree that the other party should be on an equal footing in relation to interest whether he is the payer or the payee.

(3) Where the parties are carrying on some relevant part of their business in England. It may be thought that persons or companies who carry on business in England should be encouraged to pay their debts on time and not use delayed payment as a business tool even in relation to transactions which fall to be performed elsewhere. Moreover a supplier carrying on business in England may fall within the category identified in s.6(2)(a) of those whose financial position makes them particularly vulnerable to late payment of their debts, although these are not the only commercial suppliers for whose benefit the Act is intended to apply. The policy of the Act may be engaged in the protection of suppliers carrying on business in England, whether financially vulnerable or not, even where the particular debts in question fall to be paid by a foreign national abroad.

(4) Where the economic consequences of a delay in payment of debts may be felt in the United Kingdom. This may engage consideration of related contracts, related parties, insurance arrangements or the tax consequences of transactions.’ (at 20).

 

By contrast, a mere London arbitration or English jurisdiction clause cannot be a relevant connecting factor for the purposes of s.12(1)(a).

Popplewell J therefore expressly links the non-applicability of relevant domestic English law (where such as here that law itself suggests the need for there to be a connection between the case, and England) to the need to maintain the attraction of England as a seat of international commercial arbitration  or indeed litigation. Exactly the kind of attitude in which competing courts fall short.

Geert.

 

Habas and VSC: Lex arbitri, the bootstrap principle and the irrelevance of ultra vires /excess of authority..

Postscript 1 March 2016 for a similar exercise in Greece, see here.

In abas Sinai Ve Tibbi Gazlar Istihsal Endustrisi AS v VSC Steel Company Ltd [2013] EWHC 4071 (Comm) the Commercial Court applied the Sulamerica route (subsequently applied in Arsanovia) to determine the lex arbitri: the law applicable to the arbitration agreement. Chosen seat of arbitration proved a strong argument to identify the closest and most real connection, in spite of the argument raised that agents for the Claimant had exceeded their authority in agreeing to the arbitration agreement.

The dispute between the Claimant (“Habas”) a company incorporated in Turkey, and the Defendant (“VSC”), a company incorporated in Hong Kong, arose out an alleged contract for the sale by Habas and purchase by VSC of Reinforcing Bars (Steel) for shipment from Turkey to Hong Kong.  Following a contested hearing, the Tribunal, issued an Award dated 10 July 2012. Habas challenges the Tribunal’s jurisdiction and its Award on the grounds that the Tribunal erred in finding that there was a binding arbitration agreement made between the parties because:

(1) Steel Park and/or Charter Alpha did not have actual or ostensible authority to conclude the London arbitration agreement on behalf of Habas; and

(2) there was no binding consensus on the terms of the London arbitration agreement.

The Court’s decision is crucial in further illustrating the matrix which English courts will follow in determining lex arbitri. In dismissing relevance of the alleged lack of authority, it also highlights the impact of the ‘bootstrap’ principle: Hamblen J at 109: validity is determined by the putative proper law of the contract. Determining closest connection involves a consideration of the terms of the contract as made, rather than the authority with which it was made. EU conflict of laws, too, follows this principle (in the Rome I Regulation and the recast Brussels I Regulation; with one or two corrections).

Key therefore: the bootstrap principle; as well as the usual suspect: better expressis verbis agree lex arbitri.

Geert.

‘More closely connected’ in employment contracts – The ECJ in Schlecker emphasises tax and national insurance (social security)

I reported earlier on Wahl AG’s Opinion in C-64/12 Schlecker. The ECJ held last week. Reminder: formally the judgment relates to the application of the similar provision in the predecessor of the Rome I Regulation, the 1980 Rome Convention. The relevant provisions have not materially changed, however. The ECJ in fact refers to the slightly more precise provisions of Rome I in support.

In the case at issue, a closer connection with Germany was suggested by the circumstances as a whole, in particular by the following facts: the employer is a legal person governed by German law; the remuneration was paid in German marks (prior to the introduction of the euro); the pension arrangements were made with a German pension provider; Ms Boedeker had continued to reside in Germany, where she paid her social security contributions; the employment contract referred to mandatory provisions of German law; and the employer reimbursed Ms Boedeker’s travel costs from Germany to the Netherlands.

The Court concurs with the AG that the closer connection test must apply as suggested by its formulation: even if there is a habitual place of performance, this may be trumped by other circumstances. However the Court also held that the sheer amount of ‘other criteria’ in and of itself does not suffice to rebut the presumption: ‘the court called upon to rule in a particular case cannot automatically conclude that the rule laid down in Article 6(2)(a) of the Rome Convention must be disregarded solely because, by dint of their number, the other relevant circumstances – apart from the actual place of work – would result in the selection of another country‘ (at 40).

In other words: the actual place of work has considerable gravity. Nevertheless, among the other criteria, there are two, the Court suggested (however without reference to specific support in preparatory works or otherwise), which are particularly relevant:

among the significant factors suggestive of a connection with a particular country, account should be taken in particular of the country in which the employee pays taxes on the income from his activity and the country in which he is covered by a social security scheme and pension, sickness insurance and invalidity schemes. In addition, the national court must also take account of all the circumstances of the case, such as the parameters relating to salary determination and other working conditions.’ (at 41).

As always, much misery may be avoided by inserting a proper choice of law in the contract, in accordance with the Convention (now Regulation).

Geert.

Applicable law and arbitration clauses – lex arbitri, lex curia, lex contractus – The English view in Sulamerica

Update 22 June 2020 see Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA 82 for a view from Australia, particularly Andre Bell J’s dissenting opinion.

Update 16 January 2020 the grounds in [2019] SGCA 84 BNA v BNB are finally out– thank you again Filbert Lam for letting me know. I shall post separately on the issues.

(Note see various 2017, 2016, 2015 and 2014 postscripts at the end of this posting)

Update 24 October 2019 Thank you Filbert Lam for alerting me to the Singapore Court of Appeal reversing the High Court Update- I have no access to the CA judgment yet – reasons and analysis to follow.

Update 7 July 2019 for review of a recent Austrian SC decision adopting a favor validitas approach see here. For a view from Singapore see BNA v BNB [2019] SGHC 142 reviewed here: the High Court interpreted an express provision for “arbitration in Shanghai” to be an agreement to Singapore-seated arbitration with hearings in Shanghai, thereby upholding the validity of the arbitration clause and the jurisdiction of the tribunal.

Update 15 May 2019 Whether Fiona Trust is good authority in Australia might have been, but ultimately was not considered in [2019] HCA 13 Rinehart v Hancock Prospecting Pty Ltd. For review see here update 12 November 2019 and Michael Douglas case-note here. The High Court found it unnecessary to consider whether Fiona Trust is good law in Australia. According to the plurality (Kiefel CJ, Gageler, Nettle and Gordon JJ), the appeals could be resolved by application of orthodox principles of contract interpretation, without reference to Fiona Trust: para 18.

 

Preferring to settle issues by arbitration (often preceded by mediation) continues to be a preferred method of dispute settlement in commercial transactions. It is most probable that the best results in arbitration are reached for contracts of a sizeable value, between companies with pedigree, with a certain amount of contractual history between them. However even then, lack of attention to detail may land parties in a pickle. In [2012] EWHC 42 (Comm) Sulamerica, the claimant insurers seek the continuation of an interim anti-suit injunction against the defendant insureds. Parties are at loggerheads over the validity of an arbitration agreement between them, which may be found in the policy. Express choice of law for the policy has been made for Brazil. Express and exclusive choice of court has also been made for Brasil. Parties are all Brazilian (incidentally, the re-insurers were not). The subject matter of the insurance is located in Brazil (Jirau, one of the world’s largest hydro-electric facilities). However the arbitration agreement in the contract concludes with appointing London as the seat of the arbitration. Arbitration was agreed to be held under ARIAS rules.

(Not just) under English law [see the House of Lords in Fiona Trust], an arbitration agreement is treated distinct from the substantive agreement in which it is included, for the purpose of assessment of its validity, existence, and effectiveness. This leads one to have to ascertain

lex arbitri (the law of the arbitration agreement, per the preceding sentence);

the curial law or the ‘law of the seat’ (the procedural law which will guide the arbitration proceedings; despite the latin curia not commonly referred to as lex curia);

the ‘proper law’, the law that governs the actual contract (lex contractus); and

the locus arbitri and the lex loci arbitri: the venue of the arbitration and its laws, which may or may not interact with the proceedings. Update 8 January 2018 see for an example of such impact the new Chinese approach to optional arbitration proceedings, applicable as of 1 January 2018).

In the EU, the issue is not covered by the Rome I Regulation, for arbitration is excluded from that Regulation. Whence the courts apply their national conflict of laws rules. In England, this implies identifying the law with which the arbitration agreement has its ‘closest and most real connection’. In Sulamerica, Cooke J held that this was, in this case, England, given London having been assigned as the seat of arbitration.  Indeed in Abuja International Hotels, Hamblen J came to the same conclusion with respect to an underlying agreement that was governed by Nigerian law.

The lesson here is clear. With three sets of applicable law having to be identified, one had better consider them specifically, in writing, in the agreement.

Geert.

Postscript: Cooke J held in January 2012. In May 2012, the Court of Appeal confirmed the decision.

Postscript 2, 3 July 2014: In First Link Investments, the Singapore High Court took a radically different approach in May 2014, noting that “it cannot always be assumed that commercial parties want the same system of law to govern their relationship of performing the substantive obligations under the contract, and the quite separate (and often unhappy) relationship of resolving disputes” and that “the natural inference would instead be to the contrary”. (Case come to my attention thanks to Alistair Henderson and Daniel Waldek). Postscript 4, 2 December 2016. In BCY v BCZ the High Court would seem to have entirely altered that position, reverting back to Sulamerica.

Postscript 3, 2 June 2015:In Trust Risk Group SpA v AmTrust Europe Limited, the Court of Appeal further considered the House of Lords’ presumption of the one shop principle and decided it did not apply to the case at issue. The CA, upon detailed analysis of the agreements at stake, decided in effect that the later agreement was lex specialis vis-a-vis the overall business agreement between parties and hence that choice of law and choice of court of the later agreement prevailed. (Davina Given and Ed Holmes posted on the RPC blog with full review of the case). The Court’s analysis highlights among others the often less than clear language used in commercial agreements, whether or not caused by the fog of closing. In particular, the agreements under consideration used often confusing and not clearly defined concepts to denote the various agreements at stake.

Postscript 5, 25 October 2017: in Roger Shashoua v Mukesh Sharma CIVIL APPEAL NOS. 2841-2843 of 2017 the Indian Supreme Court once again had to emphasise the difference between venue (lex loci arbitri if you like; potentially only the place where hearings are held) and the seat of arbitration (which determines procedural issues; the lex curia). See review by Herbert Smith here.

Negative jurisdiction conflicts covered by enforcement title of Brussels I – The ECJ in Gothaer

The ECJ has issued its ruling in C-456/11 Gothaer, the AG’s Opinion in which I reported earlier. The Court first of all confirmed that the term ‘judgment’ within the meaning of Article 32 of Regulation No 44/2001 covers a judgment by which a court of a Member State declines jurisdiction on the ground of an agreement on jurisdiction, even though that judgment is classified as a ‘procedural judgment’ by the law of the Member State addressed.

Moreover, the ECJ held that the court in the Member State in which enforcement is sought, is bound by the finding of the first court – made in the grounds of a judgment, which has since become final, declaring the action inadmissible – regarding the validity of that clause. To justify its finding, it refers in principle to the very definition of recognition as highlighted in the Report Jenard: recognition must ‘have the result of conferring on judgments the authority and effectiveness accorded to them in the State in which they were given’. Accordingly, a foreign judgment which has been recognised under Article 33 of Regulation No 44/2001 must in principle have the same effects in the State in which recognition is sought as it does in the State of origin. It further emphasizes the same arguments as flagged by the AG in coming to its finding.

On the peculiarity that in the case at issue, the choice of court clause points way from the EU, which raises the question what effect can be given to such clauses under the Jurisdiction Regulation, the court concedes that Article 23 does not apply, however, like the AG, it refers to the Lugano Convention, which contains a proviso very much like Article 23 JR. That to me is a bit of an awkward finding: whether the choice of court clause points to a Lugano State or not ought to be irrelevant. It would, through the recognition process, make choice of court in favour of Lugano States in some way less ‘not covered’ by the JR than those pointing to non-Lugano States (and by flagging Lugano, the Court leaves open the question of jurisdiction clauses in favour of non-Lugano States). A further argument made by the court in my view is more convincing, namely the ‘but for’ argument:

To allow a court of the Member State in which recognition is sought to disregard, as devoid of effect, the jurisdiction clause which a court of the Member State of origin has held to be valid would run counter to that prohibition of a review as to the merits, particularly in circumstances where the latter might well have ruled, but for that clause, that it had jurisdiction. (at 38)

Indeed typically the action in the court of origin is taken by the recalcitrant party (i.e. the one acting in spite of a choice of court clause), trying to convince the court of origin that it has jurisdiction on the basis of another Article in the JR, Whence indeed but for the clause, that court would most likely have exercised jurisdiction. A finding of validity of the clause therefore is likely to have been seriously considered. Allowing a court in another Member State to nevertheless exercise jurisdiction and refusing recognition and enforcement,  would make the JR nugatory.  This is in my view no different where as a result (such as here) no court in the EU will be able to hear the case.

Geert.

Unamar and lois de police in the Rome Convention /Rome I Regulation

The Court of Justice has an opportunity to clarify the exact relationship between mandatory and overriding mandatory provisions of EU and national law under the Rome Convention on applicable law to contracts (! do note that the issue is formulated differently in the Rome Regulation).

‘Overriding mandatory provisions’ is what French and Belgian private international law refers to as ‘lois de police‘, also known as lois d’application immédiate or lois d’application nécessaire. Lois de police is  the term used in the French version of the Regulation. In Arblade, which concerned free movement of services and the application of lois de police in Belgian legal practice, the Court of Justice described ‘public order legislation’ as

national provisions compliance with which has been deemed to be so crucial for the protection of the political, social or economic order in the Member State concerned as to require compliance therewith by all persons present on the national territory of that Member State and all legal relationships within that State

In the Rome I Regulation on applicable law for contracts, room is made for overriding mandatory provisions as follows:

Article 9

Overriding mandatory provisions

1. Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation.

2. Nothing in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum.

3. Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

Under the Rome Convention, which ratione tempore applies to the contract at issue, room for manoeuvre for the forum was wider:

Article 7 – Mandatory rules

1. When applying under this Convention the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract. In considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

2. Nothing in this Convention shall restrict the application of the rules of the law of the forum in a situation where they are mandatory irrespective of the law otherwise applicable to the contract.

Belgium’s stronger protection of the agent, long held by Belgian law to be of overriding mandatory rules calibre, gold plates the regime of the Commercial Agents Directive, Directive 86/653. In Unamar, parties have agreed on Bulgarian law being applicable law (as well as incidentally on the case having to go to arbitration in Bulgaria first, attempting to circumvent Belgian law which proscribes the use of arbitration for disputes such as those at issue). The question therefore arises as to whether Belgian law, the lex fori, can justifiably trump Bulgarian law of which no suggestion is being made that it does not meet the minimum standard of the precited Directive.

Were the case to be decided under the Rome I Regulation, I would argue in view of effet utile, that in the absence of a reference to gold plating in Article 9, and (arguably) its presence in Article 3, that the allowance for national rules of overriding mandatory nature, does not cover gold plating. However in the Rome Convention which is applicable to the case referred, EU law as mandatory law does not figure at all, and the room for overriding rules is much wider than it is in the Rome Regulation.

A reference of this kind is long overdue. What remains to be seen as what the Court’s eventual answer will teach us about the Rome Regulation (as opposed to the Convention).

Geert.

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