English Commercial High Court (QB): Correct approach for interpreting arbitration clause is interpreting it in its “ordinary and natural meaning” with business common-sense and reasonableness

Sally Roberts court case

 

In the case of Perkins Engines Company Limited v. Mohammed Ghaddar and Ghaddar Machinery Co. S.A.L [2018] EWHC 1500 (Comm), the English Commercial High Court heard an application to grant an interim negative anti-suit injunction in respect of proceedings commenced by Defendants against Claimant in Lebanon which as per Claimant were commenced in breach of an arbitration agreement contained within a Distributor Agreement to which Claimant and the Defendants were party. The Court granted the anti-suit injunction on construing the arbitration clause in its ordinary and natural meaning upholding the principles of construction as held by Lord Hoffman in famous House of Lords case of Fiona Trust case [2008] 1 Lloyd’s Rep 254 wherein he emphasized on upholding the “rational commercial purpose” or “reasonable commercial expectations” of “rational businessmen” while interpreting arbitration clauses. Detailed analysis given below:

Factual Matrix

At the material times, the Defendants were distributors of the Claimant’s products in Lebanon under the Distributor Agreement. The Claimant alleged that the Respondents have sold some parts in Syria which is in breach of the Distributor Agreement and therefore, they terminated the said Agreement. The Defendants commenced the Lebanese Proceedings seeking damages. Meanwhile the Claimants sent a Notice of Arbitration to the Defendants purporting to refer the dispute between them to arbitration in England but the Defendants have not taken part in the arbitration. Thereafter, claimant filed the instant case basis for the (interim and final) anti-suit injunction in respect of the Lebanese Proceedings is an alleged breach of an arbitration agreement contained in the Distributor Agreement.

Arbitration Clause

Clause 23.6 of the Distributor Agreement deals with arbitration and is reproduced below:

“This Agreement shall be deemed to be an agreement made in England and shall be read and construed and take effect in all respects in accordance with the Laws of England and the Parties hereby submit to the jurisdiction of the English Courts.

To the extent there is no reciprocal enforcement procedures between the United Kingdom and the country in which the Distributor is located, the Parties agree to submit any dispute arising between them that cannot amicably be settled to arbitration.  The arbitration shall be held in London, England …”

The Court noted that there is no reciprocal enforcement procedures between the United Kingdom and the country in which the Distributor is located (i.e. in this case the Lebanon).

Rival Contentions over the interpretation of reciprocal enforcement procedures between the [UK] and [Lebanon]”

Claimants argued that reciprocal enforcement procedures between the [UK] and [Lebanon]” means that there must be a binding bilateral or multilateral treaty between the UK and Lebanon which provides the rules or procedures subject to which judgments of one state will be enforced in the other and no such treaty exists. So, in that case, the Claimants contends that it is or ought to be common ground that: (i) the disputes in the Lebanese Proceedings fall within the Arbitration Agreement and must be referred to English arbitration; and (ii) in those circumstances there is no reason why the interim anti-suit injunction sought by Claimant should be refused.

As per contra the Defendants argued that when construing Clause 23.6 as a whole, the first paragraph amounts to a non-exclusive jurisdiction clause in favour of the English court, and the arbitration agreement in the second paragraph is conditional and only applies where there are “no reciprocal enforcement procedures between the United Kingdom and the country in which the Distributor is located”.  The defendants further submitted that in relation there are “reciprocal enforcement procedures” between the UK and the Lebanon, namely the English common law enforcement procedures for foreign judgments and the Lebanese exequatur enforcement procedures for foreign judgments so that the Arbitration Agreement does not apply.

Issues

  • What do the words “to the extent that there is no reciprocal enforcement procedures between the [UK] and [Lebanon]” in Clause 23.6 of the Distribution Agreement mean?
  • Are there “reciprocal enforcement procedures” between the UK and Lebanon applicable in this case?

Applicable Legal Principles

Section 37 of the Senior Courts Act 1981

37 Powers of High Court with respect to injunctions and receivers.

(1)The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.

(2)Any such order may be made either unconditionally or on such terms and conditions as the court thinks just.

(3)The power of the High Court under subsection (1) to grant an interlocutory injunction restraining a party to any proceedings from removing from the jurisdiction of the High Court, or otherwise dealing with, assets located within that jurisdiction shall be exercisable in cases where that party is, as well as in cases where he is not, domiciled, resident or present within that jurisdiction.

(4)The power of the High Court to appoint a receiver by way of equitable execution shall operate in relation to all legal estates and interests in land; and that power—

(a)may be exercised in relation to an estate or interest in land whether or not a charge has been imposed on that land under section 1 of the M1Charging Orders Act 1979 for the purpose of enforcing the judgment, order or award in question; and

(b)shall be in addition to, and not in derogation of, any power of any court to appoint a receiver in proceedings for enforcing such a charge.

(5)Where an order under the said section 1 imposing a charge for the purpose of enforcing a judgment, order or award has been, or has effect as if, registered under section 6 of the M2Land Charges Act 1972, subsection (4) of the said section 6 (effect of non-registration of writs and orders registrable under that section) shall not apply to an order appointing a receiver made either—

(a) in proceedings for enforcing the charge; or

(b) by way of equitable execution of the judgment, order or award or, as the case may be, of so much of it as requires payment of moneys secured by the charge.”

Analysis

It was mutually agreed between the parties that the meaning and effect of the Arbitration Agreement (including its conditionality or applicability) is a matter of English law and the English principles of contractual construction which are well-established, in accordance with the express choice of the parties in the opening paragraph of Clause 23.6 and their implicit choice of England as the seat of any arbitration in the second sentence of the second paragraph of Clause 23.6.

The Court observed that Defendants’ construction is premised on the proposition that the second paragraph of clause 23.6 does not contemplate and require the existence of a bilateral or multi-lateral treaty between the UK and the country in question, and it suffices that there are respective enforcement procedures in the UK and the Lebanon which amount to “reciprocal enforcement procedures between the United Kingdom and the Lebanon”.

The Court interpreted Clause 23.6 and held that the effect of the second paragraph is itself a choice of arbitration and an agreement to arbitrate where there is no reciprocal enforcement procedure between the United Kingdom and the country in which the distributor is located. The parties therefore consciously chose that if there was no such reciprocal enforcement procedure their choice was arbitration, and arbitration in England.  Therefore both the first and second paragraphs contemplate proceedings be they litigation or arbitration in England, with arbitration in England being the default if there were no reciprocal enforcement procedures.

In adopting the correct approach to interpret Clause 23.6, the Court adopted the approach stated by the House of Lords in the Fiona Trust case [2008] 1 Lloyd’s Rep 254 in particular in the speech of Lord Hoffman, namely, the exercise involves ascertaining the “rational commercial purpose” or “reasonable commercial expectations” of “rational businessmen”.  The commercial purpose of the wording may be affected by the “commercial background” and the court is ultimately looking for the “fair construction” to give effect to commercial purpose. Applying this approach, the Court began with construing the ordinary and natural meaning of the words used in Clause 23.6 and found that the Claimant was correct in its construction of the second paragraph of 23.6 since that is, and is the only, ordinary and natural meaning of the words used and which gives meaning and effect to each of the words used.

The Court further noted that a bilateral or multilateral treaty providing for the enforcement of court judgments between the UK and Lebanon, which proscribes the mutual enforcement procedures which both countries will use to enforce the other’s judgments, are enforcement procedures which are mutual and which bind the UK and Lebanon equally. Viewed in context, and coupled with the fact that such “reciprocal enforcement procedures” must be between the United Kingdom (a country) and the country in which the Distributor is located, such a treaty is the only thing which ensures mutual enforcement procedures that binds both countries equally and fits the language of the clause. Such an interpretation is consistent with the fact that the word “reciprocal” connotes enforcement procedures which are “done, made, etc., in exchange”, i.e. by reference to a dictionary definition. A treaty, like all agreements, is the conclusion of a process of give and take and the procedures it contains for the enforcement of a judgment are the result of that process of exchange.

The Court further noted that it is also a key that reference is to the United Kingdom (not England) and the United Kingdom encompasses England and Wales, Scotland and Northern Ireland with their separate laws. It is the United Kingdom that enters into treaties with other countries.  The United Kingdom is not synonymous with England in this Clause. The fact that the reciprocal enforcement procedures have to exist between the UK and the other country, rather than one of the three distinct legal jurisdictions (i.e. England and Wales, Scotland and Northern Ireland) within the UK, indicates that the focus of Clause 23.6 is upon a treaty which the UK is a party to, rather than the rules of one of the three legal jurisdictions within the UK. The Court also held that that such construction is the only construction that is consistent with business common-sense and reasonableness.

Conclusion

The Court granted the interim anti-suit injunction by concluding that the words “reciprocal enforcement procedures between the [UK] and [Lebanon]” mean that there must be a binding bilateral or multilateral treaty between the UK and Lebanon which provides the rules or procedures subject to which judgments of one state will be enforced in the other.

Position in India and Singapore on Interpretation

In a recent Indian case of Ameet Lalchand Shah vs Rishabh Enterprises decided on 3 May, 2018 (Civil Appeal no. 4690 of 2018 (arising out of SLP(C) No.16789 of 2017)), the Supreme Court of India addressed the issue of whether reference of the dispute between the parties to arbitration is to be refused on the ground of allegations of fraud in the plaint or whether the agreements between the parties ought to be taken as commercial undertaking of the parties “with a sense of business efficacy”. After analyzing line of cases and recent amendment (2015 Amendment Act) in the Indian Arbitration and Conciliation Act, 1996 (the Act), the court held that it is only where serious questions of fraud are involved, the arbitration can be refused. Read detailed case analysis at here.

In the recent Singaporean case of Sanum Investments Limited v ST Group Co Ltd and others [2018] SGHC 141, the Singapore High Court faced the issue regarding a dispute arising out of the interpretation and relevance of two dispute resolution clauses found in two agreements amongst the parties. The High Court of Singapore cited the famous case of Insigma Technology Co Ltd v Alstom Technology Ltd [2009] 3 SLR(R) 936 to hold that the court would strive to uphold an arbitration agreement where the parties have evinced a clear intention to arbitrate disputes. The Court also enumerated two principles of interpretation which are as follows:

Principle of Effective Interpretation

First, where the parties have evinced a clear intention to settle any dispute by arbitration, the court should give effect to such intention, even if certain aspects of the agreement may be ambiguous, inconsistent, incomplete or lacking in certain particulars, so long as the arbitration can be carried out without prejudice to the rights of either party and so long as giving effect to such intention does not result in an arbitration that is not within the contemplation of either party. This is the principle of effective interpretation.

Principle of Contextual Interpretation

Second, where the text of an agreement is clear and unambiguous, the agreement will generally be interpreted on the basis of its text alone.

The corollary to both these principles is that a harmonious reading of an arbitration agreement should be adopted. While the court should strive to uphold the parties’ intention to arbitrate, the court should, as far as possible, avoid an interpretation that does violence to express words of the arbitration agreement.

Read detailed case analysis here.

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