HMD and ERS entered into 4 shipbuilding contracts under which HMD would build 4 container vessels for ERS. The 4 contracts were identical in their material clauses, all of which provided for London arbitration and required either party seeking to transfer its rights and obligations under the contract to a third party to obtain the prior consent of the other party, such consent not to be unreasonably withheld.
CMA wanted to take over the contracts from ERS but HMD refused to agree to a novation. CMA therefore sued HMD in tort in French proceedings, alleging HMD was unreasonably withholding its consent in breach of the relevant article under the French Civil Code. During these proceedings, the parties finally came to agreement over the novations and a separate novation took place in respect of each shipbuilding contract. These novations however did not take effect until after the construction work on the vessels had been completed, as identified by a particular Transfer date.
The novation agreements provided inter alia for a mutual release and discharge between HMD and ERS in respect of all matters other than any liability that might arise out of the French proceedings. If therefore the French proceedings continued and there was any consequential claim arising out of them as between HMD and ERS, that would be left open.
CMA continued with the French proceedings and got a judgment against HMD. Although HMD had objected to the Marseille Commercial Court's jurisdiction, the latter held that in fact it did have jurisdiction to hear the claim and the applicable law for the tortious claim was French law, although English law applied to the issue of whether HMD had unreasonably refused its consent to the novation. HMD appealed that decision and that appeal is still pending.
In the meantime, the parties had pursued 4 identical London arbitrations to recover the sums HMD had to pay out in accordance with the French judgment on the grounds that CMA was in breach of the arbitration clauses in the shipbuilding contracts by bringing, continuing and pursuing the French proceedings.
The arbitrators held CMA was not in breach for having brought the French proceedings but did commit a breach by continuing to pursue and failing to discontinue those proceedings after the Transfer dates when the novations took effect. The arbitrators also held they were not bound by the judgment of the Marseille Commercial Court and that HMD did not breach the relevant provision of the French Civil Code so was entitled to recover what it paid out under that judgment as damages.
CMA appealed to the Commercial Court on two points of law:
- whether the arbitration clauses in the novated contracts applied to the pre-existing dispute between CMA and HMD which had already been referred to the French court, and was pending before it at the time of novation.
- if so, whether the arbitrators were bound by the French court's decision of the same issues between the same parties in a judgment the English courts had to recognize under the Brussels 1 Regulation (Judgments Regulation).
The Commercial Court held as follows:
On the relevant Transfer date, CMA undertook an obligation to submit to arbitration any dispute which should arise in connection with the interpretation and fulfillment of the novated shipbuilding contract. The novations were not self-standing i.e. they were not new contracts. Rather, they repeopled the original contracts, leaving their provisions (including dates) unchanged. Therefore, once CMA became party to the shipbuilding contracts, they had to arbitrate any dispute that had arisen after the date of the shipbuilding contracts, even though CMA had not come under that obligation until after the Transfer date. CMA's argument that this was a retrospective breach failed.
Turning to whether the claim before the French court was a dispute in connection with the interpretation and fulfilment of the shipbuilding contracts, CMA argued the French claim was a tortious claim by a non-party to the contracts claiming damages for having been prevented from becoming a party to the contracts by the unreasonable refusal. CMA's position was that this was not an arbitrable claim in that it did not fall within the arbitration clause and was also a tort that was not a part of English law but of French law.
The judge held that a claim in tort can fall within an arbitration clause – see "E T Plus SA v Welter" [2006]1 LLR 251. He added that a tortious claim, e.g. for misrepresentation inducing the contract, arising prior to contract, is arbitrable – see "Ashville Investments Ltd v Elmer Construction Ltd" [1989] QB 488. In the present case, a dispute about whether permission to novate a contract was unreasonably withheld was a dispute in connection with the interpretation and fulfilment of the shipbuilding contract. Once CMA became a party to the contract, the dispute which had arisen between the parties to the novated contract fell within the arbitration clause.
The judge then turned to the arbitrators' conclusion that they were not bound by the Judgments Regulation so that they were not obliged to recognize the French judgment. The judge's view was that this was not actually a question of not recognizing the French judgment. Rather, the issue was that the parties being obliged to go to arbitration, it was only the outcome of arbitration which was of any relevance. He therefore agreed the arbitrators were not bound by the French judgment.
In reaching this conclusion, the judge circumvented having to deal with the issue of whether the Judgments Regulation applies to arbitration, which has been the subject of an appeal from the House of Lords to the ECJ in the "Front Comor" case – [2007] 1 Lloyds Rep 391, which was still pending when this case was decided (November 2008). The arbitrators had referred to that case and had concluded that on a true and proper construction of the Regulation, intended to be reciprocal, the UK courts were not required to recognize foreign arbitration awards, therefore UK arbitrators were not required to recognize foreign judgments. The judge came to no conclusive determination on this argument but said he had reached his decision on other grounds.
Those following the progress of the "Front Comor" will know that the ECJ's decision was rendered last week and concluded that the English court could not circumvent the Italian court's entitlement to decide whether the arbitration agreement between the parties to that case should be given effect. It seems doubtful therefore whether the judgment in this case would have been the same had the matter come to be decided after the ECJ judgment in the "Front Comor".
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