B v S  EWCH 691 (Comm)
In the recent case of B v S, the court considered the nature and effect of Scott v Avery clauses, which provide that an arbitration award is a condition precedent to the right to bring any court action. Such clauses are commonly included in commodity associations' standard forms, including FOSFA and GAFTA. The sale contracts in this case were on the FOSFA 54 form, clause 29 (arbitration clause) of which contains a Scott v Avery clause. The Commercial Court judge held that a freezing injunction obtained by the Buyer over the Seller's assets was in breach of this clause.
The applicant, B, obtained a worldwide freezing injunction from the English court, on a 'without notice' application, over S's assets in support of its claims against S in FOSFA arbitration. S then applied to set aside the injunction on the grounds that Clause 29 (Arbitration Clause) of the FOSFA 54 Form operated so as to prevent the parties from bringing any court proceedings unless and until an arbitration award had been issued.
B argued that, on a true construction of the clause, ancillary proceedings, such as an application for a freezing injunction, which invite the court to exercise its powers under section 44 of the Arbitration Act 1996 ("the 1996 Act"), were not in breach of this form of arbitration clause.
Clause 29 provided for FOSFA arbitration in respect of "any disputes arising out of this contract" and continued as follows:
Neither party hereto, nor any persons claiming under either of them, shall bring any action or other legal proceedings against the other of them in respect of any such dispute until such dispute shall first have been heard and determined by the arbitrators, umpire or Board of Appeal (as the case may be) in accordance with the Rules of Arbitration and Appeal of the Federation, and it is hereby expressly agreed and declared that the obtaining of an Award from the arbitrators, umpire or Board of Appeal (as the case may be), shall be a condition precedent to the right of either party hereto or of any person claiming under either of them to bring any action or other legal proceedings against the other of them in respect of any such dispute".
Section 44 of the 1996 Act provides among other things as follows:
"Court powers exercisable in support of arbitral proceedings
(1) Unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about the matters listed below as it has for the purposes of and in relation to legal proceedings.
(2) Those matters are....
(e) the granting of an interim injunction or the appointment of a receiver."
The Commercial Court decision
Mr. Justice Flaux agreed with S that the wording of the FOSFA arbitration clause prevented a party from bringing any court proceedings unless and until an arbitration award had been issued. Accordingly, he held that S's application for a freezing injunction was prohibited by Clause 29 and ordered that the freezing injunction be discharged.
The Judge observed that as a matter of language, "proceedings are 'in respect of a dispute' not just when they seek to determine the substance of the dispute but also when they are ancillary to the dispute or are seeking security for it". He added that the opening words of section 44 of the 1996 Act specifically state that the parties can agree to exclude the supervisory powers of the court. The Judge highlighted the fact that under the previous Arbitration Act 1950 (now repealed), the relevant section had provided that the jurisdiction of the English courts could not be ousted by the agreement of the parties and so case-law on this issue predating the 1996 Act was of limited relevance. In the Judge's view, there is now no obstacle, either as a matter of law or as a matter of construction, to giving the wide words of Clause 29 their full meaning and effect.
Mr Justice Flaux said that in each case, the contractual provisions in question should be considered to see whether, on their true construction, they amounted to an agreement to exclude the powers the courts would otherwise have. Whilst the Judge considered that a standard form of arbitration clause without a Scott v Avery element would not be sufficient to exclude the powers under section 44 of the 1996 Act, he also thought that there was no requirement for a special form of words to be used in order to achieve this effect.
The Judge also commented that the purpose of the court's supervisory powers under section 44 of the 1996 Act is to regulate any dispute subject to arbitration, not to assist the successful party in execution of any award. The exclusion of those powers by agreement did not, therefore, frustrate the purpose of the arbitration clause.
Finally, from a commercial perspective, he said that although a conclusion that a FOSFA / GAFTA Scott v Avery clause amounted to an agreement to exclude the court's powers under section 44 of the Act 1996 might be surprising to some of those who trade in the commodity markets, that was no reason not to give the words of the clause their clear meaning and effect. Any concerns in the market or of individual trading parties could be addressed by amending the clause if the parties considered it desirable to do so.
Parties considering contracting on FOSFA/GAFTA standard forms, or any other contracts which contain similar Scott v Avery wording, should now consider, at the outset, whether they are content to exclude the court's powers under section 44 of the 1996 Act or whether they may prefer to amend the standard arbitration clause to leave it open to both parties to apply to the court for interim relief, including applications for security, before the arbitration award is made.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.