Drafting arbitration clauses

31 April 2011

Contacts

B v S [2011] EWHC 691 (Comm)

In the High Court case of B v S, Flaux J has held that the Scott v Avery clause used in the Federation of Oilseeds and Fats Association (FOSFA) 54 standard form sales contract excludes the right to apply to the court for any interim relief under section 44 of the Arbitration Act 1996 (the 1996 Act). Flaux J did not consider any of the other provisions of the 1996 Act. This decision has significant implications for all entities, especially in the commodities sector.

The interplay between Scott v Avery clauses and clause 44 of the 1996 Act has not previously been considered by the Courts and many within the commodities industry will not have predicted this decision. The result may be that parties will need to consider amending standard form contracts if they want to preserve the right to seek ancillary relief.

Facts

A dispute arose between B (buyer) and S (seller) in respect of sales contracts in place between the parties on the standard FOSFA 54 form regarding consignments of sunflower seed oil. B alleged that S was in default of the contracts and the amount in dispute between the parties was US$2.95 million.

On 8 February 2011, B made a without notice application to the court pursuant to section 44 of the 1996 Act and obtained a freezing injunction covering S’s assets to the value of US$3.4 million in support of its claims in the arbitration. S applied for the injunction to be set aside.

Flaux J was therefore required to consider whether the Scott v Avery clause included in the contracts between B and S (and as widely used in commodity contracts) excluded the ability of a party to bring any form of litigation proceedings before the arbitral award was issued or whether ancillary proceedings which invite the court to exercise its powers under section 44 of the 1996 Act were not in breach of the clause.

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Background

A Scott v Avery clause is a type of arbitration clause which prevents the parties to the contract from applying to the Court for relief unless and until the Tribunal has issued its arbitration award.

The Scott v Avery section of the arbitration clause in the FOSFA 54 standard form contract is set out in the second paragraph of clause 29 and provides 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.”

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The law

Section 44 of the 1996 Act deals with the powers of the court exercisable in support of arbitration proceedings. In particular,  section 44(3) provides that, “if the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets”. Such interim relief includes applications for freezing injunctions for the preservation of assets, mandatory injunctions to force a party to perform an act or a prohibitory injunction to prevent a party from disposing of or destroying evidence.

Much of the case law on the question of ancillary proceedings in arbitrations considered the issue in the context of the provisions of the Arbitration Act 1950 (the 1950 Act), which differed significantly from the 1996 Act.  As such, the question before Flaux J was an open one with no direct authority on the point.

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Decision

Courts have previously been reluctant to hold that arbitration clauses can act to exclude ancillary proceedings as well as substantive proceedings. Indeed, until now the commercial view of Scott v Avery clauses like clause 29 has been that they act only to exclude substantive (and not ancillary) proceedings.

However, Flaux J commented on the various commercial interpretations of such clauses in his judgment and concluded that “whilst limitation of the clause to the exclusion of substantive proceedings and not ancillary proceedings has been regarded…as commercially desirable, I do not myself think that construction is justified by the wording of” clause 29. Flaux J also commented that, while holding clause 29 amounts to an exclusion of ancillary proceedings “may be surprising to some of those who trade in the commodity markets”, this should not prevent the wording of clause 29 having its clear meaning and effect.

Based on the wording of the clause, Flaux J was of the firm view that the relevant paragraph of clause 29 was sufficiently wide to and did, on its true construction, exclude all proceedings anywhere, including England, whether substantive or ancillary or supportive of the arbitration. Flaux J went on to say that it was clear to him, as a matter of language, that 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.

Flaux J noted that the provisions of the 1950 Act were mandatory and there was no provision for contracting out of the supervisory powers of the court. Flaux J distinguished between the 1950 Act and the 1996 Act by explaining that one of the fundamental principles established by the 1996 Act was that of party autonomy; while the 1996 Act does contain some mandatory provisions, section 44 of the 1996 Act is a non-mandatory provision and as such parties to arbitration clauses are free to agree not to be bound by such provisions.

On this basis, S’s application to the court was granted and B’s freezing injunction against S was discharged.

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Comment

This is an important decision for all those operating in the commodities industry. It marks a clear departure from what many had understood to be the purpose of Scott v Avery clauses: to exclude the right to bring substantive proceedings in the English courts where the parties had agreed to submit any disputes to arbitration. It was thought that they did not also exclude the opportunity to apply to the courts for interim relief in support of the arbitral proceedings.

The decision may lead institutions to consider whether now is the time to amend their standard wording for existing and future contracts, or whether to leave it to the parties themselves to make amendments to preserve the right to apply for injunctive or any other form of interim relief under the 1996 Act.

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