Sally Roberts appeared at the High Court in Central London.

In a recent judgment of Aiteo Eastern E&P Company Ltd v Shell Western Supply and Trading Ltd [2022] EWHC 2912 (Comm) (17 November 2022) , the English High Court has discussed about the inchoate arbitration clause and asymmetric right to arbitrate as under:

Factual Matrix

AITEO Eastern E&P Company Limited (‘AITEO’) entered into an Offshore Facility Agreement with Shell Western Supply And Trading Limited (‘SWST’). Clause 41 of the Offshore Facility Agreement provided for an ICC arbitration clause with inter alia two riders i.e., firstly any party ‘may elect to refer’ to arbitration and secondly before SWST has triggered arbitration under ICC, it ‘may’ by notice require AITEO that the dispute be heard by a court of law. If such notice is issued then in terms of Clause 41.3 courts in England had exclusive jurisdiction to settle such dispute. The Offshore Facility Agreement also provided a consolidation of arbitration clause which suggested that in the discretion of arbitrator, it may consolidate the arbitrations commenced under Offshore and Onshore Facility Agreement if they are closely connected.

Separately, AITEO also entered into Onshore Facility Agreement with another group of lenders which also contained an arbitration clause with a stipulation that any dispute amongst the parties ‘shall be referred to’ ICC arbitration and before SWST has invoked arbitration under ICC, it ‘may’ require AITEO that all dispute be heard by court of law which in the case of Onshore Facility Agreement were the Courts the Federal Republic of Nigeria.

Dispute arose between AITEO on one side and SWST plus other lenders on another side and the latter group raised demands against the former. AITEO initiated and successfully granted an interim relief from the Nigerian Court inter alia directing SWST and other lenders from initiating any proceedings against AITEO. This decision was appealed by SWST and other lenders before the Nigerian Court of Appeal.

Separately, SWST triggered arbitration against AITEO under the aegis of ICC and further sought anti-suit injunction before the English Commercial Court which was in turn granted. In the similar vein, other lenders too invoked ICC arbitration and sought anti-suit relief from English Court.

AITEO unsuccessfully challenged the jurisdiction of the arbitral tribunal constituted under the Offshore Facility Agreement and which culminated into an award. Meanwhile, the English Court granted final anti-suit injunction against AITEO under both Onshore and Offshore Facility Agreements. This decision was appealed at by AITEO which resulted in the present proceedings under Section 67 of the English Arbitration Act, 1996 (‘Arbitration Act’). Subsequently, the arbitral tribunal passed a second award consolidating the arbitral proceedings under the Onshore and Offshore Facility Agreements.

Issue

Whether Clause 41 of the Offshore Facility Agreement which is in the nature of inchoate arbitration clause is a valid arbitration agreement?

Parties Contentions

AITEO contended that the position of law settled by the Privy Council in Anzen Ltd v Hermes One Ltd [2016] 1 WLR 4098is a narrow and contextual decision. It further argued that election to arbitrate in this case can only be exercised by commencing an arbitration which according to AITEO meant that if it has initiated litigation then arbitration was a mere option. According to AITECO, it can be further exercised if at least an unequivocal and irrevocable commitment to arbitrate is given to refer the relevant dispute(s) to arbitration without delay.

Position of Law

The Court noted as under:

  1. In most cases, a clause like clause 41.1 which provides that one or both parties “may” submit or refer a dispute to arbitration is not itself a fully-formed arbitration agreement, and does not of itself oblige either party to refer a dispute to arbitration. Rather, it gives the relevant party or parties an option to refer a dispute to arbitration: Russell on Arbitration (24th), [2-018].
  2. In such a case, an arbitration agreement comes into existence, and with it an obligation to arbitrate the dispute, once the option is exercised in the contractually required manner: Union Marine v The Government of the Comoros [2013] EWHC 5854 (Comm), [17].
  3. In Anzen Ltd, the Privy Council, while interpreting a similarly worded clause observed that given the permissive language of the clause, either party was entitled to start litigation.
  4. In such clauses, litigation having been commenced by one party, the other party will have the option to submit the dispute to arbitration. How the option fell to be exercised depends upon wordings of the clause which, in some contexts “might no doubt connote and require the actual commencement of an arbitration” but need not always do so.
  5. An election of one amongst arbitration and litigation is simply the exercise of a choice by a party who has more than one course open to them.
  6. In the international arbitration lexicon the phrase “refer a dispute” to arbitration has long been used to refer to enforcement of the negative covenant implicit in the arbitration agreement not to pursue a claim elsewhere, rather than a positive covenant requiring an arbitration to be commenced and pursued.
  7. Both Article II(3) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (United Nations) (1958) and Article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration refer to the court in which proceedings have been commenced “refer[ing] the parties to arbitration”.
  8. However, it is overwhelmingly the case in New York Convention and UNCITRAL Model Law countries that this obligation is performed by bringing the court proceedings to an end, not granting an order mandating the commencement of an arbitration.
  9. While a dispute resolution clause could provide an option to refer to arbitration a dispute which one party has brought to court can only be exercised by the commencement of an arbitration, it would require clear words to achieve that outcome.
  10. An arbitration agreement contains a negative covenant (a promise not to bring proceedings which fall within the scope of the arbitration agreement in a non-contractual forum) and a positive covenant (an obligation to pursue and progress claims in the contractual forum).

Conclusion

 In view of the above position of law, the Court held as under:

  1. Clause 41 of the Offshore Facility Agreement can be regarded as containing an inchoate arbitration agreement, which becomes fully formed in respect of the relevant dispute when the option to arbitrate is exercised.
  2. As is the case with most dispute resolution provisions in loan documentation, clause 41 contemplates the initiation of disputes by the Obligors (i.e., AITEO) as well as the Finance Parties (i.e., SWST and other lenders), and provides for the options of the Finance Parties in that eventuality.
  3. While it is true that SWST would be the more natural claimant in disputes arising under the Offshore Facility Agreement in most cases, this will not always be the case.
  4. In both cases, the interpretation of the option to arbitrate must cater for both scenarios. For those reasons, the Court was satisfied that opinion of Privy Council in Anzen Ltd offered relevant and valuable guidance when construing the clause 41.1 option in this case.
  5. The drafting of clause 41.2 has not been amended to take account of the asymmetric nature of the right to arbitrate a dispute in clause 41.1 of the Offshore Facility Agreement, and it undoubtedly gives rise to some infelicities as a result – in particular the reference to SWST having until service of the Answer to Aiteo’s Request for Arbitration to exercise its clause 41.2 entitlement, when Aiteo has no entitlement to serve a Request for Arbitration unless and until SWST makes its clause 41.1 election.
  6. On its proper construction, the effect of the exercise of the election in clause 41.1 is to preclude SWST from making a further election under clause 41.2 in respect of the same dispute:
    1. That is the usual effect of exercising an asymmetric right to arbitrate: Russell on Arbitration, [2-018] and Deutsche Bank AG v Tongkah Harbour Public Company Limited [2011] EWHC 2251, [25] and [29].
    1. The use of the word “elect” in clause 41.1 serves to reinforce the irrevocability of the choice (cf Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kancehenjunga) [1990] 1 Lloyd’s Rep 391, 398).
    1. This is a business like construction, which avoids the possibility of successive inconsistent elections by SWST, moving a dispute out of and back into court via an abortive arbitration process.

In view thereof, the Court dismissed AIETO’s appeal under Section 67 of the Arbitration Act. As a sequitur, the Court also dismissed the second limb of the AIETO’s which was against the consolidation of the two arbitrations citing it to be parasitic to the primary contention of AIETO.