In this case, the Court considered an application under section 18 of the Arbitration Act 1996 (the Act) for an order directing that an arbitral tribunal had been validly constituted and additional orders under sections 43 and 44 of the Act for production of documents by third parties based inside and outside the jurisdiction.

Factual background

Pursuant to a memorandum of agreement (MOA) dated 1 February 2011, the claimant had purchased from the respondent a newbuilding Capesize bulk carrier (Vessel 1045) for US $66.5 million. The respondent was a special purpose vehicle incorporated in the Marshall Islands for the purpose of owning and selling Vessel 1045 to the claimant. Accordingly, once the sale of Vessel 1045 had been completed, the respondent was dissolved.

In accordance with section 105 of the Marshall Islands Business Corporations Act, if the claimant wanted to commence proceedings against the respondent once it had been dissolved, it had three years to do so.

Eight months after the expiration of the three-year period, the claimant purported to serve an arbitration notice on the respondent pursuant to the arbitration clause in the MOA. It did so on the belief that the US $66.5 million paid to the respondent had included the payment of a secret commission of around US $5 million to a high-ranking official.

According to the MOA arbitration clause, the respondent had 14 days for appointing its own arbitrator, failing which the arbitrator appointed by the claimant would automatically become sole arbitrator. The respondent failed to respond to the notice.

The notice of arbitration made clear that the only respondent to the claim was the respondent. However, the claimant took steps to ensure the notice was given also to the respondent’s parent company, Sinokor Merchant Marine Ltd (Sinokor) and the ex-sole director of the respondent.

The arbitration proceedings

A procedural hearing took place at which, by invitation of the arbitrator, Sinokor attended. The respondent did not attend.

At the hearing the claimant argued that, despite the dissolution of the respondent, the latter continued to exist for the purpose of being a respondent to the arbitration. Sinokor disagreed and argued that the arbitral proceedings were invalid because the respondent had ceased to exist on the expiry of the three-year limitation period.

The claimant stated that if the Court was to make an order directing that the arbitral tribunal had been properly constituted then this would encourage the respondent’s parent company to participate in the determination of the continuing existence of the respondent by the arbitrator. Evidently the claimant hoped to use the arbitration as a means of getting at Sinokor.

The claimant applied to the Court under section 18(3) of the Act for an order that the arbitral tribunal had been validly constituted. It further applied under sections 43 and 44 of the Act for the production of documents held by brokers based in this jurisdiction and in Korea.

Legal issues

Section 18 had been described as a ‘gateway’ provision, which meant that it provided a way of getting an arbitration started. When there was an issue whether a tribunal had jurisdiction, the Court had powers to make the orders listed in section 18(3), namely to give orders as to making necessary appointments, to direct that the tribunal should be constituted by such appointments as made, to revoke or to make any appointments.

In order to do so, the following two questions had to be answered:

Whether the claimant satisfied the test of showing a good arguable case; and

Whether there had been a failure of the procedure for the appointment of the tribunal.

If these two questions were satisfied then the Court would be able to use its discretion to decide whether to make an order directing that the tribunal had been validly constituted.

In considering the first question, Mr Justice Males said that a ‘good arguable case’ for the purposes of an application under section 18 was a case that was somewhat more than merely arguable, but need not be one which appeared more than likely to succeed. It represented a relatively low threshold which retained flexibility for the Court to do what was just, while excluding those cases where the jurisdictional merits were so low that reluctant respondents ought not to be put to the expense and trouble of having to decide how to deal with arbitral proceedings where it was very likely that the tribunal had no jurisdiction. Crossing the threshold of ‘good arguable case’ meant that the Court had power to make one of the orders listed in section 18(3).

As to the second question, the section 18(3) powers could only be exercised if there had been a failure of the procedure for the appointment of the tribunal. That would not be the case if the procedure had operated in the way that it was supposed to, albeit without the cooperation of one of the parties.

Once it was determined that there had been a failure of the appointment procedure and that the claimant could satisfy the good arguable case test, the Court had a discretion whether to exercise any of the section 18(3) powers. The section did not prescribe how the discretion should be exercised and it had to ultimately depend on all the circumstances of the case.

In the present case, the judge accepted that there was a good arguable case that the respondent continued in existence for the purpose of being a respondent to the arbitration, since there was before him a report to that effect by a qualified expert.

However, the claimant’s section 18 application had to fail because in this case there had been no failure of the appointment procedure; the appointment had been made in accordance with the terms of the arbitration clause in the MOA. The clause provided that if a respondent failed to appoint its arbitrator within 14 days of receipt of nomination of the claimant’s arbitrator, the decision of the single arbitrator appointed should apply. No assistance from the Court was required for that to happen.

Mr Justice Males went on to say that, even if the claimant’s application had not failed, he would not have made an order directing that the tribunal was validly constituted as this was not a case where the assistance of the Court was required to enable the arbitration to proceed. Rather it was a case where the claimant was seeking an endorsement by the Court of its position with a view to drawing Sinokor to the arbitration proceedings.

The judge then considered a further application for orders under sections 43 and 44 of the Act to enable the claimant to obtain documents from brokers who were involved in the negotiation of the MOA.

In granting the claimant permission to issue a witness summons for production of documents under section 43 of the Act, the judge held that the claimant was entitled to issue a witness summons without the permission of the Court if it was content to have documents produced at the arbitration hearing, albeit subject to a right of the third party broker to apply to have the summons set aside.

Section 43 was only available when the witness in question was in the United Kingdom. The application for documents from the Korean brokers was made under section 44 and took the form of an application for the issue of letters of request directed to the Korean courts for the production of documents. The judge was prepared to assume that the Court had power under that provision to direct the issue of a letter of request (unlike the tribunal). However, he was not prepared to make the order sought at this stage. As a minimum the issue of a letter of request would require the Court to make a representation to the foreign court that (i) there was, or at the very least there probably was, an arbitration in existence for the purpose of which production of documents was requested and (ii) the documents were required for the purpose of the arbitration. While the judge had accepted that there was on the material presently available a good arguable case that the respondent continued in existence for the purposes of being a respondent in arbitration, he had not been prepared to conclude that the claimant had the better argument. Nor was it apparent that the documents were required. The application under section 44 was dismissed.

Comment

As the judge stated, it takes two to arbitrate, just as it does to tango – there cannot be a valid arbitration when one of the parties has ceased to exist. What this case most notably illustrates is that the Court will not intervene where the appointment of the tribunal is made in accordance with the terms of an arbitration clause, even if this appointment is made without the co-operation of one of the parties.

This article originally appeared in the February 2017 edition of shipping case digest. Other articles include:

Source: Hill Dickinson