Emergency, Emergency! Risk that court sanctioned injunctive relief may not be available where emergency arbitrators are available

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Whilst the concept of the emergency arbitration has been around since the late 1990s[1][2][3], the use of emergency arbitration has come to the fore over the last six years as arbitral institutions around the world have adopted emergency procedures in their rules. Although the advent of emergency procedures was welcomed when they were first introduced, it appears from statistics provided by arbitration institutions that there has not been a large take-up in using emergency arbitration and that parties still prefer the bite of a court order when seeking emergency relief.

A recent decision in the English High Court may make the concept of emergency arbitration less attractive to parties as the decision suggests that a party will not be able to seek emergency relief from the courts where the system of rules set out in an arbitration agreement provides for emergency arbitration. This article focuses on the potential ramifications of the decision in Gerald Metals SA v Timis [2016] EWHC 2327 (Ch).

Emergency Relief in the UK

Section 44(3) of the Arbitration Act 1996 (the "Act") gives the English courts powers to make orders in support of arbitration proceedings which include making orders to preserve evidence or freeze assets. However section 44(5) limits these powers and states that a court "shall only act if or to the extent that the arbitral tribunal, and any arbitral or other institution or person vested by the parties with power in that regard, has no power or is unable for the time being to act effectively".

Despite the ability to obtain urgent relief from the English courts, in 2014 the London Court of International Arbitration ("LCIA") adopted emergency arbitration provisions in its rules. These rules permit parties to apply for the expedited formation of a tribunal in cases of exceptional urgency. They also permit parties to apply to the LCIA Court for the immediate appointment of a temporary arbitrator to conduct emergency proceedings pending the formal formation of the tribunal.

Despite these developments in the LCIA Rules, participants on the whole understood that parties would generally still be able to seek court relief to freeze assets or preserve evidence under section 44 even where a tribunal had been appointed in circumstances where either the tribunal could not act in time or its order would not provide the bite needed to preserve the assets or evidence.

Gerald Metals v Timis

The case arises out of a transaction regarding an iron ore mine in Sierra Leone. Gerald Metals agreed to provide Timis Mining Corp (SL) Limited with US$ 50 million of financing in order to develop a mine. In return, Timis Mining agreed to transfer the ore it extracted to Gerald Metals. In order to protect their interests, Gerald Metals sought a guarantee up to US$ 75 million from a Trust which was comprised of the assets of Timis Mining’s principal, Mr Timis. The Trustee of the Trust was a professional trustee, Safeguard Management Corp. The guarantee contained an LCIA arbitration clause.

Request to appoint an emergency arbitrator

A dispute arose after Timis Mining defaulted on the agreements between the parties. Gerald Metals commenced arbitration proceedings to enforce the terms of the guarantee against the Trustee. Before the arbitral tribunal was formed, Gerald Metals made an application to the LCIA to appoint an emergency arbitrator pursuant to Article 9B of the LCIA Rules. However, before an emergency arbitrator was appointed, Safeguard wrote to Gerald Metals and provided it with an undertaking that it would not dispose of assets unless they were “for full value and on arm’s lengths terms with all such value to be retained by the Timis Trust” and also to provide Gerald Metals with at least seven days’ notice if it was considering disposing of assets of £250,000 or more.

After having its application to appoint an emergency tribunal rejected by the LCIA, Gerald Metals applied to the English High Court under section 44 of the Act for a freezing order against the Trust.

Decision

Mr Justice Leggatt rejected the application. He held that in circumstances where a party could obtain the emergency relief it required under the LCIA Rules (provided the LCIA and an emergency tribunal deemed it appropriate to grant that relief), the court was not permitted to grant an injunction pursuant to section 44.

In making his decision, Mr Justice Leggatt concluded that the commercial and reasonable way in which to interpret the LCIA Rules was that parties should adopt its emergency procedures where an emergency tribunal could provide effective relief within a relevant timescale - i.e. within a time which would not prejudice the parties.

However, Mr Justice Leggatt was careful to ensure that participants which had adopted arbitration rules with emergency procedures were not automatically shut out from obtaining urgent court relief where it was absolutely necessary. He accepted that “there can be situations where the need for relief, for example in the form of a freezing injunction, is so urgent that the power to appoint an emergency arbitrator is insufficient and the court may properly act under [section 44 of the Act] - for example if the application is one that needs to be made without notice”. However, he said the courts will still only be able to intervene in those circumstances where the powers of an emergency tribunal could not be adopted quickly or adequately enough to provide the relief needed.

In passing, Mr Justice Leggatt commented that given the LCIA had already rejected Gerald Metal's application, the only inference he could draw was that there was no urgent relief required by Gerald Metals as “the LCIA was not persuaded that the application [to appoint an emergency arbitrator] was so urgent that it needed to be decided before the arbitral tribunal is constituted”.

Comment

The decision is an important reminder to parties to consider at time of entering into contracts what dispute resolution clauses they adopt.

Whilst the importance of arbitration cannot be underestimated in the resolution of disputes (for example because of the benefits which can be obtained through enforcement under the New York Convention), parties should consider if they should amend standard form arbitration clauses to provide that they can seek urgent relief from the court in certain circumstances (for example, to protect proprietary information). Although such provisions are untested, they may assist parties who require the speed and bite of a court order to protect their interests in demonstrating to the court that the parties agreed they could seek urgent court relief rather than adopt emergency arbitration procedures at the outset of the contract.

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[1] For example in 1999, the American Arbitration Association devised optional rules for “Emergency Measures of Protection” although they were rarely used as parties had to specifically agree in their arbitration agreements that they wished to use them.

[2] For example, the Singapore International Arbitration Centre provided for the appointment of emergency arbitrators in its 2010 rules and the International Chamber of Commerce ("ICC") and the London Court of International Arbitration ("LCIA") implemented emergency procedures in their 2012 and 2014 rules respectively.

[3] For example, it is reported that by the end of 2014, there had only been 14 cases in which parties had sought relief under the emergency arbitration provisions adopted under the ICC Rules in 2012.