Arbitration tribunal lacked jurisdiction over company that ceased to exist

United Kingdom

In Ga-Hyun Chung v Silver Dry Bulk [2019] EWHC 1147 (Comm), the English Commercial Court held that an arbitral tribunal lacked substantive jurisdiction under s.67 of the Arbitration Act 1996. This was on the basis that the respondent company, HH, had ceased to exist by the time the notice of arbitration was filed. The judgment illustrates the crucial need for due diligence as to the status of a party when preparing to commence proceedings.

Background

HH was a company incorporated in the Marshall Islands. In 2011, it entered into a contract to sell a vessel to Silver Dry Bulk (SDB) on terms that any dispute would be referred to arbitration in London. Shortly thereafter, HH filed for dissolution.

In 2014, SDB issued a notice of arbitration alleging that the price of the vessel had been inflated by a secret commission. HH did not respond, and a sole arbitrator was appointed. SDB’s solicitors then sent a copy of the notice of arbitration to Sinokor Merchant Marine Co (Sinokor), which they believed to be the former owner of HH. Although Sinokor denied that this was the case, it instructed counsel to appear before the tribunal to dispute jurisdiction.

The arbitrator subsequently made an award in SDB’s favour. Mr Chung, acting as the former statutory trustee of HH, then applied to set the award aside as a nullity under s.67 on the basis that the arbitrator lacked substantive jurisdiction.

Decision

Mr Chung argued that no valid arbitration was ever commenced, as HH had ceased to exist under Marshall Islands law before the notice of arbitration was filed. SDB argued that the question of when HH legally ceased to exist did not go to substantive jurisdiction under s.67, but was a question of fact on which the arbitrator had already made a decision. However, Moulder J held that the question fell “squarely” within s.67. She found that the arbitration agreement required HH to appoint an arbitrator, and if it could not do so, then the clause could not operate and the tribunal could not be validly constituted. This was consistent with Baytur SA v Finagro Holdings SA [1992] 1 QB, where it was held that there could not be a valid arbitration if one of the two parties had ceased to exist at the time the proceedings were commenced. The judge held that the 1996 Act did not alter this position.

Based on expert evidence, the court found that under Marshall Islands law, HH had in fact ceased to exist by the time the arbitration commenced. As a result, the tribunal was not properly constituted. Finally, the right to challenge the award had not been waived under s.73 of the 1996 Act, as Sinokor had never represented that it or HH accepted the jurisdiction of the arbitrator.

Comment

The judgment highlights the importance of confirming the legal status of the proposed respondent before commencing arbitration proceedings. If it appears that the respondent has been dissolved, the claimant should take advice as to the effect of dissolution in the respondent’s jurisdiction of incorporation, as other potential avenues for recovery may have be considered.

For further information, please email the authors or your usual CMS contact.

The authors would like to acknowledge the assistance of Kiana Banafshe, intern at CMS London, in preparing this article.