It takes two to arbitrate: but in what circumstances will a Court intervene in the arbitral appointment process?

In Silver Dry Bulk Company Ltd v Homer Hulbert Maritime Company Ltd [2017] EWHC 44 (Comm), the Commercial Court has affirmed that whilst it “takes two to arbitrate, just as it does to tango”, the Court will nevertheless take a strict approach with regards to its powers under section 18 of the Arbitration Act 1996 where one party has failed to cooperate.

The respondent party had seemingly ceased to exist (although that was contested) and failed to participate in the arbitration. Nevertheless, the Court found that there had been no failure of the tribunal’s appointment which might allow the Court to step in and make the order sought under section 18 as the arbitration clause made clear provision for instances of non-cooperation.

As a result, it appears that the Court will be slow to make an order regarding the constitution of an arbitral tribunal, where the tribunal can proceed without any intervention.

Facts

Silver Dry (“the Claimant”) purchased a bulk carrier from Homer Hulbert (“the Respondent”) pursuant to a Memorandum of Agreement. The Respondent, an SPV incorporated in the Marshall Islands, was a 100% subsidiary within Sinokor, a Korean group of companies.

It was later discovered that the $66.5 million paid for the carrier may have included a secret commission to Hannibal Gadaffi, son of former Libyan leader Colonel Gadaffi – inflating the purchase price by some $5-7 million. The Claimant commenced arbitration under the Memorandum of Agreement’s English law arbitration clause to recover the additional sum.

The matter was complicated by the fact that, after the sale, the Respondent had been dissolved. Under the law of the Marshall Islands, an entity remains in existence for three years after dissolution for the purpose of being sued; however, the Claimant had not served its notice of arbitration until eight months after the expiry of that three-year period.

The arbitration clause provided that the Respondent had 14 days to nominate its arbitrator, failing which a single arbitrator would be appointed. The Respondent failed to respond to the Claimant’s nomination of its arbitrator. Sinokor was aware of the arbitration but refused to get involved in the substantive issues. At a procedural hearing in the arbitration Sinokor argued that under the law of the Marshall Islands, the Respondent did not exist, and thus that the arbitration proceedings were invalid. In response, the Claimant relied on an expert opinion on the law of the Marshall Islands and sought to argue that proceedings could be commenced within a six-year limitation period.

Whilst the Claimant was content for the dissolution issue to be decided by the arbitrator, it wished to avoid the risk of a ruling later that the arbitration was a nullity as a result of the Respondent’s status. It therefore applied to the Court for an order under section 18 of the Arbitration Act 1996 that the arbitral tribunal had been validly constituted.

Section 18 provides that parties are free to agree what may happen in the event of a failure of the procedure for the appointment of the arbitral tribunal; where there is no such agreement, a party may apply to the court to exercise its discretionary power to give directions as to any necessary appointments to the tribunal.
 
Decision

The Court considered the purpose of section 18, namely to ensure that arbitrations did not fail to get off the ground simply as a result of a failure in the appointments process. It recognised the need for it not to stray into substantive issues of the arbitral tribunal’s jurisdiction which were better decided elsewhere.

The Court confirmed that it must determine whether a claimant had a ‘good arguable case’. The expert opinion in the Claimant’s favour was evidence enough for the Court that the threshold of a ‘good arguable case’ had been met. More crucially, however, the Claimant also had to demonstrate that there had been a “failure of the procedure for the appointment of the arbitral tribunal”.

The Court held that there had been no such failure: the parties’ arbitration clause clearly set out a process for the appointment of the Claimant’s sole arbitrator where the Respondent failed to respond within 14 days. That process had been followed, and therefore, in the circumstances, the court did not possess any of the powers listed in section 18.

Further, the Court’s powers under section 18 are discretionary. In this case, the Court stated that even if section 18 was to have been applicable, it would not have been minded to exercise its discretion as intervention by the Court was not needed in order to allow the arbitration to continue: the arbitration had been going for some time under the sole arbitrator, and a further hearing had been set down for March 2017.

The Court also took issue with the specific terms of the order sought by the Claimant, to direct that the arbitral tribunal had been “validly” constituted by the appointment of the sole arbitrator – a word not found within the powers of section 18. Such an order, the Court held, would stray beyond ‘getting the arbitration going’, and into taking a view on whether the Respondent continued to have a sufficient existence to be a party to arbitration proceedings – a matter to be decided by the tribunal itself in due course.

Comment

This decision highlights that the Court will take a strict approach with regards to its powers under section 18 of the Arbitration Act 1996.

In refusing the Claimant’s application, the Court drew a clear line between using its section 18 powers to “prevent an arbitration from being strangled at birth” and what it saw as a situation where “the arbitration is already alive and kicking and what the claimant is seeking is some endorsement from the court of its position that the tribunal has been validly constituted.”

Parties should avoid straying into this latter category, where the Court has confirmed that ordinarily, it will respect the terms of a party’s arbitration agreement, and only use its powers to step in where there is a real and genuine need to do so.