Tuesday, 1 April 2014

Novation: Application of Contractual Arbitration Clauses to Pre-Contractual Disputes



SOURCE: INCE&CO.

CMA CGM SA v Hyundai Mipo Dockyard Ltd [2009] Lloyd’s Rep Plus 4

CMA commenced proceedings in tort against the Hyundai Mipo Dockyard (HMD) in France alleging that HMD had unreasonably refused to agree to the novation of four shipbuilding contracts to CMA. Following the commencement of the French proceedings HMD agreed to novate the four shipbuilding contracts, each of which provided for disputes in connection with their interpretation and fulfilment to be determined in London arbitration. Having been held liable to CMA in damages by the French proceedings and paid those damages, HMD commenced arbitral proceedings in London under the novated shipbuilding contracts to recover the sums paid out.

The Tribunal found in HMD’s favour, with the result that CMA were obliged to pay as damages to HMD the damages that CMA had recovered from HMD in the French proceedings. On appeal the Judge (Mr Justice Burton) upheld the arbitration award, holding that, by continuing the French proceedings, CMA was in breach of the arbitration agreements in the novated shipbuilding contracts which required the CMA to arbitrate in London disputes in connection with the interpretation and fulfilment of the contract.

The Background

HMD entered into four separate shipbuilding contracts with subsidiaries of ER Schiffahrt GmbH (ERS), each of which provided that “If any dispute should arise in connection with the interpretation and fulfilment of this contract, same shall be decided by arbitration in the City of London …”
CMA wished to take over the shipbuilding contracts from ERS and following HMD’s refusal to consent to a novation as requested by ERS, CMA issued a tort-based claim in the Marseilles Commercial Court (the French proceedings) alleging that HMD had unreasonably withheld its consent.
The French proceedings were still ongoing when the parties negotiated and eventually entered into four novation agreements, one for each vessel, in each case, the novation taking effect only after construction work on the vessel had been completed (the “transfer date”). The novation agreements each contained a mutual release and discharge between HMD and ERS, in respect of all matters other than any liability that might arise out of the French proceedings. CMA continued the French proceedings, in which HMD entered an appearance under protest and on 13 September 2006, the Marseilles Court held that HMD had unreasonably refused consent to novation and awarded significant damages to CMA, which HMD paid.

HMD subsequently brought an arbitration in London, under the novated shipbuilding contracts to recover the sums paid to CMA contending that by continuing the French proceedings, CMA were in breach of the arbitration clause and should not be entitled to benefit from their own wrong. The arbitrators found in favour of HMD and CMA appealed, the two questions of law being:

(i) Whether the arbitration clause in the novated shipbuilding contracts applied to the pre-existing dispute between CMA and HMD which had been referred to the French court and was pending before it at the time of novation; and

(ii) If so, whether the arbitrators were bound by the French court’s determination of the same issues between the same parties in a judgment which the English courts would be bound to recognise pursuant to the Council Regulation (EC) No 44/2001 (the Judgment's Regulation).

Did the arbitration clause in the novated shipbuilding contracts apply to the pre-existing dispute between CMA and HMD?

Agreeing with the arbitrators, the Judge held that it was wholly apparent that in the absence of any express agreement as to the effect of or on the French proceedings the two parties simply left the matter to be resolved as a matter of law. Therefore, what was the effect of the novation on the arbitration clause?
CMA had two arguments, both relating to the construction of the arbitration clause in the novated shipbuilding contracts.

(a) "If any dispute should arise"

CMA contended that the clause referred only to disputes arising in the future ("if any dispute should arise") and that as between HMD and CMA that meant any dispute arising after the transfer date. Accordingly, the arbitration clause did not apply to the existing dispute between HMD and CMA which had arisen prior to the Transfer Date.
The Judge rejected this argument and agreed with the arbitrators who had held that, although the words "if any dispute should arise" referred to something that may happen in the future, they were contained in a contract dated 26 February 2004 and referred to disputes arising after that date – which the dispute in question here did. The meaning and effect of the arbitration clause was not altered by the Novation Agreement. Before and after the coming into force of the Novation Agreement it referred to disputes in connection with the interpretation and fulfilment of the shipbuilding contracts arising after the date of those contracts.

On CMA’s case a dispute arising between the parties one day after the transfer date, albeit a dispute about events occurring before the transfer date, would be subject to an obligation to arbitrate, while precisely the same dispute, arising one day before the transfer date, would not. The arbitrators considered this to be a result which made little commercial sense, and which rational businessmen were not likely to have intended. Following the approach commended by the House of Lords in the Fiona Trust (Fiona Trust & Holding Corporation v Privalov [2008] 1 Lloyd’s Rep 254), they considered that the clause should be construed so as not to produce this surprising result, unless the language of the contract clearly required a different conclusion.

CMA also argued that the ordinary legal effect of a novation was to "extinguish the original contract and replace it by another", with effect that there should now be deemed to be novated shipbuilding contracts each dated on the relevant transfer date. This too was rejected: Burton J holding that the novation agreements were not self-standing, as they simply re-peopled the original contracts, leaving their provisions (including their dates) unchanged.

(b) Not an arbitrable claim

CMA’s second submission was that although the claim was one which could be said to be "in connection with the interpretation and fulfilment" of the shipbuilding contracts, it was outside the ambit of the Arbitration Clause and thus not subject to the obligation to arbitrate.

This was also rejected by the Judge, who held that the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter, to be decided by the same Tribunal. The Judge found that, like a dispute about misrepresentation prior to contract, a dispute about whether licence to assign or novate a contract was unreasonably refused was a dispute “in connection with the interpretation and fulfilment of” the shipbuilding contract. He had no doubt that once CMA became party to the novated shipbuilding contract, and the question fell to be asked whether a dispute within the arbitration clause had arisen between the two parties to that novated contract, the answer could only be in the affirmative.

Were the arbitrators bound by the Judgments Regulation to recognise the French judgment?

The case had been argued before the Tribunal on the premise that, if the Judgment Regulation applied, they would bound by the Regulation to recognise the French judgment. If the French judgment was entitled to recognition under the Regulation, it was common ground between the parties that CMA’s claim should be treated as if it would have succeeded, and therefore that (subject perhaps to issues about costs) HMD has suffered no loss.
Although they did not resolve this point, the arbitrators were doubtful as to why, even if the Judgment Regulation applied, any question of recognising the French judgment arose. If instead of proceeding in Marseilles, CMA had brought its claim in a London arbitration, and they were required to decide what conclusion a notional arbitral tribunal would have reached, there would be no French judgment and no question of recognition could arise. The one thing that the London tribunal could not have done would be to recognise a French judgment, since there would be no such judgment to recognise.

The Judge held that there was no question of needing to consider what a notional tribunal would have considered. The claim before the arbitrators was a simple claim for damages for breach of contract, i.e., breach of the arbitration agreement. The relevant question was what would have happened if the contract had not been breached. In this event the parties would have complied with their obligations to arbitrate and there would be no French judgment. This was not a question of not recognising the French judgment, but concluding that, as the parties were required to go to arbitration, it was only the outcome of the arbitration which was of any relevance.

Comment

The facts of this dispute are unusual in that it both arose and the French proceedings were commenced at a time when there was no contract, and no arbitration agreement, between the parties. Whilst such circumstances are likely to be rare, the decision serves to emphasise the English law approach following the House of Lords decision in The Fiona Trust litigation that construction of an arbitration clause should start from the assumption that the parties are likely to have intended any dispute arising out of the relationship into which they have entered, or purported to enter to be decided by the same Tribunal.

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