Where the claimant in an arbitration ceases to exist, it is usually the respondent who contends that the arbitration has been or should be brought to an end. There may then be an issue whether the claimant’s claim in arbitration can survive by, for example, a principle of universal succession (Eurosteel Ltd v Stinnes AG [2000] CLC 470).
What is the position, however, when the respondent in the arbitration is dissolved before the arbitration was commenced? Can the claimant seek the court’s assistance in confirming the validity of the arbitration, so that the tribunal may then determine the issue of whether the respondent continues to be a party to the arbitral proceedings?
In an attempt to confirm the existence of the respondent which had dissolved and to draw its parent company into arbitral proceedings, the claimant in Silver Dry Bulk Company Ltd v Homer Hulbert Maritime Company Ltd [2017] EWHC 44 (Comm) brought, inter alia, an application pursuant to section 18 (failure of appointment procedure) of the Arbitration Act 1996. The matter came before Males J.
Facts
The claimant purchased Vessel 1045 from the respondent, a wholly owned subsidiary of the Sinokor group of companies, a Korean shipowner and operator. The respondent was a special purpose vehicle incorporated in the Marshall Islands. The purchase price was $66.5m, which also included a secret commission of between $5m and $7m to Hannibal Gaddafi, the fifth son of Colonel Gaddafi, who, before the overthrow of Colonel Gaddafi, controlled the claimant. The claimant therefore argued that it had paid approximately $5m more than it need have done to purchase the vessel and that this money had been corruptly diverted to Hannibal Gaddafi.
After the vessel had been sold to the claimant, the respondent was dissolved. Pursuant to section 105(1) of the Marshall Islands Business Corporation Act (BCA), the claimant had a period of three years within which to commence proceedings against the respondent. However, no such proceedings were commenced within this period. In fact, the claimant purported to serve a notice of arbitration on the respondent eight months after the expiry of the period. The respondent failed to respond to the notice and, consequently, the claimant’s nominated arbitrator was automatically appointed.
Arbitration proceedings and arguments
Sinokor attended the procedural hearing and made clear that it did not submit to the arbitrator’s jurisdiction. It informed the arbitrator that the respondent had been dissolved, and that the three-year continuation period under the BCA had expired before commencement of the arbitration. The arbitrator directed that the claimant should prepare a detailed memorial, addressing both jurisdictional issues and the merits of the case. That memorial indicated that Sinokor was the driving force and the real participant in the sale transaction and thus should be a party to the arbitration.
The claimant put forward two reasons for the continued existence of the respondent. The first reason was that the effect of section 105(2) of the BCA was that, upon the dissolution of a corporation, the directors automatically become trustees by operation of law. Their trusteeship continues without limitation of time and therefore proceedings can be commenced after the three-year limitation period under section 105(1) of the BCA. The second reason was that in a fraud case a claimant is entitled to the benefit of the six-year limitation period regardless of the dissolution of the defendant.
Sinokor contended that the respondent had ceased to exist due to the expiry of the three-year period; that the trusteeship under section 105(2) operated during but not beyond that period; and that principles of equity could not be invoked to override the clear language of section 105(1).
Section 18 failure of appointment procedure
Males J made a number of observations regarding the operation of section 18 of the 1996 act. He noted that, where there is an issue whether a tribunal would have jurisdiction, the court had the power to make an order listed in section 18(3), if the claimant can satisfy the test of showing ‘a good arguable case’ (Noble Denton Middle East v Noble Denton International Ltd [2010] EWHC 2574 (Comm)). According to Males J, a ‘good arguable case’ would require the claimant to demonstrate a case which more likely than not would succeed. This represented a relatively low threshold which, Males J observed, ‘retains flexibility for the court to do what is just, while excluding those cases where the jurisdictional merits are 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 is very likely that the tribunal had no jurisdiction’.
If the threshold of ‘good arguable case’ is met, then the court had power to make one of the orders listed in section 18(3). However, Males J stated that the section 18(3) powers could only be exercised if there had been ‘a failure of the procedure for the appointment of the arbitral tribunal’. That will not be the case if the procedure had operated in the way that it was supposed to, albeit without the co-operation of one of the parties. That was made clear by the express exclusion of section 17 of the 1996 act, which applies when one party fails to appoint an arbitrator within the time specified, and the other gives notice that he proposes to appoint his duly appointed arbitrator to act as sole arbitrator. Once it has been established that there has been a failure of the appointment procedure, and the good arguable case test has been satisfied, then it is up to the court to exercise its discretion whether to exercise any of the section 18(3) powers.
Despite accepting that the claimant did, in fact, have a good arguable case that the respondent continued in existence for the purposes of the arbitration, Males J dismissed the claimant’s application because there had not been a failure of the appointment procedure. Males J found that the appointment procedure had worked ‘perfectly well’. The arbitration agreement had provided a clear and effective appointment process – and the claimant’s arbitrator had been validly appointed. Thus, there was no need for assistance from the court. Further, Males J held that the arbitration agreement was not one to which section 17 applied because it did not require the appointing party to give notice that it proposed to appoint its arbitrator as sole arbitrator.
Males J then considered whether he could exercise section 18 powers as a matter of discretion. The only relevant power was that contained in section 18(3)(b), namely ‘to direct that the tribunal shall be constituted by such appointments… as have been made’. Males J observed that there was no need for any arbitrator to be appointed or for any appointment to be revoked. Therefore, no intervention of the court was needed in order for the proceedings to continue. This was not a case where the assistance of the court was required in order to constitute the tribunal or to enable the arbitration to proceed. This was a case in which the claimant was seeking an endorsement by the court of its position with a view to drawing in Sinokor, a third party, to the arbitration proceedings. In these circumstances, the use of the section 18(3) procedure would not, according to Males J, be an appropriate use of the section 18(3) powers.
The decision reinforces that the courts will, in accordance with the general principles of the 1996 act (section 1), seek to uphold and protect the principle of party autonomy in arbitration and as such they will revert to the parties’ agreement. Thus, it was clear on the fact that the appointment procedure agreed by the parties had not failed and therefore section 18(3) did not apply. The decision also provides helpful judicial guidance on the interpretation and application of section 18(3) and, in particular, the test of ‘good arguable case’.
Masood Ahmed is associate professor in civil dispute resolution at the University of Leicester and a member of the Civil Procedure Rule Committee
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