Shearman And Sterling

Litigation, Gavel and Scales of Justice

March 19, 2021

English Court of Appeal Upholds Seemingly Unworkable Arbitration Clause

Subscribe

Jump to...

 

ENGLISH COURT OF APPEAL UPHOLDS SEEMINGLY UNWORKABLE ARBITRATION CLAUSE

In its recent judgement in AdActive Inc v Ingrouille [2021] EWCA Civ 313, the English Court of Appeal gave effect to an arbitration clause in a contract containing a seemingly inconsistent jurisdiction clause.

The case once again highlights the importance of clearly drafted dispute resolution clauses, the English Court’s respect for arbitration where contracting parties choose it to resolve their disputes and its willingness to give effect to contractual terms wherever possible.

Background

A consultancy agreement entered into by the parties was governed by the laws of California. It contained a jurisdiction clause requiring that any “case, controversy, suit, action or proceeding” arising out of the agreement be heard in a State or Federal court located in Los Angeles, California (the “Jurisdiction Clause”).

However, the agreement also contained an arbitration clause, which stated that, excluding claims arising under clauses 7 and 8 of the agreement, “all claims, disputes, controversies, differences or misunderstandings between the parties arising out of, or by virtue of” the agreement would be referred to arbitration (the “Arbitration Agreement”). Clauses 7 and 8 of the agreement concerned specific obligations regarding confidential information and AdActive’s interest in Mr. Ingrouille’s work product.

AdActive obtained default judgment against Mr. Ingrouille on a claim brought in the courts of California (the “U.S. Judgment”) and subsequently sought to enforce the U.S. Judgment in England under section 32 of the Civil Jurisdiction and Judgments Act 1982 (“CJJA”). The English court at first instance granted AdActive summary judgment to enforce the U.S. Judgment. Mr. Ingrouille appealed.

The Decision

The key issues before the Court of Appeal were:

  • whether the Arbitration Agreement was valid; and
  • whether the dispute in the U.S. proceedings was within the scope of the Arbitration Agreement.

Allowing the appeal, the Court of Appeal held that the Arbitration Agreement was valid and effective and covered the dispute in U.S. proceedings. Accordingly, the U.S. Judgment was obtained in breach of the Arbitration Agreement and was therefore unenforceable in the English courts under the CJJA.

Was the Arbitration Agreement Valid?

In light of the seeming inconsistency between the Jurisdiction Clause and the Arbitration Agreement, the Court referred to the recent Supreme Court decision in Enka v Insurance Company Chubb[1] and stated that, when considering the effectiveness of an express contractual term, “the courts will strive to avoid the conclusion that a provision cannot, as a matter of construction, take effect.”

On that basis, the two clauses were not inconsistent—the relevant key wording in the Jurisdiction Clause (“suit,” “action,” and “proceedings”) described court proceedings specifically, as a matter of ordinary legal language. The Arbitration Agreement, by contrast, used much wider language (“all claims, disputes, controversies, differences or misunderstandings”).

The Court of Appeal therefore held that the purpose of the Arbitration Agreement was to subject all disputes and claims arising out of the agreement to arbitration to the extent they did not fall under clause 7 or 8, while the Jurisdiction Clause concerned specifically the appropriate venue for any court proceedings, to the extent the agreement permitted them (i.e. under clauses 7 and 8 of the agreement only).

Did the Arbitration Agreement Cover the Dispute in the US Proceedings?

The Jurisdiction Clause only permitted AdActive to bring claims in the Californian courts under clauses 7 and 8 of the agreement. The U.S. Judgment in fact concerned a wide range of issues which included, but were not limited to, clause 7, and the claim ought therefore to have been brought by way of arbitration.

Under section 32 of the CJJA, the Court is precluded from recognizing or enforcing a foreign judgment where it has been obtained in proceedings brought in breach of an arbitration (or jurisdiction) agreement.[2] Given the Court’s conclusion that the U.S. proceedings had been brought in breach of the Arbitration Agreement, it followed that the U.S. Judgment could not be enforced by the English Courts.

Comment

The case is a helpful illustration of the English court’s approach to the interpretation of seemingly inconsistent contractual provisions, particularly in the context of dispute resolution clauses. It highlights not only the English Court’s respect for arbitration as contracting parties’ chosen forum for dispute resolution but also its willingness to give meaning to and enforce contractual terms wherever possible.

The case demonstrates why contracting parties must be careful to use the clearest contractual language possible when carving out certain types of disputes from the scope of an arbitration clause. Well-drafted dispute resolution clauses can limit the risk of costly ancillary litigation.

The case also serves as a salutary reminder for contracting parties as to why compliance with contractual dispute resolution clauses is important. Even if a party is successful in securing judgment in its favor in one forum, the judgment may be worth little if it cannot be enforced in other relevant jurisdictions.

Footnotes

[1] [2020] UKSC 38. Shearman & Sterling acted for the Claimant in Enka.
[2] And the defendant does not agree to the proceedings being brought or submit to the foreign court’s jurisdiction.

Authors and Contributors

Jonathan Swil

Partner

Litigation

+44 20 7655 5725

+44 20 7655 5725

London

Garreth Wong

Partner

International Arbitration

+44 20 7655 5879

+44 20 7655 5879

London

Chris Collins

Associate

Litigation

+44 20 7655 5688

+44 20 7655 5688

London

Margaret Clare Ryan

Counsel

International Arbitration

+44 20 7655 5130

+44 20 7655 5130

London