Mr Justice Flaux:
- There are before the Court two applications by the Defendant, to which I will refer as "B":
(1) An application under section 70(7) of the Arbitration Act 1996 for security for the sums awarded to B by the Board of Appeal of the Federation of Oils, Seeds and Fats Associations ("FOSFA") in two arbitrations between B as Claimant and A as Respondent, pending the determination of A's applications to the Court under section 67 of the 1996 Act challenging those Awards as to the substantive jurisdiction of the Board of Appeal and under section 69 of the 1996 Act seeking permission to appeal on a question of law;
(2) An application under section 70(6) of the 1996 Act for security for B's costs of opposing those section 67 applications.
- At the end of the hearing on 10 December 2010, I gave a short judgment on the security for costs application, granting security in the amount of £55,000 (against which was to be set off the £14,000 costs I awarded A in respect of its costs of the section 70(7) applications). I indicated that the section 70(7) applications would be dismissed but that I would give judgment setting out my reasons for that decision at a later date. This is that judgment.
- The underlying disputes concern two contracts which B alleges were entered into between A as sellers and B as buyers, for the sale of two parcels of Kazakh rapeseed, each for 2,500 metric tons, for delivery October/November 2007 and November/December 2007 respectively, in each case DAF Petropavlovsk. B's case is that binding contracts were made orally on 18 June 2007, alternatively by the return by B to A by post of signed and stamped contracts as amended by A on 27 June 2007. B contends that those contracts both incorporated FOSFA Form 28, including the FOSFA arbitration clause. A's case is that there were no binding contracts concluded, alternatively that any contract concluded incorporated GAFTA Form 125 not FOSFA Form 28.
- The two parcels were not delivered and on 30 July 2008, B commenced two arbitrations against A under the FOSFA Rules of Arbitration and Appeal, claiming damages for non-delivery of US$865,000 and US$855,000 respectively. In its Defence Submissions, A raised the objection that the tribunal lacked substantive jurisdiction and asked the tribunal to rule on its jurisdiction (as it was entitled to do under section 30 of the Arbitration Act 1996).
- The First Tier arbitrators disagreed on the issue of jurisdiction and the same umpire, Mr Smid, was appointed in both arbitrations. On 19 November 2009, he published Awards in both arbitrations in which he found that no binding contracts had been made on 18 June 2007 and that although thereafter A had signed and sealed contracts and returned them to the broker for onward transmission, B did not sign, seal and return those contracts, so no binding contracts had ever been concluded. Accordingly, he concluded that the tribunal had no jurisdiction.
- By Notice of Appeal dated 11 December 2009, B appealed against that First Tier Award to the Board of Appeal of FOSFA. It served Outline Reasons for Appeal dated 23 December 2009. It was in its submissions to the Board of Appeal that B raised for the first time its contention that it had posted stamped and sealed contracts back to A. In its response submissions dated 9 February 2010, A not only invited the Board of Appeal to uphold the decision of the umpire in full, but raised a defence of time bar.
- A two day hearing took place before the five man Board of Appeal in May 2010 at which the Board heard oral evidence from Mr Aigro of Copenhagen Merchants, the broker between the parties and from Mr Grishanov and Mr Kadralin of A. On 1 July 2010, the Board of Appeal issued awards in both arbitrations, allowing the appeal, concluding that the arbitrators did have jurisdiction, that the claim was not time barred and that, accordingly, B's claims for damages succeeded.
- In relation to jurisdiction, the issue relevant for present purposes, the findings of the Board of Appeal can be summarised as follows:
(1) Mr Aigro had acted as broker between the parties. He had taken a previous contract form for a contract between the parties (contract 15, the conclusion of which is also disputed by A) and amended its terms in English to reflect the differences as regards essential negotiated and agreed terms of the two contracts (contracts 16 and 17) currently in dispute. On 18 June 2007, he had then sent those contracts to A for it to amend the Russian versions. The Board concluded that binding contracts between the parties were made on 18 June 2007.
(2) Although the contracts sent by Mr Aigro did not contain a FOSFA Arbitration Clause but stated "Arbitration by GAFTA 125", this was an "obvious error" because the pro-forma being used was the one for contract 15, which was subject to GAFTA arbitration and A had picked up on the error and amended the contracts it sent back to provide for incorporation of FOSFA Form 28, which included the FOSFA Arbitration Clause.
(3) A sent back to the broker amended versions of the contracts which it had signed and stamped, dated 27 June 2007. The Board found that the changes being made and requested by A were no more than minor corrections to the drafts sent by the broker on 18 June 2007.
(4) The Board noted that A claimed that it never received properly signed and stamped copies of the contract as required by clause 11 of the contracts which provided so far as material:
"Each Contract between the Seller and Buyer shall become binding if it is properly stamped and signed by persons authorised to sign on behalf of the parties. The facsimile copies of the Contract shall be valid and therefore binding until the originals are exchanged. Each binding Contract shall be valid until it is executed in full...."
(5) Although the Board did not make a specific finding that, contrary to A's evidence, A had received signed and stamped contracts dated 27 June 2007 through the post from B, the Board found that if A had been relying upon the return of signed and sealed copies of the amended contracts dated 27 June 2007 by B, it is likely that A would have raised that issue at a meeting between the parties in Almaty on 12 July 2007, which it did not.
(6) The Board found that both parties were already in receipt of "facsimile copies of the Contract[s]" from the broker on 18 June 2007 and the "contract offer" documents from A dated 27 June 2007 were simply corrected versions of the contracts which contained no fundamental changes to any of the essential negotiated terms as had been agreed by the parties.
(7) After the conclusion of the contracts, B forwarded their railway instructions to A on 22 October 2007. Subsequently B requested copies of the so-called GU12 certificates for carriage by rail applied for by A. On 13 December 2007, B received a GU12 certificate for 2,500 metric tons of "seeds of oil yielding crops" from Petropavlovsk during the month of January 2008. The Board found that this matched B's railway instructions and was further clear evidence that the contracts existed and that A was planning to extend the delivery periods to the end of January 2008.
(8) On 8 January 2008, the broker sent a confirmation to both parties confirming their agreement to extend both contracts to the end of January 2008, which A did not dispute at the time.
- On 29 July 2010, A issued Arbitration Claim Forms seeking orders under section 67 of the Arbitration Act 1996 that the Appeal Awards were of no effect, because the tribunals did not have substantive jurisdiction and, in the alternative, seeking permission to appeal the Appeal Awards under section 69 of the Act. The application for permission to appeal concerns the Board of Appeal's exercise of its discretion to extend time for commencement of arbitration under the FOSFA Rules and consequent conclusion that the claims were not time-barred. A contends that the Board took account of wholly extraneous matters in exercising its discretion and its decision was obviously wrong.
- The present applications under section 70(7) of the Act were issued on 5 October 2010. The provisions of section 67 and 70, relevant to these applications, are as follows:
"67 Challenging the award: substantive jurisdiction.
(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the Court—
(a) challenging any award of the arbitral tribunal as to its substantive jurisdiction; or
(b) for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part, because the tribunal did not have substantive jurisdiction.
A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).
70 Challenge or appeal: supplementary provisions.
(1)The following provisions apply to an application or appeal under section 67, 68 or 69.
(2)An application or appeal may not be brought if the applicant or appellant has not first exhausted—
(a) any available arbitral process of appeal or review, and
(b) any available recourse under section 57 (correction of award or additional award).
(3)Any application or appeal must be brought within 28 days of the date of the award or, if there has been any arbitral process of appeal or review, of the date when the applicant or appellant was notified of the result of that process.
....
(7)The Court may order that any money payable under the award shall be brought into Court or otherwise secured pending the determination of the application or appeal, and may direct that the application or appeal be dismissed if the order is not complied with.
- This case raises an issue of principle as to the circumstances in which the Court can or should order the amount awarded to the successful claimant in arbitration to be secured by the respondent pending the respondent's challenge to the jurisdiction under section 67 of the Act or the respondent's application for permission to appeal a question of law under section 69 of the Act. So far as this issue is concerned, there is something of a conflict between decisions of judges of the Commercial Court who have had to consider the issue.
- Peterson Farms v C & M Farming Limited [2003] EWHC 2298 (Comm); [2004] 1 Lloyd's Rep 614, was a case where Tomlinson J (as he then was) delivered an ex tempore judgment on an application under section 70(7) for security to be provided for the amount awarded where the respondent was seeking to challenge the jurisdiction of the arbitration tribunal under section 67. The learned judge drew attention to two matters which seem to me to be of some importance in the context of such applications.
- First, he noted that section 67 is only one of the routes by which, under the Arbitration Act 1996, a party may challenge the jurisdiction of the arbitrators. The others he identified are section 32, which provides that in certain circumstances, the Court may determine the jurisdiction of an arbitration tribunal as a preliminary point, and section 72. Under that section, someone who is alleged to be a party to an arbitration agreement but who has taken no part in the arbitral proceedings, may subsequently seek a declaration that the tribunal has no jurisdiction. Thus, that section deals with the case of someone who does not participate in the arbitration at all, whereas section 67 deals with the case of someone who participates in the arbitration but only under protest, challenging the jurisdiction of the tribunal.
- As Tomlinson J pointed out, in the case of neither section 32 nor section 72 is the Court given any power to require the posting of security. As he said in paragraph 23:
"By definition, that [section 72] is a resort to the Court which will take place after an award has been issued in circumstances where the party challenging the jurisdiction has taken no part in the proceedings, and again if resort is had to that subsection no express power is given by the Act to require the posting of security, since the power under section 70(7) is applicable only to applications under sections 67, 68 or 69 and, of course, subsection (2) of section 72 goes on to provide in terms that a party who may apply for declaratory or injunctive relief also has the same right as a party to the arbitral proceedings to challenge an award either under section 67 or under section 68."
- He went on to make the point that it is often a matter of happenstance whether an objection is taken to the jurisdiction of the tribunal under section 67 as opposed to section 32 or 72. As he then said in that context at paragraph 25:
"What that review of the various different approaches which can be taken to an objection to jurisdiction demonstrates is that it may be a matter of accident, or at any rate a matter of happenstance, whether, in any given case, an objection to jurisdiction is brought pursuant to section 67 , or pursuant to section 32 , or pursuant to section 72(1). It is only in relation to section 67 that the Court has the express power conferred by section 70(7) , and it would, on the face of it, be somewhat surprising if certainly as a matter of course the Court were to exercise its powers to require security to be posted under section 70(7) in relation to a section 67 application when it was purely as a matter of good housekeeping or sensible approach to the arbitration that the challenge had been mounted in that fashion as opposed to at an earlier stage or in a different manner."
- The second significant matter to which the learned judge drew attention in that case is that there is a difference between an application under section 67 and applications under sections 68 or 69 in that, in the case of an award which is challenged under section 68 on the basis of serious irregularity or which is said to be wrong in law under section 69, the award has a presumptive validity unless and until set aside. By contrast, an award which is said to have been made without jurisdiction and challenged under section 67 does not have a presumptive validity; as the judge said: "it is only possible to say of it either that it was made with jurisdiction or that it was not" see paragraph 26 of the judgment.
- That point echoes the decision of a number of Commercial Court judges starting with Rix J (as he then was) in Azov Shipping v Baltic Shipping [1999] 1 Lloyd's Rep 68 that a challenge to the jurisdiction of the arbitrators is a complete rehearing. As Rix J put it at 70 the Court is not "required to review a challenge to the arbitrator's jurisdiction through the eyes of the arbitrator or on his findings of fact" or as Longmore J (as he then was) put it in Azov Shipping v Baltic Shipping (No 2) [1999] 2 Lloyd's Rep 39 at 41: the Court "will approach the question of jurisdiction wholly afresh without any preconception that [the arbitrator] has made the right decision". The earlier decisions were cited and followed by Langley J in Peterson Farms v C & M Farming Limited (No 2) [2004] EWHC 121 (Comm); [2004] 1 Lloyd's Rep 614, at paragraphs 19 and 20.
- Having referred to those two matters, Tomlinson J in Peterson Farms went on to say at paragraph 29:
"I am reluctant, whilst giving an unreserved judgment, to attempt to lay down any general principles or to give guidance as to the circumstances in which the Court will be likely to exercise its power under section 70(7) where an application is made under section 67. However, it seems to me that Mr Foxton is right to point to the apparent anomaly that if the Court were to exercise the power it would in many cases be a matter of complete accident or happenstance whether the power was available arising out of an earlier decision, either well informed or not well informed, by the relevant party, either to make the application challenging jurisdiction at an earlier stage or in a different manner at a later stage, which again might in turn simply arise or be dictated by the question whether the entirety of jurisdiction was challenged or only part of it, and whether, in all the circumstances, it was prudent or otherwise sensible for the challenging party to take part in the arbitral proceedings."
- Thus, Tomlinson J was obviously of the view that the Court should be cautious in exercising the discretion to make an order under section 70(7) where there is a challenge to the jurisdiction of the tribunal under section 67, which might in other circumstances have been made under section 32 or 72. Later in his judgment he indicated that he considered that, in most cases, it would be a "threshold requirement" for a consideration by the Court of whether to order security under section 70(7) in a section 67 case that the party resisting the jurisdictional challenge demonstrates that "the challenge is flimsy or otherwise lacks substance": see paragraph 35.
- That approach to section 70(7) was also adopted by Cooke J in Danko International v Faucon Investment Co ("The Magic Swan") [2006] 4 August, unreported. However a different approach was adopted by Morison J in a reserved judgment in Tajik Aluminium Plant v Hydro Aluminium AS [2006] EWHC 1135 (Comm). In that case, at paragraphs 46 to 49 of his judgment, Morison J set out what he described as "the origin of the subsection" tracing it back to the Arbitration Act 1934, through section 23(3) of the Arbitration Act 1950 to section 1(4) of the Arbitration Act 1979.
- Having then cited the decision of Tomlinson J in Peterson Farms and the submissions of counsel for the party resisting security being ordered as to the existence of the threshold requirement identified by Tomlinson J, Morison J said that he took a different view of the sub-section in these terms at paragraph 54 of his judgment:
"54. I take a slightly different view of the power to order security under section 70(7) from that taken by Tomlinson J. It seems to me that this question is indirectly linked to the other main issue. In my judgment it is not mere happenstance whether a jurisdiction case arises under section 30-32 or section 72, in the sense used in the judgment. As I have already tried to explain, there is a difference between a Tribunal making an award on the merits and jurisdiction which gives rise to an unfettered right to make a section 67 application, and other cases where there has been no trial by consent of the parties of all the issues in the case. The parties will choose to follow the most convenient and acceptable course. In this case, it would have been open to the parties to agree that the Court should deal with the jurisdiction issues. But in this case, because of the overlap between the facts and the jurisdiction arguments, that would have meant that their chosen method of dispute resolution would have been taken away. For good reason, and not chance, the parties chose, instead, that the Tribunal should decide these matters. It is not surprising, therefore, that Parliament should have confined section 70(7) to those jurisdiction cases where the parties had elected to have the Tribunal produce an Award after determining the facts and their impact on jurisdiction. The position is different when either there has been a one sided trial by a Tribunal, or where 'merely' preliminary jurisdiction issues are determined. The fact that section 70(7) does not apply in all circumstances says nothing about whether it should apply in the present case, indeed, it provides some support for the view which I take of it.
55. The statute contains an unfettered discretion. There is no threshold requirement."
- It seems to me that there are three principal problems with Morison J's approach to the subsection, at least in so far as it applies to section 67. First, so far as the so-called origins of the subsection are concerned, considerable caution has to be exercised. This is because none of those earlier legislative provisions was seeking to impose conditions on a challenge to the jurisdiction of the arbitrators, after the arbitrators had determined that they had jurisdiction (the situation addressed by section 67), for the simple reason that until the Arbitration Act 1996 (and specifically section 30 giving legislative effect to the concept of "competence-competence", essentially derived from civil law systems) there was no legislative provision empowering arbitrators to determine their own jurisdiction.
- Second, it is quite clear that Morison J's view that there was no threshold requirement that the party applying under section 70(7) should show that the challenge under section 67 was "flimsy" or lacking in substance was largely influenced by his dislike for the conclusion reached by other Commercial Court judges in earlier cases that a challenge under section 67 is a complete rehearing and not a review. This is clear from paragraph 38 of his judgment where, after citing the decision of Langley J in Peterson Farms v C & M Farming Limited (No 2) he said this:
"38. I remain unconvinced by the argument that there is no reason in principle why the Court should deal with a section 67 application differently from applications under the other two sections. The nature of the challenge and the circumstances in which it is made should, in my view, determine the nature of the review which the Court carries out under section 67. Here, the parties exercised their right to have the arbitrators decide the jurisdiction question. In this case that question was entirely dependant on the Tribunal's findings of fact and was inextricably entwined with an essential plank of the defence to the claim. There has been a full trial of that question. Parties who opt for arbitration in this jurisdiction would not, I think, envisage that they might be faced with two trials of the same issue, and if the law is as stated by Langley J., then the general principle in section 1(a) of the Act has been breached. What is contemplated in this case is a full trial extended over 12 days in February 2007 [the earliest date which the Court could accommodate for such a lengthy hearing] with extensive factual and expert evidence, trying to shore up, I suspect, such weaknesses as the arbitrators have identified, hoping that a Judge would assess issues of credibility differently from the arbitrators and reach different conclusions on what are likely to be essentially the same facts. Were the Judge to arrive at a contrary conclusion, then the arbitral proceedings were a waste of time and money."
- Morison J expressed similar views about his regret that applications under section 67 were a complete rehearing, in Fiona Trust v Privalov [2006] EWHC 2583 (Comm) where, at paragraph 26 he said:
"Regrettably, as I have already affirmed in another case [clearly a reference to Tajik Aluminium], the view has been taken by a number of Judges in this Division that under section 67 there is a full re-hearing with evidence, rather than some more limited 'review' suitable for an appellate process. This means that if after the arbitrator has carried out a detailed, albeit one-sided, review of the material put before him and made detailed findings of fact, the Owners could ask for the facts to be re-heard by the Court. This would be a considerable waste of resources."
- The problem with any approach to section 70(7) based upon this reluctance to accept that a challenge under section 67 is a complete rehearing, not a review is not only that it is, as Morison J himself recognised and accepted, albeit with reluctance, contrary to the views of several other judges of the Commercial Court, but that the Supreme Court has recently determined conclusively that a challenge such as is made under section 67 is indeed a complete rehearing: see Dallah Real Estate v The Government of Pakistan [2010] UKSC 46.
- Although that case was concerned specifically with a challenge under section 103(2)(b) of the 1996 Act at the time of attempted enforcement, rather than a section 67 challenge, the same principles apply, as is clear from the judgments. It is only necessary to quote two paragraphs from the judgments in that case to make good that point. At paragraph 26 Lord Mance said:
"An arbitral tribunal's decision as to the existence of its own jurisdiction cannot therefore bind a party who has not submitted the question of arbitrability to the tribunal. This leaves for consideration the nature of the exercise which a Court should undertake where there has been no such submission and the Court is asked to enforce an award. Domestically, there is no doubt that, whether or not a party's challenge to the jurisdiction has been raised, argued and decided before the arbitrator, a party who has not submitted to the arbitrator's jurisdiction is entitled to a full judicial determination on evidence of an issue of jurisdiction before the English Court, on an application made in time for that purpose under s.67 of the Arbitration Act 1996, just as he would be entitled under s.72 if he had taken no part before the arbitrator: see e.g. Azov Shipping Co. v Baltic Shipping Co. [1999] 1 Lloyd's Rep 68."
- To similar effect is the passage from the judgment of Lord Collins at paragraph 96:
"The consistent practice of the Courts in England has been that they will examine or re-examine for themselves the jurisdiction of arbitrators. This can arise in a variety of contexts, including a challenge to the tribunal's jurisdiction under section 67 of the 1996 Act, or in an application to stay judicial proceedings on the ground that the parties have agreed to arbitrate. Thus in Azov Shipping Co v Baltic Shipping Co [1999] 1 Lloyd's Rep 68 Rix J decided that where there was a substantial issue of fact as to whether a party had entered into an arbitration agreement, then even if there had already been a full hearing before the arbitrator the Court, on a challenge under section 67, should not be in a worse position than the arbitrator for the purpose of determining the challenge. This decision has been consistently applied at first instance (see, eg, Peterson Farms Inc v C&M Farming Ltd [2004] EWHC 121 (Comm), [2004] 1 Lloyd's Rep 603) and is plainly right."
- Lord Hope, Lord Saville and Lord Clarke agreed with those judgments (see also Lord Saville at paragraph 160). Given that the approach to section 67 which Morison J evidently preferred is now in effect contrary to a decision of the Supreme Court, it seems to me that the Court should be extremely cautious before following his related approach to section 70(7).
- The third difficulty with Tajik Aluminium is closely related to the second. Implicit in paragraph 54 of the judgment, which I have quoted above, is a rejection of the different approach which Tomlinson J in Peterson Farms had recognised should be taken, in deciding whether to order security under section 70(7), when the Court is dealing with an application under section 67 (which is a full rehearing with no presumption that the arbitrators' conclusion on jurisdiction is correct either on the facts or the law), as opposed to applications under sections 68 and 69, where the scope for successful challenge is much more limited.
- This implicit rejection is apparent from the explanation Morison J puts forward in paragraph 54, for drawing a distinction between a section 67 challenge and other challenges to the jurisdiction, such as under section 32 or 72:
"As I have already tried to explain, there is a difference between a Tribunal making an award on the merits and jurisdiction which gives rise to an unfettered right to make a section 67 application, and other cases where there has been no trial by consent of the parties of all the issues in the case".
- That analysis allies section 67 with sections 68 and 69 as being an example of a challenge after a trial by the arbitrators of all the issues "by consent of the parties". However, in my judgment, the flaw in that analysis is that, in a section 67 case, there has not been in any real sense a trial by consent of the parties. Rather, the party making the section 67 application has only participated in the arbitration under protest, reserving his position as to jurisdiction. Had he not done so, under section 73 he would have lost the right to make a challenge.
- Because of the problems with Morison J's approach to section 70(7) which I have identified, I consider that the view of Tomlinson J is much to be preferred. This is the view that, in most cases, there will be a threshold requirement that the party making the section 70(7) application demonstrates that the challenge to the jurisdiction is flimsy or otherwise lacks substance.
- In the present case, Mr Fionn Pilbrow for B does not shrink from arguing that the challenge is indeed flimsy. He relies upon the matters set out at paragraphs 26 to 28 of the first witness statement of his instructing solicitor, Mr Stuart Shepherd of Ince & Co.
- The initial point taken in that statement is that pursuant to section 73 of the Act, A had lost its right to object to the jurisdiction of the arbitrators because it had failed to raise any objection to the jurisdiction of the Board of Appeal until its Statement of Case served after it had raised the substantive defence of time bar. This did not seem to be the most meritorious of points for two reasons. First, as Mr Michael Collett for A submitted, although the arbitral process before FOSFA is in two stages, it is all part of one process and the jurisdiction challenge having been raised before the First Tier arbitrators, it should not be regarded as abandoned at the Board of Appeal stage unless it were clear that it was being abandoned.
- The second reason is that in its original submissions in response to B's appeal, A contended that the decision of the umpire should be upheld for the reasons he had given. Since the absence of jurisdiction was a central plank of his reasoning, A was clearly continuing its challenge to the jurisdiction of all the FOSFA arbitrators, both First Tier and on the Board of Appeal and was not abandoning the jurisdictional challenge at the Board of Appeal stage.
- So far as the other matters relied upon by B as demonstrating that the challenge is flimsy are concerned, it is undesirable, as Tomlinson J said at paragraph 30 of his judgment in Peterson Farms, for the Court at this stage to say too much about the merits in circumstances where there will be a full rehearing at the hearing of the section 67 application and it will be for the judge who hears that application to determine the merits of it. At this stage, all it is appropriate or advisable for the Court to do is to look at the various points raised to see if the threshold requirement can be met by B.
- The first point contended by B is that the process of agreement of the contract through the broker, then sending the contract forms for A to amend the Russian version was the established practice between the parties and that this was a process that did not preclude a binding contract having been concluded. However, as Mr Collett pointed out, what matters is not whether Mr Aigro was an intermediary but whether what he passed to the parties was capable of amounting to a binding contract.
- Mr Collett relies upon the fact that the evidence of Mr Grishanov was that the quality of the goods had not been discussed, which was not contradicted by the evidence of Mr Aigro. It was in those circumstances that A made the various changes to the draft contracts to propose terms as to quality. It seems to me that, on the basis of that evidence, it is reasonably arguable that if the quality of the rapeseed to be supplied had not been agreed, there were no concluded contracts as at 18 June 2007.
- As A points out, even if there were concluded contracts on 18 June 2007, there is the obvious difficulty that they were subject to GAFTA not FOSFA arbitration. B relies upon the fact that the Board of Appeal regarded that as an obvious error and made the point that A amended the provision in the changes it made to the draft. However, I agree with Mr Collett that this does not mean that FOSFA arbitration had been agreed on 18 June 2007. Mr Aigro's evidence was that the English version sent out followed what had been discussed, which as Mr Collett said would logically include the GAFTA arbitration provision, so that it would seem that Mr Aigro's evidence is somewhat equivocal on this point. It seems to me arguable that the Board of Appeal has failed to analyse exactly how the FOSFA arbitration clause can have been a term of what was agreed on 18 June 2007, assuming there were binding contracts on that date.
- B relies upon its evidence of having posted back the amended contract forms (which did contain the FOSFA arbitration clause) in support of its case that there were binding contracts and that they were subject to FOSFA arbitration. In answer to that, A essentially makes two points. First that the case that the forms were posted to A should be viewed with scepticism since it was a case that emerged somewhat late in the day. It would obviously be inappropriate for me to express any view about that point, but it seems to me to be a matter that A should be entitled to ventilate before the Court, particularly given that, as I pointed out earlier, the Board of Appeal did not reach a conclusion on the point.
- Second, A contends that whatever the position about posting, neither B's case nor the reasoning of the Board of Appeal grapple with the difficulties raised by clause 11 of the contracts which I have quoted above. The Board appears to have sought to address this by concluding that, as at 18 June 2007, the parties were in receipt of facsimile copies of the contracts. However, it seems to me arguable that this misinterprets what is meant by the second sentence of clause 11, which is no more than if, each party having signed and stamped a copy of the contract, they then fax that to each other, there is a binding contract even though the original contracts have yet to be exchanged. If that construction is right, then whatever else happened on 18 June 2007, it was not something which complied with clause 11. It seems to me to be reasonably arguable that B did not comply with the formal requirements of clause 11.
- B inevitably places great emphasis on the post-contractual events and communications to argue that both parties conducted themselves on the basis that there were binding contracts. However, that subsequent conduct cannot of itself create a contract where there was not one in the first place and Mr Collett points out that A has an arguable explanation for communications, such as that it thought it was dealing with future possible shipments, equally consistent with there not having been binding contracts.
- Overall, although I would accept that A's case on no binding contracts having been concluded may face some evidential difficulties, it seems to me impossible to categorise it as flimsy or lacking in substance. It follows that in my judgment, the threshold requirement has not been demonstrated by B and on that ground alone the application should fail. However, since the question of what other criteria might apply in determining whether to make an order under section 70(7) was fully argued, I propose to deal with those other criteria.
- Mr Collett submitted that in cases where the threshold requirement had been satisfied, that was still only necessary, not sufficient, in determining whether or not it was appropriate to order security under section 70(7) in the case of a jurisdictional challenge under section 67. He submitted that a key factor in determining whether to order security under section 70(7) generally should be the effect of any challenge to the award on the successful party's ability to enforce the award. This would bring section 70(7) into line with the similar provision in section 103(5) of the Arbitration Act, concerning enforcement.
- Section 103(2) contains various matters which a person against whom an award is sought to be enforced can prove to resist enforcement, including at (d) that the award contains matters falling outside the scope of the submission to arbitration, in other words this is another example of a provision which entitles a party to challenge the jurisdiction of the arbitrators after the award has been published. Section 103(5) then contains a provision similar to section 70(7) that on the application of the party seeking to enforce, the Court may order the other party to provide security.
- In Soleh Boneh v Government of the Republic of Uganda [1993] 2 Lloyd's Rep 208 at 212 Staughton LJ identified two important factors in considering whether or not to order security under section 103(5). The first was an assessment of the merits which involved somewhat different considerations as I see it to those which arise under a section 67 challenge. The second is to do with difficulty of enforcement, which Staughton LJ expressed in this way:
"The second point is that the Court must consider the ease or difficulty of enforcement of the award, and whether it will be rendered more difficult, for example, by movement of assets or improvident trading, if enforcement is delayed. If that is likely to occur, the case for security is stronger; if, on the other hand, there are and always will be insufficient assets within the jurisdiction, the case for security must necessarily be weakened."
- This point was considered further in the judgment of Mance LJ in Dardana Ltd v Yukos Oil [2002] 2 Lloyd's Rep 326 at 337-8 (paragraph 37) from which it appears that any relevant prejudice would generally be based on a risk of dissipation of assets and the successful party applying for security would need to show such risk in a similar manner to that required for a freezing injunction.
- That the issue of whether security should be ordered under section 70(7) should be related to issues of ease or difficulty of enforcement and diminution of assets is apparent from the Report on the Arbitration Bill of the Departmental Advisory Committee on Arbitration Law ("DAC"), headed by Lord Saville, which commented at paragraph 380 on the clause in the Bill when security was limited to what are now sections 67 and 68 and recommended extending it to what is now section 69, on the basis that the power to order security was:
"A tool of great value, since it helps to avoid the risk that, while the appeal is pending, the ability of the losing party to honour the award may, by design or otherwise, be diminished."
- Furthermore, in Peterson Farms Tomlinson J regarded it as a material factor militating against the granting of security under section 70(7) that the successful party had initiated enforcement proceedings against Peterson in the United States which would enable it to proceed to enforce the entirety of the award without regard to the pending section 67 application. In my judgment, similar considerations in the present case militate against the grant of security, for reasons I will come to shortly.
- Thus, whilst it would not be advisable or appropriate to lay down hard and fast rules as to the circumstances in which it would be appropriate to order security under section 70(7), it seems to me that as a general principle the Court should not order security unless the applicant can demonstrate that the challenge to the award (whether under section 67 or, indeed, either of the other sections) will prejudice its ability to enforce the award. Often this will entail the applicant demonstrating some risk of dissipation of assets, although there may be other ways in which enforcement could be prejudiced.
- Applying that principle to the facts of the present case, I am quite satisfied that on the material before the Court, there is no evidence that A's application to challenge the award will prejudice enforcement of the award by B. B has not only commenced enforcement proceedings in Kazakhstan but, at a hearing on 6 December 2010, the Court in Kazakhstan granted B's applications and the enforcement Orders have immediate effect. The sections 67 and 69 applications have no impact whatsoever on enforcement in Kazakhstan. Furthermore, whilst A may seek to appeal the Orders made by the Court in Kazakhstan within 10 days of the Orders being made, any such appeal will not preclude the enforcement Orders being executed as they remain fully effective pending any appeal.
- As Mr Collett pointed out, in neither his written nor his oral submissions did Mr Pilbrow really address the enforcement position, instead seeking to neutralise the position by offering the Court an undertaking that if security were ordered in England, B would undertake not to proceed with enforcement in Kazakhstan. However, that misses the point that, absent any evidence that the sections 67 and 69 applications would prejudice the enforcement of the awards in the meantime, it would not be appropriate to order security.
- Mr Pilbrow rightly eschews any suggestion that A might improperly dissipate its assets. The highest he can put the matter is that neither B nor the Court knows anything about A's assets. He submits that whilst A could have made disclosure of its assets and its financial standing in these proceedings, it has not done so. It is said that all that is known about the financial position of A is that it has failed to pay fees and expenses of some £12,000 incurred by GAFTA and its Board of Appeal in respect of the award of the Board of Appeal on contract 15. This sum has been outstanding for over two months.
- In response to these points, Mr Collett submits that A as a Kazakh private company with no presence in the United Kingdom is under no obligation to disclose its assets and that a party in the position of B should not be entitled to get disclosure of A's assets abroad though the device of a section 70(7) application. I agree that the Court should exercise caution in this regard and certainly should not draw any adverse inference from the fact that a party which has no obligation to disclose its assets (and which cannot be ordered to do so in the context of the present proceedings) chooses not to do so.
- As for the non-payment of the GAFTA fees, the latest evidence from Mr Mingay of Clyde & Co, A's solicitors, is that A has been attempting to arrange payment through its finance department and expects its bank to remit funds shortly. The delay has apparently been caused by delayed receipt of hard copy and translated documents which the bank required to effect payment. There is nothing in any of that to suggest that A is in financial difficulties, let alone that its assets might be diminished if the applications proceeded. Furthermore, as Mr Collett rightly pointed out, the GAFTA fees point is something of a two-edged sword for B since both parties are under the obligation to pay GAFTA and B has not paid.
- Accordingly, in my judgment, there is no evidence whatsoever that the challenge to the jurisdiction under section 67 will prejudice enforcement by B and, in those circumstances, it is not appropriate to order security under section 70(7).
- To the extent that the application for security is also pursued in relation to the application under section 69, I would dismiss it essentially for the same reason, that there is no evidence that that application will prejudice enforcement. In so far as B is seeking to contend that A should provide security because the section 69 application lacks merit, it is true that in Mondial Trading Company v Gill & Duffus [1980] 2 Lloyd's Rep 376, a case concerned with the circumstances in which the Court might impose conditions under section 1(4) of the Arbitration Act 1979 upon the grant of leave to appeal under that Act, Robert Goff J considered that one of the purposes of section 1(4) was: "to ensure that cases are not pursued on dubious questions of law without the imposition of conditions restraining, to some extent, such appeals coming before the Court."
- However, as Tomlinson J pointed out in Peterson Farms at paragraph 27, the Gill & Duffus case was decided in the early days of the 1979 Act, before the laying down by the House of Lords of the guidelines in Pioneer Shipping v BTP Tioxide Limited "The Nema" [1982] AC 724 as to the granting of leave to appeal. Furthermore, in the context of what is now section 69 of the 1996 Act, I agree with Tomlinson J's analysis in that paragraph and earlier in his judgment at paragraph 18, that in most cases, the Court would be unlikely to consider it appropriate to impose the provision of security as a condition of an appeal, given the stringency of the criteria that have to be satisfied, that the tribunal's decision on the point of law concerned is obviously wrong or at least open to serious doubt.
- It is difficult to see in what circumstances the Court might consider that a case satisfied those stringent criteria and thus in principle permission to appeal should be granted, but nonetheless the Court should require security for the amount of the award (which by definition it has found to be wrong or open to serious doubt) to be provided as a condition of granting permission to appeal.
- At all events, the cases in which it would still be appropriate to require security to be provided are likely to be limited to those cases where the appeal under section 69 will prejudice enforcement. Even then, given that permission to appeal will only be granted if the Court considers that the award is obviously wrong or, in cases of general public importance, at least open to serious doubt, it might be thought that the difficulties which an appeal might pose for enforcement of such an arguably "flawed" award should not, in itself, justify a requirement to provide security.
- It seems to me that it would only be in cases where the appeal might potentially be used as a delaying tactic and, in the meantime, assets otherwise available to satisfy the award might be dissipated that the Court might consider making an order under section 70(7), notwithstanding that it had formed the view that in principle permission to appeal should be granted. However, quite apart from the fact that the issue of whether permission to appeal should be granted will be for another judge on a later occasion (and, as I indicated at the hearing, it seems to me the issue of permission under section 69 should be dealt with at the same time as the challenge to jurisdiction under section 67), there is no evidence before the Court to suggest that the section 69 application is being used as a delaying tactic whilst assets are diverted. On the contrary, the evidence is that enforcement in Kazakhstan can proceed and there is no evidence of any intention to dissipate assets.
- In all the circumstances, the application under section 70(7) for security to be provided will be dismissed.
