In Aiteo Eastern E&P Company Limited v Shell Western Supply and Trading Limited[1] the High Court of England and Wales considered what a party with an option to refer a dispute to arbitration must do to successfully exercise that option. It concluded that all that was required was an unequivocal statement requiring the other party to arbitrate an identified dispute. In terms of how that statement was to be delivered, the judge clarified that “it is the message which matters, not the medium”. In this case, the unequivocal statement was found to have been made in a notice of appeal challenging a Nigerian court’s jurisdiction to hear the dispute.
Background
The claimant (‘Aiteo’) and the defendant (‘SWST’) were parties to a facility agreement concluded in connection with the former’s acquisition of interests in certain Nigerian oilfields. The agreement contained an asymmetric arbitration clause providing an option for SWST to refer a dispute to arbitration as follows:
“… [SWST] may elect to refer for final resolution any dispute arising out of or in connection with this Agreement …”
A dispute arose between SWST and Aiteo when the former alleged that the latter had breached the loan agreement and demanded accelerated repayment. Aiteo commenced proceedings before the Nigerian courts seeking a declaration of non-liability and promptly obtained an injunction from the Nigerian courts restraining SWST from taking any action that may interfere with the subject matter of the dispute.
SWST filed an application for a stay of the Nigerian proceedings and a Notice of Appeal in response to the granting of the injunction. In the Notice, SWST submitted (among other things) that the agreement provided that any dispute arising from it should be settled by arbitration and that, accordingly, the court did not have the jurisdiction to grant the injunctions.
Over a year later, SWST served a Request for Arbitration. When the tribunal had been constituted, Aiteo challenged its jurisdiction. The tribunal dismissed the challenge by issuing a partial award affirming its jurisdiction. Aiteo then made an application under section 67 of the Arbitration Act 1996 challenging (among other things) the partial award rejecting Aiteo’s jurisdiction challenge. Aiteo submitted that the tribunal did not have jurisdiction because SWST had not successfully exercised its option to arbitrate; to do so, Aiteo argued, SWST was required either to actually commence an arbitration or to make an unequivocal and irrevocable commitment that it would arbitrate the dispute without delay. Aiteo claimed that SWST had not done either until it served its Request for Arbitration and, as SWST had only done that over a year after Aiteo had commenced proceedings in the Nigerian court, its right to exercise the option had lapsed.
The High Court’s Judgment
The nature of the arbitration agreement
The judge noted that an agreement that provides that one or both parties “may” submit or refer a dispute to arbitration is not itself a fully-formed arbitration agreement, and does not of itself oblige either party to refer a dispute to arbitration. In these cases, an arbitration agreement only comes into existence once the option is exercised in the contractually required manner.
How to exercise an option to refer a dispute to arbitrate
In considering this question, the judge relied heavily on the Privy Council’s decision in Anzen Ltd v Hermes One Ltd.[2] In that case, the Board held that while there may be circumstances in which an option to refer a dispute to arbitration requires a party to actually start an arbitration, it will usually make more commercial sense to interpret such a term as simply requiring a party to make an unequivocal request that the dispute be referred to arbitration. In reaching this conclusion, the Board noted that if the exercise of the option required the requesting party to commence an arbitration, it might only be able to seek a declaration of non-liability, and might be required to incur substantial fees in order to do so.
The judge noted that that the Board in Anzen “was not offering a view limited to the particular case before it” but was reaching a conclusion “as a matter of general principle”. Accordingly, while there were differences in the factual context between this case and Anzen and the wording of the arbitration agreement differed, he nevertheless considered that Anzen offered relevant and valuable guidance.
Further, he was of the view that the practical considerations emphasised in Anzen – the inherent unlikelihood and uncommerciality of requiring a party to incur the costs of commencing arbitration and pursuing a claim for negative declaratory relief when it is the other party who has initiated the dispute resolution process – also had force in this case.
Finally, while he accepted that a dispute resolution clause could provide that an option to refer to arbitration a dispute which one party has brought to court can only be exercised by the commencement of an arbitration, he was of the view that it would require clear words to achieve that outcome.
With regards to Aiteo’s alternative submission that SWST was required to make an unequivocal and irrevocable commitment that it would arbitrate the dispute without delay, the judge was unconvinced for several reasons. The precise nature of the commitment was unclear: if by making such a commitment SWST was then bound to commence arbitration proceedings, the same practical issues arose as identified above; alternatively, if there was no such obligation, the commitment was meaningless. Finally, there was simply no textual support for such a formulation.
Accordingly, the judge held that on its proper construction, the arbitration clause simply required SWST to make an unequivocal statement requiring Aiteo to arbitrate the dispute.
Did the Notice of Appeal contain an unequivocal statement requiring Aiteo to refer the dispute to arbitration?
The judge, having quoted from SWST’s Notice of Appeal at length, noted the following in particular:
- SWST unequivocally contended that Aiteo’s claim arose under agreements in which the parties have agreed that any disputes relating to those agreements should be settled by arbitration; and
- SWST unequivocally asserted that the Nigerian court was required to give effect to the parties’ agreement to arbitrate by declining jurisdiction.
He concluded that the Notice of Appeal unequivocally required Aiteo to refer the disputes raised in the Nigerian proceedings to arbitration.
Had SWST’s option lapsed?
Finally, the judge was not persuaded that there was an implied time limit to SWST’s option for the following reasons:
- There was nothing explicit in the clause regarding the time period in which the option must be exercised;
- It was far from clear when such a time period would start running;
- The existence of a no waiver clause did not sit well with the suggestion that mere delay in exercising the option would extinguish it; and
- The doctrine of waiver and estoppel would provide sufficient protection to Aiteo against any unfairness that undue delay might cause.
Takeaway
This decision indicates how broadly the courts are prepared to interpret arbitration agreements. As ever, more precisely drafted provisions could have avoided this dispute. This is particularly true of provisions allowing for one party to exercise an option unilaterally: parties should always be clear exactly when and how that option is to be exercised.
[1] [2022] EWHC 2912
[2] [2016] 1 WLR 4098
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