In its instructive judgment in RQP v ZYX, the High Court of England and Wales has provided helpful commentary on two aspects of the arbitration process, namely: (i) the limited circumstances in which a tribunal may have jurisdiction over a set-off counterclaim; and (ii) the scope of the courts’ role in enforcing orders made by tribunals.
The dispute between the parties related to the development and modification of a product owned by ZYX (‘the Product’). The Product was originally developed under a consultancy agreement between ZYX and Mr X (the ‘Consultancy Agreement’). Under the terms of the Consultancy Agreement, ZYX was to pay Mr X royalties for his work.
Subsequently, under a license agreement between ZYX and RQP, RQP was entitled to develop enhancements to the Product in return for payment of royalties to ZYX (the ‘License Agreement’). The License Agreement contained an agreement to arbitrate under the LCIA rules.
In January 2020, ZYX commenced arbitral proceedings against RQP for various breaches of the License Agreement. ZYX claimed, among other things, that RQP had failed to pay it royalties totalling approximately US$26 million.
RQP counterclaimed that Mr X had assigned the Consultancy Agreement to it and, in breach of that agreement, ZYX had failed to pay royalties. RQP asserted that the royalties ZYX owed to it under the assigned Consultancy Agreement should be set off against any sums it owed to ZYX under the License Agreement.
The tribunal’s jurisdiction over RQP’s counterclaim
Both parties raised objections as to the tribunal’s jurisdiction. The arbitrator rejected RQP’s arguments that the tribunal did not have jurisdiction over some of ZYX’s claims but expressed a view that it did not have jurisdiction over RQP’s set-off counterclaim for royalties under the Consultancy Agreement.
RQP issued an arbitration claim form, seeking an order from the High Court under s.67 of the Arbitration Act 1996 (the ‘Arbitration Act’) setting aside the Tribunal’s ‘award as to jurisdiction’.
Mr Justice Butcher held that the arbitrator had not in fact made an award that was capable of appeal in respect of the tribunal’s jurisdiction over ZYX’s claims. While the judge was also of the view that the arbitrator had not made an award in respect of the tribunal’s jurisdiction over RQP’s set-off counterclaim, it was common ground between the parties that he had. The judge therefore considered whether the arbitrator was right to reach the conclusion that the tribunal did not have jurisdiction.
The judge clarified that in order for the tribunal to have jurisdiction over the set-off counterclaim, RQP would have to demonstrate the following: (i) the set-off was a ‘transactional’ set off, meaning that it either arose out of the same transaction as the claim, or one that was closely related; and (ii) it would be manifestly unjust to allow the claim to proceed without taking the counterclaim into account.
The judge concluded that the arbitrator was correct to conclude the tribunal did not have jurisdiction over the set-off counterclaim. First, the counterclaim was not sufficiently closely connected with the claim: it arose out of a separate agreement, entered into at different times and between different people; and it could only be pursued on the basis that RQP had allegedly taken an assignment of Mr X’s claim. Secondly, it was not manifestly unjust not to take into account the counterclaim, in part because of the absence of a close connection but also because the counterclaim arose from a contract which had its own jurisdiction provisions that RQP had invoked.
Security for costs
RQP asserted in its Statement of Defence and Counterclaim that it had sold all its assets. In light of this, ZYX applied to the tribunal for an order for security. The arbitrator granted the order, stating that ‘the irresistible conclusion is that [RQP] has been dissipating assets’.
As RQP failed to comply with the order, ZYX applied for a peremptory order under s. 41(5) of the Arbitration Act. The arbitrator made the peremptory order, requiring RQP to provide security by 27 July 2022.
On 26 July 2022, RQP sent a letter asserting that it considered the agreement to arbitrate had been repudiated by ZYX as a result of alleged disclosures of materials created for the arbitration and other confidential documents. RQP stated that it accepted the repudiation and that the agreement to arbitrate was therefore at an end.
With RQP failing to comply with the peremptory order, ZYX sought the permission of the tribunal under s. 42(2)(b) of the Arbitration Act to apply to court to enforce it. On 30 September 2022, the arbitrator gave permission to ZYX to make an application to court, which it did.
RQP argued that the court had no jurisdiction to hear ZYX’s application for a peremptory order because when the arbitrator gave the required permission for the application (i) there was an extant challenge to the tribunal’s jurisdiction (see above) and it was therefore not a ‘tribunal’ for the purposes of s.42, and (ii) the arbitration agreement had been terminated, so the arbitrator no longer had any jurisdiction.
In considering whether it would be appropriate to make an order requiring RQP to comply with the peremptory order, the judge relied heavily on the guidance set out in Emmott v Michael Wilson & Partners (No. 2) regarding the approach the court should take to s.42 applications:
- judicial interference with the arbitral process should be kept to a minimum;
- the proper role of the court is to support the arbitral process rather than review it; and
- the circumstances in which the court can properly interfere with or review the arbitral process are limited to challenges to the substantive jurisdiction of the arbitral tribunal, challenges based upon a serious irregularity and appeals on points of law.
While the judge in Emmott declined to set out a comprehensive list of the specific circumstances in which a court might decide not to make an order that a party comply with a peremptory order of a tribunal, he suggested the following three:
- where there has been a material change of circumstances;
- where the tribunal has not fulfilled its duty to act fairly between the parties; and
- where the tribunal has made an order which it had no power to make.
The judge in this case concluded that there was no basis on which the court should conclude that the arbitrator’s peremptory order had not been properly made for the following reasons:
- the arbitrator had considered and rejected RQP’s claim it could not pay the security, concluding that RQP had deliberately dissipated its assets, and there had not been a material change of circumstances in this respect;
- the order had been made in response to lengthy non-compliance, so there was no unfairness to RQP in making the order;
- a challenge to an arbitrator’s jurisdiction may be a material factor but that would depend on the apparent strength of the challenge, the nature of the order, and the stage of the proceedings in which it has been made (none of which factors supported RQP’s application in this case);
- while there was an arguable case as to the termination of the arbitration agreement, it was not sufficient to persuade the judge that it was inappropriate to make the order since if RQP’s argument as to termination of the arbitration agreement was correct the security would be returned.
The judge accordingly made an order requiring compliance with the arbitrator’s peremptory order.
Takeaway While this case does not break any new ground, it demonstrates that although courts are generally reticent about interfering with the arbitral process, they are willing to provide judicial support where necessary to ensure parties cannot take advantage of less stringent arbitral proceedings to delay (or thwart entirely) due process.
  EWHC 2949 (Comm)
  EWHC 1 (Comm)