High Court clarifies the requirement when electing to refer a dispute to arbitration

A few months after the Commercial Court held that significant delay will not necessarily be a bar to a successful anti-suit injunction,¹ Mr Justice Foxton, in a further judgment in the same case, has provided additional guidance regarding the type of unequivocal statement required to validly exercise an asymmetric option to arbitrate.²

 

Key Takeaways

The Court dismissed the challenge of the Applicant (Aiteo) to the tribunal's two partial awards in favour of the Respondent and other finance parties (Lenders) pursuant to section 67 of the Arbitration Act 1996 on the basis that the Respondent had shown a clear and unequivocal intention to arbitrate the dispute. The judgment provides useful insight, when electing to exercise an option to refer a dispute to arbitration, on:

1. what is required from the invoking party; and
2. what the invoking party should consider.

 

Background

As a recap from our previous article, Aiteo as borrower entered into a Nigerian law governed onshore facility agreement and an English law governed offshore facility agreement for the aggregate sum of US USD2 billion with the Lenders. Both facility agreements contained an arbitration agreement providing the lenders with the option of London-seated arbitration under the ICC rules or local courts. Upon receiving the Lenders' letter of demand for repayment, Aiteo initiated court proceedings in the High Court of Nigeria seeking declarations of non-liability in relation to the debt.

On 15 March 2022, the tribunal ruled that it had jurisdiction to determine the claim against Aiteo under the offshore facility agreement (First Award). On 22 July 2022, the tribunal held that arbitrations in respect of both facility agreements would be consolidated (Second Award).

On 1 April 2022, the Lenders successfully obtained an anti-suit injunction from the English court to refer the disputes to arbitration (instead of the Nigerian court).

This case deals with Aiteo's challenge to the First Award and the Second Award.

 

Grounds of Aiteo's Challenge

Aiteo's challenge boiled down to what an invoking party must demonstrate to validly exercise an option to arbitrate. Aiteo claimed this could only be done by, either:

1. commencing an arbitration to exercise the option to arbitrate (First Formulation); or
2. demonstrating "a clear and unequivocal promise or undertaking to refer a properly defined arbitrable dispute to arbitration within a reasonable time" or "an intention to commence arbitration in respect of identifiable (and arbitrable) disputes" (Second Formulation).

Aiteo argued that for the First Formulation the option imposes a negative covenant (not to bring proceedings in a non-contractual forum) and a positive covenant (to pursue and progress claims in a contractual forum) to the parties. With the enjoyment of the negative covenant, Aiteo argued that the Lenders must also actively commence a London-seated arbitration under the ICC rules.

As for the Second Formulation, Aiteo submitted that the invoking party must provide a clear and unequivocal statement to the other party or parties, with reference to the clause relied on for an option to arbitrate.

 

The Court's Analysis

The Court considered the first and second Formulations suggested by Aiteo and rejected both of them.

In rejecting the First Formulation, the Court noted that, following Anzen Ltd v Hermes One Ltd,³ it is not necessary to exercise an arbitration option by commencing an arbitration if it is not commercially sensible to do so (given that the invoking party might be a party asserting it has no liability).

The Court also found the Second Formulation unclear and held that the threshold is no more than "an unequivocal statement by [the Lenders] requiring Aiteo to arbitrate the dispute". While service of a Request for Arbitration would certainly fall into this category, something which falls short of that would still suffice to exercise the option to arbitrate. It is also not necessary to seek a stay of any court action to exercise the election. However, the Court did note that the election must be irrevocable to avoid the possibility of inconsistent elections such that a dispute might be moved out of, and back into, court by aborting the arbitration process.

The Court concluded that the service of a Notice of Appeal filed in the Nigerian Court by the Lenders, asserting that the Nigerian Court should decline jurisdiction to provide interim relief and that any dispute should be referred to arbitration, was sufficient to demonstrate an unequivocal statement that the Lenders had elected to arbitrate the dispute. In particular, the notice demonstrated:

1. an unequivocal contention that Aiteo's claims should be settled by ICC arbitration in London; and
2. an unequivocal assertion that the Nigerian Court should decline jurisdiction (and consequently not grant any injunctive relief to Aiteo).

Separately, the Court was not persuaded that a reasonable time period to exercise the option to arbitrate should be implied. The Court observed that (a) the offshore facility agreement in this case specifically excluded waiver for delay and (b) Aiteo's assertions of potential prejudice absent the implication could be dealt with under the English law doctrines of waiver and estoppel which provide "sufficient protection against any unfairness".

 

Comment

Parties with the benefit of an option to arbitrate will find the guidance provided by this judgment both useful and welcome. It sets out a relatively low threshold requirement to validly exercise an option to refer a dispute to arbitration. Here are a few points to note when considering an option to arbitrate:

1. the party exercising the option to arbitrate must demonstrate an unequivocal statement to require the other side to arbitrate the dispute, and such statement must be irrevocable;
2. it is not necessary to commence an arbitration or stay the court action to exercise such option; and
3. there is no implied time period in which such exercise must take place, noting always that the doctrines of waiver and estoppel will still apply to any failure to act.

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¹ [2022] EWHC 768 (Comm), for more details, please refer to our previous article
² Aiteo Eastern E&P Company Limited v Shell Western and Trading Limited [2022] EWHC 2912 (Comm)
³ [2016] 1 WLR 4098