Tower Bridge in London, UK
  1. Key takeaways

The Carpatsky[1] case is interesting for a number of reasons as it:

  • underlines the deference paid to decisions of supervisory courts and the importance of raising all available arguments before those courts when seeking to challenge or appeal an arbitral award;
  • is a helpful reminder of the English courts’ approach towards the doctrines of issue estoppel and abuse of process in enforcement proceedings;
  • emphasises the importance of election in available arguments as to governing law: if a party has argued that a particular governing law applies in the arbitration or in the courts of the seat, it will be difficult for it then to argue before the English courts that another governing law should apply at the enforcement stage. That said, where a foreign court has applied a particular law, issue estoppel will not arise if the English courts then finds that (under the English conflicts of law rules) the matter is governed by a different system of law; and
  • demonstrates the approach taken by English courts when determining the law of an arbitration agreement and the validity and existence of such agreement in accordance with the relevant applicable law.

The case demonstrates that parties seeking to contest enforcement of an award are presented with what some commentators have called a ‘double-edged sword’. On the one hand, if they bring all their arguments before the curial court and lose, an issue estoppel may arise which prevents them from relying on the same points before the English court at the enforcement stage. On the other hand, if they reserve some arguments in the hope that English courts might be more accepting of them than the curial court, they may be deprived from being able to rely on these arguments on abuse of process grounds. Clearly, careful consideration needs to be given to case strategy where challenges are anticipated both in the seat and at the enforcement stage. The risks posed by the doctrines of issue estoppel and abuse of process should be given due attention. It is worth noting, however, that Mr Justice Butcher observed that these doctrines are not inflexible and will take into consideration the interests of overall justice.

  1. Background to the case

The Claimant, Carpatsky Petroleum Corporation (“Carpatsky”), had applied to the English court for permission (which was granted) to enforce a New York Convention Award of US$145.7 million (the “Award”) issued in its favour by a Tribunal sitting under the auspices of the Stockholm Chamber of Commerce (SCC) against the Defendant, PJSC Ukrnafta (“Ukrnafta”).

Pursuant to s. 103 of the Arbitration Act 1996 (“the Arbitration Act”), Ukrnafta resisted enforcement of the Award arguing that:

  • there was no valid arbitration agreement between the parties; and
  • there was procedural irregularity in the underlying arbitral proceedings, resulting both from the arbitral tribunal having dealt with issues not pleaded or addressed in the evidence before it and in relation to the methodology applied for the calculation of damages.

Multiple proceedings had already been brought in relation to the underlying dispute and the challenge of the award, including in Sweden (the supervisory courts of the seat), Ukraine, and Texas, U.S.A..

Mr Justice Butcher upheld the orders recognising and granting Carpatsky permission to enforce the Award.

  1. Main findings of the case
  • No valid arbitration agreement

Ukrnafta argued that the exception to enforcement in s. 103(2)(b) of the Arbitration Act was applicable, as there was no valid arbitration agreement between the parties under the relevant applicable law. It argued that the question of the validity of the arbitration agreement fell to be determined under English law. It further contended that there was no ‘arbitration agreement in writing’, required for the enforcement of a New York Convention award under s. 101 of the Arbitration Act, by reason of s. 100(2)(a).

The court found that Ukrnafta was estopped from advancing these arguments as a result of its conduct during the SCC arbitration and in proceedings before the Swedish courts, where it had argued that Swedish law governed the arbitration agreement.  Butcher J commented that it would be ‘highly inconvenient‘ and generate ‘confusion and multiplication of argument‘ if a party could argue that one law governed an arbitration agreement before a tribunal and supervisory courts and then argue that a different law should apply to the issue at the enforcement stage.[2] By applying English conflict of laws rules, it was held that the arbitration agreement was governed by Swedish law and that, by applying Swedish law, there was a valid arbitration agreement between the parties both when the relevant underlying contract was concluded and when agreeing that the arbitration should proceed under SCC Arbitration Rules.

Ukrnafta also argued that there was an issue estoppel in its favour both in relation to the validity of the arbitration agreement and the underlying contract, as these matters had previously been litigated and determined in proceedings in Ukraine.

In obiter remarks, Butcher J commented that there was no issue estoppel as the Ukrainian proceedings had not addressed the question of the existence of the arbitration agreement under Swedish law (which in the case was found to be the applicable law). He added that, regardless of the fact that the validity of the underlying contract was irrelevant (as a matter of Swedish law) to the question of the validity of the arbitration clause, he in any event would not accept arguments based on this issue estoppel point. He believed that to do so would be unjust for multiple reasons, including that Ukraine was Ukrnafta’s home state, its courts did not have supervisory jurisdiction over the arbitration proceedings or the award, and recognising issue estoppel in these circumstances would ‘significantly undermine the effectiveness of the international scheme for enforcement‘.[3]

  • Procedural irregularity arguments – ss. 103(2)(c) or (e) of the Arbitration Act

Ukrnafta argued that the tribunal’s approach towards limitation of liability and intentional breach of contract issues that arose during the arbitration, as well as the methodology adopted for the assessment of damages, constituted serious irregularities in the proceedings. It sought to resist enforcement of the Award on these bases pursuant to ss. 103(c) and (e) of the Arbitration Act.

Carpatsky denied that there had been any procedural irregularity in the underlying proceedings, contending that Ukrnafta had had a fair opportunity to present its case and that, if and insofar as it had not taken certain points, that was its responsibility. In any event, Carpatsky asserted on the basis of an issue estoppel that Ukrnafta’s complaints could not properly be raised in the enforcement proceedings, as they had already been raised and rejected in proceedings in Sweden and Texas. It asserted that in particular, absent ‘exceptional circumstances’, the English court should not reinvestigate matters which had already been considered by the supervisory court. Carpatsky also advanced arguments that Ukrnafta’s conduct fell foul of the abuse of process principles outlined in Henderson v Henderson[4] (discussed further below).

The court outlined the following key principles relevant to the assessment of issue estoppel and abuse of process arguments made at the enforcement stage:

  • a party is not precluded from resisting enforcement on the grounds set out s. 103(2) of the Arbitration Act by reason only of the fact that it has not challenged the award in the curial courts and that ‘rarely, if ever, would it be right to recognise or enforce [an award] solely on the grounds that [the party opposing enforcement] has failed to take steps to challenge it before the supervisory court’ (Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan in the Court of Appeal per Lord Justice Moore-Bick[5]);[6]
  • there is a public interest in sustaining the finality of decisions of the supervisory courts on properly referred procedural issues arising from the arbitration (as outlined in Minmetals Germany GmbH v Ferco Steel Ltd[7]). Moreover, in assessing whether there is an issue estoppel arising from a decision of the supervisory courts in relation to an arbitration procedural issue, the English court should not adopt an overly-narrow approach to whether the same issue as was raised before it has been decided by the supervisory court;[8]
  • if substantially the same complaint as to the procedural fairness or irregularity of an arbitration, which is presented to the English court as a reason for non-enforcement under ss. 103(2)(c), (d) or (e) of the Arbitration Act, has been made and decided upon by the supervisory court, then that should be regarded as precluding the point being raised again, unless it can be plainly perceived that it would cause injustice to recognise an issue estoppel in the circumstances;[9] and
  • it is open to the court to find that it is an abuse of its process (under the principle in Henderson v Henderson[10]) for a party to raise a challenge to enforcement which it could and should have raised in challenge proceedings which have taken place before the curial court. The court found that there was room for the application of such an approach in relation to foreign proceedings (in light of Dallal v Bank Mellat[11]) and to the enforcement of New York Convention awards (reference was made to Hong Kong Special Administrative Region Court of Appeal in Hebei Import and Export Corp v Polytek Engineering Co Ltd[12]).[13]

Butcher J concluded that there was an issue estoppel as these issues had been raised and determined in earlier proceedings and that, in any event, it was an abuse of process for Ukrnafta to bring forward new arguments that it could and should have brought before the Swedish courts. Furthermore, even if the court were wrong on these points, an issue estoppel had in any event arisen as a result of a previous US court decision.

The court dismissed Ukrnafta’s reliance on s. 103(2)(e) of the Arbitration Act (arbitral procedure not in accordance with parties’ agreement or law of the seat).  It found that Ukrnafta had not established a material and consequential breach of the SCC rules or of Swedish law resulting from the tribunal’s conduct and noted that the Svea Court of Appeal had already rejected Ukrnafta’s claim that there had been a breach of mandate. The court also dismissed Ukrnafta’s argument that the tribunal’s methodology for the assessment of damages amounted to a serious irregularity, again on the basis of an issue estoppel created by the earlier decision of the Swedish court.

 

[1] [2020] EWHC 769 (Comm)

[2] Supra fn 1 at para 65

[3] Supra fn 1 at para 110

[4] [1843-60] All ER Rep 378

[5] [2009] EWCA Civ 755 at para 61

[6] Supra fn 1 at para 120

[7] [1999] 1 All ER (Comm) 315

[8] Supra fn 1 at para 121

[9] Supra fn 1 at para 122

[10] Supra fn 4

[11] [1986] 1 QB 441 at 451-4, 462-3

[12] (1999) 2 HKCFAR 111

[13] Supra fn 1 at para 123