Action abroad

A recent ruling by the European Court of Justice has undermined party confidence in having commercial disputes resolved under pre-agreed terms. Stuart Dutson and Mark Howarth explain

Arbitration agreements in favour of London for commercial disputes within Europe were dealt a theoretical blow earlier this month by the European Court of Justice's decision in Allianz SpA and Another v West Tankers.

Front Comor, a ship owned by West Tankers, had been chartered to Erg Petroli SpA; the charter party was governed by English law and provided for arbitration in London. The vessel collided with a jetty in the port of Syracuse, Sicily, causing substantial damage. As a result, Erg made a claim against its insurers - Allianz - for compensation up to the limit of its cover and commenced arbitration proceedings in London to recover the balance of its losses.

Allianz subsequently commenced subrogated proceedings against West Tankers in the Italian courts seeking to recover the amounts paid out. West Tankers challenged the Italian proceedings in the English courts on the basis that the insurer's claim was covered by the arbitration agreement. The owners requested, among other things, an anti-suit injunction requiring Allianz to discontinue the Italian proceedings. The case went to the House of Lords.

The Law Lords made a referral to the ECJ on the question of whether anti-suit injunctions, issued to give effect to arbitration agreements, are compatible with Council Regulation 44/2001, which deals with EU rules on jurisdiction in civil and commercial disputes.

Powerful argument

Lord Hoffman put his case for keeping the anti-suit injunction in the English courts' judicial arsenal in strong terms. In his view, notwithstanding the adverse momentum built up following the ECJ decisions in Gasser v MISAT Srl and Turner v Grovit - which effectively precluded such injunctions in defence of exclusive jurisdiction agreements - the anti-suit injunction fell outside the scope of the regulation by virtue of the arbitration exclusion in Article 1(2)(d). In particular, as the proceedings relate to protection of the contractual right to have a dispute decided by arbitration, he submitted that they are "outside the system of allocation of court jurisdictions which the regulation creates".

Lord Hoffman also made a powerful argument for the practical necessity of the anti-suit injunction to hold parties to their commercial agreements, thereby promoting legal certainty and reducing the likelihood of conflicting decisions.

In a notably thin judgment, the ECJ decided that anti-suit injunctions in support of agreements to arbitrate are incompatible with the regulation.

While ruling that proceedings seeking anti-suit relief do fall outside the scope of the regulation as a result of the Article 1(2)(d) exception, the court focused on the secondary effects of such relief on other proceedings to support its decision.

On the basis that tort claims initiated by Allianz in Italy were within the scope of the regulation, the court considered that the "incidental question" as to whether these claims were covered by the arbitration agreement was also a preliminary matter for determination by the Italian court. As an anti-suit injunction could interfere with the Italian court's ability to exercise that jurisdiction, the ECJ concluded that such relief must be incompatible with the regulation.

Insurer implications

It is clear that English courts will now only have the power to provide anti-suit relief where overseas proceedings are initiated in a non-member state. Arbitrations in England - or any other EU member state - may have to be delayed or interrupted until proceedings in another member state's courts have been stayed or jurisdiction has been declined (although, significantly, the possibility of parallel proceedings is not excluded).

Depending on the relevant national procedural rules, getting to that stage could involve a complex assessment of the merits, as well as the possibility of appeals. These hurdles are likely to result in additional delays and costs, not to mention the unappealing prospect of being faced with unfamiliar processes and rules in foreign courts.

The ECJ's ruling undermines the confidence parties have that their commercial disputes within Europe will be dealt with by the tribunal they expected and according to the procedural rules agreed between them. This is an obvious dent to the principle of party autonomy. Businesses undoubtedly prefer the certainty of knowing that litigation will take place in a pre-agreed forum and this is a common reason for selecting arbitration as the method for dispute resolution - for instance, to avoid one party having 'home advantage'.

In addition, the ECJ's approach to the application of arbitration agreements as an 'incidental' matter, with priority given to potential secondary effects on overseas proceedings under the regulation, suggests there is now a greater risk of a party being able to frustrate or circumvent the arbitration process by initiating vexatious overseas proceedings.

As a result, the practical appeal of forum shopping and strategically issued litigation within Europe may well be enhanced. In these circumstances, the unavailability of anti-suit relief will leave the other party - and its lawyers - with some difficult decisions about how to respond to best protect its interests.

Whether the ruling means that parties are likely to move England down the menu of possible arbitration seats remains to be seen. But the availability or otherwise of anti-suit injunctions is not generally considered influential in choosing the arbitral seat. Greatest weight is typically placed on factors such as the expertise of London-based counsel and arbitrators, plus the importance of London in international trade. Moreover, key venues for international arbitrations, such as Paris and Stockholm, are popular, notwithstanding the fact that anti-suit relief is not available.

In any event, as the decision only affects cases where 'torpedo' proceedings are commenced elsewhere within the EU, the long-range capabilities of the anti-suit injunction are unchanged, and relief will continue to be available against proceedings brought in breach of contract in non-EU states. Given that arbitrations between parties from different EU member states comprise a small proportion of London-based arbitrations, the overall impact on London as a centre for international dispute settlement should be limited to an extent.

Arbitration frustration

Following this case, the English courts can no longer deploy their weapon of choice - the anti-suit injunction - in response to proceedings started elsewhere in the EU in breach of an agreement to arbitrate. As these so-called 'torpedo actions' are often brought in member states where the judicial process is particularly slow or complex, the risk of frustrating the arbitration process is real. The anti-suit injunction has traditionally been viewed as the primary antidote to such tactical litigation, but its removal should not leave the innocent party without effective legal redress.

Parties to arbitration agreements where the seat is in England should give careful thought to the strategic implications of this decision for future disputes. A sharper focus on potential mechanisms for holding the parties to their original agreement can be expected - and the possible remedies where this cannot be done successfully - as well as safeguards to reduce the risks associated with unexpected satellite litigation.

Stuart Dutson is a partner specialising in international commercial arbitration and litigation, and Mark Howarth a solicitor in Eversheds' litigation and dispute management group.

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