Arbitration - S3D Interactive Inc. v Oovee Ltd.

London Court of International Arbitration

Author Mar9254 Licence CC BY-SA 4.0 Source Wikimedia Commmons

 

Jane Lambert

Court of Appeal (Lords justices Lewison, Popplewell and Birss) S3D Interactive Inc v Oovee Ltd [2022] WLR(D) 516, [2022] EWCA Civ 1665

This was an appeal against the decision of Mr Justice Butcher to enforce a peremptory order of an arbitrator under s.42 of the Arbitration Act 1996 notwithstanding the appellant's contention that the arbitration agreement had been repudiated. The parties managed to resolve their differences after the appeal was heard but before judgment was delivered.  Because of public interest in the issue, their lordships stated how they would have decided the appeal had it not been settled. 

Arbitration

In "What is Arbitration" the World Intellectual Property Organization defined arbitration as 

"a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court."

Because most intellectual property disputes are between parties who have not entered an arbitration agreement, few of those disputes are referred to arbitration. The reason why this case had been referred to arbitration is that the parties had settled a previous dispute over their respective rights and obligations in relation to the development of a video game by entering a licence agreement.     Clause 17 of that agreement provided for the resolution of disputes and differences by arbitration in England in accordance with the London Court of International Arbitration Rules.

The Proceedings

A further dispute arose between the parties over the payment of royalties and alleged infringement of intellectual property rights.   Oovee Ltd ("Oovee") requested an arbitration and Georg von Sergessor was appointed as arbitrator.  Oovee lodged points of claim and S3D lodged a defence and counterclaim.  The parties attended a case management conference with the arbitrator at which no objection had been taken to the arbitrator's jurisdiction.  However, S3D subsequently challenged the arbitrator's jurisdiction under s.67 (1) of the Arbitration Act 1996 which application was listed to be heard on 31 Oct 2022.

The Security for Costs Application

In its defence and counterclaim, S3D Interactive Inc. ("S3D") pleaded that it had disposed of all its assets. Oovee's solicitors asked S3D how it proposed to pay any damages or costs that might be awarded against it.  S3D failed to give Oovee a satisfactory assurance that it could meet such contingencies. Oovee applied to the arbitrator for security for costs.  He ordered S3D to deposit or obtain a bank guarantee for, US$10.9 million as security for any award in favour of Oovee and US$250,000 for the costs of its counterclaim.  S3D refused to comply with the order whereupon the arbitrator deemed the counterclaim to have been withdrawn.  Oovee then asked for a peremptory order for the US$10.9 million under s.42 which the arbitrator granted.

The Alleged Repudiation

S3D complained that Oovee had repudiated the arbitration agreement by disclosing confidential information about the dispute to public relations consultants who had forwarded it to the press.  According to S3D, three of its witnesses had refused to give evidence because they could not be sure that their evidence would not be made public.  S3D's lawyers purported to accept the repudiation contending that the arbitration was at an end and, with it, the arbitrator's jurisdiction. 

The Applications to the Commercial Court

With the arbitrator's permission, Oovee applied for a court order to enforce compliance with the arbitrator's peremptory order under s.42 (1).  Mr Justice Foxton ordered that application to be heard with S3D's on 31 Oct 2022.  Shortly before the hearing, S3D applied for a declaration that the court had no jurisdiction to hear the application for a peremptory order because the arbitration agreement had been repudiated and that Mr Justice Foxton's order be set aside on grounds of material non-disclosure.

The applications were heard by Mr Justice Butcher on 31 Oct and 1 Nov 2022.  His lordship dismissed S3D's set-aside application and granted Oovee's request for a peremptory order.   His reasons were summarized at para [21] of Lord Justice Popplewell's judgment on the appeal:

"(1) The existence of an extant challenge to the jurisdiction of the arbitrator does not mean that it is no longer a 'tribunal' for the purposes of s. 42. It is open to a tribunal to defer its decision on jurisdiction to an award on the merits, and there will be cases where it is convenient for the tribunal to be able to ask the court to enforce a peremptory order in the meantime. Sections 30 and 31 of the Act also used the expression 'tribunal' in circumstances where the jurisdiction of that tribunal was subject to challenge. To hold otherwise would enable a party to thwart the possibility of s. 42 being invoked to support the arbitral process merely by raising a spurious jurisdictional challenge. The Judge was therefore satisfied that the conditions in s. 42 (2) (b) were fulfilled and that it was a matter for his discretion whether to make the order.
(2) Helpful guidance as to the principles governing the exercise of discretion are to be found in the judgment of Teare J in Emmott v Michael Wilson & Partners (No2) [2009] EWHC 1 (Comm) [2009] Bus LR 723 at [53]-[59], [62].
(3) The fact that the jurisdiction of the tribunal is contested is not of itself and without more a good reason to refuse to make an order under s. 42. There are other circumstances where the court can make orders which seek to support the arbitral process, and to secure the enforceability of an award, even though the jurisdiction of the tribunal is contested. This is the case with orders under s. 70 (6) and (7) of the Act, which can be exercised in respect of applications under s. 67. Furthermore, unless the court were able to make orders under s. 42 notwithstanding an extant challenge to the jurisdiction of the tribunal, it would permit a recalcitrant party, simply by challenging the tribunal's jurisdiction, to prevent the court exercising a power which is there precisely to help support the tribunal in the face of recalcitrance.
(4) On the other hand, the fact that the jurisdiction of the arbitrator is challenged is a material, and may be a very material, factor in whether the court should grant an order under s. 42. How significant it is will depend on a number of matters, including:
a. the apparent strength of the challenge, if the court can take a view on this;
b. what it is that the tribunal has ordered which the court is being asked to require compliance with; and
c. the stage in the proceedings at which the challenge to the jurisdiction of the tribunal is made.
(5) The only assessment the court could make as to the strength of S3D's case on termination was that that it was arguable. He therefore had to determine the s. 42 application on the basis that there was an arguable but unresolved case that the jurisdiction of the tribunal had been terminated. There is no appeal from that finding which was plainly correct. The Judge did not have the material before him to enable the merits of the argument to be investigated, and it would have required a hearing with oral evidence from witnesses, as the Arbitrator correctly identified in his decision that it should be determined together with the merits following the December evidentiary hearing. Before us Mr Turner accepted that case management considerations would have made it inappropriate for the Judge to seek to embark upon such an inquiry.
(6) S3D's argument that the existence of a challenge to the Arbitrator's jurisdiction meant that an order under s. 42 of the 1996 Act would not support the arbitral process overlooked the point that if S3D's case on termination was wrong, the Arbitrator did indeed have jurisdiction, and on that hypothesis the order would be supporting the arbitral process, which on that hypothesis would be the parties' agreed forum for resolution of their disputes.
(7) The timing of the reference, including the approaching final evidentiary hearing, meant that if the Court did not make an order under s. 42 now it would altogether have foregone the possibility of giving relevant support to the tribunal where there was a real possibility that the Arbitrator did have jurisdiction.
(8) The possibility of prejudice to S3D was reduced by the fact that the security would be returned or released to S3D if its jurisdiction challenge succeeded.
(9) In those circumstances the interests of justice were in favour of making the order."

Mr Justice Butcher gave S3D permission to appeal to the Court of Appeal on whether "S3D should be permitted to argue that in circumstances where there is a pending challenge to the jurisdiction of the arbitral tribunal, the Court, when considering whether to make an order under s. 42 of the Act, must decide that the arbitral tribunal does indeed have jurisdiction before making any s. 42 order; and that it was an error of law to make the s. 42 order in this case without so deciding."

The Appeal

The appeal came on before Lords Justices Lewison, Popplewell and Birss on 6 Dec 2022. Lord Justice Popplewell summarized S3D's contentions in para [23] of his judgment:-

"(1) Section 42 (2) contains conditions which must be fulfilled before there is jurisdiction to make a s. 42 order. The relevant condition in this case, being the only one relied upon by Oovee, was that in sub-paragraph (b), namely that the application was made "by a party to arbitral proceedings with the permission of the tribunal".
(2) That condition is not fulfilled, in the absence of a determination of the jurisdiction challenge, because a tribunal which lacks jurisdiction is not a "tribunal" within the meaning of the subsection and a person is not a "party to arbitral proceedings" if the tribunal has no jurisdiction.
(3) Moreover s. 42 only applies "Unless otherwise agreed by the parties". Where the tribunal lacks jurisdiction, the parties have "otherwise agreed" because the whole arbitral process is consensual, and the parties do not agree to the enforcement of orders made by an arbitrator who they have not agreed should have jurisdiction over the disputes.
(4) This gives effect to the purpose of s. 42 which is to support the arbitral process. If the tribunal has no jurisdiction to make the peremptory order, the court is not supporting the arbitral process by enforcing an order the tribunal had no jurisdiction to make against a person who has not agreed to submit himself to such an order.
(5) There are first instance authorities which lend support to this approach, namely Emmott v MWP (No 2), Patley Wood Farm LLP v Brake [2013] EWHC 4035 (Ch) (Peter Smith J) and Patley Wood Farm LLP v Brake  [2014] EWHC 4499 (Ch) (Sir William Blackburne), and Pearl Petroleum Co Ltd v Kurdistan Regional Government of Iraq [2015] EWHC 3361 (Comm) [2016] 4 WLR 2 (Burton J)."

The Judgment

Their lordships handed down judgment on 19 Dec 2022.  Lord Justice Popplewell delivered the lead judgment.  He said at para [45] that he would have dismissed the appeal with little hesitation.  The other Lords Justices agreed.

In Lord Justice Popplewell's view, the key to the issue of construction of s. 42 lay in the provisions that regulate how and when challenges to the tribunal's substantive jurisdiction may be made to the court.  S.30 of the 1996 Act provides:

"Competence of tribunal to rule on its own jurisdiction
(1) Unless otherwise agreed by the parties, the arbitral tribunal may rule on its own substantive jurisdiction, that is, as to—

(a) whether there is a valid arbitration agreement,
(b) whether the tribunal is properly constituted, and
(c) what matters have been submitted to arbitration in accordance with the arbitration agreement.

(2) Any such ruling may be challenged by any available arbitral process of appeal or review or in accordance with the provisions of this Part."

That section applies the principle of Kompetenz Kompetenz which is also to be found in the UNCITRAL Model Law and rules 23.1 and 23.4 of the London Court of International Arbitration Rules. 

His lordship acknowledged at para [27] that because arbitration is consensual a person cannot be bound by a jurisdiction decision of a tribunal to which it has not agreed to submit its disputes. Such a party has the right to challenge an arbitrator's jurisdiction in the courts, unless barred by failure to object in good time. However, the Act regulates the way in which such a challenge may be made.  That is because it is intended to meet, or at least mitigate, difficulties which would otherwise undermine the arbitral process.

The Lord Justice said that s.30 was intended to promote the principles of speedy finality and efficient case management and minimum court intervention.  It required challenges to jurisdiction to be made in accordance with Part 1 of the Act.   Lord Justice Popplewell then considered the provisions of Part 1 under which a challenge can be made, namely s.67, s.66 (3) and s.32. None of those provisions applied in the circumstances of this case.

He continued that s.42 was intended to support the arbitral process.  If the court had to satisfy itself of the jurisdiction of the tribunal over the substantive dispute before exercising its powers under that section. it would cut across the careful structure of the limited circumstances in which the Court is entitled to address and determine a challenge to the jurisdiction of the tribunal during the course of the reference, a structure which is itself calibrated to assist the arbitral process.

He rejected the contention that the words "party to the arbitral proceedings" and "the tribunal" meant "a party to arbitral proceedings over which the tribunal has substantive jurisdiction" and "a tribunal having substantive jurisdiction" respectively.  Those words meant simply what they said, "namely a tribunal and a party in arbitral proceedings, irrespective of whether there is an unresolved issue as to the substantive jurisdiction of the tribunal."  That was the sense in which those words were used in other sections of the Act and it was a principle of statutory interpretation that where the same words are used more than once in a statute, there is a presumption that they have the same meaning.   In support of that principle, he referred to Bennion, Bailey & Norbury on Statutory Interpretation 8th ed Section 21.3. and para [13] of  Lord Justice Leggatt;s judgment in R (Good Law Project) v Electoral Commission [2018] EWHC 2414 [2019] 1 All ER 365 ).

He dismissed the argument that the words "unless otherwise agreed" affected the jurisdiction to enforce a peremptory order. Those words referred to a specific agreement to oust the jurisdiction of the court to make an order under s. 42, not to an argument that the tribunal lacks jurisdiction over the substantive merits of the dispute.

At para [42] his lordship said that S3D's counsel's argument was not only contrary to the careful structures of the Act and s.42 but would have consequences which are inconsistent with the principles in s. 1 of the Act.  He continued:

"If he were right, the only options for a Court faced with an application under s. 42 where the jurisdiction of the tribunal jurisdiction was in issue would be (1) to address and determine the issue of jurisdiction or (2) to decline to investigate it but then necessarily to refuse the application. The first alternative is contrary to the principle of minimum intervention in s. 1(c)."

He added:

"The second alternative is contrary to the principle in section 1(a) of promoting the efficacy of the arbitral process because it would enable a party to stymy s. 42 simply by raising a jurisdiction challenge unsuitable for summary determination, however unmeritorious."

Lord Justice Popplewell found nothing in the cases cited by S3D to cast doubt on his conclusions. None raised or addressed the point that arose in the appeal, and the attempt to extract some implied support did not bear scrutiny.

Comment

Now that the Brussels Recast Regulation no longer applies to the UK and the European Commission has advised Member States to oppose British accession to Lugano (see Jane Lambert  EU Commission rejects the UK's Application to rejoin Lugano 6 May 2021 IP after Brexit) there is likely to be renewed interest in arbitration as the UK remains a party to the New York Convention.  Had the appeal gone the other way, the efficacy and utility of arbitration would have diminished.  Anyone wishing to discuss this article can call me on +44 (0)20 7404 5252 or send me a message through my contact form.