collaborative

Follow us on Twitter
Follow @andrewskurthkenyon on Instagram
Like us on Facebook
Straight Talk® is good business

since 1902

Image of Puzzle Globe

focused

The Rule of English Law - Why Brexit, However Blindly Foolish it is, Should Not Matter for Arbitration

Melanie Willems
The Arbiter

Summer 2017

In June 2016, before the referendum on whether the United Kingdom should leave the European Union, Emmanuel Macron - then the minister in charge of the French economy - said this:

Leaving the EU would mean the ‘Guernseyfication’ of the UK, which would then be a little country on the world scale. It would isolate itself and become a trading post and arbitration place at Europe’s border.

A year later, on 19 June 2017, the negotiations between the ‘Brexit’ representatives of the United Kingdom government and their EU counterparts have now started. The wider implications of the United Kingdom leaving the EU remain uncertain. In this article, we do not propose to consider the benefits (if any) or disadvantages of Brexit, but ask whether Emmanuel Macron was right to suggest that whatever shape Brexit will take, England would still remain a centre for arbitration.

In short, we agree with the French President. Whichever way you look at it, Brexit should be irrelevant to the success of English law in international commerce, and in dispute resolution in particular. In this article, we explain why we think that Brexit will do nothing to make English law and London any less attractive for resolving disputes in international contracts through arbitration. In doing so, we also take the opportunity to review a couple of recent decisions on arbitration agreements and contract interpretation under English law - illustrating that Brexit ought not change the legal position in England at all.

Rule Britannia?

While the nostalgic notions of British Empire which seemed to surface from time to time in the context of the United Kingdom’s exit from the EU are perhaps questionable, there is at least one area where England still rules. English law is pre-eminent in international commercial contracts. It is frequently chosen by parties to transactions or projects that have little or no connection with the United Kingdom. Statistical evidence supports this:

  • In 2008, English law was accepted as most prevalent in cross-border matters by 59% of respondents in a survey of 100 multinational businesses.
  • In 2010, English law was the preferred choice in around 40% of corporate contracts that provided for arbitration (Queen Mary University Survey, 2010: ‘Choices in International Arbitration’).
  • In 2016, English law was the preferred choice in 48% of cross-border transactions involving Singapore (Singapore Academy of Law Survey, 2016).

London also continues to be a hub for dispute resolution, and has been the most popular seat for international arbitrations worldwide for some time now.

  • In Queen Mary University’s 2015 survey, 45 per cent of participants named London as the most preferred and widely used venue. 50 per cent more participants put London in first place in 2015 than did in the previous survey, in 2010.
  • In 2016, the LCIA reports that more than 80% of parties are from outside the UK, and that this is increasing.
  • The English Commercial Court recorded that, over the period from 31 March 2012 to 1 April 2013, almost 81% of cases before it involved a foreign party, and around 49% of cases were entirely between foreign parties.

Arbitration in England is unaffected

All these surveys were of course carried out before the June 2016 referendum. Since then, the English legal profession has considered the likely impact of Brexit, and there is no shortage of publications commenting on it. To give one example, in January 2017 the Commercial Bar Association’s arbitration sub-group published a Brexit report. It concluded that:

There is no substantial reason to suppose that the United Kingdom’s withdrawal from the European Union should have a substantial impact on the appeal of London as a seat for the arbitration of international commercial disputes. The principal domestic and international instruments governing the enforcement of arbitration agreements and arbitration awards and the other factors influencing the appeal of London as a seat for international arbitration are unaffected by Brexit.

Lawyers may be tempted to hedge their bets when predicting the future, which could explain the report’s reference to there being no ‘substantial’ reason to think that Brexit might have a ‘substantial’ impact. One could go a little further and instead say that, based on the legal framework that governs international arbitrations subject to English law and with a London seat, there is no ‘substantive’ reason why Brexit should have ‘any’ impact on the vast majority of commercial arbitrations.

The parties are still free to choose arbitration

Arbitration is consensual in nature. The jurisdiction of any arbitral tribunal depends on the agreement of the parties, set out in the arbitration clause. English law gives effect to arbitration clauses wherever possible. Brexit would have no effect on the validity or the interpretation of arbitration agreements under English law.

The Arbitration Act 1996 requires that arbitration clauses must be ‘in writing’ so that there is certainty as to the existence of an agreement to arbitrate. That requirement is construed relatively widely, and extends to agreements recorded in an exchange of emails, incorporating an arbitration agreement in another contract by reference, or even an oral agreement by reference to written terms - such as for instance, an oral agreement that the same terms set out in an earlier contract would apply (see Heifer International Inc v Christiansen [2007] EWHC 3015 (TCC)), or perhaps an oral agreement to resolve disputes under the (written) rules of the LCIA. English law is also willing to find valid arbitration agreements even where the parties have expressed their intention to arbitrate less clearly than they could have done. A clause referring to “UK arbitration” was upheld in Exmek Pharmaceuticals SAC v Alkem Laboratories Ltd [2015] EWHC 3158 (Comm).

Arbitration agreements are construed widely under English law. As the House of Lords noted in Premium Nafta Products Ltd v Fili Shipping Company Ltd [2007] UKHL 40, there is strong presumption that businessmen want all their disputes - be they contractual or non-contractual in nature - to be resolved by one and the same tribunal. English law will not adopt a legalistic interpretation when it comes to arbitration clauses, and there should be no mileage in arguing that certain disputes do not ‘arise out of’ or are ‘in connection with’ the relevant contract. It will be presumed that the parties intended the arbitrators to deal with all issues, unless they expressly excluded something from their remit.

A recent decision illustrating how the parties can confer wide powers on their arbitral tribunal

The recent decision of the High Court in Associated British Ports v Tata Steel UK Ltd [2017] EWHC 694 (Ch) illustrates how English law upholds the principle of ‘party autonomy,’ and allows the parties to agree that their arbitral tribunals should have wide powers (if that is what they wish).

Associated British Ports (“ABP”) owns and operates the tidal harbour at Port Talbot in Wales. Tata Steel is the owner of two steel works that make use of the harbour. Iron ore and other materials are imported through the harbour, and a significant proportion of all vessels that come to Port Talbot supply these steel works. In 1995, ABP and Tata entered into a license setting out the terms on which Tata could use the harbour. It had a term of 25 years. Clause 22 purported to give an arbitral tribunal appointed under the license considerable discretion in altering the terms of the agreement:

... in the event of any major physical or financial change in circumstances affecting the operation of [the steel works] … or [the tidal harbour] … on or at any time after the 15th day of September 2007 either party may serve notice on the other requiring the terms of this Licence to be re-negotiated with effect from the date on which such notice shall be served. The parties shall immediately seek to agree amended terms reflecting such change in circumstances and if agreement is not reached within a period of six months from the date of the notice the matter shall be referred to an Arbitrator.

In February 2016, Tata gave notice to ABP under Clause 22. Tata sought significantly lower fees based on the tonnage of goods shipped, including a 50% reduction in annual fixed fees, from £7 million to £3.5 million. Tata explained that the UK steel industry was facing significant market challenges, with a strong pound (presumably no longer a concern) and a doubling of steel imports into Europe, notably from China. Tata also noted the imposition of increased tariffs by the US on European steel imports. All this had happened against the background of Tata having to downsize and streamline its loss-making UK operations.

Absent a provision like Clause 22, none of this would have allowed Tata to change the terms it had agreed to in 1995. As discussed further below, unlike some civil law systems, English law takes the view that contracts are not invalidated, or fall to be renegotiated, because performance becomes more expensive or onerous for one party. But here the parties had included Clause 22. The question for the High Court was whether this clause was too uncertain to be enforceable. ABP argued that the clause should not be enforced because the event that triggered it - “any major physical or financial change in circumstances” - was just too open ended to create a binding obligation to submit a dispute to an arbitral tribunal. ABP said that any tribunal appointed under Clause 22 would have no objective criteria to apply in deciding what the new license terms were going to be, and would just have carte blanche to rewrite the parties’ bargain. That, ABP submitted, was not something that the parties should be held to.

Rose J noted that English law was reluctant to hold that parties to a commercial contract had failed to create an enforceable obligation. She cited another recent decision where the Commercial Court had commented that:

64. … The role of the court in a commercial dispute is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy. To hold that a clause is too uncertain to be enforceable is a last resort or, as Lord Denning MR once put it, “a counsel of despair”: see Nea Agrex SA v Baltic Shipping Co Ltd [1976] 1 QB 933, 943.

Rose J also noted that this was a contract that had been partially performed, and Clause 22 only kicked in after 12 years. The judge saw the commercial sense in including such a provision, as the parties would not have wanted to tie themselves into an immutable arrangement for a quarter of a century. She also did not think that the trigger event was too vague. She found that any tribunal would be able to consider whether such an event had occurred, and added that:

… the wording does not leave the scope of the trigger entirely open-ended. There must not only be a major physical or financial change in circumstances but also one that affects the operation of the Tidal Harbour or of Tata’s nearby steel works. This it seems to me excludes several of the changes recorded in Tata’s annual reports and accounts over the years to which [Tata] referred. Those changes may have had an impact on Tata’s overall health, but they do not appear capable of affecting the operation of the two steel works. …”

Clause 22 would have to be construed in its context. That context included the fact that matters dealt with under other provisions of the license were unlikely to be relevant for the purposes of Clause 22. Furthermore, fees under the license were calculated by reference to tonnage, and ABP’s obligations to dredge the harbour, maintain jetties or give priority to Tata vessels would all be affected by the amount of shipping traffic. Changes in annual tonnage were therefore likely to be relevant when assessing ‘major physical or financial changes’ that affected the operation of the steel works or the harbour. Finally, the Commercial Court implied a requirement of reasonableness into Clause 22, which would guide the arbitrator in amending the terms of the license. As to what would (or would not) be reasonable, the tribunal would be guided by the existing terms of the licence, the precise physical or financial changes that had given rise to the arbitration and of course the submission of the parties. There was, therefore, no reason to strike down the clause. This decision is a good illustration of how English law strives to uphold commercial contracts. Such a ‘renegotiation’ clause will not of course be appropriate for every contract. If the parties do not include a provision of this kind, then English law will hold them to their bargain - but in a long term contract, they have the option to refer the commercial basis of their dealings to a tribunal for review if they so choose.

The parties are still free to choose English law and the advantages that it offers

Arbitrating in London is the obvious choice if the contract is governed by English law. Choosing England as the seat means that the arbitration will be supervised by the English Courts, applying the Arbitration Act 1996. While governing law and seat go hand in hand and should ideally be identical, the applicable law of the contract is the more important choice. The applicable law can have a considerable impact on the rights and obligations of the parties, and it may drive the selection of the seat as a secondary (nonetheless important) choice.

Returning to the relevance (or lack thereof) of Brexit, the English law of contract as it applies between commercial parties is not dependent on EU law principles. While EU has made significant intrusions into the sphere of consumer law and provides a number of protections for consumers that were traditionally unknown to the more laissez-faire English law, nothing of the sort has happened in the field of commercial law since 1972. We do not yet know what will happen to the many hundreds of EU instruments that currently apply in the UK - but save perhaps for a limited number of cases, whatever the legal positon will turn out to be after Brexit, it will not affect the kind of disputes that are referred to international arbitration in London with any immediacy (or indeed, as far as we can tell now, at all).

Why then do so many parties choose English law for their agreements? It has often been said that English law offers certainty and predictability. When it comes to interpreting or construing contracts, what you see is very often what you get. English law has a straightforward, objective approach to contractual interpretation. The ordinary meaning of the words used in the written contract frequently carries the day. Bargains struck between commercial parties are upheld. English law offers freedom of contract. There is little room for implied terms, doctrines of good faith or notions of deliberate breach or fault-based remedies tilting the balance unexpectedly in favour of one party.

Common sense prevails - the latest from the Court of Appeal in contract interpretation

Many contracts are poorly drafted, or perhaps less than perfectly drafted because they represent a compromise, with lawyers for both sides pushing and pulling at the wording to make it that little bit more favourable for their client. English law offers a reliable and common-sense approach to resolving these issues without departing from the written words. A recent decision by the Court of Appeal dealing with a less than perfectly drafted contract provides a good illustration. In Sutton Housing Partnership Ltd v Rydon Maintenance Ltd [2017] EWCA Civ 359, the London Borough of Sutton had engaged Rydon under a long term contract to manage its housing stock - something that involved extensive repairs, maintenance and (where necessary) construction work. The main provisions of the contract stated that Rydon could benefit from an incentive scheme, and they also gave Sutton a right to terminate for poor performance. The contract explained that Sutton’s right to terminate, and Rydon’s right to additional incentive payments, both depended on whether Rydon had met, or exceeded, so-called ‘minimum acceptable performance’ levels (MAPs). The contract also said that the MAPs were to be found in a key performance indicator (KPI) framework comprised largely of a spreadsheet - which soon turned out to be problematic.

Sutton became dissatisfied with Rydon’s performance and wanted to terminate. Rydon argued that the contract did not actually contain any MAPs, certainly not for the relevant contract years. The only reference to MAPs to be found anywhere in the KPI framework was in a worked example for the first year of the contract. The worked example showed that MAPs were 3% below the performance target. Jackson LJ in the Court of Appeal deduced that the parties had wanted to set the MAPs at 3% for all contract years, even though they had not expressly said that. To hold otherwise would have limited Sutton’s right to terminate for poor performance to the first contract year, whilst equally preventing Rydon from earning incentive payments in any of the following years, something which a reasonable person would not have taken as their intention. The construction adopted by the Court of Appeal stopped short of implying a new term into the contract: it is a good example of how English law construes the intention of the parties objectively, and in a commercially sensible manner, by looking at what they have written in their contract - but does not rewrite the agreement, or subject it to a test of reasonableness.

Contrasting approaches to contract interpretation under English law and civil law

In contrast, in civil law systems we understand that there is more scope for the subjective intention of the parties to prevail over the contract wording, and there may also be greater propensity for statute to introduce further terms into the agreement, depending on the industry or sector. French law is a good example. The relevant part of the Civil Code was recently amended, with the changes having come into force as of 1 October 2016. Article 1102 of the French Civil Code describes how the principle of freedom of contract underlies French law, and declares that the parties are free to contract (or not), and determine the content and form of the contract, “… within the limits imposed by legislation.” It seems that any statutes which are deemed to reflect French public policy cannot be derogated from. It can be difficult to locate relevant statutes.

French law introduces a duty of good faith which applies both to the performance of the contract, but also to any negotiations leading up to it. As regards such negotiations, the October 2016 reforms now make it clear that a party has to disclose information that would directly affect the other party’s intention or willingness to contract.

A third change is that French law now recognises the concept of hardship - a doctrine that had previously featured in other civil law systems, but not in France. The October 2016 changes now provide that a party may renegotiate the contract if continuing performance on the originally agreed terms would be excessively onerous, always provided that it has not expressly accepted the relevant risk in the contract. English law adopts a narrower approach: there is no automatically applicable duty of good faith (although clauses expressly applying good faith are upheld), a party is not under a positive duty of disclosure during negotiations (but a contract can be void for misrepresentation where it has been induced by a false statement), and there is no doctrine of hardship (although contracts can be frustrated where performance becomes impossible, and force majeure clauses may excuse a party in certain defined circumstances).

What other advantages does English law offer?

English law practitioners would identify a couple of other advantages that are unaffected. English law - when applied by arbitrators or judges with English training - should lead to reasoned and principled awards of damages. It compensates parties based on principles that most businessmen would understand and agree with. There are no mysterious ‘lump sum’ awards as can be found in civil law decisions, and there are no punitive damages as can be awarded in the United States. English law has also strived to make itself useful to businessmen and commerce for several centuries. The English law of contract is predominantly based on judicial precedent in the shape of case law, alongside statute. The law of contract can therefore adapt and evolve more quickly than codified systems which require legislative reforms that may be slow in coming. English law has grown and kept pace with modern business practices and technology. It can deal with complicated financial structures and technically complex issues, as in the energy, engineering and construction industries (sectors where English law is often favoured). This prevalence of English law works to its advantage. Because more complex contracts are subject to English law, English judges and arbitrators resolve more such disputes. Jurisprudence can develop. While decisions on contractual interpretations are limited to the agreement in question, it helps to have recourse to a body of law on recurring issues and commentary on the standard forms that often provide the foundation for the parties’ contracts.

If you are asking your counterparty in negotiations to accept English law, familiarity may work in your favour. The common law is the basis of around 30% of the world’s jurisdictions. As the de facto market leader, English law has become increasingly familiar even to those from other legal backgrounds. English is also the lingua franca of international trade. If you are negotiating in English, then why not also resolve your disputes in English?

Lastly, the London offers a sophisticated legal infrastructure.This allows parties to access a mature legal services market, with specialist lawyers available to advise on any number of complex transactions. The Arbitration Act 1996 and English law as it applies to arbitrations and arbitration agreements provides party autonomy and strongly supports the arbitral process. The Commercial Court gives effect to arbitration agreements and assists the parties where this is required and appropriate. It deals robustly with challenges to awards (e.g. under Section 68 on the basis of a serious procedural irregularity). The Commercial Court can also grant injunctions, including worldwide freezing orders, in support of arbitration proceedings or the enforcement of awards. Again, the exercise of the High Court’s supervisory role in arbitrations with a seat in England would not be affected by Brexit.

Conclusion

The Lord Chief Justice of England and Wales, Lord Thomas, said:

In some quarters it has even been suggested that Brexit makes the law of the UK uncertain. This is all quite wrong. Brexit will have no effect on London’s key strengths.”

He was right to be emphatic. However, the English legal profession cannot be complacent in the face of Brexit. Practitioners (counsel and arbitrators alike) will continue to have to explain the true position to clients and colleagues who will, quite understandably, have questions. This also provides an opportunity for taking stock, and reminding ourselves of the reasons why parties come to arbitrate their disputes in London. There is always room for improvement, including when it comes to the duration and costs of proceedings. But whilst we might not all be proud of the leaders that our society seems to throw up like a cat regurgitating fur balls, at very least we can still, humbly and gratefully, take pride in our legal system.

Click here to download issues of The Arbiter - International Disputes Newsletter.

People

Associated Practices