The English Commercial court has overturned an arbitral award under section 67 of the English Arbitration Act 1996, finding that an arbitral tribunal lacked substantive jurisdiction because the respondent company in the arbitration had been dissolved by the time the notice of arbitration was filed (in GA-Hyun Chung v Silver Dry Bulk Co Ltd [2019] EWHC 1147 (Comm)).
Background
The disputed arbitration arose out of the sale of a ship by Homer Hulbert Maritime Co. Ltd ("HH") (represented in the court proceedings by Mr GA-Hyun Chung as trustee of the dissolved HH) to the defendant, Silver Dry Bulk Co. Ltd ("SDBC") in the Marshall Islands. The parties' memorandum of agreement provided for a London-seated arbitration.
The defendant filed a notice of arbitration with the Attorney General of the Marshall Islands in October 2014. HH did not respond and a sole arbitrator ("R") was appointed. R subsequently issued an award in SDBC's favour. The trustee for the claimant, Mr Chung, challenged the award under section 67 of the English Arbitration Act ("EAA") on the basis that the arbitration was a nullity due to HH having been finally dissolved some eight months before the notice of arbitration was filed with the Attorney General of the Marshall Islands. HH had filed articles of dissolution in the Marshall Islands in February 2011 and had been finally wound up three years later in February 2014.
Proceedings in the English courts
The main issues which the English Court had to consider were a) whether the challenge brought by the claimant fell within section 67 of the EAA, and b) whether pursuant to section 105 of the Business Corporations Act of the Marshall Islands ("BCA"), HH had existed as a corporate entity in October 2014. An additional argument by SDBC that HH had lost its right to object under s73 EAA by participating in the arbitral proceedings was given short shrift by the Court.
With regards to the whether the challenge fell within the scope of section 67 of the EAA, the Court sided with the claimant. The Court confirmed that in order to fall within section 67, the challenge had to concern the decision of the tribunal as to its of "substantive jurisdiction" (as defined in section 30(1) of the EAA) which includes the questions of whether a valid arbitration agreement exists (section 30(1)(a)) and whether the tribunal is properly constituted (section 30(1)(b)).
The Court stated that "if HH did not exist, [the arbitration clause] could no longer operate: HH could not appoint an arbitrator, no notice of arbitration could be sent to it and no arbitrator could be appointed in default of a response, since HH was no longer in a position to appoint its own arbitrator or to respond to the notice. Accordingly, if HH had ceased to exist, R could not be validly appointed and the tribunal was not properly constituted." On this basis the Court concluded that the question fell within the ambit of section 30(1)(b) regarding the proper constitution of the tribunal. The Court held that the arbitral tribunal could not give itself jurisdiction in reliance on a finding of fact as to the status of HH, if in fact there was no jurisdiction in the first place.
Even if that finding in relation to section 30(1)(b) were wrong, the Court held that the claimant's challenge also fell within the ambit of section 30(1)(a) of the EAA. The Court found that there could be no continuing agreement to arbitrate once one of the parties to the agreement had ceased to exist. The Court confirmed that "[i]f the arbitration agreement had come to an end there could no longer be any arbitration commenced pursuant to the agreement". The Court referred to the case of Baytur SA v Finagro Holdings SA [1992] 1 QB 610, where it was stated that "[a]n arbitration agreement requires two or more parties. There cannot be a valid arbitration when one of the two parties has ceased to exist".
Accordingly, the Court found that the challenge fell within section 67 of the EAA, as concerning a determination by the tribunal of its substantive jurisdiction in terms of section 30(1)(b) and/or within section 30(1)(a).
As to whether HH existed as a corporate entity in October 2014 under section 105 of the BCA, the Court held that HH had ceased to exist by October 2014. The defendant's position was that, as a matter of Delaware law (which, according to legal experts cited in the case, could be used to interpret statutes of the Marshall Islands if the statutes are substantially similar), a company will continue to exist as a body corporate for three years after its dissolution in order to settle any unfinished business and settle any claims. It was the defendant's submission that the life of the company could be extended beyond the first three years post-dissolution, pursuant to section 105(2) of the BCA, which provided for the directors of the company becoming trustees for the dissolved company. It was the defendant's view that this would also mean that any claims could be brought against the dissolved company after the first three years post-dissolution.
The Court however disagreed with this and noted that "the life of the company is not indefinite by virtue of the trusteeship under [section 105(2)] and subsection (2) does not extend the life of the company in order to dispose of potential claims in the future." It therefore held that HH had ceased to exist by October 2014 and as such the arbitration agreement between HH and SDBC was null. Accordingly the award issued by R was overturned.
Comment
The decision confirms that in order to challenge an award on the basis of a tribunal's lack of "substantive jurisdiction" under section 67, a party will need to be able to point to one of the elements of section 30(1). The case underlines the importance of effective due diligence regarding the status of a proposed respondent when commencing arbitration. This is particularly the case in instances of insolvency or winding up processes commenced in another jurisdiction where the legal ramifications of domestic corporate laws must be fully understood. In such circumstances, claimants should always consider whether their prospective respondent has the legal capacity to participate in an arbitration bearing in mind that once one or more of the parties to an arbitration agreement ceases to exist, the parties' ability to arbitrate with each other also terminates.
For more information, please contact Nicholas Peacock, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.
