AWARD ENFORCEMENT ORDERS: TO SET ASIDE OR NOT TO SET ASIDE? – THAT IS THE QUESTION

In a judgment handed down by the English High Court last month (A v B [2020] EWHC 952 (Comm)), the court delivered a stern warning to claimants considering the enforcement of an arbitration award which fails to establish a clear “right to payment”. The judgment also serves as a timely reminder that an application for leave to enforce an arbitration award should be made on solid legal grounds, and with full disclosure of all relevant points if made on an ex parte basis.

Background

A dispute between the parties in relation to a 2015 settlement agreement was referred to arbitration. Those arbitral proceedings were then settled by consent through a further settlement agreement in 2018, in which the parties agreed that the arbitrator would make an award that reflected the settlement.

The ensuing award, made on 4 December 2018 (the “Award”), provided for the Defendant to pay US$34.6 million, plus interest of US$10.2 million, provided that no interest was payable if the principal sum was paid in accordance with the payment schedule set out in the Award. However, the final instalment due from the Defendant under the payment schedule was paid over two weeks late, on 16/17 October 2019.

Unfortunately for the Defendant, the Claimant had in the meantime issued a claim (on 14 October 2019) seeking leave from the court to enforce the Award, which was granted on 17 October 2019 “under sections 101(2) and 66(1) of the Arbitration Act 1996 to enforce the operative part of the Award” (the “October Order”).

The Defendant subsequently applied to the court on 7 November 2019 to set aside the October Order (the “Set Aside Application”).

Key grounds for Set Aside Application

The grounds advanced by the Defendant in support of setting aside the October Order were, in summary, that:

1. the application for leave to enforce the Award had been made under s101(2) and s66(1) of the Act, despite the fact the Award was made in the United Kingdom. This meant the Award did not fall within the definition of a “New York Convention Award” (i.e. “an award made, in pursuance of an arbitration agreement, in the territory of a state (other than the United Kingdom) which is a party to the New York Convention”), as set out in s100 of the Act;
2. there was no power under s66(1) of the Act to order judgment in the terms made; and
3. the court should exercise its discretion under s66 to refuse leave to enforce the Award as the relevant provision set out that “an award made by the tribunal pursuant to an arbitration agreement may, by leave of the court, be enforced in the same manner as a judgment or order of the court to the same effect.”

Crucially, the Defendants submitted that an order pursuant to s66(1) could only be to enforce rights which the judgment or award had established (citing West Tankers Inc v Allianz Spa [2012] EWCA Civ 27). They argued that in the current circumstances, rights flowing from the acceleration of the debt pursuant to clause 3.3 of the Award (i.e. that payment was “due and owing in full and payable immediately”) had not yet been established.

In opposing the application, the Claimant submitted that it was common ground that the Defendants had failed to pay the October instalment on 1 October 2019. There was therefore no need for the court to determine whether the circumstances determining payment under the Award had been engaged and were accelerated under clause 3.3. Further, there was no basis to refuse enforcement of the Award given the lack of a clear agreement between the two parties during the period after default, in which the two sides had tentatively discussed the possibility of postponing enforcement of the Claimant’s rights under the 2018 settlement agreement.

High Court decision

Application for leave to enforce under s101 of the Act

While the Claimant had submitted that the judge granting the October Order  would have been aware that the seat of the arbitration was London, and that “section 101 did not apply”, this was rejected by the High Court. The High Court reiterated that it is incumbent on an applicant making an ex parte application to draw the attention of the court to “all relevant points”, including the fact the Award did not fall within the definition of a “New York Convention Award” under s101 of the Act. Moreover, the claim form not only inaccurately relied on s101 but arguably placed greater reliance on it than was reasonable. Therefore, in the court’s view, the judge may have been led “to make an order which he might not otherwise have done and the October Order should be set aside”.

Scope of S66 of the Act

The High Court also considered whether it was open to the court to make an order under s66 of the Act in terms of the October Order, the relevant part of which provided (with emphasis) as follows:

 “to enforce the operative part of the Award, namely that the Defendant shall pay to the Claimant the sum currently outstanding of USD $39,111,604.18.”

As the obligation to pay the sum arose under clause 2.1 of the Award, the Claimant submitted that the provisions under clause 3 of the Award accelerating the debt were merely “the payment mechanism”. Moulder J disagreed, for the following reasons:

• In his view, clause 2 of the award (that “The Respondent will pay the Claimant:…2.1.1 The sum of USD$34,632,475.62 (the “Principal Sum”);…2.1.2 Accrued interest on the Principal Sum, being USD$10,229,128.56 as at the Execution Date (the “Accrued Interest”)…”) contained an obligation to pay but was silent as to when that sum would be due and/or payable. In order to ascertain the amount due at any time, one would have to take note of the provisions in clause 3, which provided the scheduled due dates for payment and in certain circumstances, acceleration of the payments.
• Accordingly, it was not open to the court to make an order in the terms sought by the Claimant where circumstances required further adjudication; namely that there had been a failure to pay an instalment and the payment had become due under clause 3.3 of the Award. In coming to this conclusion, Moulder J made reference to the Court of Appeal’s decision in West Tankers, which stated (with emphasis) that “[f]or the enforcement of any judgment or award is the enforcement of the rights which the judgment or award has established. As with any judgment or award, so in the case of a monetary judgment or award its enforcement is the enforcement of the right (a right to payment) which the award has established”.

In the current case, the Award had not established the “right to payment” of the accelerated sum. There was no clear statement or finding in the Award that the entire principal sum had become due pursuant to clause 3.3. Instead, it was found that there was only provision in the Award for the sum to become due if certain conditions had been satisfied. Therefore, the terms of the October Order, which stated that the “the defendant shall pay to the claimant the sum currently outstanding of USD $39,111,604.18.”, did not reflect the terms of the Award. The judge had not gone on to establish whether clause 3.3 had been triggered and whether, as a result, the principal sum had become accelerated. Accordingly, the Claimant could not rely on section 66 of the Act.

The court went on to consider remaining issues of fact and established that the defendant had shown on the evidence a realistic prospect of establishing a defence to enforcement given the factual context surrounding the dispute. As a result, the “factual dispute” needed to be resolved by way of a further court hearing before the court could determine whether to make an order granting leave to enforce.

Comment

This case is a useful reminder of the scope of the summary enforcement procedure under s66 of the Act, which allows for swift enforcement of arbitral awards. While applications under s66 do not usually involve any detailed review of the background facts in relation to the underlying arbitration, the English courts take a robust approach to such applications and will refuse to grant enforcement where the underlying award does not establish a clear right to payment. This decision also highlights the need for careful consideration of future enforceability at the pre-award stage and the need for claimants to make submissions addressing any particular provisions necessary to ensure an enforceable award. Parties should ensure that the relief sought from the tribunal is clearly pleaded when asking for an award that Party A pays Party B a quantified sum together with a specified rate and period of interest accrual where applicable. Parties should also check the dispositive section of their awards upon first receipt and ensure they are clear enough for enforcement and where not, consider seeking clarification of the award where institutional rules allow.

For more information please contact Start Paterson, Partner, Benjamin Hopps, Of Counsel, Elikem Dzikunu, Associate, or your usual Herbert Smith Freehills contact.