Facts
In 1997 Alshaya, a Kuwaiti company, invited tenders for the
replacement of a management information system used in its business
of retailing designer goods. Retek Inc., an American software
supplier, eventually entered into two agreements with Alshaya, one
for supply of software and the other for maintenance of that
software. The licence agreement contained the following
provisions:
“14.10 Governing Law –
This agreement will be governed and construed according to the laws
of the Country of England and the parties agree to submit to the
exclusive jurisdiction of the Courts of England …"
“14.14 Disputes – Subject to the limitations
stated in the final sentence of this paragraph, any dispute arising
in connection with this agreement which cannot be settled by
negotiation between the parties and their representatives shall be
submitted to arbitration in accordance with the laws of the
American Arbitration Association or any successor
association. Notwithstanding the foregoing, Supplier retains
the right to apply for injunctive relief before a court of
competent jurisdiction as set forth in clause 13.3”.
The maintenance agreement contained the following provision:
“Governing Law – this
agreement will be governed by and construed according to the laws
of the Country of England and the parties have agreed to submit to
the exclusive jurisdiction of the Courts of England”.
The maintenance agreement did not make any reference to disputes
being resolved by arbitration.
According to Alshaya, before the agreements were concluded,
Retek Inc.’s English subsidiary, Retek Limited, made
representations that the project would cost about US$1.5m and would
take about 12 months. Alshaya said Retek Limited made these
representations on its own account, or on account of Retek Inc., or
both. Following conclusion of the agreements, Alshaya and
Retek Inc. carried out what was referred to as a pilot stage.
In that stage, according to Alshaya, it became clear that the
project might cost as much as US$8.5m and might take as long as 36
months to implement. In September or October 1998, Alshaya
purported to rescind both agreements either for misrepresentation
or for repudiatory breach of the contract.
In May 2000, Retek Inc. commenced arbitration proceedings in
which it sought two instalments payable under the licence agreement
and US$450k of the fees payable under the maintenance
agreement. It subsequently argued that fees payable under the
maintenance agreement could be claimed in the arbitration because
such claims arose in connection with the licence agreement.
Judgment
In September 2000 Alshaya commenced these proceedings in which
it sought to recover from Retek Inc. the first instalment of
US$500k paid under the licence agreement, alternatively damages,
and a declaration that it was entitled to rescission of both
agreements. As against Retek Limited, Alshaya sought damages
for negligent misstatement in connection with representations it
had made regarding the cost and time frame for the project.
In the application before the Court, Alshaya sought an order that
Retek Inc. be restrained from prosecuting the arbitration on the
basis that commencement of the arbitration proceedings constituted
a breach of agreement to submit disputes to the exclusive
jurisdiction of the English Courts.
In turn, Retek Inc. sought an order that, as against it, the
proceedings be stayed pursuant to the provisions of the Arbitration
Act 1996 on the basis that there was a binding agreement to
arbitrate. Further, both Retek Inc. and Retek Limited applied
for an order that the proceedings commenced against both of them be
stayed pursuant to the inherent jurisdiction of the Court and the
provisions of the Supreme Court Act 1981. In his judgment,
Garland J. made reference to various provisions of the Arbitration
Act 1996. The most significant are the following sub-sections
of section 9:
"(1) A party to
an arbitration agreement against whom legal proceedings are brought
(whether by claim or counterclaim) in respect of a matter which
under the agreement is to be referred to arbitration may (upon
notice to the other parties to the proceedings) apply to the Court
in which the proceedings have been brought to stay the proceedings
so far as they concern that matter …”
“(4) On an application under this section
the Court shall grant a stay unless satisfied that the arbitration
agreement is null and void, inoperative, or incapable of being
performed”.
Alshaya’s case was that there was a fundamental inconsistency in
the terms of the licence agreement. At clause 14.10 it
recorded an agreement to submit to the exclusive jurisdiction of
the English Courts, whereas at clause 14.14 it stated that disputes
were to be resolved by arbitration. Alshaya’s argument was
that in such circumstances, the arbitration agreement fell within
the provisions of section 9(4) of the 1996 Act, it was inoperative
and incapable of being performed. On Alshaya’s argument, it
followed that the Court should dismiss the stay application and
exercise jurisdiction over the entire dispute.
The gist of Retek Inc.’s argument was that there was no
inconsistency between 14.10 and 14.14 of the licence
agreement. Its argued that clause 14.10 gave the English
Courts a curial jurisdiction when the intervention of the Court was
necessary under the Arbitration Act, for example where injunctive
relief was sought. Retek Inc. said that the Courts should not
reject the arbitration provision as repugnant where it could be
reconciled with the choice of law and jurisdiction provisions.
A number of cases are cited in the judgment. The most
important were The Nerano [1994] 2 Lloyds Rep.
50, Shell International Petroleum Company Limited v Coral
Oil [1999] 1 Lloyd’s Rep. 72 and Paul Smith Limited v H
& S International Holdings Incorporated [1991] 2 Lloyd’s
Rep. 127.
Briefly, the facts in
Nerano were that a bill of lading included on its face the
following clause:
"the conditions as per relevant charter
party dated 02.07.1990 are incorporated in this bill of lading and
have precedence if there is a conflict, English Law and
Jurisdiction applies”.
The conditions of carriage on the back of the document included
the following clause:
“all terms and conditions liberties
exceptions and arbitration clause of the Charter Party, dated as
overleaf, are herewith incorporated”.
The charter party itself contained an arbitration clause.
At first instance it was held that the reference to English
jurisdiction was not inconsistent with the arbitration provision
because the Courts of England would retain a supervisory
jurisdiction over the arbitration. The Court of Appeal upheld
this decision. It said that since the parties has
specifically identified the arbitration provision in the conditions
of carriage, that provision should have effect, if at all
possible.
In Shell v Coral a trademark agreement and a supply
agreement both provided for arbitration in England in the event of
a dispute. The supply agreement included the following
clause:
“this Agreement, its interpretation and
the relationship of the parties hereto shall be governed and
construed in accordance with English Law and any dispute under this
provision shall be referred to the jurisdiction of the English
Courts”.
The Court held that in determining the intention of the parties,
the arbitration and jurisdiction clauses were capable of
reconciliation. Its reasoning was that, on the wording of the
jurisdiction clause, any dispute about the proper law of the supply
agreement was to be referred to the English Court and all
substantive disputes were to be referred to arbitration.
Finally, in Paul Smith v H&S, there was a single
agreement. It provided for arbitration under the ICC Rules in
the event of a dispute and, in a separate clause, for the Courts of
England to have exclusive jurisdiction over the agreement.
Steyn J, as he then was, held that the apparent inconsistency could
again be reconciled. He said that the jurisdiction clause set
out the curial law or the law governing the arbitration and this
was not at all inconsistent with the referral of disputes to
arbitration under the ICC Rules, which would determine the
procedure according to which the arbitration was to be
conducted.
In his judgment, Garland J. said that his primary task was to
ascertain the intention of the parties in a commercially realistic
way and that, if that were not possible, it might be permissible to
resort to the contra proferentem rule, i.e. that any
ambiguity should be resolved against the party seeking to rely on
the clause in question. That party would, of course, be Retek
Inc.
The Judge found in favour of Alshaya. He said that the
attempt to “squeeze” the dispute under the maintenance agreement
into the arbitration by saying that it arose in connection with the
licence agreement was going too far. Further, the argument in
favour of consistency of treatment of disputes under such closely
connected contracts was compelling. Since he had no power to
write an arbitration clause into the maintenance agreement, the
Judge resolved to write the arbitration provision out of the
licence agreement. He stated that if the licence agreement
had stood alone then he could see great force in the argument in
Nerano and Paul Smith that the provisions could
be reconciled. In his judgment, however, the present case was
different. There was a possibility that entirely discrete
disputes could arise under the two agreements and yet there was
continuing overlap between the agreements. Because of this
continuing overlap, Garland J. resolved to provide a single remedy
for disputes arising out of both agreements.
Commentary
There are perhaps two points which should be made before
analysing the judgment. First, this was a
semi-extempore judgment and, therefore, perhaps not as
detailed as Garland J. might have liked. Second, Garland J.
said that he found the issue a very difficult point of
construction.
Leaving aside the legal principles, it is easy to see why
resolution of all of the issues in these proceedings would be
sensible. Retek Limited, despite its very strong community of
interest with Retek Inc, could not be made a party to the
arbitration proceedings. It was doubtful that the sums
allegedly due under the maintenance agreement could possibly fall
to be claimed in the arbitration under the ambit of the licence
agreement, so the Court proceedings would always be necessary to
deal with disputes relating to that agreement. Further, from
the judgment it appears that the issues in respect of all of the
causes of action were effectively the same, so plainly it would
have been preferable to have all of the issues resolved in one set
of proceedings. This was not, however, an application in
which the Court’s task was to determine the most efficient or
effective procedure for disposing of the claims. Rather, the
Court was being asked to determine the parties’ substantive rights
in relation to the purported agreement to resolve disputes under
the licence agreement by arbitration.
The learned Judge said that the correct approach was to
ascertain the intention of the parties in a commercially realistic
way and, if that was not possible, to resort to the contra
proferentem rule. In arriving at his conclusions, however,
Garland J. does not explicitly say whether he has done so on the
basis of his perception of the commercial intention of the parties
or the contra proferentem rule. To a reader who has not seen
the evidence, it seems almost impossible to interpret the
agreements to ascertain a sensible or realistic commercial
intention of the parties.
In his judgment, Garland J. says that if the licence agreement
stood alone he would have been in a position to reconcile the two
conflicting provisions along the lines of the judgments in
Nerano and Paul Smith, namely that the
arbitration provision had effect and the jurisdiction provision
referred only to the curial jurisdiction of the Court. This
statement points up a difficulty with the conclusion arrived at by
the learned Judge. He appears to have concluded that the
inconsistency of drafting in the licence agreement was not
fundamental and was capable of being resolved. If this is
right then, arguably, the arbitration provision was capable of
being performed and that Retek Inc.’s substantive right to
arbitration should not have been denied. It is unfortunate
that the parties had chosen inconsistent methods of dispute
resolution under the two agreements but, if it is right that the
arbitration agreement was capable of being performed, then the
proper approach would have been to give effect to the agreement of
the parties, notwithstanding the possibility of somewhat
unsatisfactory results.
What, then, was the alternative course open to Garland J?
The arbitration proceedings were already on foot. Had they
proceeded to a final determination then the rights of Alshaya and
Retek Inc. would have been determined by the principles of res
judicata and issue estoppel. In respect of the causes of
action over which the arbitral tribunal validly found it had
jurisdiction (which may or may not have been the monies allegedly
due under the maintenance agreement) the findings of the arbitral
tribunal on these points would have been subject to the principle
of res judicata, i.e. final and binding on the parties and
not capable of being litigated again in the proceedings. For
the causes of action between Alshaya and Retek Inc. in respect of
which the arbitral tribunal declined jurisdiction, these could have
been disposed of subsequently, in the proceedings. However,
insofar as these causes of action arose out of the same facts as
were decided in the arbitration, then, according to the principles
of issue estoppel, the Court would have been unable to open up
those issues of fact in the proceedings.
So, if Alshaya defended the arbitration proceedings in relation
to the licence agreement on the basis of misrepresentation, the
arbitrator’s findings of fact on the points in issue would have
bound the Court in determining separate claims on the same facts in
the proceedings. It would have been open to Garland J. to
have stayed the proceedings pending the outcome of the arbitration
pursuant to section 49(2) of the Supreme Court Act 1981. This
provides that the Court is to exercise its jurisdiction in a manner
which avoids a multiplicity of legal proceedings. This would
have allowed time for the arbitration to run its course following
which, as set out above, a number of logical consequences would
have followed upon the lifting of the stay. For example, if
the arbitral tribunal found that it had jurisdiction over the
licence agreement only, and Alshaya’s defence was successful in the
arbitration, then upon the lifting of the stay in the proceedings
it would follow that Alshaya would be entitled to a declaration
that the maintenance agreement had been validly rescinded.
All of this seems workable if somewhat cumbersome.
The real difficulty with this approach arises when considering
the position of Retek Limited. As a stranger to the
arbitration proceedings, Retek Limited would not be bound by an
issue estoppel in relation to any findings of fact made by the
arbitral tribunal. The principle of res inter alios acta
essentially provides that where a person was not party to
proceedings, he ought not to be prejudiced by the findings in those
proceedings. It is possible, therefore, that the findings of
fact in the arbitration proceedings would have effectively disposed
of disputes between Alshaya and Retek Inc., only for Alshaya to
re-litigate all of the issues against Retek Limited on the basis of
an action for negligent mis-statement. Plainly, this is a
highly unsatisfactory scenario, but one which may be considered
unlikely to arise in practice.
This case raises some interesting issues of principle. At
first blush it appears to represent a bold assertion of the Court’s
jurisdiction over and above agreements to arbitrate. Yet its
application may be confined to the very limited factual scenario
arising out of the conflict between clauses 14.10 and 14.14 of the
licence agreement. Had the licence agreement been unambiguous
in its reference to arbitration then it is questionable whether the
co-existence of the maintenance agreement would have rendered the
arbitration agreement incapable of being performed. It seems,
therefore, that the case may not herald a wave of judicial
intervention in arbitration. It is, however, a timely
reminder of the need for consistency of drafting when formulating
dispute resolution provisions. Standard form licence
agreements are commonly entered into together with maintenance
agreements and parties would be well advised to ensure consistency
of drafting. Similar principles apply when a main contractor
sub-contracts some or all of its contractual obligations.
Following the judgment Retek Inc. and Retek Limited indicated
through their Counsel that the decision would be appealed. As
stated above, Garland J. openly acknowledged that he had found the
case a difficult one, and it will be interesting to see how the
Court of Appeal tackles it.
