A stitch in time saves nine

International disputes partner Jane Wessel comments on a recent High Court judgment illustrating the risks of failing to think through the consequences of inconsistent dispute resolution provisions.

9 February 2015

There is a strong presumption in English law that rational business people entering into commercial agreements intend that all questions arising out of their relationship will be determined in the same forum. This presumption in favour of a “one stop” system of adjudication was articulated by Lord Hoffmann in the leading speech in Fiona Trust & Holdings v. Privalov & Ors [2007] UKHL 40.  Clear words are required to displace this presumption.

In Monde Petroleum SA v. Westernzagros Limited [2015] EWHC 67 (Comm), Mr Justice Popplewell considered the effect of inconsistent dispute resolution provisions. In the underlying agreement, the parties had agreed to submit their disputes to ICC arbitration.  A dispute arose which was settled by agreement, the settlement agreement providing for disputes to be submitted to the exclusive jurisdiction of the English Court.

Section 7 of the Arbitration Act 1996 provides that arbitration agreement are separate from the underlying agreement in which they appear (known as the doctrine of separability), and consequently the termination of the underlying agreement will not result in the termination of the agreement to submit disputes to arbitration unless that intention is clearly expressed.  Accordingly, when a subsequent dispute arose between the parties in Monde Petroleum, there was considerable doubt as to whether the arbitration agreement in the underlying agreement would continue to apply.  The Claimant issued proceedings in the High Court, relying upon the dispute resolution provision in the parties settlement agreement, but also took the sensible step of issuing protective ICC arbitration proceedings to cover off the possibility that the arbitration agreement was still in effect.

Mr Justice Popplewell held that where business people entered into a settlement agreement including a dispute resolution provision inconsistent with that in their underlying agreement, the parties were likely to have intended that the dispute resolution provision in the later agreement would supersede that  in the earlier agreement.  The later provision clearly applied to disputes concerning the scope of the settlement agreement itself.  Issues relating to the underlying agreement would inevitably fall to be decided in any such dispute.  If the earlier arbitration agreement were to continue to apply to those issues there would be a real risk that the arbitration tribunal and the Court would reach inconsistent conclusions.To avoid the risk of such fragmentation, Popplewell J concluded:

“the dispute resolution clause in the termination/settlement agreement should be construed on the basis that the parties are likely to have intended that it should supersede the clause in the earlier agreement and apply to all disputes arising out of both agreements. Whether it does so in any particular case will depend upon the language of the clause and other surrounding circumstances.”

This case is trenchant example of the difficulties that may arise when parties fail to consider carefully the dispute resolution provisions they include in their agreements.  Both parties incurred considerable expense in a fifteen month battle over the appropriate forum in which their underlying dispute should be decided.  Had they agreed ICC arbitration in their settlement agreement, or made it explicit that the submissions to the English Court superseded the ICC arbitration provision in their underlying agreement, they would not have incurred this additional expense and could have got on with the business of resolving their substantive dispute.

The old adage holds true:  a stitch in time really does save nine.