Is your Arbitration clause wide enough to catch dispute based upon criminal conduct? (Interprods v De La Rue)

Is your Arbitration clause wide enough to catch dispute based upon criminal conduct? (Interprods v De La Rue)

In Interprods Limited v De La Rue International Limited [2014] EWHC 68 (Comm) the Commercial Court dismissed a challenge to an LCIA award pursuant to sections 67 and 68 of the Arbitration Act 1996 (AA 1996).

The court's decision is of particular interest to practitioners as the court was required to consider whether the allegations of criminal conduct in the case were sufficient to deprive the arbitral tribunal of jurisdiction to determine the parties' contractual rights and obligations in light of that criminal conduct.

Background

The applicant (Interprods), a Nigerian company, acted as agent and distributor in Nigeria for the respondent (De La Rue) in return for the payment of commission pursuant to two agency agreements (the 'agency agreements'). De La Rue terminated the parties' agency agreements following revelations by an Interprods employee that commission paid to the company would be used to bribe and corrupt Nigerian officials.

De La Rue also commenced LCIA arbitration proceedings pursuant to arbitration clauses contained in the agency agreements, seeking a declaration that it was entitled to terminate the agency agreements and that it was not obliged to pay any further commission to Interprods.

The arbitrator issued an award dated 3 July 2013, holding that the employee had stated that the commission was required to pay bribes and, therefore, De La Rue was entitled to terminate the agency agreements and was not obliged to make any further commission payments.

The arbitration clause contained in the agency agreements provided as follows:

'Any dispute arising out of in connection with this contract, including any question regarding its existence, validity or termination, shall in the first instance be referred to mediation. Should mediation fail, the matter will be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.'

Key points - challenging the arbitrator's jurisdiction (AA 1996, s 67)

Interprods challenged the award pursuant to AA 1996, s 67 on the basis that the arbitrator lacked jurisdiction to make the award. Interprods argued that the court should not construe the arbitration clause as extending to allegations of serious criminal conduct.

The court dismissed the applicant's challenge and made the following key points:

  • De La Rue's application for relief in the LCIA arbitration was a dispute arising out of or in con-nection with the agency agreements. The fact that the reason as to why the agreements were terminated and the reason why De La Rue was no longer obliged to pay commission to Inter-prods was an alleged admission that the commission would be used for a criminal purpose, did not alter that conclusion
  • it would 'seriously restrict' the ambit of arbitration clauses, such as the one above, if an allegation of criminal conduct was sufficient to deprive the tribunal of jurisdiction to determine contractual rights and obligations in light of that criminal conduct
  • such an intention is not to be attributed to the parties unless there are words in the arbitration clause that show that contractual disputes which are dependent upon an assertion of criminal conduct are to be excluded from the jurisdiction of the tribunal; an approach consistent with Lord Hoffman's famous dicta in the Fiona Trust case. There were no such express words in-cluded in the parties' arbitration clauses in this case. Further, the fact that the agency agree-ments contemplated that De La Rue could terminate if Interprods committed 'any criminal of-fence' made it even more unlikely that the parties intended such claims should not be referred to arbitration

Key points - serious irregularity in making the award (AA 1996, s 68)

Interprods also challenged the award pursuant to AA 1996, s 68, asserting that the arbitrator had committed three serious irregularities in conducting the arbitration such that the award should be set aside. Once again, the court dismissed Interprods' challenge. Before taking each allegation of serious irregularity in turn, the court confirmed that the case law as to the type of irregularity covered by AA 1996, s 68 was 'fairly summarised' by Mr Justice Popplewell in Terna.

The court's analysis of the second allegation of serious irregularity is of particular interest. The arbitrator had, after his appointment by the LCIA in the instant case, been appointed by the LCIA as arbitrator in two other cases where one of the parties was represented by Clyde and Co (solicitors for De La Rue). The arbitrator did not disclose this until late in the LCIA proceedings, albeit before rendering his award.

Interprods argued that these matters gave rise to 'apparent bias' such that the arbitrator was unable to act impartially between the parties in breach of AA 1996, s 33. The question for the court was whether, because the arbitrator was also an arbitrator in two further cases where a party was represented by the same solicitors who act for De La Rue, a fair-minded and informed observer would conclude that there was a real possibility of bias in that the 'arbitrator thus acquired familiarity with Clyde and Co and may have been unconsciously influenced by a hope of being appointed by them in other arbitrations in such a way as to lead him to regard their client's case with greater favour than he might otherwise have done.'

The court confirmed the test for apparent bias as established in Porter v Magill, i.e. whether 'the fair-minded and informed observer, having considered the relevant facts, would conclude that there is a real possibility that the tribunal was biased'. The court also noted the following observations of Mr Justice Flaux in A v B, that:

  • the test was objective and was not dependent upon the characteristics or nationalities of the parties
  • the fair-minded observer is assumed to be in possession of all the facts which bear on the question whether there was a real possibility of bias
  • although the fair-minded observer is not to be regarded as a lawyer, he is expected to be aware of the way in which the legal profession in the country operates in practice

The judge concluded that 'only the most suspicious of observers might conclude that there was a possibility of such bias', and that the fair-minded and informed observer is not unduly suspicious. In the court's view, there was nothing untoward in the relationship between the arbitrator and the solicitors firm involved in the case:

'Mr. Paul Hannon, the arbitrator in this case, is a London-based international commercial arbitrator. He is an Irish na-tional with American and French legal qualifications and extensive experience in business both as a practising lawyer and as a business executive. He is a member of the Board of Directors and a former Vice-President of the LCIA. He has acted as chairman, sole arbitrator, party appointed arbitrator and advocate in more than 60 arbitrations conducted under the rules of the ICC, the ICDR, the LCIA and other rules. Since Clyde and Co. is a well known solicitor which acts in many arbitrations in London the arbitrator would, I accept, be alive to the possibility that Clyde and Co. might, if they were satisfied with his work as an arbitrator, seek to procure his appointment in further arbitrations. But the same can be said of any arbitrator who is appointed in an arbitration where one or both of the parties has instructed a solicitor with a well-known presence in London arbitration. It is, in my judgment, an unjustifiable submission that that fact would cause the fair-minded and informed observer to conclude that there was a real possibility of bias. '

Judgment details

Interprods Limited v De La Rue International Limited [2014] EWHC 68 (Comm)

The application was heard by Mr Justice Teare in the Commercial Court on 16 January 2014 and judgment was rendered on 27 January 2014.

This article was first published on Lexis®PSL Arbitration on 28 January 2014. Click here for a free 24 trial of Lexis®PSL.

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About the author:

Barry specialises in international arbitration and commercial litigation. He trained and practised at Jones Day before joining Pinsent Masons. At LexisNexis, Barry is Head of Arbitration and Head of the Lexis®PSL Dispute Resolution Group.

In practice, Barry’s work included commercial, aviation and technology arbitrations pursuant to international arbitral rules, involving UK and international clients. He also has a background in general commercial, civil fraud and IT litigation, including experience before the High Court. While in private practice, Barry worked with a broad range of clients from the private and public sectors.

At LexisNexis, when not focused on the strategic development and operational requirements of the Dispute Resolution Group, Barry’s content work focuses on the law and practice of international commercial arbitration and investment treaty arbitration. In addition to his work for Lexis®PSL, Barry contributes to the LexisNexis Dispute Resolution Blog and New Law Journal on litigation and arbitration matters