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Partner Ioannis Alexopoulos and Associate Nikoletta Beneki examine the recent judgment in 1Malaysia Development Berhad v International Petroleum Investment Company, Aabar Investments PJS [2019], and discuss the court’s supervisory jurisdiction under Sections 67 and 68 of the Arbitration Act of 1996 and whether it takes precedence over further arbitration proceedings agreed by the parties, in Law360.

Ioannis and Nikoletta’s article was published in Law360, 9 August 2019, and can be read here.

The Commercial Court recently issued a judgment on Minister of Finance (Incorporated), 1Malaysia Development Berhad v. International Petroleum Investment Company, Aabar Investments PJS, examining the court’s supervisory jurisdiction under Sections 67 and 68 of the Arbitration Act of 1996 and whether it takes precedence over further arbitration proceedings agreed by the parties.

Background

The claimants were entities incorporated in Malaysia and the defendants were entities incorporated in Abu Dhabi. The parties were involved in an arbitration seated in London, which had been commenced by the defendants under a binding term sheet. The arbitration was settled pursuant to settlement deeds, which provided for a consent award to be issued by the arbitral tribunal. The settlement deeds provided that any dispute arising out of the settled matters would be resolved by a London seated arbitration under the London Court of International Arbitration rules.

While the claimants complied with their obligations under the settlement deeds for a period of 12 months, they then stopped making payments and challenged the consent award and the settlement deeds. The claimants alleged that both the settlement deeds and the consent award had been obtained by fraud, having been procured, to the defendants’ knowledge, by the former prime minister of Malaysia contrary to the claimants’ interests. The claimants further alleged that part of the attempts to conceal and prevent the investigation of the conspiracy was also the choice of arbitration, which would provide for the confidentiality of the proceedings. In this respect, the claimants invoked the supervisory jurisdiction of the English court under Sections 67 and 68 of the act.

The defendants denied the allegations made by the claimants and commenced arbitration proceedings, seated in London, under the settlement deeds. They further applied for the Sections 67 and 68 proceedings to be stayed in favor of the second arbitration, under Section 9 of the act, or the court’s inherent case-management jurisdiction. The claimants applied for an injunction restraining the second arbitration.

The Commercial Court Judgment

The central issue in this case was whether the question of whether the settlement deeds were void and not binding should be determined by the court, under its Section 67 and 68 powers, or by the arbitral tribunal.

As a starting point, the court referred to the importance of the principle of party autonomy (as set out by Lord Hoffman in West Tankers Inc. v. RAS Riunione Adriatica di Sicurta SpA and Others), which should allow the parties’ choice to resolve their disputes by arbitration, outside of the procedures of a national court. Consideration should, however, also be given to the court’s role and its supervisory jurisdiction. In this respect, it was pointed out that Sections 67 and 68 are mandatory provisions which, pursuant to Section 4 of the act, “have effect notwithstanding any agreement to the contrary.” However, such jurisdiction also derives from the parties’ autonomy since it is because of the parties’ choice of London as the seat of the arbitration that Sections 67 and 68 are triggered.

In light of the above, the position was that the arbitral tribunal in the second arbitration had jurisdiction to determine the validity of the arbitration agreements contained in the settlement deeds, including to determine the question of whether such arbitration agreements had been procured by fraud. At the same time, the court had jurisdiction (under the mandatory provisions of Sections 67 and 68) to determine whether the arbitral tribunal in the first arbitration had substantive jurisdiction to make the consent award as well as to determine whether there was any irregularity affecting it.

However, the latter did not amount to the arbitration agreement being rendered ineffective. It rather meant that Section 4 of the act deals with the continuous effectiveness of Sections 67 and 68. As a result, the arbitral tribunal and the court had concurrent jurisdiction to answer the question of whether the settlement deeds (pursuant to which the consent award had been issued) were void and not binding. In such circumstances, it was important that proceedings before one of the two fora were stayed in favor of the other.

The court, therefore, proceeded to examine whether a stay under Section 9 of the act, which is also a mandatory provision, was appropriate. The court held that there could be no stay under Section 9. This was not because the court proceedings should take priority over the arbitration proceedings. It was rather because Section 9 could not be engaged where there was concurrent jurisdiction between the court and the tribunal, as, on its terms, Section 9 does not apply where the matter is one that can be referred either to the court or to arbitration, rather than to arbitration alone.

This, of course, could not leave the parties with the risk of duplicating proceedings. In this respect, the court employed the tool of the case management stay of the court proceedings to allow an arbitration tribunal to proceed first. The court referred to Autoridad del Canal de Panama v. Sacyr SA and Others, where a review of the authorities on this area was undertaken and concluded that a compelling case was required for a stay to be granted.

The court rejected arguments that it is the court that should determine all factual issues which are relevant to its supervisory jurisdiction, since such a suggestion would be inconsistent with the discretionary nature of the stay, and would also elevate the court’s supervisory jurisdiction, rather than recognising that the two concurrent jurisdictions both derive from party autonomy.

The court also referred to the “distinction, independence, expertise and experience of the tribunal,” which was appointed when the former prime minister of Malaysia no longer had control.

The court concluded that this was one of the rare, compelling cases where a case management stay was appropriate. The court stressed that such a stay was temporary and that the court would be ready to exercise its supervisory jurisdiction when, where and to the extent needed, the tribunal’s work being subject to it.

Finally, the court dismissed the claimants’ application for an injunction restraining the second arbitration because it was not just and convenient, in such circumstances.

Comment

This was one of the rare cases where the court exercised its discretion to grant a case management stay of proceedings in favor of an arbitration. The judgment is useful in reminding the market of the significance of the principle of party autonomy. It helpfully clarifies that the act’s mandatory provisions granting jurisdiction to the court, although remaining effective, derive from the parties’ choice of London as the seat of the arbitration and, in effect, are of equal importance to the jurisdiction granted to the tribunal under an arbitration agreement. This may result in the court and the tribunal having concurrent jurisdiction.

In such circumstances, it is important that proceedings are not duplicated. This does not, however, mean that the court proceedings will take priority over the arbitration proceedings. The judgment makes clear that the court will not unnecessarily interfere with arbitration proceedings, but it will be ready to intervene where appropriate. This provides certain safeguards to parties that may be worried that the constitution of a tribunal may be unlawfully influenced in favor of one of the parties, but at the same time respects the parties’ choice to have their disputes resolved by arbitration. The court also demonstrated robustly that it will entrust the determination of difficult issues involving potential corruption to properly appointed, independent and experienced tribunals.