Arbitration jurisdictional challenge no bar to English court ordering compliance with a tribunal peremptory order

The Court of Appeal has found that the English court may grant an order requiring a party to comply with a peremptory order of a tribunal before the determination of an outstanding challenge to jurisdiction of the tribunal.

The judgment in S3D Interactive, Inc. v Oovee Ltd¹ confirms that jurisdiction challenges cannot be used to undermine a tribunal's procedural powers.

The facts

Oovee commenced an arbitration against S3D under a Licence Agreement containing an arbitration agreement providing for arbitration seated in London under the LCIA arbitration rules.

The arbitrator subsequently ordered S3D to provide security for the amount in dispute and for Oovee's legal and arbitration costs (the Security Order).  The security was to be provided by way of a bank guarantee in favour of Oovee or a deposit in the sum of approx. US$ 10.9m. 

S3D indicated that it would not be able to make payment of the deposit or obtain the bank guarantee.  Oovee responded by obtaining from the arbitrator a peremptory order under section 41(5) of the Arbitration Act 1996 (the Act) requiring S3D to comply with the Security Order (the Peremptory Order).  S3D subsequently failed to comply with the Peremptory Order.

In the meantime, S3D had alleged that Oovee had committed a repudiatory breach of the arbitration agreement by releasing confidential material from the arbitration into the public domain.  S3D's solicitors sent a letter saying that S3D was accepting the alleged repudiatory breaches as terminating the arbitration agreement, bringing the arbitration to an end and divesting the arbitrator of any jurisdiction in the reference.

S3D thereafter applied for permission from the tribunal to make an application to the English court under section 32 of the Act declaring that the jurisdiction of the tribunal had been extinguished.  Oovee itself applied for the arbitrator to grant Oovee permission under section 42(2)(b) of the Act to make an application to the court under section 42(1) for an order requiring S3D to comply with the Peremptory Order.

The arbitrator refused S3D's application but granted Oovee permission to make an application to the court under section 42(2)(b).

Oovee subsequently applied to the court for an order seeking enforcement of the Peremptory Order.  In response, S3D issued an application for orders declaring that the court had no jurisdiction to hear Oovee's application for a section 42 enforcement order because the arbitration agreement had been terminated.

At first instance, Mr Justice Butcher granted the section 42 order and dismissed S3D's set aside application.

S3D's position

S3D appealed the first instance judgment.  Its submissions can be summarised as follows:

1. Section 42(2) contains conditions that must be fulfilled before there is jurisdiction to make a section 42 order. In particular, section 42(2)(b) requires that the application be made "by a party to the arbitral proceedings with the permission of the tribunal".Since, as Oovee alleged, the tribunal did not have jurisdiction, it was not a "tribunal" within the meaning of section 42(2)(b).

    

2. Section 42 only applies "[u]nless agreed by the parties". Where the tribunal lacks jurisdiction, the parties have "otherwise agreed" because the arbitral process is consensual and the parties have not agreed to the enforcement of orders made by an arbitrator who they have not agreed should have jurisdiction over the dispute.

The court's view

Shortly after the hearing of the appeal, the parties settled.  However, the Court of Appeal decided to give its judgment anyway since the appeal raised a point of general interest.

Popplewell LJ, with whose judgment Birss LJ and Lewison LJ agreed, held that S3D's construction of section 42 was "unsound". Section 42 was one of a number of sections of the Act in which the court is empowered to make orders to support the arbitral process.  They should not be interpreted as requiring the court to first satisfy itself of the jurisdiction of the tribunal over the substantive  dispute before the powers may be exercised.  To do so would be to cut across the careful structure of the limited circumstances in which the court is entitled to address and determine a challenge to the jurisdiction of the tribunal.

In addition, the judge held that there was no support for S3D's proposed construction of section 42. The term "party to the arbitral proceedings" in section 42(2)(b) meant parties in arbitral proceedings whether or not there is an unresolved issue as to the substantive jurisdiction of the tribunal.  This was the natural meaning of these words and was consistent with the scheme of the Act, as well as being the sense in which the same words are used in many other sections of the Act.

The Court of Appeal therefore dismissed S3D's appeal.

Commentary

Section 42 of the Act provides a powerful tool for parties to enforce procedural directions of the tribunal via the court. 

Where a party without showing sufficient cause fails to comply with any order or direction of the tribunal, under section 41(5) the tribunal may make a peremptory order to the same effect requiring the defaulting party to comply within a certain time period.  If the defaulting party still does not comply, the court may make an order requiring it to do so.

This decision provides helpful clarification that an extant jurisdiction challenge will not prevent the court from enforcing such a peremptory order. Jurisdiction challenges therefore cannot be used tactically to relieve a party from its obligation to comply with a tribunal's procedural orders. It also underlines that parties may only challenge the tribunal's jurisdiction under specific provisions of the Act and that in the first instance, under the principle of Kompetenz-Kompetenz enshrined in section 30 of the Act, the tribunal may determine its own jurisdiction.