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Arbitral tribunal lacked substantive jurisdiction when appointed after a party ceased to exist
Arbitral tribunal lacked substantive jurisdiction when appointed after a party ceased to exist
12 June 2019
Series
Blogs
12 June 2019
In Chung v Silver Dry Bulk Co Ltd [2019] EWHC 1147 (Comm) the English Commercial Court granted an application challenging the substantive jurisdiction of an arbitral tribunal appointed after the dissolution of the defendant corporation.
HH was a Marshall Islands-incorporated corporation. On 1 February 2011, it entered an agreement for the sale of a ship to Silver Dry Bulk Co Ltd (“SDBC”). The agreement contained a London arbitration clause.
On 28 February 2011, HH filed articles of dissolution in the Marshall Islands. Under the Business Corporations Act of the Marshall Islands (the “BCA”), corporations may continue for a term of three years after dissolution for purposes including prosecuting and defending suits by or against them. The BCA also provides that upon dissolution, the directors of that corporation become its trustees, with full powers to do all acts necessary for the final settlement of the corporation’s unfinished business. In this case, Mr Chung, the sole director of HH, became its sole trustee.
On 28 October 2014, SDBC filed a notice of arbitration with the Attorney General of the Marshall Islands, alleging bribery on the part of HH. In January 2018, the tribunal made an award in favour of SDBC on the basis that HH had made a payment constituting a bribe.
Mr Chung subsequently applied to the English Commercial Court to challenge the award under s 67 of the Arbitration Act 1996 (the “Act”), seeking a declaration that the notice of arbitration filed by SDBC in October 2014 was incapable of commencing a valid arbitration against HH because HH had ceased to exist by that time, having been finally dissolved and wound up eight months before.
Moulder J allowed the application.
The main issues in the case were as follows:
Section 67(1)(a) allows parties to English seated arbitral proceedings to challenge the substantive jurisdiction of an arbitral tribunal in certain circumstances. Under s 82(1) of the Act, “substantive jurisdiction” relates to the matters specified in s 30(1) of the Act, including whether there is a valid arbitration agreement (s 30(1)(a)) and whether the tribunal is properly constituted (s 30(1)(b)).
Moulder J held that the challenge fell within the scope of s 67 for two alternative reasons. First, if HH had ceased to exist by 28 October 2014, the arbitration clause would not be able to operate because HH would not be able to comply with its provisions. If that was the case, the tribunal could not have been properly constituted within the meaning of s 30(1)(b). Whilst it was a question of fact whether HH existed as a corporate entity under Marshall Islands law at the relevant time, this did not prevent the issue from falling within s 67.
Second, there could be no valid arbitration agreement under s 30(1)(a) if HH had ceased to exist, since it would no longer have been a counterparty to the agreement. Moulder J referred to the decision in Baytur SA v Finagro Holding SA, where Lloyd LJ held that “there cannot be a valid arbitration when one of the two parties has ceased to exist”.
Moulder J held that it did not. Marshall Islands law (being the law of HH’s incorporation) was applied to determine this question and the natural meaning of the language in the relevant provisions of the BCA was that a corporation would exist for a further three years after dissolution to enable it to be wound up. The life of a corporation would not, contrary to SDBC’s submissions, be indefinite by virtue of the fact that the directors of the corporation became its trustees upon dissolution (arguments by SDBC relying on parts of the BCA requiring it to be applied uniformly with Delaware law were also rejected in the case of the provisions before the court). HH had therefore ceased to exist by October 2014.
This case highlights an important practical point – to avoid considerable wasted costs and time, it is important to be clear that a potential defendant to arbitration proceedings exists. If it does not, then the arbitration tribunal will not have the requisite jurisdiction to produce a valid award.
Click here for the judgment.