Two contracts, two clauses - what happens?

Background

The judgment followed an application by Norscot Rig Management (Norscot) under s67 of the Arbitration Act 1996 (the Act) challenging an award by the arbitrator in an arbitration commenced by Norscot that he had jurisdiction to determine certain set offs and counterclaims by Essar Oilfields Services (Essar).

Section 67 of the Act allows a party to apply to the court:

1. challenging any award of the arbitral tribunal as to its substantive jurisdiction; or
2. for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part, because the tribunal did not have substantive jurisdiction.

The background to the dispute was that Essar had bought from Norscot a Blow-Out Preventer Stack (the BOP Stack) which, it was accepted by both parties, would need to be refurbished by Norscot before use by Essar and then fitted to a semi-submersible drilling rig owned by Essar. The contract under which the BOP Stack was purchased contained a jurisdiction clause in favour of the Mumbai Court.

In respect of the same drilling rig, the parties, virtually simultaneously with the purchase of the BOP Stack, entered into a Memorandum of Understanding whereby Norscot would act as operations manager in respect of the rig, providing various services to Essar as owner in relation to operating the rig. That Memorandum of Understanding subsequently became a fully-fledged Operations Management Agreement (OMA) which contained an arbitration clause in favour of the ICC, place of arbitration, London.

The OMA also provided that Norscot would assist Essar in carrying out various repairs and refurbishment activities in relation to the rig although the BOP Stack was not mentioned in that regard.

The parties subsequently fell out and the OMA was terminated. Norscot commenced arbitration proceedings seeking a significant sum in relation to services that it had rendered under the OMA. Essar defended those proceedings and counterclaimed on the basis that the BOP Stack was not fit for purpose. Norscot argued that the defences and counterclaims could only be dealt with by the arbitrator if it was clear that they were claims arising out of the OMA, but that that was not the case here because the OMA made no reference to the BOP Stack. There was a preliminary point that the court needed to decide, namely whether the court was appropriate to decide the arbitrator's jurisdiction or whether it should be left to the arbitrator. The court took the practical approach that it should grapple with the point. The court found that the various set offs and counterclaims did not arise out of the OMA, in other words, they were claims that arose under the purchase contract which did not contain an arbitration clause. The nub of the case therefore was whether, in those circumstances, such claims by way of set off and counterclaim were covered by the arbitration agreement in the OMA; did they give rise to "disputes, controversies or claims relating to the OMA or the breach thereof".

Legal analysis

Fiona Trust -v- Privalov marked a sea change in the court's approach to the construction and ambit of arbitration clauses. In that case, the court held that parties would be taken to have intended that all and any disputes relating to their particular contract should be covered by the arbitration clause in it; in other words a liberal approach should be given when construing the width of an arbitration clause. Norscot argued that Fiona Trust was less applicable where there were two or more contracts as was the case here. Essar argued that Fiona Trust was of direct application, and that the parties should be taken to have intended that all their disputes should be decided by the same tribunal.

Secondly, Norscot argued that it would be difficult for the court to allow an arbitration agreement in a contract to cover disputes that strictly arose under an agreement reached earlier in time. There was much debate on this point and many authorities cited.

Thirdly, Essar said that if Norscot was right and that Essar must raise its defences and counterclaim before a different tribunal, it would effectively be deprived of a valid defence of set off, which would be particularly disconcerting given that it would be a transaction set off, i.e. a set off arising out of a single transaction rather than an independent set off.

Finally, there were arguments as to the convenience or practicability of having separate proceedings. Part of the basis for the arbitrator finding he could determine the set-offs and counterclaims was to prevent inconsistent decisions and save costs. The parties accepted that when determining the ambit of an arbitration clause there is no concept of "forum non-conveniens" (the argument by which a party can say that a set of proceedings should not proceed in a particular place because it is an inconvenient forum) that the court can apply. Although it was accepted by the court and both parties that arbitration is intended to be a "one stop method of adjudication for the determination of all disputes".

The Commercial Court found that the BOP Stack was an essential integral component of the drilling operations of the rig, that the purchase contract for it only marginally, if at all, pre-dated the Memorandum of Understanding in relation to the OMA. Further, the work on the BOP Stack ran in tandem with all of the management of operations under the OMA. Although the court was not certain that the defences and counterclaims did arise out of the OMA, it was clear on the facts that all the matters between the parties were being dealt with simultaneously and that accordingly either the set offs and counterclaims arose out of the OMA or they related to the OMA, and therefore the arbitrator had jurisdiction to determine those set offs and counterclaims.

Guidance

This case is a further example of the courts taking a practical approach to the ambit of arbitration clauses. This approach started with Fiona Trust where the ambit of the arbitration clause in question was given a liberal meaning and in Norscot, even though it was quite possible that the claims in question were covered by a separate contract with a conflicting jurisdiction clause, the court was happy to find that it would be sensible for those matters to be dealt with under the arbitration agreement in the OMA.

However, this should not act as a sign to contracting parties to be lax in the drafting of their dispute resolution clauses in the expectation that the court will always come to the same conclusion as it did in Norscot. The position may be different particularly where related contracts are entered into further apart in time, for example. It is always risky for the parties, whose related transactions may be governed by more than one contract to contain potentially conflicting dispute resolution clauses. This is not just because the result could be the need to have more than one set of proceedings, but substantive rights (defences) could be put in jeopardy. Nevertheless, as was held in Fiona Trust, the wider that the arbitration clause is drafted in terms of the disputes that it will cover, the more chance the parties will have in ensuring that all of their disputes are resolved by a single dispute resolution process.