04th Apr 2012
David Bailey QC, Marcus Mander and Elizabeth Lindesay acted for Owners in the latest instalment of the Front Comor case, in which Flaux J. allowed an appeal by Owners from an arbitration award in respect of Owners’ claim against Italian Insurers for equitable damages for breach of the obligation to arbitrate.
As is well-known, in 2009 the European Court of Justice held in the same case that it was incompatible with Council Regulation (EC) No. 44/2001 to grant an anti-suit injunction to restrain proceedings in the court of a member state on the ground that such proceedings were in breach of an arbitration agreement.
Following the ECJ’s decision, Owners brought a claim in arbitration against Insurers for equitable damages. The claim arose in equity since Insurers, whilst not party to the arbitration agreement (which was between Owners and the Insured), nevertheless had an obligation to arbitrate their disputes with Owners through their exercise of rights of subrogation.
The tribunal, consisting of Sir Brian Neill, Professor Santa Maria and Mr Baker-Harber (dissenting), held that, although arbitration was expressly excluded from the scope of the Regulation (pursuant to Article 1(2)(d)), the tribunal’s jurisdiction to award damages was circumscribed by Insurers’ right to bring proceedings in Italy under Article 5(3) of the Regulation. In particular, it considered that this was the outcome required by the decision of the ECJ and its “underlying philosophy”.
On appeal, Flaux J. reversed the decision of the majority and held that the tribunal was not deprived of jurisdiction by reason of EU law.
Applying the reasoning of Advocate-General Kokott and the ECJ, Flaux J. held that the Regulation, which provides for the allocation of jurisdiction between national courts of member states, not private arbitral tribunals, did not operate to circumscribe the jurisdiction of the latter to make an award of damages. Since arbitration falls outside the scope of the Regulation, the tribunal was not required to give effect to the EU law principles of effectiveness or effective judicial protection of Insurers’ rights under the Regulation. In particular, he afforded weight to the reasoning of the AG that, as a consequence of the exclusion of arbitration from the scope of the Regulation, conflicting decisions on the merits by tribunals and national courts were possible. He considered that there was no qualitative difference between a conflicting decision on the merits and an award of damages for breach of the obligate to arbitrate.
Flaux J. went on to state his view that even if the tribunal were required to ensure the effectiveness and effective judicial protection of Regulation rights, an award of damages was not, in any event, an illegitimate inference with the proceedings in Italy. Again, he reasoned that since conflicting decisions were permissible under the scheme of the Regulation, it followed that an award of damages was also permitted.
The decision will be welcomed by many in the arbitration community and allay concerns following the ECJ’s ruling on anti-suit injunctions about the potential for foreign ‘torpedo’ proceedings to derail arbitrations. Although reform of the Regulation is on the agenda in the EU to address this issue, it could be some time before it is implemented. In the meantime, an award of damages may provide parties with a viable alternative route to safeguarding the arbitration process.
Flaux J. gave leave to appeal to the Court of Appeal.
The full judgment can be found here.