B v S - FOSFA / GAFTA Claimants Frozen out of Interim Relief?
Commodities - Scott Avery Clauses - Interim Relief - FOSFA / GAFTA Standard Form Contracts
Henry Ellis
This article by Henry Ellis first appeared in Lloyd's List on 20 April 2011.
Following the publication of the article below, it has come to the author's attention that the arbitration clauses in the latest GAFTA contracts are now worded so as to permit the parties to seek security via other legal proceedings in respect of their claim or counterclaim in the arbitration reference. Therefore, it seems that the GAFTA draftsmen at least have opted to take the advice of Mr Justice Flaux referred to below.
There can be no doubt that the recent decision of Mr Justice Flaux in B v S (handed down on 23 March 2011) will be of considerable importance for the commodities markets that utilise FOSFA/GAFTA standard form contracts that incorporate Scott v Avery clauses.
Scott v Avery clauses are arbitration clauses that provide that no action, or other legal proceedings, shall be brought (in an alternative jurisdiction to that provided for by the clause) until an arbitration has been concluded and an award published. They have long been accepted as valid and effective, and they serve to postpone the accrual to a claimant of a cause of action which can be pursued in court proceedings.
However, prior to this decision, it had been thought that such clauses did not preclude a party from seeking and obtaining interim relief from the English High Court at an earlier stage.
Surprisingly, B v S is the first High Court case to consider whether parties to a contract incorporating a Scott v Avery clause are unable to obtain interim relief, in the form of a freezing injunction, under the ‘new law’, being section 44 of the Arbitration Act 1996 (‘the 1996 Act’). All previous case law, with one distinguishable exception (Re Q’s Estate, which considered the effect of an arbitration clause that was not of the Scott v Avery variety) was concerned with section 12(6) of the Arbitration Act 1950 (‘the 1950 Act’). As such, this decision is freighted with additional importance for markets in which such clauses are commonplace, as it clarifies the position going forward under 1996 Act.
The facts of the case
B v S concerned defendant sellers (‘S’) and claimant buyers (‘B’) under two contracts made in July 2010 for the sale of consignments of sunflower seed oil, which in each case were on the terms of the FOSFA 54, one of the standard forms of the Federation of Oilseeds and Fats Associations (‘FOSFA’). Disputes having arisen as a result of the alleged default by S under those contracts, B commenced two arbitrations under clause 29 of FOSFA 54, which were Scott v Avery clauses of the sort described above.
The total amount claimed by B in the arbitrations was some US$2,958,000. On 8 February 2011, B sought and obtained from Gloster J, on a without notice application, a worldwide freezing injunction over S’s assets up to US$3,400,00 in support of its claims against S in the FOSFA arbitrations (‘the Freezing Injunction’). The application was made pursuant to section 44 of the 1996 Act.
The hearing in front of Flaux J was therefore S’s application to set aside the Freezing Injunction on two grounds: (i) that the Freezing Injunction was obtained in breach of clause 29 of FOSFA 54 (the Scott v Avery clause) which on its true construction prohibits the taking of action or any other legal proceedings, including the issue of a claim form to obtain a freezing injunction in the jurisdiction and (ii) there was no jurisdiction for the Freezing Injunction to be granted, as by clause 29 the parties had agreed that the powers under section 44 of the 1996 Act would not apply.
The Judge’s decision
The Judge identified the critical question for him to answer in the following terms at paragraph 6 of his judgment:
‘whether… as a matter of construction a Scott v Avery clause in the form of clause 29 (which is in widespread use in commodity contracts) excludes any proceedings, including an arbitration claim for a freezing injunction, unless and until an award has been issued, or whether… this clause is one in relation to which there is a settled meaning and construction derived from earlier cases which have considered this wording… such that its true construction is that ancillary proceedings in England which invite the court to exercise its powers under section 44 are not in breach of this form of arbitration clause.’
It is implicit in this summary that it was settled law under the 1950 Act that Scott v Avery clauses did not preclude proceedings for relief brought in England under section 12(6) of the 1950 Act. This had been decided by a line of cases culminating in two decisions of the Court of Appeal: Mantovani v Carapelli [1980] 1 Lloyd’s Rep. 375 and Toepfer v Societe Cargill [1998] 1 Lloyd’s Rep. 379. However, as stated above, the Judge in this case was considering whether a Scott v Avery clause would have the same effect under the new regime of the 1996 Act, and specifically under section 44.
The Judge decided that it did not, and that ancillary and/or supportive proceedings in England which invited the court to exercise its powers under s. 44 of the 1996 Act were in breach of a Scott v Avery clause of the sort in clause 29 of the contracts in this case. Accordingly, the Judge discharged the Freezing Injunction.
The Judge’s reasoning
The Judge made it clear that, untrammelled by authority on the construction of the clause in question, he would have been emphatically of the view that the words therein were clearly wide enough and did, on their true construction, exclude all proceedings in England, whether substantive, ancillary or supportive of the arbitration. Further, it appears from his judgment that the Judge’s primary reason for finding that the clause should now be taken to preclude ancillary and/or supportive proceedings, was the 1996 Act, and the policy change that it represented.
The Judge undertook a detailed analysis of the preceding authorities on the old law, and came to the conclusion that those cases which had held that ancillary and/or supportive proceedings were not excluded by the Scott v Avery clause had not come to that conclusion as a result of the wording of the clause itself, but had instead recognised the width of the wording, but considered that the mandatory terms of section 12(6) of the 1950 Act were such that the power of the court to grant a freezing injunction in an appropriate case could not be excluded by the agreement of the parties.
By contrast, the Judge described the regime under s.44 of the 1996 Act as ‘permissive’ and ‘non-mandatory’; and underpinned by a more general philosophy of party autonomy. Against that backdrop the Judge considered that the words of the Scott v Avery clause (clause 29) would have the effect of also precluding a party from initiating ancillary or supportive proceedings in the English High Court prior to the conclusion of an arbitration commenced under that clause.
Comment
It is significant that this decision does not accord with the leading text on interim relief in the commercial context Commercial Injunctions [5th ed.] by Steven Gee QC, and, surprisingly, there is no reference to this text in the judgment. In that work, it is stated at 6.031: ‘Section 44(1) confers power on the court to make orders about the matters listed in s.44(2) (including the power to grant Mareva or Anton Piller relief), “Unless otherwise agreed by the parties…”. A clause such as that considered in Mantovani v Carapelli does not have the effect of contractually excluding the power to make orders ancillary to the reference under s.44(1); it merely confines the dispute to resolution by arbitration in London, which includes the jurisdiction of the court to make orders in support of arbitral proceedings in London unless that jurisdiction has itself been excluded by agreement.’
This represents an alternative approach, one that appears to have been the main thrust of Counsel for B’s submissions. This approach takes as its starting point that the wording of Scott v Avery clauses must be considered in its historical context. It is strongly arguable that the settled meaning of the clause was to ensure that substantive disputes were referred to arbitration, and that this did not preclude the court from making orders ancillary to, or supportive of, the reference. It is true that the wording of the statute has changed, but the well-established wording of Scott v Avery clauses has not; and doubtless nor has the expectation of what such clauses achieve in the market. The key question is therefore whether the change in wording of the statute to one in which the parties can opt to exclude the court’s powers under section 44(1) (‘unless otherwise agreed by the parties’), should radically change the meaning and effect of a well-established clause in circumstances where the wording of the clause remains constant; and where it is clear the parties have merely continued to incorporate the clause by virtue of the use of standard form contracts. It is submitted that without more, it is difficult to see how such a sea-change in the effect of a settled wording can be justified simply on the basis of the change in the statute.
The Judge’s stance on the effect of his decision was uncompromising, stating at paragraph 88 of his judgment that ‘(A)ny concerns in the market or of individual trading parties can be addressed by amendment of the clause, if that is thought desirable.’ It remains to be seen whether the buyers in question try to air their concerns before a higher judicial body before tampering with such a long-established clause.