The Carpatsky[1] case is interesting for a number of reasons as it:
The case demonstrates that parties seeking to contest enforcement of an award are presented with what some commentators have called a ‘double-edged sword’. On the one hand, if they bring all their arguments before the curial court and lose, an issue estoppel may arise which prevents them from relying on the same points before the English court at the enforcement stage. On the other hand, if they reserve some arguments in the hope that English courts might be more accepting of them than the curial court, they may be deprived from being able to rely on these arguments on abuse of process grounds. Clearly, careful consideration needs to be given to case strategy where challenges are anticipated both in the seat and at the enforcement stage. The risks posed by the doctrines of issue estoppel and abuse of process should be given due attention. It is worth noting, however, that Mr Justice Butcher observed that these doctrines are not inflexible and will take into consideration the interests of overall justice.
The Claimant, Carpatsky Petroleum Corporation (“Carpatsky”), had applied to the English court for permission (which was granted) to enforce a New York Convention Award of US$145.7 million (the “Award”) issued in its favour by a Tribunal sitting under the auspices of the Stockholm Chamber of Commerce (SCC) against the Defendant, PJSC Ukrnafta (“Ukrnafta”).
Pursuant to s. 103 of the Arbitration Act 1996 (“the Arbitration Act”), Ukrnafta resisted enforcement of the Award arguing that:
Multiple proceedings had already been brought in relation to the underlying dispute and the challenge of the award, including in Sweden (the supervisory courts of the seat), Ukraine, and Texas, U.S.A..
Mr Justice Butcher upheld the orders recognising and granting Carpatsky permission to enforce the Award.
Ukrnafta argued that the exception to enforcement in s. 103(2)(b) of the Arbitration Act was applicable, as there was no valid arbitration agreement between the parties under the relevant applicable law. It argued that the question of the validity of the arbitration agreement fell to be determined under English law. It further contended that there was no ‘arbitration agreement in writing’, required for the enforcement of a New York Convention award under s. 101 of the Arbitration Act, by reason of s. 100(2)(a).
The court found that Ukrnafta was estopped from advancing these arguments as a result of its conduct during the SCC arbitration and in proceedings before the Swedish courts, where it had argued that Swedish law governed the arbitration agreement. Butcher J commented that it would be ‘highly inconvenient‘ and generate ‘confusion and multiplication of argument‘ if a party could argue that one law governed an arbitration agreement before a tribunal and supervisory courts and then argue that a different law should apply to the issue at the enforcement stage.[2] By applying English conflict of laws rules, it was held that the arbitration agreement was governed by Swedish law and that, by applying Swedish law, there was a valid arbitration agreement between the parties both when the relevant underlying contract was concluded and when agreeing that the arbitration should proceed under SCC Arbitration Rules.
Ukrnafta also argued that there was an issue estoppel in its favour both in relation to the validity of the arbitration agreement and the underlying contract, as these matters had previously been litigated and determined in proceedings in Ukraine.
In obiter remarks, Butcher J commented that there was no issue estoppel as the Ukrainian proceedings had not addressed the question of the existence of the arbitration agreement under Swedish law (which in the case was found to be the applicable law). He added that, regardless of the fact that the validity of the underlying contract was irrelevant (as a matter of Swedish law) to the question of the validity of the arbitration clause, he in any event would not accept arguments based on this issue estoppel point. He believed that to do so would be unjust for multiple reasons, including that Ukraine was Ukrnafta’s home state, its courts did not have supervisory jurisdiction over the arbitration proceedings or the award, and recognising issue estoppel in these circumstances would ‘significantly undermine the effectiveness of the international scheme for enforcement‘.[3]
Ukrnafta argued that the tribunal’s approach towards limitation of liability and intentional breach of contract issues that arose during the arbitration, as well as the methodology adopted for the assessment of damages, constituted serious irregularities in the proceedings. It sought to resist enforcement of the Award on these bases pursuant to ss. 103(c) and (e) of the Arbitration Act.
Carpatsky denied that there had been any procedural irregularity in the underlying proceedings, contending that Ukrnafta had had a fair opportunity to present its case and that, if and insofar as it had not taken certain points, that was its responsibility. In any event, Carpatsky asserted on the basis of an issue estoppel that Ukrnafta’s complaints could not properly be raised in the enforcement proceedings, as they had already been raised and rejected in proceedings in Sweden and Texas. It asserted that in particular, absent ‘exceptional circumstances’, the English court should not reinvestigate matters which had already been considered by the supervisory court. Carpatsky also advanced arguments that Ukrnafta’s conduct fell foul of the abuse of process principles outlined in Henderson v Henderson[4] (discussed further below).
The court outlined the following key principles relevant to the assessment of issue estoppel and abuse of process arguments made at the enforcement stage:
Butcher J concluded that there was an issue estoppel as these issues had been raised and determined in earlier proceedings and that, in any event, it was an abuse of process for Ukrnafta to bring forward new arguments that it could and should have brought before the Swedish courts. Furthermore, even if the court were wrong on these points, an issue estoppel had in any event arisen as a result of a previous US court decision.
The court dismissed Ukrnafta’s reliance on s. 103(2)(e) of the Arbitration Act (arbitral procedure not in accordance with parties’ agreement or law of the seat). It found that Ukrnafta had not established a material and consequential breach of the SCC rules or of Swedish law resulting from the tribunal’s conduct and noted that the Svea Court of Appeal had already rejected Ukrnafta’s claim that there had been a breach of mandate. The court also dismissed Ukrnafta’s argument that the tribunal’s methodology for the assessment of damages amounted to a serious irregularity, again on the basis of an issue estoppel created by the earlier decision of the Swedish court.