The jurisdiction of the arbitral tribunals

In a multi-party, multi-contract dispute, the English Court of Appeal dismisses an appeal against an order made regarding jurisdiction of the arbitral tribunal

By Martin Ewen, Senior Associate, Fenwick Elliott

In Sadruddin Hashwani (1), Zaver Petroleum Corporation Ltd (2), Ocean Pakistan Ltd (3) v OMV Maurice Energy Ltd [2015] EWHC Civ 1171 the Court of Appeal had to decide whether an International Chamber of Commerce (“ICC”) tribunal had jurisdiction to hear a dispute which arose out of myriad agreements related to oil exploration in Pakistan.

The facts

On 29 December 1999 the President of Pakistan issued a Petroleum Exploration Licence in relation to an area identified as the Mehar Block in favour of American company Ocean Pakistan Ltd (“OPL”) and the Government of Pakistan (“Government Holdings”). On the same date the President entered into a Petroleum Concession Agreement (“PCA”) with OPL and Government Holdings which contained the terms under which exploration and production operations were to be carried out. The PCA contained Article XXVIII, which set out provisions for arbitration under ICSID rules and, if ICSID refused or was unable to act, then disputes were to be submitted to arbitration under ICC Rules. The arbitration clause was expressed to apply only to disputes between “foreign Working Interest Owners inter se or between foreign Working Interest Owners and The President”. Disputes between Pakistani owners inter se or between Pakistani owners and the President were to be submitted to arbitration in accordance with the Pakistan Arbitration Act. 

On the same date OPL and Government Holdings entered into a Joint Operating Agreement (“JOA”), which contained detailed provisions for carrying out operations within the concession area. The agreement was annexed to, and was expressed to be part of, the PCA. It contained its own arbitration clause in Article 17, which provided that any dispute should be dealt with mutatis mutandis in accordance with Article XXVIII of the PCA.

On 30 March 2000, OPL entered into a Farmout Agreement (“FOA”) with a Pakistani company, Zaver Petroleum Corporation Ltd (“Zaver”) and a Mauritian company, OMV Maurice Energy Limited (“OMV”) under which it agreed to transfer the bulk of its interest in the Mehar Block and make OMV the operating company in place of OPL. Article 7 of the FOA provided that the agreement and the relationship between the parties was governed by Pakistani law and all disputes were to be referred to arbitration in Pakistan.

By two Deeds of Assignment, OMV and Zaver became parties to, and bound by, the PCA and the JOA.

A dispute arose between OMV, on the one hand, and OPL and Zaver, on the other, in relation to operations in the Mehar Block. OPL and Zaver maintained that OMV was in breach of the JOA and stopped paying their respective shares of the operating costs. In November 2014, OMV sought to refer the dispute to arbitration under the auspices of the ICC (ICSID having declined to act). In response, OPL and Zaver issued an application under section 72 of the Arbitration Act 1996 seeking a declaration that the ICC did not have jurisdiction in the matter.     

Court at first instance

The key issue was whether the dispute fell within the arbitration clause in the JOA, or within Article 7.2 of the FOA.

OPL and Zaver contended that the provision for ICC arbitration, which is to be found in Article XXVIII of the PCA, had not survived the execution of the FOA. They argued that any dispute of any kind relating to the concession was to be determined by arbitration under Article 7.2 of the FOA. They also argued that in this case there was only one dispute involving OMV, OPL and Zaver, and to which Article XXVIII of the PCA did not apply.

The judge disagreed. He held that there were two separate disputes, one between OMV and OPL and one between OMV and Zaver; that both disputes arose under the JOA; that Article 7.2 of the FOA was limited to disputes arising under that agreement and so had no application to the disputes in issue; that the dispute between OMV and OPL fell within the terms of Article XXVIII of the PCA, because they were both foreign working interest owners; and that any dispute between OMV and Zaver also fell within Article XXVIII because the effects of the words “mutatis mutandis” in Article 17 of the JOA was to render Article XXVIII applicable to it.

The judge gave a declaration that the ICC did have jurisdiction in respect of the dispute between OMV and OPL. The judge was, however, less certain that the ICC had jurisdiction in respect of the dispute between OMV and Zaver and therefore stayed the proceedings to give the arbitrators appointed by the ICC an opportunity to decide that question.

Court of Appeal

OPL and Zaver appealed against the judge’s order. OMV cross-appealed, seeking to set aside the judge’s order staying the proceedings in relation to Zaver. It contended that the same order should have been made in relation to Zaver as was made in relation to OPL. 

OPL and Zaver argued that the ICC did not have jurisdiction and that there was only one dispute between the parties, which should be referred to arbitration in Pakistan in accordance with Article 7.2 of the FOA. They argued that the parties to the FOA had intended to simplify the agreements containing different arbitration clauses, by agreeing to an arbitration clause that would apply to disputes arising between one or more of them in relation to the concession. This was not a dispute between two foreign working owners and so could not be referred to the ICC under the PCA.

OMV argued that there were two distinct disputes, which arose under the JOA because OMV was claiming from each of OPL and Zaver operating costs owed to it under the JOA. Even if there were only one dispute, the PCA would still apply because two parties on opposite sides were foreign interest owners. In addition, the words “mutatis mutandis” in the JOA were included with the intention of extending to OPL the benefit of ICSID or ICC arbitration, which the PCA clause provided. When OMV and Zaver later became parties to the JOA under the Deeds of Assignment, they became bound by the arbitration clause in the PCA in relation to disputes under the JOA. The arbitration clause in the FOA was limited to disputes arising under the FOA.

The Court of Appeal dismissed the appeal and allowed the cross-appeal. The court held that there were two disputes both of which were subject to arbitration under the ICC. The court also held that the judge had been wrong to stay the proceedings in respect of the dispute between OMV and Zaver.    

There were a number of factors which influenced the court’s decision that disputes under the JOA were to be resolved in accordance with Article XXVIII of the PCA.

1. The court noted that the parties had gone to some trouble to identify well-recognised independent international bodies for resolution of disputes under the PCA. In particular, the agreement to refer disputes to ICSID suggested that they were conscious of the status of OPL as a foreign investor which wished to have the comfort of a dispute resolution procedure insulated from the country in which it was investing.  On the other hand, there was a clear intention to subject other kinds of dispute to domestic arbitration.
2. The most likely purpose of using the expression “mutatis mutandis” was to enable Government Holdings to be substituted for the President, so that for the purposes of the JOA the arbitration agreement extended to disputes between OPL as a foreign working interest owner and Government Holdings as representative of the state.
3. The court found it difficult to accept that when the parties entered into the FOA the parties were so concerned about uncertainties over the way in which Article XXVIII would apply once they had acquired working interests in the concession that they decided to put in place different arbitration agreements in respect of any disputes that might arise under the JOA. Article 7.2 should be understood to be limited in its scope to the FOA itself.            
4. Under the Deeds of Assignment, the parties ratified and confirmed the documents and became bound by them.

In terms of the jurisdiction of the ICC, the court decided:

1. There were two separate disputes, one between OMV and OPL and one between OMV and Zaver. 
2. Both of these disputes arose under the JOA.
3. The arbitration agreement in the FOA was limited to disputes arising under that agreement.
4. The dispute between OMV and OPL fell within the arbitration clause in the PCA, because they were both foreign interest owners. The dispute between OMV and Zaver was slightly more difficult because the PCA made no mention of disputes arising between foreign and Pakistani owners. The court held that given that the PCA, the JOA and the OMV Deed of Assignment all provided for arbitration in accordance with the PCA, and that on becoming parties to the concession documents Zaver formally ratified and confirmed them, it could not accept the parties intended disputes between Zaver and OMV to fall outside the terms of the PCA arbitration clause.  

Stay of proceedings

The court at first instance had stayed Zaver’s application in order to allow the arbitrators appointed by the ICC to decide for themselves whether they had jurisdiction to act. The Court of Appeal decided that this was wrong. 

The court said that it will only be in exceptional cases that a court, faced with proceedings which require it to determine the jurisdiction of arbitrators, will be justified in exercising its inherent power to stay those proceedings to enable arbitrators themselves to decide the question.

The court’s view was that it was in the interests of good case management to decide whether the ICC tribunal had jurisdiction.

Commentary

Parties must carefully consider the dispute resolution provisions in their agreements at contract drafting stage, particularly so in a multiple parties and multiple contracts scenario. If a further new contract is to be entered into, or a party leaves or a party joins a project, attention should be given to the clarity of the dispute resolution provisions.

It is far better, through careful drafting, to avoid the time and cost required to resolve jurisdictional issues such as these, which will only serve to delay arbitral proceedings, increase costs and could even lead to decisions which are inconsistent with each other.

If parties do, however, wish for different disputes under related agreements to be decided by a different forum, clear wording to this effect will be expected by the court.

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