English case law that is of global significance

Friday 23 April 2021

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Julian Clark
Ince, London

Reema Shour
Ince, London

English law’s position as the often-favoured law of choice to govern international commercial contracts is long-established. English law is highly developed, certain and the quality of its judicial and arbitration personnel highly respected. The common law system and the principle of precedent provide a wealth of past case law to assist in determining the potential outcome in future disputes.

Similarly, contractual dispute resolution clauses providing for English court jurisdiction or London-seated arbitration are common. Many international arbitral and other alternative dispute resolution institutions are based in London. English is one of the most widely used languages in international commerce. Notwithstanding Brexit, therefore, English law and jurisdiction are likely to continue to be the foremost choice for multinational businesses.

Important developments in English law and noteworthy English court decisions will, therefore, remain globally relevant because of their anticipated impact on international commerce.

In this article, we highlight briefly two key areas in which recent English court decisions are of wider interest: (1) arbitrator impartiality and duties of disclosure; and (2) the interpretation of contracts.

Arbitrator impartiality and duties of disclosure

On 27 November 2020, the UK Supreme Court handed down its much-anticipated decision in Halliburton Company v Chubb Bermuda Insurance [2020] UKSC 48. The key issues in this case were first, whether and to what extent an arbitrator can accept appointments in multiple references concerning the same or overlapping subject matters with only one common party, without appearing to be biased. Second, what, if any, disclosure the arbitrator needs to make to the parties concerned about such appointments.

The Supreme Court unanimously upheld the lower court decisions which dismissed an application to remove the arbitrator in question on the grounds of apparent bias. In doing so, it confirmed that the test under English law (including the Arbitration Act 1996) was and remained an objective one, namely whether there were facts or circumstances known to the arbitrator that would, or might lead the fair-minded observer to conclude that there was a real possibility that the arbitrator was biased.

The Supreme Court emphasised that determining whether there was apparent bias would be very fact specific and would depend on the individual circumstances of the case. It also confirmed that while an arbitrator had a legal duty to disclose facts or circumstances (such as multiple appointments, or appointments in overlapping references) that might amount to a potential conflict of interest, the parties could agree to dispense with this requirement. Significantly for certain specialist arbitral sectors, including maritime and commodities arbitrations, the Supreme Court also recognised that the practices and customs of those sectors might mean that no such disclosure was required, because by agreeing to arbitrate according to, for example, LMAA or GAFTA rules, the parties had agreed to dispense with this requirement.

The finding has been welcomed by the LMAA and GAFTA, who intervened in the Supreme Court proceedings to argue that specific considerations applied to specialist arbitrations. Specialist arbitrators will be limited in number. Therefore, parties to shipping, insurance and trade disputes only have a small pool of suitably qualified and experienced arbitrators from which to make appointments. To restrict a party’s choice of arbitrator could be detrimental and might be used (or even abused) as a tactical manoeuvre by the other party. Furthermore, in such arbitrations, it is common for there to be related, overlapping references (eg, claims under a chain of charterparties or sale contracts), where the parties will appoint the same arbitrator in all the references to avoid inconsistent decisions and save costs, particularly where there is a common set of facts. The LMAA Rules specifically provide for this by allowing concurrent references. The LMAA does not require its arbitrators to disclose these appointments and neither is this required nor expected by the parties. The Supreme Court’s findings in relation to specialist arbitrations, and the outcome of the case, acknowledge the strength of these arguments.

In fact, the underlying dispute in question related to a specialist arbitration. It arose under a Bermuda Form insurance liability policy, which provided for New York law but London arbitration. The Supreme Court found that in Bermuda Form arbitrations it was common practice for parties to appoint arbitrators who had experience in interpreting the Bermuda Form policy on repeated occasions, including in arbitrations relating to the same occurrence. It was also not uncommon for Bermuda Form arbitrators to disclose their involvement in prior, or current arbitrations involving a common party without disclosing the identity of the other party, or details concerning the arbitration. However, as this was a legal duty and not just best practice, the Court took the view that multiple appointments had to be disclosed absent the parties’ agreement otherwise. Unlike in GAFTA and LMAA arbitrations, the Supreme Court found there was no established custom, or practice, in Bermuda Form arbitrations by which parties could be taken to have accepted that an arbitrator could take on such multiple appointments without disclosure. Therefore, the arbitrator concerned was in breach of his disclosure obligations. On the facts of the case, however, the Supreme Court concluded that a fair minded and informed observer would not conclude that the failure to disclose gave rise to a real possibility of apparent bias. Consequently, the Supreme Court agreed with the lower courts that the arbitrator should not be removed.

By contrast to the LMAA and GAFTA, the LCIA, ICC and CIArb had intervened to argue for a more stringent pro-disclosure approach. As the LCIA and ICC’s own arbitral rules impose unambiguous obligations regarding arbitrator disclosure, it is perhaps unsurprising that they argued for a higher ‘gold standard’ duty of disclosure, which they submitted would be more consistent with the international approach. Indeed, the US courts appear to favour more onerous disclosure obligations for arbitrators. Under New York law, for example, an arbitral award may be annulled where an arbitrator has failed to disclose facts that might reasonably support an inference of bias. Other jurisdictions take a similar approach. In October 2019, the French Supreme Court upheld a decision annulling an arbitration award due to arbitrator non-disclosure. In August 2020, the Court of Appeals in São Paolo, Brazil, annulled an arbitration award on the grounds that the Chair of the tribunal had failed to disclose in a timely manner his appointment in another arbitration by one of the parties.

Notwithstanding the arguably more stringent approach taken elsewhere, the Supreme Court has maintained a less prescriptive attitude to arbitrators’ duties of disclosure, preferring instead a case-by-case analysis of whether disclosure obligations have been breached and whether apparent bias could be inferred. At the same time, the Court has also stressed an arbitrator’s ‘badge of impartiality’, namely that an arbitrator has paramount obligations of impartiality and fairness irrespective of which party appoints them. The English courts, and parties who appoint arbitrators, expect an experienced and suitably qualified arbitrator to be aware of these obligations and to comply with them fully. Indeed, the minimal number of successful arbitrator challenges in the English courts would suggest that arbitrators in London-seated arbitrations continue to demonstrate the high standard of integrity required of them.

The interpretation of contracts

The English courts’ approach to contractual interpretation has developed over the years, as reflected in several significant decisions at the highest appellate level. This is an important issue for those who enter into English law contracts and require certainty in predicting how an English court will deal with any dispute regarding contractual terms.

The key question is whether the courts should take: (1) a narrow and literal approach to construction, which gives prominence to the natural meaning of the words used; or (2) a broader and more contextual approach that allows for commercial considerations and background information in deciding what the words used actually mean.

By contrast with civil law jurisdictions, which appear to take a more subjective approach to contractual construction, the English court traditionally took an objective view. It determined the parties’ intention by considering what a reasonable person in the parties’ shoes would have intended by using the specific wording in the contract. The court relied on the language used in the contract to determine meaning, rather than going outside the four corners of the contract, except where the contractual wording was ambiguous. Where the contract contained an obvious error, then the court could rectify the contract.

The House of Lords confirmed, in Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 28, that contractual interpretation was an objective exercise and that words should be given their natural and ordinary meaning. It should not be readily assumed that parties had made a mistake in the language that they used in their contract. However, the House of Lords appeared to move away from a strictly literal approach by indicating that where it was clear from the background information that something had clearly gone wrong with the language used, then the Court should not attribute to the parties an intention that they clearly could not have had.

This was followed by a number of decisions that appeared to adopt a more purposive approach to contractual interpretation. For example, in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, the House of Lords stated that in order to decide whether there was a mistake in the contract, it should read the document in the light of its background and context. In Rainy Sky v Kookmin Bank [2011] UKSC 50, the Supreme Court stated that if the language of a contract was unambiguous, then the Court should apply the wording used. However, the wording used in commercial contracts would often have more than one possible meaning. Where there were two potential constructions, the Court should prefer the one that reflected business common sense.

While many welcomed the seemingly more liberal approach to contractual interpretation, others commented that a judge might not be the best person to decide what might be ‘commercial common sense’ in any given situation. Further that what might have seemed to be a fair commercial bargain at the time of contracting might, with the benefit of hindsight, turn out to be a bad bargain. It was not for the courts to rewrite the parties’ contract for them, or to rescue those who had entered into an unprofitable, or unfavourable deal. Freedom of contract meant exactly that, be it a good or bad bargain at the end of the day.

The more literal approach reappeared in Arnold v Britton [2015] UKSC 36, in which the Supreme Court emphasised that the reliance placed in some cases on commercial common sense and surrounding circumstances should not be allowed to undermine the importance of the actual language used in the contract. While commercial common sense was an important consideration, the Court should be slow to reject the natural meaning of a provision because the consequences might be unfavourable to one party. The Court had to give effect to what the parties had actually agreed, rather than what it thought that they should have agreed. In that case, the Supreme Court thought that the disputed wording had only one natural (literal) meaning and gave effect to that meaning.

This decision was followed by Wood v Capita Insurance [2017] UKSC 24, in which the Supreme Court reiterated that care should be taken in relying predominantly on business common sense, because what was business common sense might depend on the particular party’s standpoint. Rather, the clearer the language, the less appropriate it was to construe it in a way that might avoid what was considered to be an uncommercial result. On the other hand, the more unreasonable the result of any given interpretation, the more the Court should strive to apply an interpretation that was not unreasonable. Ultimately, interpretation was a unitary exercise in which both the language used and commercial considerations played their respective parts in determining the objective meaning and the parties’ intention.

The Supreme Court maintained that the past authorities were neither inconsistent nor conflicting. Rather, they said the same thing but in different ways. The Supreme Court’s view was that English common law on contractual interpretation may be evolving but it certainly was not changing. Indeed, that was one of the key attractions of English law as the law of choice for commercial matters, namely its continuity and the certainty that it offered to commercial parties.

Those who favour the more restrictive approach to contractual interpretation have welcomed the more recent Supreme Court pronouncements on this issue. It remains to be seen what further guidance will be given by the Supreme Court in future disputes over contractual interpretation. What is clear, however, is that many of the issues that have arisen in the past and that may yet arise can be avoided by careful contractual drafting. The importance of using experienced commercial lawyers to draft such contracts cannot be underestimated.

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