View source for Beijing Jianlong Heavy Industry Group v Golden Ocean Group

DMC/SandT/14/07

'''England'''

'''Beijing Jianlong Heavy Industry Group v Golden Ocean Group Ltd and Others'''

'''English Commercial Court: HHJ Mackie QC: [2013] EWHC 1063 (Comm): 1 May 2013'''

'''ARBITRATION: SECTION 67 OF THE ARBITRATION ACT 1996: APPEAL AGAINST SUBSTANTIVE JURISDICTION OF TRIBUNALS: GUARANTEES ALLEGEDLY ILLEGAL AND UNENFORCEABLE UNDER CHINESE LAW: VALIDITY OF ARBITRATION AGREEMENTS: PUBLIC POLICY'''

Simon Rainey QC and Benjamin Coffer (instructed by Reed Smith LLP) for Beijing Jianlong Heavy Industry Group (“BJHIG”)

Richard Gillis QC and Conall Patton (instructed by Clyde & Co LLP) for Golden Ocean Group (“GOGL”)

'''Summary'''

In the context of a number of claims in arbitration under guarantees issued by a Chinese party, the Court confirmed that the arbitration tribunals had jurisdiction to hear the substantive disputes.  The Court affirmed that an arbitration clause is a distinct and different agreement from that of the other provisions in the contract of which it forms part.  An arbitration clause is not swept away by any underlying illegality or unenforceability of the rest of the agreement.  If the assumed facts that the guarantees were illegal under Chinese law were proven in the arbitrations, then their illegality would be established and the guarantees would not be enforceable.  That outcome would not breach the obligation of international comity between nations.

This case note has been contributed by Jim Leighton, BSc (Hons), LLB (Hons), LLM (Maritime Law), Solicitor of England & Wales, an International Contributor to DMC’s CaseNotes 

'''Background'''

BJHIG (a Chinese company) guaranteed the performance of five charterparties by its subsidiary HXS.  GOGL (a Bermudian company) alleged that HXS repudiated its obligations under the charterparties and that BJHIG was liable under the guarantees.  GOGL commenced five London arbitrations against BJHIG, in accordance with the arbitration clauses in the guarantees.  GOGL obtained an interim award confirming the tribunals’ substantive jurisdiction to hear the disputes.  GOGL also obtained from the tribunals final anti-suit injunction relief against BJHIG in relation to court proceedings commenced by BJHIG in China after the five London arbitrations had been commenced.

BJHIG applied to the court to challenge the tribunals’ conclusions that they had jurisdiction to hear the substantive disputes and make the anti-suit injunctions.  BJHIG asserted that the parties had purposefully set out to contravene Chinese law which required guarantees to foreign companies, such as GOGL, to be approved by the Chinese State Administration of Foreign Exchange (SAFE).  Without consent from SAFE, the guarantees were said to be illegal and were thus unenforceable, which, it was alleged, was known by both parties.  BJHIG further alleged that the arbitration agreements were part of the unlawful scheme designed to provide a forum where the illegality could be concealed and its effects evaded or mitigated.

For the purpose of the applications, the facts asserted by BJHIG had to be assumed to be correct but GOGL strongly denied the truth of most of them.

'''Judgment'''

The issue of the validity of the arbitration agreements turned on the application of the principle of the Court of Appeal judgment in Foster v Driscoll (fn.1), as approved by the House of Lords in Regazzoni v KC Sethia (fn.2).  That principle holds that an English law contract will not be enforceable if the common intention of the parties was to perform in a foreign friendly country some act which is illegal under the law of that country.  It followed that the arbitration agreements, which required nothing to be done in China, would not of themselves fall within the principle simply because they formed part of the same overall transaction as the guarantees.

An arbitration agreement is to be treated as a distinct and separable agreement from the contract of which it forms part. Mere unenforceability of the contract will not of itself result in the unenforceability of the arbitration agreement: Fiona Trust & Holding Corporation v Privalov (fn.3) and section 7 of the Arbitration Act 1996.  However, an arbitration agreement may be rendered void or unenforceable if it is directly impeached on grounds which relate to the arbitration agreement itself and are not merely a consequence of the invalidity of the underlying contract.

The primary case of BJHIG was that the arbitration agreements were directly impeached on grounds which related to the agreements themselves and not merely as a consequence of the invalidity of the guarantees.  Those grounds were that London arbitration substantially improved the chances of a full recovery by GOGL because this a) prevented the issue of validity of the guarantees coming before the Chinese courts (which would refuse to enforce them) and b) permitted GOGL to have the validity of the guarantees determined by English arbitral tribunals applying English law.

The judge, however, held that if the assumed facts were proved in the arbitrations, the illegality would be established and the guarantees would not be enforced. That would not, as the judge saw it, "be contrary to our obligation of international comity as now understood and recognised and would therefore offend against our notions of public policy" (citing Foster v Driscoll).  That outcome would not, as that comity was identified in Foster v Driscoll, furnish any foreign government with just cause for complaint or breach the obligation of international comity identified by the case.  The policy and purpose of the rule which invalidated the guarantees did not therefore strike down the arbitration agreements.

The position was also not affected by what were to be assumed to be the bad motives and intentions in adopting arbitration to conceal wrongdoing.  The powerful commercial factors in support of upholding arbitration provisions, respecting the parties’ choice and providing a one-stop process to apply to this otherwise very conventional charterparty guarantee case, applied here.  It followed that the judge shared the views of the arbitrators in these cases and the application of BJHIG failed accordingly.

'''Comment'''

The judgment keeps the law in line with high authority on the free standing nature of arbitration agreements in that they remain unaffected by potential issues of illegality and unenforceability of the underlying substantive contract to which the arbitration agreement relates.

The issue of alleged illegality and unenforceability under Chinese exchange control law of guarantees issued to foreign entities by Chinese companies has been touched on in the English High Court before.  The conclusion reached was that, where the guarantor is at fault in issuing an unauthorised guarantee, civil liability does not become unenforceable under Chinese law and, consequently, English public policy does not require the English courts to refuse to enforce such a guarantee: see Emeraldian LP v Wellmix Shipping Ltd (The “Vine”) (fn.4).

Footnotes:

1. [1929] 1 KB 470

2. [1958] AC 301

3. [2007] UKHL 50, [2007] 4 All ER 951

4. [2010] EWHC 1411 (Comm) at [179]