English Commercial Court refuses to permit appeal on a point of law as applicant is precluded from raising an argument on damages not relied on at liability stage

Where bifurcation has been ordered and liability determined, a party in an arbitration is precluded on grounds of res judicata and/or abuse of process from referring to and relying on matters in support of its separate defence to quantum if those matters could or should also have been raised in relation to liability. A Tribunal must be obviously wrong about this issue before there are grounds for an aggrieved party to seek an appeal on a question of law to the English courts.

Partners Jonathan Choo and Shaun Lee, and associate Gladys Yeo from the Singapore dispute resolution group at Bird & Bird ATMD explain the implications of the decision.

What are the practical implications of this case?

First, the decision emphasises that a defendant would be precluded from raising any defences at the remedies stage which could or should be raised at the liability stage in the situation where bifurcation has been ordered and liability has been determined. This suggests that a defendant should be mindful to raise all available defences at the appropriate juncture of the arbitral proceedings or otherwise be precluded from challenging the award on that basis in subsequent setting aside or enforcement proceedings before the English courts.

In this regard, a bifurcated hearing (whether in arbitration or in court) does not allow a party to advance cases which would place a Tribunal in an ‘unreal’ position or a position which the tribunal could not have taken if there had been a single hearing. Specifically, the Court considered that the test is not whether the applicant was seeking to run ‘inconsistent’ cases at different stages of the hearing, but whether it would place the tribunal or court hearing the matter in an invidious position. This is perhaps somewhat akin to the position where a party may plead alternative causes of action but not inconsistent versions of fact or inconsistent pleadings which offend common sense.

Second, the English court recognised that an applicant seeking an appeal against an arbitral award must satisfy the Court that ‘the Tribunal’s decision was obviously wrong’ and not merely ‘anything wrong’ when applying a legal test in the arbitration. The mere fact that the tribunal does not refer to the case law or spell out the test which they were intending to apply, does not amount to a justiciable (and appealable) error of law. Finally, the English court has reiterated that a party’s waiver of the right to appeal an award on a question of law under Section 69 of the Act is a question of construction, and sufficiently clear wording, albeit not express reference to Section 69 of the Act, is necessary.

What was the background?

The parties and the dispute

The applicant, National Iranian Oil Company (“NIOC”) agreed with Crescent Petroleum Company International Limited (“Crescent Petroleum”), to supply and sell to Crescent Petroleum specified quantities of natural gas for a period of 25 years (the “Agreement”). Crescent Petroleum had assigned its rights under the contract to Crescent Gas Corporation Limited (“Crescent Gas”) before the first delivery of gas was due. Crescent Petroleum and Crescent Gas (collectively, “Crescent”) commenced arbitration proceedings as NIOC had failed to deliver gas pursuant to the Agreement.

The Tribunal had ordered a bifurcation of the proceedings – (1) first, to determine all jurisdictional issues and all issues relevant to liability; and (2) second, to determine the remedies to be awarded if liability was established.

Having determined that it had jurisdiction over the claims brought by Crescent, and that NIOC had been and remained in breach of its obligation to deliver gas under the Agreement, the Tribunal proceeded to consider the remedies to be awarded.

The arbitration proceedings

NIOC argued that in assessing Crescent’s loss and hence the damages to be awarded, the Tribunal must take into account the fact that sanctions and various other events affecting NIOC’s ability to supply gas under the Agreement would have reduced the amount of gas which could have been supplied and/or received under the Agreement.

In response, Crescent argued that NIOC’s aforesaid argument was precluded by the doctrines of res judicata and abuse of process as they could and should have been advanced during the liability phase. NIOC had failed to do so.  Crescent argued that NIOC’s raising of sanctions (and related) issues at the quantum stage was an attempt to circumvent the Tribunal’s findings on liability.

The Tribunal agreed with Crescent’s submissions on this issue and awarded damages to Crescent (the “Partial Award”).

NIOC then made the present application for permission to appeal against the Partial Award under section 69 of the Act on the following question of law:

“[W]here bifurcation has been ordered and liability determined, is a defendant/respondent precluded on grounds of res judicata and/or abuse of process from referring to and relying on matters in support of its separate defence to quantum merely because those matters might or could also have been raised in relation to liability?”

What did the court decide?

1. There was no agreement by the parties to waive their right to appeal a point of law under section 69 of the Act

   As a threshold issue, Crescent argued that parties had agreed to waive their right to appeal a point of law, and it was therefore not open to NIOC to appeal against the Partial Award under section 69 of the Act, on the basis that parties had incorporated Article 28.6 of the 1998 International Chamber of Commerce rules (the “ICC Rules 1998”) in their contractual agreement, which provides that:

   “Every Award shall be binding on the parties. By submitting the dispute to arbitration under these Rules, the parties undertake to carry out any Award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made.”

   The arbitration clause in the Agreement provided that any dispute, controversy or claim is to be finally settled by arbitration in accordance with the “Procedures for Arbitration” as contained in Annex 2 of the Agreement. In turn, paragraph 9 of Annex 2 provides that in the case of a gap in the procedural rules of arbitration, then ‘the procedural rules of arbitration of the International Chamber of Commerce (ICC) shall apply’.

   Crescent argued that, since the arbitration clause in Article 22.2 and Annex 2 of the Agreement did not contain any rules about appeals to the court on points of law, there was a gap which is filled by Article 28.6 of the ICC Rules and the exclusion of the right to appeal on a point of law contained within that provision.

   The Court highlighted that whether there was an agreement between the parties to waive their right to appeal a point of law is a question of construction. The Court cited with approval…