"Not a Cat’s Chance in Hell": English Court Clarifies Approach to Escalation Clauses
In Short
The Situation: On 15 February 2021, the English High Court handed down a key judgment in Republic of Sierra Leone v. SL Mining Ltd on the issue of whether non-compliance with a clause containing a pre-arbitration procedural requirement—also sometimes known as a multi-tier dispute resolution clause, or an escalation clause—could form the basis of a jurisdictional challenge to an arbitral award under s. 67 of the English Arbitration Act 1996.
The Result: The Court held that the arbitral award could not be challenged because, among other reasons, non-compliance with a precondition to arbitration (such as a requirement to first attempt to reach an amicable resolution) was an issue of admissibility (i.e., whether the dispute was ready for arbitration), which the arbitral tribunal should determine. It was not an issue of the tribunal's jurisdiction, i.e., whether a claim could be brought to the particular forum seized.
Looking Ahead: Challenges to jurisdiction based upon non-compliance with preconditions to arbitration should not be referred to the English courts under s. 67 of the Arbitration Act 1996. If they are, they are unlikely to be successful.
The Background
The arbitration proceedings concerned a dispute regarding a 25-year mining licence agreement, which was granted by the Republic of Sierra Leone to SL Mining Ltd in 2017. The licence agreement included a clause requiring the parties to endeavor to reach an amicable settlement of any disputes before the dispute could be referred to arbitration. If the parties were unable to reach a settlement within three months of the notice of dispute, either party could submit the matter to ICC arbitration.
Following the cancellation of the mining licence agreement by Sierra Leone, SL Mining filed a notice of dispute triggering the three-month period for settlement negotiations. Following this, SL Mining applied for the appointment of an emergency arbitrator under the ICC Rules. The ICC Rules required that a Request for Arbitration ("RFA") should be filed within 10 days of the emergency relief application. SL Mining proposed deferring the submission of its RFA to the end of the three-month settlement negotiation period set out in the escalation clause. Sierra Leone did not consent to this proposal, insisting that the RFA should be filed in accordance with the ICC Rules. SL Mining therefore filed its RFA prior to the expiry of the three-month period.
After the arbitral tribunal was constituted, Sierra Leone challenged the jurisdiction of the tribunal, arguing that the relevant clause had not been complied with as the arbitration had commenced before the expiry of the three-month period.
The tribunal rejected this challenge and issued a Partial Final Award finding that the escalation clause had been complied with.
Relying on s. 67 of the Arbitration Act 1996, which allows a party to challenge an arbitral award on the basis that the tribunal did not have substantive jurisdiction, Sierra Leone challenged the tribunal's Partial Final Award in the English High Court.
The High Court's Judgment
The High Court rejected Sierra Leone's challenge. The judge found that there was no basis for a challenge to the Partial Final Award under s. 67 of the Arbitration Act 1996.
First, the Court found that Sierra Leone had consented to the RFA being served before the end of the three-month settlement negotiation period required by the escalation clause. Therefore, Sierra Leone had waived its right to challenge the tribunal's jurisdiction on this issue.
Second, the Court distinguished between issues related to "jurisdiction" and issues related to "admissibility". The Court held that "jurisdiction" refers to the power of the arbitral tribunal to hear a case. "Admissibility" refers to whether it is appropriate for the tribunal to hear the claim at all or if it is premature for it to do so. A challenge under s. 67 could only be brought if the issue was one of jurisdiction, rather than admissibility. The Court found that the question of compliance with the precondition to arbitration is not an issue of whether the claim was arbitrable, or whether there is another forum in which the dispute should be decided, but rather whether a claim had been presented too early—which is best decided by the tribunal.
The Court declined to follow previous decisions of the English courts in relation to similar multi-tier dispute clauses—Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd [2015] 1 WLR 1145 and Tang v Grant Thornton International Limited [2013] 1 AER (Comm) 1226—noting that in both cases the distinction between jurisdiction and admissibility was not argued, and s. 67 jurisdiction was assumed.
The Court referred to international academic commentaries and case law in other jurisdictions, in particular, decisions from the United States Supreme Court and the Singapore Court of Appeal. It concluded that "the international authorities are plainly overwhelmingly in support of a case that a challenge such as the present does not go to jurisdiction".
Third, construing the clause in issue, the Court held that the precondition to arbitration in question was not an absolute bar to bringing proceedings for three months. The clause gave a window during which the parties could explore settlement. This, however, was always subject to earlier proceedings being able to commence if amicable settlement could not be achieved. The test is an objective one as to whether the parties would be unable to reach amicable settlement within the window. In light of the facts in this case, the Court noted that "there was not a cat's chance in hell of an amicable settlement" and so there was no failure to comply with the clause, and no bar to the commencement of the arbitration.
Three Key Takeaways
- The failure to comply with a precondition to arbitration is an issue of admissibility of the claim to the arbitration, not a matter of the tribunal's jurisdiction to hear that claim. The judgment aligns English arbitration law on the distinction between the concepts of jurisdiction and admissibility with the approach taken in the United States and Singapore.
- Challenges to the tribunal's jurisdiction based upon preconditions to arbitration are not referable to the English courts under s. 67 of the Arbitration Act 1996 and, if such challenges are filed, they are unlikely to be successful. The judgment clarifies that the determination of an alleged failure to comply with a precondition to arbitration is a matter for the arbitrators to address, not the courts.
- Preconditions to arbitration are to be treated as a mechanism for facilitating settlement, rather than as an absolute bar to commencing arbitration proceedings. However, non-compliance with such clauses may still be invoked before arbitral tribunals as an issue of admissibility, especially in cases where there is little to no effort to discuss settlement and no reason to believe that settlement may be unrealistic.
