3PLR – BAYTUR SA V. FINAGRO HOLDING SA

POLICY, PRACTICE AND PUBLISHING, LAW REPORTS  3PLR

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BAYTUR SA

V.

FINAGRO HOLDING SA

COURT OF APPEAL, CIVIL DIVISION

20, 21, 22, 23 MAY, 13 JUNE 1991

3PLR/1991/64  (CA-E)

 

BEFORE THEIR LORDSHIPS

LLOYD,

FARQUHARSON AND

NOLAN LJJ

 

REPRESENTATION

Nicholas Legh-Jones QC – for the plaintiffs

Nicholas Merriman QC – for the defendants

 

MAIN ISSUES

ADMINISTRATION OF JUSTICE; Arbitration

Arbitration – Claim – Assignment of claim – Effect of assignment – Whether assignee becoming party to arbitration – Whether assignee must give notice to other side and submit to jurisdiction of arbitrator – Whether award a nullity if assignee fails to give notice to other side and submit to jurisdiction of arbitrator.

An equitable assignee of a claim under a pending arbitration does not automatically become a party to the arbitration on the assignment taking effect in equity: the assignee must first give notice to the other side and submit to the jurisdiction of the arbitrator. If he does not do so, and if the assignor, being a corporation, is dissolved in the meantime, the arbitration and any award made in it lapses and becomes a nullity since an arbitration requires two or more parties and there cannot be a valid award when one of the two parties has ceased to exist (see page 131 h to p 132 a j, p 133 e f and p 135 h, post).

Notes

For assignees being parties to an arbitration agreement, see 2 Halsbury’s Laws (4th edn reissue) para 610.

Cases referred to in judgments

Brandt’s (William) Sons & Co v Dunlop Rubber Co Ltd [1905] AC 454,[1904–7] All ER Rep 345, HL.

Foster Yates & Thom Ltd v HW Edgehill Equipment Ltd (1978) 122 SJ 860, CA.

Getreide-Import-Gesellschaft mbH v Contimar SA, Cia Industrial Commercial y-Maritima [1953] 2 All ER 223,[1953] 1 WLR 793, CA.

London Steamship Owners Mutual Insurance Association Ltd v Bombay Trading Co Ltd, The Felicie [1990] 2 Lloyd’s Rep 21.

Mercer Alloys Corp v Rolls Royce Ltd [1972] 1 All ER 211,[1971] 1 WLR 1520, CA.

Montedipe SpA v JTP-RO Jugotanker, The Jordan Nicolov [1990] 2 Lloyd’s Rep 11.

Morris v Harris [1927] AC 252, HL.

National Bank of Greece and Athens SA v Metliss [1957] 3 All ER 608,[1958] AC 509,[1957] 3 WLR 1056, HL.

Sardinia Sulcis, The, The Al Tawwab [1991] 1 Lloyd’s Rep 201, CA.

Shayler v Woolf [1946] 2 All ER 54,[1946] Ch 320, CA.

Tito v Waddell (No 2), Tito v A-G [1977] 3 All ER 129,[1977] Ch 106,[1977] 2 WLR 496.

Weddell v JA Pearce & Major (a firm)[1987] 3 All ER 624,[1988] Ch 26,[1987] 3 WLR 592.

Cases also cited

Bank of Boston Connecticut v European Grain and Shipping Ltd, The Dominique [1989] 1 All ER 545,[1989] AC 1056, HL.

Central Insurance Co Ltd v Seacalf Shipping Corp, The Aiolos [1983] 2 Lloyd’s Rep 25, CA.

Cia Colombiana de Seguros v Pacific Steam Navigation Co [1964] 1 All ER 216,[1965] 1 QB 101.

Damon Cia Naviera SA v Hapag-Lloyd International SA, The Blankenstein, The Bartenstein, The Birkenstein [1985] 1 All ER 475,[1985] 1 WLR 435, CA.

Fisher v Yardley’s London and Provincial Stores Ltd [1953] 2 All ER 713,[1953] 2 QB 266, CA.

Provimi Hellas AE v Warinco AG [1978] 1 Lloyd’s Rep 373, CA.

Salgaoncar (VM) e Irmaos Ltda v Goulandris Bros Ltd [1954] 1 Lloyd’s Rep 56.

Tyerman v Smith (1856) 6 E & B 719, 119 ER 1033.

Interlocutory appeal

The defendants, Finagro Holding SA of Annoeullin, appealed from the judgment of Kenneth Rokison QC sitting as a deputy judge of the High Court in the Queen’s Bench Division on 17 July 1990 whereby he declared that the award in the arbitration dated 12 April 1989 between the plaintiffs, Baytur SA of Geneva, and defendants and the award of the board of appeal of the Grain and Feed Trade Association dated 20 December 1989, directing the plaintiffs to pay damage of $US1,338,175 to the defendants, were nullities. The facts are set out in the judgment of Lloyd LJ.

 

13 June 1991. The following judgments were delivered.

 

MAIN JUDGEMENT

LLOYD LJ.

The principal question in the present case, as to which there is little if any authority, is whether the equitable assignee of a cause of action can become party to a pending arbitration, and if so how. Mr Merriman QC for the defendants submits that the assignee becomes a party to the arbitration automatically, at the moment the assignment becomes effective in equity, without the need for any notice to the arbitrator, or to the other party to the arbitration. Mr Legh-Jones QC, for the plaintiffs, submits that something more is required. At the very least the assignee must give notice, and submit to the jurisdiction of the arbitrator. Mr Rokison QC, sitting as a deputy judge of the High Court, has decided the point, together with a number of other points in favour of the plaintiffs. There is now an appeal to this court.

The facts are fully and clearly set out in the judgment below. In brief the plaintiffs, Baytur SA, of Geneva, Switzerland, agreed to sell to a French company Ets Claeys Luck SA, a quantity of Turkish vetches c & f Sete for shipment from Mersin or Samsun. The contract was dated 24 July 1985. The sellers failed to ship any goods of the contract description. By letter dated 14 April 1986 the buyers claimed damages based on the difference between contract price and market price. The dispute was referred to arbitration pursuant to cl 37 of form 62 of the Grain and Feed Trade Association (GAFTA). Each side appointed an arbitrator, and the two arbitrators appointed a third arbitrator. The parties presented their cases in writing over a period of 18 months, between April 1986 and October 1987. The arbitrators did not publish their award until 12 April 1989. They found in favour of the buyers, and awarded damages of $US1,338,175.

Meanwhile, the buyers had ceased to exist. By an agreement known as a traité de scission dated 24 October 1986, the shareholders of ETS Claeys Luck SA agreed that the company should be split into two, pursuant to art 371 of French Law No 66–537 of 24 July 1966, the equivalent of our Companies Act 1985. The effect of a scission in French law is that the assets and liabilities of one company are  transferred to two or more other companies. As soon as the transfers are completed, the transferor company is dissolved. In the present case the effect of the scission was to transfer all rights and obligations possessed by the buyers under the contract of sale to Claeys Luck International SA, including rights and obligations in the pending arbitration. The transfers under the traité de scission took effect on 15 December 1986. The buyers ceased to exist on that date, long before the award in their favour. On 1 January 1989 Claeys Luck International changed its name to Finagro Holding SA. It is said that, had Claeys Luck International not changed its name, the sellers might never have noticed. But obviously that cannot affect our decision.

There was much discussion in the court below as to the system of law by which the principal question should be decided. Mr Merriman submitted that the relevant law was French law. Mr Legh-Jones submitted that it was English law, and cited r 121 in Dicey and Morris The Conflict of Laws (11th edn, 1987) vol 2 p 957 in support of his submission. Before us Mr Merriman conceded that English law is the relevant law for all purposes. His argument in this court proceeded as follows.

(1)     By English law the benefit of the contract of sale, including the arbitration clause, could be and was validity assigned to the defendants on 15 December 1986: see Shayler v Woolf [1946] 2 All ER 54,[1946] Ch 320, and Montedipe SpA v JTP-RO Jugotanker, The Jordan Nicolov [1990] 2 Lloyd’s Rep 11.

(2)     The defendants thereupon became equitable assignees of the benefit of the buyers’ claim against the plaintiffs. Notice to the plaintiffs was not required to complete the defendants’ equitable title.

(3)     As equitable assignees of a legal chose in action, the defendants were entitled to commence an arbitration against the plaintiffs in their own name. Although, as matter of practice, an equitable assignee usually joins his assignor when bringing proceedings, this is not strictly necessary: see William Brandt’s Sons & Co v Dunlop Rubber Co Ltd [1905] AC 454 and Weddell v JA Pearce & Major (a firm)[1987] 3 All ER 624,[1988] Ch 26.

(4)     There is no authority which precludes an assignee from joining in a pending arbitration. There is at least one case where this has been allowed at first instance: see Montedipe SpA v JTP-RO Jugotanker, The Jordan Nicolov [1990] 2 Lloyd’s Rep 11.

(5)     Since the defendants could have joined in the pending arbitration as soon as the equitable assignment took effect, that is to say, on 15 December 1986, they should be treated as having been a party to the arbitration from that date. It matters not, therefore, that the buyers ceased to exist on that date. The arbitration remained alive, and was still alive when the arbitrators published their award in April 1989.

Mr Legh-Jones accepted every step in Mr Merriman’s argument save the last. There is, he submits, a crucial distinction between possessing a right in equity, and exercising that right. The fact that the defendants might have applied to become a party to the arbitration does not mean that they were already a party. They had, in Mr Legh-Jones’s vivid phrase, bought a ticket. They had not yet joined the train.

In my judgment, Mr Legh-Jones’s objection is well founded. It has never been suggested that the assignee of a cause of action becomes a party to pending litigation simply by virtue of the assignment. There is nothing automatic about it. To become a party to litigation, the assignee must first apply to the court for an order under RSC Ord 15, r 7.

I cannot see why a different rule should apply to arbitrations. Mr Merriman argues that the authority of an arbitrator is based in contract, and that this makes a difference. I accept, of course, that arbitration is a consensual method of settling  disputes. But that, if anything, should make it more difficult for the assignee to join in an existing arbitration, not less.

Mr Merriman argued that we should strive to adapt our arbitration procedure so as to enable a traité de scission to take effect in English law without undue formality. This is a desirable objective. But there are difficulties, both conceptual and practical.

In London Steamship Owners Mutual Insurance Association Ltd v Bombay Trading Co Ltd, The Felicie [1990] 2 Lloyd’s Rep 21 Phillips J found it a startling proposition that a third party could become party to an arbitration without giving notice to anyone. In that case he was concerned with a transfer of rights under the Third Parties (Rights against Insurers) Act 1930. I would find it equally startling in the case of an equitable assignment. In Montedipe SpA v JTP-RO Jugotanker, The Jordan Nicolov [1990] 2 Lloyd’s Rep 11 Hobhouse J held that a legal assignee could succeed to the rights of an assignor in a pending arbitration. But the learned judge made clear that two steps are necessary. First the assignee must give notice to the other side to perfect the legal assignment. Secondly, he must ‘intervene’ in the arbitration, by giving notice to the arbitrators. I quote from his judgment, where, after referring to The Felicie, he said (at 18):

‘However, in the case of a legal assignment written notice has to be given. Notice must have been given to the party liable (ex hypothesi the respondent in the arbitration). In order to affect the arbitrators, notice must also be given to the arbitrators (as, in fact, happened in the present case). Once these steps have been taken both the practical and conceptual difficulties are, or can be, resolved. The right to arbitrate is assignable; that assignment is completed and becomes legally binding upon the other persons concerned by the service of the notice. The service of the notice and the intervention in the arbitration provide as effective and satisfactory a method of carrying on the proceedings as that which is provided in relation to litigation by O. 15, r. 7(2) of the Rules of the Supreme Court.’

A little later on, when dealing with the liability of the assignee for costs, he said (at 19):

‘As regards the subsequent costs of the arbitration, the intervention of the assignee clearly is a submission to the jurisdiction of the arbitrators and therefore, in addition to confirming the capacity of the arbitrators to make an award in favour of or against the assignee on the substantive claim, includes the acceptance that the arbitrators shall have in relation to the assignee the discretion to award costs conferred by s. 18 of the Arbitration Act 1950.’

In the present case not only was there no submission to the jurisdiction of the arbitrators, there was not even any notice of the assignment. So neither of the two steps regarded as necessary by Hobhouse J were taken.

The point was put well by the learned deputy judge when he said:

‘I should be inclined to conclude that as a matter of English arbitration procedural law an assignee cannot become party to a pending arbitration unless and until he effectively submits to the jurisdiction of the arbitrators.’

I agree with that conclusion, and find it unnecessary to deal with the other ground on which the judge was prepared to decide the principal question in favour of the plaintiffs.

I would add only this note of warning. It was assumed by Hobhouse J, correctly, that the assignor would remain liable for costs already incurred in the arbitration, and that the effect of the assignment, therefore, was only to add an additional party potentially liable for those costs. Not surprisingly he held that there were no practical difficulties on the facts of that case. But in the present case, the assignor has ceased to exist. So if the plaintiff sellers had been successful, they would have had to look to the defendants alone for their costs. Nor is it clear to me what would have happened if the plaintiffs had had a counterclaim in the arbitration. It is elementary that an assignment, whether legal or equitable, cannot transfer the burden of a contract. In his reply, Mr Merriman sought to meet this difficulty by relying on the ‘independent doctrine of pure benefit and burden’ as described by Megarry V-C in Tito v Waddell (No 2), Tito v A-G [1977] 3 All ER 129,[1977] Ch 106. But assuming the soundness of that doctrine, I find it difficult to apply to the facts of the present case. There would be scope for great injustice if an insolvent assignor could assign away the benefit of a claim in arbitration to an associated company, while remaining solely liable for the burden of the respondent’s counterclaim. This has led me to question whether mere submission is enough. Because of the nature of arbitration, as a consensual method of settling disputes, it may be that the consent of the arbitrator, and the other party to the arbitration, is required. If this is the correct analysis, then the only exception might be whether the foreign law creates a universal successor, as in National Bank of Greece v Metliss and Athens SA [1957] 3 All ER 608,[1958] AC 509. But that argument was not fully developed before us, and must therefore await another occasion.

I would decide the present case on this simple ground. An assignee does not automatically become a party to a pending arbitration on the assignment taking effect in equity. Something more is required. He must at least give notice to the other side, and submit to the jurisdiction of the arbitrator. Since this was never done, I would answer the first question in favour of the plaintiffs.

What is the consequence? The immediate consequence was, undoubtedly, that the arbitration lapsed. An arbitration requires two or more parties. There cannot be a valid arbitration when one of the two parties has ceased to exist. But Mr Merriman argued on the strength of Mercer Alloys Corp v Rolls Royce Ltd [1972] 1 All ER 211,[1971] 1 WLR 1520 and The Sardinia Sulcis, The Al Tawwab [1991] 1 Lloyd’s Rep 201 that the arbitration revived when the defendants gave notice in early August 1989. I cannot accept that argument. The point is directly covered by the decision of the House of Lords in Morris v Harris [1927] AC 252, followed by the Court of Appeal in Foster Yates & Thom Ltd v HW Edgehill Equipment Ltd (1978) 122 SJ 860. In the latter case Megaw LJ said (and I read from the transcript):

‘Apart from authority, I should have taken the view that when a corporate body is dissolved as a result of a voluntary winding-up, any action which is pending at the date of dissolution ceases, not temporarily and provisionally, but absolutely and for all time … That is the view which I should have taken on this issue as a matter of principle. It is confirmed in my judgment, inferentially, by reference to the Rules of the Supreme Court; and also, much more importantly, by reference to the decision of the House of Lords in Morris v Harris [1927] AC 252.’

Mr Merriman sought to distinguish Foster Yates & Thom Ltd v HW Edgehill Equipment Ltd (1978) 122 Sol Jo 860 on the ground that that case was concerned with an action, not an arbitration. But that very distinction was rejected at first instance in that case, and subsequently abandoned in the Court of Appeal:

‘Before Lloyd J it was argued by counsel then appearing for the plaintiff company and for the assignees that Morris v Harris was distinguishable from  the present case because it was concerned with an arbitration, and not with an action, and because in that case the company concerned was in the position of defendant, not, as here, plaintiff (and, be it added, here also defendant to a counterclaim). Before us, those suggested distinctions were not pursued. It was accepted that, if an action started before dissolution of the company survived and came to life again on an order being made under s. 352 of the Companies Act 1948, so also would arbitration proceedings. Conversely, if the arbitration proceedings came to a final and irrevocable end on the dissolution of the company, being one of the two parties to the arbitration, the same would apply in respect of an action.’

Before leaving Foster Yates & Thom Ltd case it is worth recalling what Megaw LJ had to say about the position of the liquidator in Morris v Harris. He said:

‘I know of no way in which he could have been made a party to the pre-existing arbitration proceedings, other than by the consent of the two parties to the reference to arbitration.’ (My emphasis.)

Before dealing with the remaining points, I must first complete the narrative of events. The award, as I have said, was published on 12 April 1989. That award was, for the reasons already given, a nullity. Nevertheless the plaintiffs did not know it was a nullity, since they did not know that the buyers had ceased to exist. On 11 May 1989 they gave notice of appeal. On 8 July GAFTA fixed 10 August for the hearing of the appeal before the board of appeal. The following day the plaintiffs asked to be allowed legal representation. On 3 August the plaintiffs, having made their own inquiries, found out that the buyers had been dissolved on 15 December 1986. On 7 August the plaintiffs took issue with the defendants’ title to sue. They asked the Board of Appeal to—

‘order the production of documents relevant to the deletion of the claimants [buyers] from the Companies’ Registry in Lille in December 1986, the transfer of any claim to Claeys Luck S.A., and the subsequent change of name to Finagro Holding S.A.’

On 10 August a hearing took place. The request for legal representation was granted. The date for the substantive hearing was fixed for 4 October. The plaintiffs were ordered to pay ___15,000 on account of the board’s fees. On 4 October the substantive hearing commenced. Mr Legh-Jones, on behalf of the plaintiffs, made clear at the outset that his appearance was without prejudice to the plaintiff’s contention that the board of appeal had no jurisdiction, since the award in favour of the defendants was a nullity. Nevertheless the board of appeal went ahead, and after a four day hearing, made an award dated 20 December, upholding the award of the arbitrators, but reducing the damages. On 17 January 1990 the plaintiffs issued the notice of motion in these proceedings, in which they claim a declaration that the appeal award of 20 December 1989 was a nullity.

The first of the remaining points is that the board of appeal having decided as a preliminary issue that they had jurisdiction to determine the appeal, the only remedy open to the plaintiffs is now to make an application for leave to appeal on a question of law under s 1 of the Arbitration Act 1979. There is nothing in this point. If, as I have held, the award of the arbitrators was a nullity, there was nothing to appeal about. The board of appeal could not confer on themselves original jurisdiction to decide the issue. It was, as the deputy judge pointed out, an excellent example of the board seeking to pull itself up by its own bootstraps. Mr Merriman accepted this, but nevertheless argued that the dispute whether the  award of the arbitrators was a nullity was itself a dispute arising out of the contract of sale, and therefore the Board of Appeal had jurisdiction under cl 37 of the contract, coupled with r 10:7 of the GAFTA Arbitration Rules. Rule 10:7 of the rules provides as follows:

‘Any dispute as to whether any of the conditions referred to in Rules 8 to 14 inclusive have been complied with shall be heard and determined by the Board of Appeal. If the Board of Appeal shall determine that any of those conditions have not been complied with, it may in its absolute discretion extend the time for compliance (notwithstanding that the time may already have expired) or dispense with the necessity for compliance and may proceed to hear and determine the appeal as if each and all of those conditions had been complied with. The determination by the Board of Appeal of any matters to which this paragraph applies shall be final, conclusive and binding.’

There are two answers to this argument. In the first place the dispute was not a dispute arising out of the contract, but a dispute arising upon the award: see Getreide-Import-Gesellschaft mbH v Contimar SA Cia Industrial Commercial y-Maritima [1953] 2 All ER 223 at 228, 230,[1953] 1 WLR 793 at 801–802, 805–806 per Singleton and Jenkins LJJ. Rule 10:7 does not help the defendants in that connection, since the question whether there was a valid first-tier award is not one of the matters covered by rr 8 to 14.

Secondly an arbitration clause, however widely drafted, does not itself confer jurisdiction on an arbitrator. There must first be a reference of the particular dispute or disputes. There was no such reference to the board of appeal in the present case.

That leads me to the last question. It is said that the sellers are estopped from denying the jurisdiction of the board of appeal. Mr Merriman concedes that Mr Legh-Jones reserved his position at the commencement of the hearing on 4 October. But he submits that it was by then too late. The conduct of the sellers prior to the hearing was enough to create an estoppel. In particular he relied on the application for legal representation, and the payment of the $15,000 on account of fees. It is sufficient to say that I agree entirely with the judgment of the learned deputy judge in rejecting this argument. I can find nothing in what the plaintiffs said or did which could amount to a clear or unequivocal representation on the part of the plaintiffs that they were accepting the board’s jurisdiction to determine the issue. On the contrary they made clear from as early as 7 August that they were accepting no such thing.

It follows that the plaintiffs are entitled to the declaration which they seek. This court has, of course, been conscious throughout that the point taken by the plaintiffs is highly technical, and against the merits. But nevertheless we must apply the law as we find it. The result, however regrettable, is that the defendants must start the arbitration again, assuming they are in time, or can get an extension.

FARQUHARSON LJ. I agree.

NOLAN LJ: I agree.

Appeal dismissed. Leave to appeal to the House of Lords refused.

Solicitors: Clifford Chance; Taylor Joynson Garrett.

Raina Levy Barrister.