High Court Re-Affirms Principle of "One-Stop" Dispute Resolution in Section 67 (Jurisdiction) Challenge to Arbitral Award

The English High Court has dismissed a challenge under section 67 of the Arbitration Act 1996 to an ICC arbitral award, confirming that the arbitrator appointed under the settlement agreement in question had jurisdiction to grant declaratory relief and award damages flowing from a breach of that agreement.

In this Legal Update, we take a close look at Petroleum Exploration (PVT) Ltd v Frontier Holdings Ltd and anor, which provides useful guidance on the interplay between arbitration clauses in settlement agreements and prior agreements and reinforces the English court’s commitment to the principle of “one-stop” dispute resolution. 

Key Takeaways

• The English courts will robustly uphold the principle of "one-stop" dispute resolution (the “Fiona Trust presumption”) where parties have agreed to arbitration.
• The Fiona Trust presumption has "particular potency" in the context of settlement agreements. When parties enter into a settlement agreement containing a dispute resolution clause different from that in an earlier agreement, the courts will generally construe the settlement agreement clause as superseding the earlier clause and applying to all disputes arising out of both agreements. This reflects the commercial reality that disputes about the efficacy of a settlement will inevitably require consideration of rights under the earlier contract.
• Sophisticated and complex agreements drafted by skilled professionals (like lawyers) will be principally interpreted by textual analysis, unless a provision lacks clarity or is apparently illogical or incoherent.
• The scope of an arbitrator’s jurisdiction extends to the remedies necessary to give effect to his/her findings on liability.

Case Background

The dispute arose out of a quasi-joint venture arrangement between Petroleum Exploration (PVT) Limited ("PEL") and Frontier Holdings Limited ("FHL") in relation to the Badin-IV North and South gas blocks in Pakistan. Under the arrangement, PEL held a 47.5% Working Interest in the Badin IV blocks, while FHL acquired a 27.5% Working Interest in each block. The relationship was governed by joint operating agreements ("JOAs"), which contained arbitration agreements providing for disputes to be resolved by ICC arbitration (without electing an arbitral seat).

Disputes between the parties led to two arbitrations which were subsequently settled by a settlement agreement, to which PEL, FHL and Spud Energy Pty Limited ("Spud") were parties (the "Settlement Agreement"). The Settlement Agreement provided for, among other things, the transfer of certain Working Interests to PEL subject to governmental approval, the resetting of FHL's accounts to zero and the continuation of FHL's Working Interests in the Badin IV blocks. The Settlement Agreement contained an arbitration clause providing that any dispute arising "with respect to any matter arising under this Agreement and/or the Settlement Transaction" was to be settled by ICC arbitration, but differently from the clause in the JOAs, it provided for the seat of arbitration to be London.

The settlement could not be carried into effect due to lack of governmental consent. Notwithstanding this, PEL contended that FHL and Spud were in breach of the Settlement Agreement by failing to transfer the interests they had agreed to transfer, and sought to reverse the financial settlement, demanding payment of approximately US$10.3 million and threatening forfeiture of FHL's Working Interests. FHL and Spud maintained that the obligation to transfer could only take effect with governmental consent, which had been withheld due to PEL's own failure to discharge outstanding payment obligations to the Government of Pakistan.

London and Singapore Arbitrations

Two ICC arbitrations against PEL ensued: one in 2022 in London pursuant to the arbitration agreement in the Settlement Agreement, and one in 2023 in Singapore pursuant to the arbitration agreements in the JOAs. Khurram Khan (Lewis Baach Kaufmann Middlemiss) represented FHL in the London and Singapore arbitrations, with Mayer Brown’s International Arbitration team in Singapore and Colin Liew as counsel in the ensuing Singapore litigation proceedings.

In the London arbitration,  FHL and Spud sought declarations that they had not breached the Settlement Agreement and that PEL was in breach of it, along with declarations that FHL continued to hold its Working Interests and was entitled to damages. PEL filed counterclaims valued at approximately US$480 million. In a Partial Final Award, Mr Michael Collins SC found in favour of FHL and Spud, granting the declarations sought along with substantial damages and dismissing PEL’s counterclaims in their entirety. In a further Partial Final Award, Mr Collins SC awarded legal and arbitration costs to FHL.

Section 67 Challenge and Final Anti-Suit Injunction

In its Section 67 challenge in the English courts, PEL argued that Mr Collins SC lacked jurisdiction to grant certain declarations and damages contending that these elements of relief only fell within the jurisdiction of the tribunal constituted pursuant to the JOAs.

Specifically, while PEL accepted that the arbitrator had jurisdiction to grant declarations that FHL and Spud were not in breach of the Settlement Agreement and that it (PEL) was in breach, PEL disputed the arbitrator's jurisdiction to grant (i) the damages award, and (ii) declarations relating to FHL’s Working Interests, PEL's breach due to withholding gas sale payments and PEL’s non-entitlement to forfeiture of FHL's Working Interests or reverse cost adjustments.

Using Toby Landau KC (Duxton Hill Chambers) as counsel, FHL and Spud opposed the application on the basis that the relevant declarations and monetary awards were not claims under the JOAs but remedies sought by them in the London arbitration for breach of the Settlement Agreement. FHL and Spud also sought a final anti-suit injunction to restrain PEL from pursuing court proceedings in Pakistan in breach of the arbitration agreement in the Settlement Agreement (which was parasitic on the outcome of the s.67 challenge).

English Court’s Findings

His Honour Judge Pelling KC outlined the following legal principles:

• When construing arbitration agreements, the general principles of contractual construction apply. Where "skilled professionals" draft sophisticated, complex agreements (like the Settlement Agreement), they will be interpreted principally by textual analysis (unless a provision lacks clarity or is apparently illogical or incoherent).
• Account must also be taken of the presumption identified by the House of Lords in Fiona Trust and Holding Corp v Privalov [2007] that the parties, as rational businessmen, are likely to have intended any dispute arising out of their relationship to be decided by the same tribunal, and the clause should be construed in accordance with this presumption, unless the language makes clear that certain questions were intended to be excluded from the arbitrator's jurisdiction.
• The presumption is "particularly strong" where the dispute resolution clause is in a contract entered into to resolve disputes under an earlier contract. In Monde Petroleum SA v Westernzagros Ltd [2015], the parties entered into a settlement agreement containing a dispute resolution provision different from (and incompatible with) that in the earlier agreement, and the court held that the parties are likely to have intended the settlement agreement clause to govern all aspects of outstanding disputes and to supersede the earlier clause. There is no reason why this approach should not apply where a settlement agreement resolves past disputes with the prior agreements continuing to govern the parties' future relationships.

 Applying these principles to the facts, the Judge held as follows:

• It was "highly improbable" that a reasonable person with all the background knowledge available to the parties would conclude that they had intended breach and causation to be decided by one tribunal, but remedies by another. Such an outcome would involve delay, cost, and risk of inconsistent findings with no rational justification.
• Nothing in the language of the arbitration clause hinted at an intention to exclude some remedial issues from resolution by the tribunal appointed under the Settlement Agreement.
• It was an "artificial construct" to characterise the subject matter of the disputed declarations as disputes under the JOAs. The claims concerned allegations of breach of the Settlement Agreement, and the disputed declarations were remedies that followed from that breach, not claims under the JOAs. Hence, the declarations were the natural consequence of the arbitrator's unchallenged conclusions on liability.
• PEL's argument that the damages claim fell outside the arbitrator's jurisdiction because it related to gas sales governed by a gas sales and purchase agreement containing its own arbitration clause failed. The arbitrator had awarded damages for breach by PEL of the Settlement Agreement, quantified by reference to sums withheld from FHL as a direct loss arising from PEL's breach.

Concluding that the arbitrator had jurisdiction to grant the disputed declarations and to award damages, the s.67 challenge was dismissed. The Judge also granted the final anti-suit injunction restraining PEL from continuing or commencing proceedings in breach of the Settlement Agreement's arbitration clause.

Please contact any of the authors or your usual Mayer Brown contact if you would like to discuss this decision and how it may affect your current or future arbitration strategy.