Arbitration Agreement Applies To Settlement Agreement

In Sonact Group Limited v. Premuda SPA [2018] EWHC 3820 (Comm), the English High Court found that an arbitration agreement continues to apply to a claim for the payment that agreed as a settlement of the claim in the underlying contract.

The matter arose from a charter party contract, which contained a clause providing for the arbitration of “any and all differences and disputes of whatsoever nature arising out of this charter”. By an exchange of emails, the owner and charterer settled the claim for USD$600,000. The charterer failed to make the payment and despite the fact that there was no express arbitration clause applying to the settlement agreement, the owner commenced arbitration and was ultimately awarded the agreed amount. The charterer applied to the court under s.67 of the Arbitration Act, arguing that the tribunal did not have substantive jurisdiction to determine the claim on the amount settled by the parties.

In relation to the approach to challenges under s.67, the Court stated [13]:

“It is well established and is common ground that a section 67 challenge involves a rehearing and not merely a review of the issue of jurisdiction, so that the court must decide that issue for itself. It is not confined to a review of the arbitrators’ reasoning, but effectively starts again. That approach has been confirmed by the Supreme Court in Dallah Real Estate & Tourism Holding Company v Ministry of Religious Affairs of the Government of Pakistan [2010] UK SC 46, [2011] 1 AC 763, which also makes clear that the decision and reasoning of the arbitrators is not entitled to any particular status or weight, although (depending on its cogency) that reasoning will inform and be of interest to the court. See in particular Lord Mance at [36] and Lord Collins at [96].”

In relation to whether the charterparty arbitration clause applied to the settlement agreement, the Court found that given the nature of the negotiations and the manner in which they had been carried out, there was an objective but unexpressed intention of the parties that the second agreement should be governed by the same provisions for dispute resolution as the original charter party under which the claims arose. It stated [15-16]:

The parties’ agreement in their email exchange was that the sum of US $600,000 should be paid. That was the sum to be paid in respect of the owner’s claim for demurrage and heating costs. Although the exchange of emails can be described as a “settlement agreement”, that is a somewhat grandiose expression for what was, in reality, no more than an informal and routine arrangement to finalise the sums due under the charterparty, notwithstanding that Italian lawyers became involved. I agree with the arbitrators that it is obvious that the parties intended that the arbitration clause in the charterparty would continue to apply in the event that the agreed sum was not paid. The wide wording of that clause is sufficient to encompass such a claim, albeit that the agreement to pay US $600,000 represents a new cause of action under a new and binding agreement.

It is inconceivable that the parties intended that, if the agreed sum was not paid, the owner would be unable to pursue its claim in arbitration, the parties’ chosen neutral forum, and to obtain an award which would be readily enforceful under the New York Convention, but instead would have to commence court proceedings, either in the charterers’ home jurisdiction or by seeking permission to serve English proceedings out of the jurisdiction.

In response to the argument that the settlement agreement gave rise to a new legal relationship between the parties, replacing the relationship under the charterparty, the Court noted [20] that there was no bright line rule that once the parties enter into a new legal relationship, here a settlement agreement, an arbitration clause in the underlying contract necessarily can no longer apply.

See also the following articles on this case:

DLA Piper note that despite the extensive interpretation of an arbitration clause by the English High Court, it nevertheless remains recommendable that an express arbitration clause is included in a settlement agreement or any other type of supplemental agreement.

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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