FAI Board’s negative jurisdictional decision under Article 14.2 refusing to allow the counterclaim to proceed in the arbitration

Background

Article 12 of the FAI Rules provides that claims arising out of or in connection with different contracts or different arbitration agreements may be brought in a single arbitration proceeding “subject to the provisions of Article 14”. The second paragraph of Article 14 imposes “a double prima facie test” that needs to be fulfilled in order for the FAI Board to assume jurisdiction and to administer the case whenever a respondent (or any other party against which a claim has been made in the arbitration) raises a jurisdictional plea, fails to submit a response to any claim made against it, or objects to the determination of all of the claims raised in the arbitration together in a single proceeding. The key elements that constitute the “double prima facie test” are the following:

(i) First, the Board must be prima facie satisfied that the arbitration agreements under which the claims are brought are compatible in the sense that they do not contain any contradictory provisions (Article 14.2(a)).

(ii) Second, the Board must be prima facie satisfied that all parties to the arbitration “may have agreed” that those claims can be determined together in a single proceeding (Article 14.2(b)).

The above-mentioned requirements (i) and (ii) are cumulative in that both shall be met simultaneously for the Board to assume jurisdiction.

The “compatibility test” under Article 14.2(a) requires, first of all, that each arbitration agreement must be an agreement to arbitrate under the FAI Rules. The Board obviously cannot allow an arbitration to proceed with respect to claims based on an arbitration agreement that clearly does not refer to the FAI Rules. Beyond that, the Board may be expected to construe Article 14.2(a) to the effect that it requires the same number of arbitrators, the same method of appointing the arbitral tribunal, and the same seat of arbitration.

Not all differences between the different arbitration agreements amount to contradictions, though. For instance, if one arbitration agreement is simply silent on the composition of the arbitral tribunal or on the seat of arbitration, the compatibility will nevertheless be presumed. Accordingly, where one arbitration agreement provides that the dispute shall be referred to a sole arbitrator, whereas the other leaves the number of arbitrators undetermined, there is no contradiction in the meaning of Article 14.2(a). Similarly, the arbitration agreements are considered compatible if one of them provides that the seat of arbitration is Helsinki, while the other fails to contain any indication on the seat.

As a practical matter, there may be also other differences between the various arbitration agreements, for example with respect to the language of the arbitration, the law or rules of law applicable to the substance of the dispute, time-limits regarding the rendering of a final award, provisions on the allocation of the arbitration costs, and the like. Depending on the circumstances, such inconsistencies may or may not amount to a contradiction that will prevent the Board from allowing the case to proceed under Article 14.2(a). The Board will assess each case individually in light of its particulars.

Apart from the requirement of substantive compatibility of the arbitration agreements set forth in Article 14.2(a), the Board will need to apply another prima facie test set out in Article 14.2(b) where multiple claims are raised under multiple arbitration agreements. According to Article 14.2(b), the Board must be prima facie satisfied that all parties to the arbitration “may have agreed” that those claims can be determined together in a single arbitration proceeding. This provision is devised to protect party autonomy and privity of the arbitration agreement by clarifying that no party will be forced to accept that claims brought under different arbitration agreements will be heard together in a single proceeding where it cannot be presumed, at least on a prima facie basis, that the objecting party would have consented to such possibility had it been aware of it at the time when the arbitration agreement was concluded. In practice, the closer (i) the substantive relatedness between the different contracts containing the different arbitration clauses, and (ii) the connectivity between the different claims based on the different contracts and arbitration clauses, the higher the likelihood that the Board will find that the prima facie test under Article 14.2(b) is satisfied.

Case 47/2013

The practical application of the requirements set forth in Article 14.2(a)-(b) may be illustrated with the following example.

In case 47/2013, A and B had entered simultaneously into two separate yet related contracts: one for the sale of certain equipment from A to B, and another regarding the service of the said equipment by A. Both contracts contained an FAI arbitration clause providing for a three-member arbitral tribunal. However, the clauses differed with respect to the method of appointing the presiding arbitrator and the language of the proceedings.

The arbitration clause in the sales contract was silent on the language of the arbitration, whereas the service contract stipulated that the arbitration shall be conducted in Finnish. On the other hand, the arbitration clause of the sales contract prescribed that the presiding arbitrator shall be nominated jointly by the two party-nominated arbitrators, whereas the service contract provided for “three arbitrators appointed in accordance with the FAI Rules”, meaning that the choice of the presiding arbitrator was left primarily to the parties themselves, and not to the party-nominated arbitrators (see Article 18.1(d) of the Rules).

Once A had started an arbitration against B by filing a Request for Arbitration based on the sales contract, B submitted an Answer in which it denied all the claims brought against it and raised a counterclaim against A based on the service contract. A objected to the counterclaim being resolved in the same proceeding as the requirements set out in Article 14.2(a) and 14.2(b) were not satisfied. The FAI Board sustained the objection and ruled that the arbitration was not allowed to proceed with respect to B’s counterclaim. The Board’s ruling was based mainly on the following considerations:

(i) Although B was willing to agree that the presiding arbitrator would be selected in the same manner in both the dispute relating to A’s main claim and the dispute relating to B’s counterclaim, A could not be forced to accept B’s proposal as the arbitration clauses contained in the sales contract and the service contract specifically provided for a different appointment mechanism.

(ii) While there was no direct contradiction between the different arbitration clauses with respect to the language of the arbitration (due to the reason that only the service contract made any reference to the language of the proceeding), the Board found that A’s insistence on having the arbitration concerning its claim under the sales contract conducted in English was well-founded taking into account that A and B were of different nationalities, the sales contract was drafted in English, all pre- and post-contractual correspondence between the parties (including A’s Request for Arbitration and B’s Answer to it) had been drafted in English, and A had no command of the Finnish language. In these circumstances, the Board concluded that, prima facie, A could not be deemed to have consented to the settlement of its claim based on the sales contract in proceedings conducted in the Finnish language merely on the grounds that the arbitration clause of the sales contract did not explicitly mention the language of the arbitration.

(iii) Finally, the Board appreciated that, although the sales contract and the service contract were concluded simultaneously and between the same parties, their subject matter and material terms were quite different. Correspondingly, also A’s claim based on the sales contract and B’s counterclaim based on the service contract were distinct and unrelated to each other. Having regard to this fact – coupled with the substantive differences between the arbitration clauses in the different contracts – the Board reached the prima facie determination that A could not be deemed to have consented to the resolution of the different claims arising out of the sales contract and the service contract together in a single arbitration.

To summarize, the Board’s negative jurisdictional decision under Article 14.2 meant that the arbitration was allowed to proceed only with respect to A’s claim based on the sales contract. Importantly, this finding did not prejudice B in any manner, because B remained free to commence a separate arbitration against A based on the service contract and the FAI arbitration clause contained therein. However, as the parties settled all their disputes amicably soon after the arbitral tribunal had been constituted, there was no need for B to proceed accordingly.

 

Reported by Mika Savola

Chair, FAI Board

Posted in FAI cases |