FAI Board’s first ruling on the consolidation of arbitrations under Article 13

Background

One of the less satisfactory features of the previous 1993 FAI Rules was that they did not recognize consolidation of arbitrations, meaning combining of two or more arbitration proceedings pending under the Rules into a single arbitration before the same arbitral tribunal. The FAI Rules Revision Task Force considered this a shortcoming because, in appropriate circumstances, there may be various advantages in consolidating cases involving common issues and facts arising out of the same or related transactions. In such instances, consolidation often makes for procedural and cost efficiency due to the reason that a single arbitral tribunal will decide all issues in one proceeding rather than two or more. Equally important, consolidation eliminates the risk of having contradictory awards rendered in different proceedings on closely related sets of facts.

Because of the potential benefits of consolidation, some modern arbitration institutes have adopted specific provisions governing the combination of different arbitral proceedings into a single arbitration. The FAI Rules Revision Task Force decided to follow suit. Accordingly, the 2013 FAI Rules expressly permit consolidation of arbitrations on the conditions set forth in Article 13.


Mandatory requirements for consolidation

In contrast to some other institutional arbitration rules, the FAI Rules do not confer the power to consolidate cases upon the arbitral tribunal; only the FAI Board is vested with such authority. That authority, in turn, is limited to the power to consolidate FAI arbitrations. The Board cannot consolidate FAI arbitration proceedings with an ad hoc arbitration or with an arbitration governed by some other institutional arbitration rules.

Article 13.1 also makes it clear that the Board cannot consolidate cases of its own volition. Rather, consolidation requires a request to that effect by one of the parties. A party seeking consolidation may be a claimant, respondent or an additional party to any of the arbitrations to be consolidated. However, in all cases, the decision on whether to consolidate arbitrations or not remains exclusively at the Board’s discretion.


Other criteria for consolidation

Article 13 outlines three basic scenarios in which consolidation may come into question. First, the Board may order consolidation if all parties have agreed to it (Article 13.1(a)). Parties’ agreement to consolidate can be a past one (i.e., set out in the arbitration agreement) or a current one (i.e., reached at the time when consolidation is sought). In such circumstances, the Board is likely to respect party autonomy and order consolidation regardless of any considerations that might otherwise have caused it to refuse to consolidate.

That said, Article 13 allows also non-consensual consolidation, meaning consolidation in cases where one of the parties objects to that. The justification for this lies in the fact that, when incorporating the FAI Rules to their arbitration agreement, the parties are deemed to have consented in advance to the consolidation of arbitrations on conditions set forth in Article 13. The conditions for non-consensual consolidation are enumerated in Articles 13.1(b) and 13.1(c).

According to the former, the Board may consolidate cases if all claims raised in the arbitrations fall under the same arbitration agreement. In principle, consolidation is possible in such instances irrespective of whether the arbitrations to be consolidated are between the same or different parties. The Rules reflect in this regard the widely accepted view that all parties to the same arbitration agreement may often be deemed to have consented to participate in a single arbitration concerning claims brought under that arbitration agreement. Consequently, a subsequent refusal by any party to participate in such a single arbitration would be at odds with that party’s initial consent to the arbitration agreement.

Article 13.1(c), in turn, allows consolidation on certain conditions even when the claims in the arbitrations are raised under different arbitration agreements. However, in this event, two additional requirements shall be met: (i) first, the disputes in the arbitrations must arise in connection with the “same legal relationship”; and (ii) second, the arbitration agreements must not contain “contradictory provisions that would render the consolidation impossible”.

As to the first requirement, the FAI Rules Revision Task Force intended that the Board should adopt a rather broad interpretation of the term “same legal relationship”, associating it with the notion of “same economic transaction”. Examples may include a common construction project, a common distribution strategy, or a situation where the parties have concluded a series of similar contracts for recurring supply of a certain product. This requirement may also be satisfied when the parties have entered into a letter of intent and subsequently a share purchase agreement, or where they have concluded a loan agreement and then a separate pledge agreement as security for the loan.

As for the second requirement, the term “contradictory provisions” in Article 13.1(c) is meant to be interpreted in the same manner as under Article 14.2(a), which addresses the criteria for the Board’s positive prima facie jurisdictional decision in cases involving more than one arbitration agreement. It follows that consolidation cannot be ordered where the different arbitration agreements provide, e.g., for different seats of arbitration, different number of arbitrators, or different method of appointing the arbitral tribunal, unless the incompatibility is rectified by a subsequent agreement of all parties.

Importantly, the Board has sole discretion to decide whether to order consolidation or not. The Board is not obliged to accept a request for consolidation even if the requirements of Article 13 were satisfied. When exercising its discretion, the Board will balance the advantages and potential disadvantages of consolidation in casu having regard to the issues listed under Article 13.2. According to that provision, in deciding whether to consolidate two or more arbitrations in situations referred to in Article 13.1(b)-(c), the Board shall take into account: (a) the identity of the parties in the different arbitrations; (b) the connections between the claims made in the different arbitrations; (c) whether any arbitrator has been confirmed or appointed in any of the arbitrations and, if so, whether the same or different persons have been confirmed or appointed; and (d) any other relevant circumstances.

As to item (a) above, consolidation of arbitrations is generally more appropriate when the parties to the different proceedings are the same than when they are different. Issues of privity and confidentiality are less problematic in a two-party setting than in cases involving multiple parties. Also, the procedure adopted by the arbitral tribunal in consolidated two-party arbitrations may be closer to the procedure actually foreseen by the parties than it is in consolidated multiparty arbitrations.

As for Article 13.2(b), consolidation is best motivated where it serves to eliminate the risk of contradictory decisions on the same or closely related factual circumstances. This, in turn, ordinarily requires that there is a close connection between the claims raised in the different arbitrations to be consolidated. The lack of such connection is one factor leaning in favour of a determination that consolidation may not be appropriate.

Article 13.2(c) directs the Board to consider whether any arbitrator has been confirmed or appointed in any of the arbitrations to be consolidated and, if so, whether the same or different persons have been confirmed or appointed. This provision is devised to ensure that all parties to all the arbitrations will be treated equally in the constitution of the arbitral tribunal. To further safeguard this paramount principle, the FAI Rules stipulate that, where the Board decides to consolidate the arbitrations, all parties to all the arbitrations will be deemed to have waived their right to nominate an arbitrator, and the Board may revoke the confirmation and appointment of arbitrators and apply the provisions of Article 19 in the appointment of the arbitral tribunal (Article 13.4).

Finally, Article 13.2(d) requires the Board to consider “any other relevant circumstances” as well. These may be manifold. In practice, one of the most important factors is the progress already made in the arbitration that was commenced first. The Board will endeavour to compare the savings of time and money in the second arbitration with the possible delay and other inconvenience caused to the first arbitration if the proceedings were consolidated. Generally speaking, the more advanced the pending proceedings are, the less justified a consolidation will be.


FAI case law on consolidation

There has been only one request for consolidation under the 2013 FAI Rules to date. The circumstances of that case were as follows.

Party A commenced simultaneously two separate arbitrations under the FAI Rules: one against B and C, and the other against B only. In the following, the two arbitrations will be referred to as Case No. 1 and Case No. 2, respectively.

Case No. 1 was based on an arbitration clause contained in a shareholders’ agreement between A, on the one hand, and B and C, on the other hand, concerning the ownership and governance of company D. A and B were both limited liability companies, whereas C was a natural person who was the sole owner and manager of company B.

Case No. 2, in turn, was based on an arbitration clause contained in a share purchase agreement concerning the sale and transfer by A, and acquisition by B, of A’s shares in company D.

A contended that B and C had breached the shareholders’ agreement, and that B had breached also the share purchase agreement, by failing to inform A of certain circumstances that would     have had a material effect on A’s decision-making as to the price at which it was willing to sell its shares in company D. Therefore, A claimed damages from B and C based on their purported breach of contract. Apart from that, A requested that the FAI Board consolidate the two cases pursuant to Article 13 FAI Rules. The respondents B and C objected to A’s request for consolidation.

As the shareholders’ agreement and the share purchase agreement contained separate FAI arbitration clauses, A’s request for consolidation fell under Article 13.1(c) FAI Rules. Having carefully analyzed the circumstances of the case in light of the issues listed under Article 13.2, the Board ultimately decided to dismiss the request mainly on the following grounds:

(i)         As a general rule, special reasons should be required for consolidation if one of the parties opposes it. In the present case, B and C had opposed A’s request for consolidation for reasons that could not be regarded as obstructive or dilatory.

(ii)        The parties to the different arbitrations were different (albeit closely related): in Case No. 1, there were two respondents (B and C), while in Case No. 2 there was only one (B).

(iii)       The arbitration proceedings were based on two different arbitration clauses, which were not fully compatible. In particular, the clauses differed with respect to the language of the proceedings: the shareholders’ agreement was drafted in Finnish, whereas the share purchase agreement was drafted in English. Furthermore, only the arbitration clause set forth in the share purchase agreement contained specific provisions on the language of the arbitration, stating that “the arbitration proceedings shall be conducted in the English language but evidence may be submitted also in Finnish and/or Swedish and witnesses heard in any of the said languages”.

(iv)       Importantly, all parties (i.e., claimant A and respondents B and C) had subsequently informed FAI that, in the event that the cases were not consolidated, the parties agreed to have the same arbitral tribunal in both arbitrations, which could then be conducted in the same language. The Board noted that, due to this party agreement, most of the benefits of consolidation could effectively be achieved without any need to actually consolidate the proceedings.


Final remarks

As the FAI case law regarding consolidation is still scarce, one should be careful when drawing conclusions as to how the FAI Board will apply Article 13 under different circumstances in its future praxis. However, it is probably safe to say that, even though the new consolidation regime under the FAI Rules is flexible and allows, in principle, far-reaching applications, the Board may be expected to adopt a somewhat restrictive approach in its application of Article 13. For instance, the Board is likely to accept a request for consolidation mainly in cases where the arbitrations are pending between the same parties and they are based on the same arbitration agreement. Conversely, unless all parties expressly agree to consolidation, it may be anticipated that arbitrations will rarely be consolidated if the parties are different and the proceedings are based on different arbitration agreements. Consolidation is also unlikely if different arbitrators have already been confirmed in the different arbitrations, absent special reasons to the contrary.

 

Reported by Mika Savola
Chair, FAI Board

Posted in FAI cases |