JSC Zestafoni G Nikoladze Ferralloy Plant v Ronly Holdings Ltd (2004)
Two out of four parties to a contract could make a binding ad hoc agreement to refer a dispute between those two parties to a sole arbitrator despite the provisions of an arbitration clause in the contract.
The claimant (Z) applied under the Arbitration Act 1996 s.67 for an order setting aside an interim arbitration award that the arbitrator (K) had jurisdiction over a dispute between Z and the defendant (R). Z was a company incorporated in the Republic of Georgia. R was an English company. Each had a partner company with which it was party to an agreement for the sale and supply of raw materials and electricity. An arbitration clause in the sale agreement provided that disputes should be referred to arbitration in the City of London with one arbitrator to be appointed by Z and its business partner, one to be appointed by R and its business partner and a third to be jointly appointed. R advanced a claim for amounts due under the agreement. It purported to agree with Z, through its general director, that those claims should be referred to K as sole arbitrator. After K had accepted his appointment Z took the point that it was not open to itself and R to refer claims to K alone in light of the arbitration clause. K held that he had jurisdiction by reason of the ad hoc agreement to appoint him as sole arbitrator and that the claims advanced by R fell within the scope of that jurisdiction. Z submitted that (1) the purported agreement for a sole arbitrator was intrinsically incapable of vesting any jurisdiction in anyone appointed under it; (2) there was no binding agreement for a sole arbitrator because itself and R were never ad idem; (3) it would be contrary to public policy for the English courts to give effect to the arbitrator's award because Z had acted illegally under the law of Georgia in entering the agreement for a sole arbitrator without the authorisation of the Georgian Ministry of Justice.
(1) If four parties entered into an agreement to refer to the arbitration of three arbitrators disputes arising out of an underlying agreement and, such disputes having arisen between two of the parties, those two parties agree to appoint a sole arbitrator, there was no reason in principle why (i) that bipartite agreement should not be ad hoc agreement to arbitrate the disputes defined in it binding upon the two parties who had entered upon it, and (ii) an arbitrator appointed pursuant to that agreement should not have jurisdiction to determine those disputes as between those two parties. K's jurisdiction to determine the issues referred to him by R and Z did not depend on whether there was a valid appointment of a sole arbitrator under the arbitration clause in the sale agreement. (2) The conduct of R and Z gave rise to a binding agreement to refer the relevant issues to the arbitration of a sole arbitrator. (3) The principle of openness and fair dealing between the parties to an arbitration demanded that if jurisdiction was to be challenged under s.67, each ground of challenge to the arbitrator's jurisdiction had to have been raised before the arbitrator. Z had not raised the alleged illegality under Georgian law before the arbitrator and had failed to bring itself within the exception in s.73(1) of the Act. Therefore it was not open to Z to advance that ground for challenging jurisdiction. (4) (Obiter) Public policy would not ordinarily be engaged merely because one party to a contract was a corporation incorporated subject to the law of a foreign State and having its principal place of business in that State, if the contract was governed by English law and not made within that State or such as could be anticipated to be performed within it or otherwise to involve conduct within that State which was contrary to the law of that State.
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