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a tale of two (dispute resolution) clauses

16 February 2015

Summary 

The Commercial Court has recently confirmed that where a settlement agreement terminates an earlier agreement and contains a dispute resolution clause which differs from that in the agreement under which the dispute arose, the clause in the settlement agreement will prevail and apply to all disputes arising out of both agreements. This is subject to the actual language of the clause in question and other surrounding circumstances (Monde Petroleum SA v Westernzagros Ltd [2015] EWHC 67 (Comm)).

Background

Westernzagros Ltd (WZL) and Monde Petroleum SA (Monde) entered into a consultancy agreement (CSA) under which Monde was to provide services to assist WZL in the exploration and production of oil in Iraq. The CSA contained an arbitration clause providing for arbitration in London under the ICC Rules.

A dispute arose. Having resolved their differences, the parties entered into a settlement agreement under which the CSA was to be terminated in consideration for payment of certain sums to Monde and which included a mutual release and waiver of all claims by the parties against each other (the Settlement Agreement). Clause 3.2 of the Settlement Agreement provided: "This Agreement shall be governed by and construed in accordance with the laws of England and Wales. The parties herein irrevocably attorn to the exclusive jurisdiction of the courts of England and Wales."

Monde later alleged that it was induced to enter into the Settlement Agreement by misrepresentation and/or duress, claiming that WZL had told Monde that in return for entering into the Settlement Agreement Monde would be granted new rights under a new oil exploration agreement. Monde brought proceedings in the Commercial Court claiming damages for misrepresentation and for wrongful termination of the CSA (Monde quantified its losses by reference to the fees it would have been entitled to had the CSA remained in force). Monde also commenced protective arbitration proceedings against WZL to prevent its claim being time-barred for limitation purposes, claiming damages for wrongful termination of the CSA (although its primary case was that the Commercial Court had jurisdiction). WZL brought counterclaims for declaratory relief in the arbitration, including that Monde had no further entitlement under the CSA and so had not lost any benefit by entering into the Settlement Agreement.

The arbitral tribunal decided it had no jurisdiction in relation to the declaratory relief sought by WZL and ordered WZL to pay Mondes costs of the arbitration on the basis that:

  • the Settlement Agreement was binding on the parties, since the court had not yet determined Mondes claim for misrepresentation and / or duress; and
  • whilst the language of clause 3.2 of the Settlement Agreement was not sufficiently clear to bring about the complete termination of the arbitration agreement in the CSA, the scope of the arbitration agreement was nevertheless very significantly reduced by the Settlement Agreement. The net effect of this was that, subject to one possible exception[1], the arbitration clause was inoperative.

WZL brought several applications before the Commercial Court, including challenging the arbitral tribunals decision that it did not have jurisdiction over WZLs claims. It argued that Clause 3.2 of the Settlement Agreement did not terminate the arbitration agreement because the principle of separability required the parties express agreement to terminate the arbitration clause[2]. It argued that where there are overlapping dispute resolution clauses the court should construe them accordingly, even if this resulted in some fragmentation of disputes, but here the two clauses did not overlap. Monde argued that Clause 3.2 was intended to supersede the arbitration agreement in its entirety.

The decision

The court held that the arbitral tribunal had correctly decided that it had no jurisdiction in relation to WZLs claims. Accordingly, it refused WZLs appeal.

Explaining its decision, the court referred to previous case law which emphasised that it is to be presumed that rational businessmen intend that all aspects of any dispute arising out a settlement agreement and the underlying agreement which preceded it should be resolved in a single forum. It commented that this idea "may have particular potency where there is an agreement which is entered into for the purpose of terminating an earlier agreement between the same parties or settling disputes which have arisen under such an agreement". The courts view was that if a settlement agreement contains a different dispute resolution provision to the agreement under which the dispute arose, it followed that there were several reasons why the parties were likely to have intended the settlement agreement clause to govern all aspects of outstanding disputes, and to supersede the clause in the earlier agreement:

  • first, the clause in the settlement agreement came later in time and had been agreed by the parties in the light of the specific circumstances which gave rise to the disputes which were being settled under the earlier agreement
  • secondly, it is the clause which governs the validity or effect of the settlement agreement and therefore is the only clause capable of applying to disputes which arise out of the settlement agreement
  • thirdly, when considering a dispute about the scope or efficacy of a settlement agreement, any court or tribunal is likely to have to consider the background, including the circumstances in which the dispute arose and the rights of the parties under the earlier contract. There is therefore a risk of inconsistent findings if that court or tribunal is not able also to address disputes arising out of the earlier contract (e.g., if they are to be determined by a different court/tribunal).

Comment 

Monde makes clear that in the absence of clear drafting, there is a presumption that where parties have entered into a settlement agreement which (i) terminates an earlier agreement and (ii) contains a dispute resolution clause which is inconsistent with the earlier agreement, the dispute resolution clause in the settlement agreement will prevail. The court was keen to point out that this is not a failure to give effect to the doctrine of separability of arbitration clauses, but in fact the reverse, since it presumes that by agreeing a new clause the parties intended to deal with the arbitration clause in the earlier agreement.

It may of course be that this presumption is a fiction - it often appears to be the case that parties view dispute resolution clauses as boiler plate provisions and either ignore or at best gloss over the drafting. Monde should therefore stand as a useful reminder when entering into a settlement agreement to either ensure that the drafting of the dispute resolution clause is consistent with the underlying agreement or, if you agree to change forum, to ensure that your drafting addresses the previous jurisdiction clause expressly, using clear and unambiguous wording. The use of an entire agreement clause and terms such as exclusive will assist in this regard.

It is important to remember that the position as set out in Monde is unlikely to apply in relation to every clash of dispute resolution clauses. In Monde the court made clear that it was important the Settlement Agreement was terminating the CSA. However, if a settlement agreement does not (1) terminate an underlying agreement or (2) bring to an end all outstanding claims between the parties, the position is likely to be different. In such circumstances, even if the settlement agreement contains an inconsistent dispute resolution clause, disputes may remain subject to the dispute resolution procedure provided for in the underlying agreement on the basis that the settlement agreement contains an implied term to this effect (see Interserve Industrial Services Ltd v ZRE Katowice SA [2012] EWHC 3205 (TCC)). In other words, all the more reason to give your dispute resolution clause some thought …

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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