English Commercial Court Affirms Validity of Unilateral Option Clauses

In a recent pro-arbitration ruling in Aiteo Eastern E&P Company Limited v Shell Western Supply & Trading Limited, the English Commercial Court (the ‘Court’) affirmed the validity of unilateral option clauses in English-seated arbitrations. A unilateral option clause is one that allows a party to an agreement to unilaterally exercise the option to refer its disputes to arbitration. The underlying arbitration arose out of an English law governed facility agreement.

The Court was considering challenges to the awards on jurisdiction and consolidation of the arbitrations arising under the Offshore and Onshore Facility Agreements alleging lack of substantive jurisdiction under section 67 of the Arbitration Act 1996 (the ‘Act’). The ruling is an important reminder for parties to pay close attention to the drafting of dispute resolution clauses in commercial contracts.

Background

The claimant, Aiteo Eastern E&P Limited (‘Aiteo’), entered into a US$512 million English law governed vendor financing agreement with the respondent, Shell Western Supply & Trading Limited (‘SWST’), in relation to certain energy projects in Nigeria (the ‘Offshore Facility Agreement’). Around the same time, Aiteo also entered into a US$1.488 billion Nigerian-law governed financing agreement with another group of lenders (the ‘Onshore Facility Agreement’).

The Offshore Facility Agreement contained a unilateral option to arbitrate under the ICC Rules which provided that ‘any Party (other than an Obligor) […] may elect to refer for final resolution any dispute […] by arbitration […]’. As an Obligor, Aiteo was not entitled to refer a dispute to arbitration. Only SWST as the Finance Party could do so.

In mid-2019, certain disputes arose out of Aiteo’s alleged breach of the Offshore and Onshore Facility Agreements. Following the receipt of a formal demand for repayment of the loan on 31 October 2019, Aiteo commenced proceedings against SWST and other lenders before the Federal High Court of Nigeria. It was successful at obtaining an interim injunction against SWST restraining the latter from taking any step to enforce the indebtedness of Aiteo. SWST filed a Notice of Appeal (the ‘NOA’) against the interim injunction on 12 November 2019.

Proceedings before the arbitral tribunal and the English courts

Other than filing the NOA, SWST also commenced an ICC arbitration under the Offshore Facility Agreement on 11 December 2020. The arbitral tribunal comprising Geoffrey Ma (presiding), Elizabeth Gloster and David Neuberger was constituted thereafter. The tribunal affirmed its jurisdiction and rejected Aiteo’s jurisdictional challenge on 15 March 2022 (the ‘Jurisdiction Award’).

Ostensibly relying on an express consolidation power under the Offshore Facility Agreement, the tribunal consolidated the current arbitration with an arbitration commenced by the lenders in relation to the Onshore Facility Agreement on 22 July 2022 (the ‘Consolidation Award’).

In the interim, SWST successfully obtained an anti-suit injunction from the Court on an ex-parte basis on 14 December 2020 which was confirmed finally on 1 April 2022. The English Court of Appeal granted permission to appeal against the anti-suit injunction on one ground ‘that the judge should either have determined the issue of arbitral jurisdiction himself or adjourned the hearing until the time for bringing a s.67 challenge had expired, or any jurisdictional challenge had been rejected, rather than relying on the [Jurisdiction] Award to establish the existence of an obligation to arbitrate’. The appeal was stayed pending the determination of the current challenge proceedings.

The decision

Aiteo challenged both the Jurisdiction and Consolidation Awards alleging lack of substantive jurisdiction under section 67 of the Act. The scope of the court’s review for a substantive jurisdiction challenge under section 67 comprises the following inquiries:

1. whether there is a valid arbitration agreement;
2. whether the arbitral tribunal is properly constituted; and
3. what matters have been submitted to arbitration in accordance with the arbitration agreement.

The sole basis for the jurisdictional challenge in this case was the validity of the arbitration agreement. The use of the words ‘may elect to refer’ in the Offshore Facility Agreement means that the arbitration agreement is an ‘inchoate’ one, which crystallises upon the exercise of the unilateral option. Aiteo’s jurisdictional challenge turned on whether SWST had validly exercised the unilateral option such that the arbitration agreement was valid and binding upon each party.

The law on unilateral option clauses in England is well-established. In NB Three Shipping v Harebell Shipping Ltd, the Court upheld a unilateral option to arbitrate, even in a situation where litigation proceedings had already been commenced. This position of favouring party autonomy applies to both unilateral arbitration agreements and asymmetric jurisdiction clauses alike (see for example, Mauritius Commercial Bank v Hestia Holdings Limited [2013] EWHC 1328 (Comm); Ourspace Ventures Limited v Halliwell [2019] EWHC 3475 (Ch); Etihad Airways PJSC v Flöther [2020] EWCA Civ 1707).

However, the determination of the requirements to exercise an election to arbitrate in the context of a unilateral option clause will necessarily be fact specific. The Court relied on the Privy Council’s decision in Hermes One Ltd v Everbread Holdings Ltd and others to conclude that as a matter of general principle, an ‘option [to arbitrate can be exercised] either by commencing arbitration itself or by requiring the other party which had commenced litigation to submit the dispute to arbitration by making an unequivocal request to that effect and/or by applying for a corresponding stay’ (internal citations and references omitted).

On the facts of the case, the Court found that the terms of the NOA were sufficient evidence of an unequivocal statement requiring Aiteo to refer the dispute to arbitration. SWST did not need to commence arbitration, seek a stay of the litigation in Nigeria, or provide an unequivocal and irrevocable commitment to arbitrate the disputes without delay.

Therefore, the section 67 challenge to the Jurisdiction Award was dismissed. The section 67 challenge to the Consolidation Award was deemed ‘parasitic’ on the success of the challenge to the Jurisdiction Award and failed for that reason.

Lessons and way forward

The Court commented on the fact that the drafting of the unilateral option clause in the Offshore Facility Agreement had not been amended to take account of the asymmetric nature of the right to arbitrate. In the Court’s opinion, this gave rise to some ‘infelicities’—which were resolved by applying principles of contractual construction. To avoid such a situation, it is critical for parties and their legal advisers to keep key drafting considerations in mind:

1. Who can exercise the unilateral option?
2. How is the unilateral option exercised?
3. At what stage can the unilateral option be exercised?
4. What are the conditions of exercise of the unilateral option?

The Law Commission of England and Wales is currently undertaking a review of the Act. A key point of reform is the scope of the court’s review under section 67 of the Act. The current legal position allows the court to conduct a ‘de novo’ rehearing of the jurisdictional challenge (See Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2011] 1 AC 763). This meant that in Aiteo, the Court considered all the evidence afresh, including the contents of the NOA to determine the matter. In its consultation paper, the Law Commission has provisionally proposed to raise the standard of review to an appeal if a party has participated in the arbitral proceedings and objected to the tribunal’s jurisdiction and the tribunal has issued an award on jurisdiction. The consultation closed on 15 December 2022 and the Law Commission’s final report is expected to be released later this year.

Sagar Gupta is an Associate at the London offices of Boies Schiller Flexner LLP.

The opinions expressed in the article are those of the author and do not necessarily reflect the views of his employer or its clients, or any of its or their respective affiliates.