Out-Law Analysis | 02 Sep 2020 | 3:32 pm | 5 min. read
As the construction industry emerges from the Covid-19 pandemic to a global recession, parties in dispute may turn to international arbitration to protect their financial interests and ensure the best chances of recovery.
Going forward, the primary considerations for the parties will be speedy access to justice; protection over their financial entitlements; access to the counterparty with the deepest pockets; and protection over their own assets. In the context of international arbitration, parties can consider a number of tools to assist them in achieving these goals: emergency measures; worldwide freezing orders; multiple parties; and resisting bond calls.
Some matters will require urgent or emergency interim relief, and cannot wait for an application to be brought in the usual course of the arbitration. We see this regularly in the construction industry, among others, where significant financial, commercial and health and safety risks may mean that interim relief cannot wait for the usual process of commencing the arbitration, appointing the tribunal and only then making an application for interim relief.
Andrea Utasy Clark
In the construction industry, among others, significant financial, commercial and health and safety risks may mean that interim relief cannot wait for the usual process of commencing the arbitration, appointing the tribunal and only then making an application for interim relief.
Emergency measures can often be obtained in local courts, but most parties to international projects will prefer for the arbitrators to determine all the issues between them. Many of the main arbitral institutions have recognised this need for emergency interim relief, and have responded over the years by implementing the necessary procedures.
Generally, emergency arbitration procedures allow a party to apply for urgent interim relief at the very start of the arbitration, before the tribunal is appointed. If deemed appropriate, an emergency arbitrator will be appointed very quickly.
The party applying for emergency interim relief will need to demonstrate that the relief sought is required on an emergency basis and cannot wait for the tribunal to be constituted and then determine the application. A typical argument is that some prejudice or harm will occur if the party waits to apply to the tribunal. Emergency interim measures are usually aimed at preserving the status quo pending the tribunal's determination of the parties' dispute. This could mean, for example, certain actions or inactions in accordance with the contract in order to preserve a party's financial position, or the preservation of physical assets.
The emergency arbitrator will promptly make a decision to grant or refuse emergency relief. The emergency arbitrator's decision will often be aimed at preserving the status quo pending the tribunal's determination of the dispute.
In most jurisdictions, the emergency arbitrator's decision is only interim, and not meant to provide final relief. Once it has given its decision, the emergency arbitrator's role is finished, and the parties would move forward with the appointment of the tribunal and proceed with the arbitration in the usual way. The tribunal, once appointed, has the power to reconsider, modify or vacate the emergency arbitrator's decision.
An unscrupulous party may seek to take advantage of the convenience of modern global banking to frustrate the effectiveness of international arbitration: for example, by moving funds from one country to another, away from jurisdictions where an arbitral award is likely to be enforced; or to a separate entity that would not be subject to the award.
A worldwide freezing order, or 'Mareva injunction', can sometimes be used to combat these types of evasive tactics. These injunctions effectively 'freeze' a party's assets worldwide, preserving the status quo pending the enforcement of the arbitral award.
Worldwide freezing orders must be granted by a court - generally in the jurisdiction where the arbitration is seated, or where the applicant is likely to takes steps to enforce the arbitral award. In some cases, the applicant may even be able to obtain a worldwide freezing order from a court in a jurisdiction that has no connection to the parties or the dispute, for example in the UK if international fraud can be demonstrated and the right circumstances exist.
There is generally a high threshold for obtaining a worldwide freezing order and what exactly must be shown will depend on the jurisdiction's requirements. In Singapore, for example, before granting an order, the court will generally require the applicant to show:
In times of economic hardship, the question of which party to pursue a claim against can be an especially strategic one. Ideally, the party selected will have enough liquidity to satisfy a favourable arbitral award - perhaps a parent company or guarantor.
If that party is not one of the principal parties to the contract, the first step is to consider whether the arbitration clause in the contract itself, as well as any parent company guarantees, permits the parties to arbitrate disputes arising under multiple contracts together; to 'join' additional parties to an arbitration; or to 'consolidate' multiple arbitration proceedings into a single arbitration.
Even where there are no joinder or consolidation provisions in the contract, most of the major institutional rules will provide for joinder and consolidation and will have their own requirements. Generally, to 'join' additional parties to an arbitration, the additional party must be prima facie bound by the arbitration agreement, or all parties to the arbitration have to consent. Multiple arbitration proceedings may generally be consolidated if all parties agree; where all of the claims are made under the same arbitration agreement; or where the rules are considered to be 'compatible'.
Where there are no joinder or consolidation provisions in the contract, and the third party does not consent to join the arbitration under the institutional rules, there may still be a legal basis for finding that a non-signatory is bound by the arbitration agreement. However, strict tests apply, depending on the applicable law.
In the construction context, the most likely legal bases are:
Resisting calls on bonds is likely to be of particular interest to construction companies as we come out on the other side of the Covid-19 pandemic.
If a party to an ongoing arbitration learns that its counterparty is planning a bond call, or has already made a bond call, one option is to apply for interim relief from the arbitrators to prevent the call itself, or to prevent the counterparty from receiving payment under the bond.
If there are no arbitration proceedings afoot, or if those proceedings are still in the early stages, the party seeking to prevent the bond call or payment under bond can apply for emergency interim relief.
In both cases, the applicant would need to demonstrate that the applicable test for an injunction is satisfied, as well as any additional considerations specifically for injuncting a bond call under the applicable law.
20 Oct 2015