MH Alshaya v Retek

Out-Law Guide | 02 Nov 2007 | 8:31 am | 12 min. read

Where a software licence agreement contained an arbitration provision and a separate agreement to maintain that software contained no such provision, it was right for the Court to disregard the arbitration provision and to exercise jurisdiction over disputes arising under both agreements.

MH Alshaya Company WLL v Retek Information Systems Inc., Retek Information Systems Ltd

  • [2001] MCLR 99

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Facts

In 1997 Alshaya, a Kuwaiti company, invited tenders for the replacement of a management information system used in its business of retailing designer goods.  Retek Inc., an American software supplier, eventually entered into two agreements with Alshaya, one for supply of software and the other for maintenance of that software. The licence agreement contained the following provisions:

“14.10 Governing Law – This agreement will be governed and construed according to the laws of the Country of England and the parties agree to submit to the exclusive jurisdiction of the Courts of England …"

“14.14 Disputes – Subject to the limitations stated in the final sentence of this paragraph, any dispute arising in connection with this agreement which cannot be settled by negotiation between the parties and their representatives shall be submitted to arbitration in accordance with the laws of the American Arbitration Association or any successor association.  Notwithstanding the foregoing, Supplier retains the right to apply for injunctive relief before a court of competent jurisdiction as set forth in clause 13.3”.

The maintenance agreement contained the following provision:

Governing Law – this agreement will be governed by and construed according to the laws of the Country of England and the parties have agreed to submit to the exclusive jurisdiction of the Courts of England”.

The maintenance agreement did not make any reference to disputes being resolved by arbitration.

According to Alshaya, before the agreements were concluded, Retek Inc.’s English subsidiary, Retek Limited, made representations that the project would cost about US$1.5m and would take about 12 months.  Alshaya said Retek Limited made these representations on its own account, or on account of Retek Inc., or both.  Following conclusion of the agreements, Alshaya and Retek Inc. carried out what was referred to as a pilot stage.  In that stage, according to Alshaya, it became clear that the project might cost as much as US$8.5m and might take as long as 36 months to implement.  In September or October 1998, Alshaya purported to rescind both agreements either for misrepresentation or for repudiatory breach of the contract.

In May 2000, Retek Inc. commenced arbitration proceedings in which it sought two instalments payable under the licence agreement and US$450k of the fees payable under the maintenance agreement.  It subsequently argued that fees payable under the maintenance agreement could be claimed in the arbitration because such claims arose in connection with the licence agreement.

Judgment

In September 2000 Alshaya commenced these proceedings in which it sought to recover from Retek Inc. the first instalment of US$500k paid under the licence agreement, alternatively damages, and a declaration that it was entitled to rescission of both agreements.  As against Retek Limited, Alshaya sought damages for negligent misstatement in connection with representations it had made regarding the cost and time frame for the project.  In the application before the Court, Alshaya sought an order that Retek Inc. be restrained from prosecuting the arbitration on the basis that commencement of the arbitration proceedings constituted a breach of agreement to submit disputes to the exclusive jurisdiction of the English Courts.

In turn, Retek Inc. sought an order that, as against it, the proceedings be stayed pursuant to the provisions of the Arbitration Act 1996 on the basis that there was a binding agreement to arbitrate.  Further, both Retek Inc. and Retek Limited applied for an order that the proceedings commenced against both of them be stayed pursuant to the inherent jurisdiction of the Court and the provisions of the Supreme Court Act 1981.  In his judgment, Garland J. made reference to various provisions of the Arbitration Act 1996.  The most significant are the following sub-sections of section 9:

"(1)     A party to an arbitration agreement against whom legal proceedings are brought (whether by claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the Court in which the proceedings have been brought to stay the proceedings so far as they concern that matter …”

“(4)     On an application under this section the Court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed”.

Alshaya’s case was that there was a fundamental inconsistency in the terms of the licence agreement.  At clause 14.10 it recorded an agreement to submit to the exclusive jurisdiction of the English Courts, whereas at clause 14.14 it stated that disputes were to be resolved by arbitration.  Alshaya’s argument was that in such circumstances, the arbitration agreement fell within the provisions of section 9(4) of the 1996 Act, it was inoperative and incapable of being performed.  On Alshaya’s argument, it followed that the Court should dismiss the stay application and exercise jurisdiction over the entire dispute.

The gist of Retek Inc.’s argument was that there was no inconsistency between 14.10 and 14.14 of the licence agreement.  Its argued that clause 14.10 gave the English Courts a curial jurisdiction when the intervention of the Court was necessary under the Arbitration Act, for example where injunctive relief was sought.  Retek Inc. said that the Courts should not reject the arbitration provision as repugnant where it could be reconciled with the choice of law and jurisdiction provisions.

A number of cases are cited in the judgment.  The most important were The Nerano [1994] 2 Lloyds Rep. 50, Shell International Petroleum Company Limited v Coral Oil [1999] 1 Lloyd’s Rep. 72 and Paul Smith Limited v H & S International Holdings Incorporated [1991] 2 Lloyd’s Rep. 127.

Briefly, the facts in Nerano were that a bill of lading included on its face the following clause:

"the conditions as per relevant charter party dated 02.07.1990 are incorporated in this bill of lading and have precedence if there is a conflict, English Law and Jurisdiction applies”.

The conditions of carriage on the back of the document included the following clause:

“all terms and conditions liberties exceptions and arbitration clause of the Charter Party, dated as overleaf, are herewith incorporated”.

The charter party itself contained an arbitration clause.  At first instance it was held that the reference to English jurisdiction was not inconsistent with the arbitration provision because the Courts of England would retain a supervisory jurisdiction over the arbitration.  The Court of Appeal upheld this decision.  It said that since the parties has specifically identified the arbitration provision in the conditions of carriage, that provision should have effect, if at all possible.

In Shell v Coral a trademark agreement and a supply agreement both provided for arbitration in England in the event of a dispute.  The supply agreement included the following clause:

“this Agreement, its interpretation and the relationship of the parties hereto shall be governed and construed in accordance with English Law and any dispute under this provision shall be referred to the jurisdiction of the English Courts”.

The Court held that in determining the intention of the parties, the arbitration and jurisdiction clauses were capable of reconciliation.  Its reasoning was that, on the wording of the jurisdiction clause, any dispute about the proper law of the supply agreement was to be referred to the English Court and all substantive disputes were to be referred to arbitration.

Finally, in Paul Smith v H&S, there was a single agreement.  It provided for arbitration under the ICC Rules in the event of a dispute and, in a separate clause, for the Courts of England to have exclusive jurisdiction over the agreement.  Steyn J, as he then was, held that the apparent inconsistency could again be reconciled.  He said that the jurisdiction clause set out the curial law or the law governing the arbitration and this was not at all inconsistent with the referral of disputes to arbitration under the ICC Rules, which would determine the procedure according to which the arbitration was to be conducted.

In his judgment, Garland J. said that his primary task was to ascertain the intention of the parties in a commercially realistic way and that, if that were not possible, it might be permissible to resort to the contra proferentem rule, i.e. that any ambiguity should be resolved against the party seeking to rely on the clause in question.  That party would, of course, be Retek Inc.

The Judge found in favour of Alshaya.  He said that the attempt to “squeeze” the dispute under the maintenance agreement into the arbitration by saying that it arose in connection with the licence agreement was going too far.  Further, the argument in favour of consistency of treatment of disputes under such closely connected contracts was compelling.  Since he had no power to write an arbitration clause into the maintenance agreement, the Judge resolved to write the arbitration provision out of the licence agreement.  He stated that if the licence agreement had stood alone then he could see great force in the argument in Nerano and Paul Smith that the provisions could be reconciled.  In his judgment, however, the present case was different.  There was a possibility that entirely discrete disputes could arise under the two agreements and yet there was continuing overlap between the agreements.  Because of this continuing overlap, Garland J. resolved to provide a single remedy for disputes arising out of both agreements.

Commentary

There are perhaps two points which should be made before analysing the judgment.  First, this was a semi-extempore judgment and, therefore, perhaps not as detailed as Garland J. might have liked.  Second, Garland J. said that he found the issue a very difficult point of construction.

Leaving aside the legal principles, it is easy to see why resolution of all of the issues in these proceedings would be sensible.  Retek Limited, despite its very strong community of interest with Retek Inc, could not be made a party to the arbitration proceedings.  It was doubtful that the sums allegedly due under the maintenance agreement could possibly fall to be claimed in the arbitration under the ambit of the licence agreement, so the Court proceedings would always be necessary to deal with disputes relating to that agreement.  Further, from the judgment it appears that the issues in respect of all of the causes of action were effectively the same, so plainly it would have been preferable to have all of the issues resolved in one set of proceedings.  This was not, however, an application in which the Court’s task was to determine the most efficient or effective procedure for disposing of the claims.  Rather, the Court was being asked to determine the parties’ substantive rights in relation to the purported agreement to resolve disputes under the licence agreement by arbitration.

The learned Judge said that the correct approach was to ascertain the intention of the parties in a commercially realistic way and, if that was not possible, to resort to the contra proferentem rule.  In arriving at his conclusions, however, Garland J. does not explicitly say whether he has done so on the basis of his perception of the commercial intention of the parties or the contra proferentem rule.  To a reader who has not seen the evidence, it seems almost impossible to interpret the agreements to ascertain a sensible or realistic commercial intention of the parties. 

In his judgment, Garland J. says that if the licence agreement stood alone he would have been in a position to reconcile the two conflicting provisions along the lines of the judgments in Nerano and Paul Smith, namely that the arbitration provision had effect and the jurisdiction provision referred only to the curial jurisdiction of the Court.  This statement points up a difficulty with the conclusion arrived at by the learned Judge.  He appears to have concluded that the inconsistency of drafting in the licence agreement was not fundamental and was capable of being resolved.  If this is right then, arguably, the arbitration provision was capable of being performed and that Retek Inc.’s substantive right to arbitration should not have been denied.  It is unfortunate that the parties had chosen inconsistent methods of dispute resolution under the two agreements but, if it is right that the arbitration agreement was capable of being performed, then the proper approach would have been to give effect to the agreement of the parties, notwithstanding the possibility of somewhat unsatisfactory results.

What, then, was the alternative course open to Garland J?  The arbitration proceedings were already on foot.  Had they proceeded to a final determination then the rights of Alshaya and Retek Inc. would have been determined by the principles of res judicata and issue estoppel.  In respect of the causes of action over which the arbitral tribunal validly found it had jurisdiction (which may or may not have been the monies allegedly due under the maintenance agreement) the findings of the arbitral tribunal on these points would have been subject to the principle of res judicata, i.e. final and binding on the parties and not capable of being litigated again in the proceedings.  For the causes of action between Alshaya and Retek Inc. in respect of which the arbitral tribunal declined jurisdiction, these could have been disposed of subsequently, in the proceedings.  However, insofar as these causes of action arose out of the same facts as were decided in the arbitration, then, according to the principles of issue estoppel, the Court would have been unable to open up those issues of fact in the proceedings. 

So, if Alshaya defended the arbitration proceedings in relation to the licence agreement on the basis of misrepresentation, the arbitrator’s findings of fact on the points in issue would have bound the Court in determining separate claims on the same facts in the proceedings.  It would have been open to Garland J. to have stayed the proceedings pending the outcome of the arbitration pursuant to section 49(2) of the Supreme Court Act 1981.  This provides that the Court is to exercise its jurisdiction in a manner which avoids a multiplicity of legal proceedings.  This would have allowed time for the arbitration to run its course following which, as set out above, a number of logical consequences would have followed upon the lifting of the stay.  For example, if the arbitral tribunal found that it had jurisdiction over the licence agreement only, and Alshaya’s defence was successful in the arbitration, then upon the lifting of the stay in the proceedings it would follow that Alshaya would be entitled to a declaration that the maintenance agreement had been validly rescinded.  All of this seems workable if somewhat cumbersome.

The real difficulty with this approach arises when considering the position of Retek Limited.  As a stranger to the arbitration proceedings, Retek Limited would not be bound by an issue estoppel in relation to any findings of fact made by the arbitral tribunal.  The principle of res inter alios acta essentially provides that where a person was not party to proceedings, he ought not to be prejudiced by the findings in those proceedings.  It is possible, therefore, that the findings of fact in the arbitration proceedings would have effectively disposed of disputes between Alshaya and Retek Inc., only for Alshaya to re-litigate all of the issues against Retek Limited on the basis of an action for negligent mis-statement.  Plainly, this is a highly unsatisfactory scenario, but one which may be considered unlikely to arise in practice.

This case raises some interesting issues of principle.  At first blush it appears to represent a bold assertion of the Court’s jurisdiction over and above agreements to arbitrate.  Yet its application may be confined to the very limited factual scenario arising out of the conflict between clauses 14.10 and 14.14 of the licence agreement.  Had the licence agreement been unambiguous in its reference to arbitration then it is questionable whether the co-existence of the maintenance agreement would have rendered the arbitration agreement incapable of being performed.  It seems, therefore, that the case may not herald a wave of judicial intervention in arbitration.  It is, however, a timely reminder of the need for consistency of drafting when formulating dispute resolution provisions.  Standard form licence agreements are commonly entered into together with maintenance agreements and parties would be well advised to ensure consistency of drafting.  Similar principles apply when a main contractor sub-contracts some or all of its contractual obligations.

Following the judgment Retek Inc. and Retek Limited indicated through their Counsel that the decision would be appealed.  As stated above, Garland J. openly acknowledged that he had found the case a difficult one, and it will be interesting to see how the Court of Appeal tackles it.