English court steps in to enforce arbitral peremptory order for payment

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

In November 2015, the English court enforced an LCIA tribunal’s peremptory order requiring a respondent to pay US$ 100 million pursuant to section 42 of the Arbitration Act 1996 in order to maintain the status quo and to ensure the proper and expeditious conduct of arbitration proceedings.

The case, Pearl Petroleum Company Ltd and others v The Kurdistan Regional Government of Iraq [2015] EWHC 3361 (Comm), provides a useful analysis of (1) when a court will enforce a tribunal’s peremptory order; (2) when a court should exercise its discretion to enforce such an order; and (3) a party’s ability to claim state immunity.

Background

The proceedings arose from a contract in which the Kurdistan Regional Government (“KRG”) awarded the claimant, Pearl Petroleum (“Pearl”) exploration rights over two gas fields in the Kurdistan Region of Iraq. Pearl commenced LCIA arbitration proceedings in 2013 regarding underpayments by KRG. KRG subsequently stopped making payments to Pearl.

As a result of KRG’s cessation of payments, Pearl requested that the tribunal make a provisional interim order pursuant to Article 25 of the 1998 LCIA Rules (the “Rules”) requiring KRG to resume making payments to Pearl. Section 39 of the Arbitration Act 1996 (the “Act”) provides that parties agree to confer tribunals with power to “order on a provisional basis any relief which it would have power to grant in a final award”. Art 25.1(c) of the Rules (as replicated in the 2014 Rules) provides that a “tribunal shall have the power unless otherwise agreed by the parties in writing … to order on a provisional basis … a provisional order for the payment of money”. The tribunal made a provisional interim order requiring KRG to resume payments to Pearl.

It immediately became apparent to Pearl that KRG would not comply with the order. Pearl therefore applied to the tribunal for a peremptory order requiring KRG to immediately pay a quantified sum. Under s. 41(5) of the Act, a tribunal is entitled to make a peremptory order prescribing a time limit for compliance in the event that a party fails to comply with the tribunal’s order or directions. KRG applied to the tribunal seeking discharge of the provisional interim order.

The tribunal ruled in October 2014 that KRG should pay Pearl US$ 100 million within 30 days. This was to ensure that the status quo was maintained, otherwise certain of the claimant parties would experience solvency issues which would effectively bring their ability to act in the arbitration to an end. KRG failed to pay the amount ordered. Pearl therefore applied to the court, pursuant to s. 42 of the Act, for an order requiring KRG to comply with the tribunal’s peremptory order.

The court was required to determine three issues:

1. Was the peremptory order made within the tribunal’s jurisdiction under s. 41 of the Act and did the court therefore have jurisdiction to make an order under s. 42?

2. Did KRG have state immunity?

3. Whether the court should exercise its discretion in making the order.

Issue 1: Tribunal’s jurisdiction to make the order

KRG argued that peremptory orders under s. 41 of the Act could only be made if they were to promote the “proper and expeditious conduct of the arbitral proceedings”. KRG argued that a peremptory order for the payment of monies did not meet this objective and therefore fell outside the scope of s. 41. The court found that a tribunal had jurisdiction to make a peremptory order for the payment of money under s. 39 of the Act and Art. 25 of the Rules. Given that the tribunal had made its peremptory order to maintain the status quo, it was clear that it was intended to further the “proper and expeditions conduct of the arbitral proceedings”, as without it Pearl would not be “able to continue with the arbitration and be in a position to obtain any relief”.

Issue 2: State immunity

The judgment analyses the question of state immunity in respect of a “separate entity” under s. 14 of the State Immunity Act 1978. Section 14 provides protection to an entity which is separate from a state if the proceedings relate to something which that entity has done in the furtherance of sovereign authority.

Although under the Iraqi constitution the Kurdistan Region of Iraq (“KRI”) is regarded as a “federal region”, the court determined that the two oil fields were vested in “the people of Iraq” and not the KRI. Because of this, the court concluded that the KRG had been acting in its own capacity rather than in the furtherance of the sovereign authority of Iraq. KRG was therefore not a “separate entity” and was therefore not entitled to sovereign immunity.

Notwithstanding this, the court went on to note that the agreement between KRG and Pearl contained an express term that “KRG waives on its own behalf and that of the KRG any claim to immunity for itself and assets”. Whilst there was debate about whether or not the wording of this clause operated to waive KRG’s immunity from injunctive relief (such as the peremptory order), the court found that the express term in the agreement was sufficiently wide enough that KRG had waived its right to claim state immunity in respect of the peremptory order.

Issue 3: Discretion to enforce

Finally, the court turned to whether it should exercise its discretion to enforce the peremptory order. Whilst the court accepted that it should not be used to “rubber stamp” tribunals’ orders, it decided that it should exercise its discretion. KRG maintained that it had been facing unprecedented upheaval since the peremptory order had been made, as it had to fight ISIS and deal with an increasing flood of refugees whilst on a budget deficit. Although the court had sympathy for KRG, evidence had been produced showing that (1) the KRG was continuing to pay other international oil producers; and (2) that it had written to the tribunal in September 2015 stating that it would commence making payments to Pearl if the tribunal agreed not to make a final payment award in favour of Pearl before it had considered KRG’s counterclaim. As a result of this and because there was utility in enforcing the peremptory order which would otherwise not be complied with, the court decided that it was appropriate to exercise its discretion and make an order requiring KRG to pay Pearl US$ 100 million.

Comment

This decision judgment is interesting to arbitration practitioners as its shows the courts’ eagerness to try and help tribunals and make sure parties apply with their orders even in the context of peremptory orders for payment.