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16 Mar 2021

Disputes about dispute resolution clauses: keep it simple AdActive Media v Ingrouille

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The Court of Appeal has ruled that an $11 million Californian judgment cannot be enforced in England because the judgment was obtained in breach of a dispute resolution clause.

In AdActive Media Inc v Ingrouille [2021] EWCA Civ 313, the Court considered the impact of s32(1)(a) of the Civil Jurisdiction and Judgments Act (the “Act”), which provides that foreign judgments given in proceedings brought in breach of agreed dispute resolution clauses will not be recognised or enforced.

Overturning a first instance decision of HHJ Russen QC, the Court of Appeal held that a dispute resolution clause providing for all disputes to be referred to arbitration – save for claims relating to breach of confidence, which were to be referred to the Californian Courts – was enforceable.  Accordingly, in pursuing a claim which did not solely relate to breach of confidence before the Californian Courts (as opposed to referring them to arbitration), AdActive Media ("AdActive") had breached the relevant dispute resolution clause. The Californian judgment could not, therefore, be enforced against Mr Ingrouille in the UK.

What does this mean for the enforcement of foreign judgments under the Act?

This decision makes it clear that, where being asked to permit enforcement of judgments under the Act, the English Court will carefully consider challenges to enforcement based on an allegation that the underlying proceedings have been brought in breach of a dispute resolution clause.

The focus of s32(1)(a) of the Act is whether a judgment is in breach of an agreement pursuant to "which the dispute in question was to be settled". Where the parties have expressly agreed that certain types of disputes are to be resolved in a specific forum, the Court will carefully examine whether this has been adhered to in deciding whether to permit enforcement, and if not, the judgment will, in principle, not be recognised or enforced under the Act.

Background

The Agreement

Mr Ingrouille was engaged by AdActive to provide digital consultancy services under a consultancy agreement (the "Agreement") which was stated to be governed by Californian law. Unhelpfully, the Agreement contained a multiplicity of clauses conferring jurisdiction on different fora to determine disputes thereunder1. In particular:

  • Clause 17 of the Agreement (the "Arbitration Agreement") provided for “all claims, disputes, controversies, differences or misunderstandings… arising out of, or by virtue of this Agreement or the interpretation of this Agreement” to be referred to arbitration save for any claims by AdActive regarding misuse or unauthorised disclosure of its confidential information, which claims were to be determined by the Californian Courts (the "Exception"); and
  • Clause 15 of the Agreement (the "Governing Law Clause") provided that “any case, controversy, suit, action or proceeding arising out of, in connection with, or related to this Agreement shall be brought in any Federal or State Court located in Los Angeles County, the State of California.”. Clause 16 of the Agreement also contained wording of a similar nature.

The Californian Proceedings

In 2018, AdActive terminated the Agreement and commenced proceedings before the Californian Court against Mr Ingrouille (and two former officers of its Vietnamese subsidiary). The claims alleged were both contractual and tortious, and included claims for breach of contract, breach of fiduciary duty, fraud, embezzlement, and interference with contractual relations.

None of the Defendants entered an appearance and judgment in default was entered against them for approximately $11 million (the "Judgment"). As observed by the Court of Appeal:

  • The Judgment was not broken down into amounts referable to particular causes of action. It was a global sum representing compensation for all the claims asserted; and
  • Prior to entering Judgment, the Californian Court’s attention was not drawn to the existence of the Arbitration Agreement and AdActive had expressly relied on the Governing Law Clause and Clause 16 of the Agreement to found jurisdiction for its claims.

The Decision at First Instance

At first instance, HHJ Russen QC gave an ex tempore judgment pursuant to which he granted summary judgment, permitting enforcement of the Judgment against Mr Ingrouille in the UK. In doing so, HHJ Russen QC dismissed Mr Ingrouille’s challenge under s32(1)(a) of the Act on two grounds:

  • If the Arbitration Agreement was valid, all the claims advanced (even those for interference with contractual relations, for example) related in some way to the “sharing of confidential information”, and so could be construed as falling within the exception in the Arbitration Agreement; and
  • In any event, the conflicting provisions on jurisdiction contained in the Arbitration Agreement and the Governing Law Clause indicated that “the [Arbitration Agreement] is unenforceable, or perhaps void.” On that basis, to permit enforcement of the Judgment would not breach s32(1)(a) of the Act because the Judgment had not, in fact, been obtained in breach of an agreed dispute resolution clause.

The Court of Appeal’s decision

The Court of Appeal overturned HHJ Russen QC’s decision on both grounds.

David Richards LJ, with whom Henderson LJ, and Carr LJ agreed, held that:

  • The Arbitration Agreement was enforceable and valid as:
    • The parties to a contract are presumed to have intended the entire contract to take effect. In other words, it is assumed parties do not intend to invalidate a significant contractual term (such as an arbitration agreement) by creating an irreconcilable conflict between the express terms of the contract (Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 applied2); and
    • Considering the Agreement with that principle in mind, the Arbitration Agreement and the Governing Law Clause could be read consistently. The reference in the “Governing Law” clause to the Californian Courts, could be construed as meaning that where claims could be subject to Court proceedings, the Courts in which they should be heard were to be those of California. That was not inconsistent with all claims being referable to arbitration except those falling with the Exception.
  • The claims pursued by AdActive in the Californian Proceedings could not have fallen within the Exception. Although the misuse of confidential information was an important part of those claims, the claims themselves went much further, encompassing misappropriation of funds and a conspiracy to undermine AdActive’s business interests.

Having heard argument about whether, if the Judgment had been broken down into awards of damages for particular heads of claim, elements thereof could then have been enforced without breaching the Act, David Richards LJ concluded that this would not have been possible. He held that the Act precludes the English Court from recognising or enforcing a judgment given by a foreign Court in any proceedings “if the bringing of those proceedings” were contrary to an agreement under which “the dispute in question” was to be settled.

Drafting dispute resolution clauses: keep it simple

But for the lack of clarity as to the allocation of jurisdiction within the Agreement, AdActive might have had been entitled to enforce an $11 million Judgment against Mr Ingrouille's assets in the UK.

This decision provides a stark reminder of the importance of ensuring that dispute resolution clauses properly reflect the parties’ agreed positions and, most importantly, are internally consistent. The simpler the provision, the easier this is to achieve.

The Court of Appeal's decision also makes it clear that even where a breach of a dispute resolution clause is (conceivably) inadvertent, this may render a judgment unenforceable under the Act.
 


1 The relevant clauses reading as follows:
"15. Governing Law
This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to principles of conflicts of laws. Any case, controversy, suit, action, or proceeding arising out of, in connection with, or related to this Agreement shall be brought in any Federal or State court located in Los Angeles County, the State of California.
16. Consent to Suit
Any legal proceeding arising out of or relating to this Agreement shall be instituted in the United States District Court for the District of California, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in the State of California, and Consultant hereby consents to the personal and exclusive jurisdiction of such court and hereby waives any objection that Consultant may have as to the venue of any such proceeding and any claim or defense of inconvenient forum.
17. Disputes
17.1 Excepting any claim by the Company against Consultant under Sections 7, and 8 of this Agreement, all claims, disputes, controversies, differences or misunderstandings between the parties arising out of, or by virtue of this Agreement or the interpretation of this Agreement, including the determination of "for Cause" under Section 6 hereof, which cannot be settled or resolved by the parties hereto will be settled or determined by arbitration by a panel of three arbitrators as herein provided. ..."

2 See [106]: "The principle that contracting parties could not have intended a significant clause in their contract, such as an arbitration clause, to be invalid is a form of purposive interpretation, which seeks to interpret the language of the contract, so far as possible, in a way which will give effect to - rather than defeat - an aim or purpose, which the parties can be taken to have had in view. The strength of the inference that an interpretation of the contract would defeat an aim of the parties is, however, a matter of degree. An interpretation which would without doubt mean that an arbitration clause is void and of no legal effect at all gives rise to a very powerful inference that such a meaning could not rationally have been intended."

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