Introduction

In the recent originally named decision in B v S¹, the English Commercial Court set aside an English freezing order/injunction and ruled that the inclusion of a "Scott v. Avery clause" in the underlying contract, (which provides that the parties' dispute must first be dealt with by arbitration before either party can go to court), does exclude the right of the parties to apply to the English Court for injunctive relief in support of arbitration proceedings commenced under the sale contract. This marks a change in what had been the recognised position. Although it has been clear for some time that the right to apply for foreign freezing orders/injunctions was excluded by a "Scott v. Avery clause", this now appears to be the case for such English Court relief.

This client alert examines what these "Scott v. Avery clauses" are, why are they included and how effective they are following B v S? We conclude by providing sample wording for inclusion in contract confirmations which allows either party to still apply to a court for interim or injunctive relief, even in circumstances where the main dispute is to be resolved by arbitration and even where the contract includes a "Scott v. Avery clause". 

With non-payment of arbitration awards becoming ever more common, trading companies should consider inserting such wording in their contract confirmations to give them the ability to secure their claims, so that the risk of non-payment of any eventual award is minimised.

Background

This case arose out of two CIF sale contracts for sunflower seed oil made on the FOSFA (Federation of Oils, Seeds and Fats Associations Limited) standard form 54 between "B", the Claimant Buyer and "S" the Defendant Seller. Disputes arose and B commenced arbitration proceedings under the contractual arbitration clause, which provided:

"29. ARBITRATION: Any dispute arising out of this contract, including any question of law arising in connection therewith, shall be referred to arbitration in London (or elsewhere if so agreed) in accordance with the Rules of Arbitration and Appeal of the Federation of Oils, Seeds and Fats Associations Limited, in force at the date of this contract and of which both parties hereto shall be deemed to be cognizant.

So far a standard arbitration provision, but the FOSFA clause goes further:

Neither party hereto, nor any persons claiming under either of them, shall bring any action or other legal proceedings against the other of them in respect of any such dispute until such dispute shall first have been heard and determined by the arbitrators, umpire or Board of Appeal (as the case may be), in accordance with the Rules of Arbitration and Appeal of the Federation, and it is hereby expressly agreed and declared that the obtaining of an Award from the arbitrators, umpire or Board of Appeal (as the case may be), shall be a condition precedent to the right of either party hereto or of any person claiming under either of them to bring any action or other legal proceedings against the other of them in respect of any such dispute." (Emphasis added).

This is the "Scott v. Avery clause".

Subsequently, B, made a without notice application to the English Court pursuant to Section 44 of the Arbitration Act 1996 (Courts powers exercisable in support of arbitration proceedings) and successfully obtained a worldwide freezing injunction over S's assets up to US$ 3,400,000. To achieve this, B will have provided evidence to the Court that there was a serious risk that S was arranging its affairs to avoid payment of an eventual arbitration award. S sought to have the injunction set aside on the basis that the freezing injunction was obtained in breach the Scott v. Avery language in the arbitration clause. S's position was that by including the "Scott v. Avery clause" the parties had agreed to exclude the Court's powers exercisable in support of arbitration proceedings pursuant to Section 44 of the Arbitration Act 1996.

What is a "Scott v. Avery clause"?

A "Scott v. Avery clause" is language - usually in a contract's arbitration provision - which prevents a party from applying to Court, even for interim relief (which in some cases an arbitrator cannot give) in support of an arbitration.

Examples of frequently invoked interim relief:

• arrest of bank accounts / cargo as security for a claim;
• worldwide freezing orders, freezing assets so they cannot be removed to avoid paying an eventual award;
• court ordered sale of disputed goods, where both parties say the goods belong to them or where neither party says they have an interest;
• court orders for evidence to be taken / preserved.

Why have such a clause then, if it restricts these things?

The logic for inclusion of this type of clause is that a party must first establish liability by the agreed dispute resolution procedure - arbitration - before making any applications to Court. The wording also seeks to protect parties from unnecessary and/or unjustified arrests which damage business (and reputation) and mitigates the risk that a party is dragged into lengthy Court proceedings in UK or foreign courts under the pretence that these are 'only' seeking security for a claim.

Is this clause only found in grain (FOSFA/GAFTA) contracts?

No - the original Scott v. Avery² case concerned a ship owners claim and the wording of its insurance policy. "Scott v. Avery clauses" have subsequently been seen in a wide variety of insurance policies, as well as in construction contracts. In the commodity trade, the Refined Sugar Association, the Sugar Association of London and the Ethanol Association of London Rules all include a "Scott v. Avery clause" which states:

"Unless the Council shall as hereinbefore provided have refused to arbitrate, neither the Buyer, Seller, Trustee in Bankruptcy, liquidator nor any other person claiming under any of them, shall bring any action against any party to the contract in respect of any dispute arising out of such contract, until such dispute shall have been adjudicated upon in arbitration under these Rules; and the obtaining of an award under these Rules shall be a condition precedent to the right of either contracting party to sue the other in respect of any claim arising out of the contract". (Emphasis added).

Even the dispute over royalties between the surviving members of the Rolling Stones and Decca Music Group Limited³ arose under a contract including a "Scott v. Avery clause"! They are therefore common across the commercial world.

Court Decision and Legal Analysis

The Court held that, as a result of the inclusion of the "Scott v. Avery clause", the Court did not have the power to grant an injunction while arbitration proceedings were ongoing. Accordingly, the worldwide freezing order obtained by B should be discharged. 

In reaching this decision, Mr Justice Flaux concluded that there was no reason not to give the words in the "Scott v. Avery clause" their clear meaning and effect. Any concerns in the market could (as we discuss later in this alert) be addressed by amendments to the particular contractual clause. Section 44 of the Arbitration Act 1996 unlike its predecessor, Section 12(6) the Arbitration Act 1950, was a non-mandatory provision and therefore the parties could contract out of this provision. Mr Justice Flaux examined a number of past decisions which on their face appeared to have allowed the Courts to make interim orders despite the existence of "Scott v. Avery clauses". However, he emphasized that a distinction had to be drawn between the relevant provision of the 1996 Act and the earlier 1950 Act, under which the majority of the cases were decided.

Section 44 of the 1996 Act provides:

"(1) Unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about the matters listed below as it has for the purposes of and in relation to legal proceedings. (Emphasis added).

(2) Those matters are ...

(e)  the granting of an interim injunction or the appointment of a receiver."

By contrast, Section 12(6) of the 1950 Act provided:

"the High Court shall have ... the same power of making orders in respect of ....

(f)  securing the amount in dispute in the reference; ....

as it has for the purpose of and in relation to an action or matter in the High Court". (Emphasis added).

Crucially a number of the past cases could therefore be explained by contrasting the mandatory provision in the 1950 Act ("shall"), with the revised clause in the 1996 Act which gave the Court powers "unless otherwise agreed by the parties". The 1996 Act, as well as generally introducing a "radically different concept of party autonomy"⁴, specifically provided revised wording through Section 44 which allowed the parties to exclude the supervisory powers of the Court in arbitration proceedings.

Mr Justice Flaux also considered that there was no presumption that the powers of the Court under the 1996 Act were such a good thing that the parties would always want to retain these powers, which were not accorded to FOSFA arbitrators. Neither was any particular form of wording directed at the powers of the English Court necessary. 

Conclusion and Comment

What is the effect of the decision?

While this decision may come as a surprise to some in the industry, the decision of Mr Justice Flaux is logical and applies a strict legal interpretation to the contract against the background of the modern English Arbitration Act. However, from an industry perspective, is the decision the right one?

One criticism leveled against trade arbitration is that while the right result might be obtained in an award, in reality losing respondents increasingly seem to ignore unfavourable awards. In such cases, the claimant is left to decide whether to incur further legal costs in enforcement proceedings (often in jurisdictions where enforcement is not easy) or simply to give up and cut its losses. To give a flavour of the extent of the problem, as at December 2010, the list of companies posted by FOSFA for either non-fulfillment or failure to take-up awards totaled 206, with a further 6 companies being posted to date in 2011.

One potential avenue open to a claimant who suspects its counterparty is moving or intends to move or "re-arrange" its assets to avoid paying an eventual award was via an English Court worldwide freezing order. However, as a result of the decision in B v S, such a step is now not available under the standard FOSFA contract wording.

What about other trade arbitrations?

The GAFTA (the Grain and Feed Trade Association) standard clause as well as containing an almost identical "Scott v. Avery clause" to the FOSFA wording has a third paragraph. This provides:

"(c)  Nothing contained under this Arbitration Clause shall prevent the parties from seeking to obtain security in respect of their claim or counterclaim via legal proceedings in any jurisdiction, provided such legal proceedings shall be limited to applying for and/or obtaining security for a claim or counterclaim, it being understood and agreed that the substantive merits of any dispute or claim shall be determined solely by arbitration in accordance with the GAFTA Arbitration Rules, No 125."

After the decision in B v S, does this clause allow the English, or other national Courts, to grant either asset based relief such as freezing orders or, alternatively, measures in support of arbitration proceedings such as orders for the sale of disputed goods or preservation of evidence? The answer depends on whether the Court proceedings are for the purpose of "applying for and/or obtaining security for a claim or counterclaim".

Generally, the purpose of a worldwide freezing order is to prevent the defendant from dissipating assets and to preserve any such assets. Logically, we believe that such an order would fall within "obtaining security" on the basis that the freezing of assets can provide a source of funds which an award may be executed against. However, the obligations imposed in the standard form of the Commercial Court freezing order go further and provide that the defendant must disclosure information in respect of their assets. Is this aspect of the freezing order application in respect of "obtaining security"? Or is this one step removed because it involves the provision of information, which in turn may result in the claimant being able to take further steps to obtain security? The answer to this question is by no means clear.

As regards other protective measures, these have no direct connection with "obtaining security". While useful, it appears that they are now not available from the Court under the GAFTA clause.

Protective measures, such as for preservation of goods or evidence, are often available from the arbitral tribunal, either under the relevant arbitration rules or pursuant to the tribunal's powers under Section 38 of the Arbitration Act 1996. However, unlike the English Court's powers under Section 44 of the 1996 Act, under Section 38 of the Act, the Tribunal does not have the power to order the sale of goods or to make orders relating to preservation of evidence where the evidence is in the hands of a third party. In addition, it is more likely that the need for orders relating to preservation of evidence and goods will arise prior to or at the commencement of arbitration proceedings, when there may not be a Tribunal in place. As such the exclusion of the Court's powers in this regard by a "Scott v. Avery clause" could potentially be very harmful to a claimant.

Draft clause

In order to avoid the uncertainties discussed above and to maintain the English Court's power to grant interim relief such as freezing injunctions or orders for the sale of goods, we suggest that the following clause be added to any contract confirmations which incorporate FOSFA standard terms and therefore the FOSFA "Scott v. Avery clause".

"Arbitration in London as per FOSFA No. [    ]. Nothing contained in the FOSFA Arbitration Clause shall prevent the parties from, at any time, seeking interim relief via legal proceedings provided that such legal proceedings shall be limited to:

(a) applications made in any jurisdiction for, or ancillary to, the obtaining of security; or

(b) applications made pursuant to the Courts powers under the English Arbitration Act 1996 in support of arbitration proceedings, which shall be the sole method for determining the substantive merits of any dispute or claim in accordance with FOSFA Rules of Arbitration and Appeal".

Similar wording, with appropriate amendments could be used for other sale contracts such as those on GAFTA or one of the Sugar Association's terms.

The underlying aim of such a provision is to allow the claimant the maximum opportunity to take a variety interim actions, during the process of or prior to the commencement of an arbitration. These steps could be vital, especially when it comes to getting paid under any award.

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1.  [2011] EWHC 691 (Comm) (23 March 2011)
2.  (1856) 5 HL Cas 811
3.  Michael Jagger, Keith Richards, Charles Watts v. Decca Music Group Limited [2004] EWHC 2542 (Ch)
4.  Mr Justice Flaux at paragraph 72 of the Judgment 

 

Client Alert 2011-092