A clause in a settlement agreement giving the court exclusive jurisdiction to hear disputes arising under it was upheld in the case of Destin Trading Inc v Saipem SA, even though the underlying dispute originated under an earlier contract which contained an arbitration agreement. In that case, an application under section 9 of the Arbitration Act 1996 to stay the court proceedings to arbitration was refused.
The case shows that an arbitration agreement in an original contract may not apply where the parties agree new rights and obligations in a subsequent settlement agreement which are made subject to the court’s exclusive jurisdiction.
In this article we provide a background to the Destin Trading Inc v Saipem SA case and explain why the court came to its decision.
Disputes sometimes arise where parties enter into a number of related agreements, some of which provide for disputes to be resolved by the courts of England and Wales and others provide either for arbitration, or give jurisdiction to a foreign court.
In this case, the parties entered into and operated a frame contract which contained an arbitration agreement. Disputes arose under the frame contract about the amount due to one party, Destin, from the other party, Saipem. The money claim was settled and the frame contract terminated by means of a later settlement agreement which said the courts of England and Wales had exclusive jurisdiction over any dispute arising under or in connection with it.
Subsequently, Destin applied to the court, claiming it had been induced to enter into the settlement agreement because of negligent or fraudulent representations made to it by Saipem. It also claimed restitution for its framework contract money claims which had subsequently been agreed to be due under the settlement agreement.
The court’s jurisdiction to hear those claims was contested by Saipem. It said Destin’s money claims arose under the frame contract, so they were subject to the arbitration agreement in that contract. Saipem’s application to the court for a stay to arbitration was made under section 9 of the Arbitration Act 1996. Section 9 gives the court the power to stay legal proceedings where there is an effective agreement to arbitrate and the party making the application has not taken steps in those legal proceedings. In its application, Saipem relied on section 7 of that Act, which says that, unless the parties agree otherwise:
‘An arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.’
Saipem’s application for a stay turned on whether the arbitration agreement in the frame contract applied to claims that were described by the parties in the settlement agreement as arising under or in connection with that settlement agreement. This required the court to interpret the terms of the settlement agreement to see whether the rights under the framework had been extinguished and replaced by the right to claim under the settlement agreement. Disputes about what a contract says are often contested, and the outcome of such disputes can be difficult to predict. Resolution is often only achieved by court proceedings. Conflicting jurisdiction clauses in related contracts are particularly problematic because they can create a lack of certainty about the correct forum for making a claim. This can lead to problems over limitation periods, which might be missed if a claim is issued in a forum which is later held to be the wrong forum.
When dealing with a dispute over connected contracts with conflicting jurisdiction clauses, the court will try to understand the overall scheme of the agreements, and read sentences and phrases in the contracts in the context of that overall scheme. In this case, the frame contract was expressly terminated by the settlement agreement, and that shifted ‘the centre of gravity’ of the parties’ contractual relationship. The parties had agreed a bundle of new rights and obligations in the settlement agreement, and these superseded the arrangements under the terminated frame contract. Destin’s claims were no longer claims under the frame contract, they were claims under the settlement agreement.
It followed that the jurisdiction clause agreed in the settlement agreement which gave exclusive jurisdiction to the courts applied to the settlement agreement claims, and not the arbitration agreement in the framework contract, because the claims arising under that contract had been extinguished by the settlement agreement. Saipem’s application for a stay to arbitration was dismissed as there was no effective arbitration agreement that applied to claims under the settlement agreement, therefore section 9 of the Arbitration Act 1996 was not engaged.
This decision turns on the fact the frame contract including the arbitration agreement was terminated by the settlement agreement. As Destin’s claims now fell under the settlement agreement, it was the jurisdiction provisions in the settlement agreement that applied. The judge noted that the use of the term ‘exclusive’ emphasised that the jurisdiction clause in the settlement agreement should apply to disputes about the new rights and obligations created by the settlement agreement.
The case highlights the importance of the use of clear language in jurisdiction clauses in settlement agreements where the dispute resolution forum used differs from that agreed in the original contract. The language of the settlement agreement here was interpreted to mean that the original arbitration agreement did not apply to disputes which arose under or in connection with the settlement agreement, in circumstances where the original frame contract had been brought to an end.
For further information, please contact the construction team.
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