Law Debenture Trust Corporation Plc v Elektrim Finance BV & Ors

Factual and Procedural Background

The claimant ("Law Debenture") seeks to enforce payment under bonds issued by the first defendant ("the issuer") and guaranteed by the second defendant ("the guarantor"), collectively referred to as "the Elektrim defendants". Law Debenture acts as trustee for the bondholders. The trust deed governing the bonds contains arbitration provisions. Disputes arose regarding the extent to which these court proceedings should be stayed in favour of arbitration, and which forum—the court or the arbitral tribunal—should decide the scope of arbitration. A third defendant, Concord Trust ("Concord"), a bondholder, was joined at its own request and supports Law Debenture.

The original bond trust deed dated 2 July 1999 was amended and restated on 15 November 2002. The issuer is the primary obligor, with principal and interest exceeding £440 million. Clause 12 allows Law Debenture to demand repayment upon events of default by serving an acceleration notice. The principal was repayable in December 2005.

Clause 29 sets out arbitration provisions under English law, incorporating the UNCITRAL Arbitration Rules. It establishes a three-arbitrator tribunal, with appointments by claimant, respondent, and jointly. The LCIA acts as appointing authority if appointments are not made timely. Arbitration is to be held in London, in English, and awards are final and binding. The parties exclude court jurisdiction under certain sections of the Arbitration Act 1996, except as provided. Clause 29.6 mandates exclusive arbitration for disputes, except that clause 29.7 grants Law Debenture and bondholders an exclusive right to litigate disputes in English courts, with the defendants limited to counterclaims in such courts. Clause 29.8 contains waivers and enforcement provisions relating to English courts.

By February 2004, events potentially constituting defaults occurred. Law Debenture sought directions and certified one event as materially prejudicial. Further litigation, including a House of Lords decision, established Law Debenture's obligation to serve an acceleration notice. Notices of default and acceleration followed in 2004 and early 2005. The guarantor gave notice of arbitration in January 2005 challenging the first three events of default and the acceleration notice, appointing an arbitrator. Law Debenture did not appoint an arbitrator, leading to the LCIA appointing Lord Browne-Wilkinson as second arbitrator. No arbitration was commenced regarding a fourth event of default.

Law Debenture preferred court proceedings and issued a claim form on 9 March 2005 seeking declarations and damages relating to the bonds. Concord joined supporting Law Debenture. Applications before the court concerned whether the disputes should be arbitrated or litigated, and whether the court or arbitral tribunal should decide that question. Law Debenture sought a declaration under section 72 of the Arbitration Act 1996 denying a valid arbitration agreement and asserting court jurisdiction. The Elektrim defendants sought a preliminary trial on whether an arbitration agreement existed and a stay of proceedings pending arbitration jurisdiction determination.

Legal Issues Presented

1. Whether there exists a valid arbitration agreement between the parties under clause 29 of the trust deed.
2. Whether the disputes arising under the bonds fall within the scope of the arbitration agreement.
3. Whether the court or the arbitral tribunal should determine the jurisdictional question relating to arbitration.
4. Whether the court proceedings should be stayed to allow arbitration to proceed.
5. Whether Law Debenture has validly exercised its option under clause 29.7 to litigate rather than arbitrate.
6. Whether Law Debenture has participated in arbitration proceedings so as to disqualify its application under section 72 of the Arbitration Act 1996.

Arguments of the Parties

Elektrim Defendants' Arguments

• There is a valid arbitration agreement under clause 29.2 and section 6 of the Arbitration Act 1996.
• Section 9 of the Arbitration Act requires a stay of court proceedings unless the arbitration agreement is null, inoperative, or incapable of performance.
• Sections 30 to 32 of the Act provide that the arbitral tribunal should determine its own jurisdiction, including the present dispute.
• The court should not intervene except as provided by the Arbitration Act (section 1(c)).
• Law Debenture has participated in arbitration by corresponding with the LCIA and thus cannot rely on section 72 to challenge jurisdiction in court.
• Clause 29.7 should be construed so that if the Elektrim parties commence arbitration first, Law Debenture cannot thereafter litigate the same dispute.

Law Debenture's Arguments

• There is no valid arbitration agreement covering the present disputes because clause 29.7 grants Law Debenture an exclusive right to litigate disputes in English courts.
• Even if an arbitration agreement exists, the current disputes are excluded from arbitration by virtue of clause 29.7.
• Law Debenture is entitled to bring an application under section 72 of the Arbitration Act 1996 to challenge the existence and scope of the arbitration agreement.
• Law Debenture has not participated in arbitration proceedings and thus is eligible to seek relief under section 72.
• The jurisdictional question should be determined by the court, not the arbitral tribunal.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Concord Trust v The Law Debenture Trust Corporation plc [2005] 1 WLR 1591	Clarification of Law Debenture’s obligation to serve an acceleration notice upon events of default.	Provided factual and procedural background concerning bond defaults and litigation history.
Vale do Rio v Bao Steel [2000] 2 Lloyds Rep 1	Explained the court’s role in arbitration disputes, including the application of sections 30-32 and 72 of the Arbitration Act 1996.	Supported the court’s jurisdiction to decide preliminary questions about arbitration agreements and whether a party may rely on section 72.
Caparo Group Ltd v Fagor Arrasate Sociedad Co-operative [2000] ADRLJ 254	Confirmed the right of a party not participating in arbitration to challenge jurisdiction under section 72 without being compelled to participate.	Supported the court’s acceptance that Law Debenture’s correspondence did not amount to participation in arbitration.
Azov Shipping Co v Baltic Shipping Co [1999] 1 Lloyd's Rep 68	Outlined options available when challenging an arbitrator’s jurisdiction, including court proceedings under section 72.	Reinforced the principle that a party may stand aloof and challenge arbitration jurisdiction in court without participating in arbitration.
Ahmed Al-Naimi v Islamic Press Agency Inc [2000] 1 Lloyd's Rep 522	Set out the possible judicial responses to an application for stay under section 9 of the Arbitration Act 1996.	Supported the court’s discretion to decide whether to stay proceedings or to determine the existence of an arbitration agreement itself.
Birse Construction Ltd v St David Ltd [1999] BLR 194	Discussed the appropriate judicial approach to stay applications and arbitration agreements.	Adopted as authority for the proposition that the court need not always stay proceedings pending arbitration jurisdiction decisions.
NB Three Shipping Ltd v Harebell Shipping Ltd [2005] 1 Lloyds Rep 509	Confirmed that parties may have unequal rights to arbitrate or litigate, and that the party with an arbitration option may prevent court proceedings if arbitration is commenced first.	Used to reject the Elektrim defendants’ argument that Law Debenture’s right to litigate is limited by timing of arbitration commencement.
Anglia Oils Ltd v The Owners/Demise Charterers of the Vessel Marine Champion (unreported, 10 October 2002)	Held that staying proceedings pending arbitration jurisdiction determination may be inappropriate if it effectively decides the issue in favour of the defendant by default.	Supported the court’s decision not to stay proceedings and to decide arbitration jurisdiction itself.

Court's Reasoning and Analysis

The court began by examining the arbitration provisions in clause 29 of the trust deed, noting the dual regime: a general arbitration clause (29.2) and an exclusive right for Law Debenture and bondholders to litigate disputes in English courts (29.7). The court found that clause 29.7 clearly grants Law Debenture an option to litigate, which overrides the arbitration clause for these parties.

It rejected the Elektrim defendants’ argument that once arbitration is commenced by them, Law Debenture’s right to litigate is lost. The court found no commercial rationale or sensible construction supporting this limitation. The court emphasized that the clauses can coexist logically: arbitration is mandatory for the Elektrim defendants, but Law Debenture retains the right to litigate.

Regarding the jurisdictional question, the court referred to the Arbitration Act 1996, especially sections 9, 30, 32, and 72. It held that Law Debenture is entitled to challenge the existence and scope of the arbitration agreement under section 72 as a person "alleged to be a party" who has taken no part in arbitration proceedings.

The court carefully analyzed correspondence between Law Debenture and the LCIA, concluding that Law Debenture’s communications were objections and clarifications rather than participation in arbitration. It rejected the Elektrim defendants’ contentions that such correspondence amounted to participation, thus disqualifying Law Debenture from relying on section 72.

The court also considered authorities emphasizing that a party disputing arbitration jurisdiction should not be compelled to participate in arbitration before challenging jurisdiction in court, to avoid injustice.

On the question of stay, the court held that it should decide the jurisdictional issues itself rather than stay proceedings for arbitration. It reasoned that the jurisdictional dispute is a pure question of construction not requiring extensive fact-finding and that staying proceedings would be unfair and inefficient.

In sum, the court concluded that Law Debenture is entitled to litigate the dispute and that the arbitration proceedings initiated by the Elektrim defendants must be stayed and halted.

Holding and Implications

The court rejected all applications for a stay of the present proceedings. It held that Law Debenture is entitled to maintain the current court proceedings and that the dispute falls outside the scope of the arbitration provisions in clause 29.2 of the trust deed.

The court granted an injunction restraining the guarantor from pursuing the arbitration.

The direct effect is that the dispute will be resolved in the English courts rather than by arbitration. The court did not set any new precedent beyond applying established principles of arbitration law and contractual construction to the specific facts and contractual provisions before it.