JSC Zestafoni G Nikoladze Ferroalloy Plant & Ors v Ronly Holdings Ltd

Factual and Procedural Background

The court considered an application under Section 67 of the Arbitration Act 1996 by the Applicant ("Company A") to set aside an interim arbitration award made by Mr. Judge Kinnell dated 12 May 2003, on the basis that he lacked jurisdiction to make the award. The arbitrator had held he had jurisdiction by reason of an ad hoc agreement between the Defendant ("Company B") and Company A to appoint him as sole arbitrator, and that the claims advanced by Company B fell within that jurisdiction.

Company A also applied under Section 69 of the Arbitration Act 1996 for permission to appeal against the part of the award concluding that Company B had title to sue for the amounts claimed in its own name.

The dispute arose out of an agreement dated 30 September 1997 ("the Agreement") between Company B, a company incorporated in England, and a related entity ("Entity C"), collectively referred to as "Group 1", and Company A, incorporated in the Republic of Georgia, and another related company ("Entity D"), collectively referred to as "Group 2". Under the Agreement, Group 1 was to supply raw materials and electricity to Group 2, which in turn was to supply ferroalloys produced at its plant in Georgia to Group 1. The Agreement included a loan provision and a Law and Jurisdiction clause providing for English law to govern and disputes to be referred to arbitration in London before a tribunal of three arbitrators.

Despite the Agreement's arbitration clause, Company B and Company A purported to agree to refer their disputes to a sole arbitrator, Mr. Judge Kinnell. Company A challenged this on grounds that the Law and Jurisdiction clause precluded such an agreement and that Company B lacked standing to claim in its own name. The arbitrator ruled in favor of Company B on both points. Company A now seeks to set aside the award on grounds including lack of jurisdiction, absence of agreement, and illegality under Georgian law.

Legal Issues Presented

1. Whether Company B and Company A had the authority under the Agreement to agree to a sole arbitrator, thereby varying the arbitration clause requiring a three-arbitrator tribunal.
2. Whether the correspondence and conduct of Company B and Company A gave rise to a binding ad hoc agreement to appoint a sole arbitrator with jurisdiction over the disputes.
3. Whether the purported agreement to appoint a sole arbitrator was unenforceable on grounds of illegality under Georgian law and thus contrary to English public policy.
4. Whether Company B had title to sue in its own name for amounts claimed under the Agreement.
5. Whether leave to appeal should be granted against the arbitrator’s decision on Company B’s title to sue.

Arguments of the Parties

Applicant's (Company A) Arguments

• The Law and Jurisdiction clause mandated a three-arbitrator tribunal, and Company B and Company A could not unilaterally vary this by agreeing to a sole arbitrator.
• The correspondence did not evidence a meeting of minds (consensus ad idem) to appoint a sole arbitrator.
• The agreement to appoint a sole arbitrator was illegal under Georgian law because contracts with arbitration clauses involving companies majority-owned by the Georgian government require authorization from the Georgian Ministry of Justice.
• Company B lacked standing to claim in its own name for amounts due under the Agreement.
• The arbitrator erred in concluding Company B had title to sue in its own name.

Respondent's (Company B) Arguments

• Company B and Company A, as parties to the Agreement, had the capacity to enter into an ad hoc arbitration agreement to vary the arbitration procedure and appoint a sole arbitrator binding on themselves.
• The correspondence and conduct, including signed and stamped letters, demonstrated a clear agreement to appoint Mr. Judge Kinnell as sole arbitrator.
• The Georgian law objection was not raised before the arbitrator and thus could not be advanced at this stage under section 73(1) of the Arbitration Act 1996.
• Clause 19 of the Agreement expressly authorized Company B to receive payments and sue for monies due without joining or obtaining consent from other parties.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Regazzoni v. K C Sethia [1958] AC 301	English public policy may refuse enforcement of contracts involving illegal acts in foreign friendly states.	The court distinguished the present case, holding that the arbitration agreement was made and to be performed in England and did not involve illegal acts in Georgia, so public policy was not engaged.
Rustal Trading Ltd v. Gill & Duffus SA [2000] 1 Lloyd's Rep 14	Section 73(1) of the Arbitration Act 1996 requires timely objection to jurisdictional defects during arbitration proceedings.	The court held that Company A failed to raise the Georgian law objection before the arbitrator and did not show lack of knowledge, barring the objection at this stage.
Athletic Union of Constantinople v. National Basketball Association [2002] 1 Lloyd's Rep 305	Each ground of jurisdictional challenge must have been raised before the arbitrator to be considered on a section 67 application.	The court accepted this principle and applied it to bar Company A’s late-raised Georgian law objection.
Entores Ltd v. Miles Far East Corporation [1955] 2 QB 327	Contract formation by instantaneous communication occurs where and when the acceptance is received.	The court found the agreement to appoint the sole arbitrator was made in England when the fax was received.
Brinkibon Ltd v. Stahag Stahl v. und Stahlwarenhandelsgesellschaft mbh [1982] 1 Lloyd's Rep 217	Affirmed the principle on contract formation by instantaneous communication as in Entores.	Supported the court’s conclusion on the place and time of contract formation of the arbitration agreement.
Foster v. Driscoll [1929] 1 KB 470	Contracts involving illegal acts in foreign jurisdictions are contrary to public policy and unenforceable.	The court distinguished this case, noting that the present arbitration agreement did not involve illegal acts in the foreign state.
Ispahani v. Bank Melli Iran [1998] Lloyd's Rep Bank 1333	Reinforces the principle that enforcement of contracts involving illegal acts abroad may be contrary to public policy.	Referenced in support of the court's public policy analysis distinguishing the present facts.

Court's Reasoning and Analysis

The court first examined whether Company B and Company A had authority under the Agreement to vary the arbitration clause mandating a three-arbitrator tribunal by agreeing to a sole arbitrator. Clause 18 required variations to be in writing and signed by authorized representatives of all parties. Clause 1.1.4 limited Company B’s authority to bind Group 1 alone and did not extend to varying the arbitration clause unilaterally. The court concluded that Company B acting alone could not validly vary the arbitration agreement to appoint a sole arbitrator.

Next, the court considered whether the conduct and correspondence between Company B and Company A nonetheless created a binding ad hoc agreement to appoint a sole arbitrator. The court found that the signed and stamped letter from Company A’s General Director, confirming agreement to the sole arbitrator appointment, constituted a binding agreement between those two parties. This agreement was independent of the main Agreement’s arbitration clause and was binding only on those two parties.

The court then addressed the claim that the sole arbitrator agreement was unenforceable due to Georgian law requiring Ministry of Justice approval for arbitration clauses involving government-owned companies. This objection was raised for the first time after the arbitration award, and under section 73(1) of the Arbitration Act 1996, objections to jurisdiction must be raised promptly. The court found Company A failed to demonstrate lack of knowledge of this ground and thus barred the objection.

On the merits of the public policy argument, the court held that the arbitration agreement was made and to be performed in England under English law, and did not involve illegal acts in Georgia. Therefore, enforcement did not offend English public policy.

Regarding Company B’s title to sue in its own name, the court analyzed clause 19 and the joint and several nature of the parties’ obligations. It held that the clause clearly authorized Company B to receive payments and sue without joining other parties. The arbitrator’s decision on this point was correct and not open to serious doubt.

Holding and Implications

The court DISMISSED the application under Section 67 of the Arbitration Act 1996 to set aside the arbitrator's award on jurisdictional grounds.

Further, the court REFUSED LEAVE TO APPEAL under Section 69 against the arbitrator’s decision that Company B had title to sue in its own name.

The decision means that the arbitration award stands, affirming the arbitrator’s jurisdiction and Company B’s entitlement to pursue claims in its own name. No new legal precedent was established; the ruling applies the existing principles of arbitration law, contract interpretation, and public policy to the facts.