Makarenko v Cis Emerging Growth Ltd

• Jurisdiction: Jersey
• Court: Royal Court
• Judge: Birt, Deputy Bailiff and Jurats Le Breton and Georgelin
• Judgment Date: 29 June 2001
• Neutral Citation: [2001] J.Unrep 141
• Date: 29 June 2001

ROYAL COURT

Birt, Deputy Bailiff and Jurats Le Breton and Georgelin

D.J. Benest for the plaintiff;

J.P. Speck for the defendant.

Cases cited:

(1) Ashville Invs. Ltd. v. Elmer Contractors Ltd., [1989] Q.B. 488; [1988] 2 All E.R. 577, followed.

(2) Camilla Cotton Oil Co. v. Granadex S.A., [1976] 2 Lloyd's Rep. 10, considered.

(3) Cunningham-Reid v. Buchanan-Jardine, [1988] 1 W.L.R. 678; [1988] 2 All E.R. 438, followed.

(4) Heyman v. Darwins Ltd., [1942] A.C. 356; [1942] 1 All E.R. 337, dicta of Lord Porter and Lord Wright applied.

(5) Monro v. Bognor U.D.C., [1915] 3 K.B. 167, considered.

(6) Russell v. Russell (1880), 14 Ch. D. 471, considered.

Additional cases cited by counsel:

Overseas Union Ins. Ltd. v. AA Mut. Intl. Ins. Co. Ltd., [1988] 1 FTLR 421.

Stevens & Sons v. Timber & Gen. Mut. Acc. Ins. Assn. Ltd. (1933), 45 Ll. L. Rep. 43.

Legislation construed:

Arbitration (Jersey) Law 1998, art. 6, as amended by the Arbitration (Amendment) (Jersey) Law 1999, art. 2: The relevant terms of this article are set out at para. 9.

art. 28: The relevant terms of this article are set out at para. 28.

Arbitration—agreement of reference—scope of arbitration—arbitrator not enabled to decide questions on existence or validity of contract by arbitration clause conferring jurisdiction over disputes "in connection with" contract—may do so only if words of clause specifically authorize it—arbitration clause then regarded as agreement collateral to main contract

Arbitration—stay of proceedings—discretion of court—mere allegation of fraud insufficient for court to exercise discretion to refuse stay of proceedings under Arbitration (Jersey) Law 1998, art. 28—concrete and specific issue of fraud supported by prima facie evidence required

Arbitration—stay of proceedings—discretion of court—effect of Arbitration (Jersey) Law 1998, art. 6 providing for mandatory stay and presumption of binding agreement from application of la convention fait la loi des parties means court favours staying proceedings—burden on party opposing arbitration to show why agreement not to be enforced

The defendant sought a stay of the plaintiff's action pending arbitration.

The defendant contracted to provide advisory and brokerage services in connection with the plaintiff's investments in foreign securities. Clause 8.2 of the contract stated that any dispute "arising out of or in connection with this agreement, including any question of its existence, validity or termination" should, on the failure of negotiation, proceed to arbitration. The plaintiff brought proceedings against the defendant alleging that (a) an agent of the defendant had induced him to enter the contract by fraudulent misrepresentation; and (b) a substantial sum provided by him for investment had been used by the defendant for its own purposes. He sought a declaration that, as a result, the contract was void ab initio.

The defendant submitted that (a) as a matter of interpretation, cl. 8.2 specifically conferred jurisdiction upon the arbitrator to decide questions relating to the existence or validity of the contract; (b) it took the form of a collateral contract, even though it appeared in the body of the main contract, and enabled the arbitrator to decide a dispute whether the main contract could be declared void, even though he had himself been appointed under the main contract; (c) as the issue had been the subject of negotiation, a stay of proceedings should be ordered as required by art. 6 of the Arbitration (Jersey) Law 1998; and (d) art. 28(2) of the 1998 Law, allowing the court to order that an arbitration agreement should cease to have effect in case of fraud, could not take effect when no specific allegation of fraud had been made.

The plaintiff submitted in reply that (a) cl. 8.2 should be interpreted strictly, and could not confer jurisdiction on the arbitrator to decide questions relating to the existence and validity of the contract, since he could never be enabled to decide the validity of the very instrument under which he had been appointed; (b) this was particularly the case here as his claim alleged that the contract in which cl. 8.2 appeared was void for fraudulent misrepresentation, and it followed that the arbitration clause itself was also void; and (c) notwithstanding the mandatory terms of art._6, the court should exercise its power under art. 28(2) to refuse to enforce the arbitration agreement as an allegation of fraudulent misrepresentation had been made.

Held, ordering a stay:

(1) Although a widely drawn arbitration clause allowing arbitration of disputes "in connection with" the contract would not permit the arbitrator to decide questions going to its very existence or validity, when jurisdiction to decide those questions was specifically conferred on him, as here by cl. 8.2, there was no obstacle to referring the dispute to arbitration. The allegation that the main contract was void did not affect the arbitration clause, which should be considered a collateral contract notwithstanding that it appeared in the body of the main contract ( paras. 17-21; para. 23).

(2) Moreover, it would be proper to hold the plaintiff to the arbitration agreement as the Order of Justice did not state with full particulars the acts alleged to be fraudulent. Any pleading alleging fraud had to set out the facts, matters and circumstances relied upon to show that the party charged had or was actuated by a fraudulent intention. The acts alleged to be fraudulent had to be stated fully and precisely, with full particulars. In this case, in the absence of any concrete and specific issue of fraud, the threshold for the exercise of the discretion of the court under art. 28(2) of the Arbitration (Jersey) Law 1998 to refuse to enforce an arbitration agreement had not been reached ( para. 5; paras. 33-34).

(3) In considering the exercise of the discretion under art. 28(2), the burden of proof was on the party opposing the stay: art. 6 of the Arbitration (Jersey) Law 1998 provided for a mandatory stay and the application of the maxim la convention fait la loi des parties meant that the court had to have good reason not to enforce an arbitration agreement into which the parties had entered of their own free will. If the party alleging fraud opposed a stay, this would not normally be sufficient of itself, even if the evidence of fraud was strong, for the court to refuse a stay. The court would, however, routinely refuse a stay where the party against whom fraud was alleged opposed it, that he might publicly clear his name. In this case, as there was no specific allegation of fraud, there was no reason to refuse to stay the proceedings ( paras. 31-32).

1 BIRT, DEPUTY BAILIFF: This is an application by the defendant to stay the proceedings on the ground that the matters in dispute should be referred to arbitration pursuant to an arbitration agreement. It raises an interesting question as to the permitted width of an arbitration provision.

The nature of the proceedings

2 On July 16th, 1997, the plaintiff entered into a written brokerage agreement with the defendant whereby the defendant agreed to provide advisory and brokerage services in connection with investment by the_plaintiff in securities issued by the Russian Government or by any Russian commercial enterprise. The agreement is governed by English law. The defendant is a company incorporated in Jersey.

3 By an Order of Justice dated January 4th, 2001, the plaintiff has brought a claim against the defendant on essentially two grounds:

(a) It is alleged that the defendant induced the plaintiff to enter into the contract by two false representations which were made fraudulently by an agent of the defendant; and

(b) The plaintiff having provided US$650,000 to the defendant for the purposes of investment in Russian securities, it is said that the defendant did not so invest the money but, in breach of its obliga- tions under the contract, used and diverted the money for its own purposes.

4 We have to say that the Order of Justice as pleaded does not begin to come near the required standard of particularity for an allegation of fraud. General assertions of fraudulent conduct are made with no supporting allegations of fact. Furthermore, although the body of the Order of...