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In Helice Leasing S.A.S v PT Garuda Indonesia (Persero) TBK [2021] EWHC 99 (Comm), the English High Court interpreted seemingly conflicting dispute resolution provisions in an aircraft operating lease (the “Lease”). The Lease included an arbitration clause providing for “any dispute” to be resolved by the London Court of International Arbitration (“LCIA”) and gave the lessor an option to “proceed by appropriate court action” in case of an Event of Default, which included non-payment. When the lessor commenced court proceedings to recover rent arrears, the lessee retaliated by successfully applying to stay proceedings in favour of arbitration under s9 of the Arbitration Act 1996 (the “Act”). The High Court held that the parties had agreed to refer disputes to arbitration despite the existence of the allegedly conflicting option to proceed by court action, and set out some guidance on what constituted a “dispute” in an arbitration clause.

Background

PT Garuda Indonesia (Persero) TBK (“Garuda”) and Helice Leasing S.A.S (“Helice”) became the lessee and lessor of the Lease following a novation by a previous lessor. Garuda was in rent arrears, and impliedly admitted in correspondence that it owed monies to Helice. As the parties were unable to agree on a payment plan, Helice brought a claim against Garuda in the High Court for non-payment of rent under the Lease, as well as an indemnity.

Garuda did not dispute the quantum of the claim, arguing only that it “will defend” the allegation of an Event of Default (which was broadly defined in the Lease to include, in particular, non-payment and a breach of any provision of the Lease). Garuda did, however, make several claims in relation to the jurisdiction of the Court, applying to stay the proceedings under s9 of the Act in favour of arbitration. When making this application, Garuda referred to an arbitration clause in the Lease providing for “any dispute arising out of or in connection with [the Lease], including any question regarding its existence, validity or termination” to be resolved by arbitration with a seat in London, England under the LCIA Rules (the “Arbitration Clause”).

Application for a stay

Helice’s arguments

Helice argued that the claim should remain in the High Court, referring to a different provision of the Lease which enabled Helice “at its option” to “proceed by appropriate court action or actions to enforce performance of [the Lease] or to recover damages for the breach of [the Lease]” “[i]f an Event of Default occurs, and for as long as it shall continue” (the “Event of Default Clause”).

Helice alleged that the Event of Default Clause (which was not expressed to be “subject to” the provisions of the Arbitration Clause) granted it additional rights, in particular to proceed to appropriate court litigation, not arbitration. It therefore submitted that the Event of Default Clause was a unilateral option of the lessor to litigate in court upon an Event of Default (including non-payment).

Garuda’s arguments

Garuda took the view that the rights in the Event of Default Clause were subject to the Arbitration Clause, such that the only appropriate enforcement action that could be taken was to bring arbitral proceedings in accordance with that clause.

Garuda further contended that a more reasonable explanation of the reference to “court action” in the Event of Default Clause was that it was an erroneous remnant of the original lessor’s template lease agreement, which was governed by New York law and where disputes were to be resolved by the courts of New York.

The High Court judgment

The High Court concluded that the parties objectively intended to refer any dispute to arbitration, and the Event of Default Clause (although “not happily worded”) simply set out Helice’s rights if an Event of Default occurred. It also held that due to non-payment by Garuda there was a “dispute” within the meaning of the Arbitration Clause, such that it was engaged in the circumstances. The High Court therefore granted Garuda a stay of proceedings under s9 of the Act in favour of arbitration under the Arbitration Clause.

Construction of the dispute resolution provisions

The Court decided that the parties had objectively intended to refer any dispute to arbitration, in particular for the following reasons:

  • If an Event of Default occurred, the Event of Default Clause provided Helice with a series of rights, including to “proceed by appropriate court action”. In order to give the Lease a business common sense construction, “court action” must reasonably have been intended by the parties to mean action before the “London Court of International Arbitration” pursuant to the Arbitration Clause.
  • It was difficult to see how the Event of Default Clause would have operated on Helice’s construction of the two clauses. The lessor’s rights in the Event of Default Clause arose “[i]f an Event of Default occurs”, not “if an Event of Default is alleged”. Whether or not an “Event of Default” occurred was a “dispute” within the meaning of the Arbitration Clause, and should therefore be resolved in arbitration. If this issue were to be resolved by the Court that would usurp the role of the arbitrator.
  • If it was for the arbitrators to decide whether there was an Event of Default, it would make no sense for the Lease to then provide a right to the lessor to go to Court to enforce the Lease or obtain damages (rather than to obtain that remedy from the arbitral tribunal).
  • If, on Helice’s construction, the Court was required to determine other disputed events which fell within the scope of the Arbitration Clause, it would have to adjourn the proceedings and refer the matter to arbitration. If adopted, Helice’s construction would therefore run contrary to the one-stop shop construction of arbitration clauses advocated in the well-known case of Fiona Trust v Privalov [2007] UKHL 40.

Finally, the High Court mentioned that it would have been prepared to correct the Event of Default Clause to read “proceed by way of arbitration under [the Arbitration Clause]”. However, the Court did not consider that it was necessary given its reasons for the construction of the two clauses.

Was there a dispute capable of being referred to arbitration?

The High Court was also asked to consider whether there was a dispute capable of being referred to arbitration given that Garuda had impliedly admitted it was in rent arrears and did not dispute the quantum of the claim. The Court held that by reason of Garuda’s refusal to pay there was a “dispute” within the meaning of the Arbitration Clause. This conclusion was fortified by the fact that Helice also sought an indemnity pursuant to the Lease which had not been foreshadowed by it in inter-party correspondence.

Comment

This case is an example of the potentially significant complications arising from conflicting dispute resolution provisions. While the English courts will endeavour to establish the parties’ objective intentions at the time the contract was made, the result may not always be easy to predict, given that construction of contract terms is fact-sensitive, and depends not only on the words used but also the context in which they appear. This judgment demonstrates the importance of avoiding inconsistencies in dispute resolution provisions at all costs, regardless of whether they arise as a result of a drafting error when amending the agreement template (as seems to have been the case here), or as a result of oversight during the parties’ negotiation of the clause. The case illustrates that in order to avoid lengthy disputes and costly procedural applications clear drafting is key.

Click here to read more about arbitration on our Arbitration Notes blog. For more information, please contact Nicholas Peacock, Partner, Rebecca Warder, Professional Support Lawyer, Olga Dementyeva, Associate or your usual Herbert Smith Freehills contact.

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