Does ceasing to be a party to a contract result in the revocation of the arbitration agreement? - Lessons from PDSA v DP World

Generally, an arbitration agreement is only binding on the parties to the agreement. There are, however, exceptions, including where there has been an assignment or transfer of the contractual rights or causes of action to a third party.

The question for the Commercial Court in Port De Djibouti SA v DP World Djibouti FZCO [2023] EWHC 1189 (Comm) (22 May 2023) was whether an arbitral tribunal could exercise jurisdiction over a party that had already ceased to be a party to a contract containing an arbitration clause. 

The key takeaway points from the court's decision are as follows:

1. Where the parties to a contract have agreed to refer all disputes relating to their relationship to arbitration, any dispute arising from that contract will be subject to arbitration, including questions of whether a party has ceased to be, or remains, a party to the contract.
2. An arbitral tribunal has jurisdiction to determine breaches arising out of a contract, and all matters connected with the continuation of such breaches, even after a party has ceased to be a party to the contract. 
3. Each ground of challenge to the substantive jurisdiction of the tribunal must be distinctly raised by the respondent during arbitration, and communicated to the other party. Failure to do so may result in losing the right to object later unless a party can show that it did not know and could not with reasonable diligence have discovered the grounds for the objection. 

In what follows of this article we look in greater detail at the considerations for the court and how its decision was reached.

The facts of this case 

The claimant, Port de Djibouti SA (“PDSA”) brought a jurisdictional challenge under section 67 of the Arbitration Act 1996 (UK) (the "Act"), in respect of determinations made by Professor Dr Maxi Scherer, sitting as a sole arbitrator, in her final partial award of 7 July 2021 (the “Award”). The arbitration was seated in London and conducted under the 2014 London Court of International Arbitration (LCIA) Rules. 

PDSA (a Djiboutian company) and the defendant, DP World Djibouti FZCO (“DP World”) (a UAE company), were joint venture partners in the development and operation of Doraleh Container Terminal S.A. (“DCT”), a container terminal in Djibouti. Although DP World was the minority shareholder, it was agreed between the parties that DP World would control and manage the terminal. 

Relations between the parties subsequently soured. DP World complained that the Republic of Djibouti (“the Republic”) and PDSA had sought to oust DP World from its role without compensation and had also reneged upon the terms of the Joint Venture Agreement (“JVA”) between the parties. On 28 July 2018 PDSA purported to terminate the JVA. 

The Arbitration Proceedings 

In September 2018, DP World commenced arbitration proceedings, claiming that PDSA's purported termination of the JVA was unlawful (the "Termination Claim"). Days later, by way of a presidential ordinance, the Republic took compulsory ownership of PDSA’s shares in DCT. 

Subsequently, DP World amended its Request for Arbitration and sought to advance further claims. DP World argued that: (i) the share transfer was unenforceable and that PDSA remained a shareholder in DCT (the “Share Transfer Claim”), and (ii) PDSA had breached various provisions of the JVA and DCT’s Articles of Association by reason of the share transfer (the “Breach Claims”).

Importantly, the arbitration agreements in the JVA and the Articles applied in respect of (i) disputes between current shareholders, and (ii) rights and liabilities in connection with breaches occurring before a past shareholder ceased to hold any shares. 

For its part, PDSA argued that the arbitrator had no jurisdiction over the Breach Claims and the Share Transfer Claim because it ceased to be a shareholder in DCT after the presidential ordinance.

The Tribunal's Decision

The arbitral tribunal found that the purported termination of the JVA was unlawful and declared that the JVA remained binding. 

In respect of the Share Transfer Claim, the tribunal held that, whilst the presidential ordinance, being an executive act by a sovereign state, may have validly transferred PDSA's shares in DCT to the Republic, this was unenforceable vis-a-vis DCT. This is because the JVA and the Articles made the signature of a deed of adherence by the transferee a necessary pre-condition of any share transfer and, pending a signed deed of adherence, PDSA was still deemed to be a shareholder in DCT for the purposes of the JVA and the Articles. 

In respect of the Breach Claims, the tribunal held that, having found that PDSA remained a shareholder in DCT, it had jurisdiction to hear the Breach Claim. 

The challenge under Section 67 of the Act

PDSA challenged the tribunal's findings in respect of both the Share Transfer Claim and the Breach Claims. PDSA argued that, because it was no longer a party to the JVA or the Articles, the arbitrator lacked jurisdiction to make those findings. 

The Court's Decision 

The court applied English principles of interpretation and held that the arbitrator did have jurisdiction to hear the claims. The court found as follows:

1. While the presidential ordinance was valid, it could not alter the agreements made between the parties. Unless and until a deed of adherence had been executed, the original shareholder remained a shareholder and subject to the duties thereby arising. 
2. Questions as to whether or not PDSA ceased to be a shareholder were substantive issues between the parties which the tribunal could decide.  The arbitration agreements had not been revoked or terminated and it was common ground that the arbitration agreements continued to apply to alleged breaches occurring before PDSA ceased to be a shareholder.
3. Rational business entities are likely to have intended any dispute arising out of their relationships to be decided by the same tribunal. They should be taken to have intended that the arbitration agreement would apply to disputes about matters arising when they are both alleged to have been parties, even if the ultimate conclusion of the arbitrator or court is that one or both of them had in fact ceased to be a party by the relevant time.
4. PDSA lost its right to challenge jurisdiction under section 73(1) of the Act in respect of the Share Transfer Claim, including  as the question of whether it remained a shareholder of DCT after the presidential ordinance. It was not sufficient that PDSA had said it objected to jurisdiction in respect of DP World's claims under the Articles arising out of events occurring after the presidential ordinance and in respect of claims under the JVA after the passage of the presidential ordinance. PDSA had not "distinctly or openly" raised a jurisdictional objection to the specific claim for a declaration that it remained a shareholder.