Arbitral Award Provides for an Unworkable Enforcement Mechanism Nobody Asked For – Can the Court Intervene?

The claimants entered into an agreement with the respondents for the sale of (inter alia) a limited-edition sports car (the “Vehicle”), for a price considerably lower than the Vehicle’s real value. At the same time, and as part of the same transaction, the parties entered into a separate agreement which provided that the respondents would purchase 10% of the issued shares of one of the claimants (the “Shares”) for an agreed price. The agreement concerning the sale of the Vehicle included a clause which expressly provided that, if the respondents failed to purchase the Shares for the agreed price, the claimants would have the right to rescind the entire transaction and the respondents would be obliged to return the Vehicle to the claimants. The same clause provided that in such case the claimants would return the purchase price for the Vehicle to the respondents.

The respondents paid the agreed price for the Vehicle, which was duly delivered to them by the claimants, but refused to purchase the Shares. In light of this, the claimants exercised their right to rescind the transaction and demanded the return of the Vehicle. The respondents refused, claiming, among other things, that the two agreements concluded between the parties (ie, the agreement concerning the Vehicle and the agreement concerning the Shares) were separate and independent agreements.

The dispute was referred to arbitration pursuant to an arbitration clause in the relevant agreements, which provided that any dispute would be referred to arbitration in Cyprus before three arbitrators. The arbitration was governed by the provisions of the International Commercial Arbitration Law of Cyprus, which is based on the UNCITRAL Model Law on International Commercial Arbitration (1985).

The arbitral tribunal accepted the claimants’ position in full, namely that the two agreements concluded between the parties formed part and parcel of the same transaction and that the respondents were under a clear obligation to return the Vehicle to the claimants in its original condition. However, instead of granting the relief which the claimants had asked for, the tribunal proceeded on its own initiative, and without giving the parties an opportunity to express their views, to issue an order providing for a completely unworkable enforcement mechanism which involved the opening of an “escrow account” and made the return of the Vehicle conditional upon the prior payment by the claimants of an amount equal to the purchase price of the Vehicle into the “escrow account”. No provision was made as to how the claimants were to get their money back if the respondents failed to deliver the Vehicle in its original condition or at all. No party had ever asked for or suggested such an “enforcement mechanism” at any stage of the proceedings.

In light of the above, the claimants applied to the competent Cypriot court for an order setting aside the enforcement mechanism imposed by the arbitral tribunal. This application was primarily based on the argument that by fashioning and imposing the enforcement mechanism described above, which was a remedy entirely of its own making that was never raised or pleaded at any stage of the proceedings, the arbitral tribunal decided a matter (namely the matter of how its award should be enforced) that was not submitted for determination, and thereby exceeded its jurisdiction while also violating the audi alteram partem rule. The authorities referred to by the claimant in support of this argument included the judgment of the Superior Court of Quebec in Louis Dreyfus SAS v Holding Tuscukum BV 2008 QCCS 5903, where it was held that by fashioning a “valuation and buyout remedy” of its own making according to the tribunal’s own perception as to what was fair and equitable, the tribunal acted improperly, and exceeded its terms of reference and the mandate consented and agreed to by the parties.

Unfortunately, the Cypriot first-instance court dismissed the claimant’s application without properly examining the claimant’s submissions or considering the authorities relied upon by the claimant. The court took the view that, since the terms of the agreements between the parties provided that the claimants would return the purchase price for the Vehicle if the Vehicle was returned to them in its original condition following the rescission of the transaction, the arbitral tribunal did not exceed its jurisdiction by imposing a specific mechanism for giving effect to this provision. This reasoning does not seem to take into account that the issue submitted to the tribunal for determination was whether the respondents had an obligation to return the Vehicle, and that the tribunal was never asked by any of the parties to fashion an enforcement mechanism with respect to the return of the purchase price; and since this was not part of the pleadings or the referral to arbitration, it was a matter pertaining to the (lack of) jurisdiction of the tribunal. The court’s reasoning also overlooks the fact that there was no provision in the agreements between the parties that, on its terms, provided for an obligation on the claimant to open an “escrow account” or for making the return of the Vehicle conditional upon the prior payment of the purchase price into such an account.

The judgment of the Cypriot first-instance court has been appealed. It is hoped that the Court of Appeal will take this opportunity to consider the novel and interesting issues raised in greater depth, and to reflect more carefully on the need to ensure that arbitrators act within the limits of their mandate in order to avoid inequitable results.