Enforcement of Arbitration Award Set Aside – Arbitration Must be Consensual

Background

The judgment delivered on 19 February 2019 in the matter of VRG Linhas Aereas S.A. v Matlin Patterson Global et al (FSD 137 of 2016 (IMJ)) has provided some welcome guidance on the circumstances under which the enforcement of foreign arbitral awards may be refused in the Cayman Islands.

The dispute arose from the sale of an airline following which the plaintiff obtained an arbitral award in Brazil. The plaintiff was granted leave at an ex parte hearing to enforce the arbitral award in the Cayman Islands pursuant to the Foreign Arbitral Awards Enforcement Law (1997 Revision). Subsequently, an application was made by the defendants to set aside the ex parte order on three main grounds:

  • First, arbitration is a consensual process and that as the defendants were not a party to the arbitration agreement, they did not consent to arbitration and were not bound by the arbitral tribunal's decision.
  • Second, the arbitral award was contrary to public policy of the Cayman Islands having infringed the audi alteram partem rule because it held the defendants liable on an issue that had not been pleaded or argued.
  • Third, the arbitral tribunal trespassed beyond the scope of the matters that had been submitted to it by purporting to grant relief that had never been sought.

The Decision

On the first ground, Mangatal J held that it was clear that the defendants were, intentionally, and as a matter of objective construction, not a party to the Share Purchase and Sale Agreement (the "PSA"), which contained the arbitration agreement. Whilst the defendants had agreed to undertakings pursuant to a non-compete letter which referred to one of the clauses of the PSA, the non-compete letter did not incorporate the arbitration agreement. Mangatal J accepted the submission that the deliberate intention of the defendants not to execute the PSA and only execute the non-compete letter (containing a single obligation) was that the defendants were bound by that free-standing obligation alone.

On the second ground, in applying Cayman Islands standards of fairness and due process, Mangatal J held that it was plain that the defendants could not have reasonably foreseen that they would be held liable as third parties in tort when the claim against them and relief sought throughout the arbitration was to hold them responsible for a contractual obligation of their indirect subsidiaries. It was a question of Cayman Islands law as to whether there was procedural farness and the defendants were successful in discharging the burden of showing that there was a breach of natural justice.

Finally, on the third ground (which was closely related to the second ground), Mangatal J held that it was not within the scope of the arbitral tribunal's jurisdiction to award as tortious damages a contractual price adjustment amount which was never sought by the plaintiff.

Conclusion

Although the Cayman Islands offers a modern and effective regime by which to enforce international arbitral awards, the fundamental issues that this judgment serves to reinforce are that an agreement to arbitrate must be consensual, and basic elements of natural justice must be afforded to the parties during the arbitration process.

CAYMAN ISLANDS
Rupert BellPartnerT +1 345 914 4203rupert.bell@walkersglobal.com
Andrew GibsonDirector of LegalT +1 345 814 4573andrew.gibson@walkersglobal.com

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