The problem with carving out disputes from disputes clauses

Overview

The English Court of Appeal has ruled in AdActive Media Inc v Mark Ingrouille ([2021] EWCA Civ 313) that where parties have carved out certain disputes from an arbitration clause, a claim that has been brought that is not strictly confined to those disputes would be in breach of the arbitration clause. This shows the problem with allocating different disputes to different forums when drafting a contract: the disputes that actually arise may not fall easily into the agreed categories, and a judgment that crosses over the categories may not be enforceable.

Facts                        

Mr Ingrouille was engaged by AdActive Media Inc (AdActive) as a consultant to help with the expansion of AdActive’s business in South East Asia. The consultancy agreement contained clauses that referred all disputes to arbitration with the exception of disputes relating to confidential information and Mr Ingrouille’s “work product”. Those excepted disputes were to go to court litigation in California.

A dispute arose, and in April 2018 AdActive started litigation in California. Its claim related to Mr Ingrouille’s activities in Thailand and Vietnam. AdActive alleged that Mr Ingrouille had shared confidential information with competitors in those countries, and that he had embezzled certain funds and other assets owned by AdActive. Mr Ingrouille did not participate in the litigation so the Californian court entered judgment in default. The judgment was for US$ 11 million in damages.

Mr Ingrouille is resident in the UK. In November 2019, AdActive started court proceedings in England to enforce the US judgment. Mr Ingrouille responded to these proceedings. He resisted enforcement of the Californian judgment on various grounds, including the argument that the judgment was unenforceable because it was contrary to the dispute clauses in the consultancy agreement: AdActive had brought a claim that not only covered confidential information but also other alleged breaches of the consultancy agreement, and those breaches should have gone to arbitration not litigation. The High Court rejected his arguments and ordered enforcement of the judgment. Mr Ingrouille appealed.

The Court of Appeal considered the drafting of the consultancy agreement and concluded that the clauses which referred some disputes to court litigation and some disputes to arbitration were not inconsistent with each other, meaning that the arbitration clause was effective. However, the claim was contrary to the arbitration clause because it covered more than misuse of confidential information. Only the allegation relating to confidential information should have been brought in the Californian court, and the other allegations should have been made in arbitration. As a result the judgment could not be enforced in England, by virtue of section 32 of the Civil Jurisdiction and Judgments Act 1982 which states that an overseas judgment will not be enforced in England if the litigation in the foreign country was contrary to an agreement that the dispute in question would be brought elsewhere.

Comment

Disputes clauses can be the result of compromise in the contract negotiations, without much thought as to what disputes in the future will actually look like. One party might give way on the main disputes forum, provided that the disputes which they think are important are heard elsewhere. However, neat divisions between disputes that are envisaged when contracts are drafted rarely arise in practice. The reality is that parties that have fallen out will raise as many claims as they can. This causes problems for clauses that allocate disputes between different forums. Either the parties will end up in costly legal proceedings running in parallel in different places or, as in this case, the failure to divide up the claims may prove fatal for the resulting judgment. As a general rule it is safer to specify in your contract that all disputes will be referred to the same forum, whether that is arbitration or a national court system.

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If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.