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A step too far? Guidance on applying for a stay of court proceedings in favour of arbitration

Arbitration can be a popular alternative to court litigation for resolving commercial disputes. Where court proceedings are brought against a party to an arbitration agreement, in respect of a matter which is to be referred to arbitration in accordance with that agreement, the party may apply to the court under section 9(3) of the Arbitration Act 1996 (the Act) for a stay of those proceedings. However, such an application cannot be made where the potential applicant has taken any ‘step in the proceedings’ to answer the substantive claim.

Walker Morris Dispute Resolution Partners Gwendoline Davies and Nick McQueen consider a recent court judgment giving guidance on this point and offer their practical advice.

Lawyer discussing arbitration with his client over a table

What practical advice arises?

It is important to take the time at the start, well in advance of any dispute becoming a reality, to weigh up the advantages and disadvantages of the different forms of dispute resolution, including arbitration, taking into account the parties’ particular circumstances and the likely nature of any dispute. Businesses should think carefully about what dispute resolution options work best for them; and ensure that their choices are properly catered for in contractual arrangements [1]. When a dispute or potential dispute does arise, the parties should check the dispute resolution provisions in the relevant contract and expressly reserve their right to seek a stay of proceedings for arbitration if that right exists and they wish to preserve it. Depending on the context, a private agreement reached between the parties – for example agreeing an extension of time – can invoke the court’s jurisdiction and/or demonstrate an election to abandon the contractual right to a stay. It is important to tread carefully and, if in doubt, seek specialist advice.

How we can help

Walker Morris has a large team of specialists experienced in all aspects of commercial dispute resolution across all sectors, including national and international arbitration, litigation, mediation, expert determination and other forms of alternative dispute resolution (ADR, or, as it is increasingly being named, NDR or ‘negotiated dispute resolution’). Three of our partners are Fellows/Members of the Chartered Institute of Arbitrators. If you have any queries about the points raised in this briefing, trade internationally and/or are considering arbitration, or need any assistance or advice on drafting, dispute resolution options or strategy, please contact Gwendoline or Nick.

What principles apply?

In order to deprive a defendant of their recourse to arbitration a ‘step in the proceedings’ must be one which impliedly affirms the correctness of the proceedings and the willingness of the defendant to go along with a determination by the courts of law instead of arbitration. These three requirements must be satisfied:

  • The conduct of the applicant must be such as to demonstrate an election to abandon their right to a stay, in favour of allowing the action to proceed.
  • The act in question must have the effect of invoking the jurisdiction of the court.
  • An act which would otherwise be regarded as a step in the proceedings will not be treated as such if the applicant has specifically stated that they intend to seek a stay.

What were the facts of this case?

In Fairpark Estates Ltd & others v Heals Property Developments Ltd [2], the first and second appellants entered into a joint venture agreement (JVA) with Heals to develop land. Under the JVA, any dispute or difference between the parties would be referred to arbitration. A dispute arose after a contractor occupied the site and recommenced works allegedly under the appellants’ instructions.

Heals issued proceedings against the appellants and the contractor together with an application for an urgent interim injunction to recover and secure the site. Heals claimed: (i) possession and injunctive relief to recover and secure the site (the ‘proprietary claims’); and (ii) damages from all the appellants in relation to the work done by the contractor since his return to the site, and from the first and second appellants for breach of the JVA (the ‘monetary claims’).

Before the injunction application came before the court, the parties agreed settlement terms which were incorporated into a consent order providing that: (i) the claim would be stayed for six months to allow the parties to complete the Pre-Action Protocol; (ii) the time for filing any defence and counterclaim was extended until 28 days after the lifting of the stay; and (iii) the second and third appellants gave a series of undertakings regarding activity on the site.

In the exchange of correspondence prior to finalising the order, Heals confirmed that it would be willing to deal with the matter of damages through arbitration rather than court proceedings, if the appellants were willing to agree to the terms of the proposed order.

The parties subsequently agreed a further 28 day extension for the filing of any defence and counterclaim and, on the last day of that extension, the appellants applied under the Act for a stay of (i) the whole of the proceedings or (ii) the monetary claims.

The judge had to determine whether the first and second appellants had taken a step in the proceedings to answer the substantive claim which would mean they were prevented from making their stay application. He held that, by entering into the consent order and/or thereafter agreeing a further extension of time for filing their defence and counterclaim, they had taken such steps and were prevented from making the application. He also concluded that section 9(3) of the Act is a binary provision, meaning the court either stays the whole proceedings in favour of arbitration or acts under its own jurisdiction.

What did the High Court decide on appeal?

The appeal ultimately failed. The judge was right to conclude that agreeing to the undertakings in the consent order was a requisite step depriving the first and second appellants of their right to a stay for arbitration of the proprietary claims. However, he was wrong to conclude that agreeing the terms of the consent order was a requisite step depriving them of their right to a stay for arbitration of the remaining elements of the action, i.e. the monetary claims. Despite the High Court’s finding on this point, the judge was right, in the alternative, to conclude that agreeing the further extension of time was a requisite step and, as a result, the stay application remained dismissed.

The High Court made the following key points:

Agreeing the consent order

  • The giving of the undertakings (i) demonstrated an election on the part of the first and second appellants to abandon their right to a stay and (ii) had the effect of invoking the court’s jurisdiction. The consent order had the effect of finally disposing of the proprietary claims. By their undertakings the appellants confirmed, under the court’s jurisdiction, that any license or permission granted to the contractor was unequivocally and irrevocably withdrawn. They also agreed to provide reasonable assistance and authority to Heals in its pursuit of possession against the contractor.
  • The judge was wrong to conclude that any election must be binary. Among other things, there was no reason why parties should not be free to agree that some elements of their dispute that would otherwise be covered by an arbitration agreement be resolved through court proceedings while others be resolved by arbitration. There was no reason in principle why the appellants, having debarred themselves in respect of the proprietary claims, could not seek a stay in respect of the monetary claims.
  • The judge was wrong to conclude that reference to the Pre-Action Protocol in the consent order was a clear submission to the court’s jurisdiction. The Protocol’s objectives are to secure the early exchange of sufficient information to enable parties to make informed decisions about how to proceed and in particular to consider ADR/NDR – which notably includes arbitration – as an alternative to court proceedings. It would make no sense for a commitment to engage with a process primarily designed to avoid court proceedings to have the effect of invoking the court’s jurisdiction.
  • The judge was also wrong to conclude that agreeing by way of the consent order to an extension of time demonstrated an election by the first and second appellants to abandon their right to a stay of the monetary claims, in favour of allowing those elements of the action to proceed – the mere asking of the court for extra time for a defence is not itself a requisite step unless there is also an election. Where some procedural step is taken in the proceedings, the quality of that step for the purposes of application of section 9(3) has to be judged objectively in the light of the whole context known to both parties.
  • Here, the appellants had not unequivocally represented in correspondence that there would be no reference to arbitration in respect of the monetary claims. Objectively assessed in the context of the parties’ correspondence, the intended purpose of the consent order was (i) to dispose urgently of the proprietary claims and (ii) to stay the monetary claims/agree an extension of time in order to enable engagement with the Protocol. This was done to allow for the proper exchange of information. It was entirely legitimate for the appellants to seek an extension of time to consider that information and, in the absence of settlement, make a decision in respect of the monetary claims whether to submit to the court proceedings or seek to rely on the arbitration agreement.
  • Having already disposed without any admissions of liability of the proprietary claims by way of the consent order, there was no risk of there being inconsistent findings in the event that the monetary claims progressed by way of arbitration. In those circumstances, the High Court did not consider that seeking an extension of time could objectively be construed as indicating an election to waive the right to seek a stay for the monetary claims to be dealt with by way of arbitration.

Agreeing the further extension of time

  • In contrast, by requesting a further extension of time, the first and second appellants demonstrated an election to abandon their contractual right to a stay. The context was very different to the context in which the consent order was agreed.
  • The parties complied with the Protocol through the exchange of correspondence over several months. When Heals’ solicitors expressly asked the appellants to clarify whether, if resolution could not be reached, the matter was to continue by way of court proceedings or arbitration, the appellants’ solicitors stated that in order to respond fully it would be helpful to understand why the proceedings had been brought in the first place rather than dealing with the dispute through arbitration. That question had already been answered in correspondence pre-dating the consent order (the reason was the need to secure urgent interim relief). The first and second appellants had more than sufficient information available to them to decide whether or not to waive their rights to rely on the arbitration agreement.
  • Having requested the further extension to enable them to put in their defence and counterclaim, the appellants chose not to do so, but rather on the very day that the extension was due to expire made their stay application – some eight months after the consent order. That conduct was wholly contrary to the overriding objective of arbitration being “the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense”.
  • As to the issue of invoking the court’s jurisdiction, while there was no requirement under the relevant procedural rule for the agreed extension to be incorporated into a court order, the court is not merely a passive observer, but is in a position to maintain oversight and ensure that proceedings do not stagnate notwithstanding any extensions agreed between the parties. Among other things, while it would be unusual for the court to seek to override an agreement made by the parties to extend time, the court nevertheless retains control over the proceedings and the timetable for progressing the case. This was not simply a private agreement made by the parties that did not involve the court such that the parties were taking a step altogether outside the action.
  • Finally, the appellants were asked specifically to clarify their position as to whether the matter should continue by way of court proceedings or arbitration in the event that settlement was not achieved. In response, their solicitors did not state that they intended to apply for a further stay of the court proceedings for arbitration. They said instead that they would need to prepare a defence and counterclaim.

Nick
McQueen

Partner

Dispute Resolution

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Gwendoline
Davies

Partner

(FCIArb) Head of Commercial Dispute Resolution

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+44 (0)113 283 2517

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