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Do you want to arbitrate or litigate? Is your contract clear about that?

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24/07/2014

Where parties agree to arbitrate their disputes, and one party breaches that agreement by starting court proceedings, a court has power to uphold the arbitration agreement and ‘stay’ (i.e. transfer) the proceedings to be dealt with by arbitration unless the agreement is found to be ‘null and void, inoperative, or incapable of being performed’.

In Kruppa v Benedetti & Anor [1], the claimant started court proceedings but the defendant argued there was a valid agreement to arbitrate. The defendants applied to have the court action stayed to arbitration under section 9 of the Arbitration Act 1996 (the Act). In so doing they relied on a ‘Governing Law and Jurisdiction’ clause (which was identically drafted in each of the 3 relevant agreements in dispute) as being an ‘arbitration agreement’ for the purposes of section 6(1) of the Act.

Section 6(1) states:

“an ‘arbitration agreement’ means an agreement to submit to arbitration present or future disputes (whether they are contractual or not).”

The clause relied on by the defendant (the clause) stated:

“Laws of England and Wales. In the event of any dispute between the parties pursuant to this Agreement, the parties will endeavour to first resolve the matter through Swiss arbitration. Should a resolution not be forthcoming the courts of England shall have non-exclusive jurisdiction.”

The key issue for the court was whether the clause constituted an arbitration agreement for the purposes of the Act. There were few authorities on the point but it was proposed by the claimant (and the defendant did not disagree) that the clause should be construed in the same way as other contractual clauses by ascertaining the parties’ intentions and considering what a reasonable person, with the same background knowledge, would have understood the parties to mean.

The defendants stressed that the court should give effect to all parts of the clause to arrive at an harmonious result. They argued that the word arbitration should be given its ordinary and natural meaning unless there are other provisions in the contract which make it plain that it was not intended to give rise to binding arbitration and that the use of the word ‘arbitration’ is sufficient for an English Court to find a binding arbitration agreement.

The court disagreed: the clause was not an arbitration agreement under the Act. In particular:

  • the wording of the clause was crucial: “the parties will endeavour to first resolve the matter through Swiss arbitration”. There was no agreement to refer to arbitration; rather the agreement was to endeavour to resolve the matter through arbitration. This was a two stage process. If their attempts to try arbitration failed, the parties were to seek a binding solution by litigating in the English Courts;
  • the clause did not deal with the number and identity of arbitrators nor did it specify which Swiss canton was to have jurisdiction or act as the seat of arbitration. Disagreement on these issues was likely – and the parties had provided for such disagreement by stipulating litigation as a binding fall back;
  • the mere use of the word ‘arbitration’ in this case was not sufficient to show that the parties intended their disputes to be dealt with in arbitration;
  • it was not logically possible to have a two tier dispute resolution clause where each tier was binding. The court therefore concluded that the parties had in mind to try to agree Swiss arbitration – but if that failed, the English Courts were to have non-exclusive jurisdiction to deal the dispute.

Practical Points – draft your dispute resolution clause carefully
Arbitration proceedings result in a binding award which a successful party can enforce through the courts if necessary. If arbitration – rather than litigation in the courts – is your dispute resolution procedure of choice, it is important to ensure that your contract reflects your choice.

Multi-tier dispute resolution clauses are common but must be used with care. They often escalate the procedures from, for example discussion or negotiation, through to mediation and then to procedures which lead to binding results such as arbitration or litigation (but not both of the latter). Trying to use both, as in this case, might lead you to become embroiled in a procedure not of your choosing.

Ascertaining which court or tribunal has jurisdiction to hear your dispute is an important first step in any dispute. An uncertain jurisdiction clause (such as the referral to Swiss arbitration in the Kruppa case) can only lead to extra arguments and costs in the first stages of a dispute. It is far more cost effective to ensure your dispute resolution and jurisdiction clauses are well drafted at the outset. It might have seemed a good idea to specify Swiss arbitration in the present case – but the reality gave rise to complexities which the parties did not appear to have considered.

[1] Kruppa v Benedetti & Anor [2014] EWHC 1887 (Comm)

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