Arbitration: was there a binding agreement to arbitrate?

We often find that contracts are increasingly setting out alternative ways to approaching dispute resolution. Often these include reference to arbitration and also references to preconditions on the right to arbitrate. Two recent cases demonstrate just how important clear drafting of these clauses can be. Sometimes, it is possible for a party, who might not wish to go along the dispute resolution path in the manner adopted by the claiming party, to take advantage of either unclear drafting or the failure to follow the requirements of the contract, to find ways to block and/or otherwise frustrate what the claiming party is trying to do.

Kruppa v Benedetti & Anr1

Benedetti made an application to stay proceedings brought by Kruppa pursuant to section 9 of the Arbitration Act 1996. The main question for Mr Justice Cooke to decide was whether or not the clause in question constituted an arbitration agreement within the meaning of the Act. The relevant clause reads as follows:

“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.”

Benedetti said that this clause required the parties to arbitrate their dispute. Further, the word “arbitration”, on its own, was sufficient for an English court to find a binding arbitration agreement. Benedetti sought to argue that, given the court’s general proarbitration stance, the clause should be construed so that substantive issues would be resolved by arbitration while the English court retained supervisory jurisdiction. The clause here had been drafted by professionals and the words “Swiss arbitration” referred only to arbitration and not to mediation or some other form of ADR. Parties would be expected to know the difference between “arbitration” and “mediation”. When the word “arbitration” is used, it should be given its ordinary and natural meaning.

However, the Judge considered that there were a number of difficulties with that approach. First, the parties had not specifically agreed to refer any dispute to arbitration. They had agreed to “endeavour” to resolve the matter through Swiss arbitration. Secondly, the clause plainly envisaged the possibility of two stages in the dispute resolution process. The parties had agreed to attempt to resolve the matter first by arbitration and if that did not result in a solution then there would be a need for litigation in the courts.

The clause was a two-tier dispute resolution clause which provided for a process referred to as “Swiss arbitration”, with a right to the parties to refer the matter to the jurisdiction of the English court, “should a resolution not be forthcoming” through the Swiss procedure envisaged. It was logically not possible to have an effective multi-tier clause consisting of one binding tier (i.e. arbitration) followed by another binding tier (i.e. litigation).

In the Judge’s view, what the parties had in mind was that there should be an attempt to agree a form of arbitration between them in Switzerland. If they failed to do so, the English court was to have non-exclusive jurisdiction.

The nature of that obligation showed that there was not a binding agreement to arbitrate but merely an agreement to attempt to resolve the matter by a process of arbitration which itself had not been set out in the clause or elsewhere in the contract. The absence of provisions relating to the number of arbitrators, the identity of the arbitrators, the qualifications of candidates for arbitration or the means by which they should be chosen further demonstrated the need for the parties to reach further agreement on the subject because the reference to “Swiss arbitration” did not specify the seat of the arbitration nor the court that could make any appointment in lieu of the parties’ agreement.

The requirement to submit finally to a binding arbitration is absent and would, on the face of the clause, be inconsistent with its terms because of the two-stage process envisaged.

Benedetti’s application was dismissed.

Emirates Trading Agency Plc v Prime Mineral Exports Private Ltd2

Clause 11 of the contract between the parties provided the following procedure for resolving disputes:

“In case of any dispute or claim arising out of or in connection with or under this LTC…, the Parties shall first seek to resolve the dispute or claim by friendly discussion. Any party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim. If no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks then the nondefaulting party can invoke the arbitration clause and refer the disputes to arbitration.”

The question at the heart of this case was: in a dispute resolution clause is an obligation requiring the parties to seek to resolve a dispute by friendly discussions in good faith and within a limited period of time enforceable as a condition precedent to the dispute being referred to arbitration? ETA said that this amounted to a condition precedent which had to be satisfied before the arbitrators would have jurisdiction to hear the claim and if it was not satisfied this would mean that the tribunal lacked jurisdiction. Prime argued (as did the arbitrators) that the clause was unenforceable as it was merely an agreement to negotiate and in any event, it had been satisfied.

Mr Justice Teare accepted that the first part of clause 11.1 provided that before a party can refer a claim to arbitration there must be friendly discussions to resolve the claim. Such friendly discussions were a condition precedent to the right to refer a claim to arbitration.

However, the Judge doubted that the second part of the clause required the friendly discussions to continue for four weeks. The clause provided that “if no solution” could be found “for a continuous period of 4(four) weeks” then arbitration could be invoked. The discussions may last for a period of four weeks but if no solution is achieved a party may commence arbitration. Or the discussions may last for less than four weeks in which case a party must wait for a period of four continuous weeks to elapse before he may commence arbitration.

The reference to a period of four continuous weeks ensured both that a defaulting party could not postpone the commencement of arbitration indefinitely by continuing to discuss the claim and that a claimant who is eager to commence arbitration must have the opportunity to consider such proposals as might emerge from a discussion of his claim for a period of at least four continuous weeks before he may commence arbitration.

The Judge also considered previous authorities in determining whether the clause was a mere “agreement to negotiate” and therefore unenforceable. It was not, and Mr Justice Teare dismissed ETA’s application and held that the arbitrators had jurisdiction over the dispute as the clause was enforceable and on the facts of the case, had been satisfied.

Conclusion

If you want to arbitrate, the arbitration clause should be clear and unequivocal. Whilst both cases provide a further demonstration of the preference of the courts to enforce jurisdiction clauses provided that they are clearly drafted and reflect what the parties had freely agreed at the time of entering the contract, the fact remains that there is a regular stream of such cases across all the courts. Those drafting and entering into agreements with similar clauses must remember the importance of ensuring that your contract contains a clear and certain governing law and jurisdiction clause. Indeed, the object of clauses such as the one in the Emirates’ case was actually to try and prevent costly arbitration proceedings.

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  • 1. [2014] EWHC 1887 (Comm)
  • 2. [2014] EWHC 1887 (Comm)