Court refuses to declare arbitration agreement ineffective before proceedings begin

Out-Law News | 08 Jun 2016 | 12:31 pm | 3 min. read

It would be "wrong in principle" for the High Court to rule on the existence of a valid arbitration agreement between two companies ahead of any actual proceedings, as this would deny the arbitral tribunal the power to rule on its own jurisdiction, a judge has found.

HCT Malta Ltd had applied for a declaration that it had entered into a binding contract with Tradeland Commodities in relation to the supply of bulk concrete 'clinker'; an agreement which it claimed contained a London arbitration clause. Its intention was then to refer the dispute to arbitration. However, Judge Waksman QC has now set aside that application.

Litigation and international arbitration expert Richard Twomey of Pinsent Masons, the law firm behind Out-Law.com, said that despite the general power of the courts to make declarations, the judgment in this case showed the "limits" of declaratory relief.

"The court declined as a matter of principle to grant the declaration sought, ruling that if a claimant contends that it has a claim under a binding arbitration agreement then it is for that claimant to issue arbitration proceedings and allow the tribunal to determine whether it has jurisdiction," he said.

"The judge also ruled that he would 'unhesitatingly' have refused to declare the alleged arbitration agreement ineffective as a matter of discretion on the basis that if he did so he would be usurping the function of arbitrators by failing to give weight to the scheme established in the Arbitration Act for dealing with questions of arbitral jurisdiction," he said.

The 1996 Arbitration Act gives an arbitral tribunal the power to rule on its own substantive jurisdiction. This includes such issues as whether there is a valid arbitration agreement, whether the tribunal is properly constituted and whether the matters submitted to arbitration are in accordance with the arbitration agreement. It also restricts the ability of the courts to intervene in the arbitral process, particularly once the proceedings are underway.

The difficulty in this case was that HCT had not yet commenced proceedings, something which its legal team argued changed the position in relation to court applications. However, Judge Waksman disagreed, saying that this was "plainly wrong".

"Where the Act laid down an extensive code for the governance of arbitrations from start to finish the very fact of this scheme is highly relevant when considering the scope of the court's powers prior to commencement," he said. "While [the Act] deals directly only with the question of construction, and the word used is 'should' and not 'shall', [Tradeland] is right to say that there is here a principle enunciated by the Act that in general terms, the court must be extremely slow to intervene where an arbitration is concerned."

"[HCT] accepts that principle of respect for the arbitral process but says that it is not violated if the court can generally exercise its declaratory powers in a case like this because, after all, the court will then say whether there is a binding arbitration agreement or not. If there is, the court then leaves the parties to their arbitration and if there is not, there is no arbitral process to respect. I think that this puts the matter too narrowly … [R]espect for the arbitral process includes respect for the scheme of and the principles underlying the Act," he said.

Given the circumstances of this case, the judge said that it would be "wrong in principle" to grant declaratory relief to HCT. However, he then went further. He said that it would be wrong in principle for the courts to grant any such application where the applicant believed that there was a binding arbitration agreement; had a claim which it wished to make and which could therefore only be resolved through arbitration; and where there was nothing preventing the applicant from commencing arbitration.

He went on to state that even if there had been no principled argument against granting declaratory relief, he would have "unhesitatingly" refused to use his discretion to do so. Doing so would be "a needless invocation of the court's powers" where the tribunal itself was able to do so, among other reasons, he said.

Richard Twomey of Pinsent Masons said that the decision ultimately left parties unsure of the existence or validity of an arbitration agreement with "a choice".

"If one party believes that there is a valid arbitration clause – or otherwise wishes to argue in favour of arbitration, which it may well do, for example for reasons of privacy or enforcement - then it must commence an arbitration and leave it for the tribunal to determine whether it has jurisdiction to determine the dispute," he said. "Alternatively, the party might threaten or commence proceedings before a national court, in which case the other party might apply for an anti-suit injunction, dispute jurisdiction or commence an arbitration, or some combination of all three."

"Of course, this assumes that there is a 'dispute' between the parties as to the right forum in which the dispute should be resolved. In many cases, especially where there are cross-claims, these issues can be dealt with in pre-action correspondence in order to save the costs of a jurisdiction fight," he said.