High Court ruling shows the importance of a properly drafted dispute resolution clause, says expert

Out-Law News | 20 Jun 2014 | 4:56 pm | 4 min. read

A clause which said that parties to a contract would "endeavour" to resolve any dispute through Swiss arbitration, failing which the English courts would have non-exclusive jurisdiction, was not a valid arbitration agreement within the meaning of the Arbitration Act, the English High Court has ruled.

In its judgment, the High Court said that the use of the word "endeavour" implied that the parties had envisaged a two-stage process, which was inconsistent with the final and binding nature of arbitration. In addition, the clause did not contain the necessary agreements on the number and identity of the arbitrators and method by which these would be appointed, it said.

Dispute resolution expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com, said that the case was an important reminder of the need to ensure careful drafting of contractual dispute resolution provisions.

"When negotiating a contract, these provisions are usually regarded as part of the 'boiler plate' and get little attention," he said. "However, as this case shows, if things do go wrong a poorly-drafted dispute clause can lead to undesirable outcomes and expensive satellite litigation. It is therefore worth giving some thought as to how you would like disputes to be resolved and taking advice as appropriate."

"Another difficulty, illustrated by this case, is a defectively drafted arbitration clause which does not contain the minimum elements necessary for a binding arbitration agreement: for example, the number and identity of the arbitrators, means of appointment in the absence of agreement and 'seat' of the arbitration. This is best avoided by incorporating one of the standard arbitration clauses from one of the main arbitration bodies, such as the London Court of International Arbitration (LCIA); or taking advice," he said.

Christian Kruppa, one of the parties to the contract at issue in this case, sued the others in court. Those parties, Alessandro Benedetti and Bertrand des Pallières, applied to the court to 'stay', or suspend, the court action because Kruppa had not referred the dispute to arbitration first. They attempted to rely on section 9 of the Arbitration Act and a long line of English case law, which they said showed that the courts would interpret a reference to "arbitration" in the contract as an agreement to arbitrate.

However, Mr Justice Cooke said that there were "real difficulties" with this approach. The clause in question stated that the parties would "endeavour to first resolve [any dispute under the contract] through Swiss arbitration" with the courts of England having non-exclusive jurisdiction if a resolution was not "forthcoming". He said that according to this wording, the parties had not "specifically agreed to refer any dispute to arbitration". In addition, the wording of the clause "plainly envisages the possibility of two stages in the dispute resolution process", he said.

"If regard is had to the precise wording used, it can be seen that the parties have agreed, not to refer the matter to arbitration as such, but to 'endeavour' to resolve the matter through Swiss arbitration with an express fallback provision, should they fail to do so in this way," he said.

"Within the confines of one clause, the parties envisage the possibility of two stages – first an attempt to resolve the matter through Swiss arbitration, followed by litigation in the English courts. If however a matter is referred to arbitration, the result of that arbitration is binding upon them so that the dispute between the parties is thereby resolved. What the clause anticipates however is an attempt to resolve the matter first by arbitration and that process not resulting in a solution with a consequent need for litigation in the courts," he said.

"This is not a case, like many of those cited to me, where there are provisions requiring the parties to refer disputes to different tribunals or fora – namely to arbitration on one hand and to the jurisdiction of a specified court on the other, where the two provisions have to be reconciled to the extent possible. Here the issue arises out of the form of the clause itself which specifically provides for two stages and the failure of the first to resolve the substantive dispute," he said.

The reference to "Swiss arbitration" in the clause presented further difficulties, he said. Because Switzerland is divided into 'cantons', the arbitration process would require a cantonal court to apply the provisions of Swiss law but the clause did not give any cantonal court jurisdiction or specify a cantonal seat, he said.

"It appears that, in order to commence arbitration, the parties have either to agree on the number and identity of the arbitrators or upon the cantonal court which would appoint arbitrators in default," he said. "In either eventuality, further agreement on the part of the parties is required before any arbitration could take place."

Dispute resolution expert Richard Dickman said that it was important for parties to remember that litigation and arbitration were "mutually exclusive" methods of settling contractual disputes.

"If the parties agree to refer their disputes to arbitration, then they accept that the decision of the arbitral tribunal will be final and binding, and neither party can start court proceedings," he said. "Parties may choose arbitration for a variety of reasons; including confidentiality, speed, procedural informality, perceived neutrality of the tribunal and ease of enforcement of awards."

"One example of poor drafting that I see from time to time is a contract containing both an arbitration clause and a clause giving the court jurisdiction. If the parties can't agree which clause applies the court will have to resolve the inconsistency, usually by interpreting the contract to mean that the parties have chosen arbitration for the substantive dispute, with the court having its usual limited powers to supervise the arbitration proceedings. This is best avoided by ensuring that, where there is a choice between provisions providing for arbitration or court jurisdiction, only one alternative is chosen," he said.