Parties to commercial agreements will have set out intricate procedures for resolution of disputes. These will often include a “ratchet” or “tiered” procedure of steps to be exhausted before the parties can press the litigation or arbitration trigger. The rationale being to seek to avoid the costs of expensive litigation with parties compelled to exhaust agreed Alternative Dispute Resolution (ADR) steps.
Furthermore, the parties, particularly where the participants are from different jurisdictions, will often prefer as a neutral position (rather than courts in another jurisdiction) to have arbitration as a means to finally resolve disputes that cannot be settled via the various ADR process envisaged by the agreement. This preference is asserted in a clear submission to have disputes and differences finally resolved by arbitration, and with agreed applicable rules.
However, notwithstanding the existence of a ratchet/tiered procedure or arbitration agreement, where parties fail to comply with the agreed contractual process it is often met with challenges in the courts to stay the actions. So where the parties have clearly agreed to submit disputes and differences to arbitration, and one party commences proceedings in the courts, an application to stay the proceedings may follow pursuant to the Arbitration Act 1996 (Arbitration Act). Ordinarily such disputes are relatively clear cut.
An intriguing position arose in the recent decision of IS Prime Ltd v Global Markets (UK) Ltd and others, that was dealt with by Justice Andrew Baker in the Queens Bench Division--Commercial Court.
The case involved a sale and purchase agreement that was entered into by two companies incorporated in Delaware, US (the Agreement).The terms of the Agreement made clear that:
(a) the laws of Delaware applied (section 7.7 of the Agreement); and (b) that any dispute or controversy or claim between the parties arising out of or relating to the Agreement “shall be first submitted to non-binding arbitration” under and in accordance with the CommercialArbitration Rules of the American Arbitration Association (the AAA Rules) (the AAA Process) (section 7.8 of the Agreement).
Neither the claimant nor any of the defendants in the case decided by the High Court were a party to the Agreement. However, the Agreement contemplated that there would be contracts between them for the provision of services, and there was a separate exclusivity agreement between the Claimant and the Defendants entitled “Liquidity Addendum” for the rendering of such services. This Liquidity Addendum provided for the courts of England and Wales to have nonexclusive jurisdiction. When a dispute arose which touched upon alleged breaches of the LiquidityAddendum by the Defendants, an AAA Process was commenced in the USA involving the claimant and defendants.
The Claimant alleged that in breach of this exclusivity agreement, the defendants used the services of another broker(s), claiming ensuing loss and damage.
With regards the AAA Process itself, the wording of section 7.7 of the Agreement referred to the process as one of “arbitration” to which the parties made a ‘submission’. However, it was clear from the wording of section 7.7 that AAA Process was agreed to be non-binding in its outcome, evidenced by the explicit stipulation that the process would be “non-binding”.
Notwithstanding the AAA Process that had been commenced in the US, the Claimant in the present case commenced proceedings in the English courts.
The Defendants applied for a stay of the English proceedings pursuant to section 9 of the Arbitration Act, on the basis that the AAA Process that had been started in the US constituted an arbitration within the meaning of an arbitration agreement pursuant to section 6(1) of the Arbitration Act. Alternatively the defendant’s pleaded that the court exercise its discretion under S.49(3) of the Senior Courts Act 1981 to stay the English proceedings in favour of the AAA Process.
The issue for the High Court to determine was therefore whether section 7.7 of the sale and purchase agreement constituted an arbitration agreement within the meaning of section 6(1) of the Arbitration Act, and so entitled the Defendants to apply for a stay pursuant to section 9 of the Arbitration Act.
Section 9 Arbitration Act 1996 Application
Section 9 of the Arbitration Act provides that: “a party to an arbitration agreement against whom legal proceedings are brought in respect of a matter which under the agreement is to be referred to arbitration may apply to the court in which proceedings have been brought to stay the proceedings so far as they concern that matter.”
Section 6(1) provides that an “arbitration agreement” for the purposes of the Arbitration Act means “an agreement to submit to arbitration”.
The Claimant’s argued that their decision to commence proceedings in the English courts was based on the fact that commencing and pursing the AAA Process did not equate to submission or agreement to any disputes to arbitration within the meaning of section 6(1).
Despite references to “arbitration” in section 7.7 of the Agreement, and indeed the fact tha the AAA Rules themselves do not envisage a non-binding decision, applying the Berkley Burke ratio, the High Court held that the lack of a determinative jurisdiction was sufficient to mean that there was no arbitration agreement, regardless of the similarities of the procedure adopted to a “real arbitration”. The High Court was satisfied that the wording of section 7.7 of the Agreement was such that the AAA Process was agreed to be non-binding in its outcome, and that it was a process more to allow the parties to assess the respective strengths and merits of their cases than come to a binding determination.
Furthermore, the Judge in the case noted the evident lack of “consensual submission of a dispute” to determinative and binding arbitration, which commentators have established is a further key requirement for an arbitration agreement under the Arbitration Act. Again, the present facts did not in the opinion of the Judge suggest that there was such submission by the parties.
Despite the Judge’s findings, there was a brief reconciliation of section 58 Arbitration Act by the Judge in this factual context. Section 58(1) provides that an award made by a tribunal pursuant to an arbitration agreement is final and binding on the parties, and section 58(2) goes on to state that this does not affect the right to challenge the award by any available arbitral process of appeal or review. The Defendant contended that although the AAA Process provided for non-binding arbitration, section 58(1) of the 1996 Act expressly preserved the right of theparties to agree that an award made by a tribunal pursuant to an arbitration agreement could be non-binding.
However, the Judge was not of the view that this provision could permit parties who had agreed to resolve their dispute by a method that resulted in a ‘non-binding’ decision to held to have submitted to arbitration under the Arbitration Act, as such process “will neither be nor ever become binding upon them”, despite any course for appeal or review available under that process. The Judge concluded there was no arbitration agreement within the meaning of section 6(1) and consequently, the application for a stay pursuant to section 9 of the Arbitration Act was dismissed.
Section 49(3) Senior Courts Act 1981 Applications
The Defendant sought in the alternative to stay the English proceedings commenced by the Claimant under section 49(3) of the Senior Courts Act 1981 (SCA).
Section 49(3) of the SCA grants the High Court a discretionary power to stay any proceedings before it, where it thinks fit to do so, either of its own motion or on the application of any person, whether or not a party to the relevant proceedings. The defendant sought to argue that that because the parties had agreed that the AAA Process should be undertaken and completed before either party proceeded to litigation, the High Court should exercise its discretionary power to allow the AAA Process to be undertaken and completed.
The Judge stated that as with any agreement, the question to be determined was what, if any, mutual promises did each party by its communications and conduct, viewed objectively, convey to the other that it was making. Based on the facts, the Judge did not find that there was a promise by the claimant to the defendant or vice versa that no other proceedings would be commenced until the AAA Process had been seen to its conclusion. It was therefore concluded that the present case did not satisfy the standard of “rare and compelling circumstances” necessary for the High Court to exercise its discretion under the SCA to allow a stay on that basis.
The alternative stay application on this ground therefore failed, and the outcome was that directions for case management were made, withthe case management conference hearing to take place after the outcome of the AAA Process.
Whilst parties are free to determine whatever ADR processes they choose as a means of resolving disputes, attaching a label will not always be definitive of an agreement to submit to arbitration under the Arbitration Act, nor will aping procedural similarities.
It is clear from this case that in order to make a binding agreement to submit to arbitration under the Arbitration Act, it is critical that there has to be a process that ends up with a binding decision. If not, the process will likely not fall within the meaning of section 6(1) and the Arbitration Act will not apply.
In this instant case, despite the fact that the AAA Process under the Agreement was compared to an arbitration agreement contained the word ‘arbitration’, the fact the process was non-binding prevented it from being an arbitration agreement under the Arbitration Act. Indeed, it was certainly not arbitration as we know it.
- Berkley Burke SIPP Administration LLP v Charlton  1 Lloyd’s Rep 337
- Reference was made by the court to Mustill & Boyd, Commercial arbitration, 2nd ed (1989).
- Reichold Norway ASA v Goldman Sachs International  1 WLR 173
Republished by permission.