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Commercial Court refuses to stay proceedings where arbitration clause required parties to "endeavour" to arbitrate a dispute

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Hitchins Sarah
Sarah Hitchins

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30 September 2014

In Christian Kruppa v Alessandro Benedetti & anr [2014] EWHC 1887 (Comm), 11 June 2014, the Commercial Court held that a dispute resolution clause that required the parties to "endeavour" to resolve a dispute through arbitration did not constitute an "arbitration agreement" for the purposes of s6(1) of the Arbitration Act 1996 (the Act). The Commercial Court interpreted such a clause as only envisaging that the parties would attempt to agree to a form of arbitration and, if they failed to reach such an agreement, that they would refer the matter to the English courts.

Background

The parties had entered into agreements that contained an arbitration clause (the Clause). The Clause was drafted as follows:

"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".

Notwithstanding this, the claimant commenced proceedings in the English courts against the defendants. The principal remedy for proceedings commenced in the English courts in breach of an arbitration agreement is a stay of those proceedings under s9 of the Act. As a result, the defendants applied to the court for a stay of proceedings under s9 on the basis that any dispute between the parties should be resolved through Swiss arbitration.

Definition of an "arbitration agreement"

The issue before the court was whether the Clause constituted an "arbitration agreement" for the purposes of s6(1) of the Act. Under the Act, an "arbitration agreement" is defined as "an agreement to submit to arbitration present or future disputes (whether they are contractual or not)". The defendants argued that the Clause met the requirements for an arbitration agreement.

As a result and although the Clause envisaged that resolution of a dispute by arbitration may not occur, the defendants argued that the court should grant a stay of the proceedings brought by the claimant under s9(4) of the Act, which states that the court "shall grant a stay [of proceedings] unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed".

Application for a stay of proceedings dismissed

The defendants' application for a stay of proceedings under s9 was dismissed on the basis that there was found to be no arbitration agreement between the parties for the purpose of s6(1).

Cooke J held that the Clause did not require the parties to refer any dispute to arbitration in the sense required by the Act. Rather, the Clause only intended for the parties to attempt to refer any dispute to arbitration by agreement. If the parties failed to reach agreement about referring any dispute to arbitration, the Clause envisaged that the English courts would have jurisdiction.

In addition, Cooke J rejected the defendants' argument that a stay should be granted on the basis that the Clause was consistent with the terms of s9(4) of the Act (in that the Clause was not "void, inoperative, or incapable of being performed"). He commented that the circumstances in which the arbitration provision of the Clause would fail was where the parties had endeavoured to resolve a dispute by arbitration but had been unable to do so. Furthermore, Cooke J noted that if the defendants were to seek an order for specific performance of the Clause, it would be an order that the claimant endeavoured to resolve the matter through arbitration. As a result, it was held that the nature of the obligation under the Clause demonstrated that there was no binding agreement between the parties to arbitrate disputes, but merely an agreement to attempt to resolve disputes by a process of arbitration.

In coming to his decision, Cooke J noted that certain details about the arbitration (including the identity and number of arbitrators or which Swiss canton would be the seat of the arbitration) were not set out in the Clause or elsewhere in the contract between the parties. Furthermore, Cooke J held that there was no requirement for the parties to submit finally to a binding arbitration. In any event, Cook J commented that such a requirement would be inconsistent with the terms of the Clause because of the two-stage process set out in the Clause (arbitration and, failing that, litigation in the English courts).

Overall, Cooke J commented that it was not possible for the parties to have an effective multi-tiered arbitration clause that consisted of two binding stages: the first to agree to arbitrate a dispute, and the second to agree to litigate a dispute in the English courts if the parties failed to agree to arbitrate a dispute.

Comment:

The English courts will usually try to give effect to arbitration agreements. However, Cooke J's decision in this case demonstrates that the courts will only do so when the terms of the arbitration agreement constitute a binding agreement between the parties to arbitrate disputes. In particular, this case emphasises how carefully dispute resolution clauses must be drafted, especially when parties want to provide for referring a dispute to arbitration in some circumstances and to the English courts in other circumstances. Cooke J made it clear in his decision that a multi-tiered arbitration clause that comprised an agreement to endeavour to refer a dispute to arbitration and, failing that, to litigate a dispute in the English courts, was not effective.