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Court cannot stay court proceedings on application of non-party to arbitration

31 January 2009

The Court of Appeal has overturned a previous decision relating to the circumstances in which s9 Arbitration Act 1996 operates to obtain a stay of Court proceedings. This case also reveals that, for the first time, the UK government faces an international investment treaty arbitration, brought under the UK-India bilateral investment treaty.

City of London v Ashok Sancheti

[2008] EWCA Civ 1283, 21 November 2008

The Court of Appeal has overturned a previous decision relating to the circumstances in which s9 Arbitration Act 1996 operates to obtain a stay of Court proceedings. This case also reveals that, for the first time, the UK government faces an international investment treaty arbitration, brought under the UK-India bilateral investment treaty.

Bilateral investment treaties BITs are treaties which encourage foreign investment by providing investors with rights such as market value compensation in the event of expropriation or nationalisation, a transparent and predictable regulatory framework, and provisions requiring states not to impair investments by unreasonable or discriminatory measures. Contracting states agree in advance that the nationals of another contracting state will have an automatic right to bring international arbitration proceedings in respect of any "investment dispute". The United Kingdom has entered into more than 120 BITs with other countries.

English Court proceedings by Mr Sancheti have revealed that a BIT arbitration was brought by him under the UK-India BIT against the UK government in late 2006. The BIT arbitration arose from a dispute between Mr Sancheti, a lawyer of Indian nationality, and his landlord, the City of London (the Corporation).   The Corporation sought to increase the rent relating to office premises rented by Mr Sancheti. Mr Sancheti refused to pay and commenced a BIT arbitration alleging "blatant discrimination by different organs and functions of the United Kingdom in their dealing with me in my capacity as an Inward Investor" and also made specific complaints against the Corporation, alleging that he was the subject of targeted harassment and racial discrimination which had forced him to stop his legal practice at the premises.

The lease contained a clause requiring the parties to refer disputes to the English Court. The Corporation commenced County Court litigation against Mr Sancheti for the amounts allegedly due as a result of the rent increase. Mr Sancheti then applied to the Court under s9 Arbitration Act 1996 (1996 Act), requesting a stay of the Court proceedings because the BIT arbitration was in progress.

The County Court refused to order a stay and Mr Sancheti appealed all the way up to the Court of Appeal. In the leading judgment, Lawrence Collins LJ held that s9 1996 Act did not apply in the present case because the Corporation was not a party to the BIT under which the arbitration was brought. He noted that it would be "wholly inconsistent with the purpose and structure of the 1996 Act in general, and of s9 in particular, if a stay could be obtained against a claimant who was not a party to the arbitration agreement".

The Court of Appeal overturned the case of Roussel-Uclaf v GD Searle and Co Ltd [1978] 1 Lloyds Report 225, 231-232 (which predates the 1996 Act) in which a wholly owned subsidiary company was held to be "so closely related" to the parent company that, although it was not a party to an arbitration agreement executed by its parent, it was granted a stay of Court proceedings as the arbitration agreement was held to cover the dispute. The Court affirmed the principle that under s9 a stay can only be obtained against a party to an arbitration agreement or a person claiming through or under such a party. A mere legal or commercial connection is not sufficient.

The Court then considered the clause in the lease which referred disputes to the non-exclusive jurisdiction of the English Court. It held that this amounted to a contractual agreement to submit disputes to the English Court and the parties had, therefore, already agreed that the English Court would have jurisdiction over their disputes.

Comment: The case is important because it has overturned Roussel-Uclaf and has affirmed – in strong terms – the binding contractual nature of arbitration.   Only parties to arbitration agreements or those claiming directly through them can obtain a stay under s9 of the 1996 Act. Such parties may be insurers subrogated to the rights of their insured or assignees. Parties which are only connected to a party to an arbitration agreement may not obtain such an order.

(1)       Section 9(1) of the Arbitration Act 1996 states that: "A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter under which the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter."