By Oliver Kent
Picture this. You are a Director at a substantial widget manufacturing company. One of your key materials suppliers, with whom you’ve had a relationship for many years, is causing you grief. There have been a number of complaints from customers in recent times about a decline in widget quality, which appear to be the fault of your supplier. However, you’re behind on your payments to the supplier and they are starting to threaten supply, with disastrous effects for the company. A dispute is brewing.
You have been involved with litigation before and have experience of court proceedings. However, when you check with your legal team about next steps, you learn that your agreement with the supplier contains a clause which appears to indicate that all disputes must be referred to arbitration. The clause is perhaps not drafted with the certainty it should and could have been, and it is not clear the extent to which it is enforceable. The issue usually is framed on the basis of whether there is a valid and enforceable agreement to refer disputes to arbitration.
There are also commercial considerations that may be relevant. Is it preferable to litigate in the domestic courts or arbitrate? This may be a commercial call, just as much as a legal one. This blog shares some of the practical considerations around these issues.
Where to challenge
Strange as it might sound, just as a court can decide on the question of its own jurisdiction, so can an arbitral tribunal decide on its own competence to settle a dispute. In fact, in a situation like the scenario above (where some form of arbitration agreement arguably exists), the UK the Arbitration Act 1996 (“the Act”) provides the default position. N.B. The UK is not alone, and various other jurisdictions have specific legislation to support arbitration as a process.
Specifically, Section 30(1) of the Act states that (unless the parties agree otherwise) the arbitral tribunal may rule on its own substantive jurisdiction. This includes whether there is a valid arbitration agreement, whether the tribunal had been properly constituted and what matters have been submitted to arbitration in accordance with the agreement.
Of course, this is only the default position. Care needs to be taken to examine the terms of any arbitration clause, as well as the rules of any institution (such as the LCIA, CIArb, ICC, UNCITRAL etc) mentioned in the clause, in case they prescribe a procedure for challenging jurisdiction.
Is the tribunal’s decision final? No. Section 30(2) of the Act provides that any decision by the tribunal on its own jurisdiction is not final. Such a decision is open to further challenge in court under Section 67 of the Act.
Can you go straight to court to challenge jurisdiction? Yes, but the court route is seen as the exception rather than the rule. However, it is important to note that every party has a right to challenge an arbitral tribunal’s decision in court, provided that they have not taken part in the arbitration proceedings (see Section 72 of the Act). If you have already taken steps in the arbitration proceedings, the court route is still available, but really only with the agreement of all the other parties or with the permission of the tribunal. Looking at it another way, if you take taking steps in court proceedings (whether or not initiated by you) without reserving your position could result in a part inadvertently acquiescing to court proceedings (or vice versa, in an Arbitration).
In most cases therefore, unless there is a specific reason, the question of whether a tribunal has jurisdiction in a particular dispute will be determined by that tribunal.
When to challenge
If you are in the same position as the client in the scenario above and there are concerns about jurisdiction, it is important not to delay any challenge.
The Act provides different rules in terms of the time limits for bringing any challenge depending on when objections arise.
For example, any objections arising at the outset of the proceedings must (in accordance with Section 31(1) of the Act) be raised no later than the time a party takes the first step in the proceedings to contest the merits of any matter to which that party seeks to challenge jurisdiction. This means that taking the ‘step’ of serving a defence, without first reserving your position on jurisdiction or at the same time as serving the defence, challenging jurisdiction, could mean the right to challenge is lost.
What if your objections arise during proceedings? There are circumstances where parties need to challenge the jurisdiction of the tribunal during the course of arbitral proceedings, usually where they consider that the tribunal is straying into matters or claims etc which are not covered by the arbitration agreement. In that situation, Section 31(2) of the Act provides that the objection must be made as soon as possible after the matter alleged to be beyond the tribunal’s jurisdiction is raised. Whether a party is too late will therefore be a question of fact in each case.
If court proceedings are commenced in circumstances where there is a valid arbitration agreement, then the party commencing those proceedings is at risk of being on the end of an anti-suit injunction (and the associated costs of the same). Generally speaking, we would expect the courts in England and Wales to order a stay of Court proceedings in favour of arbitration (in the same scenario), but the position may differ depending on the other jurisdictions involved.
Loss of right to challenge
In the case of objections raised under Section 31 of the Act, late challenges do not necessarily mean that is the end of the road. The tribunal has the power under Section 31(3) of the Act to accept a late challenge if it considers a delay was “justified”. Unfortunately that only applies to challenges before a tribunal.
Section 73 of the Act separately confirms (in the case of challenges both before the tribunal and the court under Section 31, but not under Section 72) that the right to challenge may be lost if a party takes part in proceedings without making an objection immediately or otherwise within the time allowed by an agreement, the tribunal or the Act. The only exception is where it can be shown that the party seeking to challenge did not know and could not with reasonable diligence have discovered the grounds for the objection.
As highlighted by Section 73, it is therefore vital that parties check the terms of any arbitration clause and in the event it refers to an institution, that institutions rules (if any) as to jurisdictional challenges.
Where there are questions about the competence of a tribunal in relation to a dispute, the key is to act swiftly. Delay can have potentially disastrous consequences, including the loss of the right to challenge in some cases.
If you need to buy more time, then (as set out above) it is possible to protect the right to challenge by a reservation of rights. However, this is really only a sticking plaster and if you have not made a challenge before the close of pleadings, you may find you have lost the right to challenge altogether.
For parties who want to take a ‘stronger’ stance, you can always refuse to participate in proceedings. There are essentially no time limits on the ability of a party to bring an application under Section 73 of the Act and indeed, in the case of a party that refuses to cooperate, the challenge can be made even after an award has been rendered by a tribunal. However, this strategy is not for the faint-hearted or the risk-adverse. If an award is rendered by a tribunal and a challenge is made under Section 73 but fails, that award will be binding.
Whatever strategy is adopted, there will always be a cost. For those with deep pockets, that may not be a problem, but for others making the decision to challenge jurisdiction can be a difficult one.
They say hind sight is a wonderful thing and it is no different in this area. In all cases, the best way to avoid unnecessary and costly challenges is to ensure that arbitration clauses are properly drafted. Where a clause is clear and unambiguous, there should be little room for challenge.