Arbitration in England and litigation abroad on the same merits of the case



It is quite frequent, in international contracts, to find a clause providing for arbitration in England, pursuant to the Rules of Arbitration of one of the various specialized organizations located there. The arbitration agreement between the parties to a contract can be also found in the standard terms and conditions proposed or imposed by either party and accepted by the other.


This makes arbitration in England, when a dispute arises as between the parties to a contract, a quite standard way to settle their dispute.


However, what happens when one of the contract parties, notwithstanding such arbitration agreement, starts an action (for credit collection, or breach of contract) against the other party in a jurisdiction other than the arbitration forum, and decides to litigate such case before a local Court? The issue is whether in such case the arbitration agreement can be deemed to have been repudiated, or there is a way to resume the litigation before the arbitration tribunal.


As it is well known and a consolidated and consistent principle of English law, the parties may agree that the arbitration agreement shall not apply to a certain dispute or that it shall cease to apply entirely, whenever a plaintiff and a defendant (by not objecting) tacitly agree to submit a dispute to an ordinary court of law although an arbitration clause in a contract executed by and in force between those parties provides for arbitration. In such a case, the arbitration agreement is made ineffective in respect of the dispute at hand by the conduct of the parties.


Furthermore, a plaintiff may also unilaterally lose his right to rely on an arbitration agreement by waiving it, while the defendant would still retain his right to submit the case to arbitration pursuant to the arbitration agreement: this may occur when a party to an arbitration agreement commences proceedings in a foreign Court in respect of a matter to which an arbitration agreement is applicable, as this must be treated as a breach of the arbitration agreement which will constitute a waiver of that party’s right to arbitrate.


The breach of the agreement by the plaintiff would in such case be in fact repudiatory, and as such it would require the defendant to elect to accept the repudiation, and thereby discharge the arbitration agreement, or to affirm the agreement and require it to be observed. In the absence of any other correspondence, until the defendant responds to the Court proceedings begun by the plaintiff in breach of the arbitration agreement, defendant will neither yet have accepted the repudiation, thereby discharging the agreement to arbitrate (see English precedent: “Downing v Al Tameer Establishment [2002] EWCA Civ 721”), nor affirmed the agreement to arbitrate (by seeking a stay of proceedings under section 9 of the English Arbitration Act 1996): if, then, the defendant submits to the foreign Court his Response and Defense brief, the defendant may be deemed to have accepted the challenge to litigate the subject-matter of the dispute before such foreign Court, with the result that the plaintiff, who had first commenced the Court proceedings, can no longer commence an arbitration in England.


In fact, once the defendant has responded to the Court proceedings by answering the substantive claim - thereby accepting the repudiation and waiving his own right to arbitrate by discharging the arbitration agreement -, the plaintiff’s waiver of his right to arbitrate has become irrevocably waived.


This outcome is also confirmed by comparing section 9 of the English Arbitration Act 1996 to Article 8 of the UNCITRAL Model Law and Article II of the New York Convention of 1954: all such provisions in fact operate to create an obligation upon a Court in which proceedings have been commenced by a plaintiff - in breach of an arbitration agreement - to refer the parties to arbitration, if so requested by the defendant, unless the court finds that the agreement is “null and void, inoperative or incapable of being performed” (Article 8 of the UNCITRAL Model Law and Article II of the New York Convention of 1954).


Section 9(4) of the English Arbitration Act 1996 imposes a mandatory stay on proceedings unless the Court is satisfied that “the arbitration agreement is null and void, inoperative, or incapable of being performed”. It arises from the foregoing that even English Courts, in line with the UNCITRAL Model Law and the New York Convention of 1954, give great importance to what has been agreed between the parties and will give effect to an agreement to arbitrate, provided, however, that the party who has not commenced the relevant Court proceedings (i.e. the defendant in the Court proceedings) actually wishes the matter to be referred to arbitration. If, on the contrary, the defendant – in the relevant Court proceedings – does not raise at first the issue of the existing arbitration agreement, such party shall not be entitled to request the case to be referred to arbitration, later on.


The existence of an agreement to arbitrate does not prevent – under English Law - either party from commencing judicial proceedings in Court (see: the above already cited “Downing v Al Tameer Establishment”; “Halifax Financial Services Ltd v Intuitive Systems Ltd [1999] 1 All ER (Comm) 303”; “Scott v Avery 91856, 5HL Cas 811”), but the issue of proceedings in Court by one party shall amount to a waiver of that party’s right to have the same dispute determined by arbitration (see: “Herschel Engineering Ltd v Breen Property Ltd [2000] All ER (D)559”) if the defendant is content and agrees to have proceedings in Court rather than in arbitration.


This is in fact supported by section 9(1) of the English Arbitration Act, which provides that: “a party to an arbitration agreement against whom legal proceedings are brought (by way of claim or counterclaim) in respect of a matter, which under the agreement is to be referred to arbitration, may… apply to the Court in which the proceedings have been brought to stay the proceedings so far as they concern that matter”.


However, a party’s right under section 9(1) to seek a stay is lost if that party takes a step in the proceedings to answer the substantive claim (section 9(3)). In “Eagle Star Insurance Co Ltd v Yuval Insurance Co Ltd ([1978] 1 Lloyd’s Rep 357, at 361”), Lord Denning indeed held that, to constitute “a step in the proceedings” depriving a party of his right to arbitrate, the action of such party “must be one which impliedly confirms the correctness of the proceedings and the willingness of the [party] to go along with a determination by the Courts of law instead of arbitration”: as a consequence, any conduct which describes an intention to abandon the right to arbitration shall be construed as taking “a step in the proceedings”.


English law uses ordinary contract law principles to identify repudiation (repudiatory breach) of the agreement to arbitrate. If the repudiation is accepted by both parties – as it may occur when the defendant does not raise any objection to the action brough before a foreign Court by the plaintiff, and on the contrary submits to said Court defendant’s response – both parties are discharged from further performance of the agreement to arbitrate.


Acceptance of a repudiation is by that means irrevocable in its consequence: it can be undone only by both parties agreeing again to arbitrate, otherwise the litigation will continue before the foreign Court up to the final judgment to be issued thereby.


Prof. Avv. Salvatore Vitale


The content of this article does not constitute legal advice, but has an informative function. For tailor made legal advice, contact the firm by e-mail to: info@dongpartners.eu or by phone +39 06 916505710. © Dong & Partners International Law Firm, All rights reserved


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