Kruppa v Benedetti & Anor

The defendants in this action apply to stay the proceedings pursuant to section 9 of the Arbitration Act 1996. The sole question which arises is whether or not a “Governing Law and Jurisdiction” clause in the three material agreements (in identical terms) constitutes an “arbitration agreement” within the meaning of section 6(1) of that Act. By that sub-section “An arbitration agreement means an agreement to submit to arbitration present or future disputes (whether they are contractual or not).”

The relevant clause reads as follows:

“Governing law and jurisdiction

Laws of England and Wales. 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.”

I was referred to a large number of authorities in relation to different forms of dispute resolution clauses, none of which, it was accepted, assisted much in the construction of this clause but which illustrated principles which were said to be those upon which the court should proceed. It was accepted by Mr Paul Stanley QC, for the defendants, that if the reference in the second sentence of the clause to “Swiss arbitration” was in truth not a reference to arbitration at all, but to some other form of dispute resolution procedure, the court could not enforce such an alternative dispute resolution procedure. The simple question therefore was whether or not the clause did constitute an arbitration agreement within the meaning of the Act and many of the authorities cited did not therefore fall for consideration.

Mr Paul Sinclair, for the claimant, submitted that the authorities gave rise to the following propositions:

Mr Stanley QC for the defendants did not disagree with these principles but stressed the need for the court to seek to give effect to all parts of a clause in the same way as it had to give effect to all clauses in a contract, insofar as it was possible to do so, in order to arrive at an harmonious result. In his submission, the word “arbitration”, on its own, was sufficient for an English court to find a binding arbitration agreement, as shown by numerous charter party cases. The clause with which the court is here concerned is one which had been drafted by professionals and the words “Swiss arbitration” were words which were apt to refer only to arbitration and not to mediation or conciliation or some other form of alternative dispute procedure. Parties would be expected to know the difference between “arbitration” and “mediation” and the difference between the two or any other form of alternative dispute resolution. When the word “arbitration” is used, it should be given its ordinary and natural meaning unless there are other provisions in the contract which make it plain, such as those which existed in AIG EuropeSA v QBEInternational Insurance Ltd [2001] 2 Lloyd’s Rep 268, that the arbitration is not to give rise to a binding and determinative result. It would not be usual to refer to some form of alternative dispute resolution by reference to nationality (e.g. “Swiss mediation”).

Furthermore, he submitted that, although the clause referred to the possibility of resolution by arbitration not transpiring, there was nothing in the clause about the reasons for that occurring. The provision effectively did little more than appears in section 9(4) of the Arbitration Act, which provides that the court should grant a stay of proceedings in favour of an arbitration agreement unless it was satisfied that the arbitration agreement was “null and void, inoperative, or incapable of being performed”.

I was particularly referred by both parties to different passages in a decision of mine in Sul America CIA Nacional de Seguros SA v Enesa Engenharia SA [2012] 1 Lloyd’s Rep 275 at paragraphs 3, 27-28 in relation to the alternative dispute resolution clause and paragraphs 47-50 in relation to the arbitration provision. The principles set out in the latter paragraphs and by Christopher Clarke J (as he then was) in Ace Ltd v CMS Energy Corporation [2009] Lloyd’s Rep 414 at paragraphs 68-94 were underlined.

Thus the defendants submit that where possible, references to “arbitration” and “jurisdiction” will be construed so as to give effect to both. That process often involves confining the jurisdictional provisions to limited circumstances but the court has consistently preferred to take that course rather than give no effect to the arbitration provision. It was said that an harmonious construction is eminently possible here since it is well known that arbitration may for various reasons prove impossible and the parties must be free to provide for what would happen in such circumstances. The wording used is not inconsistent, it is said, with the choice of arbitration as the primary means of resolving disputes.

There are, in my judgment, as pointed out by the claimant, real difficulties in the defendants’ approach. The first and most obvious difficulty is that the parties have not specifically agreed to refer any dispute to arbitration but have agreed to “endeavour” to resolve the matter through Swiss arbitration. The second is that the form of the clause plainly envisages the possibility of two stages in the dispute resolution process. This appears clearly from the requirement that the parties are to endeavour to “first resolve” the matter through Swiss arbitration and from the following sentence which provides that, if no resolution is forthcoming, either party can refer the matter to the English courts. If a dispute has to be referred to arbitration, any award would, in the ordinary way, be binding upon the parties and no second stage would arise.

The order which the defendants seek is that the proceedings against them be stayed because the claimant and defendants agreed that any disputes arising out of the agreements would be submitted to arbitration. If regard is had to the precise wording used, it can be seen that the parties have agreed, not to refer the matter to arbitration as such, but to “endeavour” to resolve the matter through Swiss arbitration with an express fallback provision, should they fail to do so in this way. Within the confines of one clause, the parties envisage the possibility of two stages – first an attempt to resolve the matter through Swiss arbitration, followed by litigation in the English courts. If however a matter is referred to arbitration, the result of that arbitration is binding upon them so that the dispute between the parties is thereby resolved. What the clause anticipates however is an attempt to resolve the matter first by arbitration and that process not resulting in a solution with a consequent need for litigation in the courts.

To my mind, an agreement that a party will “endeavour” to first resolve the matter through Swiss arbitration involves something different from an agreement to refer a dispute to arbitration. In these contracts there is no agreement as to the number or identity of the arbitrators which would require further agreement on the part of the parties or the appointment of arbitrators by a court of the seat of arbitration. Because Switzerland is divided into cantons, this would require a cantonal court to apply the provisions of Swiss law but the clause does not give any cantonal court jurisdiction nor specify a cantonal seat. On the evidence before me, article 179 of the Private International Law Statute in Switzerland provides that arbitrators are to be appointed by agreement between the parties, but in the absence of such an agreement, the court where the arbitral tribunal has its seat can make the appointment itself. The defendants’ own expert notes that problems arise where the arbitration agreement does not specify a canton as a seat of the arbitration as in such circumstances it would not be clear to which cantonal court the request to appoint an arbitrator should be made. Although the defendants’ expert refers to different schools of thought as to the effect of such clause under Swiss law and to a view that, in the case of difficulties in the constitution in the arbitral tribunal, the claimant should be allowed to file an application with the cantonal court of its choice, the opinion goes on to say that “if the respondent refuses to co-operate in the determination of the most appropriate forum within Switzerland”, “such a refusal to co-operate is tantamount to an abuse of right”. What the expert does not say is that any cantonal court of either party’s choice could appoint an arbitrator or arbitrators. Instead, reliance is placed upon the offer made by the defendants that they would not raise any objection to any cantonal court to which the claimant might apply for such appointment. This does not appear to me to resolve the problem since it appears that, in order to commence arbitration, the parties have either to agree on the number and identity of the arbitrators or upon the cantonal court which would appoint arbitrators in default. In either eventuality, further agreement on the part of the parties is required before any arbitration could take place.

As the claimant submits, on its face, the clause is a two tier dispute resolution clause which provides for a process referred to as “Swiss arbitration” with a right to the parties to refer the matter to the jurisdiction of the English court, “should a resolution not be forthcoming” through the Swiss procedure envisaged. It is logically not possible to have an effective multi-tier clause consisting of one binding tier (i.e. arbitration) followed by another binding tier (i.e. litigation). In my judgment what the parties had in mind was that there should be an attempt to agree a form of arbitration between them in Switzerland. If they failed to do so, the English court was to have non-exclusive jurisdiction.

This is not a case, like many of those cited to me, where there are provisions requiring the parties to refer disputes to different tribunals or fora – namely to arbitration on one hand and to the jurisdiction of a specified court on the other, where the two provisions have to be reconciled to the extent possible. Here the issue arises out of the form of the clause itself which specifically provides for two stages and the failure of the first to resolve the substantive dispute. It is in my judgment no answer for the defendants to say that an arbitration may for various reasons prove impossible and that the Arbitration Act itself envisages this because of the terms of section 9. The clause does not refer to the position where the agreement to arbitrate itself fails for one of the reasons enumerated in the section. The envisaged circumstance in which resolution does not take place is where the parties have “endeavoured” to resolve the dispute through arbitration but have failed in that endeavour.

The nature of the obligation incumbent upon the claimant appears from the form which an order for specific performance would take, if it were possible for the defendants to seek such an order. It would be an order that the claimant “endeavour to resolve the matter through Swiss arbitration.” The very nature of that obligation shows that there is not a binding agreement to arbitrate but merely an agreement to attempt to resolve the matter by a process of arbitration which has not been set out in the clause or elsewhere in the contract. The absence of provision relating to the number of arbitrators, the identity of the arbitrators, the qualifications of candidates for arbitration or the means by which they should be chosen shows the need for the parties to reach further agreement on the subject because the reference to “Swiss arbitration” does not specify the seat of the arbitration nor the court which could make any appointment in lieu of the parties’ agreement. The requirement to submit finally to a binding arbitration is absent and would, on the face of the clause, be inconsistent with its terms because of the two stage process envisaged.

In the circumstances, I hold that the clause does not require the parties to refer any dispute to arbitration in the sense required by the Arbitration Act but merely envisaged the parties attempting to refer the matter to arbitration by agreement between them. It provides for the parties’ failure to reach such agreement and therefore for the English courts to have jurisdiction in such circumstances on a non-exclusive basis. The defendants’ applications must therefore be dismissed with costs.