One of the main advantages of arbitration is the control and flexibility it gives to the parties. When entering a commercial agreement they are not only free to choose arbitration over litigation. They also have the ability to:
- Devise their own arbitration procedures or adopt the procedures of a recognised arbitration body like the London Court of International Arbitration LCIA
- Decide the circumstances in which the parties can resort to arbitration
- Specify the type of dispute that can be referred to arbitration
And – as we have seen – the popularity of arbitration as a mechanism to resolve tricky commercial disputes has risen markedly during the Covid19 pandemic.
But what happens when the parties don’t follow the terms of the arbitration clauses in a contract? Or they attempt to avoid arbitration altogether by refusing to follow the pre-arbitration requirements in the contract?
The 2021 High Court case of NWA & FSA v NVF is a good example of how the courts approach this kind of scenario. It shows that the courts are extremely reluctant to permit a party to frustrate a contractual agreement to arbitrate. We look at the case below.
Is There A Valid Arbitration Agreement?
It stands to reason that – for arbitration to proceed – there must ne a valid arbitration agreement in place between the parties. The agreement normally amounts to several clauses in the overarching contract between the parties. Great care should be taken when drafting these clauses as any uncertainty can prolong a dispute and significantly increase legal costs. NWA & FSA v NVF – which we’ve just mentioned – is a case in point.
Background To NWA&FSA (2021): Mediation Before Arbitration
Here the parties had a long-standing business relationship relating to exploitation of certain patents. They wished to fundamentally alter the way they did business together and entered into an agreement setting out a new working relationship. If a dispute arose the parties agreed to:
- First seek settlement of that dispute by mediation in accordance with the LCIA mediation procedure
- Refer the matter to arbitration if mediation did not result in a resolution within 30 days
When a dispute did arise the defendants (NVF) wrote to the claimants (NWA & FSA) requesting that the matter be referred to the LCIA for arbitration. In what they believed was compliance with term in the first bullet point above the defendants also indicated that the arbitration they’d requested should be put on hold to allow the parties to mediate for the 30 day period envisaged by the agreement.
The claimants to all intents and purposes appear to have ignored the request to arbitrate/mediate, and the appointed arbitrator concluded that he had jurisdiction to hear the dispute. It was only then that the claimants sought to challenge the arbitrator’s power to hear the dispute.
They argued that the arbitration agreement had not been complied with (because the defendants’ arbitration request was made at the same time as mediation was suggested i.e. the defendants had not first sought settlement by mediation as required by the agreement).
High Court Upholds Arbitration Claim
In the event the court found that the defendants had made a valid arbitration claim in accordance with the agreement. If the claimant’s position were followed to its logical conclusion it would mean that, where one side refused to mediate, they could frustrate the arbitration agreement altogether because the arbitrator would never gain jurisdiction to hear the dispute. In the judge’s opinion,
‘That would be absurd and would not give the (arbitration agreement) business common sense”
At the end of the day, as the judge highlighted, arbitration is a ‘consensual’ process. Only the arbitration agreement can shed light on what matters are to be referred to arbitration. And when seeking to establish the parties’ intentions, the courts are entitled to assume that business people wish to achieve some rational commercial purpose through the decision to arbitrate.
In summary this case bolsters the enforceability of arbitration agreements. It makes clear that the English courts will take care to uphold parties’ freely entered agreements to arbitrate –even where certain terms of the agreement have not strictly been complied with.
Contact Us
If you are a business facing a dispute, bear in mind the possibility of arbitration and other forms of Alternative Dispute Resolution (ADR). Contact our director Shubha Nath at Nath Solicitors on 44 (0) 203 983 8278 or get in touch with the firm online. We’ll happily explain how arbitration and other alternative dispute resolution mechanisms work and advise you on the best way for you to proceed.
