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Getting it wrong - Yet another arbitration clause fails the test

21/07/2014

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United Kingdom

If the parties are from different countries the dispute resolution clause in a Shareholders Agreement will often say that disputes under the Agreement are to be referred to arbitration.

Shareholders Agreements usually contain a dispute resolution clause, and particularly if the parties are from different countries that clause will often say that disputes under the Agreement are to be referred to arbitration. If an arbitration clause is not valid, under English law there will be no obligation to arbitrate because there is no valid agreement in writing to arbitrate as required by section 6(1) Arbitration Act 1996 ("the Act"). This means that a dispute between the parties needs to be resolved by litigation, often by the courts of a country which the parties had deliberately tried to avoid when they thought they had agreed in their contract to arbitrate somewhere else, usually somewhere neutral. There is also the added difficulty that, unlike arbitration Awards, the judgments of many courts are not recognised or enforced overseas in which case a successful claimant in court proceedings may never make any actual recoveries against the judgment debtor.

Time and again the English court has been asked to interpret and enforce an arbitration clause in an agreement only to decide that clause is not valid. The reasons for this are varied, but they usually all arise because the wording of the arbitration clause itself is either unclear, or contradictory.  

Kruppa v Benedetti [2014] EWHC 1887, is a dispute under a Shareholders Agreement where Mr Kruppa started English court proceedings for breaches of that Agreement which his fellow shareholders Mr Benedetti and Mr des Pallieres tried to stop on the basis they had agreed to arbitrate instead. The English Commercial Court was asked to enforce this clause:

"Law 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 such a resolution not be forthcoming the courts of England shall have non exclusive jurisdiction."

In line with previous cases, the Judge concluded that clause was invalid because it was not a clear agreement to refer disputes to arbitration as required by the Act, refused to uphold it, and allowed Mr Kruppa's litigation to continue. The Judge said there were two problems with this clause:

1. There was no agreement to refer a dispute to arbitration. Instead, there was simply a non-binding obligation on the parties to "endeavour" to resolve through "Swiss arbitration", but there was no indication of agreement on key matters such as where in Switzerland that arbitration should take place, under what arbitration rules,  how many arbitrators there should be or how they should be appointed.  All of this needed to be the subject of further agreement between the parties first, and the English courts do not enforce "an agreement to agree". Put another way, if Mr Benedetti and Mr des Pallieres had required Mr Kruppa to perform his obligations under this clause and "endeavour to resolve the matter through Swiss arbitration", Mr Kruppa would not know how to do this and so would not be in breach if he did nothing.

2. The parties seemed to anticipate a two stage process – first, an attempt to arbitrate and secondly, "should a resolution not be forthcoming", litigation. It was not logically possible to have one binding dispute resolution stage (arbitration), followed by another binding dispute resolution stage (litigation).    

As a result, Mr Kruppa's English court proceedings were allowed to continue. 

Key points from this case are these:

  • The arbitration agreement will be interpreted by the English court in accordance with the law which governs it, usually the law of the contract, here English law. So if the parties in this case had chosen a law other than English law, the result might have been different.

  • Each arbitration clause is interpreted with the objective of establishing what the parties intended to agree (if anything).

  • The value of previous court decisions can be of little use as a result of the Court's general approach that parties do not expect there to be detailed argument, with reference to previous cases, about the precise meaning of particular phrases. Instead, the approach taken  is "robust" and "literal", giving full effect to the parties' presumed intention of having a single dispute resolution process.

  • When establishing what the parties intended to agree, the court will try to give effect to all the words in the clause, and will give those words their usual meaning where there may be indications elsewhere in the contract as to what those words are intended to mean.

The English court tries hard to uphold and enforce agreements to arbitrate, and has a "pro arbitration" history, trying to reconcile conflicting provisions in favour of arbitration but this was a case too far. A valid and effective arbitration clause in an international agreement is one of its most important provisions. It probably took less than 5 minutes (and almost no cost) to draft and agree the arbitration clause in this case, but a significant amount of time (and huge cost - including Swiss law expert evidence about how, and where, a "Swiss arbitration" would take place) to work out that, actually, this one meant nothing.  

Simon Moore frequently drafts and enforces arbitration clauses in international agreements.