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Contractual arbitration pre-considerations must be clear and unequivocal, court says

Steps set out in a contract to be taken before the parties can proceed to arbitration must be clear and unequivocal before the court can hold that a tribunal was not entitled to hear a claim, the High Court has ruled.27 Nov 2012

In his judgment, Mr Justice Hildyard said that a reference in the contract to an alternative dispute resolution (ADR) procedure that should be followed before a party could bring arbitration proceedings could not form a "valid pre-condition" where that procedure was not properly defined. The contract set out a process of pre-arbitration conciliation which had not been followed before one of the parties put in an arbitration claim.

The judge said that the test was not whether the clause itself was a valid provision for ADR purposes, but rather whether the obligations it imposed on the parties were sufficiently clear and certain to be given legal effect.

"Agreements to agree and agreements to negotiate in good faith, without more, must be taken to be unenforceable: good faith is too open-ended a concept or criterion to provide a sufficient definition of what such an agreement must as a minimum involve and when it can objectively be determined to be properly concluded," he said.

"[The provision] is too equivocal in terms of the process required and too nebulous in terms of the content of the parties' respective obligations to be given legal effect as an enforceable condition precedent to arbitration."

The clause at issue in the case contained detailed escalating ADR provisions, which allowed for arbitration in the event that the dispute was not resolved. Disputes arising under the contract were to be referred to the company's chief executive in the first instance to be resolved by way of amicable conciliation. This is a less formal ADR procedure in which a third party meets with those in dispute and helps them come up with a way to settle their disagreement. If the dispute could not be resolved through conciliation, the contract stated that it would then be referred to an internal panel.

Under the Arbitration Act, parties may challenge the decision of an arbitral tribunal if it believes that it had no 'substantive jurisdiction' to decide on the claim. In this case, two of the parties to the agreement claimed that as their opponents had not followed the steps contained in the contract but had instead proceeded straight to arbitration, the tribunal lacked jurisdiction. The tribunal itself had already determined that the ADR clause was not contractually enforceable.

Established case law made it clear that an ADR clause could not be used to prevent arbitration proceedings going ahead unless it was clear and certain, arbitration expert Nigel Kissack of Pinsent Masons, the law firm behind Out-Law.com, said.

The test, as set out in the previous case, was that any positive obligations imposed on the parties by the provision needed to meet three criteria without the need for further agreement between them. There had to be a "sufficiently certain and unequivocal commitment" to begin the process and discernable steps each party would need to take to put that process in place. The process itself needed to be "sufficiently clearly defined" as to enable the court to objectively determine what the parties needed to do and when or how the process could be considered to have been properly exhausted.

"The court must be satisfied that each part of the clause that was intended to be operative can be given legal effect," Kissack said. "Here the process was not specific and its terms, with regards to the parties' respective obligations, were too nebulous to be treated as enforceable. In particular, there was no guidance given as to the quality or nature of attempts to be made to resolve the dispute."

Arbitration expert Mohan Bhaskaran of Pinsent Masons said that as most large commercial agreements contained some form of dispute resolution clause, the case was a useful reminder of the importance of clear and unequivocal wording.

"Most large agreements these days have dispute resolution clauses in them and, depending on their terms, they can be used tactically both to prevaricate and also to 'up the ante'," he said. "This case may not have involved such a tactic but it is a useful precedent where the wording of a clause isn't obviously mandatory for claimants who believe that sensible discussions are unlikely and that formal proceedings need to be started."

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