Parallel court and arbitration proceedings: English High Court grapples with further case management issues in Panama Canal dispute, clarifying that service of a defence pending appeal on refusal to grant a stay will not constitute “a step towards answering the substantive claim”

In our previous blog post on Autoridad del Canal de Panama v Sacyr, S.A. & Ors, we considered a failed application to stay English court proceedings brought in a dispute in which related ICC arbitration proceedings are also on foot. In a subsequent judgment, the English Court considered further the practical implications of the parallel proceedings. The Court rejected the Consortium’s application for permission to appeal the decision refusing to grant a stay under s9 of the Arbitration Act 1996 and refused to stay the proceedings pending an application to the Court of Appeal for permission to appeal.  In so doing, the Court held that service of a defence in the proceedings by the Consortium would not constitute a "step […] to answer the substantive claim" within the meaning of s9(3) of the Act which would deprive the Court of Appeal of its jurisdiction to grant a stay on appeal. Consequently, it allowed the proceedings to proceed pending the review by the Court of Appeal of the Consortium’s application for permission to appeal.

Autoridad del Canal de Panama v Sacyr, S.A and Others [2017] EWHC 2337 (Comm)

The case arose out of the construction project to widen the Panama Canal and the background to the proceedings is described in our blog post here. Whilst in its earlier decision the Court denied the Consortium’s application for a stay based on both s9 of the Act and the Court’s inherent case management powers, the Consortium sought permission to appeal the decision under s9 only. In deciding on the Consortium's application in this further decision, the Court addressed both the substantive question of the permission to appeal as well as the practical implications of this decision for the underlying proceedings which were ongoing.

Permission to Appeal the Dismissal of the s9 Stay Application

The Court found that previous case law did not address an application under s9 to stay an issue arising under a contract providing for the exclusive jurisdiction of the English courts. However, the Court denied the application applying the two-limb test for first appeals in Rule 52.6 of the Civil Procedure Rules, finding that the appeal would have a no real prospect of success and that there was no "other compelling reason for the appeal to be heard".

Continuation of the proceedings pending the review of the application for permission to appeal by the Court of Appeal

The Court then considered whether (i) to stay the proceedings pending a decision by the Court of Appeal on whether to grant permission to appeal, and (ii) if permission was granted, the review of the Consortium's s9 application. Blair J noted that his "strong commercial instinct" weighed against a stay, and that the claims under the advance payment guarantees (the APGs) which fell under the exclusive jurisdiction of the Court should "so far as practical, be progressed" and "settled expeditiously".

The Consortium's case was that in the event that the proceedings were allowed to progress pending the decision of the Court of Appeal (i) the Consortium as defendants would be required to serve a defence; (ii) such service would risk being interpreted as a "step [towards answering] the substantive claim" within the meaning of s9(3) of the Act; and (iii) this would operate to deprive the Court of its jurisdiction under s9 and effectively preclude the Consortium from obtaining a stay under s9. The Court rejected this argument. Previous case law confirmed that s9(3) operates only on any such steps that demonstrate the "willingness of a party to go forward with the court proceedings instead of arbitration". The Court accepted the Claimant's case that the service of a defence pursuant to a court order, while an appeal was pending, would not evidence any intention of the Consortium to accept the proceedings. The Court also advised that, for the avoidance of doubt, an express reservation in the defence (or, if required, in the order of the Court requiring the filing of a defence), would further dissipate any remaining doubt as to the exclusion of the operation of s9(3).

However, the Court still had to deal with the practical consequences whilst the application for permission remains outstanding, or of an actual appeal if permission to appeal is in due course given by the Court of Appeal. The Court considered it relevant that the practical issues had already been considered in the context of the Consortium’s application for a stay on case management grounds, on which both sides had made detailed submissions regarding the sensible management of the proceedings. The Court noted that the Consortium’s defences had already been put and considered in one of the arbitrations, and that filing them would not, therefore, impose a considerable burden on the Consortium. The defences would be limited to the question of whether liability under the APGs depends on the resolution of the dispute under the Main Contract, or is independent of it and, further, the drafting of a defence would not be wasted in this case because the same issues would arise in the arbitration if a stay was ultimately granted on appeal.

The Court nevertheless acknowledged that it should be wary of determining the dispute before the resolution of the appeal, should permission to appeal be granted. This could be avoided through a case management stay at a later stage of the proceedings. Equally, "a stay in favour of arbitration at that stage would be very much on the cards" should the Consortium's defence raise issues as to the performance of the Main Contract.

Consequently, the Court refused to stay the proceedings and set a date for the Consortium to serve their defences.

Conclusion

This further judgment highlights the practical issues arising as a consequence of parallel English Court and arbitration proceedings. In this judgment, the Court has taken a pragmatic approach, leaving the door open to a future case management stay as the proceedings develop to deal with issues which may arise as a result of continuance of the court proceedings while both the appeal and the arbitration proceedings are ongoing. This approach notwithstanding, it is clear that the case management issues are causing already considerable increased costs and complexity before the parties can resolve their substantive disputes.

For more information, please contact Craig Tevendale, Partner, Hannah Ambrose, Professional Support Consultant, Caroline Le Moullec, International Arbitration Intern, or your usual Herbert Smith Freehills contact.