ENGLISH HIGH COURT DISMISSES SECTION 67 JURISDICTIONAL CHALLENGE TO ARBITRAL AWARD IN MPB V LGK

In the recent case of MPB v LGK [2020] EWHC 90 (TCC), handed down on 23 January 2020,  the High Court dismissed an application to set aside an arbitration award on jurisdiction pursuant to section 67 of the Arbitration Act 1996 (the “Act”).

In a suite of contractual documents incorporated into the parties’ agreement, the arbitration agreement included in a lower ranking set of standard terms and conditions was held to bind the parties in the absence of any dispute resolution clauses existing in contractual documents which ranked higher in the contractual hierarchy.

Background facts

MPB, a building contractor, entered into an agreement with LGK for the installation of steel works. The agreement arose out of a series of email exchanges between the parties where various quotations, amendments to those quotations and standard terms and conditions were exchanged. The final order for the works expressly incorporated MPB’s standard terms and conditions (“MPB’s Terms”). It also included manuscript annotations and, in its description of the works and value, references to emails having attached LGK’s standard terms and conditions (“LGK’s Terms”), as well as other correspondence.

MPB’s Terms were silent as to the dispute resolution procedure to adopt in the event that a dispute arose between the parties. In contrast, LGK’s Terms provided, at Clause 11, that the parties could refer a dispute to adjudication at any time, and that the decision of the adjudicator would be binding on the parties “until the dispute is finally resolved through agreement for by Arbitration [sic] under the CIMAR rules”.

A dispute arose between the parties regarding the works performed by LGK, and MPB engaged other contractors to complete LGK’s works. A series of adjudications followed. The third was commenced by MPB with reference to Clause 11 of LGK’s Terms, and resulted in a decision being handed down in MPB’s favour, which provided that MPB was entitled to recover GBP 76,056.67. MPB sought to enforce the decision. LGK commenced arbitration proceedings to challenge the adjudicator’s decision, in accordance with Clause 11 of LGK’s Terms. MPB immediately challenged jurisdiction. Notwithstanding MPB’s position, an arbitrator was appointed, leading to a subsequent ruling that he had substantive jurisdiction over the parties’ dispute by virtue of Clause 11 of LGK’s Terms.

Application to the High Court

MPB applied to the High Court to set aside the arbitrator's award on jurisdiction pursuant to section 67 of the Act, on the grounds that there was no arbitration agreement between the parties, such that the Tribunal has no substantive jurisdiction over the dispute referred to it. In particular, MPB argued that the agreement between it and LGK did not incorporate LGK’s Terms, in particular Clause 11.

The English court was asked to rule on two questions.

• First, did the contract incorporate Clause 11 of LGK’s Terms?
• Second, in light of MPB’s conduct in the adjudication, was it open to MPB to challenge the application of Clause 11 of LGK’s Terms in any event?

Before determining either issue, Veronique Buehrlen QC, sitting as a Deputy High Court Judge, reiterated that challenges under section 67 proceed by way of de novo rehearings of jurisdiction issues. While the arbitrator’s decision on jurisdiction can be considered, it has no evidential or legal weight in the court’s determination.

On the first question, the Tribunal had found that the contract did incorporate Clause 11 of LGK’s Terms. MPB had been given clear notice of LGK’s Terms. The scope of work and price for the same in the final order were clearly designed to be read in conjunction with LGK’s Terms. Express reference to MBP’s Terms being incorporated was not sufficient to exclude the application of LGK’s Terms. The Deputy High Court Judge added that it was not uncommon for construction contracts to be set out in a number of different documents and to contain different sets of standard terms. While that inevitably increases the risk of contradictions between those terms, here this situation was mitigated by the fact that precedence had been given to MPB’s Terms.

The Judge rejected MPB’s arguments that the absence of an arbitration agreement in MPB’s Terms entitled the parties to take their dispute to court, and that given their inconsistency with the arbitration agreement in Clause 11 of LGK’s Terms, MPB’s Terms should take precedence. She found that “[w]hilst the obvious implication where a contract is silent on the matter of dispute resolution is that any dispute will be brought before the Courts, that is not the same as an express dispute resolution provision being set out in MPB's Terms which is inconsistent with a dispute resolution provision set out in LGK's Terms.”

On the second question, the Judge found that MPB’s conduct demonstrated that it would adhere to the dispute resolution mechanism set out in Clause 11 of LGK’s Terms. LGK had argued that the doctrine of approbation and reprobation, which prevents a party from electing to take and pursue inconsistent stances, prevented MPB from now arguing that it was not bound by the arbitration agreement at Clause 11 of LGK’s Terms, having previously relied on the same terms in submitting its dispute to adjudication. Indeed, MPB had relied on Clause 11 in its notice of intention to refer its dispute to adjudication and had submitted pleadings in enforcement proceedings referring to LGK’s Terms forming part of the contract.

The Judge summarised the relevant principles on approbation and reprobation arising from case law as follows:

“i) The first is that the approbating party must have elected, that is made his choice, clearly and unequivocally;

ii) The second is that it is usual but not necessary for the electing party to have taken a benefit from his election such as where he has taken a benefit under an instrument such as a will;

iii) Thirdly, the electing party's subsequent conduct must be inconsistent with his earlier election or approbation.

In essence, the doctrine is about preventing inconsistent conduct and ensuring a just outcome.”

In this instance, MPB was found clearly and unequivocally to have elected to rely on Clause 11 of LGK’s Terms as setting out the dispute resolution provisions  governing the parties’ relationship. By challenging the arbitration agreement, MPB was now asserting a different and inconsistent right with Clause 11, namely that the adjudicator’s decision should be treated as binding on the parties until finally resolved by agreement or by the Courts.

The Judge gave weight to MPB’s submissions that courts should be slow to find that the doctrine of approbation and reprobation should apply in relation to matters dealt with in the context of adjudication, which is a “rough and ready” form of dispute resolution often conducted by parties without legal representation, and where the way in which a party puts its case should not be treated as giving rise to unequivocal elections binding the parties as to how they may put their case in the future. However, she found that the question here was not whether MPB should be bound by how they put their case in the adjudication, but about their more fundamental election to use a particular dispute resolution procedure.

The application to set aside the award was dismissed with costs.

Comment

MPB v LGK will serve as a useful reminder to contracting parties to ensure consistency in dispute resolution clauses where multiple contracts and standard terms are being adopted, or at the very least to set a clearly defined hierarchy between these contractual documents in the event of a conflict.

Similarly, if parties wish to retain their ability to submit their disputes to court, this should be expressly stated in the agreements, failing which alternative dispute resolution provisions set out in contractual documents placed lower down the contractual interpretation hierarchy may apply by default. This is of particular relevance in the construction context, where it is not unusual to see more than one set of standard terms and conditions incorporated across a suite of related contracts.

Finally, the judgment demonstrates that decisions made early on matters of jurisdiction tend to have far-reaching, and usually final, consequences.

For more information, please contact Craig Tevendale, Partner, Maguelonne de Brugiere, Senior Associate or your usual Herbert Smith Freehills contact.