ENGLISH COURT CONFIRMS THAT PRE-CONDITIONS TO ARBITRATION ARE AN ISSUE OF ADMISSIBILITY AND NOT JURISDICTION

In NWA & FSA v NVF & others [2021]  EWHC 2666 (Comm) the English High Court has declined to set aside an award on the basis of failure to mediate a dispute before referring it to arbitration.

Consistent with its reasoning in Sierra Leone v SL Mining (see our blogpost on that case here), the English Court was clear that the question of compliance with procedural steps in an arbitration clause goes to the admissibility of a claim rather than to the tribunal's substantive jurisdiction, and therefore falls to be determined by the arbitral tribunal and not the Court.

This case once again provides welcome certainty that arbitration agreements will be upheld even where there are questions as to compliance with pre-arbitration requirements and that parties cannot seek to undermine the arbitral process by refusing to comply with pre-arbitration clauses in their contracts.

Background

The parties entered into an agreement for the reorganisation of their existing business dealings concerning patents and pending applications for patents. Clause 10.2 of the Agreement provided as follows:

"10.2 Disputes

(a) In the event of a dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity, termination, interpretation or effect, the relevant parties to the dispute shall first seek settlement of that dispute by mediation in accordance with the London Court of International Arbitration ("LCIA") Mediation Procedure, which Procedure is deemed to be incorporated by reference into this clause insofar as they do not conflict with its express provisions. Any mediation shall take place in London.

(b) If the dispute is not settled by mediation within 30 days of the commencement of the mediation or such further period as the relevant parties to the dispute shall agree in writing, the dispute shall be referred to and finally resolved by arbitration under the LCIA Rules from time to time in force ("the Rules"), which Rules are deemed to be incorporated by reference into this Agreement insofar as they do not conflict with its express provisions.

…"

In April 2019, the Defendants sent a Request for Arbitration (RFA) to the LCIA. In both the RFA and their covering letter to the Claimants, the Defendants' solicitors requested that the arbitration be immediately stayed prior to the constitution of the tribunal to allow the parties to settle the dispute by mediation in accordance with clause 10 of the Agreement.

Neither of the Claimants engaged with the mediation proposal and the sole arbitrator concluded that he had jurisdiction to hear the dispute.

Despite having not engaged with the offer to mediate, the Claimants brought a challenge under section 67 of the English Act. They relied on the following arguments:

• matters had not be submitted to arbitration in accordance with the arbitration agreement (under section 30(1)(c) of the English Act); and
• there was no valid arbitration agreement (under section 30(1)(a) of the English Act).

The thrust of the Claimants' argument was that because the Defendants requested mediation at the same time as requesting arbitration and proposed that the arbitration be stayed for 30 days to allow the parties to seek to resolve the dispute by mediation, the Defendants did not "first seek settlement of the dispute by mediation". Moreover, as the sole arbitrator had no jurisdiction, it was not open to him to stay the arbitration in order to allow for mediation.

Decision

The judge first tackled the issue of admissibility versus jurisdiction, before turning to the specific arguments raised by the Claimants under section 30 of the English Act.

Admissibility versus jurisdiction

The first question for the Court was whether the Defendants' alleged non-compliance was a matter affecting the admissibility of the claim, or whether it went to the tribunal's substantive jurisdiction and therefore fell within section 67 of the English Act.

The judge concluded that the issue went to the admissibility of the claim and not to jurisdiction – the dispute had been validly submitted to arbitration in accordance with the clause, and it was for the arbitrator to determine the consequences of any alleged breach of clause 10.2, which was a procedural condition.

The judge held that the consequence of the Claimants' position would be that where one party refused to mediate, the tribunal would never gain jurisdiction over the dispute. Given that mediation is a consensual process, that interpretation would be absurd and not give the clause business common sense. The objective intention of the parties was to obtain a swift and final determination of their dispute, such that a construction which allowed one or other party to frustrate that intention should be avoided. It would not be appropriate to interpret the pre-arbitration procedural requirements as jurisdictional issues, as non-compliance with them did not affect whether it was the kind of dispute that the parties had agreed to submit to arbitration.

This conclusion was also strongly supported by another provision of the agreement, which gave the arbitrator the power to consolidate disputes arising out of the same clause with no obligation to first refer those disputes to mediation, as that provision made it clear that the referral to mediation was a procedural issue to be determined by the arbitrator.

In reaching this conclusion, the judge also cited with approval the recent judgment of Sierra Leone v SL Mining (see our blog post on that case here) and agreed with the analysis therein, including distinguishing the previous cases of Emirates Trading Agency v Prime Minerals Exports Private Ltd  [2015] 1 WLR 1145 and Tang v Grant Thornton International Limited [2013] All ER (Comm) 1226.

Valid arbitration agreement under section 30(1)(a) of the English Act?

The Claimants argued that the arbitration agreement was inoperative by reason of the failure to comply with the mediation provision. The judge rejected this argument on the basis that the arbitration agreement was plainly valid – the failure to comply with a procedural condition of this type did not affect the validity of the arbitration agreement.

Submission to arbitration in accordance with the arbitration agreement under section 30(1)(a) of the English Act?

The Claimants contended that, in line with section 30(1)(a) of the Act, no matters were submitted to arbitration in accordance with the arbitration agreement. Rejecting this argument, the judge held that this provision is concerned with whether the matters referred to arbitration fell within the scope of the arbitration agreement, and not whether the procedure laid down by the arbitration agreement had been followed. Here, the dispute was an arbitrable dispute, and the issue was simply whether or not it was yet arbitrable because of the mediation clause. It followed that section 30(1) of the Act was not engaged.

As a final point, the judge clarified that even if clause 10.2(a) was a legally enforceable condition precedent (on which he did not need to make a finding), he had no doubt that the Claimants were in breach of that condition precedent by failing to engage in mediation, and thus could not rely on their own breach to allege that the Defendants had failed to comply with it.

Comment

This case provides further welcome clarification that the English courts will uphold parties' agreements to arbitrate, even where pre-arbitration conditions or requirements may not have been met.  Further, where parties have clearly agreed to arbitrate their disputes, efforts to frustrate the arbitral process by deliberately failing to comply with a pre-arbitration requirement will not be tolerated.

It is also reassuring that a consistent approach on the distinction between admissibility and jurisdiction has now been taken by the courts of England and Wales and other UNCITRAL Model Law jurisdictions such as Singapore (see the case of BBA v BAZ [2020] 2 SLR 453 and BTN v BTP [2020] SGCA 105) and Hong Kong (see our blog post on the case of C v D here).

However, and as we set out in our blogpost on the case of C v D, this judgment does not mean that pre-conditions to arbitration are not enforceable – parties should still take care to comply with such provisions to prevent any decision by the arbitral tribunal that a claim is inadmissible.

For more information, please feel free to get in touch with Simon Chapman QC, Partner, Liz Kantor, Professional Support Lawyer or your usual Herbert Smith Freehills contact.