ENGLISH COURT CONSIDERS STEPS IN LEGAL PROCEEDINGS WHICH PREVENT A SUCCESSFUL STAY APPLICATION

In Fairpark Estates Ltd and others v Heals Property Developments Ltd [2022] EWHC 496 (Ch), the English High Court upheld an order dismissing the appellants' application for a stay of legal proceedings. The Court found that the appellants had taken steps in the proceedings to answer the substantive claims, so could not apply for a stay under s.9(3) of the Arbitration Act 1996 (Act).

HHJ Richard Williams held that the appellants took a step in the proceedings to answer the respondent's claims by:

1. providing final undertakings in a Consent Order which effectively disposed of an application for injunctive relief; and
2. requesting and obtaining a further extension of time to respond to the monetary claims, and failing to reserve their rights to apply for a stay when doing so.

Background

The first and second appellants entered into a joint venture agreement (JVA) with the respondent to develop land on a specified site (the Site). The JVA expressly provided that any dispute arising between the parties in connection with the JVA should be referred to arbitration. The respondent then engaged a contractor to complete the works on the Site.

A dispute subsequently arose, and the respondent issued court proceedings against the appellants and the contractor, together with an application for an urgent interim injunction. The respondent's claims were for (i) possession and injunctive relief to recover and secure the Site, and (ii) damages.

The following steps were then taken:

1. Consent Order: the parties entered into a Consent Order, under which the appellants gave final undertakings agreeing to an injunction. The Consent Order also set a procedure for the remaining claims, including regarding the date for service of the appellants' defence and counterclaim; and
2. Further extension of time: the appellants subsequently sought and obtained by agreement a further extension of time for the filing of their defence and counterclaim.

On the day the further extension was due to expire, the appellants made an application for a stay of (i) the whole of the proceedings, or alternatively (ii) all monetary claims arising in the proceedings, on the basis of the arbitration agreement. The court dismissed the application, and the appellants then appealed the decision to the High Court.

Decision

HHJ Richard Williams dismissed the appeal, finding that the appellants had taken steps in the legal proceedings to answer the substantive claims, thus barring an application for a stay under s.9(3) of the Act.

In coming to his decision, reflecting the three factors set out in Capital Trust Investment Ltd v Radio Design AB & Ors [2002] EWCA Civ 135, HHJ Richard Williams considered whether:

1. the conduct of the appellants had demonstrated an election to abandon the right to a stay;
2. the relevant act had the effect of invoking the court's jurisdiction; and
3. the appellants specifically stated that they intended to seek a stay.

The Consent Order

HHJ Richard Williams held that the appellants' provision of final undertakings in the Consent Order constituted a step in relation to the claims for injunctive relief. This was because the undertakings had the effect of finally disposing of the claims for injunctive relief; the appellants had given final undertakings to the effect that they would not occupy or permit works to be commenced on the Site.

However, HHJ Richard Williams determined that the final undertakings only constituted a step in relation to the application for an injunction, and not in relation to the claims for damages. Notably, the judge determined that consistent with the principle of contractual freedom, parties can agree that some elements of their dispute that would otherwise be covered by an arbitration agreement could be resolved by court proceedings instead.

The final undertakings did not constitute a step in relation to the claims for damages because, in the inter-party correspondence leading up to the Consent Order, the appellants had clearly reserved their position to subsequently apply for a stay in respect of the claims for damages. In the course of that correspondence, both parties referred to the possibility that those claims may still be progressed by way of arbitration rather than court proceedings.

The further extension of time

HHJ Richard Williams held, however, that the appellants' conduct in seeking and obtaining a further extension of time to file their defence did constitute a step in relation to the claims for damages.

Looking at the surrounding circumstances, HHJ Richard Williams concluded that the appellants had objectively abandoned their right to a stay. The parties had engaged with the Pre-Action Protocol, such that the appellants had sufficient information to decide whether or not to waive their right to a stay. Nonetheless the appellants requested and obtained a further extension of time, without reserving their ability to apply for a stay.

This extension invoked the court's jurisdiction as the court could have in theory refused the extension of time (even if it was unusual for it to do so in practice). The extension was not a private agreement that did not involve the court, since the parties were varying a timetable that had been incorporated into a court order (the Consent Order).

Additionally, the inter-party correspondence in relation to the further extension of time did not reflect any qualification by the appellants that they reserved their rights to subsequently apply for a stay.

Comment

The decision provides helpful guidance as to what will constitute a step in legal proceedings that prevents a stay of proceedings for arbitration. In particular, private agreements that do not involve the court and agreeing extensions of time to comply with pre-action protocols will generally not prevent a stay application. However, it is clear that parties should proceed with caution with regard to related court-proceedings where there is a relevant arbitration clause. In particular, a party who wishes to preserve the right to arbitrate should clearly and expressly reserve their right to seek a stay when engaging in correspondence with counterparties regarding potential or actual disputes.

This decision also confirms that a party may abandon its contractual right to refer disputes to arbitration in respect of certain claims, while reserving its right to refer other claims to arbitration, for example through varying the arbitration agreement in accordance with the terms of the applicable contractual variation clause.

For more information, please contact Chris Parker QC, Partner, Liz Kantor, Professional Support Lawyer, or your usual Herbert mith Freehills contact.

The authors would like to thank Valerie Chee for their assistance in preparing this blog post.