The Supreme Court has clarified the meaning of Article 8(1) of Schedule 1 of the Arbitration Act 1996 and answered the question of how agreements to arbitrate disputes under a contract should be construed where the existence of a genuine dispute is unclear.

Arbitration Act

Article 8 provides that, where proceedings are brought in New Zealand in a matter that is subject to an arbitration agreement, the court will stay the matter unless it finds that the agreement is null and void, inoperative and incapable of being performed or there is in fact no dispute between the parties with regard to the matter being referred.

An 'arbitration agreement' is defined in the act as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

Zurich v Cognition

This case arose from a dispute between Cognition Education Ltd and Zurich Australian Insurance Ltd.(1) Cognition made a claim under an insurance policy, which Zurich declined to pay. The insurance policy contained an arbitration clause stating that any dispute relating to the insurance policy would be settled by arbitration. However, instead of referring the dispute to arbitration, Cognition sought summary judgment in the High Court to enforce the shortfall under the policy. Zurich objected to the High Court's jurisdiction on the basis of the arbitration clause, applying for a stay of the proceedings pursuant to Article 8(1) of Schedule 1 of the act.

The High Court held that the summary judgment application should be heard at the same time as Zurich's application for a stay of proceedings. The High Court's rationale was that, if a court found that Zurich had no arguable defence and summary judgment could be granted, there was no dispute between the parties to refer to arbitration under Article 8(1). The Court of Appeal upheld the High Court decision and Zurich appealed to the Supreme Court.

The Supreme Court overruled the High Court and Court of Appeal and allowed Zurich's appeal. It held that there may still be a controversy between the parties which can properly be described as a dispute even if it is ultimately capable of being determined by a summary process. Thus, if the parties have agreed to arbitrate their disputes, in principle a court should first consider and determine whether to stay any court proceedings and refer the matter to arbitration. Only if that course is rejected (eg, because the arbitration agreement is null and void or it is immediately demonstrable that the defendant is not acting in good faith in asserting that there is a dispute) should the application for summary judgment be considered.

The Supreme Court held that to go any further than this narrow interpretation of Article 8(1) (ie, to allow courts to examine the merits of disputes before or in conjunction with considering a stay of proceedings) would undermine the purposes of the Arbitration Act, which include limiting judicial involvement in the arbitral process and achieving consistency with international arbitration regimes.

The Supreme Court noted that it is important to achieve consistency between the treatment of arbitral proceedings by New Zealand courts and those overseas, particularly as New Zealand's Arbitration Act is derived from the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNICTRAL) and one of the stated purposes of the Arbitration Act is to promote consistency with international arbitral regimes based on the Model Law.

Comment

Zurich sets a clear precedent that, where parties have agreed to deal with disputes through arbitration and one party then attempts to bring court proceedings, the court must stay the matter (halting any further progress in court) and refer it to arbitration. This reflects the principle that courts will respect the parties' choice of arbitration as a means of alternative dispute resolution – referred to as the principle of party autonomy. In Zurich, the Supreme Court unanimously held that, if the parties have agreed to arbitrate any disputes under their contract, there are only very limited circumstances in which a court should hear a summary judgment application (in which the plaintiff must argue that the defendant has no defence to the plaintiff's claim).

The Supreme Court judgment provides clarity in the area of arbitration and does so in a way that is consistent with that advanced by international arbitration commentators, judicial authority from the United Kingdom and New Zealand's international obligations. The court placed significant emphasis on New Zealand's international obligations under the New York Convention 1958 and on consistency with the UNCITRAL Model Law.

Zurich also appears to expand on the Supreme Court's recent discussion of arbitral awards and the contractual nature of the arbitration process in Carr v Gallaway.(2) In that case the court invalidated the outcome of a lengthy and consensual arbitration process on the basis of an error in an appeal provision in the arbitration clause. While some saw Carr as unwarranted judicial interference in the parties' agreed arbitration process, like Zurich it affirmed the fundamentally contractual nature of the arbitration process. While the case turns on the fact that the parties had both mistakenly assumed that the award could be appealed on questions of fact as well as law, it demonstrated the necessity for a proper contractual basis for awards. The Supreme Court said that:

"The absence of a valid arbitration agreement to underpin an award goes to the root of the parties' intention to arbitrate their dispute. Unless there are special intervening circumstances, it will rarely be appropriate for the Court to refuse to set aside such an award which has been made without jurisdiction."

In the same way, Zurich emphasised the importance of the parties' ability to allocate contractually how their disputes should be remedied.

For further information on this topic please contact Sarah Kuper at Wilson Harle by telephone (+64 9 915 5700) or email (sarah.kuper@wilsonharle.com). The Wilson Harle website can be accessed at www.wilsonharle.com.

Endnotes

(1) Zurich Australian Insurance Limited T/A Zurich New Zealand v Cognition Education [2014] NZSC 188.

(2) Carr v Gallaway Cook Allan [2014] NZSC 75.

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