The High Court recently refused an application to stay proceedings pending arbitration, under Article 8 of the UNICTRAL Model Law, and under the inherent jurisdiction of the Court, on the grounds that the applicant could not establish that it was a party to the arbitration agreement. 

However Judge MacEochaidh accepted that there may be circumstances where an applicant seeking a stay in favour of arbitration is not itself a party to the arbitration clause it seeks to rely on.  The question is whether it has “a sufficient connection” with the party who agreed to the arbitration clause to invoke the clause and stay the proceedings. 

Background

Article 8 of the UNCITRAL Model Law was incorporated into the law of the State by section 6 of the Arbitration Act, 2010.  Article 8 provides:

“8(1) A Court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests, not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. 

8(2) Where an action referred to in paragraph (1) of this Article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.”

These proceedings concerned an application by the defendant to stay proceedings in which the plaintiff sought judgment of approximately STG £1.2m in connection with a consultancy contract.  The defendant argued that the plaintiff’s claim was governed by an arbitration agreement. 

The Facts

Spanish and Irish enterprises were jointly involved in a bid to design, construct, finance, operate and maintain a new hospital in Enniskillen, County Fermanagh.  An entity described as a partnership, and called ‘Northern Ireland Health Group’ (NIHG), pre-qualified in the bid-process.  Elliot Holdings Ltd and FCC Construcción S.A. respectively owned 5% and 39% of the shares in NIHG. 

The Joint Venture Agreement

Following the successful pre-qualification of NIHG, the plaintiff and FCC Construction S.A. (the joint venturers) entered into a Joint Venture Agreement (JVA).  The purpose of the Joint Venture was to prepare a tender for the design and construction works of the new hospital, and, if selected, to carry out the works under a building contract to be entered by the joint venturers and NIHG.  

The JVA contained an arbitration clause covering disputes between the joint venturers in respect of the Joint Venture Agreement, and also the building contract.  The arbitration clause invoked the Rules of Arbitration of the International Chamber of Commerce (ICC Rules), and the JVA was to be construed and interpreted in accordance with the laws of Northern Ireland. 

The Building Contract

Due to tax advice received, the joint venturers did not, in fact, enter the building contract with the hospital.  Instead the building contract was entered by a new specially formed Irish company (the defendant in these proceedings), and NIHG.  Significantly, there was no arbitration clause in the building contract.  The contract provided for the appointment of an adjudicator (who is not an arbitrator) in the event of any disputes arising, and excluded UK arbitration law from the contract.  The building contract also provided for the governing law of the contract to be the laws of Northern Ireland, and exclusive jurisdiction for disputes to be conferred on the courts of Northern Ireland. 

The Consultancy Contract

A consultancy contract was entered into by the plaintiff and the defendant after the execution of the building contract.  The plaintiff’s position was that monies were due further to this consultancy contract, which significantly, did not contain an arbitration clause either.  Instead there was a choice of law and jurisdiction clause establishing Irish law and Ireland respectively. 

The Sub-Contracted Building Contract 

The building contract was sub-contracted to a partnership between two Northern Irish companies.  The sub-contracted building contract contained an arbitration clause engaging the ICC Rules, and the contract was to be governed and construed in accordance with the law of Northern Ireland.  

The Application for a Stay

The defendant applied to stay the court proceedings pursuant to Article 8 of the UNCITRAL Model Law, as incorporated into Irish law by the Arbitration Act 2010, and the inherent jurisdiction of the High Court to stay proceedings.  The plaintiff contended that the monies were due further to the consultancy contract with an Irish governing law and Irish jurisdiction clause and without an arbitration clause.  Further, the plaintiff argued that the defendant was not a party to the arbitration agreement contained in the JVA and, lacking privity, could not invoke it.   

The defendant submitted that any dispute between the parties was intimately connected with the original JVA.  The defendant referred to case-law which suggests a generous interpretation of arbitration clauses so as to embrace commercial arrangements outside the precise commercial relationship where the arbitration clause is to be found.  Such cases favour a commonsense approach to relations between enterprises (Continental Bank v AGELAKOS [1984] 1 WLR 588; Harbour Assurance Co. (UK) Ltd v Kansa General International Assurance Co. Ltd [1993] 1 Lloyd’s Rep. 455).  

The defendant also argued that there was support for the proposition that, in multiple contracts containing contradictory resolution and/or jurisdiction clauses, the courts seek to find "the commercial centre of the overall relationship between the parties and apply the relevant jurisdiction and/or arbitration clause" (UPS AG v HSH Nordbank AG [2009] EWCA Civ. 589).  

The Decision 

The High Court refused the defendant’s application for a stay of the proceedings and did not exercise its inherent jurisdiction to grant such a stay. 

Judge MacEochaidh found that some guidance on the test for whether a stay of proceedings should be ordered may be found from foreign court decisions.  The correct test was: “a stay of proceedings should be ordered where (i) it is arguable that the subject dispute falls within the terms of the arbitration agreement and (ii) where it is arguable that a party to the legal proceedings is a party to the arbitration agreement.” (Hinkson J, in the Court of Appeal in Gulf Canada Resources Ltd v Arochen International Ltd [1992] BCJ 500, as approved by the Supreme Court of British Columbia in Pacific Erosion Control Systems Ltd v Western Quality Seeds [2003] BASK 1743.) 

Judge MacEochaidh noted that a party, who is not a party to the arbitration agreement, may invoke an arbitration clause and seek a stay of proceedings, “through or under’” a party to the arbitration agreement where it has “a sufficient connection” to such party. In regard to what amounts to “a sufficient connection”, Judge MacEochaidh adopted the approach of the UK Courts that something “more than a bare commercial or legal connection between the two entities” is required (City of London v Sancheti [2008] EWCA 1283).  

The feature which distinguished this case from the authorities cited by the defendant in favour of presumptions for one stop shopping, presumptions for a reasonable business intention, and presumptions for the avoidance of contradictory jurisdictional clauses, was that in those cases, the parties remained constant.  In this case, by the election of the original joint venturers, the parties to the arbitration clause in the JVA, were not parties to the consultancy contract, and were not the parties in these proceedings. 

If the joint venturers had desired to stitch in the original arbitration clause from the JVA into any subsequent agreements, they could have done so.  The fact that they did not, but instead took an opposite direction by including governing law and exclusive jurisdiction clauses, established beyond doubt that this was the true intention of the parties to the proceedings (Fiona Trust v Privalov [2007] UK HL 40). 

The Court held that though the dispute comprised in these proceedings could possibly be within the scope of the arbitration agreement in the JVA, the defendant was not a party to the arbitration agreement and could not invoke it.  Therefore the Court refused to grant a stay under Article 8 of the Model Law. 

Judge MacEochaidh stated: “Article 8 of the Model Law directs courts to respect the arbitral process and stay court proceedings not out of deference to arbitration per se but rather as an expression of the most basic concept in the law of contract - i.e., that parties who have mutually exchanged promises for value may, at the suit of each other, be kept to their promises. Where parties promise to arbitrate their disputes, courts should stay their proceedings in favour of arbitration if that promise is proved. In this case, the defendant has not proved even to the standard of arguability that it exchanged a promise to arbitrate with the plaintiff.”

The Court also declined to exercise its inherent jurisdiction to grant a stay.  Judge MacEochaidh found the guidance offered in Ahmad Al Naimi v Islamic Press Agency [2000] 1 Lloyd’s Rep. 150 to be useful.  In that case, Waller L.J. stated that a stay may be sensible where a Court cannot be sure whether or not there is an arbitration clause, and whether or not the subject of the action is within the clause.  Judge MacEochaidh had concluded however, on the basis of the evidence, that the consultancy contract, on foot of which the plaintiff was suing the defendant, was not governed by an arbitration clause. 

Commentary

This is an interesting case which serves as a reminder of the dangers of including differing dispute resolution mechanisms at different levels (e.g. ICC, adjudication, the courts etc.) where multiple related contracts are entered into in the course of a transaction.  It also clarifies that the fact that a party applying for a stay is not a party to the arbitration agreement is not an insurmountable barrier insofar as Article 8 of the Model Law is concerned.  Such a party may invoke an arbitration clause and seek a stay of proceedings, “through or under’” a party to the agreement, as long as there is a sufficient connection between the two entities. 

It is also noteworthy that, for the purpose of determining whether or not to grant a stay under Article 8 of the UNCITRAL Model Law, the Court appears to have undertaken a full, rather than merely a prima facie, review of whether there was an agreement to arbitrate (whereas other countries have, in the past, held that this should be done on the basis of a prima facie review only). 

This approach follows that favoured by Feeney J., in Barnmore Demolition and Civil Engineering Ltd v Alandale Logistics Ltd & Ors [2010] No 5910P (see our Client Bulletin of 24 January 2011).  In that case, Feeney J. stated that there was “a particularly strong case for the argument that any review as to the very existence of the arbitration agreement should be on the basis of full judicial consideration…”.  Albeit on the facts of that case, it was unnecessary for the court to decide which standard of review was applicable, as it was clear on either of those tests, that there was no arbitration agreement between the parties.  

Case: P.Elliot & Company Ltd (In receivership and In liquidation) v FCC Elliot Construction Ltd [2012] IEHC 361