Declarations as to the validity of an arbitration agreement; has anything changed after HC Trading v Tradeland?

This article was first published on the Practical Law Arbitration Blog.

Section 1(c) of the Arbitration Act 1996 (AA 1996) makes clear that in matters governed by Part I of the AA 1996, “the court should not intervene” except to the extent provided in the AA 1996 itself.

In HC Trading Malta Ltd v Tradeland Commodities SL, the Commercial Court was asked to entertain a dispute over the existence of a contract containing an arbitration agreement. In doing so, it addressed the challenging question of whether the restriction contained in section 1(c) of the AA 1996 ousted the jurisdiction of the court to grant declaratory relief on issues of jurisdiction to grant injunctive relief, whether under section 9 and section 37 of the Senior Courts Act 1981 (SCA 1981), or under its inherent general discretion.

The case was somewhat unusual because the claim for declaratory relief was brought by the party who asserted that the arbitration agreement was valid; the claim was therefore not intended to challenge the arbitration agreement. In a decision that will come as little surprise, the court reinforced its pro-arbitration stance and held that it would be wrong, as a matter of principle, to permit parties to side-step, overreach or pre-empt the provisions of the scheme set down in the AA 1996. However, the court also made clear that nothing in section 1(c) of the AA 1996 was intended to oust the jurisdiction of the courts to make declarations or grant injunctions generally.

The court emphasised that standalone claims for declaratory relief as to whether there is a binding arbitration agreement will be “unusual”. Further, it stressed that a party making such application must provide cogent and compelling reasons before the court will interfere. Accordingly, it is useful to consider the extent to which the court can intervene.

The decision in HC Trading

A dispute had arisen between HCT and Tradeland, in respect of which, HCT gave notice that it intended to issue an arbitration notice but had not yet done so. Tradeland argued that there had never been a binding agreement and therefore that the arbitration agreement had not been entered into. In the event that HCT commenced arbitral proceedings, Tradeland intimated its intention to raise a challenge to the tribunal’s jurisdiction within that process. HCT then took the “unusual course” of seeking declarations as to the validity of the arbitration agreement.

HHJ Waksman QC rejected the suggestion that section 1(c) of the AA 1996 had “impliedly removed” the court’s powers to intervene and recognised, as a matter of jurisdiction, that the court had the power to make the declarations sought. However, he ultimately determined that there were clear reasons of principle against the court exercising that jurisdiction in this case.

The rationale

Of particular relevance was the fact that HCT itself asserted that there was an arbitration agreement and that HCT wished to (and could) commence an arbitration. The judge also noted:

“The arbitral agreement made or allegedly made between the parties means not only that they must deal with their substantive disputes that way but also that even their disputes as to the existence or scope of the arbitration agreement should be determined by the detailed provisions of the Act, and in particular, as a starting point, by s30.”

That position is supported by the dicta of Thomas J, in Vale do Rio Doce Navegacos SA v Shanghai Bao Steel Ocean Shipping Co Ltd. Again, that case concerned an application for a declaration to affirm the existence of a binding arbitration agreement.

Once arbitral proceedings have been commenced

Nothing in HC Trading is intended to affect the position of the parties and the court once an arbitration is afoot. When arbitral proceedings have in fact been commenced, the ability of a party to apply to the court is delineated by the provisions of the AA 1996. Accordingly, in relation to questions of jurisdiction, the doctrine of kompetenz-kompetenz, enshrined in section 30 of the AA 1996, provides that the tribunal has the power to adjudicate upon its own jurisdiction and the court may only intervene under section 32 with the consent of the parties or the arbitral tribunal. Otherwise, the right to apply for declarations as to jurisdiction is deferred until after the making of any award, under sections 67 and 72.

Circumstances where the court can intervene before an arbitration is afoot

The decision in HC Trading is difficult to challenge. Logically, where one party asserts that there is a binding arbitration agreement and also wishes to have a dispute determined under that arbitration agreement, that party already has the right to test that position by commencing an arbitration.

In such circumstances, it seems highly unlikely that the court would permit that party to seek early declaratory relief; the remedy would be to pursue their arbitration. Any jurisdiction argument raised by the respondent in relation to the validity of the arbitration agreement will stand or fall in that arbitration, subject to the oversight of the court as provided by the AA 1996 as set out above. A decision to the contrary would run counter to the detailed scheme provided for by the AA 1996.

Following HC Trading, it is difficult to envisage many circumstances in which a claimant who asserts that an arbitration agreement is valid will be permitted to seek declaratory relief. However, one such situation was considered in Ust-Kamenogorsk Hydropower Plant JSC v AES Ust-Kamenogorsk Hydropower Plant LLP. In that case, the Supreme Court considered whether it would be appropriate to grant a declaration that an arbitration agreement was valid together with an anti-suit injunction preventing the defendant from commencing proceedings in breach of the arbitration agreement.

The claimant, in that case, did not itself intend to commence an arbitration because it did not in fact have an underlying claim against the defendant. Instead, the claimant wished to restrain the defendant from bringing foreign proceedings in breach of the arbitration agreement. The Supreme Court (upholding the decisions of the High Court and the Court of Appeal) held that in such circumstances, particularly because the claimant wished merely to protect its rights, the court could grant the declaration sought. In particular, the court was influenced by the idea that forcing a party to commence an arbitration that it did not wish to bring purely in order to grant declaratory relief as to the validity of the arbitration agreement was not the correct approach.

However, such circumstances are likely to be rare and it is unlikely that the decision in Ust-Kamenogorsk Hydropower would extend to a general proposition that a party is entitled to declaratory relief merely because it wishes to confirm a contractual right not to be sued other than in arbitration. There must be something more. In Ust-Kamenogorsk Hydropower the defendant had previously commenced foreign proceedings in breach (the claimant alleged) of the arbitration agreement. Although those proceedings had been withdrawn, there was a clear basis upon which the claimant sought to protect and enforce its rights.

However, absent actual or threatened breach of the arbitration agreement, the court is unlikely to entertain a claim which is merely declaratory and which is of little practical effect.

Further, it is worth bearing in mind that nothing in the decision in HC Trading is intended to affect a party’s right to challenge the existence of an arbitral agreement in the usual ways. Accordingly, the court may consider the validity of an arbitration agreement in a number of circumstances:

• First of all, arbitration is a consensual process; there is nothing in the AA 1996 or in the decision in HC Trading that would prevent the parties from agreeing that a jurisdictional issue should be determined by the court.
• Plainly, when exercising its discretion to stay a claim for arbitration under section 9 of the AA 1996, the court is entitled to determine whether there was a concluded arbitration agreement (see the guidance in JSC ‘Aeroflot Russian Airlines’ v Berezovsky) and the scope of any such agreement.
• The court is also entitled to consider the construction and scope of the arbitration agreement in support of a process clause. In Holloway v Chancery Mead Ltd, the court held that there was nothing in the restriction under section 1(c) of the AA 1996 that would prevent the court from determining whether a process clause required a party to take certain steps (in this case to refer the dispute to the NHBC dispute resolution procedure) as a condition precedent to the right to arbitrate. The court would have the jurisdiction to grant injunctive relief suspending arbitration proceedings in breach of the process clause.
• Consumer arbitration agreements. It goes without saying that the restrictions in section 1(c) only apply to Part I of the AA 1996 and therefore there is no such restriction in considering questions arising in relation to consumer arbitration agreements under Part II.