The nature of arbitration agreements
Arbitration agreements are contracts in their own right. An arbitration agreement is usually a “contract within a contract”, in the sense that it comprises a clause (or clauses) in project documentation which requires disputes to be arbitrated. In law, if the underlying project agreement is terminated, e.g. after the contractor has wrongfully walked off the job, the arbitration clause survives. The clause is regarded as “separable” from the rest of the contract. This means in such cases that disputes over who-did-what and its legal ramifications are to be resolved by arbitration in a post-termination world.
When may a right to arbitrate be lost?
Although arbitration agreements are “separable” from the contracts in which they are contained, they are capable of being breached, repudiated or terminated in the same way as any other contract. If an arbitration agreement is repudiated by one party and terminated by the other, the arbitration agreement is no more, and the parties are left to resort to the courts to resolve their disputes on a final basis. This can be a real problem in international projects, because it may be unclear as to which courts have jurisdiction to resolve disputes. Even if it is clear, the court or courts with jurisdiction may be undesirable e.g. because their procedure is regarded as cumbersome, unfamiliar or even unfair.
Our question is: when and how may an arbitration agreement or a referral to arbitration be repudiated, so that the right to arbitrate is then lost? This issue arose in a recent case before the Commercial Court.
BEA Hotels NV v Bellway LLC [2007] EWHC 1363 (Comm)
The underlying dispute concerned the rights and obligations of companies operating as part of a joint venture to purchase a property company in Romania. The joint venturers – some or all of whom were connected with Israel - signed a Term Sheet which included an arbitration clause. The arbitration clause stated that any disputes over certain matters were to be decided by one of two named arbitrators, or failing their appointment an arbitrator nominated by the President of the London Court of International Arbitration (the LCIA).
Disputes arose between the parties about the joint venture agreement reflected in the Term Sheet. The disputes were, after some wrangling, referred to arbitration by one of the parties (Bellway), and an arbitrator (an English barrister) was appointed by the LCIA.
• When the arbitration was in its early stages, however, Bellway and other claimants commenced proceedings in a Tel Aviv court against BEA (the respondent in the LCIA arbitration) and other defendants.
• BEA said that by commencing court proceedings Bellway had repudiated the agreement to refer the dispute to the LCIA arbitrator, and that Bellway accepted that repudiation with the effect that the arbitration was terminated.
• In other words, it was argued that Bellway’s right to arbitration was lost when it commenced court proceedings in Israel.
Was there are a repudiation of the arbitration? In legal terms, contracts are repudiated where one of the parties conducts itself to indicate – in clear terms – that it no longer intends to be bound by the contract. A contractor wrongfully walking off a project is a classic example in the construction world – it usually shows that the contractor does not intend to perform the work he has promised to perform.
The question in this case was: if party X commences an arbitration, and later commences court proceedings, by commencing those proceedings does party X demonstrate that it has no intention of pursuing the arbitration? The answer to this question is potentially “yes”. Arbitration and litigation are usually inconsistent means of resolving a dispute. Parties either choose one or the other. If party X has referred his final account dispute to arbitration, and he then commences High Court proceedings over the same final account issues, whilst abandoning the arbitration, it could probably be said that party X had repudiated the arbitration agreement. The right to arbitrate would then be lost. But it must be absolutely clear that there was an intention to abandon the arbitration.
On the facts of BEA v Bellway the position was, however, a little different. The Israeli proceedings commenced by Bellway expressly excluded from their subject matter the dispute the subject of the LCIA arbitration. Rather than showing an intention to abandon the LCIA arbitration in favour of litigation, Bellway’s conduct demonstrated an intention to continue with the arbitration. The result: Bellway’s right to arbitrate was not lost.
Conclusion
International arbitration plays a major role in international projects. It allows companies with a presence in one country to undertake projects in foreign countries in the knowledge that if relationships break down, and disputes arise, there will be available an experienced tribunal to resolve those disputes in a fair and transparent manner.
The right to arbitrate can be lost, where one party renounces an arbitration agreement or a reference to arbitration, and the other side accepts that renunciation. BEA v Bellway shows that English courts will not find such renunciation lightly. This should be of comfort to users of international arbitration. It means that they have the security of being able to resort to arbitration, without jeopardising that right through some conduct on their part – possibly accidental – that the other side can latch onto as a basis for avoiding the arbitration.
