Applications under section 9 of the Arbitration Act 1996 – when will a party to an arbitration agreement be debarred from applying for a stay of court proceedings?

In Fairpark Estates Ltd and others v Heals Property Developments Ltd [2022] EWHC 496 (Ch), the English High Court sets out useful guidance regarding when a party to an arbitration agreement will have lost their right to apply to stay court proceedings in favour of arbitration and will be found to have elected the court’s jurisdiction. Parties seeking to rely on arbitration clauses should consider carefully whether any decisions taken in relation to court proceedings at the pre-action stage may cross this threshold. The judgment also helpfully re-iterates that parties do not have to apply for a stay of court proceedings in relation to all matters in dispute covered by the arbitration agreement if they are content for some to be resolved in court, rather they can make an election as to which dispute/s they require still to be decided by arbitration.

Facts

The parties had entered into a joint venture agreement (the “JVA”) in July 2017 for the development of land, under which Fairpark agreed to develop 14 residential and storage plots on the site and Heals agreed to purchase 5 of the 14 plots. The JVA contained an arbitration clause, covering any dispute which arose between the parties in connection with it.

Following a variation deed signed by the parties in 2019, Heals took over the development of the plots, with a corresponding adjustment to the sale proceeds allocated to each party.

In 2020, a dispute arose in relation to a contractor engaged by Heals to complete the development of the site. Heals alleged that it had dismissed the contractor in March 2019 due to defective work, but the contractor unlawfully occupied the site from June 2020 onwards to continue the works, claiming that it was entitled to do so under instructions given by Fairpark.

Heals argued that such instructions were in breach of the deed of variation and issued proceedings against Fairpark and the contractor in July 2020 for possession of the site and for damages, along with an interim injunction for recovery of the site. Following issue of the claim, the parties agreed to a Consent Order which, among other things:

• Suspended the proceedings for six months;
• Contained undertakings on the part of the Defendant in relation to the proprietary claim;
• Agreed that the parties would deal with the monetary element of the claim by way of arbitration, under the terms of the arbitration clause in the JVA.

Towards the expiry of the six-month stay, in March 2021, the parties agreed a further 28-day extension for the filing of Fairpark’s defence and counterclaim. The defence and counterclaim were not filed, and just before this further extension expired, Fairpark applied for the proceedings to be stayed under section 9 of the Arbitration Act 1996 (“the Act”) in favour of arbitration.

Applicable law

Section 9 of the Act provides that if a party to an arbitration agreement has legal proceedings brought against them in respect of a matter covered by that agreement, they can apply to the court to stay the proceedings in favour of arbitration. However, section 9(3) states that a party loses the right if they have already taken “any step in those proceedings to answer the substantive claim.”

On what constitutes “a step to answer the substantive claim”, the Court of Appeal in Capital Trust Investments Ltd v Radio Design TJ AB [2002] EWCA Civ 135 stated that it must be one which “impliedly affirms the correctness of the [court] proceedings.” Three requirements must be satisfied:

1. the conduct of the party must be such that it demonstrates that they have elected to abandon their right to a stay of court proceedings, in favour of allowing them to proceed;
2. the act in question is one which has the effect of invoking the jurisdiction of the court; and
3. the party has not specifically stated that they intend to seek a stay.

First instance decision

At first instance, the Deputy District Judge held that certain actions taken by Fairpark amounted to taking steps to answer the substantive claim, and therefore they had lost their right to apply to the court for a stay of proceedings pursuant to section 9(3). In particular, by giving the undertakings in the Consent Order, Fairpark had elected to abandon their right to a stay in relation to the proprietary claims, and this step had the effect of invoking the jurisdiction of the court.

The Judge further held that an application for a stay under section 9 is binary in nature – it permits the court to either stay the whole proceedings in favour of arbitration or accept the court's jurisdiction for all the claims. Fairpark had submitted to the court’s jurisdiction in respect of the possession proceedings, and only wished to submit the monetary element to arbitration, and this was not permissible under section 9. In the alternative, the judge found that Fairpark had also separately invoked the jurisdiction of the court in relation to the monetary claims by seeking to enforce compliance with the Pre-Action Protocol via the Consent Order. Fairpark appealed these findings.

Compliance with Pre-Action Protocols is not submission to the jurisdiction of the Court

One appeal, the High Court upheld the first instance decision that Fairpark had lost their right to apply for a stay. However, it disagreed with the Judge’s assessment of which of Fairpark’s actions amounted to submitting to the court’s jurisdiction. Reference to compliance with the Pre-Action Protocol in the Consent Order did not have the effect of invoking the jurisdiction of the court, since the explicit objective of the Protocol is to attempt to settle the issues without resorting to legal proceedings, and to encourage the parties to consider alternatives including arbitration. Other steps, such as agreeing a six month stay of proceedings, also did not constitute submission to the court’s jurisdiction, since it was clear from the surrounding context that the parties were still considering arbitration in relation to the monetary claims.

Section 9 is not a binary provision

The High Court also disagreed with the first instance Judge’s assessment that section 9 was a binary provision which only permitted the court to either stay the whole of the proceedings in favour of arbitration or accept jurisdiction in respect of all claims. This would conflict with the principles of contractual freedom for parties to choose how their disputes are resolved set out in section 1 of the Act – the parties had agreed in the JVA that any dispute would be referred to arbitration, and had varied this in writing when agreeing (via their solicitors) that the proprietary claims would proceed through the courts. There was no reason why parties could not agree that some elements of a dispute between them (otherwise covered by an arbitration agreement) should be resolved through court proceedings while other elements of their dispute should be resolved by arbitration.

However, on the facts, the court held Fairpark had taken steps to answer the substantive proceedings in relation to both the proprietary and monetary claims. In relation to the proprietary claims, the act of giving the undertakings in the Consent Order meant that those claims had been settled and the jurisdiction of the court invoked. In relation to the monetary claims, objectively assessed in light of the context then known to the parties, the step of agreeing a further time extension after the expiry of the six-month stay in March 2021 was sufficient to invoke the court’s jurisdiction because by this point, Fairpark had been given more than sufficient time and information to decide whether they wished to proceed via court or arbitration and make Heals aware of this. As a result, Fairpark was not entitled to a stay under section 9.

Conclusion

This case contains useful guidance regarding when a party may have lost the right under section 9 to apply for a stay of court proceedings in favour of arbitration. Steps such as complying with a Pre-Action Protocol and a simple notification of an extension of time will not constitute “a step to answer the substantive proceedings” where such steps do not invoke the court’s jurisdiction. However, equivocal conduct where it leads to an impression that a defendant will respond to court proceedings may undermine a subsequent invocation of section 9. Furthermore, agreeing a Consent Order which deals with the substance of claims raised will engage the jurisdiction of the court.

Also, instructive and helpful is the confirmation that the court’s discretion under section 9 is not a binary one, and parties to arbitration agreements are free to elect to proceed through the courts in respect of only part of the dispute, leaving the rest to be decided under the agreed arbitration clause.

Authored by Nick Peacock, Louise Lanzkron and Francesca Budd

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