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The importance of an agreement to arbitrate

Finding workable alternatives to litigation is an important aspect of construction law, and as a result many construction contracts contain an 'arbitration clause', whereby parties agree to attempt to resolve any disputes that may arise through the arbitration process rather than resorting to court proceedings.

Agreements to arbitrate are generally strictly enforced under s.9(1) Arbitration Act 1996, under which a party to an arbitration agreement against whom legal proceedings are brought can apply to the court to stay proceedings in so far as they relate to a matter falling under the arbitration agreement. The recent case of Rusant Limited v Traxys Far East Limited [2013] EWHC 4083 (Comm) highlights the restrictive effect that the mere existence of such clauses can have in terms of issuing legal proceedings, and their subsequent importance in relation to the management of disputed matters.

Facts and Judgment

Traxys Far East Limited entered into a loan agreement with Rusant Limited which contained a widely drafted arbitration clause stating that:

"Any dispute, controversy or claim arising in connection with or relating to this agreement, including its interpretation, execution and effect or the breach, termination or invalidity hereof should be referred to and finally resolved by arbitration of a single arbitrator."

Such a dispute did arise, and Traxys sought to issue a winding up petition against Rusant. Rusant subsequently applied to the Court to suppress the presentation of that petition, contending that the matter should be sent to arbitration, as was agreed by the parties in the loan agreement.

The Court decided that there was an issue that required arbitration as per the agreement of the parties and granted an injunction preventing Traxys from presenting the petition. The decision was made on the basis that the Court should proceed to deal with a petition only if there is no bona fide defence to it, and as the issue of whether there was in fact a bona fide defence formed a dispute falling within the scope of section 9(1) of the Arbitration Act 1996 it was to be dealt with by an arbitrator.

Justice Warren did, however, indicate that had there been no arbitration agreement, he would have been inclined to allow Traxys to proceed with winding up proceedings under the Court's discretion to deal with short dispute points on summary assessment principles if this could be done "very quickly and straightforwardly".

Comment

Although this case concerned insolvency proceedings, the Court's reasoning is relevant to any agreement that incorporates an arbitration clause, and Justice Warren's comments on this matter cannot afford to be ignored by construction professionals.

The judgment, and specifically the comments that the agreement to arbitrate was so important that it trumped the decision which would otherwise have been made, implies that the Court will require parties to submit to arbitration if this was what was agreed, even in cases where the Court has the discretion to proceed and where summary judgement would be quicker and easier than referring the dispute to an adjudicator.

Following this decision, it is vitally important for construction professionals to carefully consider the use of arbitration clauses in their contractual arrangements. When drafting construction contracts be sure to consider the potentially limiting effect of an agreement to arbitrate on resolving disputes quickly and efficiently, as well as the often acknowledged benefits of avoiding litigation.