REUTERS | Rebecca Naden

Arbitration agreement scope and arbitrability: Bridgehouse (Bradford No. 2) Ltd v BAE Systems Plc

How pro-arbitration are the courts of England and Wales? How pro-arbitration should they be? A recent decision of the Court of Appeal indicates that the answer to both questions is “very much”. The decision, and the proceedings which led to them, illustrate just how far the system encourages arbitration now.

Background

Bridgehouse (Bradford No. 2) Ltd v BAE Systems Plc was, as its name suggests, not the first set of proceedings in respect of the disputes between the parties. The background was (at least initially) simple. BAE Systems plc entered into a contract with BB2, under which BAE was to procure the sale to BB2 of two parcels of land. Clause 19.1(a) of the contract was to apply if “any dispute arises between the parties to this agreement arising out of the provisions of this agreement”. A subsequent provision made clear that such a dispute was to be determined by an arbitrator, but clause 20.1 of the contract stated that, if BB2 suffered an “Event of Default”, BAE was entitled to determine the contract by notice in writing to BB2. Clause 20.2 defined an “Event of Default” in terms including BB2 “being struck off the Register of Companies or being dissolved or ceasing for any reason to retain its corporate existence”. Clause 20.3 provided that, if notice was served pursuant to clause 20.1, the contract would be determined immediately.

However, clause 27.2 also provided that “the courts of England shall have exclusive jurisdiction to hear and decide any suit action or proceedings and/or to settle any disputes which may arise out of or in any way relate to this agreement or its formation (including any non-contractual disputes or claims) and for these purposes each party irrevocably submits to the exclusive jurisdiction of the courts of England.”

Events unfurled as envisaged by clause 20.2. BB2 failed to file accounts; the Registrar of Companies sent a notice to BB2 pursuant to section 1,000(3) of the Companies Act 2006. It informed BB2 that, unless cause was shown to the contrary, the company would be struck off the register and dissolved after two months. It seems that BB2 did not become aware of the notice and the company was struck off the register and dissolved on 31 May 2016. On 2 June, BAE gave notice to determine the contract under clause 20.1. On 24 June 2016, an application for “administrative restoration” of BB2 to the register was made to the Registrar of Companies pursuant to section 1,024 of the 2006 Act, which allows a former director or member of a company that has been struck off the register to apply to the Registrar of Companies for the company to be restored in prescribed circumstances. The application was successful, with the result that BB2 was restored to the register on 28 July. A key provision is section 1,028 of the 2006 Act, which identifies the effect of such restoration:

“(1) The general effect of administrative restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register.

(3) The court may give such directions and make such provision as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register.
(4) An application to the court for such directions or provision may be made any time within three years after the date of restoration of the company to the register.”

The first court proceedings concerned whether the contract had been validly terminated by the notice of 2 June 2016. This dispute was determined by an arbitrator, who held that the notice had validly terminated the contract and, furthermore, that section 1,028(1) of the 2006 Act did not retrospectively undo such notice.

That decision was challenged under section 69 of the Arbitration Act 1996 (AA 1996). Cockerill J rejected that appeal, holding that the arbitrator had been correct, and refused permission to appeal. An attempt to obtain permission from the Court of Appeal itself failed. The effect was that there was a finally binding award from the arbitrator to the effect that BAE had validly terminated the contract.

BB2 tried an alternative approach. It issued court proceedings seeking an order under section 1,028(3) of the 2006 Act. BAE sought to stay that application to arbitration. The stay was imposed at first instance. The hearing before the Court of Appeal was BB2’s appeal against that stay.

Issues

There were essentially two issues. First, did a dispute under section 1,028(3) fall within the scope of clause 19 of the contract? Second, even if it did, could it be arbitrated at all?

Decision on scope of clause 19 of the contract

On both grounds, the challenge to the stay of arbitration was dismissed.

First, the question as to the scope of the arbitration clause was dealt with briefly. As all practitioners will know, in Fiona Trust & Holding Corporation v Privalov, Lord Hoffmann held, at paragraph 13:

“… [T]he construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.”

Applying that approach, the Court of Appeal found it easy to hold that the dispute in question fell within the scope of the arbitration agreement. The dispute between BB2 and BAE as to whether relief should be granted under section 1,028(3) could be described as “arising out of the provisions of” the contract. There was nothing in the contract which “makes it clear” (in Lord Hoffmann’s language) that questions as to relief under section 1,028(3) were intended to be excluded from the arbitrator’s jurisdiction, which suggests that clause 19.1(a) should be presumed to apply in accordance with the guidance given in the Fiona Trust case. Moreover, to construe clause 19.1(a) in accordance with that guidance would not deprive clause 27.2 of a role. The clause ensured that the English courts would have jurisdiction over issues arising from an arbitration or expert determination.

Males LJ held that BB2’s submission, that the arbitration clause was in relatively narrow terms, ignored the fact that the Fiona Trust case swept away what he called “arcane distinctions” between clauses which provided for disputes “arising in connection with”, “arising out of” and “arising under” an agreement to be arbitrated. He considered that these arguments “reflected no credit on English law”.

The decision on that point is striking in its breadth. Males LJ did not himself discuss the impact of clause 27.2 of the contract. While Newey LJ’s interpretation of that provision’s scope gives it meaning, it nonetheless sits uneasily with the fact that, if all that clause 27.2 were intended to do was confirm the supervisory jurisdiction of the English courts, it would not have needed to refer to such matters as formation, or any non-contractual disputes or claims. The initial presumption established in Fiona Trust becomes close to irrebuttable.

Decision on arbitrability

As to arbitrability, BB2 argued that a claim for relief under section 1,028(3) was not arbitrable; such powers existed to protect the public interest, were granted specifically to the court and no one else, and had to be exercised having regard to the position of the company and “all other persons”. This was a power which an arbitrator could not readily exercise. Finally, the power was itself ancillary to the power to restore a company to the register under section 1,024, which clearly could not be exercised by an arbitrator.

None of these arguments was successful.

First, the court considered in particular the decision in Fulham Football Club (1987) Ltd v Richards, in which the Court of Appeal upheld an order staying an unfair prejudice petition presented under section 994 of the 2006 Act. In that case, an arbitrator would have had power to grant such relief, but the petitioner had maintained that unfair prejudice disputes were not arbitrable. Longmore LJ had held (at paragraph 99) that the principle of section 1(b) of the AA 1996, namely “the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest”, set “a demanding test” to challenges to arbitrability. The absence of any provision in the 2006 Act prohibiting arbitration meant that the dispute could not be said to be unarbitrable as such.

Second, the fact that “the court” was given powers under section 1,028(3) did not mean that parties, by agreeing to arbitrate, could not agree to give the same powers: such power could be expressly or impliedly granted (Wealands v CLC Contractors Ltd).

Third, even if some forms of relief available to the court could not be granted by an arbitrator, that would not mean that the dispute itself was not arbitrable (as to this, Wealands too was cited). In any event, that problem did not arise in this case. The order sought by BB2, either restoring the terminated contract or requiring a new contract to be entered into on the same terms, was one which the arbitrator had power to make.

Against that background, the dispute in issue was held to be arbitrable. The dispute did not concern a class remedy or issue of status, such as a winding-up petition (which could not be the subject of arbitration) but a private dispute. In this case at least, no other parties would be affected by the determination of the arbitrator and, even if they were, such “persons” would not be relevant for the purposes of the arbitration.

Males LJ was even more emphatic, holding that a finding of inarbitrability “should in my judgment be a conclusion of last resort.” He further commented that, even in such limited circumstances, it may be appropriate for particular issues falling within the scope of an arbitration clause to be referred to arbitration before the court decides whether to make an order which only the court can make. For that approach, he cited the Court of Appeal decision in Salford Estates (No 2) Ltd v Altomart Ltd (No 2). Given that Phillips LJ agreed with both judgments, Males LJ’s robust approach is likely to be cited in cases to come.

Analysis

What is the consequence of this decision?

For international arbitration, the decision as to the scope of the arbitration agreement seems most likely to be important. Where the arbitration agreement is to be treated as being governed by English law, the scope of that arbitration agreement is likely to be held to be very wide indeed. This may be important in establishing, in international arbitration, whether a given claim falls within the scope of the clause in issue.

By contrast, where arbitrability is in issue, the first question is which legal system’s rules of arbitrability shall apply. The answer may depend on the stage at which the issue arises. As reflected by the Court of Appeal’s reference to a different view as to the arbitrability in the Singapore Court of Appeal decision of Larsen Oil and Gas Pte Ltd v Petroprod Ltd, English law may often not be determinative.

For domestic arbitration and other forms of dispute resolution, the decision on both scope and arbitrability is likely to be important. In adjudication, decisions in Air Design (Kent) Ltd v Deerglen (Jersey) Ltd and J Murphy & Sons Ltd v W Maher and Sons Ltd on the one hand, and Hillcrest Homes Ltd v Beresford and Curbishley Ltd on the other, have differed as to how wide the scope of an adjudication provision should be defined. This decision provides support for the broader approach. The Court of Appeal’s willingness to keep arbitrability limitations will only reinforce that impulse.

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