English courts confirm failure to comply with pre-arbitration steps a matter of admissibility, not jurisdiction

Tiered arbitration clauses, where a party is required to attempt various dispute resolution alternatives such as negotiation and mediation, are commonplace in commercial contracts. However, despite their widespread use, up until this year the English courts had not directly considered the question of what happens when a party does not comply with pre-arbitration steps before initiating arbitration proceedings. Instead, the English arbitration community has had to make do with the obiter findings of Teare J in Emirates Trading Agency LLC v Prime Mineral Exports Private Limited.

In Emirates, Teare J considered that an obligation for the parties to engage in “friendly discussion” before commencing arbitration proceedings was “a condition precedent to the right to refer a claim to arbitration.” This suggested that a failure to follow obligatory pre-arbitration steps resulted in the arbitral tribunal’s jurisdiction to hear the dispute not being engaged.

The Emirates decision came under criticism from arbitration practitioners and academics. Indeed, one authoritative text cautioned “We are sorry to say that we have less than total enthusiasm either for the decision, or the principle that it attempts to establish.” To its critics, the court in Emirates had made a mistake: the issue of compliance with pre-arbitration steps was one of admissibility of the claimant’s claims and not a question of the tribunal’s jurisdiction.

As a reminder, admissibility and jurisdiction are two related but different concepts. In the words of Butcher J, “Issues of jurisdiction go to the existence or otherwise of a tribunal’s power to judge the merits of a dispute; issues of admissibility go to whether the tribunal will exercise that power in relation to the claims submitted to it.” Importantly, a tribunal’s decision regarding admissibility cannot be challenged, whereas a tribunal’s ruling on its jurisdiction may be challenged by a party under section 67 of the Arbitration Act 1996 (AA 1996).

Despite the considerable debate regarding the Emirates decision, the English legal position remained unsettled in the following years in the absence of a suitable case before the English courts. However, like the proverbial London bus, arbitration practitioners have been treated to two high court decisions on this issue less than nine months apart.

On 2 February 2021, the Commercial Court handed down its decision in Sierra Leone v SL Mining Limited. This case concerned a section 67 challenge brought by Sierra Leone, who argued the defendant had brought arbitration proceedings before the three month notice period, a contractual pre-condition to arbitration, had expired.

In Sierra Leone, the learned judge, Sir Michael Burton GBE, devoted a considerable portion of his judgment summarising the latest commentary and international jurisprudence before concluding that they “plainly overwhelmingly” supported a finding that a failure to comply with the ADR was an issue of admissibility for the tribunal to consider and was not a basis to challenge their jurisdiction.

Although the claimant argued the Emirates decision supported their section 67 challenge, this was roundly rejected by the court who noted that jurisdiction to hear a section 67 challenge had been “assumed” by the court in that case and that the issue of jurisdiction and admissibility had been not been argued. The section 67 challenge was therefore dismissed.

Hot on the heels of that decision, the court handed down its verdict on another section 67 challenge in NWA and others v NWF and others in October. In NWA, Calver J declined an application to set aside an arbitral award made on the grounds that the defendant failed to follow a contractual obligation to mediate before commencing arbitration proceedings against the claimant.

The court rejected the claimants’ argument that the arbitration agreement was “inoperative” due to a failure to follow a mediation pre-arbitration step and consequently the defendants’ claims were not therefore arbitrable. The correct position, noted Justice Calver, was that the “dispute is an arbitrable dispute, but the issue is whether it is not yet arbitrable because of the mediation clause.” A failure to mediate was an issue for the tribunal to consider in the context of deciding whether the claims before it were admissible.

The court’s decision in NWA is particularly noteworthy, in that it approved of and applied the reasoning in Sierra Leone when coming to its decision. Indeed, Calver J noted that “the decision in Emirates has come in for considerable academic criticism” and, like Sir Michael in Sierra Leone, declined to follow the approach taken in that case.

It therefore appears that in a short space of time the English courts are settling on an alternative position regarding a failure by a party to follow the pre-arbitration conditions precedent contained in a contract: it is only relevant to a tribunal’s consideration of whether a claim is admissible and does not affect jurisdiction.

The NWA decision will likely be of interest to practitioners as, under this new position, a party’s ability to use section 67 to challenge a tribunal’s jurisdiction on the basis of a failure to follow a pre-arbitration conditions precedent has been substantially reduced. In practice, in the absence of a Court of Appeal or Supreme Court judgment on this case, parties are advised to comply with any such pre-conditions (where applicable) in order to avoid unnecessary litigation.

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