The AA 1996
A party to proceedings brought in the English courts may apply under section 9 of the AA 1996 for a stay of such proceedings in favour of arbitration. Section 9 provides:
“(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern the matter.
(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration is null and void, inoperative, or incapable of being performed.”
What then is a “matter” for the purpose of section 9(1)? Should it be equated with a claim or cause of action? Is section 9(1) engaged only if the defence falls within the scope of the arbitration agreement? Or does a “matter” mean an issue? If so, to what degree of granularity should the issues be characterised?
As Popplewell J observed in Sodzawiczny v Ruhan, there are a number of authorities dealing with these questions but they “do not all speak with one voice” (see T&N Ltd v Royal & Sun Alliance Plc; Lombard North Central PLC v GATX Corporation; Tomolugen Holdings Ltd v Silica Investors Ltd (a decision of the Singapore Court of Appeal); Autoridad del Canal de Panama v Sacyr SA; China Export & Credit Insurance Corporation v Emerald Energy Resources Ltd).
Sodzawiczny v Ruhan
In Sodzawiczny v Ruhan, two of the defendants (Mr Cooper and Mr McNally) sought a stay of proceedings pursuant to section 9 of the AA 1996 on the basis that “matters” in dispute were subject to an arbitration clause contained in a settlement deed (the deed).
The facts of the dispute are complex. The claimant (Mr Sodzawiczny) was an engineer who worked with one of the defendants (Mr Ruhan) to develop a group of digital data centres. He and Mr Ruhan entered into a number of agreements pursuant to which Mr Ruhan agreed to remunerate Mr Sodzawiczny for his efforts, to the tune of around £22 million. Part of the remuneration was to be by way of a “structure” that would be set up by Mr Ruhan’s solicitors, Mr Cooper and Mr McNally.
It transpired that the “structure” was intimately bound up with a group of companies held within a trust structure, the assets of which (once belonging to Mr Ruhan) were transferred (see Orb and others v Ruhan and others). After becoming aware that such assets had been transferred, Mr Sodzawiczny sought assurances from individuals involved in transferring the assets and entered into the deed with Mr Ruhan’s group of companies, Mr Cooper and Mr McNally, and those who apparently now held the assets.
The deed concerned Mr Sodzawiczny’s claims against Mr Ruhan and other defendants for their roles in setting up the structure and transferring the assets. It contained the following arbitration clause:
17.1 The Parties agree that any dispute arising out of or in connection with the performance or non-performance of this Agreement shall be referred to and finally resolved by arbitration under the LCIA Rules…”
Part payment was made under the deed for just under £5 million, but nothing else. Subsequently, companies subject to the deed went into liquidation, and it appeared unlikely that Mr Sodzawiczny would recover any further money. Investigations revealed that the sums held under the “structure” had been distributed to Mr Cooper and Mr McNally. As a result, Mr Sodzawiczny brought various claims in the English courts against Mr Ruhan, Mr Cooper and Mr McNally, and those who had given Mr Sodzawiczny assurances about the asset transfers.
Mr Cooper and Mr McNally subsequently sought a stay of the proceedings under section of the AA 1996 and initiated an LCIA arbitration against Mr Sodzawiczny, alleging that Mr Sodzawiczny’s court proceedings and his investigations into the wrongdoing against him constituted breaches of the deed.
It was common ground that, broadly, there are two stages to the inquiry which the court is required to make under section 9(1):
- What the matter or matters are in respect of which the court proceedings have been brought.
- In respect of each such matter, whether it falls within the scope of the arbitration agreement upon its true construction.
However, the parties disputed the approach to determining what the “matters” were.
In deciding this dispute, Popplewell J was primarily guided by the imperative of upholding party autonomy so as to enforce arbitration agreements. Accordingly, he held that section 9(1) was not concerned with causes of action but, much more broadly, “a dispute or difference”. A dispute might involve multiple issues, and some of those may be arbitral and some might not; as he colourfully explained: “The desideratum of unification of process must give way to the sanctity of contract”.
Usefully, the court set out four principles to be followed in deciding what constitutes a “matter”:
- The court should treat as a “matter” any issue which is capable of constituting a dispute or difference which may fall within the scope of an arbitration agreement.
- Where the issues have not been fully identified or developed at the time the court is making the inquiry, the court should seek to identify the issues which it is reasonably foreseeable may arise.
- The court should stay the proceedings to the extent of any issue which falls within the scope of the arbitration agreement. The search is not for the main issue or issues, or the most substantial issues, but for any and all issues which may be the subject of an arbitration agreement.
- The court should look at the nature and substance of the claim and the issues to which it gives rise, rather than simply the form in which it is formulated in a pleading.
In applying these principles, Popplewell J held that the wording of the arbitration clause in the deed was apt to cover all the issues in the current proceedings, and Mr Cooper and Mr McNally were entitled to a mandatory stay under section 9 of the AA 1996.
Take away message
This is a very pro-arbitration decision. The issues covered by any given arbitration clause are likely to be wide and varied, and certainly broader than pleaded causes of action.
Practically, the decision suggests that an applicant for a stay pursuant to section 9 is well advised to draft a comprehensive list of issues in support of the application to demonstrate that the relevant arbitration clause is engaged by the issues in dispute. Whilst Popplewell J suggests that the court could draft the list (presumably after seeking input from the parties), an applicant is likely to want to take control at an early stage and to have the time fully to consider the task, particularly given a defence is unlikely to have been drafted.
The decision gives rise to a real risk of fragmentation of proceedings. However, as Popplewell J observed, this difficulty can be ameliorated by the court exercising its case management powers to order a stay of the proceedings which fall outside the arbitration agreement until the arbitration has been concluded.