Contracts referring to litigation and arbitration: which applies?

Contracts should include a dispute resolution clause specifying that any disputes between the parties relating to the contract should be resolved either by: (i) court litigation, (ii) arbitration, or (iii) expert determination. It is only in rare cases that parties will include reference to more than one of these forums in their contract (for example, where they agree to refer certain disputes to litigation and others to arbitration), in which case clear drafting will be required.

However, parties sometimes inadvertently include in their contract a dispute resolution clause which refers disputes both to litigation and arbitration. There is thus an immediate uncertainty as to which forum any disputes should be referred. They cannot be referred to both, since each results in a binding decision.

The English High Court was recently faced with such an uncertainty in the case of OOO Abbott & anr v Econowall UK Ltd & ors, where the relevant contract appeared to refer all disputes under it both to arbitration and litigation. The Court clarified that there was no general principle that disputes should be referred to arbitration in such situations of uncertainty. Instead, each case will depend upon the construction of the relevant clauses. In this case, the Court found that the parties had intended to refer disputes to litigation, rather than arbitration.

The decision highlights the risks of including a reference to both arbitration and litigation in a contract. In the absence of a general principle as to which one trumps the other, jurisdictional arguments are likely to arise, as one party will attempt to use the ambiguity to frustrate the other party’s claim (as in this case), which will lead to both sides incurring unnecessary time and cost.

In order to avoid such unnecessary arguments, we would strongly advise parties:

1. to ensure that, at the drafting stage, the dispute resolution clause in their contract is carefully worded and does not create any ambiguity as to the forum to which any disputes relating to the contact will be referred, and 
2. if they do wish to refer certain disputes relating to a contract to one forum eg litigation, and others relating to the same contract to another forum eg arbitration, to ensure that the distinction between the types of dispute that will be referred to each is spelled out as clearly as possible in the contract.

The Econowall case

This case involved alleged breaches of a licence agreement in relation to patented metal components used in display panels in shops. The claims were heard in the Intellectual Property Enterprise Court, which is a part of the Chancery Division of the English High Court.

Each of the parties brought a number of interim applications. One such application, brought by the defendants, was to stay the court proceedings in favour of arbitration. In particular, the defendants argued that any dispute under the relevant licence agreement should have been commenced by way of arbitration based on the following clause:

“The Agreement shall be governed by and construed and interpreted in accordance with the laws of England and the parties hereby submit to the exclusive jurisdiction of the English courts.

The parties agree to be subject to be arbitration should there be a disagreement between them.” (emphasis added).

The defendants relied on the earlier English court decisions in Sulamerica and Ace Capital, which also involved conflicting arbitration and litigation clauses. In both of those cases, the Court decided that disputes should be referred to arbitration. The defendants argued that the two clauses in the licence agreement should be reconciled in the same manner, with any disputes referred to arbitration, not litigation.

Decision

HHJ Hacon rejected the defendants’ argument and held that any disputes under the licence agreement should be referred to litigation, not arbitration.

Although he did not say so explicitly, he appeared to reject any suggestion that there was a general principle that disputes should be referred to arbitration rather than litigation in situations like this (para 67).

Instead, he said that “each case must depend on the words in issue and their construction in the context of the agreement as a whole.” (para 67). In this case, the parties’ contract had included a “severability” clause, drafted in typical terms:

“If any clause or any part of any clause in this Agreement is declared invalid or unenforceable by the judgment or decree, by consent or otherwise of a court of competent jurisdiction from whose decisions no appeal is or can be taken all other clauses or parts of clauses in this Agreement shall remain in full force and effect and shall not be affected thereby for the term of this Agreement.” (emphasis added).

The judge said that “This is consistent with the [dispute resolution clause] giving exclusive jurisdiction to English courts but not with the arbitration clause…” (para 71). On that basis, he concluded that the parties’ likely intention was that the English courts should have jurisdiction over disputes relating to the licence agreement. Importantly, however, the judge said that the arbitration clause was “permissive”, such that the parties could jointly elect to refer any dispute to arbitration, so long as English court proceedings had not already commenced in respect of that same dispute.