The Arbitration Act 1996 - was early criticism justified?

The Arbitration Act 1996: One year on

Charles Spragge of the Litigation and Dispute Management Practice Area looks at cases on the Arbitration Act 1996 and considers whether early criticism of the Act was justified

Readers of this bulletin will be aware that many in the construction industry have given the Arbitration Act 1996 a hostile reception. This article shows that there is another view.

The main criticism has been that the 1996 Act has taken away the right of parties to arbitration agreements to have their disputes heard, in certain circumstances, by the courts. Under the old regime, there were two situations in particular where the court could refuse to grant an application for a stay of its proceedings in favour of arbitration:

• where the dispute involved multi-parties and more than one contract, or
• where the dispute involved a claim to which there was no arguable defence.

The court no longer has a discretion not to refer such disputes to arbitration. Before considering whether the industry's view of this development is justified, let us look at the specific changes in more detail.

Multi-party disputes

It was, and remains, the case that a defendant in a court action can apply for a stay of the proceedings if they concern a dispute that the parties have agreed to refer to arbitration.

Formerly, if the dispute was multi-partite, the court had a discretion (in relation to domestic arbitration agreements) to refuse a stay and to hear the dispute itself in order to avoid the inconvenience of parallel proceedings. There was no such discretion in relation to international arbitration agreements.

Through sections 85 to 87, it was originally envisaged that the 1996 Act would preserve this special discretion for domestic arbitration agreements. However, as is now well known, those sections were not brought into force and it is the DTI's intention that they should be repealed, although at the time of publication no decision had been made. The court no longer has any discretion to refuse a stay and must refer the dispute to arbitration even at the risk of generating multiple proceedings.

Unarguable defences

Under the old law, a plaintiff in court proceedings with a claim to which there was no arguable defence, could ask the court to refuse any application for a stay in favour of arbitration on the grounds that there was not in fact any dispute between the parties. This discretion arose either under Section 4 of the 1950 Act (for domestic arbitration agreements) or, under the express proviso in Section 1 of the 1975 Act (for non-domestic agreements). Now, however, the general discretion in relation to domestic agreements has gone altogether and the proviso in Section 1 of the 1975 Act has not been re-enacted in Section 9 of the 1996 Act, which governs applications for stays in respect of both domestic and international arbitration agreements.

The Court of Appeal has recently confirmed in Halki Shipping -v- Sopex Oils (Times, 19.1.98) that these changes mean that even claims to which there is no arguable defence must be referred to arbitration. Claims will only be regarded as undisputed (and therefore capable of being the subject of summary judgment proceedings in courts) if the sums claimed are admitted as due and payable.

A related question was raised by (although not dealt with) the court in Great Ormond Street Hospital -v- Wates Construction Limited [1997] CILL 1295. Given that it is still open to a plaintiff to argue that the dispute in respect of which he has started court proceedings falls outside of the scope of the arbitration agreement, should it be for the court, on the hearing of a section 9 application for a stay, or for the arbitral tribunal, to decide whether or not the dispute is a matter that the parties have agreed to refer to arbitration? If this issue is raised in the arbitration proceedings, it is clear that the arbitral tribunal has power to determine it under section 30 of the 1996 Act, although its decision is subject to review by the court. What, however, is the position where the issue is first raised before the court on the application for a stay? The answer to this appears to be that, consistent with the guiding principle of non-intervention by the courts, the issue should, except in the plainest cases, should be left to the arbitrators.

Is the 1996 Act at fault?

Critics of the 1996 Act argue that this loss of the court's powers to override an arbitration agreement is unwelcome. But, is it really justifiable to criticise the Act? In fact the Act clarifies that where parties have agreed to arbitrate their disputes, they should be held to their bargain.

Those who criticise this development should consider the true cause of their concern: is it that arbitration is not a suitable forum for dealing with multi-party disputes or for indisputable claims? If so, the solution lies within the 1996 Act itself. First, (by section 35) the 1996 Act allows parties to agree that arbitral proceedings may be consolidated. This agreement may be contained in the arbitration clause, either expressly or through the incorporation of rules such as those proposed by CIMAR. The 1996 Act also gives the tribunal powers, and imposes on them a duty, to deal expeditiously with claims to which there is no arguable defence. And if part of a claim is indeed indisputable, then the tribunal has the powers, and a duty, to deal with it speedily, possibly by way of an interim award under section 47. It remains to be seen whether arbitrators are capable of rising to the challenge of dealing effectively with such disputes, but if they do fail to do so, the fault is theirs and not that of the 1996 Act.