Step in Proceedings: A Step Too Far?

Step in Proceedings: A Step Too Far? Phillip Spencer Ashley Applications; Extensions of time; Commercial arbitration; Stay of proceedings; Waiver 1. Introduction In England and Wales, the existence of an arbitration agreement will generally entitle a defendant to stay court proceedings commenced against it in favour of arbitration. However, this right will be lost if the defendant, prior to making an application for a stay, takes "any step in those proceedings to answer the substantive claim". Whether an application or agreement for an extension of time for service of a defence amounts to a "step in proceedings to answer the substantive claim" for the purposes of the Arbitration Act 1996 ("the 1996 Act") s.9 is not apparent from the face of the statute. However, a number of recent High Court judgments suggest that the answer will depend upon whether the party seeking a stay to proceedings has reserved its position on the question of the court's jurisdiction. The recent cases serve as a warning to parties and counsel on how initial correspondence in relation to a dispute can be critical in preserving an agreement to arbitrate. This is relevant to all counsel and parties where London (or elsewhere in England and Wales) is the seat of the arbitral proceedings. 2. The Arbitration Act 1996 s.9 The relevant parts of the 1996 Act s.9 are: "(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of 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 that matter. (2) (3) An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim. (4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed." 3. Baker Hughes v Steadfast Engineering In 2008 Baker Hughes Ltd commenced High Court proceedings in London against Steadfast Engineering Ltd (Baker Hughes Ltd v Steadfast Engineering Ltd).' The dispute related to the supply by the defendant to the claimant of engineering components. The terms and conditions between the claimant and the defendant contained an arbitration agreement. '[2009] EWHC 3123 (QB). 176

Step in Proceedings: A Step Too Far? 177 Shortly after the service of the claim form, the defendant's solicitors wrote to the claimant's solicitors requesting an extension of time to serve the defence. The extension of time was agreed. Subsequently, the defendant's solicitors sought a second extension of time. Neither of these requests reserved the defendant's rights in respect of the arbitration agreement. At this point the claimant's solicitors replied: "I am instructed that my client would agree to a consent order giving a further 21 days. This is on the basis that you draft the order and file it. I believe that we have reached the maximum period without an order. Please let me have an order this week for approval and signature." The defendant's solicitors did write to the court and inform the court of the second agreed extension. However, the letter did not reserve the defendant's position in relation to the arbitration agreement. Subsequently, the defendant's solicitors did not file a consent order. Approximately one month after the second extension was agreed, without warning, the defendant served an application seeking a stay to court proceedings in favour of arbitration, pursuant to the 1996 Act s.9. Master Rose rejected the defendant's application. The defendant appealed. On appeal the defendant put forward two principal arguments: The agreement to extend time was an extra -judicial agreement. Despite the extensions of time for service of the defence agreed between the parties, the defendant had not made an application to the court for an extension of time. Its notification to the court of an extension of time was merely notice of an extra-judicial agreement and therefore not capable of being a "step in proceedings" (see Brighton Marine Palace and Pier Ltd v Woodhouse 2 and Ives & Barker v Willans 3). The logic of this would appear to be that the court was not asked to exercise its jurisdiction, so no "step in proceedings" had taken place. The agreement was not related to the substantive claim. If the defendant had taken a "step in proceedings" by its conduct (including its letter to the court), that step was not "to answer the substantive claim", which the 1996 Act s.9 introduced as an additional requirement to losing the right to a stay to proceedings. The claimant responded on appeal: Not an extra-judicial agreement. The construction of the 1996 Act s.9(3) was settled law. House of Lords' authority of over one hundred years' vintage bound the court. In Ford's Hotel Co Ltd v Bartlett 4 the House of Lords gave the opinion that: "I see no reason to doubt that an order obtained upon a summons for extension of time for delivery of defence is a `step in proceedings' by the defendant within the meaning of s. 4 of the Arbitration Act [1889]." In addition, the court rules had changed since Brighton Marine v Woodhouse and Ives & Barker v Willans, which related to correspondence between solicitors to agree an extension of time. These two cases were decided at a time when parties could agree extensions of time without sanction or oversight '[189312 Ch. 486 Ch. 3 [1894] 1 Ch. 68 Ch. 4 [1896] A.C. 113L.

178 Arbitration from the court. Court-imposed controls and restrictions have since been placed on the ability of parties to reach agreement on extensions of time. Under the Civil Procedure Rules 1998, 5 CPR 15.5(2) requires that where: "the defendant and the claimant agree to an extension of time to extend the period for the filing of a defence, the defendant must notify the court in writing." Consequently, by writing to the court, in the context of CPR 15.5(2), a defendant takes a step in proceedings equivalent to a "summons" (as it then was) for an extension of time as contemplated in Ford's Hotel v Bartlett. 6 Related to the substantive claim. The Arbitration Act 1889 s.4, the provision under consideration in Ford's Hotel v Bartlett, required that: "any party to such legal proceedings may at any time after appearance, and before delivering any pleadings or taking any other step in proceedings, apply to that Court to stay proceedings [in favour of arbitration]." The reference to "other" step consequently meant that a "step in proceedings" must have expressly related to more than simply "delivering any pleadings". It was the words "step in proceedings" that were carried through into the 1996 Act and continue to have the same meaning in that Act, including in relation to applications for extensions of time.' The Departmental Advisory Committee on Arbitration (DAC) Report on the Arbitration Bill did not set out any intention to overrule the House of Lords' decision in Ford's Hotel v Bartlett. The DAC Report refers to numerous arbitration cases. If the DAC had intended the 1996 Act s.9 to overrule the House of Lords' decision in Ford's Hotel v Bartlett it would have set this out in its report. The claimant argued that the additional words in s.9(3) related to interim measures. For example, responding to an interim injunction is a "step in proceedings", but it would not be "to answer the substantive claim". On appeal, the court agreed with the claimant and refused the defendant's application to stay proceedings in favour of arbitration. H.H. Judge Shaun Spencer QC held that the result of CPR 15 was that there could be no "extra judicial" or private agreement between parties in these circumstances. The impact of the CPR was to change the previous position relating to agreements for extensions of time between the parties, so that a letter to the court in accordance with the requirements of the CPR amounted to a "step in proceedings" for the purposes of the 1996 Act s.9(3). In fact: "it would have been a mighty odd state of affairs were it to be that if the defendants complied with the court order [sic], they would be shut out from seeking a stay for arbitration." 5 S1 1998/3132. 6 [1896]A.C. 1. 'See R.M. Merkin, Arbitration Law (London: Informa, 2004), para.8.27(d): "An applicant who seeks an extension of time for complying with the Civil Procedure Rules 1998, or who seeks a stay for reasons other than reference to arbitration, will be regarded as having taken a step in proceedings. By contrast, if the reason sought for the extension is merely to preserve the applicant's position in the event that the application for a stay is refused, the court retains its jurisdiction to grant a stay. Similarly, if the extension is sought by consent rather than through judicial procedures, there is no step in the proceedings."

Step in Proceedings: A Step Too Far? 179 In other words, H.H. Judge Shaun Spencer QC was concerned that it would be absurd if a failure to comply with the CPR by making an application for a consent order, as the rules require for a second extension of time, would put a defendant in a better position than compliance. In addition, the insertion of the words "to answer the substantive claim" in the 1996 Act did not have the effect of disposing of the House of Lords' decision in Ford's Hotel v Bartlett. $ H.H. Judge Shaun Spencer QC referred to the commentary relating to the 1996 Act s.9 in The White Book, 9 which cites Ford's Hotel v Bartlett as relevant to the 1996 Act s.9(3). As a consequence: "It seems to me that the lodging of the correspondence was certainly a step on the way to serving a defence because absent an extension they could not validly serve and the obtaining of an extension avoided the default judgment that would have followed in absence of a defence. So I take the view that the making of these arrangements to get an extension is a step in the proceedings, which had as its end in view the answer to the substantive claim and I think that is what the Act in section 9(3) is aiming at." It is plain that the conduct of the defendant's solicitors played a part in the judge's analysis and conclusions. In fact, the judge commented in passing: "Given the chronology, to anybody with any experience of litigation at all, one is led on a trail of wondering whether the defendant was pursuing some agenda of stringing the claimants along with requests for extensions and then, when that avenue had probably run dry, raising the issue of the stay for arbitration. But although looking at matters in a stereotypical way, that thought could cross the mind, I stress that it is not a suggestion that is made by the claimants and so it is not something that I pursue or allow to affect my thinking in this appeal." It is evident from this case that had the defendant reserved its right to contest the jurisdiction of the court H.H. Judge Shaun Spencer QC would have reached a different conclusion. In fact the claimant accepted that the court would have been bound by Patel v Patel10 to decide that no step in proceedings had occurred. It was the defendant's failure to take such action that resulted in the parties' agreement to an extension of time being construed as a step in proceedings. 4. Bilta v Muhammad Nazir In Bilta (UK) Ltd (In Liquidation) v Nazir," the sixth defendant applied for an order to stay court proceedings on the grounds that the claimant, in liquidation, was party to a contract with the sixth defendant which contained an arbitration agreement that it contended covered the claim made against it by the claimant. The sixth defendant acknowledged service of the claim form on November 26, 2009. However, on December 15, 2009, the sixth defendant wrote to the claimant stating the existence of an arbitration agreement in relation to the dispute and reserving its rights in relation to the court's jurisdiction in light of that agreement. Shortly thereafter, on January 20, 2010, the sixth defendant applied to the court for an extension of time to serve its defence. The sixth defendant subsequently applied for an application to stay court proceedings in favour of arbitration. $ [1896] A.C. 1. 9 The White Book 2009 (London: Sweet & Maxwell, 2009), p.571. Now The White Book 2010 (London: Sweet & Maxwell, 2010), p.610. 1 [2000] Q.B. 551 CA (Civ Div). t1 [2010] EWHC 1086 (Ch); [2010] Bus. L.R. 1634.

180 Arbitration CPR Pt 11 requires that if a defendant wishes to dispute the court's jurisdiction to try a claim an application "must be made within 14 days after filing an acknowledgment of service". The sixth defendant's application to stay proceedings was made after this period. The claimant raised a number of objections to the application for a stay, including: The sixth defendant had lost its right to seek a stay through passage of time. Because CPR Pt 11 governs the making of such an application and therefore, since the sixth defendant failed to make its present application within 14 days after filing its acknowledgement of service, by virtue of CPR Pt 11(5), the sixth defendant "is to be treated as having accepted that the court has jurisdiction to try the claim". Alternatively, the sixth defendant had taken a "step in proceedings to answer the substantive claim ". In making an application to court for an extension of time to serve its defence, the sixth defendant took a "step in [the] proceedings to answer the substantive claim" and was debarred by the 1996 Act s.9(3) from making an application to stay the proceedings. The sixth defendant disputed both of these submissions. In particular, it argued that the 14-day time limit CPR Pt 11 applied to jurisdictional challenges under the CPR, where a party argues that the court in an alternative country has jurisdiction, but did not apply to applications for a stay pursuant to the 1996 Act s.9. In addition, as the sixth defendant had expressly reserved its position in relation to the agreement, the claimant was not entitled to assert that the sixth defendant had taken a step in proceedings by requesting an order for an extension of time. The first of the claimant's arguments was plainly ill conceived. As Sales J. held: "Section 9 is part of a code contained in primary legislation regulating proceedings concerning disputes covered by arbitration agreements. layman reading section 9 would understand that it creates a right in section 9(1) to seek a stay (a party `may... apply to the court') within the time parameters laid down in section 9(3). There is no indication that the right in section 9(1) is to be further limited by the additional procedural rules in CPR. Part 11 and no layman or international user of London arbitration reading the statute would understand that such additional limits might be imposed. Accordingly, on its true construction, section 9(1), read with section 9(3), displaces any possible application of CPR Part 11 which might otherwise arguably be relevant. " 12 The second argument deserves much greater scrutiny. The claimant relied upon Ford's Hotel v Bartlett, 13 which decided that an application for an extension of time to serve a defence did amount to a "step in proceedings". On that basis, the claimant could be said to have a good argument that the sixth defendant has taken a "step in proceedings" and was therefore not entitled to a stay. However, prior to the application of an extension of time the sixth defendant's solicitors had written to the claimant's solicitors stating: 12 [2010] EWHG 1086 (Ch). p4 ' ' 13 [1896] A.C. 1. {

Step in Proceedings: A Step Too Far? 181 "The Contract [The sixth defendant's] relationship with your client is governed by a Framework Agreement dated 4 March 2009 ('the Framework Agreement'). A copy is enclosed. It is unclear why you have made no reference to this at all in the Particulars of Claim. We refer you to [the arbitration agreement]. Please explain on what basis you contend that your client is entitled to bring proceedings against [the sixth defendant] in the English courts, given those provisions. We expressly reserve [the sixth defendant's] position in respect of the jurisdiction of the English court. The remainder of this letter is without prejudice to [the sixth defendant's] right to contend that this matter must be dealt with by arbitration in accordance with the contract." It was only after expressly reserving its right to challenge the jurisdiction of the court that the sixth defendant sought a consent order for a second extension of time for service of any defence from the court. The application for the second extension was expressed to be "pending further particularisation of the Claimant's case against the Sixth and Seventh Defendants". It was this application that the claimant contended amounted to a "step in proceedings". As in Baker Hughes Ltd v Steadfast Ltd, 14 Sales J. 15 accepted that he remained bound by the pre-1996 Act authorities, which included Ford's Hotel v Bartlett. 16 However, he also pointed to Lord Denning M.R.'s guidance in Eagle Star Insurance Co Ltd v Yuval Insurance Co:" "On those authorities, it seems to me that in order to deprive a defendant of his recourse to arbitration a `step in the proceedings' must be one which impliedly affirms the correctness of the proceedings and the willingness of the defendant to go along with a determination by the Courts of law instead of arbitration." In addition, Sales J. relied on the reasoning of Otton L.J. in Patel v Patel18 that approved the commentary in Merkin, Arbitration Law: "... (e) An act which would otherwise be regarded as a step in the proceedings will not be treated as such if the applicant has specifically stated that he intends to seek a stay." Otton L.J. also referred to the further principle set out in the commentary in Merkin as follows: "The right to apply for a stay will also be lost if the defendant in the judicial proceedings has expressly or impliedly represented that he does not intend to refer the issues in dispute to arbitration. The matter is determined by the usual rules applicable to estoppel, i.e. has the defendant unequivocally represented that there will be no reference to arbitration, and has the plaintiff conducted his affairs on the basis that the matter will be determined by the court, in reliance on that representation?" On this basis, Sales J. drew parallels with the objective test set out by Sir Andrew Morritt in Global Multimedia International Ltd v ARA Media Services 19 relating to waiver of a jurisdictional challenge pursuant to CPR 11, which states that the right to make a jurisdictional challenge will only be waived where "the only possible explanation for the conduct relied on is an intention on the part of the defendant to have the case tried in England". 14 [20091 EWHC 3123 (QB). 'S [2010] EWHC 1086 (Ch). ' 6 [1896]A.C. 1. 17 [1978] 1 Lloyd's Rep. 357 CA (Civ Div). '[20O0] Q.B. 551. 19 L20061 EWHC 3612 (Ch); [2007] 1 All E.R. (Comm) 1160.

182 Arbitration Sales J. went on to decide that in the light of the sixth defendant's solicitor's letter in relation to the arbitration agreement, the issuing of the application seeking an extension of time for service of the defence could not objectively be construed as indicating an election by the sixth defendant to waive any right it might have to seek a stay for arbitration. Nor could it be construed as an unequivocal representation that the sixth defendant did not intend to contest the jurisdiction of the court. It was clear as between the parties that the application was made to enable the sixth defendant to have more time to consider the case put against it and to decide what position to adopt as regards court proceedings or arbitration. This was not a feature in Ford's Hotel v Bartlett,20 which could therefore be distinguished on the facts. Consequently, Sales J. decided that the sixth defendant had not taken a "step in proceedings" and rejected the claimant's argument that the sixth defendant be disentitled to a stay of proceedings pursuant to the 1996 Act s.9(3). As there was a remaining issue on the existence of an alleged arbitration agreement, a preliminary hearing was ordered on that issue alone. Again, the conduct of the parties appears to have been important in this case. The sixth defendant had taken steps to ensure that the claimant understood what its position was as to the jurisdiction of the court. The claimant could not have been under any reasonable apprehension that the sixth defendant had intended to submit to the court's jurisdiction. 5. Impact of the Two Cases There is a common thread that runs through Otton L.J.'s comments in the English Court of Appeal's decision in Patel v Patel21 and these two recent London High Court judgments: where a party reserves its right to challenge the jurisdiction of the court in favour of arbitration it will not be said to have taken a "step in proceedings" for the purposes of the 1996 Act s.9(3). However, in the circumstances where a party does not reserve its position as to the court's jurisdiction, a relatively minor application or communication with the court might lead to it having taken a "step in proceedings", by submitting to the jurisdiction of the court, and consequently losing its right to seek a stay in favour of arbitration. The authorities also suggest that conduct of the parties prior to making an application is an important consideration. The court does not take kindly to applications or objections to a stay on narrow technical grounds, particularly where it considers the applicant's conduct to appear opportunistic. In Baker Hughes v Steadfast 22 the defendant's belated application for a stay after "stringing the claimants along" was rejected by both Master Rose and H.H. Judge Shaun Spencer QC. Conversely, in circumstances where the sixth defendant in Bilta v Nazir 23 had expressly communicated a reservation to the claimant, the claimant could not take advantage of what would otherwise have been a "step in proceedings" to deprive the sixth defendant of its right to seek a stay for arbitration. The cases indicate that the following considerations are likely to be important to any dispute before the courts of England and Wales. A defendant should carefully consider any dispute resolution provisions governing its relationship with a claimant before seeking an extension of time or making any application to court. 20 [1896]AC. 1. 21 [2000] Q.B. 551. 22 [2009] EWHC 3123 (QB). 23 [2010] EWHC 1086 (Ch).

Step in Proceedings: A Step Too Far? 183 Correspondence notifying the court of an extension of time for service of a document required by the court rules is capable of being a "step in proceedings" for the purposes of the 1996 Act s.9(3). Therefore, unless the defendant has reserved its position in relation to the court's jurisdiction, such correspondence might result in the loss of its right to arbitrate. In the event that an arbitration agreement exists, if the defendant wishes (or might wish in the future) to rely upon that agreement it should expressly reserve its position in relation to that agreement in correspondence with the claimant. In the event the defendant does not have access to the relevant contract (e.g. where it is in storage) and it might contain an arbitration agreement, the defendant should reserve its position as to the jurisdiction of the court prior to making any request or application. In addition, if the defendant wishes (or might wish in the future) to rely upon the arbitration agreement it should expressly reserve its position in relation to that agreement in any correspondence with the court or application to the court. A defendant wishing to seek a stay for arbitration should do so promptly to avoid any impression that it may be "stringing the claimants along". Passage of time does not, in itself, result in the defendant losing its right to stay court proceedings in favour of arbitration. However, Baker Hughes v Steadfast suggests that a court might be more inclined to find that a defendant has taken a "step in proceedings" if there has been a significant passage of time since the service of the claim form before any objection in favour of arbitration is raised. 2011 77 Arbitration, Issue 2 0 2011 Chartered Institute of Arbitrators