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Arbitrary judgment Disputes on contracts which fail to provide for multi-party arbitration are now prove difficult to resolve, warns Trevor Nicholls.

There is a general tenet of English law that legislation is not to have retrospective effect. Once plans and contracts are in place, one would not expect a rule change that would alter fundamentally the way in which the contract operates.

But this is in effect is what has happened as a result of the way in which the 1996 Arbitration Act has been implemented. The Act came into force on 31 January 1997 and applies to arbitrations commenced on or after that date even if the contract containing the agreement to arbitrate was entered into before 31 January 1997. Does this matter?

It would have mattered little had not the government when implementing the Act omitted Sections 85 to 87. Those sections relate to domestic arbitration agreements, ie agreements between UK-based persons to arbitrate in the UK. If implemented, they would have had the effect of maintaining the position that existed under the 1950 Act.

Under Section 4 of the 1950 Act, there were two common situations in which the court would normally have allowed proceedings before it to continue notwithstanding the existence of an effective arbitration agreement.

The first and perhaps most common situation was where there was in reality no defence to the claim. The court would grant summary judgment on the basis that there was in fact no dispute to be referred to arbitration.

The second situation in which the court would retain jurisdiction was where there was a multi-party dispute for which the arbitration agreement did not allow. For example, if the employer wished to bring a claim for the cost of rectifying a defect against his professionals and the contractor, it was unlikely that the arbitration agreements in the various contracts would enable him to sue them all in the same arbitration proceedings. The court was willing to retain jurisdiction to avoid the possibility of inconsistent decisions which might result from the separate arbitrations and the additional costs which would be incurred.

This discretion is not available to the court under the 1996 Act. It can only refuse to stay proceedings before it in favour of arbitration if satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed, or the agreement is not in writing.

The absence of the court's discretion has been made painfully clear in the case of Halki Shipping Corporation v Sopex Oils Limited. In that case Halki applied to the court for summary judgment of its claim. Sopex's defence, such as it was, only realistically disputed a small part of the claim.

The judge made the point that to say that an arbitration agreement was not meant to apply to claims to which a party had no answer would mean that arbitrators had no jurisdiction in respect of the indisputable parts of a claim, which clearly they did in practice.

This would leave such awards open to challenge. He approved the statement in the case of Hayter v Nelson, where it was said that the fact that it can be easily demonstrated that one party is right and one is wrong does not and cannot mean that a dispute does not in fact exist.

The judge was also encouraged by the fact that under the 1996 Act, if the parties agree, arbitrators can have power to make interim awards and he saw no reasons why the process should be any slower or less effective than the legal process in the courts. As a result, Halki was obliged to pursue its claim in arbitration.

The case clearly sounds the death knell for applications to the court for summary judgment where there is an operative arbitration agreement.

It also has implications for the proposed mandatory adjudication procedures in the Housing Grants Act and the enforcement of the adjudicator's decision where the governing contract contains an effective arbitration agreement. On the basis of this case, if there is a dispute as to the implementation of the adjudicator's decision that matter would have to be referred to arbitration.

Equally far reaching are the implications for contracts which do not adequately provide for multi-party arbitrations. There are in fact very few contracts which adequately do so. For years the standard forms of contract have tried to cater for such multi-party arbitrations but with limited success. The Act does not, despite many people urging that it should, contain powers for an arbitrator to join third parties to proceedings which would have overcome the problems created by the failure to implement Sections 85 and 87.

The legitimate expectation of the parties to be able to use the courts, where it was necessary to have multi-party proceedings, has been cruelly dashed. Employers who wish to sue their consultants and their contractor are likely to find that they will have to launch separate arbitration proceedings to do so.

The Act also presents a dilemma for contract drafters. Should they do away with arbitration and make all contracts subject to the jurisdiction of the courts or should they seek to devise arbitration clauses which will allow all parties to be joined to one set of proceedings? To require all disputes to be referred to the courts runs into the problem created by the Court of Appeal's decision in Crouch with respect to the courts' powers to open up, review and revise opinions, decisions and certificates of the architect or engineer. Such a power will have to be expressly reserved to the court pursuant to the Supreme Court Act 1981. Simply deleting the arbitration clause is not good enough.

Trevor Nicholls is a chartered civil engineer and partner in solicitor Rowe & Maw.

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