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Broad meaning given to “dispute arising under the contract” in adjudication

Much has been written already about the Supreme Court’s judgment in Bresco Electrical Services v Michael J Lonsdale but, before you stop reading this blog because you’ve already read umpteen updates about the case, I want to assure you that I’m not going to talk about the insolvency issue. I’m not even going to summarise the facts of the case, as they aren’t relevant to the part of Lord Briggs’ judgment I want to focus on. If you want to know more about the facts and insolvency issues, I can do no better than refer to you what Jennifer Guthrie or Michael Levenstein had to say.

If you want to know what I’m going to discuss, there is a clue in the title but you’ll have to read on…

Did the dispute arise under the contract?

Lonsdale argued that the adjudicator lacked jurisdiction because, as a result of the operation of insolvency set-off, all claims and cross-claims under the contract ceased to exist and were replaced by a single claim for the balance. Lonsdale said that this was not a claim under the contract, but a claim under Bresco’s insolvency and accordingly any dispute about the claim for the balance was also a dispute under the insolvency rather than under the contract.

One of Lonsdale’s subordinate arguments in support of this submission was that the liberal construction afforded to arbitration agreements that only refer to a “dispute arising under the contract“, as opposed to “a dispute arising under or in connection with the contract”, applied in the Fiona Trust case was inappropriate in the present case, mainly because adjudication was imposed upon the parties by the Construction Act 1996, rather than freely agreed by the contracting parties, but also because arbitration differs from adjudication.

It is therefore the Supreme Court’s findings on this matter that I want to discuss but, before I do so, I thought it would be helpful to consider some of the previous case law on this issue.

A long, long time ago…

I want to take you back to 2007 when the world hadn’t even suffered the financial crisis, let alone the global COVID-19 pandemic, and the case that started the ball rolling, namely Premium Nafta Products Ltd (20th Defendant) and others v Fili Shipping Company Ltd and others (the Fiona Trust case), where Lord Hoffman stated:

“I do not propose to analyse these and other such cases any further because in my opinion the distinctions which they make reflect no credit upon English commercial law. It may be a great disappointment to the judges who explained so carefully the effects of the various linguistic nuances if they could learn that the draftsman of so widely used a standard form as Shelltime 4 obviously regarded the expressions ‘arising under this charter’ in clause 41(b) and ‘arisen out of this charter’ in clause 41(c)(1)(a)(i) as mutually interchangeable. So I applaud the opinion expressed by Longmore LJ in the Court of Appeal (at paragraph 17) that the time has come to draw a line under the authorities to date and make a fresh start. I think that a fresh start is justified by the developments which have occurred in this branch of the law in recent years and in particular by the adoption of the principle of separability by Parliament in section 7 of the 1996 Act. That section was obviously intended to enable the courts to give effect to the reasonable commercial expectations of the parties about the questions which they intended to be decided by arbitration. But section 7 will not achieve its purpose if the courts adopt an approach to construction which is likely in many cases to defeat those expectations. The approach to construction therefore needs to be re-examined.

In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction. As Longmore LJ remarked, at para 17: ‘if any businessman did want to exclude disputes about the validity of a contract, it would be comparatively easy to say so’.”

Therefore, the House of Lords did away with the distinction between “disputes arising under the contract” and “disputes arising in connection with the contract” in respect of arbitration agreements. As such, if an arbitration agreement simply refers to disputes arising under the contract, either party is nevertheless entitled to refer disputes related to the relevant contract to arbitration, for example claims for misrepresentation, claims under related agreements, and so on.

One of the uphill struggles Lonsdale faced was that there had been a number of cases in which the courts had found that Fiona Trust also applies to adjudication, in particular:

“I consider that the Courts at the highest level have strongly signposted a departure from such previous distinctions and that the Courts on adjudication cases should follow this direction [set out in Fiona Trust].”

I blogged about this case at the time and noted that the judge’s views on this subject go back some time, as can be seen by his 2008 judgment in Air Design (Kent) v Deerglen (which I also commented on at the time).

However, it wasn’t all one way traffic as other authorities suggested the opposite conclusions. In Hillcrest Homes Ltd v Beresford and Curbishley Ltd, HHJ Raynor QC saw “considerable force” in the submission that the reasoning in Fiona Trust did not apply to adjudication because it was the consequence of statutory intervention. (I also discussed this case at the time.)

That is also consistent with the view of the editors of Hudson’s Building and Engineering Contracts, who clearly consider that the reasoning in Fiona Trust does not apply to adjudication clauses.

How I’ve dealt with this issue in the past

I have had to deal with the scope of adjudication clauses on a couple of occasions in the past, and before setting out Lord Briggs’ conclusions I will share how I have dealt with it (for what it’s worth!).

I most recently dealt with this issue in respect to a settlement agreement. In that case, I applied Fiona Trust and found that the directors of the parties to the contract, as rational business people, are likely to have intended all disputes concerning their relationship to be dealt with by the same tribunal. I acknowledged that arbitration is consensual, whereas adjudication is imposed by statute, and as such it is at least arguable that what the parties intended is of limited relevance. However, even if this was the case, what Parliament intended when enacting the Construction Act 1996 was certainly relevant, and the views of Lord Hoffman (in Fiona Trust) could equally be applied to the Parliamentary draftsmen, as confirmed by Akenhead J in Murphy v Maher (paragraph 31). I also acknowledged that Lord Hoffman relied on section 7 of the Arbitration Act 1996 and the principle of separability, when reaching his conclusions. However, he did not rely solely on section 7, and there was no mention of this in Aspect v Higgins, Paice v Harding or Murphy v Maher.

But what about the Supreme Court?

The Supreme Court’s conclusion on this issue is neatly summed up in paragraph 41 of the judgment, where Lord Briggs stated:

“There is in my view little to be gained by an extensive analysis of the question how close is the analogy between arbitration and adjudication for the purpose of applying or not applying the learning in Fiona Trust. There are plainly points to be made on both sides. There are obvious differences between arbitration and adjudication, but they are both types of dispute resolution procedures for which provision is made by a contract between the parties, in which recourse to that procedure is conferred by way of contractual right. I am not persuaded that the statutory compulsion lying behind the conferral of the contractual right to adjudicate points at all towards giving the phrase ‘a dispute arising under the contract’ a narrow meaning, by comparison with a similar phrase in a contract freely negotiated. The fact that, after due consideration of the Latham Report, Parliament considered that construction adjudication was such a good thing that all parties to such contracts should have the right to go to adjudication points if anything in the opposite direction. Indeed, the fact that the right to adjudicate is statutorily guaranteed is a powerful consideration favourable both to its recognition as a matter of construction, and to the caution which the court ought to employ before preventing its exercise by injunction.”

So, the Supreme Court has put to bed the proposition that because the right to adjudicate arises under statute, unlike arbitration, Fiona Trust can be distinguished. As such, the words “a dispute arising under a contract” should be given a broad meaning. As a result, it was irrelevant whether Bresco’s claim was under its insolvency as the adjudication provisions still applied.

The implications of the Supreme Court’s findings

I’m not sure that the Supreme Court’s findings will necessarily result in more disputes concerning settlement agreements, misrepresentation, and so on, being referred to adjudication in situations where the contract only referred to “a dispute arising under the contract”, as I think many practitioners were proceeding on the basis that Fiona Trust applied in any event.

However, it may result in less jurisdictional wrangling over this issue. This is likely to be helpful for those parties that have entered into settlement agreements, but then find that disputes arise over the meaning of those agreements. I suspect we might see more of these types of dispute the next 12 months for the same reasons as I said in my blog back in 2009:

“Like many people, I noticed an increase in disputes during the second half of 2008. However, I also noticed that many of those disputes settled. Claimants were faced with cash-flow problems, which left them with little alternative other than to accept lesser sums in settlement of their dispute.”

How quickly we seem to have come full circle!

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