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When will a
court not stay proceedings even in the presence of an arbitration agreement?
Prepared by Keith Shaw, Adv. and Asaf Biger,
Adv., Zell &
Co.
January
2004
A key feature of many arbitration statutes is the
provision providing for stay of proceedings – in other words, that if the
parties have previously agreed to refer any disputes to arbitration, a court
will stay any proceedings brought by one against the other in breach of such
agreement.
Hence, for
example, section 9 of the UK Arbitration Act 1996:
“(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) An application may be made notwithstanding that the matter is
to be referred to arbitration only after the exhaustion of other dispute
resolution procedures.
…
(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.”
The Israeli
position is little different. Section 5 of the Arbitration Law 1968
provides as follows:
“(a) Where an action is brought in court in a dispute which it had
been agreed to refer to arbitration, and a party to the action who is a
party to the arbitration agreement applies for a stay of proceedings in the
action, the court shall stay the proceedings between the parties to the
agreement, provided that the applicant has been and still is prepared to do
everything required for the institution and continuation of the arbitration.
…
(c) The court may refrain from staying proceedings if it sees a
special reason why the dispute should not be dealt with by arbitration.”
Both
statutes accordingly provide that if an application is made by a party to an
arbitration agreement to stay proceedings which have been brought, the court
must grant such application, unless (in the case of the UK) the agreement is
in some way defective, or (in the case of Israel) special reasons exist for
not doing so.
Looking at
the parallel provisions closely, though, a difference can be discerned. A
UK court can decline to stay proceedings only if there is a problem with the
actual arbitration agreement itself. By contrast, an Israeli court has a
wider discretion – its powers to decline are not limited to a case of
contractual deficiency, but may be exercised whenever the court finds a
“special reason” why arbitration should not be the appropriate forum for
settlement of a dispute.
How ready will the court be to exercise such
discretion? A consideration of what might constitute such special reasons
was handed down by Judge Boaz Okon in the Jerusalem District Court on 15
January 2004, in the case of
Tel
Zion – Building and Management Services -v- Tratkovsky, Korn and others.
The
petitioner, a contractor, had entered into separate agreements with two
couples, the Tratkovskys and the Korns, concerning the sale of apartments.
The petitioner had entered into a separate agreement with a sub-contractor,
Royalco Building Ltd., to carry out the construction work in each of the two
cases.
The two
couples both filed claims against the petitioner and the sub-contractor in
respect of building deficiencies. The petitioner applied for a stay of
proceedings, based on a section in its agreements with the couples, pursuant
to which all disputes between the parties, or between them and the
sub-contractor, would be resolved by arbitration.
The court
of first instance denied the application, on the ground that the
sub-contractor was not a party to the arbitration agreements, and that
accordingly arbitration of the dispute between the petitioner and the
couples would lead to double proceedings. The court also noted that it had
not seen evidence that the arbitrators whose names were mentioned in the
agreement were indeed prepared to act as arbitrators. The petitioner
requested leave to appeal.
Judge Okon
stated firstly that the undertaking to settle a dispute through arbitration
has special meaning, and a party cannot easily avoid it. This principle is
finds expression in section 5(a) of the Arbitration Law, which permits a
court to decline to stay proceedings only if the party succeeds in showing
why he should be exempt from his undertaking to submit his dispute to an
arbitrator.
However,
the judge went on to note, there is inherent within the arbitrative process
a certain derogation from the rights of the parties to have access to the
legal system. This derogation finds expression in the parties’ waiver of
the right to be heard in a court of law, and in the limitation of the
parties’ ability to challenge the arbitrator’s decision. Nevertheless, such
a consideration is not overriding, and takes second place to the parties’
joint decision to create an agreed framework for dispute settlement.
The judge
further noted the importance of arbitration within the framework of a
cooperative democracy, in that it provides the parties with the opportunity
to design a dispute resolution procedure which meets their particular needs,
and even to style the legal principles by which their dispute will be
settled. The prevailing principle is accordingly to uphold the undertaking
to settle a dispute by way of arbitration. This is particularly the case
when there are clear advantages to resolution by an arbitrator, such as
arbitration with regard to matters of particular expertise or local
matters. On the other hand, when the advantage of arbitration is less
clear-cut, such as where the parties are of unequal bargaining power, and
this is reflected in the arbitration agreement, less weighty special reasons
may be required to allow the exercise of the discretion to decline to stay
proceedings.
In general,
the judge stated, the claim that allowing an arbitration to proceed will
lead to double proceedings (because a party not party to the arbitration
agreement will still bring its claim through the courts) does not of itself
justify declining to stay proceedings. The inconvenience caused by double
proceedings should not deprive a party of a contractual right. The claim of
double proceedings should only be considered sufficient if the circumstances
are such that the joining of all the parties to a single proceeding appears
a legal and substantive necessity, meaning that this would be vital in order
to allow a plaintiff to obtain effective relief. This was not the case in
the present matter.
There was,
however, an additional consideration. This was that the agreement to go to
arbitration afforded the petitioner a substantial advantage. It was the
petitioner who had selected the list of arbitrators set out in the
agreement, of which the couples could choose only one. Furthermore, the
petitioner had reserved the right to require that the arbitrator give a
reasoned decision, while the couples had no such right. This imbalance,
along with the risk of double proceedings, together constituted special
reasons for the court to exercise its statutory discretion to refrain from
staying the proceedings. The petitioner’s request was therefore denied.
One should
take careful note of Judge Okon’s decision. It is common belief that if an
arbitration agreement is properly entered into and valid, the courts will
act to prevent to commencement of legal proceedings in breach of such
agreement. Indeed, it would appear that this would be the case pursuant to,
for example, UK law. However, as noted above, Israeli legislation has taken
a slightly divergent route, with the result that even a valid arbitration
agreement may not be enforced by the court, if special reasons exist for
such a course of action. Indeed, it is submitted that an English court,
given the differently-drafted legislation, could not have reached the
decision made by Judge Okon, since no claim was made that the arbitration
agreement in question was void or incapable of performance. It is important
for parties entering into arbitration agreements in Israel to be fully aware
of this position.
In the
context of international arbitration, though, it is also important to note
the provisions of section 6 of the Arbitration Law, and in particular its
effect on the role of the court. This section provides as follows:
“Where an action is brought in court in a dispute which
it had been agreed to refer to arbitration, and an international convention
to which Israel is a party applies to the arbitration, and such convention
lays down provisions for a stay of proceedings, the court shall exercise its
power under section 5 in accordance with those provisions.”
This
section was not relevant in the above case, since no international
convention applied to the arbitration in question. It is however submitted
that in cases where such a convention applies, the discretion to decline to
stay the proceedings such as was exercised by Judge Okon would often be
significantly restricted.
The leading
such convention by far is the United Nations Convention on the Recognition
and Enforcement of Foreign Arbitral Awards (New York, 1958) (“the
Convention”), to which Israel is a party. Article 2 thereof provides as
follows:
“(1) Each Contracting State shall recognize an agreement in writing
under which the parties undertake to submit to arbitration all or any
differences which have arisen or which may arise between them in respect of
a defined legal relationship, whether contractual or not, concerning a
subject matter capable of settlement by arbitration.
(2). The
term "agreement in writing" shall include an arbitral clause in a contract
or an arbitration agreement, signed by the parties or contained in an
exchange of letters or telegrams.
(3) The
court of a Contracting State, when seized of an action in a matter in
respect of which the parties have made an agreement within the meaning of
this article, at the request of one of the parties, refer the parties to
arbitration, unless it finds that the said agreement is null and void,
inoperative or incapable of being performed.”
By contrast
to section 5 of the Arbitration Law, the combination of section 6 with
Article 2(3) of the Convention operates to restrict severely the exercise of
the court’s discretion to decline a stay. As noted above, it is this more
restrictive position which prevails in other jurisdictions such as the UK.
Indeed, the language of the latter part of Article 2(3) is identical to that
of section 9(4) of the UK Arbitration Act.
Consequently, if the conditions of Article 2 are met, the court has no
option but to stay the proceedings, unless the arbitration agreement is
somehow defective. As noted by Smadar Ottolenghi, in “Arbitration – Law and
Practice”:
“Here, too,
there is an express and specific referral to arbitration. The court has no
discretion in the matter, except in the three specified situations mentioned
in this section. As a result, the court is obliged to stay proceedings,
even thought reluctantly, proclaiming that had it to weigh the
considerations under Section 5 of the Arbitration Law it would not have so
decided…It is not the parties who negate the judicial jurisdiction, but
rather the Israeli legislator, in section 6, in giving preference to the
provisions of the Convention over the discretion of the court.”
Hence the Supreme Court in Mediterranean
Shipping Co. SA -v- Credit Lyonnais (Suisse) and others:
“One may
derive from section 6 of the Law and from the provision in the convention to
which it refers that the provisions of Article 2(3) of such convention
override the provisions of section 5 of the Law; based on section 6, there
is an obligatory referral to arbitration unless the arbitration agreement is
null and void, inoperative or incapable of being performed.”
Consequently, while section 5 of the
Arbitration Law grants the Israeli court a certain discretion, section 6,
when an international convention applies, effectively removes this
discretion, meaning that the court has no option but to stay proceedings and
return a matter to arbitration, even when this goes against its better
judgment. Hence the Tel Aviv Magistrates’ Court in Charles Suissa -v-
Avi Arieli and others:
“Despite all the inconvenience in doing so, it seems that
in the matter before me, I am prevented from exercising my discretion, since
in section 6 of the Law the legislator gave preference to the provisions of
the Convention over the court’s discretion. This dispute must therefore be
decided by arbitration.”
The above
represents an important caveat to the apparently wide discretion granted to
the Israeli court to decline a stay. As can be seen from Judge Okon’s
decision, the court enjoys a notably free hand when the matter before it is
of a domestic nature. In an international context, though, such freedom is
almost entirely curtailed.
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