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What is the "First Step in the Proceedings to Contest the Merits’’ under the Arbitration Act 1996?

1. INTRODUCTION

The significance of identifying what is the ‘‘first step in the proceedings’’ lies in the fact that a party wishing to challenge an arbitral tribunal’s lack of substantive jurisdiction has, under the Arbitration Act 1996 s.31(1), up to the time it takes the ‘‘first step in the proceedings to contest the merits of any matter’’ to challenge the tribunal’s jurisdiction. If it takes this first step without raising an objection, it has effectively ‘‘missed the boat’’ and has waived its rights to challenge the substantive jurisdiction of the tribunal.

Section 31(1) provides:

‘‘An objection that the arbitral tribunal lacks substantive jurisdiction at the outset of the proceedings must be raised by a party not later than the time he takes the first step in the proceedings to contest the merits of any matter in relation to which he challenges the tribunal’s jurisdiction.

A party is not precluded from raising such an objection by the fact that he has appointed or participated in the appointment of an arbitrator.’’

The question posed by this paper is what is ‘‘the first step in the proceedings to contest the merits’’. At first blush, there seems to be an obvious answer—a party has until the time it files a defence to object to the arbitral tribunal’s substantive jurisdiction. This approach would correspond with that adopted by English courts under Pt 11 of the Civil Procedure Rules, and also with Art.16 of the Model Law, which treats the defence as being the point at which, if a party continues to participate in the proceedings without raising any objections, it is considered to have submitted to the jurisdiction.

Whether the same approach will be applied in the context of the 1996 Act despite the drafters of the Act having deliberately used more flexible wording (and not specifically mentioning the service of a defence) has given rise to some uncertainty. Arguably, this issue has now become more unclear, and controversial, after a recent arbitration where a London tribunal had to determine this difficult issue.

2. ‘‘ANY STEP WHICH DID MORE THAN OBJECT TO JURISDICTION’’

The facts of London Arbitration 4/03, as reported in the LMLN 0609, were these. A dispute had arisen where the claimant owners sought to recover damages against the defendant charterers, as a result of the charterers’ refusal to perform their contractual obligations under a fixture note dated November 28, 2000 which the parties had allegedly entered into.

Pursuant to the arbitration clause contained in the fixture note, the claimants appointed their arbitrator on December 11, 2000 and notified the defendants on the following day, with a request for the latter to appoint their arbitrator within 14 days. The defendants failed to appoint an arbitrator within the period permitted under the 1996 Act. As a result, the claimants’ arbitrator informed the parties on February 9, 2001 that he agreed to act as the sole arbitrator in the reference, given that the defendants had failed to appoint their own arbitrator. About two weeks later, on February 22, 2001, the claimants served their points of claim. Most probably at the request of the claimants (although the LMLN report does not say so), on March 2, 2001 the arbitrator wrote to the defendants, ordering them to serve defence submissions with supporting documents by March 27, 2001. In the same message he said that the defendants could apply for an extension if necessary, and asked them to tell him if there was anything they did not understand about the arbitration. The defendants continued to ignore those proceedings. This prompted the claimants to apply for a final and peremptory order that the defendants serve their defence within seven days. For the first time, there was a reference to Korean court proceedings, where it was alleged by the defendants that there was no valid arbitration agreement, although those proceedings were stayed until May 22, 2001; (it was unclear whether the stay was to enable the arbitrator to make his own finding on jurisdiction). The arbitrator ordered the defendants to serve their defence by April 3, 2001, failing which he would proceed to a final award on the documents and submissions then before him.

The defendants failed to comply with the terms of this peremptory order, and the arbitrator accordingly proceeded to prepare his final award. However, two days later on April 5, 2001, he raised a query regarding the claimants’ calculation of damages and ordered them to prepare any amendments within a short deadline, with the defendants being permitted a further chance to comment. The claimants served their revised calculations promptly on the following day. The arbitrator then wrote to the defendants to order that any comments from them must be served by April 17, 2001. It was only at this point (on April 11, 2001 to be precise) that the defendants responded for the first time. Their English solicitors sent the following fax to the arbitrator:

‘‘[W]e would be grateful if the Tribunal would grant us an opportunity to make a formal application for an extension of time for service of our clients’ defence submissions . . . We understand that our clients may wish to raise arguments as to the jurisdiction of the Tribunal. Therefore, we must formally state that by this fax our clients should not be deemed as having surrendered to the jurisdiction of the Tribunal and we reserve our clients’ rights to make submissions in this respect.’’

The claimants responded by saying that, because the defendants were in breach of a final and peremptory order, their submissions should be limited to only the alteration in the quantum, and they should not be allowed to deal with the whole claim. When the arbitrator asked the defendants’ solicitors to comment on this, they wrote:

‘‘[W]e must now formally apply to the Tribunal for permission to serve defence submissions in respect of the matter as a whole rather than simply the increase in [the claimants’] claim . . . However, again we do remind the Tribunal that the defence submissions may raise arguments as to its jurisdiction.’’

When the arbitrator decided not to permit the defendants to advance defence submissions on the whole dispute, but only in relation to the alteration in quantum, the defendants’ solicitors wrote:

‘‘We are preparing our clients’ pleading. We shall serve the pleading within the time frame ordered by the Tribunal reserving all of our clients’ rights whatsoever and howsoever arising including but not limited to their right to challenge the jurisdiction of the Tribunal, the validity of its constitution, its orders and against your company generally.’’

Finally, on May 4, 2001, this being the deadline for the defendants’ submissions regarding the alteration in quantum, the defendants’ solicitors wrote to assert that there was no valid arbitration agreement, and asked the arbitrator to rule on his own jurisdiction under ss.30 and 31.

When making a ruling on his own jurisdiction, the arbitrator needed to decide whether the defendants had waived their right to object by having already taken their first step in the proceedings to contest the merits (s.31(1)) and, if so, whether the arbitrator should exercise his discretion to admit the objection, even though it was out of time (s.31(3)).

The defendants submitted that, in the faxes sent to the arbitrator before May 4, 2001 (passages in which were cited above), there were no submissions made on the merits; therefore they could not have taken a first step in the proceedings to ‘‘contest the merits’’; further (or alternatively), as the defendants’ position on jurisdiction was expressly reserved in all of those faxes, there was no question of the defendants losing the right to object by virtue of waiver or estoppel.

The arbitrator rejected these arguments and decided that the defendants had lost the right to object. A party would be considered to have taken its first step in the proceedings if it was a step which did more than object to jurisdiction. Therefore, in requesting the arbitrator to grant, for example, an extension of time and permission for the defendants to serve submissions in respect of the whole claim (rather than only the alteration in quantum), the defendants did more than to challenge jurisdiction, and had therefore taken their first step in the proceedings. Furthermore, he did not consider the defendants’ express reservation of their rights to object to jurisdiction sufficient to protect their position. It was not specific enough and only indicated, for example, that they ‘‘may’’ raise arguments as to the tribunal’s jurisdiction. The arbitrator also decided not to admit the defendants’ objection on jurisdiction out of time. When the defendants alleged in the Korean court proceedings that there was no valid arbitration agreement, which was not later than March 28, 2001, they should have known of the grounds for objecting to the tribunal’s jurisdiction. Yet they waited for over a month to raise the objection, despite having the opportunity to do so in their earlier faxes. There was, therefore, no basis on which the arbitrator would wish to exercise his discretion in favour of the defendants.

3. APPRAISING THE CURRENT APPROACH

Was the arbitrator’s approach in London Arbitration 4/03 to conclude that ‘‘the first step in the proceedings to contest the merits’’ was merely a step which ‘‘did more than object to jurisdiction’’ an attractive proposition? There was certainly high profile dissent to this approach. In the popular commentary to the 1996 Act by Harris, Planterose and Tecks, the position was taken that the step had to be ‘‘a formal one, possibly ordered by the tribunal’’, and the authors would ‘‘hope that the courts would look for some greater degree of formality’’. To illustrate this point, the authors thought that a party’s attendance at a preliminary meeting would not necessarily amount to a step in the proceedings but, if the party actually submitted a formal denial of the claim, whether by way of a defence or otherwise, then it could be considered a step. The denial does not need to be in writing, and could, conceivably, be an oral statement made at the preliminary meeting.

On this analysis, it would follow that the defendants in London Arbitration 4/03 had done nothing that was tantamount to a step in the proceedings that would extinguish their right to challenge the tribunal’s substantive jurisdiction. The authors make this point clear by stating that they have ‘‘reservations about this non-authoritative decision’’. It is easy to appreciate why a degree of formality would make good sense. It is usually encouraged and is quite common for litigants to interact, in the spirit of co-operation, with each other and with the tribunal on procedural matters, whether they involve asking for time-extensions or agreeing to timetables. This spirit of co-operation would be adversely affected if litigants are to feel that any interaction with the tribunal, even if it is on routine matters with no reference to the merits of the dispute, could be construed as a waiver of their right to challenge the tribunal’s substantive jurisdiction. Drawing a meaningful line which would distinguish between a fax seeking a time-extension and, for example, a fax acknowledging receipt of a message from the tribunal could be extremely difficult, since they are clearly both steps that did ‘‘more than object to jurisdiction’’, and could conceivably be construed as the first step in the proceedings that would deprive the litigant of the right to challenge the tribunal’s jurisdiction.

It must be noted, however, that London Arbitration 4/03 was not the only authority for the proposition that a time-extension could constitute a waiver of the right to object to the tribunal’s jurisdiction. The tribunal in London Arbitration 4/03 relied on the obiter comments of Steyn J. in The Jing Hong Hai, that an application to the tribunal for a timeextension within which to provide submissions was an ‘‘implied representation’’ that the party regarded the tribunal (Harris and Hamsher in that case) as properly appointed.

On balance, however, it is submitted that a degree of formality is the more preferable way forward. As English law now stands, the safest course of action must surely be for a litigant who intends to challenge jurisdiction to ignore the tribunal completely. It could potentially jeopardise its position if it writes to the tribunal, even if simply to acknowledge receipt of the tribunal’s message, consent to deferring appointment of a third arbitrator, or agree to a procedural timetable, for any such action will surely be something ‘‘more than object to jurisdiction’’.

Whether the drafters of the 1996 Act intended this result is questionable. The Departmental Advisory Committee (DAC) Report on the 1996 Act stated that it was their intention to use flexible wording, rather than to refer to the word ‘‘defence’’, to dispel the notion that ‘‘every arbitration requires some formal pleading or the like’’. It is obviously correct that arbitration is anticipated to be a flexible mechanism where parties are allowed autonomy to adopt a procedure that fits their dispute resolution requirements. Therefore, it could well be the case that a defence is not necessary, or that it would not be the first step that the parties take (for example, the first step could be a preliminary meeting in which the merits of the dispute were discussed). There is, however, nothing in the DAC Report which suggests that the attribute of formality which is inherent in a defence is no longer required. In fact, it would make good sense to conclude that the first step need not be a defence as such, but could be an act that is equally formal that has an impact on the merits. There is certainly no suggestion that anything ‘‘more than object to jurisdiction’’ could constitute such a step.

It is understandable that the requirement of a formal step could give rise to a feeling of injustice on the facts of London Arbitration 4/03, given that the defendants had been able to drag the matter out for so long. However, this is a concern that could already be covered by the 1996 Act, s.73(1), which states that any objections must be taken forthwith once the grounds for challenge are known, and cannot be taken later. In other words, any delay in raising an objection could be fatal. It could well be that the defendants in London Arbitration 4/03 would have fallen foul of s.73(1). A difficulty, however, is that s.31(1) does not specifically refer to s.73(1). This is surprising because s.32(1), which is a sister provision that deals with objecting to the tribunal’s jurisdiction by way of an application to the court on a preliminary point of jurisdiction, expressly refers to s.73(1). I could find no explanation for this discrepancy but note that authoritative commentators seem to treat s.73(1) as being available to deny the right to challenge the tribunal’s jurisdiction if there was delay.

4. CONCLUSION

If s.73(1) does indeed apply to challenges under s.31(1), then this would appear to be a more satisfactory basis for deciding that the defendants had waived their right to object to the tribunal’s jurisdiction in London Arbitration 4/03. Therefore, for the reasons already discussed in this paper, it is submitted that ‘‘the first step in the proceedings to contest the merits’’ must be one that involves a certain degree of formality. Otherwise, it could potentially make litigants wary of engaging the tribunal even on routine matters. This would hardly be constructive.