Lawbite: Forum shopping in rent reviews

A recent County Court decision provides important guidance for commercial landlords and tenants on how to protect arbitration clauses in lease disputes.

The County Court found that a landlord who had applied to strike out or, in the alternative, stay its tenant’s defective court proceedings had not lost its right to pursue separate arbitration proceedings. Taking such action did not amount to taking a "step in the proceedings" for the purposes of section 9(3) of the Arbitration Act 1996 (the Act), such that the landlord could be said to have demonstrated an intention to abandon arbitration in favour of litigation.

This England and Wales County Court appeal decision is relevant to commercial landlords, tenants and their advisers.

Background

A tenant of commercial premises in London had commenced court proceedings which, in part, sought the determination of rent payable pursuant to the rent review provisions in the lease of the premises.

The landlord applied to strike out the rent-review parts of the claim under CPR 3.4 as arbitration proceedings were already ongoing in relation to the same matter. In the alternative, it sought a stay under section 9(1) of the Act to allow arbitration to continue.

The landlord’s defence and acknowledgment of service expressly stated they were filed without prejudice to the strike-out and stay application.

The tenant argued that the landlord had lost its right to a stay because, by applying to strike out part of the claim, it had taken a "step in the proceedings" within the meaning of section 9(3) of the Act.

Section 9(3) of the Act

Section 9(3) prevents a party from obtaining a stay in favour of arbitration if its conduct in the court proceedings demonstrates that it has chosen to litigate the dispute rather than pursue the contractual arbitration process. The abandonment of arbitration can take place by taking any “step in those proceedings to answer the substantive claim”.

First-instance decision

The District Judge held that the landlord’s primary purpose in making its application was to strike out the claim. This made the stay secondary and amounted to a “step in the proceedings” under section 9(3). The stay application was dismissed.

Appeal

HHJ Marquand allowed the appeal, finding that the District Judge had not applied the full three-part test from Capital Trust Investments Ltd v Radio Design TJ AB [2002] EWCA Civ 135.

The three elements of the test derived from Capital Trust Investments Ltd and the court’s comments on these are set out below:

1. Has the party demonstrated an election to abandon arbitration in favour of court proceedings?

The key question is whether the party's conduct objectively shows an intention to give up its right to arbitrate and instead have the dispute determined by the court.

2. Has the party invoked the court's jurisdiction to answer the substantive claim?

Merely engaging with the proceedings is not enough. The court must consider whether the party has taken a substantive step which engages the court to determine the underlying dispute.

3. Has the party expressly reserved its right to seek a stay and pursue arbitration?

A procedural step that might otherwise amount to a "step in the proceedings" will generally not do so where the party has clearly stated that it intends to seek, or reserves the right to seek, a stay in favour of arbitration. Such a reservation is inconsistent with an election to abandon arbitration. The concept of “primary” versus “secondary” purpose as applied by the District Judge does not appear in the test.

The Court found that the landlord’s overall conduct showed it had not abandoned arbitration.

The appeal was allowed and the court concluded that the dispute should remain subject to the contractual arbitration process, overturning the earlier decision refusing a stay.

Takeaways:

• where parties have agreed that rent reviews are to be determined by an arbitrator, the courts will generally uphold that bargain unless there is a clear basis for concluding that the arbitration agreement is invalid, inoperative or incapable of being performed.
• the court applied a three-part test in making its determination: (1) whether the conduct demonstrates an election to abandon arbitration; (2) whether the act invokes the court’s jurisdiction; and (3) whether a specific statement reserving the right to seek a stay exists. Satisfying the third element can prevent a procedural step from qualifying as a “step” under section 9(3)
• it is crucial in such cases expressly to state in any court application, defence and correspondence that the application is made without prejudice to the right to seek a stay for arbitration. The order in which remedies appear in an application notice is not determinative
• the further court proceedings progress without a clear reservation of arbitration rights, the harder it becomes to avoid being treated as having elected to litigate. Act promptly and consistently
• care should be taken before commencing court proceedings where a lease contains an arbitration clause. Parties risk incurring unnecessary costs if the court ultimately concludes that the dispute should proceed through arbitration in accordance with the lease
• while a County Court decision and therefore not binding authority, the case provides a helpful reminder of the courts' approach to disputes concerning competing dispute resolution forums, and in particular when participation in litigation will, and will not, amount to a waiver of a party's right to arbitrate