If litigation proceedings are commenced in breach of a valid and enforceable agreement to arbitrate, how soon in the proceedings does a defendant need to seek a stay of the litigation?
The Supreme Court of Bermuda recently considered this question in Shelly Hall Properties v Warren [2022] SC (Bda) 101.
Statutory provisions for staying litigation in favour of arbitration
The Bermuda International Conciliation and Arbitration Act 1993, which governs international commercial arbitration, provides that if litigation is brought on a matter which is subject to an arbitration agreement, the court shall refer the parties to arbitration if a party makes this request not later than when the party submits its first statement on the substance of the dispute.
Bermuda's Arbitration Act 1986, which applies to domestic arbitration, sets out that if litigation is commenced in respect of a matter which the parties have agreed to refer to arbitration then any party may, before delivering any pleadings or taking any other step in the litigation, apply to the court to stay the litigation.
The premise of these statutory provisions is a strong policy in favour of arbitration, however the agreement to arbitrate must be raised by one of the parties and if a defendant fails to do so — and instead proceeds to respond substantively to litigation brought in contravention — then it may have waived its right to rely on the agreement.
Shelly Hall Properties v Warren
In Shelley Hall, a landlord commenced proceedings in Magistrates' Court against tenants of a residential property for unpaid maintenance fees required under the lease. The lease contained an arbitration clause but the tenants, who were self-represented, did not raise the clause in defending against the claim and also counterclaimed alleging that the landlord had failed to maintain the property and provide adequate water service. The tenants failed to appear at the trial, at which the landlord did not bring the arbitration clause to the attention of the presiding magistrate. The magistrate rendered monetary judgment in favour of the landlord and dismissed the tenants' counterclaim.
The landlord applied to the Supreme Court for possession of the property on the basis of the judgment. The tenants, in turn, applied to stay the possession application on the basis of the arbitration clause in the lease and the Arbitration Act 1986. Mr Justice Mussenden stayed the landlord's possession application so to provide the tenants with the opportunity to appeal the judgment on the basis of the arbitration clause and, if successful, to commence arbitration. Central to this ruling was that the landlord had not raised the arbitration clause at the trial in the Magistrates' Court which the tenants failed to attend.
Case comment
The ruling of Mussenden J in Shelley Hall may be construed narrowly as an exception, in cases of self-represented defendants, to the general rule that defending litigation substantively without raising the arbitration agreement is a waiver of the right to arbitration. Similarly, parties to arbitration agreements which bring litigation proceedings on the basis that their counter-party will not — or would not be expected — to arbitrate may, out of an abundance of caution, wish to ensure that the court's attention is brought to the arbitration clause in any application for default judgment.
However, it also goes to show that the rule, that a defendant will waive its arbitration rights if it responds to litigation without raising the arbitration clause, is not absolute. Indeed, in Shelley Hall, Mussenden J cited English case law where an application to strike out a Statement of Claim for failing to disclose a cause of action did not preclude the defendant from subsequently seeking to stay the litigation on the basis of an arbitration clause.
As always, care should always be taken by each party at the outset of any litigation to ensure that all applicable arbitration rights are considered and, if so desirable, preserved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Kennedys operates in Bermuda in association with Kennedys Chudleigh Ltd.
