New Zealand: Arbitration clauses and summary judgment: what to do when you don't think there is a dispute

Introduction

Arbitration clauses are increasingly used in commercial agreements and in leases. One question that often arises in situations where there is an arbitration clause is what claimants should be doing when it does not think the defendant has a defence? Usually the claimants have proceeded to Court under the summary judgment procedure¹; however the Supreme Court in Zurich Australian Insurance Limited t/a Zurich New Zealand v Cognition Education Limited² has now closed off this option.

The decision will have significant practical implications for parties. The summary jurisdiction is not often used in arbitrations and the reasons for that appear to be both principled and practical.

Nevertheless there are good reasons – both in terms of principle and practicality - why clients might want to have access to a summary jurisdiction and there are ways that this can be achieved – namely by allowing for it in the arbitration clause itself.

What did the decision say?

The Zurich Australian Insurance Limited v Cognition Education Limited case involved a contract frustration insurance policy between Zurich (the insurer) and Cognition (the insured). That policy contained an arbitration clause.

Cognition made a claim under the policy which Zurich declined to pay. Cognition then applied for summary judgment (presumably because of confidence in its case). In response Zurich filed an appearance objecting to the jurisdiction of the Court and sought a stay of the proceeding under Article 8(1) of schedule 1 of the Arbitration Act 1996.

Article 8(1) of schedule 1 is key to this case. That article says:

Arbitration agreement substantive claim before court

The court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if the parties so request not later than when submitting that party's first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless if finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.

The question before the Supreme Court was summarised at paragraph [10] of that judgment where the Court said it needed to assess the final words in Article 8(1) which gives the Court the power not grant a stay where "it finds...that there is not in fact any dispute between the parties with regard to the matters agreed to be referred"

Two interpretations were put forward. The first was for the Court to find there was no "dispute" then it must be satisfied there was no reasonably arguable defence – which would mean the Court could grant summary judgment even though there was an arbitration clause. The second interpretation advanced was that for the Court to find there was no "dispute" meant it had to be satisfied that any dispute raised was not "bona fide".

The Supreme Court described the competing interpretations as the "broad and narrow tests".³ It preferred the narrow test. Accordingly where an arbitration agreement covers the relationship between the parties they can no longer apply for summary judgment.

What are the practical implications of this?

What then are claimants to do when it considers the defence is either extremely weak or is not genuine? First unless it is obvious that any dispute raised is not bona fide then you should proceed to the court. In cases where there has simply been no reply then parties should probably proceed to the court anyway; it is difficult to imagine a court that would say a recently raised dispute after considerable correspondence was in fact "bona fide" and that a court would then refer the matter to arbitration. Even if it did so the risk of an adverse costs award would be low.

However, if the case is simply weak, then the dispute resolution process set out in the relevant agreement should be commenced as soon as possible. But, are there ways to short-cut that process through a summary judgment type procedure?

The answer to that would appear to be 'no'. That is because arbitrations generally do not allow for interlocutory applications or summary procedures (especially internationally); as Williams & Kawharu note "[a] recurring criticism of arbitration is that there is no efficient method for the early disposal of meritless claims.⁴

Why is that? One reason may be that it is a matter of principle – arbitrators are afraid of breaching the requirements for natural justice and having any award set aside by the Court later. One of the requirements of natural justice in the arbitration context is said to be "the hearing must, unless the contrary is expressly agreed, be the occasion on which the parties present the whole of their evidence and argument".⁵

The idea of a potential two stage process, with a summary hearing and, if that failed, a full hearing would, on that basis, appear to need to be specifically agreed.⁶ However there should be no objection to that – after all the provisions of the Arbitration Act itself (namely Articles 18 and 24 of Schedule 2) mean that the parties are free to agree whether or not to have a hearing at all. Provided there is agreement between the parties that should remove the risk of any award been set aside in the event a summary procedure is used.

The second reason why arbitrators may have been reluctant to exercise a summary jurisdiction is because "add ons" and procedural complexity – such as multiple hearings - undermine one of the advantages of arbitration – namely it can be a "relatively quick, simple, and confidential method of resolving their disputes."⁷

How then should parties approach this issue? First, it must be said that there are benefits to a summary procedure. It does allow parties to quickly resolve a dispute where one party is very confident in their case. There is no reason in principle why that should be available to the Court but not to arbitrators.

There are also practical cost and time savings for the parties and there is no reason why a party that is particularly confident of its case should not have the right to effectively "take the risk" and see whether its case is as strong as it believes or the other side's case is as weak as it believes.

In saying that, there are questions as to whether summary judgment procedure would in fact add much in arbitration. Practically speaking most arbitrations proceed with evidence on the papers with cross examination and oral submissions (as do most Court hearings now). If there is, in fact, no reasonably arguable defence then it is difficult to see how a full hearing would be that much longer or more expensive than a partial one.

Further the primary purpose of the summary jurisdiction is to enable a 'short-cut'. Given that arbitrations are generally swifter than the Court process without the summary jurisdiction it is difficult to see what is gained.

What should parties do?

The best way for parties to deal with this issue is up front in the arbitration clause. Those drafting arbitration clauses for parties should discuss with them whether or not they want to have summary judgment or strike out available to them after considering the practical benefits. Provision could be made in the arbitration clause in a way similar to the following:

The parties agree that any arbitrator appointed under this clause has the jurisdiction to determine an application for summary judgment or for strike-out in the same manner as a judge of the High Court and following the same procedure set out in the High Court Rules. The timeframes for the making of any such application will be set by the arbitrator.

This would appear to resolve the objection to the exercise of a summary jurisdiction by arbitrators on the basis of principle; the parties agreeing to it up front means that no party can be denied natural justice when they are simply being held to the bargain they have already made. As for practicality such a clause leaves that in the hands of the parties at the time.

Footnotes

¹The summary judgment procedure allows the Court to grant judgment after a short hearing where there is "no reasonably arguable defence".
²Zurich Australian Insurance Limited t/a Zurich New Zealand v Cognition Education Limited [2014] NZSC 188.
³Zurich Australian Insurance Limited t/a Zurich New Zealand v Cognition Education Limited [2014] NZSC188 at [10].
⁴D Williams & A Kawharu, Williams & Kawharu on Arbitration (LexisNexis, Wellington, 2011) at 304 and Walker, C T "International arbitration: return to Eden?" [2008] NZLJ 301 at 302
⁵Trustees of Rotoaira Forest Trust v Attorney General [1999] 2 NZLR 452 citing Mustill and Boyd, Law and Practice of Commercial Arbitration in England (2nd ed, Butterworths, London 1989) at [3] p 301
⁶Although that must be questionable – the requirement appears to be directed more towards communications with the tribunal outside of the hearing itself.
⁷C T Walker "International arbitration: return to Eden?" [2008] NZLJ 301 at 303

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.