Dispute Resolution Clauses24 Feb 2021 // Insights
Recent case law reminds us that commercial parties should think carefully about dispute resolution provisions at the drafting stage.
It can be very tempting for commercial parties to simply cut and paste ‘boilerplate clauses’ from previous agreements without giving any real thought to how disputes under a new contract should be dealt with. However, as recent English case law demonstrates, this can be an expensive way to proceed.
Arbitration or litigation?
The Commercial Court decision in Helice Leasing S.A.S v PT Garuda Indonesia (Persero) TBK  EWHC 99 (Comm), is a reminder to commercial parties that they should give consideration to specific breaches that might arise under a contract and in what forum they wish those specific breaches to be resolved.
The case concerned an aircraft operating lease which included a standard arbitration clause providing for “any dispute” to be resolved by the London Court of International Arbitration (clause 15.2). However, the lease also purported to give the lessor (Helice) an option to “proceed by appropriate court action” in case of an Event of Default under the lease, including non-payment of rent (clause 13.2(b)).
In the event, the lessor (Garuda) was in rental arrears which was an undisputed fact. Following some failed attempts at reaching agreement regarding a repayment plan, Helice issued a claim in the High Court against Garuda for non-payment under clause 13.2(b). Garuda sought a stay in favour of arbitration under s.9 of the Arbitration Act 1996 relying on clause 15.2.
At the hearing, Helice argued that clause 13.2 comprised an exception to clause 15.2 and gave it additional rights in the event that Garuda was in default for non-payment, one of these additional rights being the right to proceed in court, by court action. Helice submitted that this construction made good commercial sense because it was understandable that on the occurrence of an Event of Default, a lessor would wish to have greater flexibility as regards forum, for a variety of reasons including location of the aircraft or other assets of the lessee or the availability of summary procedures.
In his Judgment, Mr Justice Calver considered the apparently conflicting dispute resolution provisions of the lease and various points on construction. In granting Garuda a stay in favour of arbitration he noted that “in order to give the contract a business common sense construction … "court action" in clause 13.2(b) must reasonably have been intended by the parties to mean action before the London Court of International arbitration, that is action within clause 15.2”. In support of this construction, he noted clause 2.1(k), whereby Garuda represented and warranted to Helice that "The choice by [Garuda] of the law of England and Wales to govern this lease agreement as set out in section 15.1 and the submission by [Garuda] to the non-exclusive jurisdiction of the courts as set out in section 15.2 are valid and binding" [emphasis added]. Here, the “courts” could only have meant the LCIA as provided for under clause 15.2. He noted also the absence of the words “subject to clause 13.2” in clause 15.2, noting that one would expect to see such wording were specific disputes of this nature to be carved out of the general dispute resolution provision at clause 15.2.
Of greater importance to the Judge, however, was the wording of clause 13.2 which he noted would only apply “If an Event of Default occurs” and not merely "If an Event of Default is alleged". Any dispute as to whether an Event of Default had in fact occurred would plainly constitute a “dispute” under clause 15.2. Helice’s construction of clause 13.2 could give rise to all manner of jurisdictional issues should the lessee contend in court proceedings that no Event of Default had in fact occurred, for example, in circumstances where the validity of the lease was in question. This could result in adjournment of court proceedings in favour of arbitration. Put simply, the Judge was of the view that Helice’s construction of 13.2 was “likely a recipe for confusion, cost and delay”. This could not have been what the parties intended.
The decision is noteworthy because it highlights the need for parties to carefully consider specific breaches that might arise, and whether they would wish for these to be resolved in a different forum from general disputes. Helice clearly would have preferred to go down the route of High Court proceedings in circumstances of non-payment of rent by Garuda, presumably on the basis that such a straightforward matter of non-payment could be resolved quickly and cost effectively in the courts. However, by failing to adequately carve out its right to take disputes regarding non-payment to court rather than arbitration, Helice will now have no option but to commence arbitration proceedings to recover the rent. In circumstances where the quantum of the claim was apparently not disputed by Garudat, nor was any specified defence put forward in pre-action correspondence, this is clearly an expensive and undesirable outcome for Helice.
It is worth noting that the additional time and expense of commencing court proceedings followed by arbitral proceedings could have been avoided had Helice opted for arbitration under clause 15.2 as a means of recovering the rental arrears in the first instance. In this regard, Mr Justice Calver noted that “whilst not as quick as court proceedings, it is nonetheless possible nowadays for a party to an LCIA arbitration to obtain an expedited constitution of a panel under the LCIA Rules, article 9A, and a relatively speedy award”. Further support for the arbitral process by the courts.
In any event, thinking carefully about dispute resolution provisions at the drafting stage and wording those provisions clearly to give effect to the intentions of the parties is key to avoiding such an outcome.
If you have any questions regarding the above information, or need dispute resolution related advice, please contact Aoife Keane at firstname.lastname@example.org, or 020 7725 8031.
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