The end of summary judgment for arbitrating parties?

The meaning of “dispute” has come under considerable scrutiny in the summary judgment, strike out and arbitration context. While “no dispute” on its face has an obvious threshold, the test is not clear, and there have been conflicting interpretations of that concept in the phrase “not in fact any dispute between the parties” contained in Article 8(1) of Schedule 1 of the Arbitration Act 1996 (Act).

Janine Stewart Helena Hallagan

However, in December 2014, the Supreme Court ruled on the meaning of “dispute” in the Act, which had the potential to significantly affect how those with arbitration clauses in their contracts seek relief in court (Zurich Australian Insurance Limited T/A Zurich New Zealand v Cognition Education Limited [2014] NZSC 188). This article considers how that decision has been applied by the courts in 2015, and what “dispute” now means for parties going forward.

Background

This case concerned an insurance contract with a clause that read: “Any dispute, controversy or claim arising out of, relating to, or in connection with the Insurance Policy shall be finally settled by arbitration.” When the insurer (Zurich) declined a claim from the insured (Cognition), Cognition sought summary judgment in the High Court on the basis that Zurich had no arguable defence to Cognition’s claim. In retaliation, Zurich sought a stay of proceedings because the parties had agreed to arbitrate.

The Act obliges the Court to grant a stay and refer the parties to arbitration unless, as argued in this case, “there is not in fact any dispute between the parties with regard to the matters agreed to be referred.” The quoted words in Article 8(1) were interpreted differently by the parties: Cognition considered that there was no “dispute” to be referred to arbitration if the defendant had no arguable defence (broad test); whereas Zurich argued that arbitration should proceed unless it is immediately demonstrable that there is, in reality, “no dispute” or that the defendant is not acting bona fide (i.e. in good faith) in asserting that there is a dispute (narrow test).

The High Court and the Court of Appeal upheld the broad test, which treats a summary judgment application and a stay application as being opposite sides of the same coin. On one side, there will be no basis for granting a stay and referring the parties to arbitration if the grounds for summary judgment are met, i.e. if there is no arguable defence to the claim. On the flip side, if an arguable defence exists, then summary judgment will not succeed and proceedings should be stayed to allow the parties to arbitrate.

This broad approach was applied by the courts throughout 2013 and 2014, resulting in a general understanding that, despite a mandatory arbitration clause, parties could seek relief by applying to the court for summary judgment. This was a useful option for parties with a strong claim who sought a more efficient resolution of the issue, particularly when faced with unwilling or unresponsive arbitration opponents. If the opponent was forced to defend the application in court without any arguable defence to the claim, the court was empowered by Article 8(1) to refuse to stay the proceeding and issue judgment in favour of the applicant, depending on the facts of the case.

Supreme Court decision

The Supreme Court rejected the “arguable defence” threshold in favour of the narrow test. The narrow test requires the court to refer any “dispute” to arbitration under Article 8(1), except disputes that are not “bona fide disputes” (i.e. disputed in bad faith) or disputes that are obviously not “real disputes” (for example, if the defendant has acknowledged liability for the applicant’s debt, but wishes to use arbitration to delay meeting that debt).

Before reaching this conclusion, the Supreme Court considered the Law Commission’s review of New Zealand’s arbitration law from 1988 to 1991 and the Model Law on International Commercial Arbitration 1985, adopted by the United Nations Commission on International Trade Law (Model Law).

Promoting consistency with international arbitral regimes based on the Model Law is a stated purpose of the Act. As legal relations between commercial parties become increasingly global in nature, arbitration is likely to be the chosen mechanism for dispute resolution. The Supreme Court recognised that Article 8 applies to a wide range of arbitrations (both inside and outside New Zealand). To permit the court to examine the merits of the dispute, as it could under a summary judgment application, was thought to be inconsistent with New Zealand’s international obligations ([40]) and the Act’s purposes of facilitating the enforcement of arbitration agreements and limiting the opportunities for court intervention ([38]).

Counsel for Cognition submitted that the legislative history supported the broad test because the Law Commission proposed the addition of the words “unless…there is not in fact any dispute between the parties” at a time when the equivalent United Kingdom statute treated the words to mean “unless there is no arguable defence.” The broad test had proved to be useful in England for protecting creditors with valid claims from being forced into unfavourable settlements by the prospect of having to wait until the end of arbitration in order to collect their money (Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 (HL) at 356, per Lord Mustill).

However, in the Supreme Court’s view, the Law Commission had merely noted the utility of the summary judgment procedure in its report to Parliament and did not go so far as to endorse the broad meaning of the words ([26], [49]). The Supreme Court agreed with Lord Mustill’s assertion that “care should be taken not to confuse a situation in which the defendant disputes the claim on grounds which the plaintiff is very likely indeed to overcome, with the situation in which the defendant is not really raising a dispute at all.” The added words in Article 8(1) address the latter situation (“not in fact any dispute”) but do not include the former (“very likely to overcome”).

Reaction to the Supreme Court decision

There have been mixed opinions about the Supreme Court’s decision. Some view it as positive for arbitration in New Zealand as it respects party autonomy in choosing arbitration as the way in which the parties will resolve their dispute. Others view the narrow test as unnecessarily depriving parties from the perceived time and cost savings of the summary judgment process (which was emphasised as valuable in the Law Commission’s report “Arbitration” NZLC R20, 1991 at [128]).

In line with Zurich v Cognition (SC), the courts are now considering the reality of the dispute and referring the parties to arbitration if the defendant has acted bona fide in disputing the allegations made against it (Alpine Sun Ltd v Hortiventure Ltd [2015] NZHC 278, [31], [34]). Brown J concluded in September 2015 that “it is not open to the Court to elect to retain jurisdiction over claims on the grounds that the Court is in as good a position as an arbitrator to consider the issue or because the matter in dispute is a “jurisdiction legal issue”. Only if there is in reality no dispute may the Court decline to order a stay of the proceeding” (Davey v Baker [2015] NZHC 2282, [91]).

In deciding whether it is immediately demonstrable either that there is “no dispute” or that the defendant is not acting bona fide, the credibility of the defendant’s position is likely to be taken into account. This presents an opportunity for the narrow test to slip back into a broad approach if the courts are willing to hear arguments about what constitutes “bad faith” or a “real dispute” for the purposes of the Act.

Examples of bad faith can be drawn from cases where the courts have ordered indemnity costs. In cases where the other party has acted with flagrant misconduct, brought a “hopeless case” (i.e. one with no chance of success), continued proceedings for some ulterior motive (such as pressuring the other party to settle) and/or done so with a wilful disregard of the known facts or the clearly established law, the court may decline to stay proceedings under Article 8(1) and instead issue summary judgment.

It is arguable that the broad test was more effective in dealing with hopeless cases than the narrow approach mandated by the Supreme Court, particularly given that questions of law can be determined in a summary judgment application, including with reference to arguments, evidence and legal authority. There are concerns that the narrow test denies counsel the opportunity to defeat “bona fide” but legally untenable defences by way of legal submission, and that it will result in pointless arbitrations about issues that could have been dealt with summarily (such as the validity of a payment claim or payment schedule under the Construction Contracts Act 2002).

Yet these concerns may be unwarranted as the High Court has confirmed that the narrow test excludes “contrived disputes” (Teak Construction Limited v Andrew Brands Limited [2015] NZHC 2312, [29]). Contrived disputes are, broadly speaking, non-existent disputes or disputes made in bad faith (which should include hopeless cases). In these circumstances, the court may determine the dispute summarily instead of referring it to arbitration.

However, the courts will be influenced by the Supreme Court’s finding at [44] of Zurich v Cognition that referral of a dispute to arbitration is not the exercise of a “discretion”, rather, the court is obliged to grant a stay unless one of the specified conditions in Article 8(1) is met.

Further observations

Going forward, the word “dispute” in Article 8(1) now appears to mean “anything disputed” rather than “anything disputable/defendable” (as the summary judgment test would hold). The application of Zurich v Cognition (SC) in 2015 indicates that the courts will enforce the parties’ choice to have their disputes decided by arbitration, and the scope for judicial assessment of the dispute has been reduced.

The narrow test makes sense in an international context in that it prevents foreign parties from being embroiled in domestic stay proceedings without just cause. While the Supreme Court is confident that Article 8(1) acts to filter out cases where the defendant is obviously playing for time by baldly asserting that there is a dispute (when there is none), there remains a risk that delay tactics will be employed by parties on the basis of a “bona fide” yet questionably tenable dispute. If parties want to have the summary jurisdiction available to them, the most practical way to achieve this is directly in their arbitration agreement.

Parties could agree that arbitrators appointed under the arbitration clause have the jurisdiction to set timeframes for summary judgment or strike out applications and determine such applications in the same manner as a High Court judge under the High Court Rules. If arbitrators are able to determine issues between parties without a full hearing and/or strike out claims or defences based on legal precedent, this could result in time and cost savings for the parties.

As recognised in recent judgments, the court is not necessarily in “as good a position as an arbitrator” to consider the dispute before it. The Supreme Court appreciated that the parties’ decision to arbitrate may reflect their desire to have questions determined by an arbitral tribunal with expertise in a particular area ([42]). This is relevant to disputes in specialised areas such as valuation and construction where parties frequently select expert arbitrators to determine technical issues. If parties want the arbitrator(s) to hear a summary judgment application as part of their determination of the dispute itself, it may be prudent for them to agree to select an umpire with legal experience to form part of the arbitral tribunal.

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