Arbitrary justice

In most building projects there is a principal contract whereby the builder agrees to carry out the work, and a secondary contract within it which states that any disputes are to be resolved in arbitration. Just as the principal contract can be discharged by breach, so too can the arbitration agreement. It is subject to the same principles as any other contract. This was neatly shown in the recent Court of Appeal decision of John Downing vs Al Tameer Establishment (22 May 2002).

Downing was the inventor of a process for separating crude oil from water. He took out a patent but lacked money for its exploitation.

As a result he entered into an agreement with Al Tameer in 1991 for the joint exploitation of his invention. That agreement contained a secondary agreement whereby any dispute that could not be settled was to be determined by arbitration.

By 1994 the parties had fallen out. In December that year, Downing wrote to Al Tameer pointing out that his attempts to settle the dispute had been rebuffed and asked for arbitration.

Al Tameer responded that if there was a contract between them, Downing had fundamentally breached it. Both sides decided to call the lawyers in.

In June 1995, Downing reiterated the request for arbitration. Al Tameer's solicitors replied in the same month, and adopted the stance that Al Tameer never had any contractual relationship with Downing and that it had no intention of dealing with him further. Downing's solicitors then changed tack and asked Al Tameer's solicitors to accept service of a writ. The immediate response was that they would not and they repeated that Al Tameer did not have any contractual relationship with Downing.

Faced with this, Downing's solicitors wrote a letter before action in February 1997 accepting Al Tameer's failure to provide finance as a repudiatory breach that terminated the principal agreement. Al Tameer responded as before, denying that there was any contractual relationship between them.

To bring a contract to an end, the innocent party has to accept the repudiation as terminating the contract

A writ was issued and, after some delay, served. Al Tameer then applied for a stay of the proceedings on the grounds that there was an arbitration agreement. Downing resisted the stay on the grounds that the arbitration agreement had been discharged. He said that Al Tameer had not only repudiated the principal contract but also the arbitration agreement.

In order to bring a contract to an end, the innocent party has to unequivocally accept the repudiation as terminating the contract. Downing's argument was that the issue and service of the court proceedings on Al Tameer constituted such an unequivocal acceptance. Judge Kershaw rejected this argument. The Court of Appeal accepted it.

The court confirmed that the question had to be determined on conventional contractual principles. The Bremer Vulkan case and subsequent decisions had demonstrated that whether or not a party has lost their right to arbitrate under the secondary contract was to be decided by applying traditional principles of law, and in particular the doctrine of repudiation.

In this case, Downing had sought arbitration in accordance with the arbitration agreement.

Al Tameer had rebuffed him and by its letter of June 1995 denied that there was any contractual relationship between them. That letter constituted a repudiatory breach of the agreement to arbitrate.

In the light of that letter, Downing's solicitors made it clear that they intended to switch to court proceedings. Al Tameer, both before and after the letter before action, maintained its stance that there was no contractual relationship. Against that background, it was held that the issue and service of the writ constituted acceptance of the continuing repudiation by Al Tameer of the arbitration agreement. Of course, the issue of a writ could be for all sorts of reasons and each case depends on its own facts. However, given the facts of this case, the issue and service of the writ could properly be construed as acceptance of the breach as ending the contract.