What is the approach of local courts towards a party commencing litigation in apparent breach of an arbitration agreement?
International Arbitration (3rd edition)
The courts strictly enforce the agreement to arbitrate. However, if the defendant appears and addresses the merits without raising an objection, he is deemed to have waived the right to insist on arbitration.
In the case that a party commences litigation in breach of an international arbitration agreement, the court is obliged, as stated in the Law 101/1987 article 8 (1) on the application of either party to stay any litigation procedure and refer the dispute to arbitration unless the court deems the agreement void or incapable of being enforced.
If both parties submit to the jurisdiction of the court, then the court may ignore the arbitration agreement and continue with litigation. In the case of domestic arbitration under Cap.4 the matters are different. It is a matter of discretion.The arbitration agreement does not oust the jurisdiction of the court and the latter may continue the litigation despite the arbitration agreement .
This situation is regulated under Section 106 of the Civil Procedure Code, stating that if an objection concerning the existence of an arbitration agreement is raised at the latest together with the first action in the proceedings, the state court shall terminate the proceedings. However, if no objection is raised or if the parties agree for the matter to be subject to court proceedings, the state court shall continue with the proceedings in accordance with the Civil Procedure Code.
Under Romanian law, a domestic court will assess the existence of a breach of an arbitration agreement solely if the interested party raises a plea of lack of jurisdiction, as a result of the underlying arbitral clause. In this context, the Romanian courts of law shall render a decision on jurisdiction, after proper analysis of the clause and its validity.
On a general perspective, to the extent that the arbitral clause comprises all the legal conditions related to its validity, as per the applicable law, the courts of law will refer the dispute to arbitration.
In case a dispute is brought before the court, in an apparent breach of the arbitration agreement, the court will decline its jurisdiction and will dismiss the lawsuit if the respondent raised an objection that arbitration clause exists between the parties. This objection needs to be submitted before entering into the pleadings of the merits of the dispute.
Even in case the responded submits such objection, the court commence the litigation proceedings if it determines that the arbitration agreement is manifestly null and void, inoperative or incapable of being performed.
Courts are not obliged to dismiss a claim for the lack of jurisdiction in cases the other side fails to invoke the existence of the arbitration agreement.
If a party initiates a litigation against the other party in breach of the arbitration clause or agreement between them, the other party may challenge the court’s jurisdiction based on the existence of a valid arbitration agreement. If the court determines that the arbitration agreement is valid, it shall reject its jurisdiction to the dispute.
a. According to the Danish Arbitration Act 2005, the local courts may only reject litigation in breach of an arbitration agreement, if the defendant requests the court to do so.
The court dismisses the case, if the respondent asserts the plea of the arbitration agreement before joining issue on the merits, unless the arbitral clause is invalid, ineffective, inoperative or lost its effects, or unless an arbitration tribunal has ruled on lack of its jurisdiction. Moreover, commencing litigation does not prevent the arbitral tribunal from hearing the case.
At least with regard to arbitral tribunals seated in Switzerland, Swiss court practice has established principles favouring arbitration over state court litigation. As per the "negative effect" of Kompetenz-Kompetenz, if the jurisdiction of the state court seized is contested based on the existence of an arbitration agreement, the state court ought to refer the matter for review to the arbitral tribunal stipulated in the arbitration agreement in question, unless the arbitration agreement on its face appears to be invalid and incapable of being performed by the parties (art. 7 PILA). Thus, if an arbitration agreement provides for an arbitral tribunal seated in Switzerland, a state court seized by a party will only summarily examine whether the alleged arbitration agreement is invalid and/or not covering the dispute.
Claimants may attempt to bypass a contractually required arbitration process and file their claim directly with the courts.
Before the UAE Arbitration Law, the applicable provision of the UAE Civil Procedure Law (Federal law no. 11 of 1992 for the Promulgation of the Law on Civil Procedure) dictated that a party was required to object at the first hearing to litigation proceedings filed by the other party, failing which it would be deemed to have waived its right to arbitrate.
However, this provision has now been repealed by the UAE Arbitration Law, although the practice of filing an objection at the very first hearing is likely to remain.
UAE - Free-zone Jurisdictions
The DIFC Arbitration Law (Article 23) empowers an Arbitral Tribunal to rule on its own jurisdiction. This is further supported by the DIFC-LCIA Arbitration Rules (Article 23).
If a party commences court proceedings in the jurisdiction in breach of the arbitration agreement, the court has the power to grant a stay on an application made by the other party against whom legal proceedings are brought (s.9(1)). The courts are also empowered to issue anti-suit injunctions against the breaching party, except in cases where the litigation is commenced before a European court which is within the regime of the Brussels Regulation or the Lugano Convention.
Article 11 of the Law of Arbitration provides that a court before which a dispute, which is the subject of an arbitration agreement, is filed shall dismiss the case if the defendant raises such defense before any other claim or defense. This shall not preclude the commencement or continuation of the arbitration proceedings or the rendering of the arbitration award.
U.S. federal courts diverge on the applicable approach towards a party commencing litigation in apparent breach of an arbitration agreement. The First, Fifth and Ninth Circuits have held or implied that courts may dismiss an action where all of the claims are arbitrable. In contrast, the Second, Third, Seventh, Tenth, and Eleventh Circuits have all held or implied that the case must be stayed pending resolution of the arbitration, rather than dismissed, in light of the language of the FAA, which indicates that a court “shall on application of one of the parties stay the trial of the action” where a court refers all claims to arbitration. 9 U.S.C. § 3. The Supreme Court declined to address the issue in Green Tree Financial Corp. Alabama v. Randolph (531 U.S. 79, 87 n.2 (2000)), and the circuit split remains unresolved. Therefore, whether a case will be stayed or dismissed will depend on the federal circuit that has jurisdiction over the arbitration.
There is a similar split among state courts, with some states allowing for dismissal (such as California; see, e.g., Charles J. Rounds Co. v. Joint Council of Teamsters No. 42, 4 Cal. 3d 888 (1971)) and some states requiring a stay (such as Pennsylvania; see, e.g., Sew Clean Drycleaners & Launders, Inc. v. Dress for Success Cleaners, Inc., 2006 PA Super 182, ¶ 12, 903 A.2d 1254, 1258 (2006)).
The approach of Austrian courts towards a party who commences court proceedings in breach of an arbitration agreement will simply be to dismiss the action, unless the other party enters into the merits of the dispute without raising a jurisdictional objection, or if — after an objection has been raised — the court finds that the arbitration agreement does not exist or is incapable of being performed. If arbitral proceedings are already pending, no parallel court proceeding regarding the same matter may be initiated and any court action will generally be dismissed.
Nigerian courts consider arbitration agreements to be binding on the parties and have been consistent in holding parties to their arbitration agreements. See M. V. Lupex v NOC & S Ltd. (2003) 15 NWLR (Pt. 844) 469. Where a party to an arbitration agreement commences an action in court with respect to any matter that is the subject of an arbitration agreement, any party to the arbitration agreement may, at any time after appearance or before delivering any pleadings or taking any other steps on the proceedings, apply to the court for an order of stay of proceedings. If the court is satisfied that there is no reason why the matter should not be referred to arbitration in accordance with the arbitration agreement and that the applicant is still willing and ready to submit to arbitration, the court may order a stay of proceedings. See sections 4 and 5, ACA. Recently, the Chief Justice of Nigeria in collaboration with the National Judicial Institute issued a policy statement and directives mandating Nigerian courts to insist on enforcing arbitration agreements.
Under both the Code of Commercial Procedure and Code of Civil Procedure a court shall dismiss a case without prejudice should a party raise an objection to the court’s jurisdiction and invoke an arbitration agreement prior to its first submission on the merits. The court proceedings, however, will continue if the court finds that the arbitration agreement is invalid, ineffective, or unenforceable.
The Irish courts take a very supportive approach to arbitration and will stay court proceedings in favour of arbitration unless they find that the arbitration agreement is null and void, inoperative or incapable of being performed. Section 32 of the Arbitration Act, 2010 permits a court to adjourn proceedings to enable the parties to consider whether any or all of the matters in dispute might be determined by arbitration. The High Court is the designated court for arbitration matters. There is a dedicated arbitration judge which results in consistency of approach and there is no appeal from a decision of the High Court. These features serve to make Ireland a very attractive seat for international arbitration.
If a party commences litigation in apparent breach of an arbitration agreement, the courts shall as a principal rule dismiss the case. The court shall, however, hear the case if it finds that the arbitration agreement is invalid or for other reasons cannot be implemented.
If litigation proceedings are commenced in breach of the arbitration agreement, the local court will deal with the issue of jurisdiction if respondent invokes the arbitration clause in order to contest the admissibility of the lawsuit, section 1032 (1) ZPO. The defendant must object prior to the hearing on the merits.
If a party commences court proceedings, breaching the an arbitration clause, the court shall, upon the respondent’s objection, declare the lack of jurisdiction of the court, annul all actions undertaken in the court proceedings and reject the statement of claim (unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed). The respondent may object to the jurisdiction of the court at the preliminary hearing, at the latest, and if no such hearing is held, at the main hearing during the discussion on the merits, until the answer is given to the statement of claim.
Under Article 8 of the ICAL, if a dispute that is subject to an arbitration agreement is presented to a local court for its resolution, the court must, upon the motion of either party presented no later than when submitting its first statement on the substance, declare that it lacks jurisdiction for the resolution of the dispute and refer the parties to arbitration, unless the court determines that the arbitration agreement is invalid, inoperative, or of impossible execution.
There have been some cases in Chile where a party, notwithstanding the existence of an arbitration agreement, has required the resolution of a dispute before local courts. Upon the request of the counterparty to seek the enforcement of the arbitration agreement, Chilean courts have upheld the binding effect of the arbitration agreement and declined to exercise jurisdiction. Nevertheless, in those cases local courts have not relied on specific provisions of ICAL to declare their lack of jurisdiction.
In domestic arbitration, the party against whom a complaint is brought before local courts notwithstanding the existence of an arbitration agreement may file a motion to dismiss for lack of jurisdiction based on the arbitration agreement (Article 303 CCP).