Lombard North Central plc v GATX Corpn

The court considered whether Part 8 proceedings seeking declarations about the legal effect of clause 9.4(i) of a commercial agreement should be stayed under section 9 of the Arbitration Act 1996 because clause 9.4(x) referred disputes "relating to the creation of the JV pursuant to this Clause 9.4" to arbitration under the LCIA Rules. The judge held that the proceedings for the first declaration did involve a matter which, under the parties' agreement, ought to be referred to arbitration because the enforceability of the obligation to negotiate would require consideration of the scope of the arbitration agreement.

The court applied the statutory test in section 9(4): a stay must be granted unless the arbitration agreement is null and void, inoperative, or incapable of being performed. It refused to decide the merits of competing interpretations of the arbitration clause and accepted that where an applicant can raise an arguable case in favour of validity (per Court of Appeal authority) a stay should be granted. The court also explained that an arbitration clause is not "inoperative" merely because, on one party's interpretation, no referred matter could now arise.

Accordingly the court granted GATX's application for a stay under section 9 and, in consequence, ordered that the whole proceedings be stayed (the second declaration to be stayed as a matter of case management or on the court's inherent jurisdiction if necessary).

Background and parties: The claimants (Lombard) and the defendants (GATX) were parties to a Further Trains Agreement dated 14 July 2000 which was amended by a Deed of Amendment dated 6 April 2004. The 2004 amendment altered clause 9.4 which governed leasing and sale of trains after the Residual Value Date and included provision for the establishment of a joint venture (JV) and an arbitration clause in clause 9.4(x) referring disputes to the LCIA Rules.

Factual context: The parties had not established the JV by 30 June 2011 and the claimants sought two declarations: (i) that because the parties failed to establish a JV the claimants' sole obligation under clause 9.4 was an obligation to negotiate in good faith which is unenforceable for want of legal content (relying on Walford v Miles), and (ii) that the 2004 amendments take effect notwithstanding that the obligation to negotiate is unenforceable and notwithstanding a saving clause in the Deed of Amendment.

Procedural posture and relief sought: Lombard brought Part 8 proceedings in the Commercial Court. GATX applied for a stay of the proceedings under section 9 of the Arbitration Act 1996 and alternatively (or additionally) under the court's inherent jurisdiction.

Issues framed: (i) the scope of the arbitration agreement in clause 9.4(x) and whether the court or an arbitral tribunal should determine its jurisdiction; (ii) whether the proceedings were "in respect of" a matter to be referred to arbitration within section 9(1); (iii) whether the arbitration agreement was null and void, inoperative or incapable of being performed under section 9(4); and (iv) whether the court should nonetheless exercise its inherent jurisdiction to stay.

Court's reasoning: The court held that the question whether the agreement to negotiate is enforceable will require consideration of whether the arbitration agreement covers the subject matter of the contemplated negotiations, and so the claim for the first declaration would draw into the proceedings a referred matter (the scope of the arbitration agreement). The court emphasised that a stay application under section 9 must be made before the respondent takes steps in the proceedings and that the court should not decide the merits of the underlying dispute when considering a stay. It accepted authority that where an applicant can raise an arguable case that the arbitration agreement is valid a stay should nevertheless be granted. The court rejected the submission that an arbitration clause is "inoperative" merely because, on a particular interpretation, no further referred matter could arise; "inoperative" covers circumstances where the party invoking the clause is not entitled to do so (for example, waiver or termination).

Remedy and wider comment: The judge granted a stay under section 9 in respect of the claim for the first declaration and, because of sensible case management and the parties' positions, ordered that the whole proceedings be stayed. The court noted that the parties agreed to submit disputes about the creation of the JV to arbitration under the LCIA Rules and that, subject to preserving the parties' rights, the dispute should be left to an arbitral tribunal to determine its jurisdiction. The court observed that the inherent jurisdiction could be used in exceptional cases to achieve the same result but did not need to rely on it here.

The court granted GATX's application for a stay under section 9 of the Arbitration Act 1996 in respect of the claim for the first declaration because that claim raised a dispute as to the scope of the arbitration agreement and GATX could raise an arguable case that the clause required referral to arbitration. For reasons of case management the whole proceedings were ordered to be stayed. The court did not decide the merits of the contractual construction or whether the obligation to negotiate was enforceable, leaving those matters to an arbitral tribunal where appropriate.