Guidance Investments Ltd v Guidance Hotel Investment Company BSC

Where a contract provides for some disputes to be litigated and others to be arbitrated, there is no general presumption that the arbitration clause should receive a wide construction. The court must construe the particular contractual allocation of disputes.

An arbitration clause referring disputes connected with an Event of Default under a termination clause may be confined to disputes concerning the existence of that default for termination purposes. It need not extend to damages claims based on similar allegations where no termination is sought and no Event of Default is alleged.

A transaction set-off may be pleaded notwithstanding an arbitration agreement governing the cross-claim. Whether an equitable set-off exists depends on the required connection and on the justice of enforcing the claim without taking the cross-claim into account.

The claimant, an investment manager, claimed management fees under a Management Agreement. The defendant denied liability and counterclaimed for losses allegedly caused by the claimant’s mismanagement, including alleged gross negligence in a Cairo property transaction. It also relied on those matters by way of set-off.

The Management Agreement provided for arbitration of disputes arising out of or in connection with an Event of Default under its termination clause, while conferring non-exclusive jurisdiction on the English courts for other disputes. The claimant applied under section 9 of the Arbitration Act 1996 and under the court’s inherent jurisdiction for a stay of the relevant counterclaim allegations and for an order preventing their use by way of defence. The central issue was whether those allegations fell within the arbitration agreement.

1. Application dismissed. The allegations in the Defence and Counterclaim were not caught by the arbitration agreement. No stay was therefore required.
2. Although Fiona Trust v Privalov established a general presumption of one-stop adjudication for arbitration agreements, that presumption did not apply where the parties had deliberately allocated some disputes to arbitration and others to the courts. The question was one of construction, assisted where appropriate by business common sense, as illustrated by Barclays Bank PLC v Nylon Capital LLP.
3. Clause 13 applied only to disputes arising out of or connected with an Event of Default under clause 9. The defined expression “Event of Default” operated for the purposes of clause 9, which concerned termination. In the present proceedings no termination was sought and no Event of Default was alleged. The dispute therefore did not fall within clause 13.
4. The claimant’s wider construction would rewrite the agreement and create an unworkable division between related allegations of gross negligence, ordinary negligence, breach of contract and breach of mandate. The defendant’s construction produced a coherent and limited carve-out from the general jurisdiction clause. The court accordingly preferred it, applying the approach in Rainy Sky SA v Kookmin Bank.
5. If issue (1) had been decided differently, the court would have had to consider transaction set-off. The general position, reflected in Aectra Refining v Exmar NV, is that transaction set-off may be pleaded notwithstanding that the cross-claim is subject to arbitration. The court may examine the related facts necessary to determine the defence.
6. The court did not finally determine whether an equitable set-off existed. The formal requirement was a close connection between claim and cross-claim, and the functional requirement was that it would be unjust to enforce the claim without taking the cross-claim into account. The fact that both claims arose under the same contract was not necessarily sufficient, particularly where the cross-claim concerned substantially earlier misconduct.

First-instance decision. No prior appellate decision is stated in the judgment.