The Supreme Court’s recent decision in
Zurich Australian Insurance Limited T/A Zurich New Zealand v Cognition Education Limited
1 will be widely viewed as positive for arbitration in New Zealand.
In a unanimous judgment, the Court held that if parties have agreed to arbitrate any disputes under their contract, there are only very limited circumstances in which a court should hear a summary judgment application (that is, an argument by a plaintiff that the defendant has no defence to the plaintiff’s claim). The usual position is that where the parties have agreed to arbitrate and one party then attempts to bring court proceedings, the Court will stay the matter (halting any further progress in court) and refer the matter to arbitration. This reflects the principle that courts will respect parties’ choice of arbitration as a means of alternative dispute resolution (referred to as the principle of party autonomy).
The case arose from a dispute between Cognition Education Ltd (Cognition) and Zurich Australian Insurance Ltd (Zurich) regarding Cognition’s recovery of the shortfall under its insurance policy with Zurich. The shortfall arose from Cognition’s dispute with a third party which was settled for less than Cognition’s contractual entitlement. The insurance policy contained an arbitration clause stating that any dispute relating to the insurance policy would be settled by arbitration. However, instead of referring the dispute to arbitration, Cognition sought summary judgment in the High Court to enforce the shortfall under the policy. Zurich objected to the High Court’s jurisdiction on the basis of the arbitration clause, applying for a stay of the proceedings pursuant to Article 8(1) of Schedule 1 of the Arbitration Act 1996 (Article 8(1)). Article 8(1) provides (with the words at issue italicised):
8. Arbitration agreement and substantive claim before court
(1) A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed, or
that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.
The High Court held that the summary judgment application should be heard at the same time as Zurich’s application for a stay of proceedings. The High Court’s rationale was that if a court found that Zurich had no arguable defence and summary judgment could be granted, then there was no “dispute” between the parties to refer to arbitration under Article 8(1). The Court of Appeal upheld the High Court decision and Zurich appealed to the Supreme Court.
Supreme Court judgment
The Supreme Court overruled the High Court and Court of Appeal and allowed Zurich’s appeal.2 It noted that there may still be a controversy between the parties which can properly be described as a “dispute” even if it is ultimately capable of being determined by a summary process. Thus, if the parties have agreed to arbitrate their disputes, in principle a court should first consider and determine whether to stay any court proceedings and refer the matter to arbitration. Only if that course is rejected (for example, because the arbitration agreement is null and void or it is immediately demonstrable that the defendant is not acting bona fide in asserting that there is a dispute), should the application for summary judgment be considered. The Supreme Court held that to go any further than this narrow interpretation of Article 8(1), i.e. to allow courts to examine the merits of disputes before or in conjunction with considering a stay of proceedings, would undermine the purposes of the Arbitration Act 1996 which include limiting judicial involvement in the arbitral process and achieving consistency with international arbitration regimes.
A notable feature of the Supreme Court’s judgment, and one that will be welcomed by arbitration supporters, is the Supreme Court’s focus on achieving consistency between the treatment of arbitral proceedings by New Zealand courts and our overseas counterparts. New Zealand’s Arbitration Act 1996 is derived from the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL). Promoting consistency with international arbitral regimes based on the Model Law is a stated purpose of the Arbitration Act. The position adopted by the Supreme Court is consistent with that advanced by international arbitration commentators and authority from the United Kingdom. Moreover, the
Zurich decision is particularly positive in light of the Supreme Court’s judgment last year in
Carr v Gallaway Cook Allan.3 In that case the Supreme Court invalidated the outcome of a lengthy and consensual arbitration process on the basis of an error in the arbitration clause. (Click
here for our earlier update on the Supreme Court’s decision in
Carr case was seen by some as an unwarranted judicial interference in the parties’ agreed arbitration process. The
Zurich case may be seen as exactly the opposite.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.