How to Respond to a Notice of Arbitration

Summary

• A response to a notice or request for arbitration is not merely a formal acknowledgement. It is a respondent’s first procedural opportunity to protect its position, preserve its right to appoint an arbitrator, raise jurisdictional or procedural objections, and shape the early direction of the proceedings. Failure to respond promptly and properly may have serious consequences, such as loss of appointment rights, waiver of objections to jurisdiction or other procedural matters, and, ultimately, the risk of an award being rendered solely on the claimant’s pleadings and evidence.
• In practice, when working on the response, the relevant commercial contract together with the arbitration agreement, any incorporated arbitration rules, and the law of the seat should be taken into consideration. In particular, attention should be given to possible jurisdictional objections, the constitution of the tribunal, the claimant’s factual and legal allegations, and any counterclaim or procedural proposals that the respondent may wish to advance.
• A well-considered response will have significant impact on both the strategic and procedural development of the arbitral proceedings.

Introduction

Responding to the request for arbitration within the prescribed deadline is critical. Such deadlines are, as a rule, provided in the relevant arbitration rules or in the arbitration agreement, and both must be checked carefully. Failure to reply within the prescribed time may have a number of negative consequences, which are discussed in more detail below.

The most immediate risk is that the responding party may lose the right to appoint an arbitrator. In that event, the appointment may instead be made by the arbitral institution or by the competent court. Where the opposing party is required to apply to court for the appointment because of the respondent’s failure to participate, the court will most likely order the respondent to pay costs of that application. It is also possible that the claimant’s nominated arbitrator may become the sole arbitrator, or that the claimant may be given the right to appoint the respondent’s arbitrator. Since some parties appoint arbitrators perceived to be favourable to their position, this may significantly prejudice the respondent’s case.

A less obvious but equally damaging consequence is the loss of the right to raise procedural or jurisdictional objections. For example, if there is a sole arbitrator, failure to participate may result in the arbitrator selecting a seat that is inconvenient or issuing procedural directions with which the respondent later will not be able to comply.

The arbitration may also proceed in the respondent’s absence, and the tribunal may ultimately render an award based solely on the claimant’s evidence and submissions. Although the claimant must still prove its case, the absence of any defence, witness evidence, or challenge to quantum may materially increase the risk of an adverse award.

Non-participation at an early stage may also result in the loss of strategic opportunities, including the possibility of narrowing the issues in dispute, seeking bifurcation, proposing a more convenient procedural timetable, or engaging in early settlement discussions.

Once an award is rendered, it may be recognised and enforced in multiple jurisdictions, often with only limited grounds for challenge. Early non-participation may therefore create significant enforcement risks, particularly where the respondent holds assets in several countries.

Checklist of Considerations When Reviewing a Notice of Arbitration

Upon receiving a notice of arbitration, the first step is to read it carefully and identify the contractual document on which it relies. In most cases, arbitration will have been commenced in respect of an alleged breach of contract. It is therefore essential to determine which contract is said to have been breached, as this will identify the relevant arbitration clause. The claimant may be relying on the wrong arbitration agreement, or there may be no arbitration clause at all. Either issue will materially affect the way in which the response should be prepared.

The next question is whether the arbitration clause itself prescribes any procedure for responding to the notice. It might, for instance, provide that a response should be made within fifteen days and that it should include nomination of a relevant arbitrator to be appointed by the respondent.

It is then necessary to check whether the arbitration clause incorporates any arbitration rules by reference. If it does, those rules will usually govern both the timing and the contents of the response. By way of example, Article 2 of the LCIA Rules requires a response within 28 days of the commencement date, being the date on which the request is received by the registrar. The Rules also specify what the response must contain, including the respondent’s full name and contact details, confirmation or denial of all or part of the claim, and the respondent’s position on the claimant’s invocation of the arbitration agreement.

Finally, if the arbitration agreement is not subject to institutional rules and does not itself explain how the respondent is to react, the next point to consider is the seat of the arbitration. The law of the seat may provide for a default procedure for commencing arbitration and for the appointment of the tribunal. The English Arbitration Act 1996 does not specify how one should respond to a notice of arbitration; however, it provides for deadlines for the appointment of the tribunal. Section 16(3) of the Act provides that if there is a sole arbitrator, the arbitrator should be jointly appointed by the parties within 28 days of the service of the notice of arbitration. At the very least, the respondent should therefore state within that period whether it agrees with any candidate proposed by the claimant. Under sections 16(4) and 16(5), where the tribunal is to consist of two or three arbitrators, each party must appoint its arbitrator within 14 days of the written request to do so. In practice, this means that the response to the notice should usually include the respondent’s nomination within that 14-day period.

Jurisdictional Objection

If it becomes apparent that there is no arbitration clause, that the claimant is relying on the wrong arbitration clause, or that the arbitration has not been commenced or is not being conducted in accordance with the terms of the arbitration agreement, a jurisdictional objection should be raised as soon as possible, ideally in the response to the notice of arbitration. Jurisdictional objections may also arise where, among other reasons, the respondent is not a party to the arbitration agreement, where the dispute falls outside the scope of the arbitration clause, where pre-arbitration steps have not been complied with, or where the tribunal has been constituted in a manner inconsistent with the parties’ agreement.

Where the arbitration is conducted under the LCIA Rules, any jurisdictional objection must be raised as soon as possible and, in any event, no later than in the statement of defence. It would, however, be unwise to wait until the statement of defence, as the tribunal may conclude that the objection was not raised at the earliest opportunity. In addition, Article 2.1(ii) requires the respondent to state in its response whether it disputes the claimant’s reliance on the arbitration agreement. For that reason, the safest course is to raise any jurisdictional objection in the Response to the Request for Arbitration.

Section 31 of the English Arbitration Act 1996 provides that an objection to the tribunal’s substantive jurisdiction must be raised not later than the time the respondent takes the first step in the proceedings to contest the merits of the dispute. Accordingly, if the respondent intends to address the merits in its response to the notice of arbitration, any jurisdictional objection should be raised in that response as well.

A jurisdictional objection will typically rely on one or more of the following grounds:

One common ground is that the respondent never agreed to submit the dispute to arbitration. In some cases, there may be no arbitration agreement at all, in which event the dispute must be resolved before the state courts. In others, an arbitration agreement may exist but be unenforceable, for example, because it is forged or was signed by a person without authority. It may also be the case that the arbitration agreement is valid, but the respondent is not a party to it. A typical example is where arbitration is commenced against both a company and its directors. If the directors signed the agreement only on behalf of the company, and not in their personal capacities, they will not ordinarily be bound by the arbitration agreement, with the result that the tribunal will lack jurisdiction over them.

Another common objection is that, although the respondent agreed to arbitrate, it did not agree to the particular form of arbitration commenced by the claimant. The objection may relate to the constitution of the tribunal, the seat, or the procedural framework. For example, the arbitration agreement may require a three-member tribunal, in which case a sole arbitrator may lack jurisdiction. Likewise, where the agreed seat is London, a tribunal purporting to sit in Stockholm may be acting outside the scope of the parties’ agreement. The same applies where the parties agreed to ad hoc arbitration, but the claimant instead commenced proceedings under the LCIA or other institutional rules.

This issue arose in Minermet SpA Milan v Luckyfield Shipping Corp SA, where the arbitration clause gave each party 14 days from notification of the other party’s nomination to appoint its own arbitrator, with the two party-appointed arbitrators then selecting the third. The claimant failed to nominate its arbitrator in time, with the result that the respondent’s nominated arbitrator became sole arbitrator. The claimant later raised a jurisdictional objection and sought an extension of time, arguing in particular that an award rendered by a sole arbitrator might face enforcement difficulties where the arbitration agreement called for a three-member tribunal. The court rejected that argument and dismissed the objection.

Thirdly, the respondent might argue that the matters on which the claimant invites the tribunal to rule are not covered by the arbitration agreement. For example, the parties may have several contracts containing different arbitration clauses. Where the claimant commences arbitration under one arbitration clause, but the dispute clearly relates more closely to another contract with a different arbitration clause, issues may arise as to what the tribunal is, or is not, entitled to rule upon.

In A v B¹, the claimant sold the respondent two consignments of crude oil under two distinct contracts. Each contract was governed by English law and provided for LCIA arbitration. The claimant commenced a single arbitration, paid a single commencement fee, and submitted a single Request for Arbitration, alleging non-payment of the purchase price under both contracts. The respondent challenged jurisdiction on the basis that the Request was invalid. It argued that, in breach of Article 1 of the LCIA Rules 2014, the Request concerned two disputes governed by separate arbitration clauses. It was therefore impossible to determine which dispute was properly the subject matter of the arbitration. The Court concluded that the single Request for Arbitration was invalid, because the Rules could not be interpreted as: (i) allowing a claimant to commence multiple arbitrations upon payment of a single fee; or (ii) allowing consolidated proceedings without the consent of all parties. A separate Request for Arbitration was therefore required for each arbitration governed by the different agreements.

Usual Contents of the Response

If, having reviewed the arbitration clause, the applicable arbitration rules, and the law of the seat, it is still unclear what the response to the request/notice of arbitration should contain, it would be prudent to address at least the following issues:

• Confirm the full name and contact details at which the respondent can be reached, including address, email, and telephone number.
• If there may be grounds to challenge the tribunal’s jurisdiction, explain why, and reserve the right to set out those grounds more fully in the defence or in a separate jurisdictional challenge.
• Where the tribunal is to consist of three arbitrators, and the arbitration agreement or applicable rules require the respondent to appoint one arbitrator, that appointment should be made in the response.
• Make any procedural comments considered appropriate, such as those relating to the seat of arbitration, the number of arbitrators, any conflicts of interest involving the claimant’s appointed arbitrator, any applicable arbitration rules, and any procedural directions already agreed between the parties.
• Comment briefly on the claimant’s claims and explain why they are denied.
• If the claimant’s account of the facts is disputed, explain why and provide the respondent’s own factual narrative.
• Address the value of the claimant’s claim, including whether the respondent agrees with the claimant’s calculations.
• If there is a counterclaim, set out the relevant facts relied upon, the legal basis for the counterclaim, and the relief sought.
• Explain how the response will be delivered to the claimant, the tribunal, and any arbitral institution. If the applicable institutional rules require submissions to be made through the institution, a sufficient number of copies should be provided to enable circulation to all recipients, including each member of the Tribunal and the claimant or claimants.

References

1. A v B [2017] EWHC 3417 (Comm).