Arbitration clauses: what if there is no clear dispute?

Supreme Court pic

Credit: Courts of New Zealand

The Supreme Court addressed this issue at the end of last year in Zurich Australian Insurance Limited t/a Zurich New Zealand v Cognition Education Limited [2014] NZSC 188. Many construction contracts refer disputes to arbitration, and so the principles of this case are likely to impact construction disputes.

Cognition had made a claim under its policy with its insurer Zurich, which Zurich declined to pay. Cognition then applied to the Court for summary judgment to enforce the shortfall of the policy, even though there was an arbitration clause in the policy stating that any dispute would be settled by arbitration. In response, Zurich objected and sought a stay of the proceeding under Arbitration Act 1996 (art 8, Schedule 1).

The Supreme Court decided that the only way for parties to avoid arbitration when there is an arbitration clause in place is by demonstrating that there is no clear dispute. If the parties have agreed to arbitrate, the 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 it is immediately obvious that there is no genuine dispute) should the application for summary judgment be considered. To examine the merits of disputes before considering a stay of proceedings, would undermine the purposes of the Arbitration Act 1996 which include achieving consistency with international arbitration regimes and limiting judicial involvement in the arbitral process.

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