Waiver of a Right to Arbitrate by Resort to Litigation, in the Context of International Commercial Arbitration

• Author: Peter Gillies; Andrew Dahdal
• Position: Professor, Law Division, Macquarie University, Sydney. Associate Lecturer, Law Division, Macquarie University, Sydney Andrew
• Pages: 221-230

Key words: waiver, election, estoppel, arbitration

Page 221

1 Overview

This paper examines the circumstances in which a party to an arbitration agreement may be deemed to have waived their right to arbitrate a dispute comprehended by this agreement, by involvement in litigation concerning this dispute. This involvement may consist of commencing the subject action, or defending against it. The focus will be on the response of courts to this issue in three representative common law jurisdictions, Australia, the United States of America (where there is considerable case law), and the United Kingdom.

In particular, the recent decision of the Australian Federal Court in Australia in Comandate Marine Corp v Pan Australia Shipping Pty Ltd ([2006] FCAFC 192) which afforded the issue significant treatment, will be examined. The decision clarifies the circumstances in which Australian courts will recognise whether a party to an international commercial dispute has by involvement in litigation, waived their right to have the dispute arbitrated pursuant to an arbitration agreement. It is potentially of interest in other jurisdictions. The decision will be considered in some detail, below.

The issue of waiver will usually arise when a party seeks a stay of litigation and a reference of the subject dispute to arbitration. Commonly, the issue arises in the context of international commercial disputes, but in principle the same principles govern cases of alleged waiver in the context of domestic arbitration.

Before discussing the case law, it will be convenient to comment on the concepts of waiver and such related (and often overlapping) concepts as abandonment, election and estoppel. All of these doctrines, if indeed these concepts have attained the status of a doctrine, are potentially relevant to explaining in the jurisprudential sense how it is that a party may be prevented from enforcing their right of arbitration.

2 Waiver, Abandonment, Election and Estoppel - General Principles

It has been commented that (in common law jurisdictions) the term waiver is often used imprecisely (see ACD Tridon v Tridon Australia [2002] NSWSC 896 at [55]). It has been said that most of the cases which purport to apply the doctrine of waiver are really cases of contract, estoppel or election (see ACD Tridon, ibid, citing McHugh J in Commonwealth v Verwayen (1990) 170 CLR 394,491). There may not be a unified doctrine of waiver at common law. There are many instances where the general law or statute or a contractual provision may operate to deem a person to have waived a legal right. For example, Article 4 of the UNCITRAL Model Law on International Commercial Arbitration provides in substance that a party may waive a right accruing under the Law by remaining silent. This waiver can potentially be raised in litigation at any point along the spectrum from a party's attempt to invoke arbitration, to proceedings involving enforcement of the award. A party may waive performance of a contractual right by another, such as by extending the time for performance. In principle, a waiver would need to be intentional.

Page 222

The term "waiver" is routinely used in alleged waiver of arbitration cases. When examined, it will frequently be found that they are instances of election or estoppel. As it will be noted in 3.2 below, there is some authority for the proposition that an independent principle of waiver exists in this context (as it does in other contexts), independently of the doctrines of election and estoppel. In this primary sense waiver is "constituted by the deliberate, intentional and unequivocal release or abandonment of the right that is later sought to be enforced" (Zhang v Shanghai Wool and Jute Textile Co Ltd [2006] VSCA 133, [14]). An instance where a party to an arbitration successfully submitted that the other party had waived the arbitration right is the Victorian case of La Donna Pty Ltd v Wolford AG ([2005] VSC 359), where a Supreme Court trial judge held that a party to an arbitration agreement had, by involvement in litigation concerning the dispute comprehended by the arbitration agreement, waved its arbitration right. The decisive act was an application by this party for security for costs. The case will be reviewed in some detail below at 3.2.

The concept of abandonment centres on the unqualified forsaking or abandonment of a legal right or claim, as in this case where a party establishes by extrinsic evidence that a contract purporting to be wholly in writing has in fact been abandoned by conduct of the parties. As in the case of waiver, there may not be a general doctrine of abandonment, as distinct from a plethora of situations where a discrete legal principle or statutory or contractual provision invests abandonment with legal significance. In principle, a waiver would need to be intentional. Typically "waiver" and "abandonment" are used synonymously.

The doctrine of election is well recognised in various legal systems including the common law: pursuant to it a party may be required to elect between two mutually inconsistent legal rights each of which has different consequences. An example would be the obligation of a party to a contract in a common law jurisdiction, who when confronted with a breach of condition, must within a reasonable period decide whether to terminate or affirm the contract. The doctrine of election has not commonly been evoked in arbitration waiver cases, but as it will be seen in the analysis of Comandate Marine Corp v Pan Australia Shipping (op cit), below at 3, it was employed in a decision that held that for a party to commence litigation collateral to the dispute comprehended by the arbitration agreement, did not amount to an election to litigate and not to arbitrate.

Various doctrines of estoppel are recognised in common law and other legal systems. The common feature of these doctrines is that a party to litigation may be prevented (estopped) by their prior conduct from relying upon a legal right on the basis that to do otherwise would produce an injustice. United States case law dealing with waiver of the right to arbitrate identifies estoppel and prejudice as the core tests for determining a waiver submission. Thus, a party who resisted arbitration with the consequence that the other party fully litigated the subject dispute, was estopped from seeking the post-litigation arbitration of the dispute, on the basis that this would represent a prejudice to the other party (see the discussion of Menorah Insurance Company Ltd v INX Reinsurance Corporation (72 F 3d 218 (1st Cir, 1995), below at 4).

These doctrines or principles overlap - their common feature is that they involve the relinquishing or divestiture of a legal right or claim by a party, which conduct binds the party. The subject conduct may fall within two or more of these categories.

Another possible basis for waiver is that a party has by litigating a dispute that is comprehended by an arbitration agreement, committed breach or anticipatory breach of a core term (a condition) in this agreement, thereby entitling the other party to rescind. Caution would need to be exercised in applying this analysis - it could represent a quite low threshold for waiver. In the English decision of Downing v Al Tameer Establishment (2002] EWCA Civ 721), the Court of Appeal held that a party had by its conduct repudiated the arbitration agreement, with the consequence that the other party had been entitled to rescind it and to litigate. The first party had by this conduct waived its right to arbitrate.

A further theoretical basis for determining that an arbitration waiver has occurred is contractual - can the parties by litigating be viewed as having contracted to vary or annul the arbitration clause or agreement? This analysis was employed in the English decision of The Elizabeth H ([1962] 1 Lloyd's Rep 172), where a submission of waiver was made by a party a year and a half after the commencement of litigation by one of the parties. The court considered that the parties had by their conduct agreed to accept the court's jurisdiction and to vary the arbitration clause (ibid at 179).

3 Australian Authority

3. 1 Comandate Marine Corp v Pan Australia Shipping Pty Ltd

3.1. 1 The Course of Litigation

A core issue in the 2006 decision of Comandate Marine Corp v Pan Australia Shipping Pty Ltd (op cit) (Comandate v Pan) was whether a party to an arbitration agreement had waived its right to have the subject dispute arbitrated, because prior to the commencement of arbitration it had resorted to litigation. Comandate

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Marine Corp (Comandate Marine) and Pan Australia Shipping (Pan) were parties to a contract for the time charter of a ship, the Comandate. Pan had chartered this ship from Comandate Marine. Pan had also chartered a ship, Boomerang I, from a third party.

The Comandate Marine - Pan charter included a clause for the arbitration of any disputes arising from the charter, in London. In time, both parties alleged breaches of the charter. Pan commenced in rem proceedings against the Comandate in the Australian Federal Court, and arrested the ship. Comandate Marine wished to arbitrate the dispute in London. Pan wanted to litigate in Australia. Pan got an order from the Federal Court (an...