Court stays construction contract dispute under Arbitration Law, noting injunctions are inappropriate for forfeiture clauses.

[*431] 1982 May 8

(NIKITAS, P.D.C. AND PR. NICOLA IDES, AG. S.D.J.)

IN THE DISTRICT COURT OF NICOSIA

ΧΕΚΤE, S.A., of Athens,

Plaintiffs,

v.

The Attorney-General of the

Republic of Cyprus,

Defendant.

(Action No. 2044/82).

Arbitration

- Stay of proceedings - Section 8 of the Arbitration Law, Cap.4 - Discretion of the Court - Principles applicable - Burden of showing cause why dispute should not go to arbitration is on the party resisting a stay - Contract for construction of road - Forfeiture and arbitration clause - Employer exercising his right of forfeiture and taking possession of the works - Action by contractor for a declaration that the resorting to the forfeiture clause was null and void and for an injunction restraining employer from exercising his power of forfeiture - Application by employer for stay of proceedings - Grant of an injunction not an appropriate remedy - Lack of power by an arbitrator to grant an injunction not a decisive factor for granting or refusing stay - Action stayed.

A. Evangelou, for Defendant-Applicant.

G. Cacoyiannis with P. Polyviou, for Plaintiffs-Respondents.

JUDGMENT

The judgment of the Court was delivered by:-

NIKITAS, P.D.C.; We have before us [*432] an application by the defendant Attorney-General seeking a stay of every further proceeding in the cause

pursuant to section 8 of the Arbitration Law, Cap.4 and we are therefore required to decide whether the action should

be stayed pending the outcome of arbitration proceedings envisaged in the agree­ment of the parties.

The background against which the application falls to be determined may be summarized as follows: By a written agreement entered into on January 16, 1979, between the plaintiffs, a company incorporated in Greece, and the Minister of Communications and Works On behalf of the Cyprus Government, the company (hereafter called the plaintiffs) undertook to construct the new Nicosia-Limassol highway, a project of major social and economic importance for the country. The project was divided into four sections in respect of which four separate contracts were made.

The conditions of contract which are incorporated in all four agreements appear to be in the standard form used in international civil engineering contracts known as the F.I.D.I.C. contract from the initials of the international tody responsible for its sponsorship and drafting. In fact express reference is made in the document to its character and origin - see exhibit A.

Clause 63(1) of the conditions of contract as. amended in Part II is a forfeiture clause. In substance the clause gives the right to the employer, on the occurrence of certain events, to take possession of the works, eject the contractor and complete the work himself or employ another [*433] contractor to do so, without thereby avoiding the contract or releasing the contractor from his obligations. He may also retain, use or sell the contractor's property such as machinery and materials.

The power to forfeit may be exercised, inter alia, in the eventuality of the Engineer of the Works certifying that in his opinion "the contractor is persistently and flagrantly neglecting to carry out his obligations under the contract".

Clause 67 is an arbitration clause which provides that if any dispute or difference shall arise between the employer or engineer and the contractor in connection with or arising out of the contract whether during the progress of the works or after their completion it shall first be referred to and settled by the engineer who shall give his written decision to the employer and the contractor. The

decision is to be final and binding unless either party within 90 days of receiving the notice of the decision, requires it to be referred to arbitration under the Arbitra­tion Law, Cap.4.

Clause 67 is couched in terms similar to the English I.C.E. conditions. Duncan Wallace, the learned editor of the current edition of Hudson's Building and Engineering Contracts, in his manual on the International Civil Engineering Contract at page 168 observes in this connection;- [*434]

"Fortunately for the parties to international contracts, the present arbitration clause contains a number of small but significant. amendments of. the clause found in the English I.C.E. conditions, which greatly reduce the area of doubt created by the English arbitration clause, particularly in regard to the strange 'two-tier' structure for reference of disputes in the first place to the engineer and later to an arbitrator".

The material facts, as they appear from the record, . the affidavits and other documents before us are, chronologi­cally, as follows: In August last, an arbitrator was appointed by consent of the parties to hear and determine the disputes enumerated in paras. 8 and 9 of the affidavit sworn by Mr. Pantazides, a Senior Administrative Officer in the Ministry of Communications and Works, submitted by the plaintiffs and the Government respectively.

In January, 1982, while the arbitration proceedings were still in progress, the arbitrator was appointed to public office and the proceedings came to an end without there being any adjudication on the subject-matter of the reference.

Mr. Pantazides says in para.2 of his affidavit that on January 20, 1982, the employer, that is the Government, made a proposal to the plaintiffs for a new arbitrator, but by their reply on March 20, the plaintiffs rejected the arbitrator suggested by the employer. On the other hand Mr. Vassilas, the plaintiffs' project manager, states in his [*435] affidavit - para. 4 - that the parties held consultations for solving their various problems; that the plaintiffs put forward a number of solutions "particularly with a view "to infusing life into the arbitration process" but no solution, was found. However that may be, on March 19, 1982, the Minister, relying on a certificate given to him by the Engineer earlier on March.6, 1982, in which it was alleged that the plaintiffs "had. persistently and flagrantly neglected to carry out their obligations under the contract", served a notice on the plaintiffs, purporting to be a notice under clause 63(1), of his intention to enter upon the Site and Works, On, expiry of the notice on April 3, 1982, the Minister exercised his right of forfeiture and took possession. As we read, in para.2 of a supplementary affidavit sworn by Mr. Pantazides the employer continued the work as from April 4, 1982.

To complete the picture we shall refer briefly to the history of the proceedings up to the date of hearing of the application for a stay. On April 2, 1982, the plaintiffs instituted the present action against the defendant pursuant to section 57 of the Courts of justice Law No. 14/60 claiming a declaration that:-

(i) the action of the Minister in resorting to clause 63(1) is null and void as being contrary to the provisions of the agreement and arbitrary;

(ii) the. Engineer's certificate, dated the 6.3.1982, on the basis of which the Minister purported to exercise the power of forfeiture is null and void [*436] and was issued in breach of the agreement;

(iii) the above disputes between the plaintiffs and the Minister or the Engineer concerning the issue of the certificate and the invocation by the Minister of clause 63(1) ought to be submitted forthwith to arbitration under clause 67;

(iv) an injunction restraining the Minister, the servants and agents of the Government from exercising their power of forfeiture under clause 63 until the above disputes are properly determined by arbitration and, lastly, damages for breach of contract.

At the same time the plaintiffs moved the Court for an interlocutory injunction framed in substance in the same terms as those set out in para. 4 of the general endorse­ment. The motion was set down for trial on April 13,1982 – see the two rulings of the Court delivered on the 2nd and 3rd April. Meanwhile, the application for a stay was filed on the 3rd April, and when it came before us on the 8th April, both counsel agreed that the hearing of the present application should take precedence over the hearing of the motion for an injunction. We may add that we fully endorse the course adopted by learned counsel for otherwise the right of a party to refer disputes to arbitration may be jeopardised if he takes a step in the action. For what constitutes a step in the proceedings see the judgment of Lindley L.J. in Ives and Barker v. Willans (1894) 2 Ch.478 [*437] at p.484 and Russell on Arbitration 19th Ed. at p. 182 et seq.

Section 8 of the Arbitration Law on which the present application is founded is modelled on the corres­ponding provision of the English Arbitration Acts. Arbi­tration is a process of great antiquity and at least in certain types of dispute it is believed that it has advanta­ges over litigation in a Court of law because it is speedier, sometimes cheaper, more flexible and informal. For example in the construction industry an arbitrator reaches his decision morequickly because he can draw on his own know­ledge and experience of the particular trade whereas a court of law would have to hear expert witnesses. The first Arbitration Act in England was passed in 1698, but though there have been significant changes in this area of the law by the passing of the Arbitration Acts of 1975 and 1979, the cornerstone of the law was laid in the 1.950 Act. Section 8 of our law is identical to section 4 of the 1950 Act. It follows that it is legitimate to resort to English decisions for guidance.

Before we refer to the submissions of counsel we shall have to glance briefly to the provisions of s.8 and their implications. It is one of the fundamental freedoms of the citizen under our system of law that he can have recourse to the ordinary courts of the land for vindicating his rights. Accordingly the existence of an arbitration agreement does not automatically oust the jurisdiction of the courts. Even in cases where the prerequisites laid [*438] down by section 8 have been complied with, the Court has a discretion to grant or refuse a stay which is not fettered in any way except that it must be exercised judicially. The existence of a valid arbitration agreement is a strong factor in favour of the party seeking a stay. (See Bristol Corporation v. Aird. (1911-1913)All E.R. Rep. 1076).

In Freeman & Sons v. Chester Rural District Council (1911) 1 K.B.783 at p.791, Buckley L.J. dealt with the scope of the section and said:-

"It remains that s.4. of the Arbitration Act, 1889, (now s.4(1) of the 1950 Act) gives a discretion in two ways, namely, (1) the words are permissive not imperative, for the verb is 'may make', not 'shall make’, and (2) the jurisdiction to stay the proceedings arises if the Court is ’satisfied that there is no sufficient “reason why the matter should not be referred in accordance with the agreement".

This passage from the judgment of Buckley L.J. was cited with approval by Triantafyllides P. in Frederick W. Harrison Ltd. v. E. Philippou Ltd. (1980)

1 C.L.R. 603. And the learned President added (at p. 608);-

"Over and above the contractual rights, therefore, there exists this discretion in the Court".

For further analysis of the principles see Scaliotou v. Pelekanos (1976) 1 C.L.R.251. [*439]

An important rule to bear in mind is that the burden of showing cause why the dispute should not go to arbitration is on the party resisting a stay. Russell on Arbitration at p. 190 observes:-

"Once the party moving for a stay has shown that the dispute is within a valid and subsisting arbitration “clause, the burden of showing cause why effect should not be given to the agreement to submit is upon the party opposing stay”.

The statement rests on the cases referred to in the foot­notes on the same page.

Learned counsel appearing for the defendant submitted that all the conditions of s. 8 have been satisfied and there is no valid reason why the Court should not order a stay. He argued further that the effect of s.28 of the Contract Law, Cap.149, is to introduce into our law what is known as the "Scott v. Avery” type of arbitration clause, a proposition that the other side accepts as correct. In the "Scott v. Avery" form of arbitration clause it is open to the parties to agree that no right of action can arise until the matters in controversy have been referred to and determined by an arbitrator appointed under the arbitration agreement.

Despite the existence of the "Scott v. Avery" clause judicial precedent in England establishes that a Court may still refuse a stay of the proceedings in a proper case though it is recognised that the discretion [*440] is limited and the Courts are more reluctant to refuse a stay. It should be noted that under s. 28 an agreement in the "Scott v. Avery" form may be pleaded as a bar to an action brought by a party to the agreement against the other. The position in Cyprus is the same in view of the provisions of s.

14 (4) of the Arbitration Law, Cap.4, which provides that the Court may order that a provision making an award a condition precedent to the bringing of an action shall cease to have effect.

Mr. Evange.lou argued that clause 67 is in effect a "Scott V. Avery" clause and in support of hip submission referred us to the opinion of Duncan Wallace expressed in the following passage of. his. book at pp. .169-170:-

"By virtue of the changes from the English form already referred to, it now seems clear (see the words 'in the first place' in regard to the preliminary reference to the engineer and the words ’all disputes ... in respect of which the decision (if any) of the Engineer has not “become final and binding as aforesaid’) that the clause is what would be called in English law a 'Scott. v. Avery’ type of clause – namel a clause preventing resort to the courts unti such time as an award under the arbitration clause has been obtained. ... As a result, it can be stated with fair confidence that, in English law at least, the only and exclusive way of liti gating a dispute between the parties to the [*441] present contract is that, first, there must be a mandatory reference to the engineer under the terms of the clause and secondly (provided always that following this reference there has been the appropriate request within the relevant period) and arbitration under the rules of the International Chamber of Commerce can then be held, and subsequently “any award can be enforced in the courts".

Counsel contended that it. is unnecessary that there should be express provision in the agreement making the award of the arbitrator a condition precedent to legal proceedings, as submitted by counsel for the plaintiffs, if the wording of the clause, as in the instant case, shows that this was the intention of the parties.

Learned counsel for the plaintiffs conceded that 1 (1) despite the alleged exercise by the Minister of the power of forfeiture, clause 67 is still a valid and binding arbitration agreement; (2) that all the disputes, subjectmatter of the action, properly fall within the arbitration clause; (3) that the defendant acted promptly without taking any steps in the proceedings which would have precluded him from seeking a stay; and (4) the Government have expressed their readiness "to do all things necessary to the proper conduct of the arbitration".

Mr. Polyviou drew a distinction between the disputes concerning the engineer's certificate and the alleged exercise of the right of forfeiture by the Minister [*442]

which are covered, admittedly, fay clause 67 and the claim for an injunction and advanced two reasons why the defendant's application should be turned down. First, an arbitrator has no power to issue an injunction and this is a proper case to grant the remedy for preserving the status quo as. otherwise the plaintiffs will suffer irreparable damage. Counsel relied on a number of authorities which will be discussed later. And, secondly, the matters in controversy affect adversely the plaintiffs' professional reputation and the Court should exercise its discretion in favour of the plaintiffs by allowing the action to proceed. For the same reasons counsel added the Court should not, in the exercise of its discretion, stay the proceedings even if we hold that clause 67 is a "Scott v. Avery" clause.

We shall deal with the second point first. Under s.9(2) and (3) of the Arbitration Law, where the dispute arising under the agreement involves allegations of fraud the Court has express power to order that the agreement shall cease to have effect and at the instance of the party charged with fraud may refuse to stay any action brought in breach of the agreement. This is so because unlike arbitration in a court of law the party charged with fraud is afforded the opportunity to clear himself of the accusations levelled against him.

The principle has been extended to cases where dishonesty is alleged or other charges of a personal character are made involving the professional reputation of a party. From a perusal of some decided cases it seems that the point [*443] was raised successfully by professional men accused of fraud or similar charges who were member in a partnership of professionals.

In our view the position here is entirely different. What is alleged in the present situation is merely a breach of a contractual stipulation, i.e., clause 63 of the contract and nothing more. This submission accordingly fails.

We shall now consider the other argument put forward by. counsel for the plaintiffs against a stay. On principle the Court will not refuse a stay on the sole ground that an arbitrator has no power to grant an injunction. The law is stated in Russell on Arbitration at pp. 191-192 as follows:-

"The fact that a party who has agreed to refer disputes to arbitration desires to obtain, in connection with those disputes, relief which it is beyond the powers of the arbitrator to afford, is not a conclusive reason for the court, in the exercise of its discretion, refusing to stay an action in which such relief is claimed".

The principle was applied in Willesford v. Watson (1873) L.R. 8 Ch.473, where the agreement - a mining lease - contained an arbitration clause. In refusing the injunction Selborne L.C. said at p.480:-

"The parties here have made that agreement. They probably knew what were the reasons in favour of determining these questions by arbitration, and what were the reasons against it, and they made it [*443] part of their mutual contract that these questions should he so determined. The plaintiffs cannot, therefore, he now heard to complain if that part of their contract is carried into effect. No doubt he (i.e. the arbitrator) could not grant an injunction but he might say that the thing was not to be done, and there being liberty to apply to this court, this court would then grant the injunction. I agree that if, in the present state of circumstances, the court saw there was a case for now granting the injunction, that would be an extremely good reason for not sending the matter to arbitration. But nothing has been said to us which has any tendency whatever to make us think that, in the present state of circumstances. there is a case for now granting an injunction".

In Marchon Products Ltd. v. Thornes, Ch. D. April 27, 1954, an unreported case which was relied on by Mr. Polyviou, the Court refused to stay an action brought by an employer against his former employee restraining him from engaging in similar work with a competing business on the ground that the arbitrator could not grant an injunction which was the sole remedy claimed. Prom a summary of the decision given in Russell on Arbitration at p.200 it appears that the dispute involved, basically, a question of law and it seems that on that ground the case can be distinguished from the present situation. [*445]

Counsel for each side referred us to a number of other authorities where the question of granting an injunction was raised in relation to disputes arising out of building and engineering contracts and in circumstances greatly resembling those of the present case. These three cases are reported in the British and Empire Digest, Vol.7 p.410 and it is important to stress that they are cases more directly in point and provide some general guidance on the matter. In Munro v. Wivenhoe and Brightingsea Ry. Co. (1865), upon motion for an injunction by the contractor to restrain the employer, inter alia, from availing himself of a clause in the contract enabling him to declare the contract void as to the work yet incomplete and from entering on the works in progress it was held that unless the case was so clear as to be almost undisputed, the Court would not issue an injunction; that to issue an injunction would be analogous to specific performance which the Court has no power to enforce, but the remedy for any breach of which must lie in damage's.

In Garret v. Banstead and Epsom Downs Ry. Co. (1864) a contractor similarly applied for an interlocutory injunction to restrain the employer from taking possession of the works and from interfering with the plaintiff in the further execution of the works. The full report of this case can be found in the English Reports Vol. 46 at p.997 and it is worthwhile to quote in full the short judgment given by Knight Bruce L.J. at p.999:- [*446]

"There may possibly he a case in which the propriety of an injunction of the nature and to the extent here asked for in the position in which these parties are, and the relation in which they stand to one another of contractor and railway company, may he, although I cannot at present conceive a case in which it could he, free from question. But to suppose, in a case like this, where, if the company are wrong, ample compensation in damages may he obtained by the contractor, that the company are liable to have a person forced on them to perform these works, to whom they reasonably or unreasonably object, whereas there would be no reciprocity if the wrong were on the other side for the purpose of compelling the performance of the works, is more than I am able to do. In my judgment, without entering into the merits of the case, and expressly without, prejudice to any question, the injunction should be dissolved".

See also Kirchner and Co. v. Gruban (1909.) 1 Ch. 413, where a contract of service contained an arbitration clause and the Court dismissed a motion for an injunction restraining the defendant· from engaging in any other business similar to the plaintiff's and from divulging matters relating to the ‘plaintiff’s business and stayed, the proceedings.

In support of their case the plaintiffs relied on Poster and Dicksee v. Hastings Corporation (1903) 87 L.T.736. [*447] The facts of the case and the decision are taken from the English and Empire Digest at p.410 where it is reported and are as follows:-

"On a motion to restrain defendants from acting on a notice, given by them or their engineer pursuant to a contract between plaintiffs and defendants, from entering on or taking possession of works in course of execution under such contract and for damages, it appeared that defendants were carrying out a scheme for a water supply, and had contracted with plaintiffs to sink certain wells. The work was to he performed to the satisfaction of defendants' engineer, and any dispute was to go to arbitration, and if in the judgment of the engineer sufficient dispatch was not used defendants or their engineer might dismiss the contractors and their workmen. Difficulties having arisen in carrying out the work, and delay being thereby occasioned, defendants gave notice dismissing the contractors and their men: - Held; (1) the terms of the contract were consistent as a whole, and the reference to arbitration was engrafted upon them, and the contractors were not bound to give Up to the engineer the decision of every question; (2) the court ought to imply that defendants Would not act upon the summary clauses until the arbitrators had affirmed the judgment of the engineer, and injunction granted to preserve the status quo until trial or an award should be made".[*448]

Hudson views this case as rather exceptional. At page 713 (10th Ed.) the following comment occurs;-

"This case was decided on an interlocutory application as a matter of urgency and, in so far as it relates to the granting of an injunction may not he of general application. Farwell J. clearly doubted the bona fides of the engineer and was influenced by the fact that the employers had purported to act without any previous complaint".

The effect of the cases on the subject is summed up in Hudson at p.712 as follows:-

"No injunction will ordinarily be granted to restrain the exercise of the powers given by a forfeiture clause, for the contractor can be amply compensated in damages if the forfeiture is wrongful, whereas if the contractor were allowed to continue the work, the court could not specifically “enforce the contract, nor compel the due completion of his obligations".

And at p.714:-

"As a general rule the builder cannot restrain the employer from forfeiting the contract, while the employer can restrain the builder from interfering with his taking the works out of the builder's hands, subject to an undertaking in damages if the court requires it". [*449] As illustrative of this see Cork Corporation v. Rooney (1881) 7 L.R.Ir.191. The more recent case of London Borough Council of Hounslow v. Twickenham Garden Developments Ltd. (1970) 3 All E.R.326 a decision to the contrary by Megarry V.C. has been doubted and criticised. See, for example, Keating Building Contracts, 4th Ed. pp. 123-124.

We have considered every argument for and against a stay and we are satisfied that the defendant-applicant has fulfilled all the conditions for obtaining a stay. Further, in view of the principles enunciated in the autho­rities, the grant of an injunction in the present circum­stances does not appear to be an appropriate remedy and since the lack of power by an arbitrator to grant an injunction is not a decisive factor for granting or refusing stay we. have decided, in the exercise of our discretion, to stay the action. Having reached this

decision we consider it unnecessary to decide whether clause 67 is a "Scott v. Avery" clause. The costs of the application are reserved to be determined on motion after delivery of the arbitrator's award.

Stay of action granted. Order for costs as above.