If court proceedings are commenced in the English court in breach of an arbitration agreement, those proceedings will be stayed pursuant to section 9 of the Arbitration Act 1996 which provides (so far as relevant):

Where, on a stay application, the claimant disputes that it is bound by a valid arbitration agreement, the issue arises as to whether the court, or the arbitral tribunal, should determine that question. Although the tribunal has power to rule on its own jurisdiction, the English court has taken the view that, in general, where such issues arise in the context of a stay application, the court should rule on them. The judgment in Birse Construction Ltd v St David Ltd [1999] BLR 194, identified four possible options for the court in such a situation:

The second of these options will be adopted only exceptionally: in most cases, the court will determine the issue (see Albon (t/a N A Carriage Co) v Naza Motor Trading SDN BHD & Anor [2007] EWHC 665 (Ch)).

For further discussion of these aspects of section 9 of the Arbitration Act 1996, see Legal update, Remedies for breach of the arbitration agreement: stays of English court proceedings: Overlap with jurisdictional issues.

In these proceedings, the claimant bank advanced claims in connection with loans made to the third to sixth defendants which were said to have been procured by the fraud of the first defendant, Mr Ablyazov, and his associate, the second defendant, Mr Khazaev. Mr Ablyazov owned or controlled each of the third to sixth defendants. The bank sought declarations that the loans were invalid as a matter of their governing law (Kazakh law) and associated remedies.

The loans incorporated an arbitration clause referring "any disputes, differences or claims arising from this contract (agreement) or in connection therewith" to arbitration in Russia.

The third defendant, T, which was party to the relevant agreements, applied for a stay of the English proceedings pursuant to section 9 of the Arbitration Act 1996. The seventh defendant, C, a shareholder in T, applied for a stay pending the outcome of the arbitration on case management grounds. C argued that if the proceedings against T were stayed, it would be pointless for the case against itself to proceed.

Christopher Clarke J granted both stay applications.

In respect of T's application pursuant to section 9, he noted that three questions arose:

In relation to the first and second questions, T argued that the existence of the arbitration agreement depended on the outcome of the substantive dispute. If the loan agreements were not valid or binding, then no valid arbitration agreement would exist. The court was, in effect, being asked to grant specific performance of the arbitration agreement which might not be valid. In connection with the four options identified in Birse, T argued that there was a fifth option: namely, to decline to make any order at all, on the basis that the issue to be resolved, so far as any arbitration agreement was concerned, was the principal issue in the action. T submitted that it would make no sense to have this central issue determined separately in an arbitration to which the principal players, Mr Ablyazov and Mr Khazhaev, were absent.

Christopher Clarke J rejected this submission. He noted that there was a dichotomy inherent in sections 9(1) and (4), in that a defendant might establish that an arbitration agreement had been concluded (for the purposes of section 9(1)), which the claimant said was null and void, inoperative or incapable of being performed (for the purposes of section 9(4)). It would be inconsistent with the scheme of the Act to require the defendant to establish both an arbitration agreement and that the agreement is not null and void or inoperative or incapable of being performed. The onus in relation to the latter fell on the party resisting the stay. If the applicant could show that it was arguable that the arbitration agreement was not "null and void etc", a stay would be granted.

Turning to the four options identified in Birse, Christopher Clarke J rejected the suggested fifth option of leaving the issue to the trial on the merits. In his view, that would be to sidestep the Act.

In the present case, the Bank's claims, properly analysed, rested on the contention that the loans were voidable, rather than void. In the circumstances, T had established that an arbitration agreement had been concluded, but the Bank had failed to show that it was null and void, inoperative or incapable of being performed. Furthermore, it would not be appropriate to order the trial of the issue relating to the validity of the arbitration agreement: such a course should only be adopted where the trial could be confined to a "relatively circumscribed area of investigation" (A vB [2006] EWHC 2006 (Comm)). Finally, the Bank's claims fell within the scope of the arbitration clause. A stay would therefore be granted.

In relation to C's application for a stay on case management grounds pending the outcome of the arbitration, Christopher Clarke J agreed that it would make no sense for the case against C to proceed in the absence of T. The action against C was therefore also stayed.

The judgment of Christopher Clarke J includes a clear and helpful analysis of the relationship between sections 9(1) and 9(4) of the Arbitration Act 1996. He further clarified that there is no fifth option over and above those identified in Birse: the court may not simply leave the issue of whether there is an arbitration agreement to be determined at trial. Such a course would be inconsistent with the scheme of the Act.

The outcome of the application means that there are now two sets of parallel proceedings: arbitral proceedings against T and court proceedings against the other defendants. The court was, however, able to stay the proceedings against C on case management grounds, and it is interesting to see the court's case management powers being used in this way to grant a stay which is "parasitical" on the section 9 stay application brought by another party.