Consent is the bedrock of the arbitrators’ power to determine the parties’ dispute. Parties record their consent in the arbitration agreement. The arbitration agreement defines the scope - and existence - of an arbitrator’s jurisdiction. Challenges to the arbitrator’s jurisdiction can cause unexpected delays and add additional costs to the arbitration process. Given this substantial impact, it is important to understand the grounds that give rise to jurisdictional challenges and the associated procedures.

Challenges to jurisdiction

The terms of the arbitration agreement will determine whether the arbitrator(s) has jurisdiction over a given dispute. Challenges to jurisdiction typically assert that either there is no agreement to arbitrate at all, there is no agreement to arbitrate the particular dispute, or that there is in fact no dispute between the parties. We consider each of these arguments below.

The arbitration agreement is invalid or defective

An arbitration agreement may be invalid or defective if it fails to comply with the formal requirements found in the law of contract, or in various statutes. Arbitration agreements written as clauses in broader contracts are separable from the contract in which they are contained; a declaration that the contract is void or voidable does not necessarily mean that the arbitration agreement is also void or voidable. The validity of the arbitration agreement is determined on its own merits. An arbitration agreement may be void or voidable if there is evidence of incapacity, conditionality, duress, bribery, illegality, misrepresentation, mistake or undue influence. In certain circumstances, such as in consumer contracts, the failure to comply with statutory requirements may also void the agreement.

A key lesson is to ensure that the arbitration agreement is between the disputing entities. Parties that run their business through multiple entities can come unstuck here. Parties should ensure that the correct entity is named in the contract containing the arbitration agreement and that the corresponding entity issues the notice to arbitrate. 

The dispute does not fall under the scope of the arbitration agreement

In the course of business, a wide array of disputes can arise between the parties. Not all disputes arising between two parties who have agreed to arbitrate disputes will necessarily fall under the arbitration agreement. For example, depending on the wording of the arbitration agreement, parties may agree to submit contractual disputes to arbitration while remaining silent on the treatment of tortious disputes or disputes arising under legislation [1]. Whether a particular dispute is subject to an existing arbitration agreement will necessarily depend on the nature of the dispute and the wording of the agreement. If a dispute does not fall under an existing agreement, the parties are free to agree to arbitrate the dispute under a new agreement.

There is no dispute

Parties may not pre-emptively refer matters (unless agreed) to arbitration before a dispute arises. A dispute will exist “where two or more individuals express and maintain, in relation to each other, conflicting views or positions, the resolution of which will or may be of legal consequence, or where there are questions which may give rise to such a dispute if left unresolved” [2]. The disputing parties must be in a defined legal relationship; usually, this relationship will be contractual, but it may also be equitable, tortious or statutory [3]. The dispute in question must arise out of that legal relationship and be one that the parties have agreed to refer to arbitration. Arbitrators cannot rule on any matter that is not an arbitrable dispute under the arbitration agreement. Doing so would exceed the arbitrator’s mandate set by the parties.

Procedure and timing to challenge jurisdiction

Parties may challenge the jurisdiction of the arbitrator and/or the validity or applicability of the arbitration agreement at arbitration. Jurisdictional challenges can be raised either as a preliminary matter or as an objection to the enforcement of any award (such as under the Article V of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards). The challenges and issues raised in this article focus on jurisdictional challenges arising before the arbitration is underway; for more information on challenging awards, please see our upcoming article on enforcement of domestic arbitral awards.

In New Zealand, those objecting to the arbitrator’s jurisdiction must raise their objection no later than the submission of the statement of defence. Participation until that time, for example, the appointing of an arbitrator does not constitute a waiver or consent to the tribunal’s jurisdiction. The position is different in other jurisdictions and arbitral institutions. For example, in the UK parties must raise their objection “as soon as possible”[4]. To avoid the perception of delaying proceedings, parties intending to object to the tribunal’s jurisdiction ought to engage with their counterparty to constitute the tribunal and have the objection determined without delay.

Bifurcation of arbitral proceedings

Where jurisdiction is contested, it is possible to bifurcate the proceedings so that the jurisdiction of the tribunal can be confirmed before too much time is sunk into preparing for the merits proceeding. Bifurcation involves splitting proceedings into two separate stages. In litigation, a common approach is to separate a dispute into hearings on the merits (determination of liability) and on quantum (determination of damages). In arbitration, however, a common approach is to bifurcate the arbitration into a preliminary hearing on jurisdiction and a second substantial hearing on the merits. Alternatively, if time and the complexity of the dispute permit, the two issues can be decided at the same hearing. 

Bifurcation is not a given. A party may oppose bifurcation, often for strategic reasons. Whether proceedings are bifurcated will ultimately come down to considerations of efficiency, time and fairness. 

Bifurcation is often possible in institutional arbitrations, subject to the institution’s rules and the tribunal’s discretion. For example, the Rules of the London Court of International Arbitration (LCIA) give the tribunal discretion to order bifurcation of the hearing where it would be fair, efficient and expeditious. The International Chamber of Commerce (ICC) rules allow tribunals to bifurcate proceedings “when doing so may genuinely be expected to result in a more efficient resolution of the case” [5].

Under New Zealand law, where the hearing is bifurcated, and the tribunal finds that it does have jurisdiction, the parties have 30 days to request the High Court to decide the issue de novo (afresh) [6]. Parties failing to request the High Court to determine the issue are deemed to have waived their right to later object to the arbitral tribunal’s jurisdiction; where a party does request the High Court to determine the issue then the High Court’s decision will be final and without a right of appeal. 

Footnotes

[1] See Fiona Trust and Holding Corporation v Privalov [2007] UKHL 40, [2007] Bus LR 1719; and Maritime Mutual Insurance Association (NZ) Ltd v Silica Sandport Inc [2023] NZHC 793.
[2] Methanex Motunui Ltd v Spellman [2004] 3 NZLR 454 (CA) at [59].
[3] Methanex Motunui Ltd v Spellman [2004] 3 NZLR 454 (CA) at [83].
[4] Arbitration Act 1996 (UK), s 31.
[5] Appendix IV of the ICC Rules
[6] Arbitration Act 1996, sch 1 art 16(3); and Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd HC Auckland CIV-2004-404-4488, 26 October 2004 at [56].

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