Scott v Avery - Arbitration

Scott v Avery (1855) 5 HL Cas 811

Whether arbitration clauses are against public policy.

Facts

The respondent, Avery, took out a policy of insurance on a ship from the appellant. A clause in the policy stated that in the case of any dispute about an award, the matter should first be referred to arbitration. This was said to be a “condition precedent” to the maintaining of an action. The respondent claimed under the policy for losses, but a dispute arose as to the amount to be awarded. Avery was dissatisfied by the amount offered. He refused to refer the matter too arbitration and instead took the matter directly to court.

Issues

The respondent argued that the clause requiring the matter be referred to arbitration was illegal. He claimed that by denying the parties the right to sue for any amount except that which the arbitration panel committee awarded him the agreement was ousting the jurisdiction of the court to settle such claims and make such awards as they saw fit.

Decision/Outcome

The House of Lords found for the insurers. Lord Cransworth distinguished between a clause that ousted the jurisdiction of the court where a cause of action had already risen, and the present case. Here, the clause stated that there was no cause of action until an arbitration decision had been made. He stated that the principle against ousting the court’s jurisdiction was one of public policy and said (at 853):

“I can see not the slightest ill consequences that can flow from such an agreement, and I see great advantage that may arise from it.”

Therefore, the clause to refer the matter to arbitration did not offend public policy and as enforceable.