LEGAL PRINCIPLE: ARBITRATION LAW – Arbitration Agreements – Scott v. Avery Clause – Effect on Guarantor’s Liability – Defence Distinguished from Stay Application
PRINCIPLE STATEMENT
Where the arbitration clause is of Scott v. Avery form which ties the contractor's liability to an award and makes it incumbent on the contractor to pay only such sum as the arbitrator shall award, the cause of action against the guarantor may not accrue until the contractor's liability is found by award; that may well be a defence in an action against the guarantor or a ground for terminating an action prematurely brought, in limine, but it is not a ground for seeking a stay of proceedings pursuant to the statutory provision.
RATIO DECIDENDI (SOURCE)
"Where the arbitration clause is of that type of a Scott v. Avery form which ties the liability of the contractor to an award and makes it incumbent on the contractor to pay only such sum as the arbitrator shall award, the cause of action against the guarantor may not accrue until the liability of the contractor is found by an award. That may well be a defence in an action against the guarantor or a ground for terminating an action prematurely brought, in limine, but it is not a ground for seeking a stay of proceedings pursuant to section 5(1) of the Decree."
EXPLANATION / SCOPE
Scott v. Avery clauses make arbitral award a condition precedent to liability—contractor liable only for amounts arbitrator awards. Effect on guarantor: cause of action against guarantor may not accrue until principal’s liability is established by award (guarantees are typically secondary—guarantor liable when principal is liable). This creates potential defence for guarantor: action is premature (principal’s liability not yet determined), no cause of action exists (prerequisite award absent), and matter should be dismissed in limine. However, this is substantive defence or grounds for dismissal, not grounds for stay under arbitration statute. The distinction: Stay application (section 5(1))—requires being party to arbitration agreement, seeks postponement pending arbitration. Defence/dismissal—argues no current liability exists, seeks termination of premature action. Guarantor who isn’t party to arbitration agreement: cannot seek statutory stay, but may raise defence that liability hasn’t accrued, and may obtain dismissal if action is premature. This distinguishes procedural remedy (stay for parties) from substantive defence (no current liability). Courts must identify the proper basis for relief—guarantor’s remedy lies in defence/dismissal, not arbitration stay provisions.