Background

The judgment followed an application by Habas Sinai VE Tibbi Gazlar Isthisal Endustri A.S. (Habas) under section 67 of the Arbitration Act 1996 (the Act) challenging an interim final award by a London Court of International Arbitration (LCIA) tribunal on jurisdiction. Section 67 of the Act allows a party to apply to the court:

  1. challenging any award of the arbitral tribunal as to its substantive jurisdiction; or
  2. for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part, because the tribunal did not have substantive jurisdiction.

The contract in dispute was entered into between Habas and Sometal S.A.L. (Sometal) on 9 June 2008 and included some specific terms, followed by the words "all the rest will be same as our previous contracts".

Sometal contended that these words had the effect of incorporating an LCIA arbitration provision into their agreement (as it had been incorporated in some of their previous agreements). It had therefore commenced the arbitration proceedings to which Habas was objecting. Habas argued that the words used were insufficient to incorporate the relevant arbitration clause and that the tribunal had no jurisdiction to hear the parties' dispute.

The tribunal considered the issue of jurisdiction as a preliminary point and agreed in its Interim Final Award on Jurisdiction and Costs that the clause was properly incorporated and the tribunal therefore had jurisdiction. Habas subsequently sought to set aside the tribunal's award on jurisdiction pursuant to section 67 of the Act.

The issues

In the judgment, the court considered the words necessary to incorporate an arbitration clause into an agreement.

The parties' previous dealings spanned some 14 contracts between 23 January 2004 and 9 January 2008. The agreements incorporated several separate dispute resolution provisions, including UNCITRAL Arbitration, the "Court of Arbitration in Istanbul", as well as the London Court of International Arbitration, which appeared in the parties' most recent agreements.

The two questions before the court were:

  1. Are general words of incorporation capable of incorporating an arbitration clause in to an agreement?
  2. Did the parties, in fact, incorporate an arbitration clause into their agreement?

Mr Justice Clarke conducted a thorough review of the case law on the incorporation of arbitration agreements and identified the two main categories of contract in relation to which general words of incorporation had a different effect:

the two contract scenario - where parties A and B were seeking to import terms from a separate agreement between parties A and a third party, C

the single contract scenario - where parties A and B were seeking to import provisions from their previous agreements.

The two contract scenario

In relation to the two contract scenario - where an attempt had been made to incorporate terms in to a contract between A and B which were derived from a contract between e.g. A and C - the case law shows that in order for an arbitration clause to be validly incorporated there must be a specific reference to the clause in the incorporating contract or that contract must manifest a clear intention to incorporate the arbitration clause in question.

The various different reasons offered in the authorities (the majority of which relate to charterparties/bills of lading) include the following:

  1. that the arbitration provisions are not sufficiently germane to the subject matter of the contract and general words of incorporation extend only to the main contractual provisions
  2. arbitration provisions are personal to the parties as to the manner in which their disputes are to be resolved and are incapable of incorporation by general words only
  3. arbitration clauses oust the jurisdiction of the courts and therefore clear words of incorporation are necessary
  4. bills of lading may come into the hands of those who do not know or who cannot have access to the terms of the underlying charterparty. A third party is not capable of appreciating the existence of an arbitration agreement and cannot therefore be taken to have agreed to it.

Habas relied on the restrictive two contract approach in its submission that the arbitration provision was not incorporated into the contract and therefore that the tribunal had no jurisdiction.

The single contract scenario

While there were some inconsistent comments in the case law, Mr Justice Clarke did not accept that the same approach adopted in the two contract situation should be adopted in single contract cases, where parties A and B were seeking to incorporate terms from their previous agreements. He held that the court should, as far as possible, try to determine what incorporation the parties intended to effect and that it should be slow to find that the words of incorporation used had no effect at all. In single contract cases, there was no reason why arbitration clauses should be singled out or subject to more strict rules of incorporation.

In this respect, he accepted the statement by Langley J in The Athena (No.2) where he said:

"In principle, English law accepts incorporation of standard terms by the use of general words and, I would add, particularly so when the terms are readily available and the question arises in the context of dealings between established players in a well-known market. The principle ... does not distinguish between a term which is an arbitration clause and one which addresses other issues. In contrast, and for the very reason that it concerns other parties, a ''stricter rule'' is applied in charterparty/bills of lading cases. The reason given is that the other party may have no knowledge nor ready means of knowledge of the relevant terms.

The judge concluded that, in single contract cases, general words of incorporation are capable of incorporating terms, which include arbitration provisions, without specifically having to refer to them. Where the court is able to determine what terms the parties sought to incorporate through their general words, it should not impose restrictions or special rules on the terms which, on ordinary principles of construction, they would be taken to have agreed.

If the terms of an earlier contract or contracts between the parties are said to have been incorporated in a further agreement between the same parties, it must be clear which terms those were and that the parties intended to incorporate them. This is the case with all nature of contract terms and not simply arbitration provisions.

Therefore, if a contract between A and B incorporates all the terms of a previous contract between them, other than the terms newly agreed in the later contract, there should be no lack of clarity in respect of what is to be incorporated.

The judge did not accept that, in a single contract scenario:

  1. The fact that an arbitration clause ousts the jurisdiction of the court means that it requires some extraordinary method of incorporation; or
  2. that the special nature of an arbitration clause as a self standing, independent agreement is any bar to its incorporation by general words.

An arbitration provision can therefore be incorporated in a single contract scenario through the use of general words of incorporation such as those used in this case. On the facts, the judge agreed with the tribunal and found that the LCIA arbitration provision had validly been incorporated in the parties' agreement.

Guidance

This case is a prime example of the risks presented by either a poorly drafted or an improperly incorporated arbitration provision. The additional expense and, perhaps, unwanted publicity of court proceedings following the tribunal's decision on jurisdiction (and indeed, the necessity for the tribunal to consider the question of jurisdiction at all) could have been avoided had the parties clearly and expressly incorporated the relevant arbitration provisions.

While we would strongly advise anyone seeking to incorporate an arbitration provision in an agreement to do so expressly and not to rely on general words of incorporation, it is clear from Mr Justice Clarke's judgment that, in certain circumstances, incorporation through general words is possible.

The general principles which can be taken from this case are that:

  1. where parties are seeking to incorporate an arbitration agreement from their previous agreements, then it is possible to use general words of incorporation.
  2. where the arbitration agreement is contained in an agreement with a third party or between third parties, then express words of incorporation are necessary and specific reference to the clause or the intention to include it in the latter agreement is necessary.

The court will be reluctant to find that the parties' general words of incorporation had no effect at all, as the parties must have intended that they meant something. However, the restrictive nature of the two contracts rule is such that an arbitration agreement is unlikely to be imported in those circumstances.

In any event, it is better not to leave the question of whether or not an arbitration provision has been incorporated to be determined by a tribunal or a court. Where arbitration is the parties' chosen method of dispute resolution, clear and express provision should be made.