Justice Chan Seng Onn’s recent High Court decision in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and another [2012] SGHC 226 brought to the fore the issue of whether a dispute resolution clause (in this case an arbitration clause) contained within a primary contract between two parties binds a third party who later entered into a supplemental contract with the two parties.

The answer turned on whether the parties intended the primary and supplemental agreements to function as one agreement: if on a contextual interpretation the courts find that they did, the dispute resolution clause in the primary contract would bind the third party to the supplemental contract even though he was not a signatory to the primary contract.

The parties and the agreements

The primary contract in this case was a Cooperation Agreement for Application and Services Implementation (CA) between Datamat Public Company Ltd (Datamat) and Lufthansa Systems Asia Pacific Pte Ltd (Lufthansa) for Lufthansa to supply a special information system to Datamat which Datamat then incorporated into a larger system for supply to another company. The CA provided for three rounds of mediation followed by arbitration proceedings as its dispute resolution mechanism.

Two supplemental agreements (collectively the SA) were later entered into by Datamat, Lufthansa and a third company, International Research Corp PLC (IRCP). These related to how Lufthansa was to be paid for work and services rendered under the CA; Datamat was obliged to transfer monies to IRCP and IRCP would in turn pay Lufthansa. There was no dispute resolution clause in the SA.

The arbitration proceedings

Lufthansa terminated the CA and SA when IRCP refused to pay, and commenced arbitration against IRCP. At the arbitration, the Tribunal first dismissed IRCP’s objections on jurisdiction, and found that the CA and SA were to be treated as a composite agreement and that therefore the dispute resolution provisions in the CA applied to IRCP even though IRCP was not a signatory to the CA. IRCP’s objections that the pre-arbitration mediations were not conducted were also dismissed, as the Tribunal found that those provisions were too uncertain to be enforceable. Dissatisfied with the Tribunal’s ruling, IRCP commenced court proceedings to contest the Tribunal’s jurisdiction.

High Court decision

In dismissing IRCP’s application, the High Court considered two main issues:

  1. whether IRCP is bound by the CA dispute resolution provisions;
  2. if so, whether the mediation pre-condition for commencement of arbitration was met.

(a) Whether IRCP bound by the CA dispute resolution provisions

The first issue turned on whether the CA and SA were to be read as distinct and separate contracts or as one composite agreement. This was dependent entirely on the parties’ intentions which, under Singapore law, are to be objectively ascertained.

Where two agreements are distinct and separate, clear and express words are required to incorporate the dispute resolution provisions of one into the other. Lufthansa’s argument in this case however was that the CA and SA were intended by parties to be one composite agreement.

The court emphasised that the above issues were questions of construction, and where the court had to ascertain the parties’ intentions from the agreement and background matrix of facts, and how these would affect the way a reasonable person would understand the language used in the agreement.

Applying these principles, the court found that the SA had been entered into as a result of Lufthansa’s concern that Datamat would not be able to pay for works and services provided by Lufthansa under the CA. IRCP was brought into the transaction by Datamat to satisfy the latter’s payment obligations to Lufthansa under the CA. The court concluded that the SA was inextricably tied to the CA. Effectively, the SA served to modify the original payment obligations and mode of payment under the CA with the participation of IRCP.

The court concluded that the CA and SA were intended by the parties to function essentially as one agreement and should be read as a whole. Consequently, the dispute resolution provisions in the CA applied to IRCP.

(b) Whether the mediation pre-condition to arbitration was met

The next question was whether Lufthansa was entitled to proceed to arbitration without first exhausting the tiers of mediation laid out in the CA’s dispute resolution provisions.

The court found that despite not providing for IRCP, the dispute resolution provisions could be read to refer to meetings held between the three companies’ representatives where the payment dispute was likely discussed to give effect to it. In this manner, contrary to the Tribunal’s finding, the mediation procedure was not too uncertain to be enforceable. They were pre-conditions to the commencement of arbitration, which if not complied with meant that the Tribunal had no jurisdiction.

The court took note of several rounds of meetings between representatives of Lufthansa, Datamat and IRCP to resolve the payment dispute, and concluded that the mediation pre-conditions to arbitration were met, and that the Tribunal had jurisdiction. The court therefore dismissed IRCP’s application.

Practical considerations

When entering into supplemental agreements, one should take a step back and consider how disputes that might arise will be handled. Absent reflection, parties may find themselves dealing with contradictory provisions or bound by provisions that are difficulty or impractical to work with. There is a real risk that complacency in this regard will mean protracted issues later on.