Habas Sinai Ve Tibbi Gazlar Istihsal Andustrisi AS v VSC Steel  Company Ltd1

Background

The claimant, Habas, a Turkish company,  entered into a contract (through its agents,  Charter Alpha Limited and Steel Park Limited)  with the defendant, VSC, a Hong Kong  company, for the sale by Habas of 15,000mt  of steel. No delivery was made and VSC  commenced arbitration proceedings. The  contract specified ICC arbitration in London  but did not provide for a governing law.

The tribunal accepted jurisdiction and found  that Charter Alpha Limited and Steel Park  Limited had ostensible authority to conclude  the contract, including the arbitration  agreement, on Habas’ behalf, which was  therefore binding on the parties. 

Habas challenged the tribunal’s jurisdiction  under Section 67 of the Arbitration Act 1996  (the Act). Section 67 of the Act provides  that a party to arbitral proceedings may  challenge an award made by the tribunal  on the basis that the tribunal did not have  substantive jurisdiction. Under Section 73 of the Act, a party may lose the right to object  if he did not raise the objection during the  arbitration itself. 

Habas brought its Section 67 challenge on the  grounds that the tribunal had erred in finding  there was a binding arbitration agreement, on  the basis that:

  1. Charter Alpha and Steel Park did not have  actual or ostensible authority to conclude  the arbitration agreement on behalf of  Habas; and
  2. There was no binding consensus on the  terms of the arbitration agreement. 

The issues the court had to consider therefore  included:

  1. Whether Habas had lost its right to bring a  challenge under Section 67 of the Act;
  2. Whether there was consensus as to a  London arbitration agreement; and
  3. The applicable law of the arbitration  agreement.

Habas’ right to bring a Section 67  challenge

Habas sought to rely on two jurisdictional  objections to the tribunal’s award: 

  1. Turkish law was relevant to whether  Charter Alpha and Steel Park had authority  to enter into the arbitration agreement and  as a matter of Turkish law they had no such  authority; and
  2. The formal requirements for concluding an  arbitration agreement had not been met 

During the arbitration itself, Habas had not  relied on questions of Turkish law. VSC argued  that, as Habas had not referred to Turkish  law during the arbitration, these were new  grounds of objection that, under Section 73 of  the Act, Habas was not entitled to make.

The court stated that the purpose of  Section 73 was to promote principles of  openness and fair dealing by ensuring that  a party objecting to jurisdiction, who had  decided to take part in the arbitration, should  put forward his objections in the arbitral  proceedings and not hold them in reserve for  a challenge in the courts. On the facts, the  court found that Habas’ first objection was  admissible as it fell within Habas’ argument  that there was a lack of authority to enter into  the agreement, but the second objection  was a new objection that was barred under  Section 73 of the Act. 

Consensus

On the facts, the court found that there was  a binding consensus as to the terms of the  contract, which had been agreed by Habas’  agents and VSC. 

Applicable law

In determining the law applicable to the  arbitration agreement, the court applied  the principles set out in Sul America Cia  Nacional de Seguros SA and others v Enesa  Engenharia SA 2  and Arsanovia Ltd v Cruz City 1  Mauritius Holdings 3 . under Turkish law. 

Those principles, in summary, are as follows:

  1. Even if an arbitration agreement is part of  the matrix (ie main commercial) contract  (as is very often the case), its proper  governing law is not necessarily the same  as that of the matrix contract;
  2. The proper law is determined using a  three-stage test:
    • Express choice
    • Implied choice
    • The system of law with which the  arbitration agreement has the closest  and most real connection.
  3. Where the matrix contract does not  contain an express governing law clause,  the choice of the seat is likely to be  “overwhelming” – on the basis the law  of the country in which the arbitration is  seated will usually be the law with which  the arbitration agreement has the closest  connection; and
  4. Where the matrix contract does contain  an express choice of law, in the absence of  anything else, that is a strong indication  of the intended law governing the  arbitration agreement.

In this case, given that there was no express  choice of law, applying Sul America meant  the applicable law was the law of the seat,  ie England. 

Habas argued that this conclusion should  be overridden on the basis that its agents  had exceeded their actual authority when  agreeing to London arbitration and that the  applicable law should be that with the closest  connection to the underlying contract, which,  in this case, they said was Turkish law. 

The court dismissed this argument (describing  it as “novel”), finding that even if the matrix  contract was governed by Turkish law, the  fact that London had been chosen as the seat  would be determinative in finding that English  law applied to the arbitration agreement.

Comment 

The case reinforces the importance of  providing for a governing law in contracts  and the need, should the parties wish an  arbitration agreement to be governed by  a different law from the law of the seat, to  make this expressly clear. In the absence  of a separate specified law applying to the  arbitration agreement that agreement will  be governed by the principles laid down  in Sul America which, by their nature,  involve a measure of uncertainty. A careful  consideration of the dispute resolution  provisions in a contract at the drafting stage  is likely to be a far more efficient use of time  and money than a satellite dispute as to their  meaning once a substantive dispute between  the parties has arisen.