Paul Darling QC and Samar Abbas, 39 Essex Chambers
This is an extract from the third edition of GAR’s The Guide to Construction Arbitration. The whole publication is available here.
The nature of an arbitration agreement
In an essay written in 1974, Frédéric Eisemann, a leading light of international arbitration not least because of his role as Secretary General of the ICC International Court of Arbitration, articulated four minimum requirements that an arbitration agreement must meet:
(1) The first, which is common to all agreements, is to produce mandatory consequences for the parties;
(2) The second, is to exclude the intervention of state courts in the settlement of the disputes, at least before the issuance of the award;
(3) The third, is to give powers to the arbitrators to resolve the disputes likely to arise between the parties;
(4) The fourth, is to permit the putting in place of a procedure leading under the best conditions of efficiency and rapidity to the rendering of an award that is susceptible of judicial enforcement.
While these requirements are not, strictly speaking, mandatory legal or statutory requirements, they provide a useful shorthand for the core parameters of an arbitration agreement. An arbitration agreement, quite frequently a midnight clause in a large and complex contract, which fails to achieve any or all of these requirements is considered defective or, in arbitration parlance, ‘pathological’.
In modern practice, almost all arbitration agreements are set out in writing, either by way of an express dispute resolution clause in a contract or by way of some other mechanism that provides a written basis for the agreement. Modern legislation in most arbitration-friendly jurisdictions adopts an expansive approach of what constitutes an agreement in writing. For instance, Sections 5(2)–(6) of the English Arbitration Act 1996, read together, provide that an arbitration agreement is made in writing if any of the following conditions apply:
- it is made in writing (whether or not it is signed by the parties);
- it is made by an exchange of communications in writing;
- it is evidenced in writing (including circumstances where an agreement made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties);
- it is not made in writing but is made by reference to terms that are in writing; or
- the parties exchange written submissions in arbitration or legal proceedings and an arbitration agreement is alleged by one party and not denied by the other party.
Therefore, if a contractor and an employer agree by an exchange of email correspondence (or even orally) to be bound by a standard form of contract that contains an arbitration agreement then they will have made an agreement in writing for the purposes of the Arbitration Act 1996.
One of the unique features of an arbitration agreement is that it is treated as distinct and separable from the substantive agreement of the parties (even when it is nothing more than a clause in a long and complex contract): unless otherwise agreed by the parties, it is not regarded as invalid, non-existent or ineffective simply because the substantive agreement has been so rendered; the arbitration agreement itself would have to be directly impeached for it to be invalid. In the words of the English High Court in Westacre Investments Inc v. Jugoimport-SDPR Holdings Co:
These characteristics of an arbitration agreement…are in one sense independent of the underlying or substantive contract [and] have often led to the characterization of an arbitration agreement as a ‘separate contract.’… [An arbitration agreement] is ancillary to the underlying contract for its only function is to provide machinery to resolve disputes as to the primary and secondary obligations arising under that contract.
Consequently, when considering international contracts, particular care needs to be given to the question of the governing law of the arbitration agreement: the law governing the substantive agreement is not necessarily the law governing the arbitration agreement. For instance, in Reliance Industries v. Union of India, the Supreme Court of India recognised that three sets of laws may apply to any given arbitration:
- the proper law of the contract;
- the proper law of the arbitration agreement; and
- the proper law of the conduct of the arbitration.
As discussed further below, in most jurisdictions, the question of the scope of the jurisdiction of an arbitral tribunal is left to the tribunal to determine, and courts tend not to intervene in the process. Further, if court proceedings are issued or threatened in breach of an arbitration agreement, courts are often happy to stay such proceedings or grant anti-suit restraining such proceedings – particularly in jurisdictions like England and Wales, where the court may not refuse such an application unless it is satisfied that the arbitration agreement is void, inoperative or incapable of being performed.
Seat versus venue versus governing law
An issue that often arises in construction and infrastructure arbitration involving parties from different jurisdictions is a dispute over the meaning and effect of terms like ‘seat’, ‘venue’ and ‘governing law’.
These disputes can have important practical consequences for the scope, conduct and the ultimate enforcement of the award rendered by a tribunal.
In terms of scope, these questions can have a considerable impact on what issues are considered arbitrable and proper before the tribunal. Some jurisdictions might restrict arbitrability of certain kinds of disputes. In India, for instance, only disputes that can be characterised as disputes over ‘rights in personam’ and not ‘rights in rem’ are generally considered arbitrable; Pakistan, like many other jurisdictions, restricts questions of public policy from being decided by arbitration but adopts a relatively wide definition of what is considered public policy.
In terms of conduct, an arbitration seated in an arbitration-friendly jurisdiction will benefit from procedural rules designed to support the process; an arbitration seated in jurisdictions that adopt an interventionist approach may struggle to get off the ground.
Coming to enforcement, an award sought to be enforced in a jurisdiction that is also the seat of the arbitration would be considered a domestic award by the enforcing court and will often be subject to a set of rules different from those applicable to a foreign-seated award being enforced under the New York Convention (provided that both seat of the arbitration and the place of enforcement are signatories to the New York Convention). Different approaches adopted by different jurisdictions can lead to drastically different outcomes at the all-important stage of enforcement.
The distinction between seat and venue is conceptually relatively easy to tackle. Simply put, the ‘venue’ is the geographically convenient place in which the parties have elected to hold their arbitration; on the other hand, the ‘seat’ of the arbitration is the juridical place of the arbitration and determines which courts supervise the arbitration, the scope of such supervision and the manner of enforcement of an arbitration award. Issues can arise where the parties do not use clear language to denote whether a place named in the arbitration agreement is intended as a venue or as a seat. For instance, in Shashoua v. Sharma, the agreement simply provided that the ‘venue of the arbitration shall be London, United Kingdom’ without saying anything explicitly about the intended seat of the arbitration. While recognising that venue is not in itself synonymous with seat, the English High Court held that:
‘London arbitration’ is a well-known phenomenon which is often chosen by foreign nationals with a different law, such as the law of New York, governing the substantive rights of the parties. This is because of the legislative framework and supervisory powers of the courts here which many parties are keen to adopt. When therefore there is an express designation of the arbitration venue as London and no designation of any alternative place as the seat, combined with a supranational body of rules governing the arbitration and no other significant contrary indicia, the inexorable conclusion is, to my mind, that London is the judicial seat and English law is the curial law.
More complex issues arise when considering governing law, especially as to whether the governing law of the substantive agreement is the same as the law governing the arbitration agreement. The English Court of Appeal addressed this issue in C v. D, where the substantive agreement was to be ‘governed by and construed in accordance with the internal laws of the State of New York’ but where any dispute arising under the agreement was to be ‘finally and fully determined in London’. It held, unanimously, that:
the inquiry must always be to discover the law with which the [agreement to arbitrate] has the closest and most real connection ...[A]n agreement to arbitrate will normally have a closer and more real connection with the place where the parties have chosen to arbitrate than with the place of the law of the underlying contract in cases where the parties have deliberately chosen to arbitrate in one place disputes which have arisen under a contract governed by the law of another place.
As observed earlier, in most arbitration-friendly jurisdictions, courts do not intervene in a determination of the question of a tribunal’s jurisdiction. The underlying doctrine of kompetenz-kompetenz holds, in simple terms, that every arbitral tribunal has the power to determine its own jurisdiction. Once it does so, even if it declares the substantive contract as null or void or void ab initio, the finding will not defeat the validity of the arbitration clause itself.
Multi-tier dispute resolution clauses
Dispute resolution clauses often stipulate that in the event a dispute arises, parties have to undertake certain steps such as negotiation and mediation to resolve the dispute amicably before commencing arbitration. Before discussing how domestic courts approach these multi-tiered clauses, it is useful to consider the advantages and the disadvantages of such clauses.
Some advantages of a multi-tiered approach:
- it saves the parties the expense of an arbitration if the dispute is settled with high-level talks or negotiations;
- it acts as a ‘second opportunity’ for both the parties and their advisers to re-evaluate the expense of an arbitration with regard to outcome and the net profit or goodwill of the business;
- it helps to preserve long-term relationships between employers, contractors, engineers and other professionals, and does not jeopardise future business opportunities; and
- it reduces the aggregate number of issues to be resolved in an actual arbitration. Through negotiation or early meditation, frivolous or trivial claims can be settled or written off at the outset.
Some disadvantages of a multi-tiered approach:
- where the dispute has reached a deadlock, or where only a third-party verdict on the merits of the issues will suffice, the exercise of going through the motions of a negotiation or mediation may constitute a wastage of resources;
- in time-sensitive and urgent matters, the opportunity of obtaining interim measures may be lost, resulting in an asset being be disposed of or funds being siphoned;
- it increases the risk of the arbitration clause being rendered a pathological clause. In particular, where there are no well-defined stages of negotiation, mediation or high-level talks a multi-tiered clause can lead to ambiguity in determining the beginning and termination of each of these stages; and
- its interplay with the domestic limitation act can lead to a bar in commencing arbitration owing to the time taken in negotiation, mediation and high-level talks.
In instances where different preliminary steps in a multi-tier clause are considered conditions precedent to the commencement of arbitration, difficult issues can arise that are often treated differently by domestic courts in different jurisdictions. As a result, there is no single internationally recognised ‘best practice’ position in this regard. Some examples are considered below.
England and Wales
Courts generally adopt a liberal stance on the basis that a bare agreement to negotiate is unenforceable as it is a mere agreement to agree. However, there is authority to the effect that negotiation was a condition precedent to the right to refer to arbitration.
In the context of an investment treaty arbitration, the US Supreme Court first considered the nature of multi-tier clauses, drawing a distinction between ‘procedural’ and ‘substantive’ conditions precedent to arbitration. It took the view that if a clause was procedural in nature then it would be the discretion of the arbitral tribunal to determine the consequences. On the other hand, if it was substantive then a failure to comply would imply a bar on commencing arbitration.
The Swiss Supreme Court has struck a balance between, on the one hand, holding the parties to their agreement of following through with various steps and, on the other, ensuring that non-compliance with such steps cannot be or abused to derail an arbitration that has already been commenced.
The Singapore Court of Appeal gives that strict compliance with multi-tier clauses is mandatory, holding that ‘substantial’ compliance with them is not enough.
Incorporation by reference
While an express arbitration agreement would be considered ideal, there are often instances in the construction industry where an arbitration clause is incorporated by reference.
There are a number of degrees of complexity of incorporation. On the simpler end of the spectrum are instances where two parties have contracted on the basis of general standard terms, including an arbitration clause. On the more complex end of the spectrum, one finds instances where two parties deal on a basis of terms agreed by them previously, by two other parties in the same group of companies, or by entities up and down the chain.
Conventionally, incorporation by express or implied reference to arbitration was characterised into relatio perfecta and relatio imperfecta. The former is an express reference that the main contract makes to a separate contract containing an arbitration clause. In the latter, the main contract makes a general reference to a separate document with no specific mention of an arbitration clause therein.
A number of jurisdictions have held that general words of incorporation are capable of incorporating an arbitration agreement even where no specific reference to it has been made. For instance, the English High Court in Habas sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL held that general wording would be sufficient in a context where some of the previous 14 contracts between the parties had contained a clear arbitration agreement whereas the others had just used wording to the effect that ‘all the rest will be same as our previous contracts’.
On the whole, however, incorporation remains a tricky issue – especially in multi-party or non-signatory instances – and difficulties can arise in jurisdictions that are less familiar with, or permissive of, international arbitration. Given the preponderance of construction projects in such jurisdictions, care needs to be taken to ensure that a valid arbitration clause is expressly included in the parties’ agreement as reliance on incorporation might lead to protracted satellite litigation.
The discussion above has highlighted some of the general themes to bear in mind when drafting arbitration agreements. Some of the common specific mistake include:
- inchoate agreement to arbitrate indicating the mere intention of the parties to have a binding arbitration: an agreement simply to have the option of referring a dispute to arbitration can lead to uncertainty as to whether the parties intended for arbitration to be mandatory – for example, ‘any dispute of whatever nature …may be referred to arbitration’;
- unclear multi-tier clauses: failure to use precise words to define the scope of each tier can lead to disputes as to whether a mandatory milestone has been crossed or what kind of steps are envisaged within that milestone – for example, ‘the parties should mediate/negotiate as long as they believe settlement is possible’ or ‘disputes which may be resolved by conciliation shall be first submitted to conciliation’;
- non-existent institution: reference to the rules of an arbitral institution that does not exist runs the risk of protracted satellite proceedings – for example, ‘the tribunal must be appointed in accordance with the rules of arbitration of the Singapore Chamber of Commerce’; and
- failure to specify the governing rules: reference to a set of institutional rules without specifying which version or edition of them is applicable can lead to disputes over whether the intention was to adopt the rules in force at the time of the contract or at the time of the dispute – for example, simply saying ‘under the rules of Institution X’. This can be significant where the rules have undergone significant change.
The FIDIC arbitration agreement
The FIDIC Suite of Contracts is extensively discussed in other chapters of this work. A few observations on its arbitration element follow.
As readers will be aware, one of the key elements of the FIDIC Suite of Contracts is the Dispute Adjudication Board (DAB) provided for within Clause 20 and the ‘pay now, argue later’ approach underpinning it.
However, jurisdiction-specific complexities can arise after the decision of the DAB: for instance, in jurisdiction X, how is a DAB decision to be enforced; in jurisdiction Y, what weight, if any, can an arbitral tribunal give to the decision of the DAB in making its award, etc.?
Many jurisdictions have limited to no jurisprudence in relation to such questions; in instances where there has been some judicial treatment of the issues, the answers can vary considerably and can have a real impact on the extent to which the underlying ‘pay now, argue later’ principle is respected in principle.
The Singapore case of PT Perusahaan Gas Negara (Persero) v. CRW Joint Operation (Indonesia) serves as a useful example. Between 2009 and 2015, no fewer than two arbitration proceedings and four court judgments were needed to resolve the question of the interplay between the findings of the DAB and subsequent arbitration proceedings. Ultimately, the Court of Appeal upheld the (second) arbitral tribunal’s interim award, which permitted the enforcement of the DAB’s decision. A different jurisdiction may well have reached a different (and less helpful) decision.
Even though the FIDIC Clause 20 is a cogently-drafted, clear and perfectly sensible provision aimed at speedy and cost-effective resolution, the example illustrates the importance of electing the appropriate applicable law and seat – preferably one which, like Singapore, has already clarified its approach on the matter. As such, even when using a well-known and respected standard form of contract, the precise relationship between the arbitration agreement contained within that contract and the law applicable to the arbitration is a crucial consideration. Therefore, it would be prudent to be not too ‘spoilt for choice’ and opt for jurisdictions with a proven track record of upholding adjudication decisions and supporting arbitration.
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