The Commercial Court recently considered a case(1) in which Habas, a Turkish company, had entered into a contract (through its agents, Charter Alpha Limited and Steel Park Limited) with VSC, a Hong Kong company, for the sale by Habas of 15,000 metric tons of steel. No delivery was made and VSC commenced arbitration proceedings. The contract specified International Chamber of Commerce 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's behalf, which was therefore binding on the parties.
Habas challenged the tribunal's jurisdiction under Section 67 of the Arbitration Act 1996. Section 67 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 statute, a party may lose the right to object if it 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 that there was a binding arbitration agreement, on the basis that:
- Charter Alpha and Steel Park had no actual or ostensible authority to conclude the arbitration agreement on behalf of Habas; and
- there was no binding consensus on the terms of the arbitration agreement.
The court therefore had to consider the following issues:
- whether Habas had lost its right to bring a challenge under Section 67;
- whether there was consensus as to a London arbitration agreement; and
- what law applied to the arbitration agreement.
Habas sought to rely on two jurisdictional objections to the tribunal's award:
- 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.
- The formal requirements for concluding an arbitration agreement had not been met under Turkish law.
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 which, under Section 73, Habas was not entitled to make.
The court stated that the purpose of Section 73 is to promote principles of openness and fair dealing by ensuring that a party objecting to jurisdiction, and that had decided to take part in the arbitration, should put forward its 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's first objection was admissible as it fell within Habas's argument that that there was a lack of authority to enter into the agreement; however, the second objection was a new objection that was barred under Section 73.
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's agents and VSC.
In determining the law applicable to the arbitration agreement, the court applied the principles set out in Sul America Cia Nacional de Seguros SA v Enesa Engenharia SA(2) and Arsanovia Ltd v Cruz City 1 Mauritius Holdings.(3) Those principles are as follows:
- Even if an arbitration agreement is part of the matrix (ie, main commercial) contract (as is often the case), its proper governing law is not necessarily the same as that of the matrix contract.
- The proper law is determined using a three-stage test:
- express choice;
- implied choice; and
- the system of law with which the arbitration agreement has the closest and most real connection.
- 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 that 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.
- 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 governing law of the arbitration agreement.
In this case, given that there was no express choice of law, applying Sul America meant that the applicable law was the law of the seat – that is, 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 Habas claimed to be 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.
The case reinforces the importance of providing for a governing law in contracts and the need to make this expressly clear should the parties wish that an arbitration agreement be governed by a different law from the law of the seat. 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. 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.
For further information on this topic please contact Chris Ross or Jonathan Cary at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
(1) Habas Sinai Ve Tibbi Gazlar Istihsal Andustrisi AS v VSC Steel Company Ltd  EWHC 4071 (Comm).
(2)  1 Lloyd's Rep 671.
(3)  2 All ER 1.