The English High Court has recently set aside two arbitration awards under section 67 of the Arbitration Act 1996 (1996 Act) on the grounds of lack of substantive jurisdiction. A tribunal will lack substantive jurisdiction if, inter alia, there is no valid arbitration agreement.

In Hyundai Merchant Marine Company Limited v Americas Bulk Transport Limited [2013] EWHC 470 (Comm) a contract for a time charter and an alleged arbitration agreement were contained in the same document. Eder J found that if there was no consensus between the parties as to the charter, there could be no binding arbitration agreement. On the facts, there was no evidence that the parties intended the alleged arbitration agreement to have effect independently of the existence of the main agreement. In the circumstances, the court found that the questions of whether there was a binding main contract and/or binding arbitration agreement stood or fell together.

In Lisnave Estaleiros Navais SA v Chemikalien Seetransport GmbH [2013] EWHC 338 (Comm) the court found that an arbitration clause in a shipyard’s General Conditions applicable to individual ship repair contracts was not incorporated by way of a prior course of dealing into a Ship Repair Fleet Agreement (the Fleet Agreement) between the shipyard and the agent of the ship owners.

The test for incorporating terms into a contract by way of a prior course of dealing is whether the parties must have intended the relevant term to form part of their contract. The court found that it was impossible to conclude that it was obvious that the parties intended the arbitration clause to apply. The judge urged caution in relying in cases such as this on Lord Hoffmann’s comments in Fiona Trust v Privalov [2008] 1 Lloyd’s Rep 254 to the effect that it should be assumed that parties, as rational businessmen, are likely to have intended any dispute arising from their relationship to be decided by the same tribunal. Lord Hoffmann’s comments were made in the context of construction of arbitration agreements to which the parties have expressly agreed. It was an entirely different matter to apply this line of reasoning to the incorporation of arbitration clauses to which the parties have not expressly agreed.  

Hyundai Merchant Marine Company Limited v Americas Bulk Transport Limited MV [2013] EWHC 470 (Comm)

Background

Facts

The dispute concerned an alleged contract for a single time charter between Hyundai Merchant Marine Company Limited (HMM) and the proposed charterers, Americas Bulk Transport Limited (ABT). The alleged contract was purported to have been made through a series of emails and telephone calls. ABT’s case, which HMM disputed, was that HMM was bound from the time that ABT sent an email (the Recap) setting out the main terms of the proposed contract. The Recap provided for arbitration in England and included two condition precedents or “subjects”, which ABT claimed were within its discretion to lift. HMM claimed that one of the condition precedents could not be satisfied, so when ABT subsequently purported to lift both subjects, HMM argued that there could be no binding contract. ABT referred the dispute to LMAA arbitration. The tribunal established its jurisdiction on the basis that the parties had agreed and entered a binding contract under the terms of the Recap. HMM applied under section 67 of the 1996 Act for an order to set aside the award on the basis that there was no binding contract and no arbitration agreement.

Law

The principle of separability in English law provides that an arbitration agreement which forms or was intended to form part of another (“main” or “host”) agreement will not necessarily be regarded as invalid or non-existent on the grounds that the main agreement is invalid or has not come into existence. For these purposes the arbitration agreement will be treated as a separate, independent agreement.

Decision

Eder J noted that the court was faced with considerable difficulties because the evidence presented by both sides was unsatisfactory and incomplete and related to events that had taken place five years before. However, on the balance of probability, HMM’s account of the facts was to be preferred. On this basis, it was found that there was no consensus between the parties before or at the time the Recap was sent and that the Recap was not capable of binding the parties. Accordingly, the Award was set aside on the grounds that there was no consensus and therefore no binding contract, and therefore no arbitration agreement. Eder J provided the following reasons:

  • If there was no consensus between the parties, the lack of consensus would not only prevent the charter from coming into existence but also any arbitration agreement from coming into existence.
  • There was no evidence that the parties intended any alleged arbitration agreement to have effect independently of the proposed charter.
  • It was common ground that a challenge under section 67 involves a full rehearing. ABT’s submission that the rehearing was limited to the question of whether there was an arbitration agreement and would not extend to the question of whether there was a binding contract for charter of the vessel was rejected. In the circumstances the questions of whether there is a binding main contract and/or binding arbitration agreement stood or fell together.
  • ABT’s claim (by reference to UR Power GmbH v Kuok Oils & Grains PTE Ltd) that there was a powerful argument that where there was consensus on the arbitration clause, the parties intended the question of whether there was a condition precedent to a binding main contract to be determined by arbitration did not apply in the present case. The view put forward in UR Power was distinguishable as in that case the question did not go to the existence of any consensus ad idem.
  • The arbitration provision in the Recap, like all the other terms in the Recap, would be subject to the condition precedents contained in the Recap. ABT’s claim that where there is a condition precedent to the coming into existence of the main agreement, the condition precedent will only apply to the arbitration agreement if the parties have made clear that this is the case, was rejected.

Comment

Fiona Trust v Privalov [2008] 1 Lloyd’s Rep 254 provides that an arbitration agreement will be impeached only if there are independent vitiating factors which directly affect the arbitration agreement and not merely the main “host” agreement. Lord Hoffmann commented that even if the allegation is that there is no concluded main agreement, that is not necessarily an attack on the arbitration agreement. If the arbitration clause has been agreed, the parties will be presumed to have intended the question of whether there was a concluded main agreement to be decided by arbitration.

In the same case there was further comment that there may be cases in which the ground upon which the main agreement is invalid is identical with the ground on which the arbitration agreement is invalid. If there is no contract to go to arbitration at all, an arbitrator’s award will have no validity, so where the arbitration agreement is set out in the same document as the main contract, the issue of whether there is an agreement at all may indeed affect all parts of it. Eder J’s judgment purports to follow this line of reasoning, finding that on the basis that the alleged charter and alleged arbitration agreement were contained in the same document, HMM’s submissions to the effect that there was no binding charter necessarily meant that there was no binding arbitration agreement. Nonetheless, this decision might justifiably be viewed as an attempt to put a limit on the principle of separability. Eder J found that there was no agreement on the main terms and the lack of consensus was sufficient to find there was no arbitration agreement. On the facts it appears that the proposed arbitration agreement was not itself a matter of dispute, but this point was not considered. This raises the question as to when Lord Hoffmann’s dicta as set out above might apply.

The principle of separability underpins the viability of arbitration as a means of dispute resolution. Fiona Trust is generally perceived as having put an end to attempts to circumvent arbitration agreements by alleging that the main agreement containing the arbitration clause is itself invalid. Hyundai may be perceived as re-opening the door to such challenges and thereby to risk undermining the arbitration process because it seems to contradict Lord Hoffmann’s comments in Fiona Trust that where the arbitration clause has been agreed, the parties will be presumed to have intended the question of whether there was a main concluded agreement to be decided by arbitration. However, Hyundai might be better viewed as a welcome clarification of the limits of the principle. Whether or not pre-contractual negotiations have resulted in a binding arbitration agreement will always be a question of fact and degree depending on the circumstances of the individual case and Hyundai makes it clear that where, on the evidence, pre-contractual negotiations have not resulted in any form of consensus, the parties cannot be bound by an alleged arbitration agreement. It is helpful to establish the limits of the principle or else there is arguably a risk that parties may find themselves bound to arbitrate from the moment they engage in any type of commercial negotiations that could potentially lead to the conclusion of a contract that would typically provide for arbitration.

Lisnave Estaleiros Navais SA v Chemikalien Seetransport GmbH [2013] EWHC 338 (Comm)

Background

Facts

Under the Fleet Agreement, Lisnave Estaleiros Navos SA, a shipyard (Lisnave) and Chemikalien Seetransport GmbH, a fleet agent (CST) agreed certain commercial terms to apply to contracts for the dry-docking and repairs for CST’s managed fleet of ships. Lisnave had previously entered into individual ship repair agreements with individual ship owning companies managed by CST. Lisnave’s General Conditions had been expressly incorporated into each of the individual ship repair agreements. Article 15.2 of the General Conditions provided for disputes to be resolved by arbitration in London (Article 15.2).

A dispute arose concerning a fleet rebate under the Fleet Agreement and CST referred the matter to arbitration on the basis that Article 15.2 was incorporated into the Fleet Agreement by virtue of the parties’ prior course of dealing under the individual ship repair agreements. The majority arbitrators found that Article 15.2 had been incorporated into the Fleet Agreement and there was therefore an agreement to arbitrate. Lisnave applied under section 67 of the 1996 Act to have the arbitrators’ award set aside.

Law

Terms can be implied into a contract when parties have consistently on former and similar occasions adopted a particular course of dealing, and it is not necessary for the parties to the prior course of dealing to be exactly identical to the contract under consideration. However, an unexpressed term will only be implied if the court finds that the parties must have intended the term to form part of their contract. It is not enough that the term would have been a reasonable one for the parties to include or that they would have agreed to it if it had been suggested to them.

Decision

On the facts, the judge found it was impossible to conclude that it was obvious that the parties intended Article 15.2 to apply to the Fleet Agreement, and set aside the award.

CST relied, inter alia, on Lord Hoffmann’s comments in Fiona Trust v Privalov [2008] 1 Lloyd’s Rep 254, that in relation to the construction of an arbitration clause it should be assumed that parties, as rational businessmen, are likely to have intended any dispute arising from their relationship to be decided by the same tribunal. CST argued that the logic underlying those comments was equally relevant when considering whether or not an arbitration agreement is to be incorporated into a particular contract where the parties have a pre-existing relationship which is directly relevant to the contract. CST also relied on Hamblen J’s observations in Stellar Shipping v Hudson Shipping Lines [2012] 1 CLC 476 to the effect that where there was a close connection between various contracts and between the partied involved, one would expect the parties, as rational businessmen, to agree a common method of dispute resolution.

The judge found that while it was one thing to seek to make sense, as a matter of construction, of arbitration clauses to which the parties have expressly agreed by reference to assumptions as to what the parties, as rational businessmen, are likely to have intended, it was an entirely different matter to apply that line of reasoning to the incorporation of arbitration clauses to which the parties had not expressly agreed. To adopt such an approach would run the risk of lowering the bar for the implication of terms to the standard of reasonableness rather than necessity or obviousness which are the requirements for the implication of a term under English law.

The judge noted that the majority arbitrators had found that the Fleet Agreement was supplementary to and thus closely related in subject matter to the individual ship repair contracts and that they would, from their experience, have been “amazed” to find either party had anticipated that Article 15.2 would not apply. However, the judge found that the closeness of the relationship did not make it obvious that the parties must have intended that Article 15.2 should be applicable to the Fleet Agreement and while deference must be shown to the experience of the arbitrators, he emphasized that the test for the implication of terms is an objective one and sets a high and exacting standard.

Comment

This case shows that the usual rules relating to the incorporation of implied terms apply in cases where the court is asked to seek to incorporate an arbitration agreement into a contract. It is possible that the assumption as to what parties, as rational businessmen, are likely to have intended can assist in answering the question as to whether it is obvious that the term was intended to apply, but caution must be exercised in attempting to rely in such cases on such an argument.

The decision is also a useful reminder that it is always advisable to ensure that every contract includes express dispute resolution provisions. It is all too easy to assume in long term relationships that certain terms are agreed or understood but, as this case shows, in the absence of express terms, there will always be scope for dispute.