The Commercial Court recently considered a peculiar challenge to two partial final awards under section 67 of the Arbitration Act 1996 based on evidence that neither the Applicant nor the Respondent were in fact the same entities that had entered into the arbitration agreement, which was, of course, the foundation of the arbitrator’s jurisdiction.

The court accepted the evidence that the corporate entities involved in the arbitration were not the same entities that had entered into the arbitration agreement, which one might think would result in the challenge to the awards being successful. However, the court overcame this defect finding that clear mistakes in the description of parties in the contract can be readily corrected as a matter of construction. Applying the principles set out by Lord Hoffmann in Chartbrook v Persimmon Homes [2009] UKHL 38, the judge held that there was an implied arbitration agreement between the correct entities based on the understanding that a reasonable person would have if they knew all of the background to the formation of the contract and how the mistake had arisen to include the incorrect corporate entities in the agreement. This is an interesting approach as its impact was to broaden the scope of the arbitrator’s jurisdiction to include non-parties.

SEA2011 Inc v ICT Ltd [2018] EWHC 520 (Comm).

Background

The case related to a contract between a distributor of electronic equipment and its sales agent dated 20 January 2012 which contained an arbitration clause. The parties were respectively named in the contract as SEA Inc and ICT Ltd. However, the proper name of the agent that should have been used was its registered name IN Ltd. That company later in January 2012 changed its name to ICT Ltd, but at the time of the agreement there was another company in the same ownership with that name so the Applicant contended that that company should be deemed to be the contracting party.

Additionally, SEA Inc named in the contract was a separate legal entity from SEA2011 Inc named in the Notice of Arbitration and only incorporated after the contract had been concluded. In March 2012 ICT Ltd received a circular letter advising that SEA Inc had changed its name to SEA2011 Inc, but in fact it was a separate legal entity. When a dispute arose related to the performance of the contract in 2016, ICT Ltd commenced arbitration proceedings against SEA2011 Inc.

SEA2011 Inc challenged the arbitrator’s decisions arguing that the arbitrator did not have jurisdiction (a) as both SEA2011 Inc and ICT Ltd were not parties to the contract containing the arbitration clause, and (b) to consider ICT Ltd’s application for the defect to be cured by implying a contract on the same terms because no mention of this had been made in the Notice of Arbitration. These challenges were dealt with as preliminary issues by the arbitrator who dismissed both in two partial final awards. SEA2011 Inc issued proceedings to challenge those awards under section 67 of the Arbitration Act 1996.

Jurisdictional Challenges

In the Commercial Court Sir Ross Cranston first considered the fact that ICT’s registered name was IN Ltd and it only changed that to ICT Ltd on 20 January 2012, one year after the Sales Agency Agreement was executed. As to errors in the description of parties to a contract, he referred to the principles in Chartbrook v Persimmon Homes [2009] UKHL 38, and concluded:

In my view there was a clear mistake on the face of the Sales Agency Agreement. As of 28 January 2011 there was no company registered in any part of the UK named ICT Ltd, nor one registered at the address given in the agreement. At that point the name of IN Ltd had not been changed; that occurred a year later. The reality is that the agreement was prepared by lay persons and the precision to be expected in such circumstances will not generally be equivalent to what would be expected if lawyers were involved (…) The inference is that they did not get around to changing the name as they should have (…)

Further, that clear mistake can be readily corrected in my view as a matter of construction considering, as is necessary, the meaning which the Sales Agency Agreement would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract (…)

He decided that this part of the jurisdictional challenge failed, since a reasonable person having all the background knowledge would have understood that the words “ICT Ltd” were being used to describe IN Ltd trading as ICT (before its name change). The necessary correction of the Agreement to align its wording with that meaning would be to substitute for “ICT Ltd” the description “IN Ltd trading as ICT”.

Secondly, Sir Ross Cranston considered the fact that the Agreement referred to SEA Inc as the principal party. Regarding implied contracts, he referred to the legal principles as set out in Chitty on Contracts [para. 1 – 104], and concluded:

In my view, after March 2012 the parties impliedly agreed to be in a contractual relationship on the terms of the Sales Agency Agreement. That is the way their consent was manifested, and a matter of inference from the circumstances. The commercial context was one where both SEA Inc and SEA2011 Inc were largely in common ownership and where SEA2011 Inc took over seamlessly the role of principal to ICT Ltd as a sales agent sometime after it was incorporated. The dealings between the parties continued to be the same in practical matters for some three years (…) Neither side sought to amend any terms of the agreement (…) ICT Ltd did nothing to indicate it was aware of any change in legal personality (…)

He decided that this part of the jurisdictional challenge failed, since:

In this case the obvious inference is that the arbitration clause was implied in the contract between SEA2011 Inc and ICT Ltd. There was the same subject matter as under the Sales Agency Agreement, dealings continued as before, both parties had knowledge of the clause, and there was no need for modification for it to work between the parties.

Moreover, Sir Ross Cranston considered that generally there are no special rules in deciding on the incorporation of an arbitration clause in a contract. The incorporation of an arbitration clause as part of an implied contract should, therefore, be established according to the parties’ consent, which entails “a normal, commercially realistic manner from the perspective of reasonable business people in the position of the parties.”

Lastly, Sir Ross Cranston decided on the Applicant’s submission that the Notice of Arbitration made no mention of an implied contract between SEA2011 Inc and ICT Ltd. The Applicant argued on the basis of Colman J’s judgment in Westland Helicopters Ltd v Sheikh Salah Al-Hejailan [2004] EWHC 1625 (Comm) [para. 48] that:

(…) Once the jurisdiction of the arbitrator has been engaged by the reference to him of a particular dispute or group or class of disputes, which fall within his jurisdiction as pre-defined by the agreement to arbitrate, his jurisdiction is further confined by the scope of the reference and he cannot make an award in relation to a claim which is not within that scope unless all parties agreed that the scope should be widened sufficiently to include it.

Sir Ross Cranston considered that the Notice of Arbitration did include the implied contract argument, as a matter of construction. He then concluded that:

It is trite law that arbitrators have jurisdiction to decide only matters properly referred to them, but this principle does not act as a straightjacket as SEA2011 Inc seemed in its submissions to suggest. Colman J recognised that the parties can agree to widen the scope of a reference to arbitration. On ordinary principles that does not need express agreement. Further, the ordinary rules of construction apply to a notice of arbitration. That means that the task is to identify what its words mean for a reasonable person with knowledge of their factual context.

Therefore, also this part of the jurisdictional challenge failed.

Comment

This decision demonstrates how some defects in arbitration clauses can be cured by application of the principles relating to implying contracts incorporating an arbitration clause thereby restoring or broadening the scope of the arbitrator’s jurisdiction.