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Arbitration Clauses and Uncertainty:
Chalbury Mccouat International Limited v P.G.Foils Limited[1]
Steven Gee QC
Steven Gee QC was asked by Lexis Nexis to write an article on the case of Chalbury Mccouat International Limited v P.G. Foils Limited. This article was first published by LexisNexis.
Arbitration Clauses and Uncertainty:
Experience shows that arbitration clauses are not always well drafted. This can give rise to issues of complexity.
Normally English judges seek to uphold agreements to arbitrate unless compelled on the facts to find invalidity. An arbitration clause is itself when valid, a binding and enforceable contract for arbitration[2]. Under English law for there to be a binding and enforceable contract to arbitrate it has to be sufficiently certain[3]. An example of this requirement is Lovelock (EJR) v Exportles [1968] 1 Ll. Rep. 163, an extreme case on the facts. The arbitration clause provided that "Any dispute" to be referred to arbitration in London, but the second part provided that "Any other dispute" was to be referred to Arbitration Commission in Moscow. Lord Denning MR said:
"..... I am forced to the conclusion that the clause is so uncertain that the Court cannot give effect to it. The clause is divided into two parts which are inconsistent with one another: and it is impossible to reconcile them. The first part of this arbitration clause would send "Any dispute and/or claim" to arbitration in England. The second part of the clause would send "Any other dispute" to arbitration in Russia. It is beyond the wit of man-or at any rate beyond my wit- to say which dispute comes within which part of the clause. I think I can see how it has come about. The parties have taken separate clauses from two separate forms and bundled them both together into one clause without stopping to think how they could be applied..."
In Chalbury Mccouat International Limited v P.G.Foils Limited[4] there was an arbitration clause in a contract between the claimant, an English company, and the defendant, an Indian company, for the dismantling by the claimant of manufacturing plant in Vaassen in the Netherlands. It provided that:
"In case if there is any dispute between the parties of this contract the same will be sorted out by mutual discussion, But in case if the issue is not resolved even after discussions the same will be referred to arbitration as per prevailing laws of European Union in the Europe. The decision of the Arbitrator is final and binding on both parties."
There were no "..prevailing laws of European Union in the Europe." to be applied. It was clear that the parties in agreeing the clause had made a mistake. Was the mistake fatal to there being an enforceable agreement to arbitrate? How was "the Arbitrator" to be appointed?
The claimant sought permission to serve out of the jurisdiction a claim form in India applying for the High Court to exercise its jurisdiction to appoint an arbitrator under section 18 of the Arbitration Act 1996. Ramsay J decided at a hearing, at which only the claimant was represented, (i) to grant permission to serve the claim form in India, and being satisfied that service had been effected, then (ii) granted relief under section 18 providing for the President or Vice-President of the LCIA to appoint a sole arbitrator.
Ramsay J looked first at what was the substantive law governing determination of the underlying dispute on the dismantling contract, which the judge called the "lex causae", then secondly the proper law of the dismantling contract, which, applying Article 4(2) of the Rome Convention, appeared to be English law, and then thirdly considered the application under section 18 as a matter of discretion taking into account section 2(4) of the Arbitration Act 1996. Ramsay J said:
"29. ...So far as the seat of the arbitration is concerned, the reference to "arbitration as per prevailing laws of European Union in the Europe" means that the seat of arbitration is likely to be in Europe, possibly England, and is unlikely to be in India. It follows that in this case there is no clash of jurisdiction of the type which gave rise to the concerns expressed in the DAC[5] Report. The further connection with England is the fact that payment under the Contract was to be by way of payment in England. The connection with India is the fact that the Defendant is an Indian Company operating in India and a contention by the Defendant's lawyer that the Contract was entered into in India.
30. Returning to the test under section 2(4) of the 1996 Act, is there a sufficient connection with England for this court to be satisfied that it is appropriate to exercise the powers under section 18 of the 1996 Act? In my judgment the links through the likely proper law, the closer connection to the seat of arbitration and the payment provision, provide sufficient connection for the court to act under the 1996 Act.
31. I take into account the fact that the Defendant may, as its lawyer has stated, apply to the Indian courts for some relief which may include the appointment of an arbitrator. In the light of my conclusion that English law would be likely to apply and that an English seat of arbitration is possible but an Indian seat is unlikely, I consider that this court should use its powers to have an arbitral tribunal appointed and thus enable the disputes to be referred to arbitration, as was clearly intended.
32. Accordingly, I am satisfied that because of the connection with England it is appropriate for the court to exercise its powers to support the arbitral process in this case."
Arbitration is a matter for agreement between the parties. The jurisdiction of the arbitral tribunal depends upon that agreement. Unless there was an agreement about how the arbitrator was to be appointed, or applicable machinery for making the appointment, the clause would not be sufficiently certain to be binding and enforceable.
Under what was section 10 of the Arbitration Act 1950 there was a procedure for the High Court to appoint an arbitrator in certain circumstances[6]. Outside those circumstances there was then no jurisdiction for the High Court to appoint the arbitrator, and an arbitration agreement which fell outside of section 10, in default of appointment by the agreed machinery in the contract, or by agreement between the parties, would have been unenforceable.
Under section 18 of the Arbitration Act 1996, which is in Part I of the Act, there is a power conferred on the court to make appointments of arbitrators. It provides:
"18.- Failure of appointment procedure.
(1) The parties are free to agree what is to happen in the event of a failure of the procedure for the appointment of the arbitral tribunal.
There is no failure if an appointment is duly made under section 17 (power in case of default to appoint sole arbitrator), unless that appointment is set aside.
(2) If or to the extent that there is no such agreement any party to the arbitration agreement may (upon notice to the other parties) apply to the court to exercise its powers under this section.
and when the parties have not agreed what is to happen in the event of failure of appointment."
Section 18 confers jurisdiction to make an appointment when (i) Part I of the Arbitration Act 1996 applies, (ii) when there is no contrary agreement by the parties, but (iii) not in cases governed by section 17[7].
There is a distinction between the proper law of the agreement to arbitrate, and the "curial law" which governs the procedure in an arbitration or arbitral proceedings[8]. For example under English conflicts rules whether an agreement to arbitrate on its true interpretation requires one or three arbitrators would be a matter of construction of the arbitration clause to be determined applying the rules for its interpretation which are laid down by the proper law governing the agreement to arbitrate. Whether a time bar operates so as to preclude arbitration would under English case law also be regarded as a question for the proper law[9]. On the other hand whether there is a right to appeal from an arbitral award would be regarded as a matter governed by the procedural law of the arbitration, the curial law, which is the law of the juridical seat of the arbitration[10].
England has its own conflicts rules and an English judge must apply those rules. The arbitration agreement had been concluded in 2008 so that the Rome Regulation did not apply to it[11]. The Rome Convention 1980 does not apply to agreements to arbitrate[12]. Therefore the proper law of the contract to arbitrate was to be ascertained applying English common law conflicts rules. The proper law of the agreement to arbitrate can be different from the proper law of the main contract[13]. On the facts it may have been the case that ascertained in accordance with English common law conflicts rules, English law was the proper law of the agreement to arbitrate[14].
Section 18 is in Part I of the Arbitration Act 1996. By section 5(1) section 18 only applies where there is an arbitration agreement in writing. Under section 6(1) that must be an agreement to submit to arbitration present or future disputes. These sections require an enforceable agreement and not one which is incomplete and unenforceable for uncertainty. Did this arbitration clause qualify under sections 5(1) and 6(1)? Was there contrary agreement to section 18 applying because of the words "..as per prevailing laws of European Union in the Europe."?
One possibility was that these words were a necessary part of the agreement to arbitrate, and that therefore there was no agreement to arbitrate because arbitration in accordance with these words was not possible. Another possibility was that these words could be disregarded as impossible to perform but leaving in place an agreement to arbitrate. A further possibility was that the words restricted the seat to Europe but otherwise were ineffective surplusage. In Nurdin Jivraj v Sadruddin Hashwani Sadruddin Hashwani v Nurdin Jivraj [2010] EWCA Civ 712, the Court of Appeal decided that the requirement that a requirement that "All arbitrators shall be respected members of the Ismaili community and holders of high office within the community." was unlawful discrimination, was unenforceable as a matter of English law and that it could not be severed with the consequence that the arbitration agreement was unenforceable. The agreement to arbitrate was, according to the Court of Appeal, dependent upon the validity of that requirement. Each case turns on its own facts[15].
Had the defendant been represented before Ramsay J it might have argued that (1) "..as per prevailing laws of European Union in the Europe..." were words of a compromise rejecting London arbitration under English law in favour of a compromise which selected neither England nor India; (2) these words were an essential part of the agreement to arbitrate so that their invalidity had the consequence there was no agreement to arbitrate; (3) section 18 did not apply because (i) sections 5(1) and 6(1) were not satisfied; and/or (ii) section 18(2) was not satisfied because on the true interpretation of the agreement, there was no agreement to arbitrate.
Had that argument been advanced the issue would then have been a matter for interpretation of the agreement to arbitrate, to be decided applying the putative proper law of that agreement. That law may have been English law.
If the claimant was correct on the severance issue, then if the agreement to arbitrate was governed by English law it would take effect as an agreement to arbitrate with a sole arbitrator[16], and with that arbitrator to be appointed by agreement between the parties not later than 28 days after service of a request in writing by either party on the other[17]. In the absence of agreement the court could then make the necessary appointment or give directions as to the making of any necessary appointments[18].
On this analysis there would be no difficulty in giving permission to serve out of the jurisdiction. It is true there was no agreement about the "seat" of the arbitration. An arbitration agreement can be valid and effective under English law before the "seat"[19] or curial law[20] has been determined, or is even capable of being ascertained (e,g when it is to be chosen by the tribunal once appointed). Section 2(4) of the Arbitration Act 1996 concerns the exercise of discretion by the court in relation to a number of powers conferred on the court by that Act. It provides that the power under section 18 can,as a matter of discretion, be exercised when:
(a) no seat of the arbitration has been designated or determined, and
(b) by reason of a connection with England and Wales ... the Court is satisfied that it is appropriate to do so.
If it be the case that there was a valid agreement to arbitrate with the appointment of the arbitral tribunal under that agreement being governed by sections 15, 16 and 18 of the English Arbitration Act 1996 because English law was the proper law of that agreement then in view of this connection with England the court would ordinarily be satisfied under section 2(4) that it would be "appropriate" to exercise the power.
If on the other hand the correct analysis was that applying the proper law governing the arbitral agreement (ascertained under English conflicts rules) either (i) there could be no severance, or (ii) the agreement to arbitrate was invalid under its proper law because there was no machinery for the appointment of the arbitral tribunal, then the consequence was that section 18 could not supply a solution. Part I of the Act would not apply.
The question of permission to serve out of the jurisdiction was decided by the judge by reference to whether there was a good arguable case that the claim fell within the procedural rule allowing service out of the jurisdiction[21].
In contrast the power to make an appointment under section 18 could only be exercised by the court if there was jurisdiction under section 18 to do so. Which analysis was correct went to the court's jurisdiction to make an appointment under section 18. The claimant had the burden of proof and persuasion. The issue of jurisdiction on whether section 18 applied had to be finally decided by the judge in favour of the claimant on the application before granting any relief under that section.
On the evidence and submissions before him the judge was entitled to decide that (i) English law governed the agreement to arbitrate, (ii) this was a binding agreement to submit the disputes to a sole arbitrator, and (iii) as a matter of discretion applying section 2(4), it was appropriate to grant the relief because of the connection of the case with England even though no seat of the arbitration has been designated in the arbitration clause, or determined.
Steven Gee QC is Head of Stone Chambers, a commercial litigator, and the author of "Commercial Injunctions" (published by Sweet & Maxwell, 6th edition forthcoming).
[1] [2010] EWHC 2050 (TCC) (Case No: HT-09-250 High Court of Justice Queen's Bench Division Technology and Construction Court 3 August 2010).
[2] It is separate from the main agreement.- Section 7 Arbitration Act 1996. Premium Nafta Products Ltd & Ors v Fili Shipping Co Ltd & Ors. [2008] 1 Lloyd's Rep. 254 at para. 17.
[3] A contract for sale of land or goods is not enforceable if the parties have not agreed the price or a way for the price to be ascertained. It is not sufficiently certain.
[4] [2010] EWHC 2050 (TCC) (Case No: HT-09-250 High Court of Justice Queen's Bench Division Technology and Construction Court 3 August 2010).
[5] Departmental Advisory Committee report under the Chairmanship of Lord Saville (as he became).
[6] In National Enterprises Ltd. v Racal Communications Ltd. [1975] Ch. 397 the Court of Appeal decided that section 10 of the Arbitration Act 1950 did not apply to an arbitration clause which provided for the appointment of an arbitrator by a third person unless there was an express or implied agreement that in default of appointment by the third party appointment would be made by the parties.
[7] Under section 17 of the Arbitration Act 1996 in the absence of contrary agreement there is a power in the party not in default to appoint an arbitrator to act as sole arbitrator where each of two parties to an arbitration agreement is to appoint an arbitrator and one party "the party in default" refuses to do so, or fails to do so within the time specified. This provision is commonly used in London Maritime Arbitration Association arbitrations.
[8] The law governing procedure is also referred to as the lex arbitri or lex loci arbitri.
[9] International Tank & Pipe S.A.K. v Kuwait Aviation Fuelling Co. K.S.C. [1975] QB 224
[10] Whitworth Street Estates (Manchester) Ltd. v. James Miller and Partners Ltd. [1970] A.C. 583
[11] The Rome Regulation came into force on 17th December 2009.
[12] Article 1.2 (d).
[13] Deutsche Schachtbau-Und Tiefbohrgesellschaft m.b.H. v R'as al-Khaimah National Oil Co. [1987] 3 W.L.R. 1023
[14] This may have flowed from the proper law of the main agreement being English Law and the facts that performance of the dismantling contract was to be made by an English company with payment in England- thus making English Law applicable to the agreement to arbitrate under the common law conflicts rules.
[15] There has been concern by Arbitral Institutions and their users that this case could affect other clauses which are standard and in common use and that the severance issue was either incorrectly decided or the decision is to be limited to the special facts in this case.
[16] In the last sentence of agreement reference was to "the Arbitrator" and furthermore under English law absent contrary provision section 15(3) of the Arbitration Act 1996 provided for a sole arbitrator.
[17] Section 16(3) of the Arbitration Act 1996.
[18] See section 18(3) of the Arbitration Act 1996.
[19] See as an example of this section 3 (c) of the Arbitration Act 1996 which envisages that an arbitral tribunal once appointed might have jurisdiction to decide the "seat".
[20] Star Shipping A.S.v. China National Foreign Trade Transportation Corporation (The "Star Texas") [1993] 2 Ll. Rep. 445.
[21] See paragraphs 11 and 12 of the judgment of Ramsay J.