English Commercial High Court: whether or not an arbitration clause is deemed to be incorporated where the underlying contract is “implied”

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The case of SEA2011 Inc v ICT Ltd [2018] EWHC 520 (Comm), is a perfect example of how English courts uphold the intention of the parties with regard to an implied agreement containing arbitration clause. In this case the Court recognized and gave effect to an arbitration clause contained in a sales contract between the parties which was held implied. The dispute arose because of the fact that the parties changed their name during the course of business and later alleged that the arbitration clause which was in the initial agreement cannot bind them since they are separate legal entities later as to those who have initially signed the contract. The Court while considering the business between the parties held that although the names of the companies have changed, they still have an implied contract between them and thus the arbitration clause in the initial agreement is still alive and effective. The case analysis follows:

Factual Matrix

The claimant SEA2011 Inc (SEA2011), was a Canadian Company and the defendant ICT Ltd (ICT), was an English company. A dispute amongst ICT and SEA2011 emerged from an alleged repudiation of a sale agreement (the Sales Agreement) containing an England seated arbitration clause. The disputed triggered the arbitration. SEA2011 was the respondent before the arbrital tribunal.

At the initial stage, the parties to the Sales Agreement were named as “Ocean Inc” and “ICT Ltd”. But at the time of it conclusion, be that as it may, ICT’s legitimate name was IN Ltd, and there was no UK organization called “ICT Ltd”. Based on this fact, after half year of commencement of arbitration, SEA2011’s contended that ICT was not a party to the Sales agreement, which includes the arbitration agreement challenging the jurisdiction of the arbitral tribunal. Further, SEA2011 contended that it was also not a party to the Sales Agreement, as it was signed by SEA Inc, which is a separate legal entity whereas SEA2011 was incorporated much later after signing of this Sales agreement.

The arbitral tribunal dismissed SEA2011’s jurisdictional challenge which was further challenged in Commercial High Court by SEA2011 under Section 67 of the English Arbitration Act, 1996 (the Act) which allows a party in an English seated arbitration to challenge a an award as to its substantive jurisdiction.

Parties’ Contentions

Out of several contentions, the one that pertains to arbitration was whether or not arbitration clause was part of an implied contract between the parties.

In this regard, SEA2011 Inc submitted that the fact that it was not named as a party to the Sales agreement – the agreement referring to the separate legal personality, SEA Inc, as the principal – could not be overcome by the doctrine of implied contract.

SEA2011 Inc also submitted that ICT Ltd had to show that there was an implied contract which included the arbitration clause of the Sales agreement. That required showing specific conduct referable to the arbitration clause because it was well established that an arbitration clause was an ancillary provision and a separate contract from the host agreement under Section 7 of the Act and as per SEA2011 there was no such conduct.

SEA2011 challenged the jurisdiction of the arbitral tribunal contending that in the notice of arbitration ICT Ltd. had contended that the agreement was assigned to SEA2011 Inc. Subsequently ICT Ltd. accepted that there had been no assignment. There had been no mention in the notice of arbitration that the terms of the Sales agreement were the terms of an implied contract between ICT Ltd. and SEA2011.

Applicable Legal Principle

 The jurisdictional challenge was brought under section 67 of the Act which is reproduced below:

67 Challenging the award: substantive jurisdiction.

(1)A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court—

(a)challenging any award of the arbitral tribunal as to its substantive jurisdiction; or

(b)for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part, because the tribunal did not have substantive jurisdiction.

A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).

(2)The arbitral tribunal may continue the arbitral proceedings and make a further award while an application to the court under this section is pending in relation to an award as to jurisdiction.

(3)On an application under this section challenging an award of the arbitral tribunal as to its substantive jurisdiction, the court may by order—

(a)confirm the award,

(b)vary the award, or

(c)set aside the award in whole or in part.

(4) The leave of the court is required for any appeal from a decision of the court under this section.

Analysis

The Court cited Chitty on Contracts, on principles of implied contract which are as follows:

“Contracts may be either express or implied. The difference is not one of legal effect but simply of the way in which the consent of the parties is manifested. … There may also be an implied contract when the parties make an express contract to last for a fixed term, and continue to act as though the contract still bound them after the term has expired. In such a case the court may infer that the parties have agreed to renew the express contract for another term or the court may infer an implied contract drawing on some of the terms of the earlier contract, but omitting others”.

The Court observed that the task is to establish the parties’ consent in the ordinary manner in respect of the arbitration provision. That task is approached in a normal, commercially realistic manner from the perspective of reasonable business people in the position of the parties.

Relying on Christopher Clarke J in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal SAL [2010] EWHC 29 (Comm)[2010] Bus LR 880 the Court held that in general there are no special rules in deciding on the incorporation of an arbitration clause in a contract, and there is no reason that the position should be any different with the doctrine of implied terms.

Having said that the Court also remarked citing Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal SAL, that it may be that there is a presumption against the parties having consented to the implication of an existing arbitration clause in a new contract if the clause needs modification or would place an unduly onerous obligation on one of them, or if one party did not have proper notice of it but none of these is the situation in the instant case.

The Court also remarked that it is trite law that arbitrators have jurisdiction to decide only matters properly referred to them, but this principle does not a straightjacket. Citing Colman J in Westland Helicopters Ltd v Sheikh Salah Al-Hejailan [2004] EWHC 1625 (Comm) the Court 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.

Conclusion

The Court concluded that there was a clear mistake in the Sales agreement as there was no registered company by the name of ICT Ltd. 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.

With regard to the arbitration clause the Court observed that the arbitration clause was a part of an implied contract between the parties. With regard to whether or not notice of arbitration included the implied contract the Court concluded that as a matter of construction the notice does include the implied contract.

Similar Position taken by Supreme Court of India

In Ameet Lalchand Shah vs Rishabh Enterprises decided on 3 May, 2018 (Civil Appeal no. 4690 of 2018 (arising out of SLP(C) No.16789 of 2017)), the Supreme Court of India pointed out that the duty of the Court is to impart “sense of business efficacy” to the commercial transactions pointing out that mere allegations of fraud were not sufficient to decline to refer the parties to arbitration. The issue in that case was whether reference of the dispute between the parties to arbitration is to be refused on the ground of allegations of fraud in the plaint or whether the agreements between the parties ought to be taken as commercial undertaking of the parties “with a sense of business efficacy”. The full case analysis is available here Supreme Court of India: whether reference to arbitration can be refused on the ground of allegations of fraud or it should be granted treating contract between the parties as commercial undertaking “with a sense of business efficacy”

 

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