English Commercial Court considers arbitration clause in implied contract in s.67 challenge

The judgment is an interesting illustration of how, when English law applies, ordinary rules of contract can assist in identifying both the parties to a contract and whether an arbitration clause is incorporated where that contract is “implied”.

 

Background

SEA2011 Inc (“SEA2011”), was a Canadian company.  ICT Ltd (“ICT”), was an English company. A dispute between ICT and SEA2011 arose from an alleged breach of a sales agency agreement dated 28 January 2011 (“the Sales Agreement”) which contained an arbitration clause with seat in England. The matter was referred to arbitration. SEA2011 was the respondent in the arbitration proceedings.

 

The parties to the Sales Agreement purported to be “SEA Inc” and “ICT Ltd”. At the time it was concluded, however, ICT’s legal name was IN Ltd, and there was no UK company called “ICT Ltd”.  Six months after the reference to arbitration, SEA2011’s solicitors relied on the above to argue that ICT was not a party to the contract, including the arbitration clause, and challenged the arbitrator’s jurisdiction on that ground. Further, SEA2011 argued that it too was not a party to the Sales Agreement, which referred to SEA Inc, a separate legal entity. SEA2011 was only incorporated in December 2011.

 

The arbitrator rejected SEA2011’s jurisdictional challenges. SEA2011 challenged the arbitrator's conclusions under s67 of the Arbitration Act 1996 which permits a party to an arbitration with seat in England to challenge a tribunal’s award as to its substantive jurisdiction.

 

Commercial Court decision

 

The judge found that naming ICT Ltd rather than IN Ltd in the Sales Agreement was a mistake which could be corrected as a matter of construction. He rejected SEA2011’s argument that the correction could only be made if the contract as drafted would be arbitrary or irrational. All that was required was a clear mistake in the contract, and that it be clear what correction must be made. Before the change of name, IN Ltd traded as ICT and no company called ICT Ltd was registered at that time in the UK. It would be clear to a reasonable person in the parties’ position and with their background knowledge who the parties to the agreement were.

 

As to whether SEA2011 was a party to the Sales Agreement, the judge held that an implied contract existed between SEA2011 and ICT. SEA2011 adopted SEA Inc’s business in March 2012 and seamlessly took over its dealings with ICT. The dealings between the parties continued to be practically the same for a number of years and referred to the terms of the Sales Agreement as if they continued to apply. They therefore impliedly agreed to be in a contractual relationship on the terms of the Sales Agreement.

 

As to this question, the judge took the view that, under English law, there are no special rules which apply when deciding whether an arbitration clause is incorporated into a contract, and this extends to implied contracts. The parties might be presumed not to have consented to it if the clause required modification, if it subjected them to undue onerous obligations, or if they lacked notice of it. In the instant case, however, both parties had knowledge of the agreement (and therefore of the arbitration clause), dealings continued as before (there were no onerous obligations) and the clause did not require modification to work between the parties. The parties’ consent to the arbitration clause was established in the normal, commercially realistic manner from the perspective of reasonable business people in the parties’ position.

 

 

SEA2011 raised an additional jurisdictional point before the judge. It asserted that the arbitrator should not originally have accepted ICT’s arguments as to the existence of an implied contract. The basis for this submission was that in the Notice of Arbitration, ICT did not rely on an “implied contract” but instead contended that the Sales Agreement had been assigned to SEA2011. Subsequently, ICT had accepted that there had been no assignment. It was only directly before the arbitrator that ICT raised its “implied contract” argument.

 

The judge was quick to dismiss this argument, stating 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…”. The judge identified three main reasons to reject SEA2011’s argument. First, SEA2011 had not raised such a complaint before the arbitrator when the implied contract argument was aired in that forum. Even if the implied contract point had not fallen within the Notice of Arbitration, SEA2011 had therefore agreed that the scope should be widened. Second, applying ordinary rules of construction to the Notice of Arbitration, the issue of an implied contract in any event came within the matters raised therein. Third, certain authorities relied upon by SEA2011 in this context regarded the abandonment of an argument, which ICT had not done in relation to its implied contract argument.

 

Comment

This judgment is an interesting illustration that, insofar as English law falls to be applied to such matters, issues such as identifying the parties to a contract and whether an arbitration clause is incorporated where that contract is “implied”, can be resolved by basic principles of contract law. Finally, whilst acknowledging the judge’s robust conclusions as to the notice of arbitration, it is a reminder of the benefits of consistency in pleadings from the outset.