The Law Governing the Arbitration Agreement and Ostensible Authority of an Agent

The
influence of the principle of ‘severability’ of arbitration agreements, some
may think, has extended far beyond the core problem it was intended to deal
with: allowing an arbitral Tribunal to determine the existence or validity of
the contract that contains the arbitration clause. Nor is it necessarily
confined to arbitration agreements: the underlying principle is that a
defendant who denies that a contract ever came into existence, or that it is
valid, must first run that argument before the forum chosen (arbitral Tribunal
or court) in the putatively valid contract. This principle is illustrated in
the classic speech of Lord Hoffmann in Fiona Trust v Privalov.
But it is not—as Lord Hoffmann himself recognised—without exceptions and it has
also given rise to difficult questions about the effect it has on other
well-established principles of arbitration law or the conflict of laws. Hamblen
J considered two such issues in his recent judgment in Habas
v VSC
. The first, the law governing the arbitration agreement, is a well-known
controversy in Indian law as well. It is a question of great practical
importance in India, with the rapid growth of neutral arbitration clauses
especially where the law governing the main contract is not the law of the
country of the seat (for example an Indian and a Japanese company enter into a
contract governed by Indian law but with a London arbitration clause). The
second issue in Habas is
a novel and interesting point that highlights the importance of a close
analysis of the Fiona Trust principle—suppose
a defendant enters into a contract through an agent who, it is said, lacked
actual authority to agree to a particular
seat
of arbitration (but not to arbitration
itself as a mode of dispute resolution), can the seat be treated as a relevant
factor in the choice of law analysis?

The
first question has produced somewhat contradictory answers in the English
courts in recent years. The starting point is uncontroversial enough: as with
any contract, the applicable law is the law expressly or impliedly chosen by
the parties or, in the absence of choice, the system of law with which the
transaction has its ‘closest and most real connection’. However, the principle
of severability has led some to suggest (notably in C v D) that the arbitration
agreement
may be more closely connected to the seat of arbitration even if
the matrix contract is not, on the footing that it is a (separate) agreement to
resolve disputes. As Shantanu
has pointed out, the most recent Court of Appeal authority on this point—Sulamerica v Enesais
not easy to interpret. Indeed, signalling that the courts may be retreating
from the obiter views expressed by
Longmore LJ in C v D, Andrew Smith J
recently held, after considering Sulamerica,
that the choice of a law to govern the matrix contract is an ‘implied’ (and
perhaps even ‘express’) choice of the law governing the arbitration agreement. However,
the seat retains its importance in cases where the parties do not choose a law
to govern the matrix agreement: it is likely in such cases that the law of the
country of the seat will govern the matrix contract as well as the arbitration
agreement, unless there are strong indications to the contrary. In Habas, Hamblen J accepted this (at [101]) but was faced with a more difficult question: what if the defendant
alleges that the agent lacked actual authority to agree to that particular seat of arbitration? Can the seat then be used as an
indication of closest connection?

This
question arose in a dispute between a Turkish manufacturer of steel [“Habas”] and a Hong Kong engineering
company [“VSC”] over whether a
contract for the sale (by Habas) of steel had indeed been concluded. In the
course of negotiations for this contract, Habas and VSC never communicated with
each other directly: Habas acted through its agent, Steel Park, which communicated
with VSC or another agent, Charter Alpha. In cases like this, it is more usual
to find the defendant alleging that there was no contract because some
essential term was not agreed or that its agent was bribed and so on and therefore that the chosen forum lacks
jurisdiction. In this case, however, the disagreement between the parties
during negotiations was not about the commercial terms but about dispute resolution: VSC had initially proposed
Hong Kong arbitration and Hong Kong governing law while Habas had proposed
Turkish arbitration and Turkish governing law. The last draft of the contract
that Habas directly signed contained an arbitration clause with a Turkish seat.
However, VSC later proposed to amend the seat to London and Steel Park accepted
that amendment. A London arbitral Tribunal found that it had jurisdiction and
awarded VSC damages for Habas’ failure to supply the agreed steel. Habas
challenged the jurisdiction of the Tribunal on the ground that, under Turkish law, Steel Park would not
be treated as having had actual or ostensible authority to bind it to London
arbitration. This was notwithstanding the fact that Habas, in October 2009, had
issued an ‘Agency Letter’ to Steel Park which had been forwarded to Charter
Alpha and VSC—this letter would, under
English
(but not Turkish) law, have
given Steel Park ostensible authority to conclude an agreement to sell steel with a London arbitration clause. So to
resolve the jurisdiction question, it was necessary to ask the first question
set out above: what law governs the arbitration agreement? Since the seat of
arbitration under the putatively valid contract was London, and since the
contract contained no choice of law clause for the matrix agreement, Hamblen J
held that English law prima facie governed
the arbitration agreement.

It
is important to notice that this case differs from many cases on this subject
in this way: here the defendant’s attack on the seat of arbitration was not
parasitic
on an attack on the main agreement (bribery, failure to agree
essential terms, contract invalid under proper law etc): the attack was specifically on the seat of arbitration since Steel Park was
said to have lacked actual or ostensible authority to agree to London arbitration (although not to arbitration itself). So Habas argued
that the fact that London was the
seat of arbitration had to be disregarded in the choice of law analysis in
which event Turkish law would become the proper law, under which Steel Park
would have lacked ostensible authority. Virtually the only authority for this
proposition is the following passage from Dicey,
Morris and Collins
in relation to a choice of law clause:


it may be thought unlikely that P [ie principal]
could be bound and entitled by virtue of a law which governed the contract with
the third party only because A [ie agent],
in excess of his actual authority, agreed to its selection as the applicable
law.  The problem is similar to that
raised by the question of capacity and can be resolved in a similar way.  Where the agent exceeds his authority in
choosing the law to govern his contract with the third party, P should only
be regarded as entitled or bound if he would be so under the law applicable in
the absence of choice
.

Hamblen
J declined to accept the argument made in this passage for a number of reasons,
the most important of which (apart from prior Court of Appeal authority) were
that there is no “logical or principled
link between the issue of authority and the issue of the law with which the
contract has its closest connection
” [108]
and that “it involves English law
according special treatment to actual authority for conflicts purposes
”. In
other words, since the (putatively valid) contract contained a London seat, the
arbitration agreement was governed by English law; since it was governed by
English law, Steel Park did not lack ostensible authority to agree to a London
seat; therefore the Tribunal did not lack jurisdiction. It is respectfully
submitted that this conclusion (although perhaps inevitable at first instance
given prior authority) may need to be reconsidered in appeal because it does
not appear to sufficiently distinguish between a direct attack on the seat or the choice of law and an attack on
those matters through an attack on
the main agreement. If Habas had argued that the entire contract was void and therefore there was no arbitration
clause or London seat, Hamblen J’s decision would have been perfectly right; but
it is not inevitable that the same answer must be given when the argument is
that the arbitration clause is void
or (as in this case) the chosen seat could not have been chosen by the agent. 

The parallel to Fiona Trust is clear,
with the important difference that Habas’ argument did not deny authority to
conclude an arbitration agreement
(which Lord Hoffmann
accepts is an exception to his general rule, at [17]) but rather said that although the agent could have agreed to
arbitration, it could not have agreed to a London
seat. Hamblen J is correct that there is no ‘logical link’ between this
lack of authority and the applicable law, since the seat is only taken as an
indication of with which system the contract is most closely connected, but it
is not clear why there should be, as long as the choice of this seat is specifically attacked (whatever the reason
for the lack of authority). Of course, Hamblen J rightly points out that Habas’
argument went further than this: it was not confined (as Dicey, Morris and
Collins is) to the choice of law clause itself but extends to any clause that
is relevant in the choice of law analysis. One may indeed ask: if the DMC argument
is extended (as Habas argued it should be) to an attack on the seat, why should
it not be extended to an attack on any other clause that is relevant to the
choice of law question, such as place of performance? Ultimately that may be
the strongest argument in favour of Hamblen J’s view and it seems likely that
this question will be considered by the appellate courts in the future.

About the author

V. Niranjan

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