Abstract
The notion that every arbitration is subject to the parties’ will is well-established and widely accepted. In most circumstances, when there is only one contract between the parties to a dispute, ascertaining the intent to be bound by the arbitration clause is quite simple. However, the matter becomes more complicated when the transaction involves more than one agreement between the parties. In such situations, a series of arbitrations relating to the same dispute may result, with the risk of conflicting decisions, high costs and delays, thereby negating the very essence of the arbitral process. Commercial arbitration is currently the favoured means of conflict settlement for complex commercial issues, and in recent times, parties involved in long term transactions tend to be favourable towards the inclusion of arbitration clauses in all agreements. Through this article, the Author, by comparing different jurisdictions, sheds light on multi-contract agreements and arbitration clauses and disputes related to the same.
Introduction
Thelex mercatoria has evolved into a more complex and sophisticated framework for commercial dealings in the modern-day. Parties can now have multiple contracts with each other, and in today’s commercial reality, it has become common for them to be a party to a network of interconnected contracts, colloquially known as “multi-contracts”. Significant problems arise when there is an absence of a clear and explicit arbitration clause in contracts. These hurdles cause uncertainty, which gives rise to even more complications when the seminal text on international commercial arbitration, i.e., the “New York Convention“, expressly states in Article II that the arbitration agreement will (a) be in writing and (b) shall include an arbitral clause in a contract or arbitration agreement signed in writing by the parties.
By now, it is a well-established and well-known fact that party autonomy is a fundamental principle for the commencement of an arbitration. However, where there is more than one contract between the parties, it becomes less easy to ascertain the intention of the parties to be bound to arbitration as a method for the resolution of their disputes for all successive contracts. Indeed, one party may favour the Courts, whereas the other party may resist the same by relying on the arbitration clause from one of the contracts. This dilemma has caused significant problems, and Courts and arbitral institutions worldwide have rushed to formulate a response to this predicament.
Multi-contracting is especially prevalent in the construction sector. In this scenario, a party enters into a contract with the main contractor and then contracts with sub-contractors and parties such as suppliers. The project’s overarching aim, i.e., construction of x for the client, is common for all those who are part of the project and the subsequent contracts. However, the issue that arises is that, in all likelihood, the dispute would be under several of those contracts, and these contracts would either have different sets of provisions concerning the resolution of the dispute or, conversely, a dispute resolution clause is absent.
Court Ordered Consolidation
Courts have endeavoured to give effect to the element of commonality for consolidation of different arbitral proceedings, where there are common issues of law and fact. Bernard Hanotiau, one of the revered authorities of arbitration, aptlyexplains that:
“In a situation involving a series of agreements between the same parties, the main problem is determining whether these contracts constitute an indivisible whole (ensemble contractual unique). The solution will rest on an interpretation of the will of the parties.”
Furthermore,Philip Leboulanger directs attention towards the “commercial realities” of the operation because he states that the obligations of parties sometimes arises, not from one contract but a series of contracts; it ought to be checked whether obligations under the various agreements are: reciprocal; having a common origin; identical sources; and form an operational unit:
“When the agreements make up one single business transaction, the interplay between the undertaking cannot be ignored, as there exists within the contractual context a kind of freedom of circulation of obligations and interrelated debts. Whenever obligations were undertaken for the accomplishment of a single goal and are economically interdependent, the different disputes should be appreciated on an overall basis. Agreements may be considered to be interrelated when they were concluded on the same date, for the same duration, for the same purpose. Another indication of the interrelation between contracts is the presence of a general—or a master, a cover, a basic or a head—agreement outlining the obligations undertaken by the parties, obligations which are usually discussed in more detail in the ancillary agreements. General agreements often contain a preamble describing the transaction and the interrelation between the different agreements. In this case, the interdependence between a general agreement and its ancillary agreements is evident, especially when the general agreement expressly refers to each one of the ancillary agreements and each one of the ancillary agreements expressly refers to the general agreement and the other ancillary agreements. Interrelation also exists in the context of framework and application agreements.”
Indeed, it seems that drawing from this jurisprudence; different jurisdictions have adopted more or less similar approaches to this effect.
For instance, in Hong Kong, theHong Kong Arbitration Ordinance No. 17 of 2010 allows for the consolidation of arbitrations by a Court if: (i) it involves a common question of law or fact; (ii) the rights to the relief claimed in those arbitral proceedings are in respect of or arising out of the same transaction or series of transactions; or (iii) it is for any other reasondesirable. However, it must be noted that in Schedule 2, Part 2 of the Ordinance, the Court may do so on the application of one of the parties; it cannot make an order on its own motion, thereby limiting the Court’s power of consolidation of arbitration.
The English Arbitration Act, 1996 also allows for consolidation of Court proceedings; however,Section 35 adds certain limitations. Similar to Hong Kong, the section makes it evident that a Court cannot compel parties to consolidate arbitral proceedings without parties’ consent. The reason behind this is because the English Arbitration Act and English Courts, in general, are reluctant to “read in” provisions into a contract that have not been agreed by the parties, thereby upholding high standards of party autonomy. Indeed, the wording of Section 35 makes it apparent that in the absence of agreement between the parties for consolidation, there can be no consolidation.
In the English case ofCity & General (Holborn) Ltd. v. AYH Plc, there were two agreements; in one, the Plaintiff had entered into a contract with Company K to undertake refurbishment works in London, and in the other, the Plaintiff contracted AYH as the project manager and quantity surveyor for the project under two separate agreements. Under the deed of appointment, Clause 17.2 stated that if any dispute arising under the deed was “substantially related to” or “connected to issues raised in another related dispute“, the dispute shall be referred to the arbitrator appointed to determine the related dispute. Delays and costs exceeded the initial estimates, and Plaintiff commenced arbitration against K and sought to refer a claim against AYH for failure to exercise its reasonable care and diligence duties as the project manager and surveyor to the same arbitrator. In ruling against AYH, the Judge reasoned that the purpose of the clause was to avoid multiple proceedings leading to high costs and the probability of inconsistent findings. Since a material portion of the issues in the two arbitrations was related, Clause 17.2 would come into play. He, therefore, ordered that the dispute be dealt with by the same arbitrator handling the dispute with company K.
Furthermore, the Italian Supreme Court in the case ofAliman Immobiliare del Geon, Roberto Gufler & C.S.A.S v. Meridiana Costruzionisrl decided that the filing of one single request for arbitration in respect of various claims based on identical arbitration agreements was valid, and an award could not be set aside on this ground. The Court held that the principle of good faith justifies consolidation in one single proceeding as long as: (i) the parties are the same; (ii) the contracts are connected; and (iii) the arbitration agreements are identical.
Consolidation under Arbitral Rules
Moreover, arbitral institutions also provide the option of consolidation of arbitral proceedings.Article 9 of the I.C.C. Arbitration Rules explicitly provides that claims “arising out of” or “in connection with more than one contract” may be made in a single arbitration irrespective of whether they are made under one or more than one arbitration agreement.
Article 10 of the I.C.C. Rules further elaborates that if the multiple arbitrations are under the I.C.C. Rules, the I.C.C. Court may consolidate them into a single arbitration at the request of a party where either: (a) there is an agreement to consolidation, (b) the claims in the arbitration are under the same arbitration agreement or (c) there is a commonality, i.e., the parties are the same, the disputes arising in connection with the same legal relationship, and the Court finds the agreements to be “compatible”.
Similarly, the 2017 Arbitration Rules of the Stockholm Chamber of Commerce (“S.C.C.“) explicitly authorises the filing of claims “arising out of” or “in connection with” more than one contract in a single arbitration. Subsection (3) of Article 14 lays down considerations regarding whether or not consolidation will be granted, such as the compatibility of the arbitration agreements, whether the relief sought arises out of the same transaction or series of transactions; efficiency; and any other relevant circumstances.
Article 29 of the 2018 H.K.I.A.C. Administered Arbitration Rules, in the same vein, authorises the filing of simultaneous claims provided that three conditions can be fulfilled: a common question of law or fact arises under each arbitration agreement giving rise to the arbitration; the rights to the relief claimed is in respect of, or arising out of, the same transaction or a series of related transactions; and the arbitration agreements under which those claims are made are compatible.
From the above discussion, it can therefore be seen that one solution to multi-contract claims in arbitration lies in the consolidation of different contracts and agreements into one, provided that there is an element of commonality between them. This invariably reduces costs of parties, enables resolution of the dispute promptly as compared to what may have been multiple arbitrations and litigations, and most importantly, prevents the possibility of rendering inconsistent arbitral awards, which would prove difficult to enforce due to conflicting remedies granted in each award.
Incorporation
Complications arise where there are several contracts, and only a few of them incorporate dispute resolution clauses within them. This raises questions about whether the Courts will allow such transactions to be rendered by the same Tribunal or a different one. However, it is to be noted that consolidation of arbitral proceedings in multi-contract disputes is arguably easier where there is a commonality in separate contracts with separate dispute resolution clauses.
As mentioned above,Article II of the New York Convention gives effect to an arbitration agreement “in writing”. It is important to note that after it prescribes the method for an acceptable arbitration clause, it also adds “contained in an exchange of letters or telegrams“. Novel judicial approaches have been made to the issue at hand, discussed below.
Standard Term/Form Contracts
Courts are generally more lenient in incorporating an arbitration clause by reference in standard form contracts due to the fact that parties, as rational businessmen, ought to know what they are signing up for when they decide to contract.
In the award rendered by the Swiss Federal Tribunal inTradax v. Amoco, the Tribunal reasoned that different results should be reached depending on whether the reference is made by experienced businessmen or by laypersons with little or no experience of a particular industry and its customs. Consequently, a different conclusion would be reached if the contract refers to provisions of another contract entered into by the same parties – which they are aware of – or if it refers to general conditions which may not necessarily be known to the parties.
In this case, Amoco agreed with Tradax to transport oil. The relevant page of the charter party, which the parties signed, contained an arbitration clause stipulating New York as the place of the arbitration. The charter party also referred to standard conditions set out on the reverse side called ‘Part II,’ Article 24, which contained an arbitration clause; the parties had not signed this page. Amoco sued Tradax before the Tribunal of First Instance in Geneva, and Tradax objected to the Court’s jurisdiction, arguing that the dispute should be resolved by arbitration in light of the arbitration clause. The Tribunal of First Instance and the Court of Justice in Geneva favoured Amoco. Tradax filed a public law appeal, claiming that the two tribunals should have applied Article II NYC instead of cantonal law. The Swiss Federal Tribunal upheld Tradax’s appeal, stating that Article II NYC requires the Contracting States to recognise the force and legality of an arbitration agreement and that the Swiss Courts lacked jurisdiction to entertain the case. Specifically, the term ‘agreement in writing’ was held to include a clause in a contract or arbitration agreement signed by the parties or contained in telegrams or letters exchanged by the parties. Therefore, the fact that Amoco’s signature did not appear on the bills of lading did not deprive the arbitration clause of its effect, even if the bills of lading did not specifically refer back to the arbitration clause in the agreement between Amoco and Tradax.
In another Swiss case several years later, it was stated with more clarity that there should be no need for specific reference to the arbitration clause contained in the provisions that the parties intend to incorporate. It was held that reference to the contract in its totality would suffice for the arbitration clause to beincorporated by reference.
In the case ofAlimenta SA v. National Agriculture Co-op Marketing Federation of India, the Indian Supreme Court held that “it is now well established that the arbitration clause of an earlier contract can be incorporated into a later contract by reference, provided it is not repugnant to or inconsistent with the terms of the contract in which it is incorporated“. In this case, the contract was for the sale and supply of H.P.S. groundnut kernel Jaras. After the terms for quality, quantity, and the price had been negotiated and incorporated, the contract provided that other terms and conditions are per FOSFA-20 contract terms. F.O.F.S.A. contracts are those standard form terms issued by theFederation of Oils, Seeds and Fats Associations Ltd (“F.O.S.F.A.“), a professional international contract issuing and arbitral body concerned exclusively with the world trade in oilseeds, oils and fats. The question, therefore, was whether the arbitration clause in the FOSFA-20 contract was incorporated by reference in the contract for the sale and supply of H.P.S. groundnut kernels. The Supreme Court answered in the affirmative; that the arbitration clause in the FOFSA-20 contract was incorporated by reference into the contract for the sale and supply of H.P.S. groundnut kernel Jaras. This judgment established an essential principle of the doctrine of incorporation, i.e., incorporation can be considered valid only when it is “consistent, sensible and intelligible” with the contract terms in which it is incorporated.
Furthermore, in M.R. Engineers & Contractors (P) Ltd v Som Datt Builders Ltd the Supreme Court went a step further and provided a list of guidelines concerningSection 7(5) of the Indian Arbitration and Conciliation Act, 1996 that are to be followed when dealing with incorporation by reference. These were: (i) the contract should contain a lucid reference to the documents containing arbitration clause; (ii) the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract; and (iii) the arbitration clause should be appropriate, that is, capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract. The Apex Court also clarified that only a specific reference from the referred document in the contract between the parties could incorporate the arbitration clause. However, there is a requirement for a “conscious” acceptance of the parties before incorporation can occur. Where the contract mandates the incorporation of the standard form of terms and conditions of an independent trade or professional institution, a general reference to the referred document would suffice.
Other Contracts
Initially, Courts were not as lenient in their approach regarding incorporating arbitral clauses from other contracts in contracts that did not contain standard terms or were not standard form contracts.
Indeed, the greatest reluctance to incorporation by reference may be evidenced by the approach of the English Courts inAughton Limited v MF Kent Services Ltd, wherein the judges took differing views on the issue. Sir John Megaw relied on the case ofThomas v. Portsea. He reinforced the strict rule in that case, which maintained that specific words were necessary to incorporate an arbitration clause into a contract and that the reference in a sub-contract to another contract’s terms and conditions would not suffice to incorporate the arbitration clause into the sub-contract. The learned Judge’s reasoning for imposing the requirements of specific words of incorporation was based on three essential factors concerning arbitration agreements. Firstly, that an arbitration agreement may preclude the parties from bringing a dispute before a Court of law, which is not only a permissible but also a desirable way of settling disputes, secondly, it was held thatSection 7(1)(e) of the Arbitration Act, 1979 provides that an arbitration agreement, has to be a “written agreement”. The object and effect ensure that one is not deprived of their right to have a dispute decided by a Court of law unless he has “conspicuously and deliberately” agreed that it should be so. Thirdly, he emphasised the peculiarity of arbitration clauses since an arbitration clause, according to him, is a “self-contained contract“; for example, it is capable of having a different proper law from the main contract.
In the same case, Ralph Gibson L.J concluded that express words of incorporation were not always necessary. In some circumstances, general words would be sufficient to effect incorporation depending on the terms of the arbitration agreement. His preferred approach was to look at the precise words of the contract alleged to permit incorporation and the exact terms of the arbitration agreement. If the terms of the arbitration clause are such that they only apply to the contract in which they appear, Ralph Gibson LJ’s view was that general words of incorporation would be insufficient, but if they apply to both, then general terms of incorporation are sufficient.
Other countries have taken a more lenient approach; for example, the Hong Kong High Court did away with the strict policy employed by English Common Law in Thomas Portsea and held in the case ofAstel Peiniger Joint Venture v. Argos Engineering that Courts must endeavour to give contractual and commercial effect to the actual words used by the parties. This opinion also found favour in the case ofGay Constructions Pty v. Caledonian Techmore (Building) Ltd.
The Orient Power Case
The most recent case concerning the issue of incorporation of an arbitration clause in the absence of a standard form contract is the decision of the Supreme Court of Pakistan inOrient Power v. Sui Northern Gas Pipelines Limited. In this case, the two parties, Orient and S.N.G.P.L., entered into various contracts to purchase and supply gas, the main contract being the Gas Supply Agreement. UnderSection 18.3 of the Gas Supply Agreement, arbitration of disputes arising out of and in connection with the Gas Supply Agreement was conducted in London under the aegis of the London Court of International Arbitration (“L.C.I.A.“). Differences arose between the parties regarding specific operative dates, and the parties appointed a third-party expert determiner to resolve their dispute. Based on the opinion of the Expert Determinator, the parties executed another Agreement, known as the Payment Agreement, out of which certain payments were due to S.N.G.P.L. from Orient Power. Differences again arose concerning payment, and S.N.G.P.L. filed a Request for Arbitration before the L.C.I.A. Orient Power contested against the arbitration filing, contending that the Payment Agreement did not contain an arbitration clause the Tribunal did not have jurisdiction to decide claims relating to or arising under the same. The Tribunal rejected the claim of Orient Power and held that the dispute resolution provisions in the Gas Supply Agreement found their way into the Payment Agreement by incorporation. The Lahore High Court upheld the Tribunal’s decision, and ultimately, the Supreme Court of Pakistan held that although the Payment Agreement did not have a dispute resolution clause, the continuous reference to the Gas Supply Agreement in the recitals of the Payment Agreement indicated an intention of the parties to have their disputes resolved in the same manner.
Furthermore, the provisions of the Payment Agreement were such that after the resolution of issues under the Payment Agreement, the provisions of the Gas Supply Agreement were held to prevail, which indicated that the main commercial agreement was the Gas Supply Agreement and that the Payment Agreement was dependent on it for its existence. Therefore, it was an “interdependent” and “interconnected” agreement which was economically interdependent and had a common origin.
The Supreme Court also affirmed the principle of commercial sensibility laid down in the English House of Lord’s case ofFiona Trust& Holding Corporation v. Privalov, in which it asserted that the proper approach is for Courts to give effect to the commercial purpose of the arbitration clause and that parties, as rational businessmen, were likely to have their disputes arising out of their relationship dealt by the same forum, i.e., the arbitral Tribunal and that the proper approach to the construction of such contracts is to give effect to the commercial purpose of the arbitral clause. The Supreme Court held that “disputes arising out of” and “in connection with” the Gas Supply Agreement would invariably extend to the Payment Agreement, which existed under the umbrella of the Gas Supply Agreement. Finally, using the “centre of gravity” test for multi-contract arbitrations, the Court concluded that the centre of gravity lay with the Gas Supply Agreement.
Conclusion
The above discussion lays down the various approaches that Courts and arbitral institutions alike may adopt when trying to ascertain the parties’ true intent concerning multi-contract agreements. Different case laws spanning several Common Law & some Civil Law jurisdictions also establish that Courts will first and foremost try to find a common element in the interconnected network of agreements before trying to club them together. In this way, they strive to maintain party autonomy and keep in line with the commercial sensibilities of modern-day transactions to keep arbitrations cost-efficient, time-efficient, and overall efficacious.
About the Author
Ms Mahnoor Waqar is a Judicial Law Clerk at the Supreme Court of Pakistan and holds an LL.M in International Business Law from The London School of Economics and Political Science.
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Preferred Method of Citation
Mahnoor Waqar, “Multi-Contract Agreements and Arbitration Clauses in Commercial Disputes in Pakistan & other Common Law Jurisdictions: An Analysis of Orient Power v. SNGP & Other Common Law cases” (IJPIEL, 19 January 2022).
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