Case Update: Arbitration Clause in Main Agreement was an implied term in Settlement Agreement

The English High Court recently saw it fit to imply an arbitration clause found in a main agreement between parties to a settlement agreement which had arisen out of a dispute between the same parties. On that basis, the defendant in Interserve Industrial Services Ltd v ZRE Katowice SA, [2012] EWHC 3205 (TCC), successfully applied for a stay of court proceedings which had been initiated by Interserve.

ZRE had subcontracted certain construction works to Interserve under various subcontracts. Those subcontracts provided for settlement of disputes by way of ICC arbitration pursuant to Clause 67.3 of the subcontracts. A dispute arose as to certain interim payments due from ZRE to Interserve in circumstances where Interserve’s delay in completing its works impacted negatively on ZRE’s ability to complete its own works on time. Interserve responded by suspending its works. Parties then came to a settlement agreement in respect of Interserve’s entitlement to payment of the interim amounts certified under two of those subcontracts (the “December agreement“) (see paragraph [5]).

The December agreement did not make any reference to Clause 67.3 of the subcontracts. However it did provide for a governing law clause and an exclusive jurisdiction clause. It read,

“8. This agreement is governed by and construed in accordance with the laws of England and Wales and the courts of England and Wales shall have exclusive jurisdiction in respect of any dispute arising under this agreement”.

Interserve took the position that the December Agreement governed ZRE’s payments of the disputed interim payments. This, they argued, did not affect the final account provisions which were subject to the original subcontracts. Accordingly, since the present dispute in court between the parties related to payments under the December agreement, there was no basis for ZRE to claim that this dispute should be subject to the arbitration clause under the subcontracts (see paragraph [6]). Furthermore, the December agreement did not contain an arbitration clause or refer to the arbitration clause in the sub-contract but instead provided for the exclusive jurisdiction of the English courts. In other words, the December agreement was a standalone agreement (see paragraph [12]).

ZRE’s position was that the December agreement constituted a variation of the subcontracts such that Clause 67 applied to the December agreement. Accordingly, any dispute under the December agreement would be subject to the arbitration clause (see paragraph [9]).

English Position

The High Court held that “the relationship between the first agreement on the second agreement was crucial” and that the exercise was “an analysis of the two agreements in question, in order to identify the relevant features of the relationship between the two agreements” (see paragraph [14]).

Where the second agreement was a stand alone agreement or one that had resolved all disputes under the first agreement, then the arbitration clause of the first agreement would not apply to disputes under the second agreement. The English High Court held that a stand alone agreement,

“…referred to an agreement that is (a) entirely independent of any prior agreement between the same parties; (b) contains all necessary terms to found a cause of action based upon a breach of its terms; and (c) is thus capable of operating on its own without recourse to, or necessary reference to, a prior agreement between the same parties”.

However, even if the second agreement were a standalone agreement, further analysis would still be required to determine whether the second agreement incorporated the dispute resolution mechanism of the first agreement (see paragraph [34]).

Relationship between subcontracts and December agreement

The learned judge considered that the December agreement was a standalone agreement. He noted the following key features of the December agreement and its interplay with the subcontracts (see paragraph [29]):

“(1) Following the making of the December agreement, the parties still had to perform their respective obligations under the subcontract. The work under the subcontract had not been completed. As a result, after the parties made the December agreement, the parties remained in an ongoing contractual relationship in connection with the subcontract works.

(2) The making of the December agreement was not in full and final settlement of all claims or disputes which had arisen, or which might arise, under the subcontract.

(3) Instead, the December agreement resolved the dispute that had arisen in connection with the unpaid invoices in the outstanding sum of £820,773.02″.

On that basis, he considered that the December agreement more akin to those in cases in which “the party’s obligations under the respective ‘main’ contracts remained to be performed, irrespective of the terms of the respective settlement agreements” (see paragraph [30]). The learned judge eventually concluded that “on its proper construction, in many respects the December agreement either [did] not in fact vary the terms of the subcontract, or – if it [did] – then it [did] not do so in any material respect” (see paragraph [33]).

Implied Term

Nevertheless, the learned judge considered that “there was an implied term of the December agreement that disputes under the December agreement would be subject to the same dispute resolution as contained in the subcontract” (see paragraph [34]).

The High Court adopted the analysis and rationale of another High Court decision in L Brown and Sons Ltd v Crosbie, [2005] EWHC 3503 (TCC) in that the practice and nature of the construction industry would lead naturally to the conclusion that the dispute resolution clause in the second and subsequent agreements would be the same as that in the original main agreement. In L Brown v Crosbie, the learned judge held that,

“51. In addition, I bear in mind that it is quite common in the construction industry for parties to enter into side or supplemental agreements which add to or vary the terms when matters arise during the course of the contract. Those agreements frequently do not have their own provisions for dispute resolution, including adjudication. If the officious bystander had asked such parties what dispute resolution methods applied, I consider that they would invariably assume that those in the underlying contract would apply. The idea that different or no provisions applied to such additional changed obligations would, in my judgement, be an impossible situation and make adjudication unworkable for such projects.”

Arbitration Clause and Exclusive Jurisdiction Clause – Interplay

Insofar as the arbitration clause was therefore to be implied into the December agreement, the issue then was how to reconcile the arbitration clause with the exclusive jurisdiction clause (see paragraph [38]).

In this respect the High Court cited Paul Smith Ltd v H & S International Holding Inc [1991] 2 LL Rep 127 at 129 for the proposition that both clauses were to be interpreted as being concurrently valid and binding. The arbitration clause was to be read as a “self-contained agreement providing for the resolution of disputes by arbitration; [the exclusive jurisdiction clause] specified the lex arbitri, the curial law or the law governing the arbitration which would apply to this particular arbitration [and] [t]here was no inconsistence between [the two clauses] and both clauses were valid and binding“.

And on that basis, the learned judge held at paragraph [39],

I read clause 67 of the subcontract as providing a self-contained regime providing for the resolution of disputes; and clause 8 of the December agreement as providing for the lex arbitri, or curial law, governing any arbitration brought under clause 67. As such, I find there is no inconsistency between the two clauses, and both are valid and binding“.

Since the exclusive jurisdiction clause did not prevent the operation of the arbitration clause, ZRE’s stay application was successful.

Singapore Position

The recent case of International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and anor, [2012] SGHC 226 discussed a number of similar issues (see our discussion here) and in particular the approach of the Singapore courts towards the incorporation of arbitration clauses into second/subsequent contracts which are silent on the dispute resolution mechanism.  

As for the reconciliation of arbitration clauses and jurisdiction clauses in the same (or related) contracts, the Paul Smith approach has been applied in Singapore, see P. T. Tri-M.G. Intra Asia Airlines v Norse Air Charter Limited, [2009] SGHC 13. After an extensive survey of case law in England and Hong Kong, the learned AR Darius Chan inclined to adopt the Paul Smith construction (see paragraph [46]) on the basis that,

such a construction would best give effect to the expressed intentions of the parties in the context of an international commercial contract. The Agreement was a formal contract presumably concluded at arms’ length under advice. Bearing in mind how courts should generally approach issues of inconsistencies (see [43] supra), I do not think that [the arbitration clause and the exclusive jurisdiction clause] are so irreconcilable such as to deprive either clause of its effect in the overall scheme of the Agreement“.

Conclusion

Courts will generally give effect to the presumed intention of commercials parties where there is an arbitration clause in the contract between them. That presumed intention is that they would want to resolve all their disputes through a single forum in the absence of express words to the contrary, see Premium Nafta Products Ltd. (20th defendant) & Ors v. Fili Shipping Co. Ltd. (14th claimant) & Ors sub nom Fiona Trust & Holding & Holding Corporation & 20 Ors v. Yuri Privalov & 17 Ors [2007] UKHL 40.

This presumption generally also extends to related contracts between the same parties. In a recent Singapore High Court case, the court held that an arbitration clause contained in a contract between two parties bound a third party who subsequently entered into a supplemental agreement with those two parties. For more details, see our discussion of the case of International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and anor,[2012] SGHC 226.

In order to avoid costly jurisdictional fights, parties ought to be explicit in incorporating the arbitration clause or in spelling out the arbitration procedure in the second/subsequent agreement.

Conversely, we would also suggest that it would be prudent for parties to be explicit if they do not want to arbitrate their disputes under a settlement agreement. For example, where the dispute under a settlement agreement is likely to be a straightforward payment dispute, then depending on the jurisdiction, litigation might be faster or more cost effective than arbitration. If the court considers that the arbitration clause from the main agreement has been incorporated into the settlement agreement or implies an arbitration clause into the settlement agreement, then the mere fact that there is an exclusive jurisdiction clause in that settlement agreement does not prevent the arbitration clause from being effective.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for Domain Name Dispute Resolution at the KLRCA.
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3 Responses to Case Update: Arbitration Clause in Main Agreement was an implied term in Settlement Agreement

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