UK: Incorporation Of Arbitration Clauses

Last Updated: 17 July 1997
(First published in In House Lawyer, December 1996/January 1997)

The Arbitration Act 1996 (the Act) has changed the common law position so that an agreement incorporated into a contract by reference may or may not be effective depending on whether the agreement was entered into before or after the date of the Act.

It is common business practice to form a contract by an exchange of letters in which the parties agree to incorporate into the contract the terms of a standard form. Sometimes the exchange of letters together with the provisions of the standard form is intended to comprise the contract.

In the construction industry it is particularly common to incorporate standard forms by reference. The JCT main contract forms and the conditions of engagement are sufficiently familiar that employers frequently incorporate their terms by reference in a letter of intent or engagement, or in a schedule of amendments.

Before commencement of the Act

The position for contracts entered into before the Act is still governed by common law. A series of recent cases has made it clear that the clauses agreeing to refer disputes to arbitration contained in a standard form contract cannot be effectively incorporated into a contract by reference. Accordingly, a letter from an employer accepting a contractor's tender on the terms of JCT '80 or engaging an architect on the terms of the RIBA blue book will not validly incorporate the arbitration agreements into the contract.

The result is that disputes will be resolved in the courts and not by arbitration, even if this was the intention of the parties to the contract.

The background

Most standard forms used in the construction industry include arbitration agreements; for example, Article 5 of JCT '80. However, the courts consider these clauses referring disputes to arbitration to be separate agreements collateral to the contract terms themselves. In addition, the Arbitration Act 1950 requires that an arbitration agreement must be 'in writing'.

In Aughton Limited v. MF Kent Services Limited Sir John Megaw in the CA gave three reasons why arbitration agreements are to be treated differently from the other terms of a standard form contract:
  • an arbitration agreement can prelude a party from bringing a claim before the courts (the other party being entitled to stay the proceeding under s4 of the Arbitration Act 1950) and therefore very clear language should be introduced into any contract which is to have that effect;
  • the statutory requirement that an arbitration agreement be 'in writing' is designed to ensure that a party has not been deprived of his right to litigate 'unless he has consciously and deliberately agreed that it should be so';
  • an arbitration clause included in a contract constitutes a self-contained contract collateral or ancillary to the substantive contract. To be incorporated this self-contained contract must be expressly referred to, and it is not incorporated by a mere reference to the terms and conditions of the contract to which the arbitration clause forms a collateral contract.

The CA confirmed the position in Giffen (Electrical Contractors) Limited v Drake & Scull Engineering Limited: 'it (an arbitration clause) is not incorporated by a mere reference to the terms and conditions of contract to which the arbitration clause constitutes a collateral contract'.

In the case of Ben Barrett v Henry Boot the judge discussed the cases relating to the incorporation of arbitration agreements and he unambiguously followed the reasoning set out above. In that case the defendants gave the plaintiffs a letter of intent stating that the conditions of contract were to be in the standard form of JCT '87 Works Contract/1 and /2. The letter of intent was countersigned by the defendant and was held by the judge to constitute an effective contract incorporating the terms of Works Contract/1 and /2. The defendants purported to determine the contract for the plaintiffs' alleged failure to proceed regularly and diligently with the works and refused to pay certain certified sums, alleging a substantial cross-claim.

It was held that although the rest of the terms of Works Contract/1 and /2 were incorporated into the contract, the arbitration agreement was not. Referring generally to the JCT form was insufficient to incorporate the arbitration agreement.

It should be noted, however, this seeming strong current of authority was departed from by Carswell LJ in Extrudakerb (Maltby Engineering) Limited v White Mountain Quarries.

This was a case in the High Court in Northern Ireland and as such, although not binding on the English courts, is of persuasive authority. Carswell LJ expressly declined to follow the opinion of Sir John Megaw in Aughton and adopted the conflicting approach of Ralph Gibson LJ in that case. The parties in Extrudakerb had agreed that work would be done on the terms of the FCEC form of sub-contract, which were familiar to the parties, both of whom knew that they contained an arbitration clause. Carswell LJ stated that if the officious bystander had asked them if they considered that the arbitration clause should apply in the event of a dispute, the answer would have been clearly positive, and that it would 'negate the parties' intention to refuse to hold that the arbitration clause had been incorporated into the contract, purely in order to uphold a rule of convenience which has to be applied rigidly without exception.' Carswell LJ agreed that as an arbitration clause may preclude the parties from resort to the courts, the court should be fully satisfied of the intention of the parties. However, he regarded the requirement that arbitration agreements have to be in writing and their nature as self-contained contracts as tending to merely support this proposition that clear language is required for them to be incorporated into a contract. He did not agree with Sir John Megaw that if followed that they must be specifically referred to in the contractual documents.

In Black Country v Kier Construction, it was held that if parties to a building or engineering contract clearly intend to submit disputes to arbitration, the courts will uphold that agreement. It should, however, be noted that these are first instance judgements. The issue will in any event become of diminishing importance as it will be of relevance only in relation to contracts entered into before the coming into force of the Act.

After commencement of the Act

The Act received Royal Assent on 17 June 1996 and is expected to come into force in early 1997. The Act restates and improves the law relating to arbitration under an arbitration agreement, s1 of the Act sets out three general principles, the first of which states that the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without necessary delay or expense. The second principle is that the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest, and the third, that the court is to intervene only in prescribed circumstances.

In writing

In Aughton Sir John Megaw referred to the statutory requirement that an arbitration agreement be 'in writing'. The meaning of 'in writing' is now defined in s5 of the new Act. There is an agreement in writing if
  • the agreement is made in writing (whether or not it is signed by the parties), or
  • the agreement is made by exchange of communications in writing,or
  • the agreement is evidenced in writing (s5(2))
Mere reference

The court's refusal to allow incorporation by mere reference as outlined above appears to be no longer appropriate. Section 5(3) of the Act says that 'where parties agree otherwise than in writing by reference to terms which are in writing, they make an agreement in writing'. Thus the parties could make an oral agreement which incorporates by reference the terms of a written form of agreement containing an arbitration clause.

Agreement in writing

Sections 5(4), (5) and (6) are also relevant in the context of writing and are respectively as follows:

An agreement is evidenced in writing if an agreement made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties to the agreement (s5(4)). Thus an oral agreement could become an agreement in writing by being recorded at any stage.

An exchange of written submissions in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another and not denied by the other in his response constitutes an agreement in writing to the effect alleged (s5(5)). It should be noted that it is not enough for one party to allege in a written submission that there is an arbitration agreement and for the other party to simply fail to respond. Such a result would be unfair in that it would place an obligation on a party to take the active step of serving a written submission in order to deny this allegation.

References in Part I of the Act to anything being written or in writing include its being recorded by any means (s5(6)).

Until definitive judicial pronouncements have been made on the text of s5 of the new Act however, the safest option is to continue to specifically refer to the arbitration agreement in any letter of intent or professional appointment.

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

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