UK: HFW Commodities Bulletin - January 2010

Last Updated: 3 February 2010

Incorporating Arbitration Clauses Into Sale Contracts
By Mark Morrison

The recent English High Court decision in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal Sal (18 January 2010) reviewed the principles to be applied under English law to determine whether an arbitration clause is incorporated into a sale contract.

Sometal agreed to sell to Habas scrap steel ex Romania and Bulgaria CIF Memrut Bay, Turkey. The contract was written out under the letterhead of Sometal's agent. It specified key terms such as quantity, price, discharge rate and payment and concluded with the words "all the rest will be the same as our previous contracts".

There had been fourteen previous contracts between these parties. The first three were on Habas' letterhead and included either UNCITRAL or Istanbul arbitration clauses; the eleven subsequent contracts were either drawn up by Sometal or were on the letterhead of Sometal's agent. Some of the later contracts contained a London arbitration clause; others were silent, providing that dispute resolution terms were to be agreed. The question in the case was whether the London arbitration clause had been incorporated into the fifteenth contract.

The case first came before London arbitrators, who held that the London arbitration clause had been incorporated. Habas appealed against this decision, arguing that there had to be express wording or a clear intention to incorporate the arbitration clause, and that, even if general words were sufficient, the words used in the fifteenth contract fell short of what was required. The High Court rejected Habas' appeal.

In its judgment, the High Court restated that English law accepts incorporation of terms by the use of general words. However, the Court also emphasised the important distinction between (1) incorporating terms from a different contract made between the same parties, as in this case; and (2) incorporating terms from a contract between different parties, or between one of the parties and a third party, such as when charterparty terms are incorporated into a bill of lading. The Court will take a stricter approach for the second category, requiring clearer words to be used before the incorporation is found to be effective. This is particularly so with arbitration clauses, which are viewed as personal to the parties and not integral to the principal subject matter of the contract.

General words of incorporation may be sufficient to incorporate an arbitration clause from one contract into another contract, but the intention to incorporate must be clear, and, as the Court explained, clearer words will be required where the parties to the contracts in question are different. In the Habas Sinai case, the Court was readier to find that the London arbitration clause had been incorporated into the fifteenth contract because all the contracts had been made between the same parties. The decision may have been different if the parties had not been identical. Of course, the prudent approach is to ensure that dispute resolution provisions are set out explicitly in every contract to avoid any argument about incorporation by reference.

Challenging Awards On Grounds Of Fraud
By Jane Walton

In Double K Oil Products 1996 Ltd v Neste Oil OYJ (18 December 2009), the English High Court considered whether a London arbitration award could be set aside if evidence provided by a third party and relied on by the successful party was later shown to be false.

In 2004, Double K ("DK") entered into a three-year contract for the sale of Vetlosjan gas condensate ("VGC") to Neste. DK purchased the VGC needed for this contract from Gazprom. In September 2007, Neste contracted directly with Gazprom for the supply of VGC. In October 2007, Gazprom ceased all supplies of VGC to DK.

DK brought arbitration proceedings against Neste arguing, among other things, that Neste had breached an implied term of its contract with DK that neither party would deliberately make performance of the contract impossible for the other. DK submitted that Neste's direct contract with Gazprom made it impossible for DK to continue to obtain from Gazprom the VGC which DK needed to perform its contract with Neste.

DK's claim failed. The tribunal decided that (1) DK's performance of its contract with Neste was not necessarily impossible; and (2) even if performance had been rendered impossible, Neste did not know that its contract with Gazprom would have that effect.

A key issue was whether Gazprom could supply VGC to both Neste and DK. Neste produced a letter from Gazprom which suggested that Gazprom could meet the demands of both contracts. The Tribunal relied on this letter in its award. DK later obtained evidence which suggested that the information in the letter was false.

DK challenged the award, alleging that it had been obtained by fraud or in a manner contrary to public policy. DK argued that it was enough for them to show that the fraud had been committed by either Gazprom or Neste. The High Court rejected this submission and reaffirmed case law (specifically Elektrim SA v Vivendi Universal SA [2007] All ER (Comm) 365) that an award will only be set aside for fraud where the fraud is perpetrated by one of the parties in the arbitration; the rationale being that if fraud by a third party were a ground for setting aside an award, such challenges could be made on many occasions, undermining the certainty of arbitration decisions.

The Court therefore held that DK had to prove that Neste (not Gazprom) had been fraudulent, and found that DK was unable to prove that Neste knew Gazprom's letter was false.

DK's alternative argument, that the way in which the award had been obtained was contrary to public policy because false evidence had been used to procure a favourable decision, was closely connected to its argument on fraud. Once that had failed, the public policy argument was found also to have failed, but was not considered directly. It is not certain that a party challenging an award needs to prove fraud to be successful on public policy grounds. However, it seems likely, on the basis of the decision in Elektrim, that the policy of limiting challenges to arbitration awards would have prevailed again.

Commodities Breakfast Seminars

In March 2010, HFW's Trade & Energy Group will present another in its regular series of breakfast seminars, covering a range of current issues affecting commodity trading. The seminars will be held at HFW's London offices on 3, 10 and 17 March 2010.

Conferences and Events

Kingsman Dubai Sugar Conference 2010
Hotel Intercontinental Dubai, Festival City (7-9 February 2010)
Mark Morrison

Refined Sugar Association Seminar
The Broadgate Tower, London (11 February 2010)
Mark Morrison

GAFTA Trade Foundation Course
Millenium Hilton, Bangkok (1-3 March 2010)
John Rollason, Barry Stimpson & Simon Davidson

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