The Validity of an Arbitration Agreement in the Absence of a Written Agreement
With Special Reference to FOSFA 53
(The necessity to expressly stipulate an arbitration agreement/clause when entering into a contract)
Introduction to FOSFA 53 and relevant legal framework
FOSFA 53, which stands for the Federation of Oils, Seeds, and Fats Association Limited, is an industry-standard contract used for the international trade of vegetable oils and fats. The contract includes several standard terms and conditions that are designed to provide clarity and certainty to the parties involved. One of the critical terms of FOSFA 53 is the arbitration clause, which specifies the rules and procedures that will govern the resolution of disputes between the parties.
According to the Article 27 of the FOSFA 53 Standard Contract, the relevant domicile for the contract is England and the matters arising are governed by English Law.
Rules of Arbitration and Appeal of the Federation of Oils, Seeds, Fats Associations Limited lays out the framework for dispute resolution involving FOSFA 53 Contracts.
The Arbitration Act 1996 is the governing law concerning the Rules of Arbitration and Appeal of the FOSFA.
Validity of an Arbitration Agreement when no written agreement is present and with electronic communications
The focus issue of this article is as follows;
Two parties entered into a contract for the sale of sunflower oil. The parties did not sign the FOSFA 53 Contract.
However, in the course of electronic communications, via email, the Seller mentioned that the contract will be governed as per other terms of the FOSFA 53 Contract except for the terms he expressly mentioned in the same email.
Even though the Buyer did not reply specifically referring to the said email, both parties mutually proceeded with the sale, indicating the implied assent of the Buyer.
As a dispute arose between the parties, the Buyer proceeded to Arbitration and thus emerged the question of the validity of the arbitration agreement.
The following Sections stipulated in the Arbitration Act 1996 (the Act) are of essential importance in addressing the focus issue of this article.
Sec. 6 (1) of the Arbitration Act defines an "arbitration agreement" as an agreement to submit to arbitration present or future disputes (whether such agreements are contractual or not).
As per Sec. 6 (2) of the Act, there must be a specific reference to the arbitration agreement in writing (in the contract as a clause or in the document that is used by the parties to enter into an agreement).
The Sec. 5 of the Act provides that the agreements must be in writing and elaborates on the relevant instances.
The concept of separability of an arbitration agreement has been stipulated in Sec. 7 of the Act, and accordingly, an arbitration agreement shall be treated as a distinct agreement.
There are a few key elements to be noted when deciding the validity of the arbitration agreement of the FOSFA 53 contract in light of the aforementioned provisions.
In order for an arbitration agreement to be valid;
- The agreement must be in writing
- The agreement between the parties must refer to arbitration as the dispute resolution method in writing (Arbitration agreements are typically set out in a clause within a larger commercial contract but may also be set out in a separate document, incorporated into a contract by reference)1
- The arbitration agreement can be separated from the rest of the contract and must be treated as a separate contract.
It must be noted that the agreement in this context specifically refers to an arbitration agreement.
The agreement must be in writing (in writing-signed or unsigned or in communications in writing/electronically or an agreement evidenced in writing)
In the matter of hand, the Seller referred to the FOSFA 53 standard contract yet did not refer to the arbitration agreement separately, which is incorporated in the FOSFA 53 contract. Thus the requirement of reference provided in Sec. 6 (2) had not been fulfilled for the arbitration agreement to be considered valid.
The House of Lords' ruling in Fiona Trust & Holding Corporation v Privalov  UKHL 402 is considered the foremost English authority on the separability doctrine. According to this decision, Section 7 dictates that the arbitration agreement must be considered a separate entity and can only be nullified if it is directly related to the arbitration agreement and not due to the invalidity of the primary agreement.
Accordingly, in the given circumstances, though the parties entered into an agreement for the sale of sunflower oil via electronic correspondence (Email & Whatsapp), the arbitration agreement may not become valid automatically.
Nevertheless, it must be noted that as per the FOSFA Rule 5 (a), the arbitrators have the jurisdiction to ascertain whether there is a valid arbitration agreement.
Implications parties will face due to the absence of a written agreement
The existence and validity of the agreement have to be addressed prior to proceeding with the dispute in hand in a situation explained herein.
Evidently, the absence of a written arbitration agreement between parties may cause ambiguity and further delays in the proceedings, affecting both parties adversely in the dispute resolution process.
As discussed above, it is obvious that the presence of an arbitration agreement in writing provides certainty and the clear intention of parties to seek arbitration for dispute resolution. It will assist the parties to have a smooth arbitration process and reach a resolution effectively.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.