Thursday, December 13, 2012

Long term contracts and dispute resolution clauses - Part II

(Part I outlined the facts of Interserve v Katowice, and discussed its findings on variation).

After holding that the side/supplemental agreement in this case did not form part of the sub-contract, the High Court movies on to consider the alternative argument based on the implication of terms. Without referring to A-G Belize or any other cases on the implication of contractual terms, the Court puzzlingly concludes that there is an implied arbitration clause in the settlement agreement; based solely on “the analysis or rationale of Ramsay J in L Brown”. However, this reliance on L Brown v Crosby Homes ignores that it was a case where the High Court concluded that the supplemental agreement was a variation of the sub-contract, and that disputes arising out of the supplemental agreement were disputes arising out of the sub-contract. Therefore, Ramsay J in Brown was discussing variation and the scope of the phrase ‘arising out of and in connection with’. The implication of terms does not form the basis of that decision; in fact, there is no reference to implication in the case report (notwithstanding a slightly puzzling stray reference to the ‘officious bystander’, which is a test which was used for the implication of terms prior to A-G v Belize).

Further, not only is the reliance on Brown misplaced, but it is also inadequate when assessing whether on the facts here, there was indeed an implied term in the supplemental contract. This is particularly the case when, as here, the settlement agreement has a jurisdiction clause of its own and there is no vacuum which needs to be filled by the sub-contract. The Court reasons that, based on Paul Smith Ltd v H & S International Holding Inc [1991] 2 LL Rep 127 and Axa Re v Ace Global Markets Ltd [2006] EWHC 216 (Comm), the jurisdiction clause in the settlement agreement can be reconciled with the arbitration clause in the sub-contract by treating the jurisdiction clause merely as specifying the lex arbitri, the curial law or the law governing the arbitration. However, the Court does not adequately address the argument raised by the claimant that both those cases dealt with single contracts which contained (by express reference) an arbitration clause and a jurisdiction clause. That is a fundamentally different situation from one in which two independent contracts contain a jurisdiction clause and an arbitration clause each, and one is sought to be implied into the other. Therefore, while such reconciliation of jurisdiction and arbitration clauses is not unsound in theory, applying it to the present case amounts to putting the proverbial cart before the horse. The need for such reconciliation arises only when the arbitration clause expressly forms part of or can properly be implied into the settlement agreement; the possibility of such reconciliation is not an argument in favour of such implication. To the contrary, the existence of a potentially conflicting jurisdiction clause in the settlement agreement should be a factor which goes against such an implication.

Therefore, with respect, the Court’s conclusion and the reasoning underlying this conclusion are both suspect. It is of course arguable that the dispute here was such that it fell within the scope of the dispute resolution clause in the primary contract, and that the Court’s conclusion was justified on the facts. However, without any discussion in the report as to the nature of the dispute, and given the absence of any reference to this argument, it appears difficult to rationalise the decision on that basis.

The principled debate notwithstanding, the greater significance of the case is in outlining the issues to be borne in mind when drafting settlement agreements, or other side/supplemental agreements to long-running contracts. Given the ambiguities and the fact-specific inquiries involved in such cases, it is probably best to carefully consider how any subsequent disputes in connection with the primary contract or the side/supplemental agreement should be resolved, and draft the dispute resolution clauses accordingly. Drafting the side/supplemental agreement as a variation or amendment to the primary contract, or incorporating the dispute resolution clause of the primary contract by reference seem to be the ideal ways in which the dispute resolution provisions of both agreements can be kept consistent. However, if a different dispute resolution mechanism is intended to apply to the side/supplemental agreement, it is advisable to expressly include a provision to that effect, rather than relying on the result of a fact-specific inquiry into the parties’ intentions and the nexus between the two contracts.

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