The incorporation of arbitration agreements

By Jeremy Glover, Partner, Fenwick Elliott

Sub-clause 20.6 of the FIDIC Red Book is a good example of the express incorporation of an arbitration clause. The clause sits clearly within the main contract terms.  However, that is not always the case.  Often parties will not include an arbitration clause in the contract itself but you will find that arbitration has been included by reference to a standard set of conditions which contain an arbitration clause. In this situation it is often the case that there will be no separate indication that there is an arbitration clause in those standard conditions.

Under section 5 of the 1996 Arbitration Act, in England and Wales, arbitration agreements must be in writing but that can include agreements evidenced in writing, including where an agreement is recorded by one of the parties, or by a third party, with the authority of the parties to the agreement.

A recent decision in the English courts demonstrates some of the difficulties that can arise, where the arbitration agreement is found in a separate set of standard terms which have not actually been seen by one of the parties to the contract.  Could there be a valid arbitration agreement in such circumstances?

Barrier Ltd v Redhall Marine Ltd

In the case of Barrier Ltd v Redhall Marine Ltd1 Redhall had entered into a contract with BAE for the construction of Astute Class submarines for the Ministry of Defence (MoD). In January 2002 Redhall then subcontracted part of its functions under the Main Contract to Barrier. Barrier's role under the subcontract related mainly to painting the submarines internally and externally. A dispute arose over payment.  Barrier sought the disclosure of certain documents through the courts.  However, Redhall said that the contract contained an arbitration clause.  If that was right, the disclosure request would fail.

Redhall argued their case in two ways:

(i) The arbitration agreement was contained in the Redhall standard terms and Barrier had been given sufficient notice of these.

(ii) There was an arbitration agreement in the Main Contract between Redhall and Barrier. The terms of the Main Contract were explicitly incorporated into the subcontract.

Incorporation of the standard terms even though these had not been provided

Barrier worked on six submarines in total; however, the subcontract was only for Boats 1—3. In December 2001 Redhall sent Barrier a purchase order in respect of painting and scaffolding work on Astute submarines. The purchase order was numbered 122274. The purchase order included the words:

"The terms overleaf must be read and strictly adhered to."

By clause 10, these terms were incorporated into the subcontract. For an unknown reason, the purchase order did not include conditions on the back. Standard Condition 18 stated:

"18. Arbitration.

Any dispute or indifference (sic) arising from the Contract shall on application of either Seller or Purchaser be submitted to arbitration in accordance with the Arbitration Act 1950 or any amendment or re-enactment thereof for the time being in force."

Redhall submitted that the provisions of the subcontract were sufficient to incorporate the arbitration clause into their standard terms. Redhall said that the Terms and Conditions were part of a standard form contract provided by CIL, which were communicated to Barrier.  Crucially, Barrier did not need to have read the Terms and Conditions in order to be bound by them.  It was sufficient that they had been drawn to Barrier’s attention. Redhall made the following three points:2

(i) If the person receiving the document did not know that there was writing or printing on it, he is not bound;

(ii) If he knew that the writing or printing contained or referred to conditions, he is bound;

(iii) If the party tendering the document did what was reasonably sufficient to give the other party notice of the conditions, and if the other party knew that there was writing or printing on the document, but did not know it contained conditions, then the conditions will become the terms of the contract between them.

It is not necessary for the conditions to be set out in the document tendered. They can be incorporated by reference, provided that reasonable notice of them has been given.  HHJ Behrens agreed, noting that assuming that the purchase order sent to Barrier had no conditions on the back and that for some unexplained reason the wrong copy was sent or given to Barrier:

“a reasonable person reading clause 10 of the subcontract would have no doubt that CIL's standard terms were incorporated. The fact that they were not on the back of the purchase order does not affect this. It would, at all times have been open to Barrier to request a copy of the terms if they had wanted to.”  [Emphasis added]

Incorporation of the Main Contract Arbitration Agreement

HHJ Judge Akenhead QC noted in the case of Walter Llewellyn & Sons Ltd v Excel Brickwork Ltd3 that for parties to have agreed on arbitration as the dispute resolution tribunal or forum, there needs to be something in subcontract documents that shows or demonstrates an express or conscious agreement that arbitration was the ultimate dispute resolution process. In the case here there was a clear reference to arbitration in the standard terms. The problem for Barrier was that they had not seen it, although they could have requested a copy of the standard terms if they had wanted to.

The situation was different in relation to the suggested incorporation of the main contract arbitration agreement. In the case here, HHJ Behrens followed the decision of Mr Justice Clarke who, in Habas Sinai v Sometal,4 had distinguished between a case where a party is attempting to incorporate an arbitration clause between two other parties or one of the parties and a third party (i.e. BAE, Redhall and then Barrier), and incorporation where the same two parties had previously contracted (i.e. Redhall and Barrier).  

Where a third party was involved, there was a particular need to be clear that the parties intended to incorporate the arbitration clause when the incorporation relied on was the incorporation of the terms of a contract made between different parties, even if one of them was a party to the particular contract in question.  In contrast, where, as here, there were just two parties involved, the court would follow the traditional rules of contractual incorporation. Here there were no clear words that the parties intended to and/or had agreed to incorporate the main contract arbitration agreement.  Further, the main contract arbitration agreement would have needed to be modified to make sense in terms of the subcontract for the painting of the submarines.

Boats 4—6 – an oral agreement?

This left Boats 4–6. Here the instructions were oral. The only document that was provided to the court was the minutes of a relationship meeting held on 29 October 2012. The Relevant Minute recorded that there was no contract for Boats 4—6 and noted that:

“RNL and Barrier agreed the following:

All works completed under Sis for Boats` 4 and 5 do fall under the contract in accordance with Addendum 4 (attached for information)

RNL and Barrier agreed the following:

Neither RNL nor Barrier are contracted to complete the full scope of supply for Boats 4 and 5.

This position supersedes all comments/actions stated in any correspondences referred above.”

Addendum 4 is a document between BAE and Redhall which referred to a number of further purchase orders, at least one of which referred to Boat 4. It acknowledged that the purchase orders were a modification to the [Main] Contract and that further work may be needed to be incorporated into the Contract in particular until such time as a separate Boat 4 Contract is agreed.

Was the contract in writing?

The question for the court was whether the contracts for Boats 4–6 were contracts in writing within the meaning of the Arbitration Act 1996. Section 5 of the 1996 Arbitration Act defines agreements in writing quite widely:

“5 Agreements to be in writing

(1) The provisions of this Part apply only where the arbitration agreement is in writing, and any other agreement between the parties as to any matter is effective for the purposes of this Part only if in writing.

The expressions ‘agreement’, ‘agree’ and ‘agreed’ shall be construed accordingly.

(2) There is an agreement in writing —

(a) if the agreement is made in writing (whether or not it is signed by the parties),

(b) if the agreement is made by exchange of communications in writing, or

(c) if the agreement is evidenced in writing.

(3) Where parties agree otherwise than in writing by reference to terms which are in writing, they make an agreement in writing.

(4) 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.”

The court was clear that where Boats 4–5 are concerned, it appears that the agreement was evidenced in writing by the Minute of the 29 October 2012 meeting which incorporated the work for those two boats into the subcontract.

Boat 6 was not mentioned in any written document. However, oral evidence was provided which suggested that the parties had agreed that the work on Boat 6 would be carried out subject to the subcontract.  This was sufficient to bring the agreement relating to Boat 6 within s. 5(3) of the 1996 Arbitration Act.

Conclusion

This is an interesting decision.  The reminder that terms of a contract can be incorporated even though one of the parties to that contact has not seen them, is a valuable one.  If your draft contract documentation refers to terms and documents you have not seen, you should ask to see them.  Usually, it will be too late if a dispute comes to court and you say you were not aware of what the terms had to say.

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• 1. [2016] EWHC 381 (QB)
• 2. Taken from Chitty on Contracts at 13-013  Published by Sweet v Maxwell. 32nd edn, November 2015
• 3. [2010] EWHC 3415 (TCC)
• 4. [2010] EWHC 29 Comm