International Commercial Arbitration: Privity of Contract in Arbitration Agreements - Essay Example

International Commercial Arbitration: Privity of Contract in Arbitration Agreements Introduction Since the middle 1870s, the concept of arbitration has always been an issue of legal concern across international borders. It revolves around mutual promises and contractual agreements as observed by Redfern and Hunter (2009, p.17). On the other hand, arbitration in a broader context implies the need for an outside-court mode of settling disputes thereof. However, legal technocrats posit that all facts and procedures in such agreements cannot exclusively prohibit compulsory laws from offering a hand. The idea emanated from the fact that arbitration tribunals may fail to offer amicable solutions to the dispute thereto illustrated in the case of Naviera Amazonica Peruna SA v Companion International de Seguros del Peru [1988]1 Lloyd’s Rep.93 (Richard & Salzedo 1996, pp.31-3). Thus, any other applicable law as requested by the involved parties shall take effect to provide justice to the injured party in accordance with the intended purpose of the contract in question. This paper therefore explores the fundamental issues in arbitration agreements with respect to the privity of contract, consolidation of parties, arising conflicts and potential remedies. Besides, the paper takes a critical examination of a specified case study with a view to determine the validity of the contracts presented before the arbitration tribunals. To that end, this paper seeks to provide a succinct and integrated understanding of international commercial arbitration with reference to recognition and enforcement of Orders and Awards. Part A: Privity of Contract as a cause of unnecessary disputes Primarily, it is worth noting that all commercial contracts are subject to the law of the land and the international law of contract if it involves cross-boundary trade. Accordingly, Mustill and Boyd (1989, p.72) argued that any act of commission or omission might affect the terms of the said contract in such a manner that would necessitate legal redress. However, these scholars acknowledged importance of protecting the weaker party from malicious intentions of the other so as to sustain the initial purpose of the contract entered into by the two parties. In addition, contemporary studies suggest that only those abound by the contract in question shall have the right to file an act in the event one party has breached the contract (Lew 1987, p.36). It is also a matter of good practice to ensure that the terms to each contract are clearly spelt out so as to avoid potential failure of performance or considerations. The ideals therein elicit the contentions of privity of contract and the need for arbitration agreements. Confidentiality, consolidation and conflicts in arbitral contracts Any valid contract contains an implied confidentiality of private contractual relationship between the subscribers to the contract at hand. Hence, third parties are cannot claim contractual rights to sue or take legal actions if one of the parties jeopardised the contract as illustrated in the case of Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Company [1915] AC 847 (Gary 2011, p.64). In that case, the presiding judge ruled on the maxim of jus quaesitum tertio in which he stated that third parties do not have any right of action in a valid contract even if breach of such contract would compromise their perceived benefits. Another important aspect of privity of contract relates to the consolidation of parties to that contract. First and foremost, the law of contract postulate that there must be at least two parties for a contract to exist. Where the contract agreement does not specifically bind a third party to its terms and conditions, the third party shall be deemed to have no legal right in that contract. With that in mind, Lew (2006) argue that international arbitrations are always challenging and ought to have a specific clause of consolidation which acknowledges the circumstances under which a beneficent third part man effect legal redress. The concept of privity also applies to the outlined procedure of addressing contractual disputes. For one, privity of contract limits the litigation process to the parties directly bound by the disputed contract. Secondly, it leaves no room for third parties to purse their interest in the breached contract. Finally, the philosophy of privity outlined under the maxim of ex aequo et bono has often been criticised to undermine the basis of law in pursuit of amiable compositeur (Lew, 1987). Thus, legal experts argue that arbitration conflicts occasionally do result in a unnecessary disputes on grounds of unfair ruling, perceived breached of tribunal duties or undistinguished issues in dispute. Redfern and Hunter (2009 also argued that privity of contract has proven to be quite problematic in related arbitral conflict. While two parties may ratify an effective contract, failure of one party to perform his contractual obligation could impair the interest of yet another unrelated party. For instance, in the case of Twiddle v Atkinson [1861] EWHC QB J57, the court ruled that the plaintiff could not succeed since she was only but a third party. Even if she field for a court order for specific performance, her chances of success were limited on grounds of privity of contact between Atkinson and the groom (Gary 2011, p.55). Recognition and enforcement of Orders and Awards From a different perspective, the question of Orders and Awards is imminent and of much concern with respect to contemporary claims that privity of contract is the cause of unnecessary disputes. To start with, there are elements that must be observed when handling arbitration orders. In that light, every arbitration order must be served in writing to the concerned party with respect to procedural concerns. In the event that the arbitration tribunal fails to do so in the prescribed format, the intended party shall be at liberty to ignore the order. In addition, traditional principles of law shall also not hold the mentioned party liable for contempt of court for refusing to honour defective order as reiterated by Richard and Salzedo (1996, pp.81-7). Where the contract involve foreign parties who agreed to operate within the terms of an arbitration clause, it is practicable to specify the law that shall govern such contract. As a result, common practice has since observed that the arbitration tribunals are bound to resolve any arising disputes in accordance with the chosen law. Otherwise, the case shall be decided under the English Law if the arbitration agreement failed to specify any law to that effect. It is for that reason that Mustill and Boyd (1989) noted that foreign courts are at liberty to recognize orders and awards issued under a specific law chosen by the arbitration parties as illustrated in the case of Altaine Khuder LLC v IMC Mining Inc. and IMC Mining Solutions Pty Limited [2011] VSC I. In recognizing orders, the following principle must apply. First, there arbitration tribunal must demonstrated utmost adherence and application of the specified law identified to govern the breached contract. Secondly, the applying party must have acted in good faith, and lastly, the order ought to serve the intended purpose as read with Section 46(1) of the Arbitration Act, 1996 (Redfern & Hunter 2009, p.157). The other essential matter in privity revolves around valid documentation and evidence in arbitration proceedings. According to (Gary 2011, p.73), it is vital to ensure that all documents relating to the contract under redress should be presented in time without intentional waste of time or resources. Further, international commercial arbitration principles require that the injured parties present evidence of breach in accordance with expert opinion for such evidence to be admissible in a court of law or the tribunal. Only then shall any evidence be deemed valid to substantiate a claim or challenged of Award (Gaillard & Savage 1999, p.166). Whereas Orders cannot be transferred or imported across international boundaries, Awards are regularly enforceable internationally provided that the laws under which such Awards were issued are generally conventional or international. However, England and Wales do not subscribe to the Rome Convention, and shall thus not recognize or enforce Orders or Awards issued under the aforementioned convention (Mustill & Boyd 1989). In related contract where the parties did not specify the law governing their arbitration agreement, the Customary English Law shall always apply. Therefore, it is obvious that the native party shall enjoy sovereignty immunity unless otherwise stated by a specification clause as to where the seat shall be held (Redfern & Hunter 2009, p.105). In the event that the defendant discovers serious irregularities in application of law, he can successfully challenge the issued Order or Award. Nonetheless, matters including unexplained Awards, ultra-vires acts of the tribunal or inoperative Awards can also elicit successful challenge in a court of law (Gaillard & Savage, 1999, p.159). Where the court of first instance fails to give a directive or ruling pertaining to a given application of Order or challenge, subsequent courts may not recognize or effect furtherance of similar claims. It is also prudent to note that each country is subject to its laws. For that reason, a foreign court may not have jurisdiction in enforcing an Order issued outside the scope of its mandate. Likewise, a Court of Appeal may not interfere with arbitration tribunal proceedings instituted under foreign national law as discussed by Clarkson and Hill (2011, p.32). All these limitations revolve around the defined powers of tribunals as outlined in Section 46 of the Arbitration Act, 1996 unless the issues in question relates to misinterpretation of law. Part B: Case study: Brech & Brewer Ltd, Smolkin Inc. and ZhaoZhong Inc In this case, B&B Ltd entered into a contract with Smolkin Inc. in which B&B contracted Smolkin for the purchase of 500,000 barrels of Texas heavy crude oil to be delivered by 23rd February, 2010. On the other hand, B&B Ltd contracted ZhaoZhong Inc. for the sale of the same consignment of Texas heavy crude oil due for 1st March, 2010. In both cases, the parties agreed to operate under a specific arbitration clause that conferred exclusive jurisdiction to the courts of England and Wales. Moreover, the agreement identified London to be the place of seat where final settlement shall be made in the event of any disputes whatsoever. Those were the basic terms of arbitration set forth in the related contract between the parties. Legal issues at hand To begin with, it is modest to understand the relationships existing among B&B Ltd, Smolkin Inc. and ZhaoZhong Inc. As such, it is true that B&B Ltd had a valid contract with Smolkin. Conversely, B&B Ltd and ZZ Inc also had a valid contract. However, there was not contractual relationship between ZZ Inc and Smolkin. Thus, ZZ Inc remained a third party in the contract between B&B Ltd and Smolkin Inc. Likewise, Smolkin was perpetually a third party in the contract between B&B Ltd and ZZ Inc. Bearing the outlined facts in mind the arbitration agreement could not bind Smolkin Inc. and ZZ Inc. in any way even though Smolkin happened to be the supplier of the consignment in dispute. Despite the fact that 500,000 barrels of Texas crude oil were timely delivered to ZZ Inc, it was not of the desired quality. Particularly, the delivered consignment was Texas light crude oil instead of Texas heavy crude oil. Since it was defective in nature and quality, ZZ Inc. was justified to file an arbitration claim against B&B Ltd for breach of contract as illustrated in the case of Mobile Telesystems Finance SA v Nomihold Securities Inc. [2011] EWCA, Civ 1040 (Gary 2011, p.70). The second issue relates to the freezing injunction applied for by B&B Ltd against Smolkin in Texas District Court. While the arbitration agreement specified that disputed arising between the parties shall be referred to London, the New York Convention would ordinarily apply to a native a party in disputes where the Customary English Law could have otherwise been applicable. In spite of fact that B&B Ltd applied for and obtained the freezing injunction under Texas national law, Smolkin failed to oppose the order for a period of more than sixty days as required provided in Section 38(2) of the Arbitration Act, 1996 and read with s.48(5) of the same Act (Richard & Salzedo 1996). Where a party failed to challenge an Order within the permitted span of time, the tribunal shall admit such Orders unconditionally in further arbitration proceeding. In any case, international arbitration laws including the New York Convention allow courts in member states to issue injunction in support of arbitration proceedings as vividly illustrated in the case of Celtic Resource Holdings v Arduina Holding BV [2006] EWHC.2553 (Gary 2011, p.97). The court held that the defendant could not succeed in revoking the freezing injunction issued against on grounds that the defended failed to do so within the stipulated time frame. With that in mind, Smolkin has no right to challenge the validity of the freezing injunction stopping from accessing the payment balance due on delivery of misrepresented goods to B&B Ltd. Beside, Smolkin only brought such application when the two tribunals had already exhausted the substance of the matter in dispute. According to Clarkson and Hill (2011, p.74) unchallenged orders are admissible in legal proceedings. In the same way, unopposed freezing injunctions are enforceable in both arbitration and litigation where such injunctions had been effectively ratified in the ordinary course of business as applied in the case of Mobile Telesystems Finance SA v Nomihold Securities Inc. [2011] EWCA, Civ 1040. Thus, Smolkin could neither estopple the tribunal from recognizing the Order not succeed in dismissing the operability of the arbitration agreement as argued by Lew (2006, pp.137-144). On the issue of setting up the tribunals, B&B Ltd knew of the identical nature of the two tribunals as well as the related nature of the two contracts. As such, his claim for consolidation of the 1st and the 2nd tribunals was in itself non-merituous and contrary to the rules of the New Lex Mercatorio law ascertained by Redfern and Hunter, (2009). In any case, it was not reasonably foreseeable that B&B Ltd would lose in both cases. When issuing the partial Award, the 1st tribunal genuinely refused the application filed by B&B Ltd for consolidation. For one, there was no legal relationship between the two contracts. Secondly, the two tribunals were not bound to proceeds with any intentions to create contractual responsibility between ZZ Inc and Smolkin Inc. Therefore, it is not in order for B&B Ltd to imply that the decision of the two tribunals would collectively compromise his position in the two cases. The above conflict was distinguished in the case of Altaine Khuder LLC v IMC Mining Inc. and IMC Mining Solutions Pty Limited [2011] VSC I. According to Gary (2011, p.95), the defendants were jointly responsible for the breach of contract under trial and were therefore held collectively liable. Taking into account the precedence set forth in the case of Coulls v Bagots Executor & Trustee Co. Ltd [1967] 119 CLR 460, it was out of order for B&B Ltd to apply request the 1st tribunal to uphold its ruling subject to the outcome of the 2nd tribunal in line with arguments of Lew (1987, pp.113-15). In the first place, the subject matter in two cases was differentiated by the inapplicability of the jus quaesitum tertio maxim between ZZ Inc and Smolkin Inc regardless of the connection between the two contracts. The move of ZZ Inc. to oppose the application was therefore justified even as the 2nd tribunal issued an order to hold the proceedings of the 1st tribunal until the final hearing date. The final issue of concern emanates from the final ruling made by the 2nd tribunal. In issuance of the $750,000 Award in favour of B&B Ltd, it was erroneous to mention that the governing law was that of Texas when the two tribunals had previously acknowledged the English Law to that effect. Secondly, Smolkin Inc. has a right to resist the enforcement of the Award so issued on grounds of legal irregularities. It must be noted with a lot of concern that the ruling was unfair since the 2nd tribunal, having subscribed to the English Law would still denounce it in adoption of the Texas law which was favourable to the defendant. However, we must also ponder the credibility of the expert report claimed by ZZ Inc. with a view to admit the document as evidence. The above claims of ZhaoZhong were indeed viable since the tribunal had also admitted the freezing order against Smolkin Inc. The practice applied in the later scenario conformed to the principles of ex aequo et bono for purposes of fairness with regard to the loss suffered by ZZ Inc. as applied in the case of Donoghue v Stevenson [1932] UKHL 100 (Gary 2011, p.38). Accordingly, the manufacture owes its consumer the duty of skill and care where the consumer cannot reasonably foresee or test the content of the product without expert knowledge. With similar understanding, Smolkin’s failure to deliver the ordered Texas heavy crude oil directly caused ZZ Inc. substantial economic injuries. It was therefore a tortious for Smolkin to deliver Texas light crude oil instead of Texas heavy crude oil. To that end, the expert report and evidence was perfectly admissible in the arbitration tribunal. In addition, the 24 August 2011 ruling in favour of ZhaoZhong was also valid. According to Richard and Salzedo (1996) the Award was issued in line with the doctrine of consideration where Smolkin had already received part of the payment from B&B Ltd for the same 500,000 barrels of defective substance. On the contrary, the claims presented by B&B Ltd with respect to the final Award in favour of ZZ Inc could not hold since expert reports are admissible in both tribunals and litigation proceedings (Redfern & Hunter 2009, p.183). While B&B Ltd had not offered ZZ Inc. any form of remedy for the breach of contract between them, it could not successfully claim irregularities in law under Section 68(1) of Arbitration Act 1996. Part C: Similarities and differences between Part A & B In both parts, the issues of privity of contract emerged in which ZZ Inc and Smolkin Inc shared no contractual relationship in the disputed related contracts. Secondly, Part B clearly demonstrated the circumstances under which conflict may arise in arbitration agreements. Furthermore, both sections illustrated the theoretical and practical challenges in arbitration, recognition and enforcement of Orders and Awards. Particularly, part B demonstrated the legal implications of foreign laws between different counties with partially related national laws. In ether apart, party autonomy defined the protocols of arbitrations and governing laws to in the arbitration dispute. In terms of differences, only part B offered a classical application of ex aequo et bono where compromise and equity prevailed over the literary strictness of the law. On the other hand, Part A categorically illustrated the lines of jurisdiction between the court and arbitration tribunals. However, it was rather indifferent to determine the aspect of contract waiver in both cases. Conclusion Having exhausted the fundamentals of arbitrations agreements, it is plausible to note that privity of contract is synonymous in both local and international laws of contract except where it impacts on administrative interest. That notwithstanding, every arbitration law endeavours to provide protection to its parties without necessarily attracting legal relations. However, and subject to international laws, the courts can always intervene if the partied thereon believes that the set arbitration tribunal has exceeded its mandate or acted beyond matters presented before it. Otherwise, all matters of law are often integrated thereby allowing the remission or enforcement of Awards in both native and foreign countries purposefully aimed at serving justice, repressing malpractice and resting mutual understanding. References Clarkson, CM & Hill, J 2011, Jaffey on the conflict of laws. Oxford University Press, Oxford. Gaillard, E & Savage, J (eds.) 1999, Fouchard, Gaillard and Goldman on international commercial arbitration, Kluwer Law International, Alphen. Gary, B 2011, International arbitration: cases and materials, Kluwer Law International, Alphen. Lew, JM (ed) 1987, Contemporary problems in international arbitration, Martinus Nijhoff Publishing Group, Boston: MA. Lew, JM 2006, Pervasive problems in international arbitration, Aspen Publishers, New York: NY. Mustill, MJ & Boyd, SC 1989, Law and practice of commercial arbitration in England, 3rd edition, Butterworths Publishing, London. Redfern, A & Hunter, M 2009, Law and practice of international commercial arbitration, 4th edition, Sweet & Maxwell, London. Richard, L & Salzedo, S 1996, Arbitration Act 1996, Cavendish Publishing, London. Read More