Importance of the Principle of Severability - Assignment Example

Title: International Commercial Arbitration Name: Professor: Institution: Course: Date: Question 1. Importance of the principle of severability According to the severability doctrine, the arbitration clause is the agreement that is independent of the contract in which it appears. It is known as a savings clause as it makes sure that the provisions agreed in the contract remains valid and enforceable, should the contract or a part of it be held null and void at a later date. This is an essential function of the severability principle as it ensures that a contract remains valid once a part of it is held invalid. The importance of the principle of severability is that courts do accept the principle of severability. This give the arbitrator the mandate to deliver a verdict on a matter that is covered for in the arbitration law. It enables the court to decide the validity of the arbitration clause once the contract is declared invalid. Should the arbitration clause be declared invalid and void, then a party has a leeway on which to challenge the whole process of arbitration based on the fact that the contract is null. The courts employ the concept of severability when making a decision in an arbitration case. This is supported by section 30A of the International Arbitration Act 1974 which outlines the extent of applicability of the principle of severability in arbitration. The principle of severability is important as it facilitates international trade in the global economic market. When there is an international transaction and where the principle of neutrality of the arbitral process is guaranteed, parties to the contract are assured of a fair deal. This is unlike in local courts where the prized principle of neutrality is mostly absent (Legalsutra, 2011). The principle allows for resolution of disputes arising out of bilateral relations in the international market. 2. The Seat as an important part of the arbitration process. The seat is one of the most vital matters which have to be specified during the process of drafting an arbitration clause. The selection of the seat is a key determinant in the law governing the arbitration and rights relating to the enforcement of the arbitration award. This view is supported by Ashurst LLP (2008), where it says that the choosing of the seat is of importance for the arbitration as it can have the following effects. It can affect if the courts of the seat are allowed to intervene in the arbitration, and if any other rules are imposed, on top of the arbitral rules settled for by the parties. The seat determines the extent to which the local courts get involved in the arbitral process. Different countries have got different ways of arbitration. For instance, where some countries are friendlier to the whole process of arbitration, others have laws which restrict the autonomy of the parties in the arbitration (Warren, 2011). The seat influence whether the dispute is admissible as arbitration in the country chosen. This in essence implies whether the subject matter is something which the local courts have jurisdiction over. It can affect the enforceability of the arbitral award and the possibility of an appeal over a ruling. The seat is instrumental in determining the degree to which an award may be challenged. Furthermore, the extent to which judicial reviews is available to parties in the arbitration is dependent in the law of the seat (Warren, 2011). In some circumstances, the arbitration process might be declared null and void under local laws. For instance, in a case involving Deuttchse vagainst Al-Khaimah in 1987, it was held that the arbitration agreement was void under own law, and, therefore, could not be enforced. Once a seat has been set and agreed upon by the disputing partiers and the tribunal, it can not be changed unless under the mechanisms provided for in the Model Law.1 The seat neither provides a complete process of arbitration, since arbitration without a seat is not recognized as legal in most countries. For instance, the common law does not recognize arbitration without a seat. This fact was stipulated by Kerr in Bank Melllat v Helliniski Techniki SA where he stated that the jurisprudence of the court does not recognize arbitration without a connection to any system of law, which in essence implies a seat. When fixing a seat, there a number of factors that need to be put into consideration. These include attitude of courts towards arbitration, effortlessness of enforcement, neutrality of the seat,2 convenience, knowledge of procedural law of the seat and the time it will take to get the process of arbitration in motion. 3. Challenging an arbitration process. Arbitration is a process that is consensual. It must be founded on the agreement of both parties involved, in this case Mr. Jones and Mr. Smith. The two parties ought to have made a prior agreement to arbitrate any dispute arising out of their commercial engagement. On top of this, the authority of the tribunal to deal with the despite must be guided by the agreement of the two parties. In this case then the absence of a contract in the first place rules out the possibility of arbitration between the two parties. Mr. Jones can draw his claim from the provisions of article V of the New York Convection, which states that a party can lodge a request to nullify an award made by providing valid evidence to the competent authority. Mr. Jones can present facts to demonstrate that there was no agreement between the two parties, and at no point did they agree to settle for arbitration, nor even settle for Singapore as the seat of the arbitration (UN, 2005). Therefore, based on the above claim by Mr. Jones, Mr. Smith might not succeed in having the matter resolved in Singapore through the tribunal. 3 However, should the court see the need for the tribunal to continue with resolving the dispute; the Model Law provides on how the court can handle the issue. In its 10th Article, the Model Law states that in case parties fail to select a mediator, or one party abstains from selecting the arbitrator(s), the authority that is competent to hear the dispute shall proceed to appoint the arbitrator(s). For instance, in the case of Mr. Jones and Mr. Smith, the tribunal under ICC can continue with the hearing and resolve the issue and the verdict shall be final. 4. Enforceability of an arbitral award in Australia. Arbitral awards are enforceable in Australia depending on the arbitration law regime which applies to the arbitration agreement. The prerogative of enforcing the arbitral award lies with the court jurisdiction. This occurs when an action to enforce the award is made as a form of an act in search of satisfying legal proceedings brought about by the contravention of the agreement. A foreign arbitration award can be enforced in Australia by a court of a State or Territory of the Federal Court in the same manner as a judgment of a local court (it follows the same procedure as the enforcement of a court judgment). The enforcement is done under section 7 of the International Arbitration Act 1974, which implements Australia’s obligation under the New York Convection and article 8 of the Model Law (Australian Law Reform Commission, 2001). This governs foreign/international arbitrations, whereas domestic arbitrations are directed by the relevant arbitration acts of each state or Territory where the arbitration takes place. For instance, an Australian court has the power to freeze assets in Australia on the application of a party to an international arbitration seated in London, or even Singapore. Article 27 compels the courts to assist in taking evidence pertaining to the arbitration. Article 35 and 36 further recognize the arbitral awards and provide for their enforcement in countries like Australia where the Model Law has been ratified. There are a limited number of ways on how one can successfully challenge arbitration award in Australia. One of them is on the basis of fraud by the arbitrator. Secondly, when one of the parties in the arbitration was not part of the initial agreement made during the transaction. The Supreme Court of Australia is the place where a one can appeal on any question of law arising out of the award. This is provided for in article 38(2) of the Module Law (Gehle and Jones, 2010). In circumstances where one of the parties to the arbitration was not in a capacity to draft an agreement, or any other reasons which contradicts the Model Law, provide ground for one to challenge arbitration and its enforcement. A challenge can also be instituted in enforcement of the award especially where the arbitrator had no jurisdiction. However, lack of jurisdiction of an arbiter does not imply that the awards cannot be enforced.4, Another instance in which one can challenge the admissibility of arbitration is when the subject in question is not capable of being settled upon through arbitration. Furthermore, if the subject is in conflict with public policy, then the arbitration can be challenged. A court should not make a mistake of quoting from article 34 of the Model Law so as to refer to an arbitration matter back to the tribunal, and request reconsideration of a question which was not originally considered by the arbitrators.5 The limitation in the challenge if arbitration in a court of law is as a result of arbitration being recognized as a legal way of solving commercial disputes outside the courts. Moses Margaret (2008), states that arbitration results in a final and binding award which generally cannot be challenged in a higher court level. Article 5 of the model law provides that courts shall not intervene in an arbitration process except where so provided. This matter was brought to light in the D Frampton & Co Ltd v Slvio Thiebault and Navigation Harvey & Freres Inc. The courts are only allowed to provide for the enforcement of the arbitral awards which are made by experts in the trade involved. For instance, if the dispute is in the jewel business, the arbitrators are mostly experts in that field. The courts should be cautious when appointing the arbiters to ensure that the parties involved are satisfied with the choice of arbitrator(s) and the decision made at the end. However, pursuant to article 8 of the Model Law, the courts are only allowed to annul arbitration if the agreement is illegal. The arbitration act allows courts to nullify an arbitration award if made. 6 Question 2. Case Study. The case involving Mr. Jones v Mr. Chan. Claimant: John Frost Ltd. Millers Road. Melbourne. Defendant: Honest Dealers Ltd. Nathan Road. Hong Kong. The purpose of this memo is to present the claims made by Jones Frost Ltd (claimant) against Honest Dealers Ltd (defendant) before the ACIA in Singapore on July 1, 2009. The two parties find themselves in a dispute over an international transaction they entered as from December 1 2007. The claimant, Frost Ltd, see compensation for a breach of contract on the contractual agreement entered with the defendant. The matter in question is as a result of unpaid money out of diamonds sold to China Exchange via Honest Dealers Ltd (defendant) who was acting as the sales agent. Matters that pertain to the case. At the time of entering into the contractual agreements, both Australian (seller’s place of business) and Hong Kong (buyers/agent’s place of operation) were Contracting States. Hence, the applicability of International Trade Convections such as Model Law, New York Convection and Vienna Convection was applicable in the two states. The claimant had written to the defendant on 1st of December, 2007, notifying them of their intention to enter into a commercial relationship. The claimant deals with diamonds directly from its mines, which it sells to industrial users of diamonds. On the other hand, the defendant operating under the name of Honest Dealer Ltd specializes in selling diamonds and acting as a del credere agent. The claimant sougt the defendant services in the diamond trade. In a response letter dated 10th December, 2007, the defendant acknowledged receipt of the request sent on 1st December, 2011. In the letter, the defendant furnished the claimant with their terms of engagement which are outlined below. The fees for acting as a normal sales agent are 10%, which shoots to a high 20% once the defendant acts as a del credere The goods must be sent to the defendant/ agent first The danger of loss or harm to the goods will shift to the agent once the goods are secured in the agent’s offices. Disputes were to be resolved by arbitration using SIAC rules. The seat of the tribunal was to be in Hong Kong. On December 15th, of the same year, the claimant wrote a letter to the defendant notifying him of the receipt of the letter dated 10th December, 2007. The claimant accepted to the commissions charged by the defendant, and the clause on passage of risks. Diamonds are sold by John Frost Ltd in parcels of $ 100,000. In the letter, the seller’s/plaintiff set out the terms of the contract which are outlined below. The consignment was to be sent through secure transport. A letter of credit was to be opened through the claimant’s bank in Melbourne, once the goods had been received. According to the defendant, the seat of arbitration was to be Singapore. Any disputes arising out of the terms of the contract being resolved through arbitration in accordance with ACICA rules. A Mr. Delbon was hired by the claimant to verify the quality of the diamonds. He is an expert in the field of diamond trade. On December 20th, 20007, via an email, the defendant informed the seller of their intention to purchase a sample of the diamonds. The specifications were for 10 cut diamonds each weighing 10 carats, the cut was to be princess, color G.I.A. scale D with clarity of GIA and a scale F. The order was to be delivered via secure air transport not later than 23rd December, 2007 at a price of $ 20,000 per carat. The letter of credit was to be opened as soon as the agent confirmed the receipt of documents. The plaintiff responded on 21st December via the mail, informing the agent that the order had been sent through the air as per the instructions made over the phone. The consignment was verified by a Mr. Delbon as per the instructions of the agent. This in essence is proof that the claimant met his side of the bargain. The agent confirmed the receipt of the order and was pleased with the quality of the diamonds. This led to a further transaction of 20 diamonds weighing 30 carats each, at a price of $ 6000 per carat. The defendant was to act as del credere agent with delivery being made in the usual fashion. Pursuant to the matter, the claimant confirmed receipt of the request made earlier and on March 8th 2008 and agreed to comply with it. The agent was instructed to deduct his commission directly from the sales price and remit the net amount into the accounts of the plaintiff at HSCV Bank in Hong Kong. The dispute arose when the defendant failed to honor the terms of the contract. By the 20th of April 2008, the defendant had not paid for the last shipment, despite being reminded by the seller a month earlier (refer to the letter dated March 20 2008). The defendant had plans to merge with Chinese diamond exchange as its new partner. Furthermore, it was intending to dispose its premises in Hong Kong and relocate to the republic of China. The applicant wants the tribunal to put a hold on sale in order to safeguard its interests. This will provide time for the dispute to be resolved to determine who is supposed to settle the fee owed to the claimant, as the defendant insists that the China exchange is the one responsible for payments. Legally, the defendant acted as a third party in the commercial transactions pitting the plaintiff and the defendant. He was the one who introduced the plaintiff to the buyer and committed itself to acting as a del credere agent. This matter is subject to arbitration since the parties had agreed that their legal relationship will be submitted to arbitration. The agreements entered as from December 1 2007 were contractual agreements in nature. They bound the two parties to some commercial commitments, the plaintiff to deliver the diamonds, and the defendant to sell and remit the net worth. This is provided for in Model Law Article 7(1) where the parties in a contract are bound by the law to honor their commitments. The seller is supposed to deliver the goods in good order, whereas the buyer is obliged to pay for the goods on time as per the agreement.7 In the context of an international arbitration, this case qualifies to be one as the arbitration agreements entered between the two parties met the qualifications of an international arbitration. For instance, there is a clear indication of the range of the arbitration accord, shaping which disputes to be referred to arbitration. The agreement stated that the choice of seat by the seller was Singapore. English was proposed to be the language for conducting the proceedings. By writing to inform the seller that the quality of the diamond delivered was of poor quality, the defendant was misleading the seller, since he had earlier acknowledged the receipt of high quality diamonds. Consequently, it took him quite a long time to inform the plaintiff of the low quality of the products, which in normal circumstances would not have the case. This is a clear indication of a countermeasure to justify the delay in payment of the money owed to the claimant. As a del credere agent, the defendant agreed to sell the diamonds to China exchange on behalf of the plaintiff. Furthermore, he guarantees honesty on the side of the buyer. This in essence meant that once the claimant delivered the consignment, he was assured of payment by the buyer via the agent. The terms of a de credere agent stipulate that the agent assumes responsibility of paying the seller incase the buyer fails to pay. Therefore, the claimant disputes the claim by the defendant that it was not a party to the contract. The defendant had agreed to act as the del credere agent in the transaction, hence was responsible for seeking payment from the buyer of the diamonds. The agent breached the agreement entered earlier with the claimant by failing to pay the money. The plaintiff would like to present the contract entered to, and the other documentary evidence. This is informed by a decision made by the High Court of Australia in case between Plowman and Esso Australian Ltd. The claimant seeks damage for the delayed payments amounting to $ 3,600.000 less the agent commission (20% of sales) and a 20% fee for the delayed payment or as the tribunal may consider being realistic. This is meant to serve as the liquidation fee for the delayed payments by the del credere agent (defendant). The claimant acknowledges the legal provision that the tribunal may issue a correction or interpretation of it as an award. The tribunal is at discretion to give an additional award regarding the matters raised in proceedings. See General Distributors Ltd v Gasata Ltd [2006] NZLR 721. The claim in damages is further supported by the Vienna Convection on Contract for the International Sale of Goods of. Article 53 of the convection obliges the buyer to pay for the goods delivered. Pursuant to Article 78 of the convection, default in payment of the price, creates a right to seek interest on the sum owing. The claimant has a right to seek interest on the delayed payment of diamonds delivered to the defendant. The claimant also wants the disposal of the defendants premises stopped before the matter is put to rest. This in essence will safeguard the plaintiff’s interest. References Gehle, B. and Jones, D. 2010. The International Comparative Legal Guide to International Arbitration 2010- A Practical Cross-border insight into international arbitration. London: Global Legal Group. Moses, L. M. 2008. The Principles and Practice of International Commercial Arbitration. Cambridge: Cambridge University Press. United Nations, 2005. Dispute Settlement: International; Commercial Arbitration. New York: United Nations Conference on Trade and Development. Amanda, L, and Peter, V. 2010. The Changing International Arbitration Framework inn Australia. Legalsutra, 2011. ADR-Arbitration Clause- Severability and Law Applicable, viewed 8 December 2011, http:www.legalsutra.org. Warren, L. 2011. The Seat of Arbitration-Why is it so important? Retrieved 8 December 2011, http://www.clydeco.com. Ashurst LLP, 2008. International Arbitration Clauses. Abu Dhabi: Ashurst LLP. Australian Law Reform Commission (ALRC) 2001. International Arbitration, viewed 9 December 2011, http://www.alrc.gov.au/. Deutcshe Schachtbau- und Tiefbohrgesselschaft GmbH v R’As al-Khaimah National Oil co [1987] 3 WLR 1023. Front Row Investment Holding Singapore Pte Ltd v Daimler South East Pte Ltd [2010] SGHC 80. Government of the Philippines v Philippine International Air Terminal Co Inc (Piatco) 1 SLR 278. Grandeur Electrical Co Ltd V Cheung Kee Fung Cheung Construction Co Ltd 3 [2006] HKLRD 535, viewed 10 December 2011, http://www.austlii.edu.au/au/journals/MqJlBLaw/2007/14.html. Read More