REUTERS | Dani Cardona

Incorporating an arbitration clause: a barrier to pre-action disclosure?

In the recent case of Barrier Ltd v Redhall Marine Ltd the court re-visited the rules for deciding whether or not an arbitration clause had been incorporated into the contract, and how the rules differ when you are trying to incorporate a term from a different contract altogether.

The case also contains some useful reminders about the jurisdiction for pre-action (or, rather pre-arbitration) disclosure and the rules requiring there to be a contract in writing for the purposes of the Arbitration Act 1996 (AA 1996).

Not bad going for a seven page judgment.

On the other hand, the brevity of the judgment does seem to have resulted in some of the key points not being very fully explained, and it is hard to know how far the case will add to the developing and uncertain jurisprudence on incorporation of arbitration clauses.

A quick reminder on pre-action disclosure

It is now relatively well-established that if a contract incorporates an arbitration agreement, then a court will not entertain an application for pre-action disclosure (see the first instance decisions of EDO Corporation v Ultra Electronics and Travelers Insurance Company Ltd v Countrywide Surveyors Ltd).

At first blush one might consider this to be a surprising proposition.

In many situations the AA 1996 does allow for the court to step in when the arbitration process has hit the buffers or found itself without the power to make the orders the parties need. For example, section 44(2) of the AA 1996 grants the courts “the same power of making orders” about specific matters set out “as it has for the purposes of and in relation to legal proceedings”. Those matters include the preservation of evidence and the preservation and inspection of property as to which any question arises in the proceedings.

As a matter of commercial efficiency, it does seem needless to require a party to initiate arbitral proceedings solely for the purpose of then asking for early disclosure, only to then discover there was no basis for a claim.

However, in both Edo and Travelers the court held that an application for pre-action disclosure did not come within those powers and that neither sections 33(2) nor 37(1) of the Senior Courts Act 1981 provided the court with jurisdiction. Section 33(2) only allowed for pre-action disclosure where the applicant appeared likely to be a party to subsequent proceedings in that court (rather than in arbitration). Section 37, which contains a general power to order an injunction where it is just and convenient, could not be invoked where there was otherwise no express jurisdiction.

Although the point has never been considered at a higher level, the point was conceded in Mi-Space (UK) v Lend Lease Construction and in the Barrier case. Consequently, in order to succeed on their application, Barrier needed to show that there was no arbitration clause in the contract.

The Barrier case

The case itself concerned monies claimed under a sub-contract by Barrier from Redhall, for the painting of a number of submarines.

Barrier maintained that Redhall had made wrongful deductions to sums otherwise due to them. However, under the sub-contract, Barrier were only ever entitled to sums that had been paid to Redhall under the main contract from BAE.

So, if it turned out that the deductions had in fact been made by BAE, then Barrier accepted they would have no claim. The only problem was that, absent seeing the relevant documentation as to payment and deductions, there was no way for Barrier to know whether this was the case.

The application

Redhall maintained that there was no such documentation, which is at first glance a bit odd. How could Redhall not have documentation showing what money they had been paid?

Anyhow, the point of wider interest was that they alleged that the sub-contract incorporated an arbitration agreement (and so the application would be defeated on the principles set out in Travelers). They said the arbitration clause was incorporated in two possible ways:

  • The sub-contract referred to terms and conditions set out in a purchase order (PO) sent by Redhall, which contained the arbitration agreement.
  • The sub-contract also incorporated the terms of the main contract, which itself contained an arbitration agreement.

The problem was that the PO in question was sent by a different Redhall company to the one mentioned in the sub-contract, and, as chance would have it, did not in fact contain any terms and conditions. It said simply that they were overleaf, and, by mistake, they were not.

As for the main contract, Barrier asserted that its incorporation into the sub-contract did not extend to the arbitration clause within it.

Applying normal rules on incorporation?

The court seemed to have no trouble in deciding that the terms referred to in the PO were incorporated.

Okay, the PO came from the wrong Redhall company and did not in fact contain any terms overleaf, but applying normal principles of construction it was clear, thought the court, that the objective intention of the parties was for those terms to apply.

The court quoted from Chitty at [13-014], which stated that:

“It is not necessary that the conditions themselves should be set out in the document tendered: they may be incorporated by reference, provided that reasonable notice of them has been given.”

Presumably, the court had also read the preceding sentence in Chitty, which pointed out that:

“Cases in which the notice has been held to be insufficient have been those where…on documents sent by fax, reference was made to conditions stated on the back, but those conditions were not in fact stated on the back or otherwise communicated.”

That point was supported by the Court of Appeal case Poseidon Freight Forwarding v Davies Turner, to which the court makes no reference.

The court’s decision on this point may well be right on the facts, but it is regrettable that it seems the issue was not aired at all.

Incorporation from another contract

By contrast, the court did look more closely at the question of how you approach incorporation from another contract altogether.

The law in that area has been unclear for some time, not least because in Aughton v MF Kent Services, the Court of Appeal judges seemed to disagree as to whether in those circumstances specific words were required relating to the incorporation of the arbitration clause itself (as per Sir John Megaw), rather than general words of incorporation (as per Ralph Gibson LJ).

The court in Barrier rightly noted that subsequent cases, such as Habas Sinai v Sometal and TTMI SARL v Statoil, seemed to prefer Sir John Megaw’s requirement for specific and clear wording.

However, the judge made no reference to other cases where that position has been doubted, such as in Stellar Shipping v Hudson Shipping Lines, which emphasised Christopher Clarke J’s misgivings in Hasbro to extending the principle beyond an established area. The recent Court of Appeal case Northrop v BAE Systems doubted that the Aughton line of cases did anything other than apply well-understood principles of construction. The editors of Russell on Arbitration Law consider the point to be “not entirely settled” [2-048], which looks about right to me.

The end result is that we are not much the wiser than we were, save for a further example of the court adopting the Sir John Megaw approach.

The most obvious lesson from the whole dispute is that in order to be certain of incorporating an arbitration clause, you would be best advised to make specific and clear reference to it.

Also, try to remember to send copies of both sides of your orders if you have put your terms and conditions on the back.

Hardwicke David Pliener

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