In the recent decision of Habas Sinai Ve Tibbi Gazlar Istihsal Andustrisi AS and VSC Steel Company Ltd  EWHC 4071 (Comm), the English Commercial Court summarised the guidance provided in Sulamérica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A  EWCA Civ 638 (Sulamérica) and Arsanovia Ltd v Cruz City 1 Mauritius Holdings  2 All ER 1 (Arsanovia) and applied those principles to determine the law of the arbitration agreement. It further added that the terms of the arbitration agreement may themselves indicate an implied choice of law of that arbitration agreement.
The Court rejected the argument that it should disregard the chosen seat included in the arbitration agreement when considering the law with which the agreement had its closest connection, on the basis that the Claimant’s agents exceeded their actual authority when agreeing to the arbitration agreement. For a number of reasons, the Court found that, even if it was the case that there was no actual authority to agree the London arbitration clause, the applicable law of the arbitration agreement would be English law.
A dispute arose between Habas, a Turkish company and VSC, a Hong Kong company in relation to a contract for the sale and purchase of steel. Two companies, Charter Alpha Limited and Steel Park Limited, acted as agents for Habas in its negotiations with VSC. The contract which was ultimately concluded provided for no applicable law to the substantive contract or to the arbitration agreement, but provided for arbitration in London.
No delivery of steel was made and VSC commenced arbitration proceedings claiming damages pursuant to the London arbitration agreement. The Tribunal concluded that it had substantive jurisdiction and that Habas’ agents had ostensible authority to conclude the contract and the arbitration agreement; there was a binding contract made containing a binding arbitration agreement.
Habas challenged the jurisdiction of the Tribunal and its Award pursuant to section 67 of the Arbitration Act 1996 on the grounds that the Tribunal erred in finding that there was a binding arbitration agreement because: (i) there was no binding consensus on the terms of the London arbitration agreement; and (ii) Habas’ agents had known that it would only accept a Turkish law contract which provided for arbitration in Turkey and they did not have actual or ostensible authority to conclude the London arbitration agreement on behalf of Habas.
The Court dealt quickly with this argument and found that all the terms of the contract had been agreed by VSC and Habas’ agents. There was a binding consensus on the terms of the London arbitration agreement.
Applicable law of the arbitration agreement
The Court reaffirmed the principles for determining the applicable law of the arbitration agreement which were set down in Sulamérica and considered in Arsanovia. The Court summarised the “guidance” provided by these cases (see diagram below), including the three stage test set out in Sulamérica that the proper law is to be determined by undertaking a three stage enquiry into: (i) express choice; (ii) implied choice; and (iii) the system of law with which the arbitration agreement has the closest and most real connection. The Court added that the terms of the arbitration agreement may also indicate an implied choice of law of the arbitration agreement. It referred to the cases of Cie. Tunisienne v Cie d’Armement  A.C. 572 and Egon Oldendorff v Liberia Corp  1 Lloyd’s Rep 380, which recognised that such terms may operate as an implied choice of law for the substantive contract. The Court reasoned that, where the terms of an arbitration agreement do operate as an implied choice of the law of the substantive contract, they must equally operate as an implied choice of law for the arbitration agreement itself.
Having applied these principles, the Court found that the applicable law of the arbitration agreement was the law of the country of the chosen seat, i.e. English law.
For multiple reasons, the Court rejected Habas’ “novel” argument that the chosen seat should be ignored when applying the closest connection test as their agents had exceeded their actual authority when agreeing to London arbitration. The Court held that there is no logical or principled link between the issue of authority and the issue of the law with which a contract has its closest connection. Determining the latter question involves a consideration of the terms of the contract as made, rather than the authority with which it was made. The Court held that it would potentially make major and uncertain inroads into the well-established common law doctrine that validity of a contract is determined by the putative proper law of the contract. It would mean according special treatment to actual authority for conflicts of law purposes, but as a matter of English law, actual authority is not a stronger or more effectual form of authority than ostensible authority. As between principal and third party there is no difference between actual and ostensible authority. The Court found that Habas’ agents had ostensible authority to agree to the London arbitration agreement and that Habas had not shown that the agents had no actual authority to enter into the arbitration agreement; even if it was the case that there was no actual authority to agree the London arbitration clause, the applicable law of the arbitration agreement would be English law.
Drawing together the principles of guidance which the Court expressed to take from Sulamérica and Arsanovia, it is clear that the outcome of the application of the three stage test laid down in Sulamérica may be unpredictable. It will depend on whether there is an express choice of law of the matrix contract; whether there is a choice of seat in the arbitration agreement (and whether this is different to the express choice of law of the matrix contract), and whether there are any other “sufficient factors” which may displace an attempt to imply a choice of law on the basis of the chosen seat and lead to application of the third limb (the “closest connection” test):
The case again highlights the importance of expressly including a governing law clause in the arbitration agreement in international contracts.
The decision is also noteworthy because of its treatment of the question of the validity of the arbitration agreement. The Court held that the applicable law of the putative agreement must be examined before any question of the validity of the agreement should be considered; it refused to exclude consideration of the clause allegedly agreed in excess authority when such clause was necessary to determine the applicable law.
For more information, please contact Nick Peacock, Partner, Harry Ormsby, Associate or Hannah Ambrose, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.