12 Feb 2019
“Is the Devil in the Detail?” was the title of Dr Melis Özdel’s Fifth CIArb Roebuck Lecture, back in 2015. In her talk, Dr Özdel taught us about the intricacies of the incorporation of arbitration clauses in maritime contracts, a subject that “has kept the minds of lawyers, judges [and arbitrators] busy for centuries.”[1] Indeed, knowing whether an arbitration clause was incorporated into a collateral contract or not is one of the most pressing questions facing an arbitral tribunal on a preliminary ruling on jurisdiction.
This issue is even more consequential in international arbitration, where there is no uniformity in the treatment of this point of law on a global level. As Dr Özdel points out, “this brings with it the risk of concurrent litigation and arbitration proceedings, as well as enforcement problems under the New York Convention.”[2] Different legal traditions treat the question in such a diametrically opposed fashion that, in practice, it might appear to arbitrators that reconciling them is but an impossible task.
One striking example of being oceans apart in dealing with the issue of incorporation of arbitration clauses is by a comparison between the English Law approach with that of Brazilian Law. As we shall see in more detail below, while English Law has treated the subject with the utmost care to its slightest details, Brazilian Law dealt with all the different situations in one fell swoop by the application of an old Roman maxim.
This exercise should at least serve the purpose of alerting arbitrators to keep a sharp lookout when ruling on the incorporation of arbitration clauses in collateral contracts. That will surely help to avoid problems of enforcement of the award in different jurisdictions. Caveat arbiter – arbitrators, beware!
Is the devil really in the detail…
English law, in fact, has developed the question of which terms of a contract are incorporated into another related contract to its highest levels of sophistication. For a start, the case law has developed in two branches on the issue: general contract law and maritime law.[3] There is no single approach to the question, as the correct test will vary depending on the branch of the law. For the sake of brevity, we will focus primarily on the maritime rules of incorporation, which mainly relate to which charterparty provisions are incorporated into a bill of lading.
One should never underestimate the gravity of the issue. A bill of lading, in the same fashion as a financial derivative contract, as we shall see below, is a negotiable instrument, capable of being transferred to a third party, which means that a bona fide purchaser for value of the bill can see him or herself bound to provisions that are contained in the main contract – the charterparty, which he or she has not negotiated and, for most of the time, has not even access to it. The arbitral tribunal, as a consequence, must be extra careful not to impose hidden liabilities on an innocent third party.
According to Dr Özdel, therefore, English maritime jurisprudence has developed a four-stage approach to determine the issue of incorporation: the first concerns a test of formality of the documents; the second is the so-called ‘description test’, by which one can decide which words are apt to incorporate charterpary provisions into a bill of lading; the third is to decide whether the incorporated provisions should be adapted to fit the general meaning of the bill of lading; and the fourth, finally, is to evaluate whether the incorporated provisions are consistent with the bill of lading.[4]
The kernel of the question is, in short, the ‘description test’. Dr Özdel stresses the fact that it is not a matter of pure construction as there is a common law limitation on which kind of words can aptly incorporate ancillary provisions, such as an arbitration clause.[5] The test was established by the early twentieth-century authority of Thomas v Portsea.[6] In that case, Lord Loreburn LC ruled that specific words were needed to incorporate an arbitration clause into a bill of lading, since it was not germane to the obligations of a charterparty.[7] Lord Gorell further explained that the meaning of this rule is to protect an innocent consignee of the bill that, in normal conditions, would not have agreed to arbitrate an issue in a place where he perhaps has no connections.[8]
Dr Özdel reminded that in general contract law the solution could be the reverse, with general words being sufficient to incorporate an arbitration clause.[9] In Habas Sinai ve Tibbi Gazlar Isthisal Endustri AS v Sometal SAL[10] , the issue involved a contract of sale with very general words of incorporation, stating that “all the rest will be the same as our previous contracts”. Mr Justice Clark made a distinction between “two-contract cases” and “single-contract cases”. In the former, such as a bill of lading, there might be third parties involved, who had no knowledge of the negotiations, whereas in the latter, the parties are dealing with readily accessible terms in a well-known market[11]. In such cases, for instance, when there are standard terms set or the parties have a long course of dealing between themselves, general words of incorporation would suffice.
In this very brief exposition, it becomes quite clear that, as a general rule, at least some reference to the arbitration clause of the main contract is necessary to incorporate that provision into the collateral contract. Which kind of reference would suffice to effectively incorporate the provision is a difficult point of law to be decided almost on a case by case basis, notwithstanding the vast array of authorities to format the discussion. In any case, it is clear that if the collateral contract made no reference to the arbitration clause of the main agreement it would be impossible to even think on incorporation.
… or in the lack thereof?
Under Brazilian law, however, the situation would be quite the reverse. A lack of reference in the collateral contract would not impede the incorporation of the arbitration clause of the main contract. In fact, even the presence of an exclusive jurisdiction clause in favour of the state courts would not suffice to bar the [almost] imposed incorporation.
That was precisely the ratio of a recent decision[12] of the Superior Tribunal of Justice (the highest appellate tribunal for non-constitutional matters) concerning a dispute over a contract of credit agreement, with an arbitration clause, between two leading financial institutions (BTG Pactual and Santander) and a major copper mining company (Paranapanema SA). The credit was paid by the issuing of shares in favour of the lenders. The parties, at the point of payment, entered into stock swap contracts, to hedge the banks in case of devaluation of the shares. The swap contracts had an exclusive jurisdiction clause in favour of the state courts.
A dispute in the exercise of the swap options arose and the lenders submitted the matter to arbitration. The borrower appealed to the court submitting, among other points, that 1) the arbitration clause of the credit agreement could not be automatically incorporated into the swap contracts and 2) the contracts had an exclusive jurisdiction clause in favour of the state courts which would bar the incorporation of the arbitration clause.
The Presiding Judge, Minister Paulo de Tarso Sanseverino, dismissed both points. Concerning the first, His Excellency ruled that according to arts. 112 and 113 of the Brazilian Civil Code, collateral contracts should be construed as a unity, having in mind the economic objectives of the parties. Minister Sanseverino concluded, therefore, that by the application of the Roman maxim of assessorio sequitur principale - the accessory follows the principal, the swap contracts, as accessories to the main credit agreement, should follow the latter’s system for dispute resolution.
Concerning the second point, further, His Excellency explained that the jurisprudence of that Superior Tribunal understands that, as a consequence of the competence-competence principle, an arbitration clause overrules an exclusive jurisdiction clause, with few exceptions, such as a challenge on the validity of the award and questions of public policy[13].
Minister Luis Felipe Salomão, however, in a dissident vote argued that an arbitration clause should not be automatically incorporated without due consideration to the will of the parties[14]. His Excellency noted that in accordance to art. 4º of the Brazilian Law of Arbitration, a valid arbitration clause must be in writing. Since an arbitration clause has the effect of ousting the jurisdiction of the courts, one should not infer it lightly. Such renunciation, thus, should only be made under clear and written manifestation of the parties[15].
The decision of the majority, it is submitted, follows an automatic application of a Roman maxim, that, as the dissident vote rightly noted, without due consideration to the subtleties of each concrete case, would end up by trumping the will of the parties. The decision, moreover, did not consider – as English law does at great length – its effects on innocent third parties. As swap contracts are negotiable instruments, an innocent purchaser for value of the options run the risk of being dragged into a dispute resolution clause of whose existence he had absolutely no previous knowledge. Or, worse still, an “equity’s darling” might discover that he is bound by an arbitration clause drafted in way in which he has no control of the composition of the tribunal, the seat of the arbitration or the procedural law. Caveat emptor…
Conclusions
The issue of incorporation of arbitration clauses is indeed of the most difficult questions of law facing an arbitral tribunal. If the central point here is the need for certainty in commercial relations, English law risks an overkill as all the possible details are treated with the utmost attention by the authorities, making it difficult sometimes to distinguish the concrete situation on hand. Brazilian law, on the contrary, risks being superficial, putting the interests of honest third parties in jeopardy by a lack of sophistication on the treatment of the matter.
As Bingham LJ in The Federal Bulker[16] rightly pointed: “this is indeed a field in which it is perhaps preferable that the law should be clear, certain and well understood than it should be perfect.”[17] In this sense, although imperfect, English law seems to be preferred as there is clear, certain and well understood precedents to be followed. Here a lack of detailed authority on the point might be a source of greater evils. The worst devil seems to be indeed in the lack of detail.
Paulo Fernando Pinheiro Machado FCIArb is a diplomat and arbitrator, Managing Partner of Pinheiro Machado & Co in Brazil.
[1] Melis Özdel, “Is the devil in the detail? A maritime perspective on incorporating charterparty arbitration clauses: the fifth annual CIArb Roebuck Lecture 2015”, Arbitration 2015, 81(4), 389
[2] Ibid, 397
[3] Ibid, 390
[4] Ibid
[5] Ibid
[6] Thomas TW & Co Ltd v Portsea Steamship Co Ltd [1912] A.C. 1
[7] Ibid, 7
[8] Ibid, 8
[9] Melis Özdel, “Is the devil in the detail? A maritime perspective on incorporating charterparty arbitration clauses: the fifth annual CIArb Roebuck Lecture 2015”, Arbitration 2015, 81(4), 391
[10] [2010] EWCA 29 (Comm)
[11] Melis Özdel, “Is the devil in the detail? A maritime perspective on incorporating charterparty arbitration clauses: the fifth annual CIArb Roebuck Lecture 2015”, Arbitration 2015, 81(4), 391
[12] Recurso Especial Nº 1.639.035 – SP (2015/0257748-2), published on 15 October 2018.
[13] Ibid, 24
[14] Ibid, 40
[15] Ibid, 41
[16] [1981] 1 Lloyd’s Rep 103
[17] Ibid, at [65]