Note of the lunch held at Holman Fenwick & Willan
Monday, 14 March 2005

Graham Perry chaired the lunch. There were two topics:

1. Which law applies to the question of whether there is a valid contract?
2. Case management: accommodating hearing dates and avoiding adjournments.
The first topic was introduced by way of a presentation by John Rollason of HFW and the second was introduced by Graham Perry. Contributions were made to the discussions by many of the participants who included arbitrators, lawyers and representatives of trade associations.
1. Which law applies to the question of whether there is a valid contract?
John Rollason explained that this topic had been prompted by a recent Commercial Court decision arising out of a GAFTA arbitration, Continental Enterprises Ltd v Shandong Zhucheng Foreign Trade Group Co [2005] EWHC 92 (Com), a case in which HFW had represented one of the parties.
When arbitrators have to determine the question of whether they have jurisdiction (Section 30 of the Arbitration Act 1996), they can be faced with the sometimes difficult question of which law, or laws, governs the validity of the contract. Normally contracts containing an arbitration clause will also contain a proper law clause. The law so chosen (the "putative law of the contract") will govern questions of interpretation, existence and material and formal validity (Rome Convention Articles 3.1, 8, 9 and 10.1). However, such questions as capacity, illegality and agency may be governed by a different law.
Capacity: questions involving the status or legal capacity of natural persons and questions governed by the law of companies such as legal capacity are excluded from the Rome Convention (Article 1.2). Under English common law conflicts principles, questions of corporate capacity are governed by the constitution of the corporation, which in turn is governed by the law of the place of incorporation.
In CEL v Shandong Zhucheng, the Respondent was a Chinese corporation and it was common ground that questions of capacity were governed by Chinese law. The Judge decided that the Respondents' articles of association did not permit them to engage in foreign trade and the contract was therefore void for lack of capacity.
Illegality: questions of material validity are governed by the putative law of the contract but there is also an English law principle that where an act required to be performed in a foreign country becomes illegal under a provision of that country's law, the contractual obligation to perform that act is discharged. In CEL v Shandong Zhucheng, the Judge did not make a final decision on whether Chinese law was relevant because he found that under either Chinese or English law the contract in question was not contrary to public policy.
Agency: excluded from the scope of the Rome Convention (Article 1.2(f)). According to English common law conflict of laws principles, the question of whether one party (an agent) can create contractual relations on behalf of another (a principal) is governed by the law applicable to the relationship between those parties.
Contributions from the floor included the following:
- Venue for the arbitration and whether the law of that venue might apply. John Rollason pointed out that in the CEL v Shandong Zhucheng case, the arbitration hearing was held in Hong Kong, although the "seat" of the arbitration remained in England. It was pointed out that Trade Association Arbitration Rules can make a distinction between venue for the hearing and the seat of the arbitration.
- Questions of whether a contract has been validly made can sometimes arise where there is a series of contracts for goods by instalment. One contract may be signed, another not. The dispute could be a difficult one with questions being raised about whether there had been a "fair hearing" etc.
- The onus must be on a party to check that its counter-party has capacity to enter into the contract. Chinese parties often raise incapacity as a defence. Parties should check the local requirements for signing contracts.
- There was a question as to whether the trade associations could keep registers of whether companies had capacity to enter into contractual relations but this must ultimately be a question of the applicable law and not one for associations.
- An arbitrator referred to a case in which the Tribunal had looked at the Rome Convention rules to determine whether the parties had agreed to make a contract. The question of applicable law did not arise.
- From the practical point of view of traders, it made little sense for it to be decided that a company did not have capacity when the traders involved had obviously intended that the trade would be done. However, it was a question of objective analysis whether a company did in fact have capacity.
- Arbitrators had to be careful in making decisions under foreign law if, for example, a question of capacity had to be addressed under foreign law. Decisions could be appealed under Section 69.
- An arbitrator gave an example of a dispute between a Turkish company and a Turkish subsidiary of a foreign company. The arbitrators decided that English law applied to the validity of the contract but the Court on appeal decided that Turkish law applied because both companies were Turkish.
- No easy answer. The legal maxim "it depends" applied.
A copy of John Rollason's note is attached.
2. Case management: accommodating hearing dates and avoiding adjournments
Graham Perry introduced this topic, pointing out that arbitrators faced a common dilemma: setting a hearing date late could give rise to delay in the conduct of the arbitration whereas setting it too early could make it difficult to manage the procedure up to that date.
Amongst the contributions addressing this question were the following:
- A trade association administrator said that parties liked to have the hearing dates fixed in advance and the Association made efforts to maintain the dates that were fixed.
- Another arbitration organiser said that an advantage of fixing a hearing date early was that steps could be taken to progress the arbitration smoothly up to that date. If an adjournment was required, so be it.
- It was suggested that problems could be reduced if the hearing date was fixed only after submissions had been exchanged.
- On lawyers being asked for their views, one repeated the maxim "it depends". It was a matter of individual judgment in a particular case. Occasionally, a client might wish to spin an arbitration out for its own reasons.
- Another lawyer made the point that strict timetables were not necessarily in the commercial interests of the parties, for example, where another set of proceedings was also involved. Some flexibility could be required.
- An arbitrator made the point that arbitrators have to serve both parties and could not expedite cases to the extent that they might wish to. The parties had to be given reasonable opportunities to deal with procedural matters.
- Another arbitrator gave an example of a case where one party had deliberately delayed matters and mismanaged its side of the case in order to gain a commercial advantage.
- Different arbitral institutions have different rules and it is for the parties to know which rules apply.
- Case management at first tier in commodity arbitrations can be fairly straightforward. It is at the appeal stage that difficulties can arise in relation to hearings with parties coming from abroad and the diaries of three or five arbitrators having to coincide. Proceedings can be speeded up by not allowing lawyers to attend a hearing.
- Some rules allow a claim to be renewed on an annual basis with case management only coming into play after Claim Submissions have been served. The effect of Section 41 of the Arbitration Act 1996 (powers of Tribunal in case of party's default, including strike out for delay) had not yet been decided in relation to rules allowing for the annual renewal of claims.
The Chairman closed the discussion by thanking all participants for their attendance and contributions and by thanking HFW for their hospitality.

TALK FOR ARBITRATION CLUB LUNCH
by JOHN ROLLASON
FIXED FOR 14TH MARCH 2005

Is the contract valid? Which law applies?

Commercial arbitrators often find that a Respondent's first (and sometimes only) defence to a claim is an argument that there is no contract between the parties. The consequence of this is twofold. First the Respondent has no performance obligations under the non-existent contract, and secondly the tribunal have no jurisdiction to determine the issues between the parties (unless the Arbitration Agreement is a separate, severable agreement which has an independent existence beyond that of the contract).

Arbitrators are given the power to determine the question of whether they have jurisdiction (subject to review by the Court) under Section 30 of the Arbitration Act 1996. Although the parties can go straight to the Court on this question (under Section 32) they commonly ask the arbitrators to decide the question of jurisdiction.

The arbitrators are then faced with the sometimes difficult question of which law, or laws, governs the issue of the validity of the contract. This issue has been thrown into relief recently by a Commercial Court decision arising out of a GAFTA arbitration, Continental Enterprises Limited v. Shandong Zhucheng Foreign Trade Group Co. [2005] EWHC 92 (Comm).

Normally contracts which contain an arbitration clause will also contain a proper law clause. If a case is before GAFTA or FOSFA arbitrators then it will usually be subject to English law by virtue of incorporation of the GAFTA or FOSFA standard terms.

English Law is therefore the putative law of the contract, and consequently governs questions of interpretation and the existence and material and formal validity (Rome Convention Articles 3.1, 8, 9 and 10.1).

The story doesn't end there. Even though questions of validity of a contract are in principle governed by the putative law of the contract, in some circumstances those questions will in effect by governed by a different law. One needs to look at the reason why it is asserted that the contract is invalid. In CEL v. Shandong Zhucheng, it was argued that the contract was invalid for two reasons. First because the Respondent lacked the capacity to enter into the contact, and secondly because the contract was illegal. A third argument was based on agency.

1. Questions of capacity
The Rome Convention applies the law chosen by the parties to all questions concerning the contract except to the extent that contrary provision is made in the Convention (Article 3).
Questions of capacity are excluded from the scope of the Convention in two circumstances. The Convention does not apply to:
(a) Questions involving the status or legal capacity of natural persons (Art. 1.2(a))
(b) Questions governed by the law of companies….such as the creation by registration or otherwise, legal capacity, internal organisation or winding up of companies….and the personal liability of officers and members as such for the obligations of the company…..(Article 1.2(e)).
The first exclusion is unlikely to be of relevance to commercial contracts since it relates only to natural (as opposed to legal) persons. The second is designed to exclude questions concerning internal corporate affairs.
Under English common law conflicts principles, questions of corporate capacity are governed by the constitution of the corporation and by the proper law of the contract (Dicey and Morris Rule 154, page 1109).
All matters concerning the constitution of a corporation are governed by the law of the place of incorporation. This is one way in which one gets to the foreign law.
In CEL v. Shandong Zhucheng, the Respondent was a company incorporated in China. It was common ground that questions of capacity were governed by Chinese law. The Judge heard evidence from expert witnesses on Chinese law. The contract was a contract for purchase of a large quantity of soyabeanmeal CIF Chinese ports. The Judge decided that the Respondents' articles did not permit them to engage in foreign trade, and therefore the contract was void for lack of capacity.
2. Questions of illegality
By contrast the Judge rejected an alternative argument advanced on behalf of the Respondents that the contract was void for illegality.
This issue was governed by English law. Article 8 of the Rome Convention provides that questions of material validity are governed by the putative law of the contract (here, English law). However, again Chinese law was arguably relevant. The Claimants conceded that it is sometimes said that there is an English law principle that where an act required to be performed in a foreign country becomes illegal under a provision of that country's law, the contractual obligation to perform that act is pro tanto discharged (e.g. Benjamin 25-112, footnote 90). It is uncertain to what extent that principle has survived the Rome Convention (Dicey and Morris 32-145).
The Judge did not make a final decision on whether Chinese law was relevant, as he found that under either Chinese or English law the contract in question was not contrary to public policy. The Respondents argued that it was contrary to public policy because it contemplated an illegal act (i.e. the import of goods by a company which did not have the capacity to do so). The Judge rejected this argument, saying that the default lay in regard to non-compliance with the foreign trade licence system, rather than breach of some form of absolute prohibition.
3. Questions of agency
CEL and Zhucheng provides a further illustration of the way in which the issue of whether there is a valid contract between two parties can, even where that contract is governed by English law, ultimately be determined in accordance with a foreign law.
The purchase contract was originally made between CEL and Zhucheng GroupCo. Before performance of the first shipment under the contract the Respondents requested that a separate entity, Zhucheng Foreign Trade Company, be substituted as buyer in order to facilitate the opening of a Letter of Credit. One of the issues between the parties was whether Zhucheng Foreign Trade Company acted as agent of Zhucheng GroupCo, or as a principal in its own right.
It was common ground that questions of agency as between Zhucheng GroupCo and Zhucheng Foreign Trade Company were governed by Chinese law.
The question whether "an agent is able to bind a principal" is excluded from the scope of the Rome Convention (Article 1.2(f)), so English common law conflict of laws principles must be considered.
The question of whether one party (an agent) can create contractual relationships on behalf of another (a principal) is governed by the law applicable to the relationship between those parties although the third party with whom the contract is made may also be able to take advantage of any additional rules (on ostensible authority) provided by the law governing the contract between the agent and the third party (Dicey and Morris 33-425 – Ruby SS v Commercial Union (1933) 150 LT 38 (CA)).
The Judge found that Zhucheng Foreign Trade Company acted as a principal, and not as an agent. He therefore found that there was no valid contract between CEL and Zhucheng Group Co.

John Rollason