Parties’ Consent as an Essential Element of Arbitration Agreements

The year 2020 was quite challenging for the Ukrainian soft commodities market due to various factors, primarily the drought which significantly affected  crop production in Ukraine. The imposition of COVID-19 restrictions by the Ukrainian government also had a negative impact on the market. In these circumstances, many contracts on the sale of Ukrainian commodities were under threat of supply failure.

It is commonly acknowledged that a considerable part of Ukrainian soft commodities deals is based on standard forms of contracts developed by GAFTA (Grain and Feed Trade Association) and FOSFA (Federation of Oils, Seeds and Fats Associations Ltd). All of these forms contain an arbitration clause under which all disputes under the contracts are to be resolved in accordance with the rules of the corresponding organization. Another feature of standard contracts is that they are governed by English law.

By concluding a contract based on a standard form, the parties expect that their dispute, if any, will be resolved by the relevant arbitral institution in a competent and effective manner. However, sometimes they fail to duly agree to refer their differences to arbitration. In this regard, due to the lack of substantial jurisdiction, parties lose an opportunity to submit their claims to an arbitral tribunal under GAFTA or FOSFA arbitration rules, but have to apply to a state court instead, which may be more costly and time-consuming.

The recent case law of English courts shows that the conclusion of arbitration agreements and, consequently, its binding effect is an issue of sometimes nonunified approaches. One of the last judgments relating to this matter in Black Sea Commodities Ltd v Lemarc Agromond Pte Ltd [2021] EWHC 287 gave rise to active discussion among lawyers and professional commodity traders.

General Provisions on Arbitration Agreements in English Law

General issues of arbitration agreements in English law are regulated by the Arbitration Act 1996, based mainly on the UNCITRAL Model Law on International Commercial Arbitration. Its section 6 defines an arbitration agreement as an agreement to submit to arbitration present or future disputes (whether contractual or not). The reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.

Section 5 of the Arbitration Act 1996 establishes that the arbitration agreement must be in writing in order to be effective. However, the term “written agreement” is broadly construed. The section provides that there is an agreement in writing in the following cases:

•  if the agreement is made in writing (whether or not it is signed by the parties),
•  if the agreement is made by exchange of communications in writing, or
•  if the agreement is evidenced in writing.

In addition, section 5 sets out two cases where an agreement made otherwise than in writing equates with a written one. First, where parties agree otherwise than in writing by reference to terms in writing. Second, an agreement is evidenced in writing if an agreement made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties to the agreement.

The section further specifies that references to anything being written or in writing include its being recorded by any means.

Finally, it is established that an exchange of written submissions in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another party and not denied by the other party in its response constitutes as between those parties an agreement in writing to the effect alleged.

The outlined approach to an arbitration agreement is in line with Article II of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. The latter provides that each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

When concluding an arbitration agreement, the doctrine of separability of arbitration agreement should also be taken into account. As set out in section 7 of the Arbitration Act 1996, unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.

Relying on the provisions of the Arbitration Act 1996, English courts support the pro-arbitration approach and tend to interpret arbitration clauses in broad terms.

As may be seen from the provisions given above, parties may agree to arbitrate by any of the determined ways. However, to record a reference to arbitration does not necessarily mean concluding an arbitration agreement.

Consent as a Fundamental Concept in Arbitration

According to the classical definition, arbitration is a consensual dispute resolution mechanism. As Lord Hoffman said in Premium ­Nafta Products Ltd (20th Defendant) & Ors v Fili Shipping Company Ltd & Ors [2007] UKHL 40 at [5], “[a]rbitration is consensual. It depends upon the intention of the parties as expressed in their agreement”. That is why particular importance is attached to the consent of parties while concluding an arbitration agreement.

Hence, to conclude an arbitration agreement, the parties must express their consent to it. They can do this in different ways: it can be expressed by promise, conduct, or performance. In any case, as Professor Gary Born noted, the parties must sufficiently manifest their consent to the separable arbitration agreement, regardless of their consent to the underlying contract.

In practice, however, parties usually focus on the terms they consider essential for their contracts, such as description, quantity, and price of goods, and pay less attention to other terms. It is even more so in commodity trading, where a contract can be concluded by the exchange of emails. Neglecting an arbitration clause may lead to losing parties’ opportunity to refer their dispute to arbitration, as was in the case described below.

Consensus to Arbitrate Must Be Clearly Expressed

In Black Sea Commodities Ltd v Lemarc Agromond Pte Ltd, a dispute arose as to whether there was a binding arbitration agreement in place between the parties. The negotiations between them were conducted by exchange of emails containing draft conditions through a broker during the period 9 to 14 March 2018. In a series of communications between them, which was called the “pick and mix” approach, the parties agreed on certain terms (quantity, price, delivery period, etc.). By 14 March, the NOR spread was only one issue to which the defendant had not agreed. Interestingly enough, the parties did not dispute the arbitration clause; however, it appeared later, after 9 March. In any case, a formal contract had never been executed and signed by the parties.

According to the claimant’s submission, there was neither a binding contract of sale nor an arbitration agreement. He further claimed that if, contrary to his contention, there was a binding contract of sale, it did not contain a GAFTA or any arbitration clause, and that although, in the draft conditions which the claimant’s agent sent to the defendant, a GAFTA arbitration clause was included, those draft conditions were never agreed, and there was no consensus ad idem when the negotiations broke down.

The defendant’s primary case is that there has been a binding agreement, varied/supplemented by agreement as to a GAFTA arbitration clause by virtue of the subsequent exchanges between the parties. He made it clear that his case was not about whether an arbitration clause had initially been agreed, but that subsequently, in the exchange of draft conditions, whereas there was a dispute about other terms, there was no dispute as to the GAFTA clause. So that the arbitration agreement became binding, either by virtue of a variation of the contract or as an independent agreement.

The defendant relied on the definition of separability of an arbitration agreement in Section 7 of the Arbitration Act 1996 and the obiter dicta of Lord Hoffmann in Fiona Trust v Privalov [2007] Bus LR 1719 at [10], whereby he referred, in the context of construction of contract, to the fact that “businessman frequently do want the question of whether their contract was valid, or came into existence, or has become ineffective, submitted to arbitration and that the law should not place conceptual obstacles in their way”. So here, the Court should not place conceptual obstacles arising out of a strict interpretation of offer and acceptance in the way, when, as he submits, the parties intended to be bound by the GAFTA arbitration clause.

Having held in favor of the claimant, the High Court stated that even if there had initially been a binding agreement in place between the parties on 9 March, the GAFTA arbitration clause was not one of the terms set out, and it was not agreed then or by virtue, or in the course, of the ensuing abortive exchange of draft conditions, whether by “pick and mix” or progressive supplementation or silent agreement by conduct.

In response to the defendant’s reference to the separability of an arbitration clause under section 7 of the Arbitration Act 1996, the High Court noted that to take the benefit of this the defendant must show that the arbitration agreement was the subject of consensus even if the underlying agreement was not, or he must show that it was incorporated into the underlying agreement by a variation. He must establish, therefore, that the clause was agreed by virtue of its being included in the draft conditions and not rejected by the parties when other conditions were rejected.

It is also of interest that the High Court found insufficiently certain a term that there would be “provision for GAFTA arbitration”. In this regard, the Court indicated that the arbitration clause in the draft conditions was not as per GAFTA 49.

Finally, the High Court stated that particularly in the absence of prior dealing, an arbitration agreement cannot be implied without any reference “in an agreement to a written form of arbitration clause or to a document containing an arbitration clause” as required by section 6(2) of the Arbitration Act 1996.

Departure from the Pro-Arbitration Approach

The decision in Black Sea Commodities Ltd v Lemarc Agromond Pte Ltd may be viewed as a certain departure from the pro-arbitration approach adopted by English courts. According to the latter, arbitration agreements are to be given effect wherever possible. It should be noted that the Arbitration Tribunal appointed under the GAFTA Rules determined that it had jurisdiction over the dispute.

In the present case, it was concluded that there was no arbitration agreement due to the lack of consensus among the parties on this matter. The court was not convinced by the defendant’s argument that the claimant did not expressly object to the arbitration clause.

It appears that the court’s conclusions must be taken into consideration by professional traders and other commodity market participants. In practice, the parties to an arbitration agreement are advised to ensure they have reached a clear consensus to refer their disputes to arbitration. During the contracting process, references to the GAFTA or FOSFA standard forms of contracts, while included in the underlying agreement, need to be specific in order to avoid any uncertainties.