Incorporation by Reference: Focus on Arbitration Clauses

09-04-2014

Author: Niav O’Higgins, Tristan Conway-Behan



Arbitration Clauses

Judgments in two recent High Court cases dealing with the issue of incorporation by reference of arbitration clauses highlight that clarity is key in terms of contract formation. When seeking to incorporate terms into an agreement, whilst the accepted position is that general words of reference will be sufficient, the same general words should be evident as to the terms to which they relate. Clear as mud….then read on!

Incorporation by Reference – The Basics

The completion and execution of a formal written document encompassing all of the agreed terms governing the relationship between parties is something which is more often honoured in the breach than in the observance. The more usual scenario will involve an exchange of correspondence between the parties during which one or both parties may seek to incorporate their standard terms, or those contained within the standard forms of contracts provided by governing bodies such as Engineers Ireland/Royal Institute of Architects of Ireland, into a contract. This is an acceptable and efficient way in which to record the terms of an agreement between parties provided that the essential terms are agreed and the terms incorporated are clear in their effect.

Similarly, conditions usual in a particular trade may be incorporated where both parties are in the trade and aware that conditions are habitually imposed and of the substance of those conditions, even though they may not have been referred to at the time the contract was formed. A sequence of emails may be read together even if they do not, strictly, form part of a chain and further, where the later email does not expressly refer to the earlier emails.

However, parties should note that, in the cases of particularly onerous or unusual terms, the party putting forward the document will be obliged to demonstrate that the relevant term has been brought to the specific attention of the other contracting party. To quote Lord Denning:

“Some clauses which I have seen…would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.”

General Position

The accepted position is that general words of incorporation will be effective to incorporate a term(s) from another contract. In the construction context, the concept of incorporation by reference is often used to incorporate the terms of a main contract into a sub-contract.

In Ireland, the case of James Elliott Construction v. Irish Asphalt is instructive. In looking at the incorporation of an exclusion clause which was found within one of the party’s standard terms and conditions, Charleton J. applied a test of reasonable notice, noting:

“I approach the matter in that tradition-bound way because contracts are based upon what people agree. Any absence in agreement is not to be supplied by litigation and a court is not entitled to alter the plain wording of any agreement, save as required by statute or, in the rare case circumstances where that might be possible, by necessary implication. Each party to a contract, moreover, is to be judged as if that party is acting out of rational motives and expects the other side to act reasonably both in the performance of obligations and in the incorporation and construction of terms.”

There are no special rules as to the incorporation of arbitration clauses by reference in construction cases. The paramount issue for consideration in each case is whether, on a proper construction of the contractual documentation, the parties intended to incorporate the arbitration clause. However, the caveat must be added that, clear evidence of the parties’ intention to incorporate will be required where the arbitration clause is not specific to the contract in question.

The Recent Cases

In the first case, In the Matter of the Arbitration Act 2010 And In the Matter of an Intended Arbitration Between John G. Burns Limited (Applicant) And Grange Construction and Roofing Company Limited (Respondent), the respondent sought to incorporate the arbitration clause found within the standard Construction Industry Federation (“CIF”) form of sub-contract into the contract between the parties. Laffoy J. held that the respondent was unable to demonstrate, in any of the documentation determined by the Court as forming the basis of the sub-contract between the parties, that its contractual relationship with the applicant was governed by the CIF form of sub-contract. Accordingly, the Court held that there was simply no arbitration agreement in writing that could be binding on the applicant (main contractor).

The Court distinguished such cases as Lynch Roofing Systems v. Bennett & Son Limited, McCrory Scaffolding Limited v. McInerney Construction Limited and Barnmore Demolition & Civil Engineering Limited v Alandale Logistics Limited & Ors, on the basis that, in those cases specific references were made in documents found to underpin the contractual relationship between the parties to standard terms and conditions which included arbitration clauses.

In the current case, the Court found that the key contractual documentation neither contained an express reference to the CIF standard form of sub-contract, nor anything from which it could be implied that the intention was that the CIF standard form sub-contract would apply. Laffoy J. noted that the last of the four documents forming the sub-contract, a letter dated 19 January, 2010 (referred to by counsel for the applicant as the sub-contract and by counsel for the respondent as a contract document), contained the contract price, clarified the VAT position and stated:

“All other terms and conditions are based on all tender documents and post tender negotiations as per the letter of nomination dated 13 December, 2009, and as noted below.”

There followed what were described as “additional conditions relating to this order”, which numbered seventeen in total. It was accepted by the Court that, the respondent’s commencement of the sub-contract works was evidence of its acceptance of the terms set out therein. The Court noted that on a plain reading of the letter, in conjunction with the documents referred to within it, the terms of which were effectively incorporated in it, it seemed clear that the intention of the parties was that all the terms and conditions applicable to the parties’ relationship were to be found in the documents referred to in the letter and in the letter itself. None of these referred to the arbitration clause in the CIF standard form of sub-contract.

Mount Juliet Properties Limited v. Melcarne Developments Limited & Ors, [2013] IEHC 286

In this case, Laffoy J. found that the standard terms of SE 9101 and ME 9101 (both standard forms of appointment issued by Engineers Ireland) formed the basis of the respective relationships between the applicant consultants and respondent developer. In so finding, the Court held that the standard form of arbitration agreement contained within each of SE 9101 and ME 9101 applied to the separate contractual relationships between the parties and had been incorporated by general words of reference in correspondence between the parties.

In both cases, correspondence issued by each of the third and fourth defendants made specific reference to these standard terms of engagement and additionally, in the case of the fourth defendant, to the fact that its opinion on compliance would be in the standard industry form:

“Engineering services are provided in accordance with the standard conditions in Agreement SE 9101 as published by the Institution of Engineers of Ireland. Engineering Services include all necessary designs, specifications, drawings and schedules for the proper tendering and construction of the project. Monitoring of the construction will be carried out by visits of inspection in the normal manner. Form BRSE 9101 ‘Opinion on compliance with building regulations’ will be provided on completion of the engineering aspects of the works.”

In the case of the fourth defendant, the correspondence also set out the relevant fees, referred to an upcoming meeting and included a statement that the fourth defendant trusted that the details set out in the correspondence met the plaintiff’s approval. It was specifically noted that there was no ‘demurrer’ by the plaintiff to the fourth defendant’s correspondence. The fourth defendant proceeded to provide the relevant services.

The Opinion on Compliance, BRSE 9101, as issued by the fourth defendant also noted that it was for use where a consulting engineer is appointed under “Conditions of Engagement Agreement SE 9101”.

Clause 4.2 of SE 9101 provided for a right of either party to refer a dispute to arbitration.

The plaintiff’s position was that it was not aware of the terms of SE 9101 at any stage during the negotiations and, further, that the arbitration clause contained in Agreement SE 9101 was never sufficiently identified to make it a part of the agreement between the parties.

Similarly, initial correspondence from the third defendant made specific reference to the fact that its services would be based on the “Agreement ME 9101 in relation to Mechanical & Electrical Services” and intimated that the plaintiff should request any further information which it might require in this regard. Similarly, the plaintiff argued that it was unaware of the terms of ME 9101.

In the case of both the third and fourth defendants, the Court held that specific reference had been made to the basis upon which both parties would provide their services and, hence, the basis of the contractual relationship between them and the plaintiff. Having been put on notice of this, the plaintiff could not plead ignorance in seeking to avoid the arbitration clause in the standard conditions.

In making her decision, the Court referred to a decision of the High Court in Kastrup Trae-Aluvinduet A/S v. Aluwood Concepts Limited, in which McMenamin J. considered that the respondent in that case had been put on notice of the applicant’s general conditions, by virtue of a reference to the same in the first letter from the applicant to the respondent, and that it was open to the respondent to seek copies of those conditions but it had not done so.

The Court also referred to the decision of Leo Laboratories v. Crompton BV (a choice of jurisdiction case) and noted, in particular the following passage from the judgment of Fennelly J.:

“It is not in dispute that the plaintiff was on notice of the [defendant’s] standard terms and conditions…The defendant’s order confirmation referring to them was exhibited in the plaintiff’s own affidavit. Indeed the plaintiff purported to rely on standard conditions of its own. I am quite satisfied that O’Higgins J. was correct to conclude that the plaintiff was fixed with the general terms and conditions of sale. It was put expressly on notice of their existence and thus put on inquiry as to their terms.” [emphasis added]

Conclusion

Both recent High Court cases further affirm that general words of incorporation will be effective in incorporating an arbitration clause between parties to an agreement. However, parties should avoid having to rely on general references within their contractual documentation and should strive, at all stages, to be clear in recording the specifics of the agreement between them. It is always worth bearing in mind that some additional time spent around the formation of the contracts and accurately recording the relevant agreed terms, will be time better spent than in potential dispute at the far end, where it may fall to an arbitrator or court to interpret the intentions of the parties.

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