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Drafting Arbitration Clauses - A Trap for the Unwary?


Arbitration clauses, along with boiler plate provisions and the like, are often drafted at the last minute - after long nights of commercial negotiations they are rarely given the attention they deserve. A typical solution is to use one of the model arbitration clauses that are readily available on the websites of arbitral institutions. These have the effect of incorporating the entire arbitration rules of the particular institution (or, in some cases, UNCITRAL Rules) and the effects of the incorporated arbitral rules are rarely considered in any great detail.

The recent case of Econet Satellite Services Limited v Vee Networks Limited is a recent example of one effect of incorporating UNCITRAL Arbitration Rules (the "Rules") which may well come as a surprise to those not familiar with the details of such Rules. In this case, an arbitral tribunal and the English Commercial Court considered whether the inclusion of the UNCITRAL Rules in an arbitration clause prevented a party from relying on set-off in defence to a claim - an equitable remedy available under English law. Both the tribunal and the Commercial Court found that the UNCITRAL Rules did prevent set-off unless the set-off arose under the same contract.

The issue

Econet provided satellite services for the mobile telephone and internet industry. It entered into a series of contracts (the" Main Contract") with Vee, a Nigerian telecoms company establishing a network in Nigeria, to provide satellite and voice termination services. The Main Contract incorporated Econet's standard terms and conditions, was governed by Danish law, and contained an arbitration provision stipulating ICC Rules and Copenhagen as the seat of arbitration. Sometime later, the parties entered into a further contract, the Voice Traffic Termination Rate Agreement (the "VTTRA"), under which the parties would each provide certain telecoms services between London and Nigeria. The governing law was English law and any disputes arising under the VTTRA were to be determined by arbitration in accordance with the Rules.

Vee invoiced Econet some US$12,OOO,OOO under the VTTRA but Econet only paid US$2,500,OOO. Vee commenced arbitration proceedings for the balance and an arbitral tribunal (the "Tribunal") was established pursuant to the terms of the VTTRA. Econet effectively admitted the claim, but by way of a defence sought to rely on transaction set-off such that it would be able to set-off sums due to it under the Main Contract against the sums claimed under the VTTRA. Transaction set-off is an equitable remedy under English law that permits a party to set-off against a debt under one contract. sums due to it under other contracts in the same, or a closely related, transaction. It is frequently distinguished from an independent set-off which relates to a counterclaim under a wholly separate transaction.

Vee disputed the Tribunal's jurisdiction to determine the alleged transaction set-off. Vee contended that transaction set-off was expressly prohibited by Article 19.3 of the Rules, which states, "In his statement of defence ... the respondent may make a counter-claim arising out of the same contract or rely on a claim arising out of the same contract for the purpose of a set-off" .

Econet argued that, whenever a contract is governed by English law, any claim under the contract can be met with the defence of transaction set-off based on a different contract, irrespective of the provisions of the arbitration clause of the contract and alternatively that on their true construction, the Rules did not restrict the right of transaction set off.

The Tribunal determined as a preliminary issue that it did not have jurisdiction to determine the issue of transaction set-off on two grounds:

  1. By a majority, that the arbitration clause pursuant to which the Tribunal had jurisdiction over Vee's claim was not sufficient to establish jurisdiction over the alleged set-off.
  2. Unanimously, that Article 19.3 of the Rules excluded any right of transaction set-off.

Econet sought relief from the Court under sections 67, 68 and 69 of the Arbitration Act 1996.

UNCITRAL Rules trump the governing law

The Court upheld the Tribunal's unanimous decision that Article 19.3 expressly excludes any right of transaction setoff. The Court emphasised that, as the parties had agreed to incorporate the Rules into the VTTRA, those Rules would apply as provisions of the contract. The Rules contain an express limitation on the matters which can be dealt with in an arbitration concerning the VTTRA. The Court rejected Econet's submission that transaction set-off is a matter of substantive law such that it should apply regardless of the terms of the arbitration agreement and the Rules. To allow a transaction set-off would be contrary to the provisions of the VTTRA and the Rules.

Whilst the Court acknowledged that there was "a certain tension" between the English law clause and arbitration clause in the VTTRA, it found that there is no rule that the governing law of the contract is to prevail over any conflicting procedural rules. A contract should be construed by the words used by the parties, including any provisions incorporated into the contract.

The Court considered the issue of whether transaction setoff could be available where a tribunal did not have jurisdiction over the other contracts. Econet relied on Aectra Refining and Manufacturing Inc v Exmar NV and Ronly Holdings Ltd v JSC Zestafoni G Nikoladze Ferroally Plant where the courts had indicated that transaction set-off could be raised as a defence even though the set-off arises under another contract outside the court or tribunal's jurisdiction. The Court disagreed: it considered that the comments and observations made by the courts could not be applied to the case before it. The Court held that, unlike the jurisdiction of an English court, an arbitral tribunal's jurisdiction is dependent on the scope of the arbitration agreement. Accordingly, whether the tribunal has jurisdiction over a set-off depends on the true construction of the arbitration agreement. In this case, Article 19(3) of the Rules did not permit transaction set-off and therefore Econet's application failed.

The Court also rejected submissions by made by Econet in relation to two other Articles in the Rules:

  1. Article 1 (2): "These Rules shall govern the arbitration except that where any of these Rules is in conflict with a provision of the law applicable to the arbitration from which the parties cannot derogate, that provision shall prevail". The Court held that reference to the "the law applicable to the arbitration from which the parties cannot derogate" was a reference not to the governing law but to the procedural law governing the forum (see section 4 and schedule 1 of the Arbitration Act).
  2. Article 33(3): "In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction". The Court held that Article 33(3) does not give the law of the contract precedence over procedural rules relevant to determining the jurisdiction of the Tribunal.

The Court refused to decide the question of whether, in the absence of the provision in the Rules, it would have held that the defence of transaction set-off was excluded from the tribunal's jurisdiction by the terms of the arbitration clause.

Analysis

The importance of this case is that in circumstances in which a party would normally expect to rely on a remedy of transaction set-off under English law, that right is removed if the procedural rules governing the arbitration, incorporated by reference in the contract, say otherwise. In large commercial transactions involving numerous related contracts between two parties, the implications are potentially significant. If the applicable arbitration rules provide that only set-off under the same contract is permitted, a party who otherwise has a good transaction set-off defence to a claim will have to pay up. It will then be in the unenviable position of having to bring separate actions for the repayment of sums due to it under the other closely related contracts.

The wider question of whether in the absence of specific language in the relevant institution rules, a transaction setoff would have been outside the jurisdiction of the Tribunal (as the majority of the Tribunal held) or within their jurisdiction (as the minority held) was left open. It seems likely that this point will come back to the COU!ts within a relatively short period of time. Whilst the wording of the particular arbitration clause will be important, it is submitted that tribunals and courts should be inclined to accept jurisdiction over a genuine transaction set-off in order to avoid a multiplicity of proceedings.

The finding on Article 19.3 of the Rules is also open to criticism. The wording of Article 19.3 is essentially permissive in nature - it states that "the respondent may make a counter-claim arising out of the same contract or rely on a claim arising out of the same contract for the purpose of a set-off". However, both the tribunal and Court have read this as carrying a necessary implication that the Rules conversely prevent a party relying on a set-off if it does not arise out of the same contract.

Prohibitions on transaction set-off are not found in the ICC, LCIA or AAA Rules or in regional institutions such as the Rules of the Singapore International Arbitration Centre. However, similar wording to that considered in the Econet case are found in institutional rules such as the Rules of the International Commercial Arbitration Court at the Centre of Commerce and Industry of the Russian Federation (Rule 33.1) and the Rules of Procedure of the Inter-American Commercial Arbitration (Article 16.3). There are also a number of those institutional rules that incorporate the UNCITRAL Rules - e.g. the Rules of the Hong Kong International Arbitration Centre and the Kuala Lumpur Regional Centre for Arbitration.

Care should also be taken with rules such as the Japan Commercial Arbitration Association Commercial Arbitration Rules (Rule 19.1) and the Rules of the Arbitration Institution of the Stockholm Centre of Commerce (Article 10.3), which provide that any counterclaim or set-off must be based on the arbitration agreement4. Depending on the wording of the arbitration agreement in question, it may well be that transaction set-off will prohibited.

Ironically, despite the lengthy debate on jurisdiction, this may not be the end of the road for Econet. When putting their arguments to the Tribunal on the preliminary issue, Econet made a last-minute submission that in fact the VTTRA was an amendment to the Main Contract and therefore the claim and the set-off both arise under the same contract, and Article 19(3) does not apply. The Tribunal gave Econet leave to pursue this claim at a later hearing.

Lovells Projects (Engineering & Construction) Newsletter
January 2007



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