Arbitration: service of notice

The issue of whether the correct party has been served in arbitration becomes complicated in an agent-principal scenario. Here, party A, wishing to commence arbitration proceedings against party B, purports to serve the notice of arbitration on party B but does so by serving party B’s agent. Subsequently, party B, realising that he is being drawn into arbitral proceedings, argues that it has not been validly served because his agent did not possess the necessary authority to accept service on his behalf.

As a party who has not taken part in the proceedings, party B may apply to the court under section 72 of the Arbitration Act 1996 for a declaration and order questioning whether the tribunal has been properly constituted or what matters have been submitted to arbitration in accordance with the arbitration agreement. This agent-principal scenario received attention in Sino Channel Asia Ltd v Dana Shipping and Trading PTE Singapore [2016] EWHC 1118 (Comm).

Facts

Dana Shipping (Dana) purported to commence arbitral proceedings against Sino Channel Asia (Sino) in connection with disputes arising under a contract of affreightment between Dana as owner and Sino as charterer. That contract provided for arbitration in London. Dana appointed Mr M as its arbitrator and emailed its notice of arbitration to Mr Cai requesting that Sino appoint its arbitrator. However, Mr Cai was not an employee of Sino but an employee of Beijing XCty Trading Ltd (Beijing X), a company that had entered into various contracts with Sino under which Beijing X arranged back-to-back sale and purchase contracts which would be concluded in the name of Sino. As part of those agreements, Sino agreed to handle the financial side of the transaction and Beijing X would handle the operational side.

Sino had entered into a contract of affreightment with Dana. It was assumed that the operational matters would be handled by Beijing X rather than Sino. However, Beijing X failed to do this and no shipment was made under the contract of affreightment. At an early stage of the dispute, Dana identified Mr Cai as Sino’s representative. Mr Cai conducted pre-arbitral negotiations with Dana, however, and when those negotiations failed Dana purported to commence arbitration by serving the notice of arbitration by email directly on Mr Cai and Sino’s brokers. Further messages were sent to Mr Cai which eventually resulted in the appointment of Mr C as sole arbitrator who rendered an arbitral award in favour of Dana.

Nothing further was done by Sino until after the commencement of enforcement proceedings in Hong Kong. Sino then applied to the High Court for a declaration and order pursuant to section 72. The matter came before Mr Justice Eder, who considered whether Mr Cai/Beijing X had implied actual authority and/or ostensible authority to receive the notice of arbitration on behalf of Sino and whether Sino had ratified the award.

Arguments and decision

Eder J first considered whether Mr Cai/Beijing X had implied actual authority from Sino to accept service. As explained by Lord Denning MR in Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, implied actual authority ‘is inferred from the conduct of the parties and the circumstances of the case’. On this issue, Dana argued that Mr Cai possessed implied actual authority to receive the notice of arbitration because Sino had delegated responsibility of the contract of affreightment to Beijing X, including the negotiations when the dispute first arose.

It was further argued that when the notice of arbitration was served on Sino it chose to ignore it and delegate it to Beijing X to ‘deal with it’. Sino contended that in the absence of explicit authority to accept service, it would be extraordinary and unprecedented if service could validly be effected on company X by sending an email to a junior employee of company Y, even if that employee was in practice handling the contract in question, and even if there was a relatively close relationship between companies X and Y.

Eder J was persuaded by Sino’s arguments and found that Mr Cai/Beijing X did not, in fact, have the authority to accept service of a notice of arbitration. Eder J found Gross J’s examples in Lantic Sugar Ltd v Baffin Investments Ltd (The ‘Lake Michigan’) [2009] EWHC 3325, of P&I clubs and solicitors not generally having authority to accept service of proceedings, instructive. He noted that although section 76 of the 1996 act operated more flexibly than the Civil Procedure Rules, a notice to commence arbitration is an important step which has significant legal consequences beyond the performance of ordinary contractual obligations.

As Eder J explained, once that notice is served and the other party does not appoint its arbitrator, then the sole arbitrator becomes ‘vested with important statutory powers by virtue of the terms of the act. Such powers would, of course, include the general powers exercisable by the tribunal under section 38 of the act. Similarly, once the tribunal is constituted, the parties are subject to the general statutory duties under section 40 of the act. Further, the effect of section 58(1) of the act is to render any award made by the tribunal final and binding, both on the parties and on any persons claiming through or under them subject to any legitimate challenge as contemplated by section 58(2) of the act. These are all important legal consequences of the effect of serving a notice of arbitration’.

Eder J went on to consider the issue of ostensible authority which, according to Lord Denning MR in Hely-Hutchinson, ‘is the authority of an agent as it appears to others. It often coincides with actual authority’. Dana repeated some arguments in support of its submissions for actual authority to illustrate that Mr Cai/Beijing X possessed ostensible authority, including that all pre-arbitration correspondence and the efforts to resolve the dispute were with Mr Cai/Beijing X. However, a careful analysis of the facts by Eder J did not indicate anything which constituted an express representation by Sino that Mr Cai/Beijing X had any authority to accept notice of arbitration, nor did Sino put Mr Cai/Beijing X in a position where the latter could hold themselves out to such effect.

Dana finally argued that Sino had ratified the award by receiving it and/or by its subsequent inaction. Ratification occurs when an act purportedly done by A in the name of B but without B’s authority, B subsequently approves A’s act. However, Eder J rejected Dana’s arguments on ratification on the grounds that the main ingredients for ratification to be effective, including the need for an unequivocal act, were absent. In particular, the judge held that where an arbitral tribunal is not properly constituted, a party who has not participated in the arbitration proceedings cannot be taken to ratify an award by mere silence and inaction.

This was consistent with Lord Mance in Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2011] 1 AC 763, when he explained: ‘A person who denies being party to any relevant arbitration agreement has no obligation to participate in the arbitration or to take any steps in the country of the seat of what he maintains to be an invalid arbitration leading to an invalid award against him. The party initiating the arbitration must try to enforce the award where it can. Only then and there is it incumbent on the defendant denying the existence of any valid award to resist enforcement.’

Discussion

Sino Channel is an important reminder of the need to fully appreciate and comply with the procedural requirements under the Arbitration Act 1996 as to service. Although some of the act’s provisions are intended to be flexible and less stringent than corresponding provisions under the CPR, it is clear that a party wishing to commence arbitration cannot ignore the obligation to serve the correct party. Further, an agent of a principal who may potentially be a party to arbitral proceedings cannot be assumed to have the necessary authority to accept service, even though that agent may have authority to deal with a third party in respect of other matters; such an agent must have actual or ostensible authority to accept service.

Masood Ahmed is a member of the Civil Procedure Rule Committee