Vee Networks v. Econet Wireless

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Vee Networks Limited v Econet Wireless International Ltd
High Court (England), Queen’s Bench Division: Colman J.: [2004] EWHC 2909 (Comm): 14 December 2004
Mr S Browne-Wilkinson QC (instructed by DLA) for the Applicant, Vee Networks
Mr S Moverley-Smith QC (instructed by Kerman & Co) for the Respondent, Econet Wireless
Arbitration: Arbitration Act 1996: section 7 – Separability of arbitration agreement: section 30 – competence of tribunal to rule on its own jurisdiction: section 67 – challenging the award, substantive jurisdiction: interrelationship of sections 7 and 67

S.7 of the Arbitration Act 1996 introduced to English statute law the separability doctrine first developed in the English courts in 1992 but long established in other jurisdictions, whereby the invalidity of the contract that contains an otherwise valid arbitration clause does not of itself vitiate that clause. It is "for that purpose" to be regarded as a distinct agreement. S.30 of the Act introduced, for the first time in statute, the power of the arbitral tribunal to decide upon its own jurisdiction, subject to challenge in Court under s.67. This decision looks at the interaction of those two provisions and holds that a ruling on the validity of the host contract does not – in and of itself - affect the validity of its arbitration clause and does not amount to a ruling on the "substantive jurisdiction" of the tribunal, open to challenge under s.67

DMC Category Rating: Developed

This case note is based on a note prepared by Hew Dundas, International Arbitrator, Mediator and Expert Determiner, who is a contributor to this website

Vee Networks Ltd (Vee) wished to establish a mobile phone network in Nigeria and contracted under a Technical Support Agreement ("TSA") with Econet Wireless International Ltd ("EWI"), a Bermudian company, for the provision of support and technical services. The TSA was terminable by either party on 180 days notice and forthwith under certain default provisions. Vee claimed to terminate the TSA in October 2003 but EWI neither accepted that Vee was entitled to do so nor treated Vee as having repudiated it. The dispute was referred to arbitration under the arbitration clause in the TSA. EWI claimed damages of over US$20 million and subsequently raised an alternative claim that if the TSA were held to be void, it was entitled to recover a like amount by way of restitution or quantum meruit. Vee pleaded that the TSA was void and unenforceable because, under it, EWI was engaged in a business that was ultra vires [beyond the powers] EWI's Memorandum of Association ("MoA") by operation of the Bermudian Companies Act. Vee claimed US$856,973 as money paid to EWI under a mistake of fact or as money had and received, alleging that this was the amount of withholding tax which it ought to have deducted from monies paid to EWI but had mistakenly failed so to do.

The Arbitrator issued consent directions that he should hear and determine in a partial award various preliminary issues including: (i) whether Vee was estopped by convention [prevented by agreement] from asserting that the TSA was ultra vires the powers of EWI; (ii) if not, whether the TSA was ultra vires; (iii) if it was ultra vires, whether any claim for restitution, unjust enrichment or quantum meruit [payment of what the services were worth] could be advanced in the arbitration or whether the only further order that could be made was as to the costs of the arbitration. The Arbitrator concluded in his Partial Award that: (i) Vee was not estopped from asserting that the TSA was ultra vires the powers of EWI; (ii) the TSA was not ultra vires EWI's powers; and (iii) it was therefore unnecessary to decide the third issue.

Vee applied under s.67 of the Arbitration Act that the Partial Award should be set aside because – in Vee’s view - the Arbitrator had wrongly construed EWI’s MoA. Further if the TSA were ultra vires, the Arbitrator had had no jurisdiction conclusively (that is, without the possibility of appeal under s.67) to determine any of the preliminary issues because his jurisdiction was derived from the arbitration clause in the TSA and he ought to have held that the TSA was void and therefore that the agreement to arbitrate contained within it was void. Accordingly, Vee was entitled to have the whole of the partial award set aside under s.67.

EWI responded by raising a threshold point which is of considerable importance to the scope and application of the jurisdictional provisions of the 1996 Act. It submitted that Vee’s application was fundamentally misconceived inasmuch as s.67 was inapplicable where, as in the present case, the issue to be determined by the Arbitrator was not whether he had substantive jurisdiction but whether the underlying or "matrix" contract, as distinct from the arbitration agreement contained in the arbitration clause of the contract was invalid. This submission was based on s.7. It was argued that the effect of this section was to preserve the jurisdiction of the arbitrator to determine conclusively whether the underlying contract was ultra vires the powers of EWI notwithstanding that, if it were, the underlying contract containing the arbitration agreement would be null and void. The function of s.67 was not to challenge an arbitrator's determination of the issue whether an underlying contract was void, for whatever reason, but to challenge a determination by an arbitrator as to whether he has "substantive jurisdiction". The determination of substantive jurisdiction involved only the matters set out under s.30(1), namely (a) whether there was a valid arbitration agreement, (b) whether the tribunal was properly constituted or (c) what matters had been submitted to arbitration in accordance with the arbitration agreement. In the present case, the issue to be determined by the arbitrator was not whether there was a valid arbitration agreement but whether the matrix contract was ultra vires EWI’s powers. The effect of s.7 was to give the arbitrator jurisdiction conclusively to determine the latter issue. Therefore, the validity of the arbitration agreement was never in issue and accordingly s.67 had no application.

EWI further submitted that if it were held that the TSA was ultra vires, the effect of s.7 was to preserve the Arbitrator's jurisdiction to the effect that he had jurisdiction to determine non-contractual disputes such as its alternative claim for restitution and/or quantum meruit and the counterclaim for money had and received. Given that the scope of the arbitration agreement was wide enough to cover such disputes, the Arbitrator had had jurisdiction to determine such issues.

[Other issues arose in the case relating to a (successful) challenge to the award under s.68 – it was remitted to the Arbitrator for reconsideration. These issues are not addressed in this Case Note, which focuses on the separability/jurisdiction issue]

Colman J summarised the essence of the separability doctrine pre-1996, as expressed in Harbour Assurance Co (UK) Ltd v. Kansa General Insurance Co Ltd [1993] QB 701, as being that of insulating the agreement to arbitrate from the matrix contract, with the effect that the agreement to arbitrate would not be rendered void or invalid or avoided solely because the matrix contract was void or invalid or had been avoided. Unless the agreement to arbitrate was independently void or invalid, that agreement would remain in effect and the arbitrator could determine conclusively whether the matrix contract was enforceable. Thus, for example, as in Harbour Assurance, if the matrix contract were illegal and void, that matter of illegality could be conclusively determined by the arbitrator unless the agreement to arbitrate was also independently rendered illegal and void by the legislation in question. S.7 of the 1996 Act reflected this concept of separability but left intact the requirement that the arbitration agreement should be valid and binding. If it was not valid and binding for reasons other than the bare fact that the matrix contract was not valid and binding, then s.7 did not enable arbitrators to exercise conclusive jurisdiction in respect of any issue relating to the matrix contract.

If, in accordance with s.7, a tribunal determined that the matrix contract was, for example, void ab initio by reason of illegality and it was not in issue whether the arbitration agreement was also illegal and void, the tribunal could continue to exercise such jurisdiction under the arbitration agreement as its scope permitted. For example, if there was an alternative claim in tort or for restitution which was within the scope of the clause, the tribunal would continue to have jurisdiction conclusively to determine that claim. Vee’s argument that, once the tribunal had decided that the matrix contract was void ab initio, the tribunal's jurisdiction to determine other issues was automatically spent save as to orders for costs, was misconceived, reflecting a misunderstanding of the principle of separability underlying s.7.

If it was in dispute not only whether the matrix contract was void or otherwise non-existent but also whether the arbitration agreement itself was independently void or non-existent, then that issue can be determined by the arbitrator under s.30, but not conclusively, since an award as to jurisdiction under that section is subject to challenge under s.67. The issue identified in s.30(1)(a), "whether there is a valid arbitration agreement", has to be understood as referring to an issue as to the validity of the arbitration agreement while giving full effect to the principle of separability under s.7. Accordingly, for the purpose of determining an issue as to substantive jurisdiction under s.30(1) it is not sufficient to proceed from a conclusion that the matrix contract was or was not void or invalid to the conclusion that therefore the arbitration agreement was or was not valid. The relevant issue can only be whether the latter agreement is, independently of the validity or invalidity of the matrix contract, valid or invalid.

Colman J continued by considering whether or not the Partial Award was one to which s.67 applied. Vee submitted that it was an award as to the substantive jurisdiction under s.67(1)(a) since the case presented to the Arbitrator by Vee was that: (i) the TSA was ultra vires the powers of EWI; (ii) the TSA was therefore void; (iii) therefore the arbitration agreement was also ultra vires and void; (iv) if so, the only jurisdiction which the arbitrator had was to determine the ultra vires point in respect of the TSA and the incidence of arbitration costs, (v) his jurisdiction on those points arose from s.7 of the 1996 Act. Accordingly, when the Arbitrator concluded in his Partial Award that the TSA was not ultra vires the powers of EWI, he was determining that he had substantive jurisdiction. Consequently, the partial award was one to which S.67(1)(a) applied.

Colman J noted that the Partial Award had contained no express indication that the Arbitrator had considered and determined the question of whether he had had substantive jurisdiction. But an arbitration award which determined an issue which was determinative both of the substantive merits of the claim and of the arbitrator's substantive jurisdiction but which did not expressly indicate that it was determining substantive jurisdiction, could in some circumstances amount to an implied award as to substantive jurisdiction.

In order to ascertain whether in the present case there had been an implied award or ruling on substantive jurisdiction in the Partial Award it was necessary to investigate whether the issue of substantive jurisdiction in relation to the ultra vires point had effectively been referred to the arbitrator or, alternatively, had Vee effectively raised an objection to his substantive jurisdiction ?  Vee submitted that its plea that the TSA was ultra vires was in substance a plea that the arbitration agreement within it was also ultra vires and therefore that the defence did effectively challenge the arbitrator's substantive jurisdiction. Colman J considered that this could not be correct: a party who wished to challenge the substantive jurisdiction of the arbitral tribunal must do so explicitly and timeously. Given s.7, a submission that the matrix contract was void ab initio because it was ultra vires the powers of the company under its MoA was not an explicit submission that the arbitration clause included within it was also independently void ab initio [from the very beginning]. That issue would depend on whether on the proper construction of the MoA it would be ultra vires to enter into an arbitration agreement which could, for example, be utilised to resolve disputes as to whether the matrix contract was ultra vires on the true meaning of that MoA.

Correspondence from Vee to the Arbitrator not only contained no assertion that the arbitrator lacked substantive jurisdiction to determine any issue on the pleadings, but also, by relying on s.7 as distinct from s.30 as providing the arbitrator with jurisdiction to determine the ultra vires point, Vee was stating in express terms that the arbitrator did have substantive jurisdiction to determine that point conclusively. The principle of separability led inexorably to that result unless the crucial additional point was raised that the agreement to arbitrate itself was independently invalid. 

The essential question was whether the award that the TSA was not ultra vires was impliedly a determination of an issue as to the arbitrator's substantive jurisdiction for the purposes of s.30. Colman J had no doubt whatever that it was not and for the following principal reasons:

(i) In relation to the ultra vires point, the parties had throughout proceeded on the basis that, by reason of s.7, the Arbitrator had had substantive jurisdiction to determine that point conclusively.

(ii) It had therefore never been part of the reference to the Arbitrator, which defined the issues that he was invited to decide, whether, because the agreement to arbitrate would be invalid if the TSA were ultra vires, he lacked substantive jurisdiction to determine the ultra vires point

(iii) Until service of Vee's skeleton argument only nine days before the hearing, it had never been suggested for any purpose that, if the TSA were ultra vires and void, the arbitration agreement was also void and that s.30 was thereby engaged. Until then Vee had asserted that the effect of s.7 was to clothe the Arbitrator with jurisdiction to decide the ultra vires point conclusively, but that, once that jurisdiction had been exhausted, he would have had no residual jurisdiction to decide the restitutionary claims and quantum meruit points. .

(iv) By the time that the skeleton argument emerged, it was far too late for Vee to object that the Arbitrator lacked substantive jurisdiction to determine any point on the grounds of the arbitration agreement being ultra vires.

(v) It followed that Vee never effectively raised any objection to the Arbitrator's substantive jurisdiction to determine conclusively the ultra vires point and accordingly the determination of that point was incapable of amounting to an implied award as to the Arbitrator's substantive jurisdiction to determine that point.

(vi) It followed that Vee’s application failed from the outset and had to be rejected.

Comments from Hew Dundas
This analysis by Colman J is, in my view, correct but perhaps, initially at least, surprising in that the arbitrator has in effect ruled on his substantive jurisdiction but in an indirect way not permitting any challenge via ss.32 or 67. However, Merkin’s "Arbitration Law" at §9.7 takes an opposing view, stating that

"The right of the arbitrators to rule on the existence or legality of the substantive agreement may be regarded as a consequence of the severability principle under s.7 or it may be regarded as governed by the Kompetenz-Kompetenzt principle set out in s.30 [namely, the competence to decide its own jurisdiction. Ed] Although the wording of s.30 is sufficiently wide to encompass these matters it is submitted that the better view is that the jurisdiction of the arbitrators in this context is governed only by Kompetenz-Kompetenz and not severability as it should always be open to a party to have the existence of the arbitration agreement determined by a court by means of a full judicial review under s.67 and it should not matter whether the challenge to the arbitration agreement is direct (there is no arbitration agreement or indirect (there is no substantive agreement). Such reasoning does not deprive any severability principle of its validity, as that principle remains necessary to empower arbitrators to decide issues such as the repudiation and frustration of the main agreement."

With respect, I do not share the view that "it should always be open …"

However, it remains open to the ‘losing’ party to attempt a challenge under s.69 assuming that application thereof has not been excluded by agreement; of course, leave of the Court is required to make any such challenge (s.69(2)(b)) unless agreed by all the parties (s.69(2)(a)). We are all well aware from recent jurisprudence of the height of the s.69 threshold, notwithstanding the Court of Appeal decision in the "Northern Pioneer" [2002] EWCA Civ 1878. Further, the Courts are loth to grant leave where a s.69 application is in reality a s.67 challenge in a different guise.

A question arises at to what the arbitrator should do if he finds himself in the same situation as in the present case i.e. where the argument is a s.7 argument brooking no challenge or a s.30 one which is challengeable one. In the present case the Arbitrator responded to what was asked of him by the parties and he decided the issues they agreed as the issues. Was it for him to have raised the s.7/s.30 distinction assuming he had noted it? I suggest not: as Colman J stated "an arbitrator whose substantive jurisdiction is NOT challenged does NOT have to determine whether he has that jurisdiction."

It remains the case that these are subtle and difficult decisions and, it is submitted, Coleman J’s clarifications are of considerable value.

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