Vee Networks v. Econet Wireless
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
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]
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
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"  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.
These Case Notes have been prepared with care, but neither the Editor nor the International and other Contributors can guarantee that they are free from error, nor that they contain every pertinent point. Reliance should not therefore be placed upon them without independent verification. The Editor and the International and other Contributors disclaim all liability for any loss of whatsoever nature and howsoever arising as a result of others acting or refraining from acting in reliance on the contents of this website and the information to which it gives access. The Editor claims copyright in the content of the website.