Incorporation of arbitration clauses under English law

Why should parties take extra care when incorporating arbitration clauses that are outlined in a separate document?

In the shipping industry, it is common for parties to set out the terms of their agreement in multiple documents. As a result, ascertaining the full terms of a contract when these terms are spread across different documents can be a challenge and the risk of failing to identify the correct terms can lead to unfavourable consequences. 

We often encounter cases involving our Members where it is necessary to consider whether an arbitration agreement contained in a separate document has been effectively incorporated into a primary contract, such as a charterparty or bills of lading. Under English law, the question of whether an arbitration clause has been effectively incorporated is determined by applying principles of construction and by objectively assessing the parties’ intentions in light of the surrounding evidence. 

As a general rule English law recognises that standard terms (such as the Gencon 1994 form), including the arbitration clause contained in those standard terms, can be effectively incorporated into a contract by the use of general words of reference to that document.  The rationale for this rule is that parties are expected to be familiar with the standard terms that they have incorporated, including the arbitration clause contained in those terms, and therefore the scope of ambiguity is less. 

In this regard, Section 6(2) of the English Arbitration Act 1996 provides that “the reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement”. However, the complication that often arises is in determining when the reference “is such” as to make that clause part of the agreement.

A leading judgment on this topic, The “Athena” No.2[1], saw the English Court distinguish between what is called a 'single-contract case’, where the arbitration clause is found in the standard terms within another document[2], and a 'two-contract case’, where the arbitration clause is contained in a secondary contract involving at least one party different from those in the main contract. 

In essence, in a single-contract case the arbitration clause (along with any other terms) is contained in a separate document (for example in a standard form), that is incorporated by reference, in its entirety, into the main contract. In such cases, general words of incorporation are typically sufficient and there is no need to refer explicitly to the arbitration clause[3].

In a two-contract case, the arbitration clause is contained in a secondary contract to which at least one of the primary contracting parties is not a party. This raises the question of whether the primary contracting parties are bound by the arbitration clause, particularly if one (or both) of them has no notice of the terms in the secondary contract. In such cases, English courts are generally known to take a stricter approach, requiring an express reference to the arbitration agreement contained in the secondary contract, as general words of incorporation are typically insufficient. This means that there must be a clear and specific reference to the arbitration clause itself, not merely to the contract in which it is contained. The reason is that, in situations where at least one of the parties to the primary contract is different from the parties in the secondary contract whose terms are intended to be incorporated, the different party may not have knowledge of the relevant terms in the secondary contract.

A good example of the stricter approach often applied in a two-contract case is when bills of lading incorporate some or all of the terms of a charterparty. This is because bills of lading are negotiable instruments and may be transferred to a party in a different jurisdiction who may not be privy to the terms of the underlying charterparty. Therefore, for the arbitration or jurisdiction clause in the charterparty to effectively incorporated into the bills of lading, the clause in the charterparty must be specifically referenced in the bills of lading. 

Another reason why general words of incorporation of charterparty terms may not be sufficient is that the terms may need modification to sensibly apply in a bill of lading context, further emphasizing the need for a specific reference to clarify that incorporation is intended.

The English courts have held that general words of incorporation used in bills of lading incorporate only those clauses of the charterparty which are applicable to the contract contained in the bill. In TW Thomas & Co Ltd v Portsea Steamship Co Ltd (The Portsmouth)[4] the House of Lords rejected the argument that general words of incorporation effectively incorporated an arbitration clause from a charterparty on several grounds, including that the clause was not germane to the receipt, carriage, or delivery of the cargo or the payment of freight, and that bills of lading are negotiable instruments. This is further supported by the Supreme Court’s recent decision in The Polar[5].

Such a restrictive approach, which is an exception to the general rule, does not apply where standard terms are incorporated by reference into a contract like a charterparty. As a matter of general practice however it is advisable to make clear and explicit reference to the arbitration clause contained in a secondary document or contract, if the intention is for that arbitration clause to apply to the primary contract.

As always, Nordisk is available to assist Members with any queries that they may have in relation to the above. Please do not hesitate to contact us.

[1][2007] 1 Lloyd’s Rep. 280

[2]The ‘single-contract’ rule has recently been extended by the courts to apply in cases where the incorporation of the terms of a separate contract is made between the same parties (as opposed to situations where there are different parties as in the ‘two contract case’).

[3]The St Raphael [1985] 1 Lloyd's Rep 403

[4][1912] AC 1

[5][2024] UKSC 2 (paras.76-87)

Author Rituparna Chattopadhyay, Solicitor (England & Wales)