Arbitration clause’s formal requirements and enforcement of an arbitral award

In re: “Armada Holland Bv Schiedam Denmark v. Inter Fruit S.A. over breach of contract”[1] Tribunal II of the Federal Court of Appeals in Civil and Commercial Matters ratified the decision of first instance which rejected the claimant’s request for recognition and later enforcement of an arbitral award rendered by the Arbitrator Mr. George Henderson against the firm Inter Fruit S.A. for the sum of US$ 175,138.50, plus interests and costs.

In order to decide on this manner, the court of first instance sustained that the charter-party contract invoked by the claimant was not celebrated, which is why the arbitration clause agreed on by the parties was not applicable, since the defendant’s submission had never come into force under British law or in an arbitration in London, grounds on which it rejected the plaintiff’s claim with costs. In order to reach this conclusion the judge of first instance grounded his decision on the requirements for the formal validity of the arbitration clause established by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (or New York Convention of 1958).

This decision generated the claimant’s appeal, who sustained that the judge had exceeded his jurisdiction by deciding on the existence or not of the contract in which the arbitration clause had been included, when he should have only evaluated if the documents indicated in the applicable legislation had been presented.

The dispute had its origin in a charter-party contract entered into by means of a facsimile that “Oceanic Navigation S.A.”, representative of Armada Holland Bv Shiedam Denmark (“Armada Holland”) had sent to Inter Fruit S.A. (“Inter Fruit”) through which the parties had agreed to celebrate a charter-party contract for the transport of an integral and complete charge of fruit on board of the vessel “ICE SEA” subject to the terms of the GENCON charter-party form, clause N° 19 which provided that any dispute arising from the mentioned agreement would be submitted to arbitration in London.

Later, the plaintiff sent another facsimile to Inter Fruit in which it nominated the “MV ICE FERN OR SUBSTITUTE” as the vessel to accomplish the agreed charter, maintaining in all other respects the conditions of the charter-party form which, it is necessary to note, was referred to the vessel “ICE FERN” ready for its integral and complete charge, being included in the document the remitter’s request to the addressee to countersign the document.

According to what was alleged by Armada Holland, the agreement was closed by means of a telephone conversation between the representatives of both parties.

After this, the claimant sent a new facsimile to Inter Fruit in which it nominated the vessel PEARL REEFFER in substitution to accomplish the charge convened, without presenting any evidence that demonstrated that said nomination had been accepted by Inter Fruit through any document signed by this party or contained in an exchange of letters, telegrams or analogous instruments.

On the basis of this background, the Court of Appeals understood that “the precaution of admissibility of the request for the recognition of a foreign arbitral award in this case [was not present]; requisite established in art. II (2), and art. IV (1) b), of the Convention ratified by lay 23.0619; that is, since the only ‘written agreement’ by means of which the parties obliged themselves to submit to arbitration any differences that may arise amongst them in respect to a load charter (…) is the one referred to the vessel ‘ICE SEA’ (…); it is clear, then, that it is inadmissible to expect this agreement to bear effects over a supposed agreement in relation to a different vessel, in respect to which no evidence was produced to demonstrate the defendants acceptance.”

With this decision the Court of Appeals confirms and ratifies the importance of the inclusion of an appropriate arbitration clause in each contract, and the application of the requisites of formal validity of the same, established in the New York Convention at the moment of requesting the recognition and enforcement of an arbitral award.

Article II (2) of the New York Convention of 1958 establishes that: “The term "agreement in writing" shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.”

On the other hand, article IV (1) b) cited by the Court of Appeals indicates that: “1. To obtain the recognition and enforcement mentioned in the preceding article, the party applying for recognition and enforcement shall, at the time of the application, supply: (…) b) The original agreement referred to in article II or a duly certified copy thereof”.

In the present case, it is worth mentioning, from the definition given by article II (2) of the New York Convention, the fact that the arbitration clause must be in written form and signed by the parties, or contained in an exchange of letters or telegrams.

International case law, in respect to the interpretation of this article of the Convention is not uniform. There are Courts, mainly Italian Courts, which are inclined to understand that its interpretation must be strict. Other Courts, such as the ones in Rotterdam, are inclined towards a more open interpretation, understanding that the spirit of the article should be more important than the punctual accomplishment of the requisites there established.

Furthermore, international scholars’ opinion has understood that this article of the New York Convention “must in principle be deemed to be both a maximum and a minimum requirement: a court may not require more, but may also not accept less than is provided by Article II(2) for the form of the arbitration agreement.”[2]

In respect to the present case, it is worth mentioning that the scholars’ opinion has also understood that “(…) an interpretation contrary to what is specifically provided by the text is unacceptable. For instance, where the text requires an exchange of letters, there must have been a mutual transfer of documents; the mere transmission of one document by a party to the other cannot linguistically fulfill the word ‘exchange’.” [3]

Moreover, it has been understood that an oral or tacit acceptance of the contract does not comply with the requisites established by the New York Convention. In this sense, it has been indicated that “The text of Article II (2) does not leave any doubt on this point either: An exchange of letters or telegrams cannot mean anything else than that they are forwarded and replied to in written form. It means that an arbitration agreement which is proposed in writing and accepted orally or tacitly does not constitute an exchange of letters or telegrams.” [4].

We can also mention a judicial precedent from the Court of Appeals of Naples in the same vein, which rejected the enforcement of two awards based on the breach of payment of two wood sales and transport contracts, sustaining that the requisites for the form of the arbitration agreement established in the New York Convention had not been met, since those two contracts had not been sent back to the seller, act which implicated the acceptance by the buyer of the terms of the contract, and mainly, the submission of disputes to arbitration.[5]

We must then stress the fact that the Court of Appeals, with this decision, has followed the case law and scholars’ opinion’s international trend of this subject by rejecting the recognition and enforcement of an arbitral award dictated in these conditions. Moreover, we consider it is a strong step towards the recognition of arbitration that the decision was not grounded in local legislation, but on a strict application of the New York Convention, which establishes the unavoidable requisites for form of the arbitration agreement in order that the award rendered in relation to it can be enforced in another country.