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INCORPORATION BY WAY OF REFERENCE

 

Peh Fern and Wen Shan explain a significant decision on section 9(5) of the Arbitration Act

It is not an uncommon practice for parties to incorporate the provisions of one contract (“original contract”) into another contract (“second contract”) by referring generally to the provisions of the original contract in the second contract. One of the common phrases being e.g. terms and conditions: “as per original policy” or “as attached”.

This broad brushstroke of language was the point of contention in Best Re (L) Limited v ACE Jerneh Insurance Berhad [2015] MLJU 0256 wherein the Court of Appeal was asked to determine whether a mere general reference to the original contract constituted effective incorporation of an arbitration clause into a reinsurance contract. Interestingly, the Malaysian case law had no precedent to the concept of a ‘reference for incorporation’ in relation to such contracts.

BACKGROUND FACTS

The insurance policy (“Original Policy”) between Sony, the insured, and ACE Jerneh (“Insurer”) contained an arbitration clause (Clause 13). The Insurer and Best Re (“Reinsurer”) entered into three Reinsurance Contracts (“Reinsurance Contracts”). It was an undisputed fact that the Reinsurance Contracts contain neither an express arbitration clause nor an express reference to Clause 13 in the Original Policy. The Reinsurance Contracts only included a clause which read “as per Standard Extended Warranty Insurance Policy issued by [Insurer] as attached.”

A dispute arose between the Insurer and the Reinsurer resulting in the Insurer initiating a suit against the Reinsurer in the Sessions Court. The Reinsurer applied for and was granted a stay of proceedings by the Sessions Court pending reference of the dispute to arbitration.

The Insurer appealed against the decision of the Sessions Court to the High Court where the Insurer successfully argued that the arbitration clause in the Original Policy was not incorporated into the Reinsurance Contracts. In support of this submission, the Insurer cited a series of English cases on bills of lading and reinsurance which held that an arbitration clause could not be incorporated by a mere general reference, but that a specific reference to the arbitration clause was required.

The Reinsurer, dissatisfied with the High Court’s decision, appealed to the Court of Appeal.

ISSUES CONSIDERED BY THE COURT OF APPEAL

The Court of Appeal was asked to decide on a single issue: whether Malaysian law requires a specific reference to incorporate an arbitration clause or whether a mere general reference would suffice.

On 29 June 2015, the Court of Appeal decided that a mere general reference sufficed as Section 9(5) of the Malaysian Arbitration Act 2005 (“Arbitration Act”) made no requirement for a specific reference for the incorporation of an arbitration clause. In its reasoning, three points were considered:

(1) The Approaches

Within reinsurance law, arbitration clauses have been considered as a special species with special requirements for incorporation by reference. In the English case of the Federal Bulker [1981] 1 Lloyd’s Rep 103, Bingham LJ said that, “generally speaking, the English law of contract has taken a benevolent view of the use of general words to incorporate by reference standard terms to be found elsewhere. But in the present field a different, and stricter, rule has developed, especially where the incorporation of arbitration clauses is concerned.”

This benevolent view, referred to herein as the ‘General Approach’, is the frequently used general reference to incorporate the original contract into the second contract, e.g. the phrase of “terms and conditions are as attached” being a familiar phrase.

For over a century, the English reinsurance and shipping markets have operated in their own spheres with their own set of rules and regulations. The English Courts have accommodated their practices and have developed a unique albeit stricter approach towards incorporation of an arbitration clause by reference. Beginning with T W Thomas & Co, Limited v Portsea Steamship Company, Limited [1912] AC 1 and followed by a series of cases through the last century, the English Courts have consistently held that an arbitration clause cannot be incorporated by a mere general reference. In Cigna Life Insurance Co of Europe SA-NV v Intercaser SA de Seguros y Reaseguros [2001] Lloyd’s Rep IR 821, the High Court held that, “the legal justification for this conclusion comes from the special position which these clauses have in English law. An agreement to arbitrate disputes is regarded as personal to the parties to the agreement and collateral to the main obligations.”

This stricter approach, referred to herein as the ‘Strict English Approach’, requires a specific reference to be made for effective incorporation of an arbitration clause from the original contract into the second contract, e.g. “the terms and conditions are per the original contract, including the arbitration clause”. It was this approach that the High Court adopted in this instance.

(2) The Framework of the Arbitration Act

Section 9(5) of the Arbitration Act provides that an arbitration clause is incorporated when “the reference is such as to make that clause part of the agreement.” Section 9(5) corresponds to Article 7(2) of the UNCITRAL Model Law.

The Court of Appeal recognised that the Arbitration Act is based upon and reflective of the UNCITRAL Model Law which provides a standard model to assist nations in modernising and reforming the features of their national arbitration law.

Several jurisdictions, including Hong Kong and Singapore, have adopted the Model Law, thus the contents of their respective legislation are similarly drafted to our Arbitration Act. In contrast, the English Arbitration Act 1996 is non-Model Law compliant albeit bearing substantial similarities to the Model Law. As such, the Court of Appeal found it helpful to consider how other common law jurisdictions which are Model Law compliant have approached the interpretation of Article 7(2).

The Hong Kong High Court in Astel-Peiniger Joint Venture v Argos Engineering & Heavy Industries Co Ltd [1994] 3 HKC 328 construed Article 7(2) of the Model Law as incompatible with the Strict English Approach. This decision was affirmed in Gay Construction Pty Ltd & Anor v Caledonian Techmore (Building) Ltd (Hanison Construction Co Ltd, Third Party) [1994] 2 HKC 562.

The Singapore Court of Appeal in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd & Anor [2014] 1 SLR 130 adopted the reasoning in the Hong Kong cases, holding that “the strict rule has been overextended impermissibly from its original application in the context of bill of lading and charter parties”.

(3) The Malaysian Position

The Court of Appeal recognised that the interpretation of Section 9(5) of the Arbitration Act had hitherto been unsettled. The Court of Appeal in Albilt Resources Sdn Bhd v Casaria Construction Sdn Bhd [2010] 7 CLJ 785, a case concerning a construction contract, adopted the General Approach whereas the High Court in Sigur Ros Sdn Bhd v Malayan Banking Bhd & Anor [2013] 8 CLJ 86, a case involving a bank guarantee, followed the Strict English Approach. Notably, however, in Albilt there was no reference to the Model Law, whilst in Sigur Ros there was no reference to Albilt, which could have set the precedent for it.

THE COURT OF APPEAL’S DECISION

In coming to its decision, the Court of Appeal appreciated that the enforceability of an arbitration clause was to be read in light of the statutory provision and the purpose for it. Their Lordships recognised the trend of encouraging arbitration along with its secondary duty to enable business efficacy in the commercial world. With these factors in mind, the Court concluded that the word “reference” in Section 9(5) of the Arbitration Act did not require a specific reference to the arbitration clause; that it was drafted and designed to accept general references. Consequently, their Lordships unanimously decided that the general reference used in the Reinsurance Contracts had incorporated the entire Original Policy, including the arbitration clause.

COMMENTARY

Broadly, there is no right or wrong as the two approaches to incorporation by reference are both applicable and workable in the real world. The General Approach is near universal but the Strict English Approach has time and again been considered and justified for matters relating to bills of lading and reinsurance.

Historically, the Strict English Approach was developed foremost for bills of lading and charter parties; and was subsequently extended to reinsurance. A unique feature of bills of lading is that the new party to the second contract is not actually furnished with the original contract. Hence, whilst a bill of lading may state that the terms are as per the original contract, the new party may not have actual knowledge of the contents and logically should not have agreed to terms unknown to it. This unique feature is notably absent in reinsurance contracts.

The Strict English Approach has its merits but T W Thomas was decided long before the Model Law was introduced to aid international commercial relations by providing a uniform framework for national legislation to adopt. The Model Law does not proscribe a state from adopting the Strict English Approach but was deliberately drafted to accept the wider interpretation of the General Approach. Regardless, it is the General Approach which has found favour, being adopted by a number of other jurisdictions, including Bermuda, Canada, Switzerland, France, Hong Kong, Singapore and the United States.

For the most part, this decision will not affect the vast majority of existing contracts or cause a stir amongst commercial entities that prefer arbitration. Entities should nonetheless be aware that by importing all the terms from the original contract, they may also be agreeing to arbitrate a dispute. Thus a party who does not wish to arbitrate a dispute will have to expressly exclude the application of the arbitration clause where a general reference to incorporate is used.

All things being considered, this decision is welcomed for two reasons. First, it makes it clear that the Malaysian Courts will adopt the General Approach in interpreting Section 9(5) of the Arbitration Act. Second, it determines that the Strict English Approach in relation to the adoption of an arbitration clause in a reinsurance contract under English law will not apply to a reinsurance contract in Malaysia. As the matter began at the Sessions Court, the Court of Appeal’s decision is final and any change must come from a separate case to be decided by the Federal Court.


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