Parties Must Take Care to Avoid Risk of Defective Service in Arbitration

Two recent English court decisions provide useful reminders that parties to arbitration agreements must take care to properly serve arbitration proceedings on the other party. In doing so, parties will avoid the risk of the court setting aside an award on the grounds that service was defective and that the tribunal did not have jurisdiction.

In Sino Channel, the Court of Appeal confirmed that only in rare cases will an agent have anything other than express actual authority to accept service of a notice of arbitration.[1] However, in the unusual circumstances in Sino Channel, the Court of Appeal held that the agent had both implied actual and ostensible authority to accept service. In Glencore Agriculture, the High Court confirmed that a notice of arbitration sent by email to a junior employee is unlikely to amount to effective service, unless the nature of that individual’s role implies that they possessed authority to accept service on their employer’s behalf.

Sino Channel

The Court of Appeal overturned the High Court’s decision that the arbitral award was made without jurisdiction due to defective service. Whilst the Court of Appeal approved of the High Court’s analysis of the agency principles relevant to the issue of service, it disagreed with the High Court’s application of those principles to the facts in Sino Channel.

The questions before the Court of Appeal were the same as those before the High Court; whether Dana Shipping & Trading Pte Singapore’s (Dana)’s notice of arbitration served on Beijing XCty Trading Limited (Beijing XCty), a Chinese affiliate of Sino Channel Asia Ltd (Sino Channel), was effective. For more information on the High Court’s decision, see Latham’s previous post. These questions centred on whether Beijing XCty, and more specifically Mr Cai, an employee of Beijing XCty, had implied actual or ostensible authority to accept service of the notice on behalf of Dana. Dana proffered an alternative case stating that Sino Channel had subsequently ratified Beijing XCty’s receipt of the notice.

Despite the alternative case, the High Court set aside the award under section 72 of the Arbitration Act 1996 (the Act) ruling that Dana served the notice of arbitration on Mr Cai — who the court found was not authorised to accept service. The High Court explained that, even when an agent has general authority to act, this does not, without more, encompass an authority to accept service of a notice of arbitration.

Sino Channel: the Court of Appeal’s Decision

The Court of Appeal held that Mr Cai did have implied actual authority and ostensible authority to accept service,[2] emphasising that:

1. Implied actual authority to accept service is a separate and distinct matter from general implied authority to conduct business. Implied actual authority to accept service “requires an intense scrutiny of the particular and no doubt rare facts from which it is said to arise”.
2. On the facts, Sino Channel took no role in the negotiation or performance of the underlying contract. Sino Channel delegated all performance-related matters of the underlying contract to Beijing XCty. Furthermore, Sino Channel’s expectation was that the notice would be served on Beijing XCty. These facts demonstrated implied actual authority and ostensible authority.
3. Whilst the position is not, as Dana argued, “express authority or bust”, the court should take a cautious approach to finding that an agent possesses implied actual or ostensible authority to accept service.

Glencore Agriculture[3]

Glencore Agriculture concerned a similar challenge to an arbitral award, in which the court held that a notice of arbitration emailed to a junior employee did not amount to effective service.

Glencore Agriculture B.V. (Glencore) also sought to set aside an arbitral award under section 72 of the Act. Like Sino Channel, Glencore had not taken part in the arbitration, and Glencore only became aware of the proceedings when it received the award by post. The notice of arbitration had been emailed to the address of a junior employee who later left the company.

The High Court’s decision that the junior employee did not have actual implied or ostensible authority to accept service highlighted that:

1. Following Sino Channel, whilst an employee may have general authority to conduct business on behalf of its principal, this does not mean, without more, that he/she has authority to accept service of arbitration proceedings. Authority to accept service is a serious and distinct matter.
2. Whether sending a notice of arbitration to an employee constitutes effective service depends on that employee’s particular role, and how that role is held out within the organisation. Serving a notice on an employee who has had some involvement in the underlying events or dispute is unlikely, without more, to be sufficient. The court noted a difference between an employee with an operational function and an employee whose role is to manage the company’s disputes. The latter is more likely to have implied authority to accept service, but this will depend on the facts of each particular case.
3. Service by email can constitute effective service. If a notice is sent to a generic email address promulgated on a company’s website, the sender will have a legitimate expectation that the notice will come to the attention of a person authorised to deal with it. However, an email sent to an individual employee’s email address is different, and the sender can only expect the named individual to open it.
4. In contrast to Sino Channel, Glencore Agriculture involved an employee, not a third-party agent. In the case of a third-party agent, a company may never have authorised that third party to accept service. However, usually, at least one employee within a company has sufficient seniority and authority to accept service. If the employee’s role encompasses managing the company’s disputes, ordinarily that will imply their authority to accept service.
5. On the facts, the junior employee did not have ostensible authority. Whilst the junior employee did send three emails relating to the underlying matter, this did not amount to anything more than a limited operational role.

Comment

The decisions in both Sino Channel and Glencore Agriculture are a reminder that the courts consider service of originating process in arbitration a serious and important step. Although service in arbitration is subject to more flexible rules than in court litigation, these rules are still important and parties must comply with them. Claimants should not take effective service in arbitration for granted.

If in doubt, a party to an English-seated arbitration agreement should carefully follow section 76 of the Act, which deals with service. Under section 76(1) of the Act, parties to an arbitration agreement are free to agree on the manner of service. If there is no agreed manner of service contained in the arbitration agreement or any institutional rules incorporated by reference (the arbitration may be ad hoc rather than institutional), then parties can serve documents by “any effective means” under section 76(3) of the Act. However, the safest course is always to follow the default provision in section 76(4) of the Act. In the case of a respondent company, that means serving the notice of arbitration by post on the company’s registered or principal office. The service method prescribed in section 76(4) of the Act will always be effective. The courts observed in both Sino Channel and Glencore Agriculture that the claimants could have saved themselves considerable time and expense by taking advantage of this default provision.

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Latham & Watkins LLP – Robert Price