Sole Arbitrator’s jurisdictional decision finding that an arbitration clause contained in a loan agreement was valid and binding on both the lendee and the guarantor

Background

On 6 June 2009, A (a Finnish entity) and B (an Indian company) entered into a loan agreement, which was subsequently amended three times: twice in 2009 (the first and second amendment), and once in October 2012 (the third amendment) (hereinafter collectively referred to as the “Loan Agreement”). Pursuant to the terms of the Loan Agreement (as amended), B had received from A in three drawdowns a total amount of USD 4,214,269.12 as a loan.

The governing law clause of the Loan Agreement provided as follows: “This Loan Agreement, as well as all rights and obligations arising therefrom, shall in all respect be governed by and construed and interpreted in accordance with the laws of Finland.” Further, the Loan Agreement contained the following arbitration clause: “Any controversy between the parties to the Loan Agreement and claim by any such party against the other party arising under the Loan Agreement or in connection herewith, which has not settled by contract of the parties within 60 days, shall be submitted to arbitration and shall be finally settled by the [FAI Rules] by one (1) arbitrator appointed in accordance with the said rules. The seat of arbitration shall be Helsinki […]”

Apart from the Loan Agreement between A and B, an Indian company C – which was controlled by the same persons as company B – had issued a first demand guarantee of B’s obligations under the Loan Agreement on 27 August 2009 (hereinafter the “Guarantee”). The Guarantee did not contain any arbitration clause but provided instead as follows: “The Lender [A] shall have the right to bring any claims based on this Guarantee and any disputes that may arise herefrom into the Finnish courts […]”

The above-mentioned third amendment to the Loan Agreement provided that “this Amendment Agreement shall be governed by and construed in accordance with Finnish law. Any dispute arising out of or in connection with this Amendment Agreement shall be finally settled in accordance with the dispute resolution mechanism set out in the Loan Agreement.” Additionally, the third amendment contained the following statement, followed by C’s name and signature of C’s representative: “C (the ‘Guarantor’) has created a guarantee of the amount of USD 4,000,000 in favour of A by a guarantee made on 27 August 2009. This Amendment Agreement to the Loan Agreement and the guaranteed amount USD 4,214,269.12 is accepted by the Guarantor. Dated as of the date of this Amendment Agreement.”

As B failed to repay the loan to A, the latter (hereinafter “Claimant”) commenced FAI arbitration proceedings against B (hereinafter “Respondent 1”) and C (hereinafter “Respondent 2”), claiming payment of the principal amount of USD 4,214,269.12 together with interest. Respondents objected to FAI’s jurisdiction on various grounds. In brief, Respondents referred to certain other agreements concluded in connection with the Loan Agreement, which were governed by Indian substantive law and which stipulated that the parties “agree to submit to the jurisdiction of the courts of Chennai, India”. Further, Respondents contended that the various amendments made to the original Loan Agreement had rendered it void, with the result that Claimant was unable to invoke the arbitration clause referring to arbitral proceedings seated in Finland. Finally, Respondent 2 also argued that it was not a signatory or otherwise party to the third amendment of the Loan Agreement, as a consequence of which the arbitration clause relied upon by Claimant could not be extended to it.

Claimant disagreed with Respondents and maintained that the sole arbitrator had jurisdiction to hear all of its claims on the merits against both Respondents. To summarize, Claimant’s key arguments were as follows:

(i) Respondent 1 was a party to the arbitration agreement as it had consented to it by signing the Loan Agreement and all three amendments made to it.

(ii) In addition, Respondent 2 was a party to the arbitration agreement as it had consented to the signing of the third amendment, where it was expressly stated that the arbitration clause of the Loan Agreement shall apply to the third amendment. Moreover, Respondent 2 had signed the Guarantee which was an integral part of the Loan Agreement as Respondent 2 offered the main security for the loan.

(iii) The fact that there was a jurisdiction clause in the Guarantee – referring to the courts of Finland – did not deprive Claimant of the right to invoke the arbitration clause of the Loan Agreement against Respondent 2. The jurisdiction clause in the Guarantee did not stipulate an exclusive forum for dispute resolution but merely a one-sided right for the benefit of Claimant, in addition to the arbitration clause set out in the Loan Agreement.

(iv) Also, in their reply to Claimant’s notice for the termination of the loan, both Respondents had invoked the arbitration clause of the Loan Agreement and stated that all disputes shall be referred to the “Arbitration Institute of Helsinki Chamber of Commerce”.

(v) Furthermore, even if Respondent 2 were found not to be a signatory to the arbitration agreement, it would bind Respondent 2 because the same person had signed the third amendment to the Loan Agreement for both Respondents and Respondent 2 was therefore aware of the arbitration clause contained in the Loan Agreement. Under Swedish law, it was generally accepted that, in case the guarantor had the same obligations as the lendee, the guarantor was also obliged to participate in an arbitration initiated by the lender, unless there were special circumstances in support of a different conclusion. The same legal principle should apply also under Finnish law because of the close connection between the two legal systems.

Being prima facie satisfied that a valid and binding FAI arbitration agreement between A, B and C may exist, the FAI Board decided to allow the arbitration to proceed against both Respondents pursuant to Article 14 FAI Rules and appointed a Swiss sole arbitrator to resolve the dispute. The arbitrator chose to decide the jurisdictional plea as a preliminary matter and issued a separate procedural ruling finding that he had the authority to adjudicate all claims raised against both Respondents. Below is an anonymized summary of the sole arbitrator’s jurisdictional decision.

Summary of the sole arbitrator’s decision

(1) It is uncontested between the parties that Claimant and Respondent 1 entered into the Loan Agreement, signed by Claimant and Respondent 1, on 6 June 2009. In addition, Claimant and Respondent 1 signed three amendments to the Loan Agreement. Respondent 1 does not contest that the Loan Agreement and the amendments were signed on its behalf. However, Respondents do contest that the Loan Agreement is valid and enforceable any longer as it was allegedly replaced by several other agreements.

(2) The parties also agree that Respondent 2 signed the Guarantee on 27 August 2009 in favour of Claimant in the amount of USD 4,000,000.00. It is also undisputed that the amount was amended in the third amendment to the Loan Agreement to USD 4,214,269.12.

(3) The law of Finland is the lex arbitri of the present arbitration proceedings. Leading arbitration scholars suggest that the law governing the arbitration agreement should be applied to determine in particular the effects of an assignment, the group of companies doctrine, or implied consent to an arbitration agreement (BORN, International Commercial Arbitration, 2nd ed., Kluwer Law International 2014, p. 1498). In line with this reasoning, it is appropriate to deal with such problems pursuant to the law of Finland.

(4) Claimant has submitted legal authorities suggesting that arbitration clauses shall be interpreted broadly. In particular, in the context of disputes involving companies within the same company group, the scope of an arbitration agreement might extend to bind an entity which is a non-signatory but responsible for the fulfilment of the contract.

(5) The key question that presents itself is whether Respondent 2, as a guarantor of the Loan Agreement, is bound to arbitrate the claims raised against it. According to Claimant, there is no case law in Finland on whether and when guarantors are bound by an arbitration clause in the main agreement. However, Claimant maintains that Swedish law should serve as guidance on this point due to its substantive similarity. Claimant has also submitted a decision of the Svea Court of Appeal in which the Swedish court held that a guarantor was bound by the arbitration clause in the main agreement due to its identical obligations and because the guarantor was aware of the presence of an arbitration clause in the main agreement, which was entered into before or simultaneously with the guarantee undertaking. However, the guarantee in the Swedish case did not contain any dispute resolution clause or reference to an arbitration clause, contrary to the Guarantee in the case at hand.

(6) The sole arbitrator’s jurisdiction can only be based on the arbitration clause set out in the Loan Agreement; all other dispute resolution clauses referred to by the parties provide for jurisdiction of a national court. The fundamental issues to be decided can therefore be formulated as follows: If Respondents are bound by the arbitration clause of the Loan Agreement, and if the claims raised against Respondents fall within the scope of that clause, then the sole arbitrator has jurisdiction with regard to such claims.

(Note by the reporter: At this point, the sole arbitrator proceeded to examine (i) first, whether the claims raised fell within the scope of the arbitration clause of the Loan Agreement, and (ii) second, whether Respondents could be deemed to be bound by the said arbitration clause.)

(7) The scope of the arbitration clause of the Loan Agreement is expressed in particularly broad terms, including disputes merely “in connection herewith” (i.e., the Loan Agreement).

(8) As Respondent 1 has entered into the Loan Agreement and its three amendments, Claimant’s claims against Respondent 1 clearly fall within the scope of the arbitration clause relied upon by Claimant.

(9) The preliminary question whether Respondent 2 may be liable for an alleged breach of the Loan Agreement may likewise be subsumed as being “a claim […] arising under the Loan Agreement or in connection herewith [the Loan Agreement]” on the following grounds: (i) the Guarantee and the Loan Agreement are closely related in the sense that Respondent 2’s obligation was to secure the repayment of the loan given to Respondent 1 under the Loan Agreement. (ii) The sole arbitrator cannot decide on the claims raised against Respondent 2 before having determined the effects of the Guarantee on Respondent 2’s obligation under the Loan Agreement, which shows that these issues are so closely related that they cannot be separated. (iii) In their reply to Claimant’s termination notice, both Respondents have relied upon the arbitration clause of the Loan Agreement, also with regard to Respondent 2. (iv) The different dispute resolution mechanism stipulated in the Guarantee was entered into three years before Respondent 2 acknowledged the amendment of the Guarantee in the third amendment (August 2009 vs. October 2012), which itself refers to the dispute resolution mechanism stipulated in the Loan Agreement (i.e., FAI arbitration).

(10) Respondents seek to contest the validity and applicability of the arbitration clause of the Loan Agreement by alleging that the Loan Agreement itself “is not valid in law as it has undergone a sea change over a period of time and in its place several agreements had been entered into and thereby giving up the jurisdiction of arbitration in Finland”. Therefore, the sole arbitrator has to examine what effects, if any, the alleged invalidity of the Loan Agreement has on the arbitration clause contained in it.

(11) Article 32 para. 1 FAI Rules, according to which the arbitral tribunal shall have the power to rule on its own jurisdiction, is intended to embody the doctrine of severability in proceedings under the FAI Rules (cf. SAVOLA, Guide to Finnish Arbitration Rules, 2015, p. 284). The doctrine gives an arbitration clause an independent legal existence and effectiveness, even if the underlying contract between the parties is void. In accordance with the severability doctrine, Respondents cannot rely on the argument that the arbitration clause in the Loan Agreement is no longer valid. Even if the Loan Agreement itself had become void, the arbitration clause has its own destiny pursuant to the doctrine of severability.

(12) Finally, the role of Respondent 2, as a guarantor of the Loan Agreement, has to be examined in order to determine whether Respondent 2 is a party to the arbitration agreement. According to Born, is it crucial to examine the parties’ intentions in order to determine whether the guarantor should be bound by the arbitration clause in an underlying contract, and such issue will in most cases be governed by the national law applicable to the underlying guarantee relationship (BORN, International Commercial Arbitration, 2nd ed., 2014, p. 1461-1463). In that regard, Claimant has submitted the following statement of Dr. Risto Ovaska under Finnish law: If an entity has assumed responsibility over certain aspects of the contract, such as the payment obligations under the contract, this entity must be viewed as bound by the arbitration agreement if it has known or should have known about the existence of the arbitration agreement […] A guarantor is bound by an arbitration agreement [contained in the main agreement] if the [main] agreement was entered into before or simultaneously with the guarantee undertaking and the guarantor was, or should have been, aware of the arbitration agreement.”

(13) In the present case, Respondent 2 was aware of the Loan Agreement and the arbitration clause contained in it. This is evident from the following: (i) Respondent 2 has signed the third amendment to the Loan Agreement three years after it had signed the Guarantee. (ii) The third amendment specifically states that the dispute resolution mechanism of the Loan Agreement (i.e., FAI arbitration seated in Finland) is meant to apply. (iii) The parties agree that Respondent 2 issued the Guarantee as security for the loan given to Respondent 1. Without prejudice to any findings of the sole arbitrator on the merits of the case, Respondent 2 became involved in the execution of the Loan Agreement on a de facto basis.

(14) On these grounds, Respondent 2 is by virtue of Finnish law bound to the arbitration clause in the Loan Agreement.

(15) This finding has to be distinguished from the issue whether Respondents have continuing obligations vis-à-vis Claimant which can serve as a basis for the claims raised by Claimant against Respondents. The sole arbitrator’s decision on the issue of jurisdiction does not in any shape or form prejudice any future decision of the sole arbitrator on the Respondents’ liability on the merits.

(Note by the reporter: At this point, the sole arbitrator proceeded to present his conclusions and dispositive part of the jurisdictional decision.)

(16) The above analysis leads the sole arbitrator to conclude that both Respondents are bound by the arbitration clause of the Loan Agreement on the basis of which Claimant has initiated these arbitration proceedings. Consequently, the sole arbitrator has jurisdiction to adjudicate Claimant’s claims against both Respondents. No opinion is expressed and no view has been formed by the sole arbitrator on the merits of the dispute.

(17) Based on the foregoing analysis, reasoning and findings, the sole arbitrator issues the following order:

(i) Respondents’ objection to the jurisdiction of the sole arbitrator is dismissed.

(ii) The sole arbitrator decides that he has jurisdiction to adjudicate all claims raised against both Respondents.

(iii) All other and further claims and requests for relief, including costs, will be determined at a later stage of the proceedings.

 

Reported by Mika Savola
Chair, FAI Board

Posted in FAI cases |