“IF ITS AIN’T BROKEN, IT’S NOT WORTH MENDING” – A LOOK INTO A ‘DYSFUNCTIONAL’ DISPUTE CLAUSE

[POSTSCRIPTS]: One interesting feedback that I get from an Architect was, "Can an Architect be a Quasi Arbitrator?" To answer that, we ought to ask the question as to whether Arbitration is a business of Law or Architecture? The question led me to search any legal case that address such and I found that there is indeed one! 

An argument arise when the business of architecture also include being arbitrator or more aptly known as quasi-arbitrator. What is ‘quasi-arbitrator’? There is no legal definition of ‘quasi-arbitrator’, and the closest are given as:

Per Lord Reid, “person who undertake to act fairly have often been called quasi-arbitrator […] all persons carrying out judicial function must act fairly […] there is nothing judicial about an architect’s function in determining whether certain work is defective. There is no dispute. He is not jointly engaged by the parties. They do not submit evidence as contentious to him. He makes his own decision and comes to his own opinion.”[1]

Per Lord Salmon, “[…] no more reason for regarding the architect as being in the same position as a judge or arbitrator than there is for so regarding the Valuer […] The descriptions 'quasi-arbitrator' […] have been invoked but never defined. […] Judges and arbitrators have disputes submitted to them for decision […] evidence and the contentions of the parties are put before them […] They then give their decision. None of this is true about the valuer or the architect who were merely carrying out their ordinary business activities. Indeed, their functions do not seem to me even remotely to resemble those of a judge or arbitrator.”[2]

Arbitration falls within the ambit of law, not architecture as the saying goes, when you have a dispute, you go to the lawyers, not the architects. Therefore, it cannot be said that arbitration is an extension of the knowledge, study and practice of architecture and the various arts and science connected therewith.  

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[1] Sutcliffe v Thackrah [1974]1 All ER: at p.864
[2] Ibid,p.882

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​“IF ITS AIN’T BROKEN, IT’S NOT WORTH MENDING” – A LOOK INTO A ‘DYSFUNCTIONAL’ DISPUTE CLAUSE 

This article attempt to demonstrate how a scenario requiring a ‘legal advice’. The scenario given is fictional, but the application of law mirrored real event. Any resemblance of the character in this scenario, to anyone alive or dead or any institution existed or non-existent, is purely coincidental.
 
[SCENARIO]: ‘Sure-win’ and ‘Must-win’ enter into a contract issued by ‘Malu-Usia’ Society of Project-Managers (“MSPM”), hereinafter ‘MSPM-Form’. The form contains an exclusion clause fine-printed, “parties are held to rely on their judgement when using this form of contract and MSPM takes no liability whatsoever to anyone in connection with the usage of the form”. The dispute clause contained therein, state “Any dispute[1], arising out of or relating[2] to this contract, shall be finally determined[3] by arbitration, by applying to the President of Malu-Usia’ Society of Project-Managers (“MSPM”) to appoint an Arbitrator, in accordance with the MSPM Arbitration Rules in force at the time of the commencement of the arbitration.”
 
Parties went into dispute. Sure-win commence arbitration by an application to MSPM President, as they cannot agreed to one another on the candidate of the arbitrator. The parties foresee that an ‘institutionalize administered arbitration’ would be fair and just. An arbitrator was appointed and the proceeding went on as usual. The counsel of ‘Must-win’ found out that the constitution of incorporation of MSPM in accordance with the Society Act of Malu-Usia, does not contain any provision that MSPM can accord any services of alternative dispute resolution (‘ADR’). In fact, all statutes of Malu-Usia mirrored those of the Malaysian Law. The counsel pose a challenge that due to the alleged dysfunctional of the dispute clause, his client Sure-win’s position has now been prejudiced on the basis that he has been misled fraudulently by MSPM through the use of the MSPM-Form. ‘Sure-win’ is contemplating to sue MSPM.
 
You are appointed by MSPM. Discuss on the point of law, the legal implications of both your client and Sure-win.
 
To consider the legal implications of both Sure-win and MSPM, [THE ISSUES] are: foremost, whether MSPM has the jurisdiction to provide services beyond what has been incorporated in its object of incorporation in accordance to the law? If so, whether MSPM breaches the law? If so, whether the MSPM President has the power to appoint arbitrator for the parties as in accordance to the provision of the dispute clause? If so, whether the President is acting on its personal capacity in such an appointment or in the office of the MSPM President? If so, whether the President has acted in ‘ultra vires’ against the object of the society he represented? If so, whether the dispute clause is dysfunctional due to the illegality of the dispute clause itself on the context of the severe lack of inherent jurisdiction of the society to provide such services? Is it not an ad-hoc arbitration that the MSPM President is at liberty to choose who he wishes? If so, whether the party has been fraudulently misled? Ultimately, who is liable?
 
[THE LAW] holds that: foremost, a society cannot provide any means of services that is not prescribed in its objects of incorporation.[4] Further, the law also provided that, a President is an individual who acted in its capacity as representative of the society as an ‘office-bearer’ in accordance to the Act.[5] In addition, the law provides that ‘misrepresentation’ is, being an unambiguous ‘false statement of facts’[6], addressed to the party misled[7], inducing the ‘victim’ into entering a contract.[8] However, the law[9] assumes that one commits fraudulent[10] misrepresentation, which is a criminal offence[11], and the burden of proof is vested upon the defendant[12]. As for the ‘fine-prints’, the law allows that terms can be incorporated by notice, where it must be given before the time of concluding the contract[13], terms must be contained/referred in the document[14] i.e. contractual[15], reasonable steps be taken to bring the term[16] to the party’s attention[17] i.e. a ticket[18] must be explicit[19], with a clause not in-front of ticket (not incorporated)[20], reference to clause is obliterated (not incorporated)[21], reference to a website (incorporated)[22], and ‘more unusual and unreasonable’ is the clause, higher degree of notice is required[23]. Finally, the issue of illegality in contract law, it holds that illegality comes in different ‘sizes and shapes’ and it is difficult to categorise. Generally, it covers ‘commissioning of a legal wrong’ or ‘contracts against public policy’[24].[25] Illegality affect the contract in two ways, ab-intitio as to its formation[26] and ‘in the performance’[27], i.e. whether a party entitle to sue to recover losses despite the illegality[28], on such basis he was unaware of the illegality[29]? What if the party has knowledge about the illegality, he is unable to sue.[30] The subject of the contract is made illegal ab-intitio, i.e. against the law[31].
 
[THE EVIDENCE] shows that: MSPM’s object of incorporation, does not contain any provision that MSPM can accord any ADR services. If so, whether the President is acting on its personal capacity in such an appointment or in the office of the MSPM President? By the act of the MSPM President, he in his capacity as an office-bearer, not representing himself, but the society[32] and has acted ‘ultra-vires’ against the object of the society[33]. Thus, whether MSPM has the jurisdiction to provide services beyond what has been incorporated in its object of incorporation in accordance to the law? The short answer is, ‘no’ as the law forbade it. [34] If so, whether MSPM breaches the law? MSPM has not only crossed the law, the society is tantamount to be deregistered.
 
If so, whether the MSPM President has the power to appoint arbitrator for the parties as in accordance to the provision of the dispute clause? Although the dispute clause require the President to appoint arbitrator, it is evidence that MSPM itself has no provision to accord ADR services. As such an illegal act cannot be contracted. [35]
 
If so, whether the President has acted in ‘ultra vires’ against the object of the society he represented? The President of MSPM has taken unto his own hand to perform an illegal act, on behalves of the society, knowing well that he has not accorded with the jurisdiction to do so. The powers [jurisdiction] has to be laid down from the constitution to the office-bearer.[36] In its absent, where is the power to act?
 
If so, whether the dispute clause is dysfunctional due to the illegality of the dispute clause itself on the context of the severe lack of inherent jurisdiction of the society to provide such services? The original intent and purpose of the dispute clause is not dysfunctional. But arising from the illegality of performance by the President of MSPM, in breaching the very fundamental Act of the incorporation of the society, the dispute-clause, which is by itself a formal contract. The question of is severability[37] in this case is irrelevant. Thus the object of a contract [dispute resolution services] cannot be illegal. Such consistent with the recent ruling that holds the dispute clause is governed by the law of contract, not the seat.[38] Thus, the question how can such dispute clause, drafted so carefully to avoid any ‘pathological defects’ can be dysfunctional? The short answer, is the ‘act of appointing the arbitrator’ itself is made illegal, given this context.     
 
Is it not an ad-hoc arbitration that the MSPM President is at liberty to choose who he wishes? The evidence shows that foremost, parties cannot agreed to one another on the candidate of the arbitrator, so they went to MSPM for institution administered arbitration. The parties foresee that an ‘institutionalize administered arbitration’ would be fair and just. This consideration, in itself, is res ipsa loquitur[39] that arbitration is to be held as an instruction administered arbitration, not ad-hoc.
 
The evidence shows that the constitution of incorporation of MSPM does not accord any ADR services to be rendered. This lead to the next question, if so, whether the party has been fraudulently misled? It is undoubtedly, a contract exist between the user of the form and MSPM. The law holds that ‘misrepresentation’ is, being an unambiguous ‘false statement of facts’[40], addressed to the party misled[41] and the law[42] assumes that one commits fraudulent[43] misrepresentation, which is a criminal offence[44], and the burden of proof is vested upon the defendant[45]. Has the President aware of such false statement? Has he not aware of the constitution of the society he holds as office-bearer? Obviously, he has committed a crime.
 
Ultimately, who is liable? The evidence shows that ‘Sure-win’ position has now been prejudiced on the basis that he has been misled fraudulently by MSPM by virtue of the MSPM-Form. In the said form, it was fine-printed, “parties are held to rely on their judgement when using this form of contract and MSPM takes no liability whatsoever to anyone in connection with the usage of the form”. Can this be said to be an ‘exclusion clause’ for liabilities against MSPM? The law holds that terms can be incorporated by notice, where it must be given before the time of concluding the contract[46] and ‘more unusual and unreasonable’ is the clause, higher degree of notice is required[47]. Since the exclusion term is incorporated in the document[48], although as a fine print, it is legible and constitute a valid exclusion clause. In other words, contract advisors who does not strike out the dispute clause and replace with another more legitimate arbitrator appointing institution, had the greater chances to be liable. Notwithstanding such the MSPM with its entire retinue of office-bearer are criminally liable as to the effect of the breaches to the Act. Criminal offences cannot be contracted out.
 
[Concluding]: The fundamental breach is where the office-bearer, has been contracted to act illegally against the Act. The legal impacts are not only the dispute clause made dysfunctional, but include therein criminal offences and contractual liabilities to the contract advisors, namely Project Managers, Architects and QSes. Thus, caveat emptor.[49]
 
POSTSCRIPT: Upon reading this article, Contract Advisors will have a field day of striking off and amending the dispute clauses, by making sure the institutionalize arbitrations are legitimate in accordance to the law, while lawyers with adverse award, will be lining up in court to set aside due to unenforceability and the police will start knocking at the door of the ‘illegal society’.

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[1] Asia International Arbitration (‘AIAC’) model dispute-clause: ‘any dispute, controversy, difference or claim arising […], including the performance, breach, termination or invalidity thereof, as well as any non-contractual claims’
[2] International Commercial Court (‘ICC’) model dispute-clause: ‘or in connection with’
[3] ICC model dispute-clause: ‘settled’
[4] S. 13.(1)(c)(iii) Societies Act 1966 (‘SA1966’): ‘[the Registrar] may, in the following cases, cancel the registration of any society registered […] (c) if the Registrar is satisfied – (iii) that the society is pursuing objects other than the objects with which the society is registered;’
[5] S.2 SA1966: ‘office-bearer: means any person who is the president […]’
[6] Kleinwort Benson v LincolnCC.[1999]2AC349
[7] Brennon v Bolt[2004]EXCACiv1017
[8] Renault v Fletpro[2007]EWCH2541
[9] Hedley Byrne v Heller[1964]AC465
[10] Derry v Peek(1889)14AppCas337
[11] Barclays Bank v O’Brien[1994]1AC180
[12] Esso v Mardon[1976]QB801
[13] Olley v Marlborough Cort[1949]1KB532
[14] Chapleton v BarryUDC[1940]1KB532
[15] Taylor v GlasgowCorp.(1952)SC440.21
[16] Wilkes v Jessop(2007)CLY795
[17] Parker v SE.Railway(1877)2CPD461; Thompson v LMS. Railway[1930]1KB41:exclusion clause incorporated even if claimant was illiterate; Richardson,Spence v Rowntree[1894]AC217:in contrast if defendant knows claimant is illiterate
[18] Thompson v LMS.Railway[1930]1KB41 and Thornton v ShoeLane Parking[1971]2QB163:not given notice, not incorporated.
[19] Interfoto v Stiletto[1988]QB433
[20] Handerson v Stevenson(1875)LR2Sc&Div470
[21] Sugar v LMS Railway[1941]1AllER172
[22] Impala Warehouse v Wanxiang[2015]EWHC25(Comm)
[23] J.Spurling v Bradshaw[1956]1WLR461
[24] Johnson v Driefontein[1902]AC484
[25] Treitel(2015)
[26] Re Mahmoud and Ispahani[1921]2KB716
[27] St.John Shipping v Joseph Rank[1957]1QB267
[28] Shaw v Groom[1970]2QB504
[29] Marles v Philip Trant[1954]1QB29
[30] Asmore Benson v AV.Dawson[1973]1WLR828
[31] St.John Shipping v Joseph Rank(1957)1QB267
[32] S.2 SA1966
[33] S. 13.(1)(c)(iii) SA1966
[34] Ibid
[35] Re Mahmoud and Ispahani[1921]2KB716
[36] S.49 SA1966
[37] Arbitration agreement is severable from the contract in which it is contained. Any challenge relating to the validity of the underlying contract will generally not affect the validity of the arbitration agreement.
[38] Enka v Chubb [2020] UKSC 38
[39] Latin for "the thing speaks for itself."
[40] Kleinwort Benson v LincolnCC.[1999]2AC349
[41] Brennon v Bolt[2004]EXCACiv1017
[42] Hedley Byrne v Heller[1964]AC465
[43] Derry v Peek(1889)14AppCas337
[44] Barclays Bank v O’Brien[1994]1AC180
[45] Esso v Mardon[1976]QB801
[46] Olley v Marlborough Cort[1949]1KB532
[47] J.Spurling v Bradshaw[1956]1WLR461
[48] Chapleton v BarryUDC[1940]1KB532
[49] Let the buyer beware