Arbitration Clause "Survives" Void Contract

By: Eli Doron, Adv; Yaron Tikotzky, Adv, (C.P.A); Dr.Slomo Nass, Adv, (C.P.A)

1/1/1900

The plaintiff - Tyco Building Services Pte Ltd ("Tyco") is a Singapore company, which markets electronic security equipment. The responded – Alvakes Video Ltd ("Alvakes") is an Israeli company which imports and markets closed-circuit television.

During 2001 Singaporean Authorities published an international tender for the supply of closed –circuit televisions to be used in the Singapore prisons. According to the terms of the Tender, the approved supplier had to enter into a joint venture with a local Singapore company, and establish a permanent Singapore representative.

 Alvakes agreed to introduce Tyco to a Singapore company "Megason", on condition, that if Tyco/ Megason will be awarded the Tender, they will purchase and supply Alvakes's equipment. More specifically the parties agreed that Alvakes will submit the joint venture - Tyco/Megason a purchase offer and if Tyco/Megason will be awarded the Tender, Megason will issue a purchase order to Alvakes. Accordingly, Alvakes purchase offer was sent, Tyco/ Megason were awarded the Tender, and Megason sent Alvakes a purchase order. The Order declared as follows: "Please note that this order is subject to (A) complete client approval of your CDR submission and (B) in accordance with the enclosed sub-contract agreement". Under Clause 23 of the Order Singapore law governed the agreement. Clause 23 of the attached sub-contract agreement, was an arbitration clause, as follows: "Any dispute arising out of or in connection with this Sub-Contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in Singapore at the Singapore International Arbitration Centre (the "SIAC")"

Alvakes filled a claim against Tyco and Megason in front of the District Court of Tel-Aviv, claiming damages and compensation of 10MUS$. Alvekes contained that Tyco/Megason deliberately demanded excessive prices (from the Singapore Authorities) for the products, were late in responding to the Singaporean Authorities requests, and used substitute products of "Philips" instead of Alvakes equipment. Both Tyco and Megason applied for a stay of proceedings in the Israel District Court, relying on the above arbitration clause and the Israeli Arbitration law .A Decision granting a stay of proceeding based on an arbitration clause in an contract, means actually a dismissal of the claim before the Israeli court and the referral of the parties to the arbitration, as agreed between them.

Reversing the District court decision, the Supreme Court began with the finding that although documents were transferred by e-mail and were not signed, the order and the sub-contract agreement, do incorporate a valid arbitration agreement. Alvakes didn’t resist the terms presented to it, and intended to contract on the terms submitted, and Alvakes claim itself was based on the existence of an agreement –which included an arbitration clause.

But, in this case the contract itself didn't come into force due to the non-fulfillment of the condition established into it by the wording of the order (as stated above – "Please note that this order is subject to (A) complete client approval of your CDR submission"). Therefore, the question the Three Supreme Court Judges had to relate to was- can the arbitration clause "survive" or govern, a void contract. The first Supreme Court Judge Y. Danzinger, held that according to the Israeli law of Contracts, when a contract becomes void the court can still give effect to parts of the contract, if it is justified to do so, according to the circumstances. In this way, for example courts give effect to clauses in a contract that may be void because the contract in part was contradicted to public policy.

 There is no reason why an arbitration clause will not be given an effect, when a commercial contract does not come into effect as a result of non-fulfillment of a condition, especially when both the wording of the arbitration clause and the governing law clause, clearly determines that any dispute, including "regarding its existence, validity or termination" is subject to arbitration. Therefore the claimant – Alvakes is bound by the arbitration clause.


The second Judge, Y. Amit reached the same conclusion, but provided different reasoning: There is no relevance as to why and how the contract wasn't fulfilled. The main point is that under the freedom of contracts the parties agreed in advance upon the mechanism to settle any dispute arising from the contract, and this includes obviously the dispute as to why the condition was not fulfilled, or if one of the parties deliberately frustrated the contract. The third Judge, A. Hayot, agreed both with Judge Danzinger conclusions and Judge Amit remarks.

IT was held, by the approval of all three Judges, that although the contract wasn't signed, and void, the arbitration clause is valid and binding. The matter was send back to the District Court to determine the terms for the stay of the proceedings, and the conditions for the referral of the matter to the agreed arbitration forum. Tyco Building Services V. Alvakes Video Ltd and others, Israel Supreme Court, Appeal No' 4986/08, 12/4/2010


Contributed by:

Yoav Harris – Doron Tikotzky & Partners, International Law Offices (Israel)

The Commercial, Shipping & Investment ARBITRATION WATCH, April – June 2010, Issue no. 6.