Headnote

Arbitration – Validity of arbitration agreement – Capacity to enter into arbitration agreements – Grounds for annulment of arbitral awards

Summary of facts

The First Respondent, as contractor, hired the Appellant to perform work for two projects under a subcontract. The First Respondent ordered the Petitioner to stop the work on the pretext that the employer had terminated the main contract. Although the subcontract contained an arbitration clause, the Petitioner contended it was void due to the lack of capacity of the manager who signed the contract on behalf of the Petitioner.

The Court of First Instance ruled that the action could not be heard because of the arbitration clause. The Petitioner appealed in Commercial Appeal No. 296-2012 claiming that the signature on the schedule to the subcontract was forged. The Court of Appeal appointed a Forensic expert and after receiving his report ordered that the appeal be dismissed and the primary ruling upheld.

The Petitioner appealed to the Court of Cassation, contending that the Court of Appeal erred in upholding the Court of First Instance’s dismissal of the Petitioner’s plea that the arbitration clause (presuming it was validly inserted in the schedule to the subcontract) was void due to lack of capacity of the attorney and manager of the Petitioner who signed the subcontract and agreed to submit to arbitration any disputes that may arise out of the subcontract. The Petitioner had argued that the power of attorney given to the manager, pursuant to which he signed the subcontract, did not include the right to arbitrate for which the law requires special authorisation or express inclusion in a general power of attorney. Yet, the Court of Appeal held that the power of attorney given to the Petitioner’s representative by its owner was a general power of attorney to act and execute contracts and agreements on the Petitioner’s behalf and that arbitration per se is normally agreed upon between the parties which is the case here.

Held

The Court of Appeal decision was overturned.

It is settled in the Court of Cassation that the capacity required to enter into a valid arbitration agreement, according to Article 216 of the Civil Procedure Law, is the capacity to dispose of rights. The manager of a private commercial business acts for the owner of the business in conducting its affairs in line with its activities. The manager may not, however, dispose of any rights of the business without authorisation from the owner or the owner’s approval of the undertaking by assuming a position that leaves no doubt under the circumstances of the purposes intended to be served. The owner of a private business is liable for legal commitments that are assumed in the name of his business provided that they are assumed by him or, duly, on his behalf. In this case the power of attorney given by the owner of the business to its manager was limited to managing the business and did not extend to other acts such as agreeing to arbitration.

Judgment

It is settled in the Court of Cassation that the capacity required to enter into a valid arbitration agreement, according to Article 216 of the Civil Procedure Law, is the capacity to dispose of rights. The manager of a private commercial business acts for the owner of the business in conducting its affairs in line with its activities. The manager may not, however, dispose of any rights of the business without authorisation from the owner or the owner’s approval of the undertaking by assuming a position that leaves no doubt under the circumstances of the purposes intended to [Page83:] be served. The owner of a private business is liable for legal commitments that are assumed in the name of his business provided that they are assumed by him or, duly, on his behalf.

An arbitration agreement entered into by an attorney without authority to do so by his principal is null and such nullity is relative in favour of the principal to the exclusion of its adversary where the principal alone would have the right to challenge the arbitration agreement. The trial court will determine the existence of a power of attorney and its scope but must exercise its discretion soundly based on relevant and sufficient evidence.

The power of attorney given by the owner of the Appellant to the attorney in question confirms that he was appointed to manage the company’s administrative, technical and financial affairs, organise the company, arrange its affairs and hire and terminate staff. The attorney was granted power to submit tenders, conclude deals, execute contracts and agreements, compromise, discharge and deny. As such, the power of attorney given by the owner of the Appellant to its manager is limited to managing the business and does not extend to other acts such as agreeing to arbitration. Therefore, the owner of the Appellant is not bound by any agreement to submit rights to arbitration on the part of his attorney and manager as it exceeds the attorney’s limit of authority and the owner has asserted that his power of attorney did not authorise such acts.

It follows that the arbitration clause is void and the Court of First Instance and, in turn, the Court of Appeal were wrong to find that the power of attorney included the power to bind to arbitration because the manager had been given a power of attorney that allowed him to execute contracts and agreements and that arbitration per se is normally agreed upon between the parties. The Court of Appeal ultimately ruled the action barred by the arbitration clause even though the power of attorney did not include the right to compel arbitration which must be expressly set out in the power of attorney or granted by the principal (owner of the business) which is not the case here. The Court of Appeal reached an erroneous result and its decision will be overturned for this reason without the need to consider the other grounds of appeal.