Transaction set-off

Econet Satellite Services Ltd v Vee Networks Ltd [2006] 2 Lloyd’s Rep 423 (QBD (Comm))

A contract to provide telephony services via a satellite from the claimant’s teleport in Brookman’s Park was expressed to be governed by the ‘substantive internal laws of the United Kingdom’ and s16 of the contract provided that ‘any disputes, controversies or claims arising under or out of, or by virtue of this agreement’ were to be resolved by arbitration under UNCITRAL Rules. Under the agreement EWN was to provide ESS with international voice traffic termination into the telecommunications networks in Nigeria. It submitted invoices for approximately US$12m, only US$2.5m of which was paid. EWN therefore began an arbitration claim pursuant to the agreement. ESS defended by admitting the sums claimed but asserting the right of a transaction set-off arising out of claims under the main contract under which ESS agreed to provide EWN with satellite capacity and voice termination services. The arbitrators held as a preliminary issue that they had no jurisdiction to determine the transaction set-off defence. First, the agreement provided only for disputes arising under that agreement to be resolved by arbitration and, second, under the UNCITRAL Rules ‘the respondent may make a counterclaim arising out of the same contract or rely on a claim arising out of the same contract for the purpose of a set-off’ which they found confined set-off to claims arising out of the same contract and not some related contract. The application of ESS to set aside the award on the basis that the arbitrators had erred in failing to assert jurisdiction was dismissed. The argument that wherever a contract was governed by English law, any claim under the contract could be met with the defence of transaction set-off based on a different contract whatever the wording of any arbitration agreement or exclusive jurisdiction clause was rejected. An arbitral tribunal’s jurisdiction depends on the scope of the arbitration agreement: whether the tribunal had jurisdiction over a set-off depended on the true construction of the arbitration agreement. The plain and ordinary meaning of article 19(3) of the UNCITRAL Rules was that a respondent might raise a set-off, whether in his defence or in a counterclaim, only if it was founded on a claim arising out of the same contract as that on which the claimant’s claim was based. There is no rule that the governing law of the contract is to prevail over any conflicting procedural rules. On a true construction of the agreement and the Rules, transaction setoff was excluded.