UK: Why All The Fuss?

Last Updated: 29 July 2007
Article by Steven Friel and Rowan Planterose

The recent Court of Appeal judgment in Fiona Trust & Holding Corporation & ors has caused considerable excitement throughout the London and international arbitration community.

Described by the President of the Chartered Institute of Arbitrators as ‘fundamentally important’, Fiona Trust & Holding Corporation & ors v Yuri Privalov & ors [2007] was raised for discussion by no fewer than six separate arbitration practitioners, including Steven Friel of Davies Arnold Cooper, at the recent London Court of International Arbitration European Users’ Council symposium in Madrid.

Is this case really a landmark for English arbitration? In itself, probably not. However, coming as it did on the tenth anniversary of the Arbitration Act 1996, a time of reflection on the development of London as a centre for international arbitration, the case provides an interesting focus on a number of issues, including:

  • the increasing tendency for liberal construction of arbitration clauses;
  • the judicial display of trust in arbitration as a ‘one-stop shop’ for the resolution of disputes;
  • the coming-of-age of the doctrines of separability and competence-competence; and
  • the ability of international arbitration to deal with complicated allegations of fraud and bribery in international disputes.

‘Law and Litigation’ Clause

The contracts contained a ‘law and litigation’ clause, which provided as follows:

41(a) This charter shall be construed and the relations between the parties determined in accordance with the laws of England.

(b) Any dispute arising under this charter shall be decided by the High Court in London to whose jurisdiction the parties hereby agree.

(c) Notwithstanding the foregoing, but without prejudice to any party’s right to arrest or maintain the arrest of any maritime property, either party may, by giving written notice of election to the other party, elect to have any such dispute referred… to arbitration in London…

  1. A party shall lose its right to make such an election only if:

(a) it receives from the other party a written notice of dispute which –

  • states expressly that a dispute has arisen out of this charter;
  • specifies the nature of the dispute; and
  • refers expressly to this clause 41(c)

And

(b) it fails to give notice of election to have the dispute referred to arbitration not later than 30 days from the date of receipt of such notice of dispute… [emphases added]

Fiona Trust

Facts A dispute arose out of a series of charterparties (the charterparties) entered into between a Russian group of shipowners (the owners) and a number of chartering companies (the charterers). Itwas alleged by the owners that the charterparties, and numerous other agreements entered into by the parties, were procured by bribery. The extent of the alleged bribery went far beyond the charterparties, which formed only a small part of an overall set of fraud allegations.

Court proceedings were commenced in England relating to the fraud allegations on the whole. One of the claims made in the English proceedings was that the charterparties had been validly rescinded and that restitution of benefits under the charterparties should be made.

The contracts contained a key ‘law and litigation’ clause, details of which can be seen in the box above. The charterers commenced arbitration proceedings pursuant to this clause. The owners therefore applied to the English Commercial Court under s72 of the 1996 Act, seeking to restrain the arbitration proceedings on the basis that the charterparties, and the arbitration clauses contained therein, had been validly rescinded. In turn, the charterers made a cross-application under s9 of the 1996 Act for a stay of the ongoing court proceedings for rescission.

First instance decision

At first instance, Morison J declined to stay the court claims for rescission and restrained the arbitration proceedings pending the trial of the court action. He held that the question of whether the owners validly entered into the charterparties could not be said to be a dispute that arose out of the charterparties, and it certainly did not arise ‘under’ the charterparties. Further, he decided that the arbitration clause was not severable from the matrix of charterparties where rescission was an available remedy. Accordingly, he ruled that the arbitrator did not have jurisdiction to hear the dispute.

The charterers appealed. The Court of Appeal allowed the appeal, based primarily on a wide construction of the clause and a rigorous application of the doctrine of severability.

Issues under consideration

Liberal construction of the arbitration clause The first question to be considered by the Court of Appeal was whether the arbitration clause was wide enough to cover allegations that bribery had induced the charterparties. Counsel for the parties pursued arguments based on the differences between arbitration clauses that refer to disputes ‘arising under’ and disputes ‘arising out of’ the relevant contract. After citing a large number of authorities (from Heyman v Darwins Ltd [1942] to The Delos [2001]) on the construction of arbitration clauses and the subtle differences in language used therein, Longmore LJ held that the arbitration clause was wide enough to allow the arbitral tribunal jurisdiction to decide the bribery allegations. He stated:

… the time has now come for a line of some sort to be drawn and a fresh start made at any rate for cases in an international commercial context… If businessmen go to the trouble of agreeing that their disputes be heard… by a tribunal of their choice they do not expect (at any rate when they are making the contract in the first place) that time and expense will be taken in lengthy argument about… whether any particular cause of action comes within the meaning of the particular phrase that they have chosen in their arbitration clause. If any business man did want to exclude disputes about the validity of a contract, it would be comparatively simple to say so… It seems to us that any jurisdiction or arbitration clause should be liberally construed.

This statement has been welcomed by many. It is widely considered that one of the main threats to the flexibility of London arbitration and to the success of the 1996 Act is the increasingly litigious nature of the process and the tendency by unwilling parties to arbitration to engage in lengthy jurisdictional arguments based on semantic readings of the arbitration clauses in question. The Court of Appeal has, to large extent, now put a lid on these arguments and sent the very clear message that if you refer to arbitration, then arbitration you shall have.

One-stop arbitration

The Court of Appeal judgment can be viewed as particularly supportive to arbitration if we consider two competing considerations that the court had to take into account:

  • On the one hand, there was the fact that, if the arbitration was allowed to proceed, it would almost certainly do so concurrently with the High Court litigation, in which the fraud allegations were being considered in a wider context.
  • On the other, there was what Longmore LJ described as the presumption in favour of ‘one-stop arbitration’, by which he meant that, rather than a court deciding on whether a contract should be rectified, avoided or rescinded, followed by an arbitration on the merits of the dispute, itwas to be presumed that the arbitrators should decide on all the relevant issues.

That the presumption in favour of one-stop arbitration was not rebutted by the resultant concurrency of procedures (High Court litigation and arbitration) shows how far the English courts have come from the days when a presumption in favour of arbitration was readily rebutted. In this context of supporting arbitration, Longmore LJ’s judgment in Fiona Trust can be seen as following a path taken by Lord Steyn in Lesotho Highlands Development Authority v Impregilo SpA & ors [2006].

Separability

It has long been accepted in English law that an arbitration clause is a separate agreement that survives the destruction (or other termination) of the parent contract. The principle is that the arbitration agreement gives rise to a distinct legal obligation and is not conditional on the rest of the contract. This principle is given statutory form by s7 of the 1996 Act, which states:

Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.

In Fiona Trust, the limits of the doctrine of separability were tested. The evidence before the courtwas that the owners would not have entered into the charterparties at all if they had been aware that their employees had been bribed. With no contract, the argument went, there could have been no arbitration agreement.

Longmore LJ posed the question of ‘whether the assertion of invalidity goes to the validity of the arbitration clause, as opposed to the validity of the charterparties as a whole of which the arbitration agreements are a part.’ In answering this question, he stated:

It is not enough to say that the bribery impeaches the whole contract unless there is some special reason for saying that the bribery impeaches the arbitration clause in particular. There is no such reason here.

The separability doctrine is, of course, not peculiar to English law. Many jurisdictions have adopted Article 16 of the UNCITRAL Model Law on International Commercial Arbitration, which provides that ‘an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract’. See, for example, s1040(1) of the German Code of Civil Procedure and s13B of the Hong Kong Arbitration Ordinance.

Despite its almost universal acceptance, the doctrine of separability has been under attack. Many arbitrators will be comforted, however, by the knowledge that the English Court of Appeal is not the only important domestic court to vigorously defend it. In the 2006 case of Buckeye Check Cashing Inc v John Cardegna et al, the US Supreme Court, by a majority of 7-1, reaffirmed that the doctrine applies in the US. In overturning a decision of the Florida Supreme Court, which had held that Florida state law did not allow parts of an illegal and void contract to be severable, the US Supreme Court established that the landmark 1967 decision in Prima Paint Corp v Flood & Conklin Mfg Co continued to hold good.

Competence-competence principle

Although not referred to in terms by the Court of Appeal, the Fiona Trust case provides further support in England for the principle of competence-competence and takes us further away from the pre-1996 days, when itwas generally thought that arbitrators could do no more than express a view as to whether they had jurisdiction – the ultimate decision always being reserved for the courts.

The question of whether England should more fully embrace the principle of competence-competence was raised recently by a body set up to review the 1996 Act on its tenth anniversary. As it stands, a tribunal’s decision on jurisdiction is open to challenge under s67. Further, when considering the challenge, an English court is entitled to consider the question of jurisdiction de novo and is in no way bound by the tribunal’s findings of fact or law. Although the review committee concluded that itwas not yet time to amend this position in English law, the committee did state that further research was necessary on the question whether the current English position has a detrimental effect on London arbitration – are international parties wary of arbitrating in London due to the risk of English courts rehearing and re-deciding jurisdictional issues? This is a research task that Davies Arnold Cooper has decided to undertake and we hope to publish our findings by the end of this year.

Complex international frauds

In the context of the Fiona Trust case, it has been asked whether London arbitration is best equipped to deal with multi-jurisdictional fraud allegations. Can an arbitral tribunal move quickly enough, and does it have the requisite powers of subpoena, investigation and preservation of assets to ensure that justice is done in these cases? Many would say that, together with the assistance and supervisory jurisdiction of the English High Court, there is no reason why London arbitration cannot handle these cases effectively. However, would an alleged victim of a complex international fraud, who is forced to arbitration despite the allegations of fraud, necessarily agree?

Conclusion

Fiona Trust provides Court of Appeal authority that arbitration clauses in international commercial contracts should be construed in a liberal and expansive fashion. The Court has drawn a line under previous case law, which had laboured on the precise forms of wording of dispute resolution clauses, and has set a precedent that the English courts should no longer scrutinise the minutiae of the wording. In doing so, the Court has further strengthened England’s status as an arbitration-friendly jurisdiction, where commercial parties will benefit from greater certainty that arbitration clauses will be upheld.

In addition, this case has upheld the all-embracing doctrine of severability and confirmed that it applies to contracts where it has been alleged that the contract in question has been procured by bribery. The Court of Appeal has reiterated that, under s7 of the 1996 Act, an arbitration clause that forms part of a contract will be treated as an agreement independent of the other terms of the contract and that it is possible to arbitrate disputes as to the illegality of a contract, including circumstances where there has been alleged bribery.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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