UK: International Arbitration - The House Of Lord’s Golden Rule Relating To Arbitration Clauses

Last Updated: 18 October 2007
Article by Jeremy Glover

In our article headed "The New Liberal Approach Of The English Court Of Appeal" we highlighted the comments of Longmore LJ in the case of Fiona Trust & Holding Corporation & Ors v Privalov & Ors [2007 EWCA Civ 20] where he indicated that a new approach needed to be taken by the English courts when considering questions relating to the jurisdiction of arbitration clauses in international commercial contracts. Longmore LJ said this:

"It seems to us any jurisdiction or arbitration clause in an international commercial contract should be liberally construed."

The case, albeit with a new name, Premium Nafta Products Ltd & Others v Fili Shipping Company Ltd & Others [2007] UKHL 40 has now reached the House of Lords, who have unanimously endorsed the Court of Appeal decision and in particular the comments of Longmore LJ.

One of the issues in the Fiona Trust case, related to the dispute resolution clause, which referred first to disputes "arising under" the contract, and later to disputes which have "arisen out of" the contract. In particular the Court of Appeal had to consider arguments relating to the distinction, if any, between disputes arising "under" a contract and disputes arising "out of" a contract. Should "out of" should have a wider meaning than "under", and if so, given the wording of this particular clause, which of the two should prevail?

This lead the Court of Appeal firstly to review the authorities and then having done so to rule that the time had come to take a fresh approach. That approach was that the English Courts should not spend time considering the fine distinctions and minutiae of the wording of arbitration clauses. As the Court of Appeal said, if any business man wanted to exclude disputes about the validity of the contract it would be comparatively simple to say so.

This was a point taken up by the House of Lords. It was time to draw a line under what had gone before and to make a fresh start. In particular Lord Hope of Craighead, having expressly noted that the arbitration clause here was taken from a standard form, said this:

"The proposition that any jurisdiction or arbitration clause in an international commercial contract should be liberally construed promotes legal certainty. It serves to underline the golden rule that if the parties wish to have issues as to the validity of their contracts decided by one Tribunal and issues as to its meaning or performance decided by another, they must say so expressly. Otherwise they will be taken to have agreed on a single Tribunal for the resolution of all such disputes."

This House of Lords decision, although it says little that is new, is important because of the firm judicial support they have given to the comments of the Court of Appeal. In their view, the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship which they have entered into would be decided by the same tribunal. Any dispute resolution clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from (in this case) the arbitrator's jurisdiction. The judgments of the 5 law lords make it clear that the questions at issue were carefully considered at the hearing. For example there is reference to the approaches of other jurisdictions notably those of the USA, Australia and Germany where Lord Hoffman noted that:

"There is every reason to presume that reasonable parties will wish to have the relationships created by their contract and the claims arising therefrom, irrespective of whether their contract is in effect not decided by the same Tribunal and not by two different Tribunals."1

In the view of the Law Lords the attempt to draw out differences between the meanings of the words "arising under" and "arising out of" was inappropriate. The distinction was at best a "fussy" one.

Lord Craig referred to the "simplicity of the wording" of the arbitration clause. Taken overall, the wording indicated that arbitration may be chosen as a one-stop method of adjudication for the determination of all disputes. The disputes were to be determined in accordance with the laws of England but not to be decided by the English courts.

In the view of the court it was important to remember that disputes about validity are no less appropriate for determination by an arbitrator than any other kind of dispute that may arise. The purpose of the arbitration clause in question was to provide for the determination of disputes of all kinds, whether or not they were foreseen at the time when the contract was entered into.

Lord Craig also noted that experience shows that as soon as a dispute of any kind arises from a contract, objections are very often immediately also raised against its validity. Entrusting the assessment of the facts of the case to different Tribunals according to the approach that is taken to the issues between them is unlikely to occur between the contracting parties. In particular, if the parties were operating in an international market, it is unlikely that they would intend that possible disputes arising from their transaction could be heard in two different places.

Conclusion

The rationale behind this judgment was clearly expressed by Lord Hoffman who said this:

In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship to which they have entered or purported to enter to be decided by the same Tribunal."

This resounding confirmation of the remarks of the Court of Appeal means that parties to international commercial contracts can be that much more certain that arbitration clauses will be upheld. It will accordingly follow that parties will know that, if arbitration is their chosen course, then it is the arbitrators who will decide all the disputes which may arise, which is why Lord Craig referred to the "one stop method" of dispute resolution in his judgment.

Thus, in a decision which can very much be seen as one in spirit with their decision in Lesotho Highland Development Authority v Impregilo Spa & Others [2005] UKHL 43, (where it was held that an error of law does not necessarily mean that the arbitrators had acted in excessive of their jurisdiction), the House of Lords has sent out another powerful message that can only serve to confirm the attractiveness of London and England as an arbitration centre. 

Footnote

1 Bundesgerichtshof’s decision of 27 February 1970 (1990) Arbitration International, Volume 6, No. 1, Page 79.

This article is based on an article from a forthcoming issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.

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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