UK: "Full Steam Ahead For London Arbitration As The House Of Lords Steers Clear Of Semantic Obstacles"

Last Updated: 7 November 2007

Article by Nikos Dimopoulos

The House of Lords in the landmark case of Premium Nafta Limited & Others v Fili Shipping Company Limited & Others1 has unanimously upheld the earlier decision of the Court of Appeal in Fiona Trust & Holding Corp & Others v Privalov & Others2, agreeing that arbitration clauses should be construed liberally and should be treated separately from the agreements in which they are found.

The decision has been heralded by commentators as a fresh start for international arbitration in England upholding the rights of parties who elect to resolve commercial disputes by arbitration.

Background

The dispute arose out of eight charterparty contracts entered into between a group of shipowners and charterers. Each of the charters included an arbitration clause, according to which parties could refer any disputes "arising under" the charter to arbitration. The ship-owners argued that the charters had been procured by bribery and sought to rescind them.

Subsequently, the charterers commenced an arbitration to determine whether rescission was effective. The ship owners applied to the English court to restrain the arbitration proceedings under section 72 of the English Arbitration Act 1996 ("AA 1996") on the basis that the contract was procured by bribery and so the arbitration agreement was invalid.

The reasoning of the House of Lords has two important implications for the arbitration community.

(1) Liberal construction of the arbitration clause

The House of Lords considered whether the dispute that the charterparties may have been procured by bribery was a dispute covered by the arbitration agreement itself. In doing so, the House of Lords considered whether there was any distinction between "disputes arising under" and "disputes arising out of" an agreement, and concluded that these distinctions "reflect no credit upon English commercial law".

In reaching its decision the House of Lords endorsed the approach taken previously by the Court of Appeal that the time has come to leave semantics behind and make a fresh start in relation to the construction of arbitration agreements. According to Lord Hoffmann, 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 into which they have entered or purported to enter to be decided by the same tribunal. Therefore, there should no longer be any difference between what is covered by an arbitration clause referring to disputes "arising under" and "arising out of" an agreement.

This presumption shall prevail unless the language makes it clear that certain disputes were intended to be excluded from the arbitrator's jurisdiction. As the arbitration clause in this case did not expressly exclude disputes as to the validity of the charterparty the dispute fell within the scope of the clause. It seems that the rule, as stated by Lord Longmore of the Court of Appeal, should be that: "if any businessman did want to exclude disputes about the validity of a contract, it would be easy to say so expressly".

(2) Separability of the arbitration agreement

The House of Lords also considered the separability of the arbitration agreement, and whether the fact that the charterparties may have been validly rescinded, automatically meant that the arbitration agreement had been rescinded as well.

Under section 7 of the AA 1996 the arbitration agreement has to be treated separately from the main agreement. Therefore, the invalidity or rescission of the main contract due to bribery, will not necessarily entail the invalidity or rescission of the arbitration agreement. The House of Lords restated the long-standing principle that the arbitration agreement must be treated as a "distinct agreement" and can be void or voidable only on grounds which relate directly to the arbitration agreement. Accordingly, the House of Lords concluded that the arbitration agreement survived any rescission of the main agreement.

Implications for London as an arbitration venue

The House of Lords in this case steered clear of the semantic obstacles presented by the construction of the arbitration clause. The liberal interpretation adopted by the House of Lords on the construction of the arbitration clause provides the international arbitration community with legal certainty and indicates that arbitration should be chosen as a "one-stop" method for resolving all disputes. If parties want to exclude issues from the ambit of the arbitration clause they must do so expressly.

The judgment is another indication of the English courts’ unwillingness to intervene in cases where business parties have elected to resolve their disputes by arbitration, strengthening even more London’s attractiveness as an arbitration venue.

Footnotes

1 [2007] UKHL 40 on appeal from [2007] EWCA Civ 20.

2 [2007] EWCA Civ 20.

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