House of Lords
Published October 25, 2007
Fiona Trust and Holding Corporation and Others v Privalov and Others
Before Lord Hoffmann, Lord Hope of Craighead, Lord Scott of Foscote, Lord Walker of Gestingthorpe and Lord Brown of Eaton-under-Heywood
Speeches October 17, 2007

A dispute as to whether a charterparty contract had been validly rescinded for alleged bribery came within the scope of an arbitration term in the contract.

The House of Lords so held in dismissing an appeal by Fili Shipping Co Ltd and seven other shipowning companies against the decision of the Court of Appeal (Lord Justice Tuckey, Lady Justice Arden and Lord Justice Longmore) (The Times January 29, 2007; [2007] Bus LR 686) to require their dispute with Premium Nafta Products Ltd and two other charterers to go to arbitration.

In the course of proceedings by Fiona Trust and Holding Corporation and 26 other companies, including the owners, against the charterers and 19 other defendants, the owners had sought a declaration as against the charterers that they had validly rescinded the charterparties for having been induced by bribery. The charterers, in reliance on an arbitration clause in each charter, sought to have the issue determined by an arbitrator.

On the owners’ application under section 72 of the Arbitration Act 1996 seeking to restrain the arbitration proceedings, and the charterers’ application under section 9 that the court proceedings in relation to the issue be stayed, Mr Justice Morison had held that the dispute as to the validity of the rescission fell outside the scope of the arbitration clause, but the Court of Appeal reversed his decision.

Mr Christopher Butcher, QC and Mr Philip Jones, QC, for the owners; Mr Nicholas Hamblen, QC and Mr Vernon Flynn for the charterers.

LORD HOFFMANN said that the owners had argued that the arbitration clause did not apply for two reasons: The first was that, as a matter of construction, the question of whether the charters were procured by bribery was not a dispute arising under the charter. The second was that the arbitration clause was liable to be rescinded and therefore not binding on them.

In approaching the question of construction, it was necessary to inquire into the purpose of the arbitration clause.

Parties to an arbitration agreement wanted disputes decided by a tribunal which they had chosen, commonly on the grounds of such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law.

Particularly in the case of international contracts, they wanted a quick and efficient adjudication and did not want to take the risks of delay and, in too many cases, partiality, in proceedings before a national jurisdiction.

There had been a number of cases in which a distinction had been drawn between disputes “arising under” and “arising out of” the agreement, with the former having a narrower meaning.

Such distinctions reflected no credit upon English commercial law. His Lordship applauded the opinion expressed by Lord Justice Longmore in the Court of Appeal that the time had come to draw a line under the authorities to date and make a fresh start.

The construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, were likely to have intended any dispute arising out of the relationship into which they had entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with that presumption unless the language made it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.

The language of the relevant clause here, clause 41 of Shelltime 4, contained nothing to exclude disputes about the validity of the contract, whether on the ground that it was procured by fraud, bribery, misrepresentation or anything else. It therefore applied to the present dispute.

The next question was whether, in view of the allegation of bribery, the clause was binding upon the owners. They said that if they were right about the bribery, they were entitled to rescind the whole contract, including the arbitration clause; the arbitrator therefore had no jurisdiction and the dispute should be decided by the court.

However, the principle of separability enacted in section 7 of the 1996 Act meant that the invalidity or rescission of the main contract did not necessarily entail the invalidity or rescission of the arbitration agreement.

The arbitration agreement was to be treated as a distinct agreement and could be void or voidable only on grounds which related directly to the arbitration agreement.

In the present case, it was alleged that the main agreement was in uncommercial terms which, together with other surrounding circumstances, gave rise to the inference that an agent acting for the owners had been bribed to consent to it. But that did not show that he had been bribed to enter into the arbitration agreement.

Mr Butcher had said that but for the bribery, the owners would not have entered into any charter with the charterers and therefore would not have entered into an arbitration agreement. But that was exactly the kind of argument which section 7 had been intended to prevent.

It amounted to saying that because the main agreement and the arbitration agreement were bound up with each other, the invalidity of the main agreement should result in the invalidity of the arbitration agreement; the one should fall with the other because they would never have been separately concluded.

But section 7 meant that they had to be treated as having been separately concluded and the arbitration agreement could be invalidated only on a ground which related to the arbitration agreement and was not merely a consequence of the invalidity of the main agreement.

Lord Hope delivered a concurring opinion and Lord Scott, Lord Walker and Lord Brown agreed. Solicitors: Ince & Co; Lax & Co.

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