October 2007

A "fresh start" : House of Lords back arbitration

Premium Nafta Products Limited & Others v Fili Shipping Company Limited & Others [2007] UKHL 40

In a decision that is strongly supportive of arbitration, the House of Lords has ruled that generally worded arbitration clauses should be interpreted broadly and that the parties to such arbitration clauses must be regarded as having chosen arbitration as a one-stop method of determination of all disputes arising out of their relationship, including disputes regarding the very validity of their contract.

In a judgment issued today in Premium Nafta v Fili Shipping, on appeal to the House of Lords from the Court of Appeal's decision in the same proceedings (better known as the Fiona Trust proceedings), the shipowner appellants sought determination from the Court that their charters (which contained arbitration clauses) had been validly rescinded on the grounds that they had been procured by bribery. The charterers applied for a stay of the Court proceedings under section 9 of the Arbitration Act 1996 on the grounds that the issues should be determined by arbitration.

The House of Lords considered two issues: (1) whether the terms of the arbitration clause (referring to "Any dispute arising under this charter") covered the question of whether the contract was procured by bribery, and (2) whether it is possible for a party to be bound by an apparent submission to arbitration when he alleges that, but for the bribery, he would never have entered into the contract containing the arbitration clause.

In addressing the issue of construction of arbitration clauses, the House of Lords stated that it is necessary to recognise the commercial purpose behind an arbitration clause. Rational businessmen in international commerce submit to arbitration to avail themselves of the advantages that arbitration offers, and must be taken to want to avoid the risks of delay, partiality in proceedings before a national jurisdiction and having different aspects of their relationship determined by different tribunals/courts. Absent express wording to the contrary, they are unlikely to wish to have questions of validity or enforceability decided by one tribunal and questions concerning performance decided by another. For this reason, the House of Lords said that a "fresh start" to the construction of arbitration clauses was necessary that did not focus on distinctions such as whether or not arbitration clauses covered disputes arising "under", "out of" or "in connection with" a contract. Adopting this liberal approach, it held that questions as to whether the contract was procured by bribery fell within the terms of the arbitration clause.

As to the question of whether, in view of the allegation of bribery, the arbitration clause was binding on the owners, the House of Lords pointed to the principle of separability in section 7 of the Arbitration Act 1996. This section encapsulates the principle that, unless otherwise agreed, an arbitration clause is not invalidated by virtue of the invalidity of the agreement in which it appears. As a result, it was held that the arbitration agreement must be treated as a distinct and separate agreement, and can be void or voidable only on grounds which relate directly to the arbitration agreement itself. Since the bribery allegation did not relate to the agreement to arbitrate itself, the dispute had to be submitted to arbitration.

Interestingly, the House of Lords also rejected the submission that this approach infringed the owners' Article 6 rights of access to a court under the European Convention of Human Rights. The Lords properly rejected this submission, saying that the European Convention was not intended to destroy arbitration and that if the parties had agreed to arbitrate their dispute, they could be presumed to have validly waived their right to a court.

Following a run of cases which made fine distinctions of language in determining whether disputes arising "under", "out of" or "in connection with" a contract should go to arbitration, this decision brings English law into line with the realities of international commerce and the liberal approach increasingly being taken by courts across the globe in favour of one-stop arbitration. It should minimise tactical challenges being made to the courts, the very fora which the parties will have wished to avoid in agreeing to arbitration. The case will be welcomed by the international arbitration community and will promote England as a dispute resolution venue respected for its impartiality and rigour in supporting arbitration.

Simon Kamstra, Head of International Arbitration, has commented, "This is incredibly welcome. The weakness of arbitration ironically is where its strengths of speed and jurisdictional clarity are hamstrung by the delay and expense that can be triggered by occasional vulnerability to technical challenges of the kind the House of Lords has now finally confirmed should cease or reduce".