19 April 2007

Bribery allegations to be determined by arbitration? – Fiona Trust and Holding Corporation & Ors v Yuri Privalov & Ors [2007] EWCA Civ 20

Where a party alleges contracts were procured by bribery and purports to rescind those contracts, does the dispute come within the arbitration clauses in those contracts? Is there really a difference between a dispute arising "out of" a contract and a dispute arising "under" a contract? If a contract is rescinded on grounds of bribery, will the arbitration clause within that contract survive?

These were the questions that came before the Court of Appeal in the Fiona Trust case. The claimant shipowners in this case went to the Courts to restrain arbitration proceedings commenced pursuant to arbitration clauses in various charterparty contracts. Their grounds were that since the contracts – and therefore the arbitration clauses – had been rescinded for bribery, there could be no arbitration.

The Court of Appeal's 'pro-arbitration' approach was a welcome return to reality from the previous case law. It decided: 

1.  Artificial distinctions made in the previous case law between, for example, disputes arising "out of" a contract and disputes arising "under" a contract did not reflect the realities of international business. Businessmen do not, at the time of negotiating contracts, consider the legal niceties of the language used in arbitration clauses. It was time to draw a line under that case law and take a fresh approach. 
2.  Arbitration clauses in international commercial contracts should be liberally construed – if a business man wanted to exclude disputes about the validity of a contract in the arbitration clause, then it would be comparatively simple for him to say so. A dispute as to whether the contract could be rescinded for alleged bribery therefore fell within the arbitration clause in question. 
3.  As long as the arbitration clause was not itself directly impeached, it was separable from the rest of the contract – in other words, it remained valid despite the invalidity of the contract in which it was contained. In this case, the allegation of bribery affected the main contract, but did not affect the arbitration agreement in a specific way – the arbitration agreement remained valid and the arbitration was allowed to proceed. 
4.  English law should favour the presumption of one-stop arbitration – it should recognise the reality no commercial man would knowingly create a system that required the parties to go to the Courts to first decide whether the contract should be avoided or rescinded before the arbitrator could go on to resolve the dispute.

Essentially, what the Court of Appeal did was reiterate the overriding principle (enshrined in the Arbitration Act 1996) that wherever there is a valid arbitration clause, arbitration should take precedence over litigation. The decision will serve to re-affirm London's primacy on the international arbitration scene.

The case is proceeding to an appeal before the House of Lords.  We will provide an update once their decision is issued.

Despite the sensible developments  at the Court of Appeal level however, careful thought should in all cases be given at the time of drafting your contract to what sorts of disputes arbitration should encompass. Arbitration has many advantages over litigation, but will be less useful for certain types of disputes such as fraud. To avoid unintentionally submitting such disputes to arbitration, consider these issues fully with your legal advisers when negotiating your contracts.

Risks of non-disclosure in arbitrations – Elektrim SA v Vivendi Universal SA & Others [2007] EWHC 11 (Comm)

Parties to arbitration must be alert to the risk of failing to meet their obligations to disclose documents – even the smallest slips in conducting a proper search and disclosure exercise can make arbitral awards vulnerable to challenges in the Courts.

In the Elektrim v Vivendi case, the claimants applied to the Court to challenge an award granted to the defendants following lengthy and complex arbitration proceedings. The grounds were that the award had been fraudulently obtained because the defendants had failed to disclose an important document.

The Court held that the disclosure was inadvertent and not fraudulent. It also held that the party to the arbitration itself (and not just one of its witnesses) must itself have committed or been privy to the fraud for the Court to set aside an award, and that there must be a causative link between the non-disclosure and the final award. Mr Justice Aikens said that "this fits in with the general ethos of the [Arbitration Act], which is to give the courts as little chance to interfere with arbitrations as possible". The challenge to the award failed.

The decision shows that English courts will be reluctant to upset the validity of awards made by arbitral tribunals. However, no sensible business will want to spend the costs of an entire arbitration only to find itself fighting a challenge to the award. To avoid the risks and costs of such challenges arising from even inadvertent non-disclosures, you should consider at an early stage with your legal advisers issues of document retention and the scope of any search and disclosure exercise which you need to conduct to avoid falling foul of your disclosure obligations.

Court proceedings not to be brought lightly in arbitration cases – A v B & Others [2007] EWHC 54 (Comm)

If your opponent brings Court proceedings despite an arbitration agreement being in place, consider applying for costs orders on an indemnity basis, seeking a higher rate of interest and going for an interim payment on account of costs. That will strengthen your tactical position and minimise your irrecoverable costs in those Court proceedings.

This approach was given support in the A v B & Others case. Court proceedings were brought despite an arbitration agreement requiring the parties to refer disputes between them to arbitration. The Court proceedings were stayed and the successful party applied for indemnity costs, interim payments and orders for interest to be paid at 8%. The Court granted the costs applications. In ordering costs on an indemnity basis, Mr Justice Colman said that a party who deliberately ignores an arbitration or jurisdiction clause so as to derive an unjustifiable procedural advantage is acting in breach of contract but is also misusing judicial facilities and, as such, requires "discouragement by more stringent means than an order for costs on the standard basis".

The decision serves as a reminder that the courts will vigorously discourage any breach of the arbitration obligation and that the costs angle should be factored into any decision to go to Court where there is an arbitration agreement in place.

Corporate Counsel Finds its Voice in International Arbitration

Despite being the main users of arbitration, corporate counsel have historically been underrepresented at large scale international arbitration meetings. Things are set to change.

On 3 November 2006, the Corporate Counsel International Arbitration Group (CCIAG) held its inaugural meeting which was attended by 23 companies, among them GE, Exxon Mobil, Rio Tinto, Nestl é, Total, Nokia, Siemens and L'Or éal. CCIAG is comprised exclusively of corporate counsel and is not affiliated to any arbitral institution. It aims to provide a forum to discuss the common arbitration issues that corporate counsel face and will serve as both a spokesbody and pressure group for its members. The steering committee is currently drafting the Group's membership rules and operational guidelines.

The initiative has been enthusiastically received, with over 50 companies registering interest. The arbitration industry can only benefit from increased involvement from this Group. It will be fascinating to have the input of these experienced players in what remains a rapidly evolving international arbitration scene.