The case of Fiona Trust and Holding Corp. and Others v Yuri Privalov and Others was heard by the Court of Appeal[1] in late December 2006. The dispute arises out of eight charterparties made by one ship owning company in the Russian Sovcomflot Group of Companies as owners, and three separate chartering companies, between February 2001 and September 2003 on the Shelltime 4 form. However, the charter disputes formed only a small part of an overall and complicated dispute in the English High Court (the “main litigation”) between Sovcomflot and its numerous subsidiaries, and individuals who were alleged to have bribed directors and employees of the Sovcomflot Group of Companies. Sovcomflot owned and operated a large fleet of vessels through Fiona Trust. The various claims pursued by Fiona Trust (the “claimants”) amounted to US$370,000,000. The claim in relation to the charter disputes was that they had been procured by bribery and contained terms highly favourable to charterers.
The claimants’ position was that the eight charters were rescinded on 12 April 2006. Thirteen days later the charterers commenced arbitration by appointing their arbitrator and claimed damages by way of the arbitration reference (the “charterparty claims”) for any general average that might have been recoverable from them subsequent to a grounding of one of the vessels, as well as a “balance of account” in respect of the same vessel. They also asked the arbitrator to determine the effectiveness of the claimants’ rescission of the charterparty. The basis on which the charterparties were rescinded by the claimants was the allegation that the charterers had been induced by bribery. On 27April, and without prejudice to the contention that they had already done so, the claimants sought to rescind the charterparty arbitration clause and took no part in the arbitration. Subsequently the claimants sought to incorporate the charterers’ charterparty claims into the main litigation in which the claimants claimed damages for the tort of deceit, damages as a result of the payment of bribes, compensation for a breach of fiduciary duty, as well as claims that the eight charterparties had been validly rescinded and that the restitution of benefits should be made. The charterers sought to resist the attempt to incorporate the charterparty claims in the main litigation.
Therefore, the issue before the Court of Appeal was whether a dispute as to the effectiveness of the rescission of charterparties induced by bribery, that had been rescinded on discovery of that bribery, was a dispute that fell within the arbitration clause of the charterparties and could be determined by arbitration.
The relevant charterparty clause provided:
41. (a) This charter shall be construed and the relations between the parties determined in accordance with the laws of England.
(b) Any dispute arising under this charter shall be decided by the English Courts to whose jurisdiction the parties hereby agree.
(c) Notwithstanding the foregoing, but without prejudice to any party’s right to arrest or maintain the arrest of any maritime property, either party may, by giving written notice of election to the other party, elect to have any such dispute referred … to arbitration in London, one arbitrator to be nominated by Owners and the other by Charterers, and in case the arbitrators shall not agree to the decision of an umpire, whose decision shall be final and finding up both parties. Arbitration shall take place in London in accordance with the London Maritime Association or Arbitrators in accordance with the provisions of the Arbitration Act 1950, or any statutory modification or re-enactment thereof for the time being in force:
(i) A party shall lose its right to make such an election only if:
(a) it receives from the other party a written notice of dispute which
(1) states expressly that a dispute has arisen out of this charter;
(2) ……
(Emphasis supplied).
At first instance, the claimants argued that the words in Clause 41 (c) “… any such dispute…” was a reference back to the words “… arising under the charter …” in Clause 41 (b) which should be read narrowly[2] . Therefore, for a dispute to be caught by the clause the dispute had to be a dispute “under” the charterparty. In this respect, the claims for damages and compensation were disputes in relation to matters that occurred before the charterparties were made, and were not disputes “under” the charterparty. As to the claim for restitution, it did not arise under a contract because there was no contract as a result of the bribery.
In response the charterers argued that the intention of Clause 41 was that all disputes relating to the charterparties could be arbitrated. If claims or disputes that could be said not to arise “under” the charterparty were not caught by the clause there would be uncertainty as to which court and where had jurisdiction[3] , and the wording of Clause 41 c(i)(a)(1) emphasized this so that if “a dispute has arisen out of the charter” it is capable of being arbitrated.
In deciding this question of Morison J held the claimant’s argument to be no different from one of non est factum (“it is not his deed”) or mutual or unilateral mistake. Therefore, the question was whether the bribery argument, if sustainable, impeached the whole contract, or whether the arbitration clause was a separate contract capable of surviving the termination (i.e. rescission) of the charterparties. He referred to the decision of Ralph Gibson LJ in Harbour Assurance Co. (UK) Limited v Kansa General International Co. Limited [2003] 1 LLR who, commenting on the first instance[4] decision of Steyn J, said (at p461):
“Mr. Justice Steyn said that the question of fraud or initial illegality was capable of being referred to arbitration. He did not qualify the clearly stated principle that if the validity of the arbitration clause itself is attacked the issue cannot be decided by the arbitrator. His reference to a direct impeachment was, as I understand his judgment, to distinguish an attack upon the clause otherwise than by the logical proposition that the clause falls within the containing contract. When it is said that the contract was induced by fraud it may well be clear that, if it was, the making of the independent arbitration clause was also induced by fraud.”
And Hoffman LJ[5] in the same case:
“There will obviously be cases in which a claim that no contract came into existence necessarily entails a denial that there was any agreement to arbitrate. Cases of non est factum or denial that there was a concluded agreement, or mistake as to the identity of the other contracting parties suggest themselves as examples. But there is no reason why every case of initial invalidity should have this consequence.”
In the view of Morison J the question whether the owners ever made a contract could not be said to be a dispute which “arises out of” the contract, and certainly did not arise “under” the contract. The relevant issue was the basis on which the charterparties had been rescinded and it was not possible to distinguish between their unenforceability without necessarily impugning the validity of the charterparties as a whole, which included the arbitration clauses. As such only the court had jurisdiction to decide the issue whether the charterparties had been rescinded for bribery.
The charterers appealed. Before the Court of Appeal they argued that “out of” was a wider phrase than “under”, and the parties intended a wide meaning to be given to the clause so that disputes of this nature would be caught by the clause. Not surprisingly, the claimants argued the opposite; that the words “out of” were secondary because they appeared in a sub-subclause and took their meaning from the word “under” which appeared earlier in the clause and had a narrower meaning.
Numerous authorities were cited by both sides to support their arguments. In a welcome comment on these Longmore LJ said:
“Hearings and judgments get longer as new authorities have to be considered. For our part we consider that the time has now come for a line of some sort to be drawn and a fresh start to be made at any rate for cases arising in an international commercial context.”
and decided that a dispute as to whether a contract can be set aside or rescinded for alleged bribery was a dispute arising “under” or “out of” the contract, so that the arbitrators had jurisdiction over the dispute:
“Although in the past the words “arising under the contract” have sometimes been given a narrower meaning, that should no longer continue to be so. Since both phrases are used in the present case there is, in any event, no need to differentiate between them but the proposition that the phrases “under” and “out of” could be widely construed is to my mind strongly supported by Mackender v. Feldia[6] .”
In Mackender the Court of Appeal rejected an argument that the jurisdiction clause did not apply when underwriters avoided the contract for material non disclosure of material facts and therefore there was no contract governing the relations between insurer and insured. The Courts view was that there was a contract until avoidance and that the issue was not like one of “non est factum”.
Interestingly, Longmore LJ also distinguished the words “arising out of” (“arisen out of” in clause 41(c)(i)(a)(1)) as discussed in Mustill and Boyd, Commercial Arbitration Second Edition at page 120, wherein they are said to “cover every dispute except a dispute as to whether there was a contract at all”[7] , and concluded that the dispute[8] did, on the proper construction of the charterparty arbitration clause, fall within the arbitration clause. Further, the dispute in Fiona Trust was different from a dispute “as to whether there was ever a contract at all” in the Mustill and Boyd sense.
Finally, with respect to the separability point, Longmore J confirmed that it was not enough to say that because the charterparties as a whole were impeachable there was no agreement to arbitrate and that there must be something more than that to impeach the arbitration clause. In this respect, if arbitrators can decide whether a contract is void for initial illegality[9] there is no reason why they should not decide whether a contract has been procured by bribery, just as much as they can decide whether a contract has been procured by misrepresentation or non-disclosure. Additionally, it is also relevant that Section 7 of the 1996 Arbitration Act provides:
“unless otherwise agreed by the parties, an Arbitration Agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non existent or ineffective because that other agreement is invalid or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.”
Therefore, unless the arbitration provisions of a contract can be read as limiting the scope or nature of the disputes that are to be referred to arbitration, it is necessary to identify some special reason for saying that bribery or some other cause impeaches the arbitration clause itself. In Fiona Trust there was no such cause and in any event the words “under” and “out of” should not be differentiated and should be construed widely.
It is understood that the House of Lords has given leave to appeal the decision.
Report on House of Lords decision
[1] [2007] EWCA Civ 20
[2] the word “under” was narrower in scope than the words “in connection with” or “with regard to”
[3] the modern approach is to adopt a generous interpretation of disputes with Arbitration clauses and to apply a presumption in favour of one stop adjudication “I would be very slow to attribute to reasonable parties an intention that there should in any foreseeable eventuality be two sets of proceedings” – Bingham LJ Ashville Investments Limited v. Elmer Contractors Limited (1989) QB 488 at page 517.
[4] Harbour v Kansa [1993] 1 LLR 81
[5] At page 468
[6] (1967) 2QB 590
[7] H E Daniel Limited v Carmel Exporters and Importers Limited [1953] 2 LLR 103.
[8] Ie a dispute as to whether a contract can be set aside or rescinded for alleged bribery can fall within the arbitration clause of the contract
[9] Harbour v Kansa [1993] 1 LLR 81, [2003]) 1 LLR 455
