The decision of the House of Lords in the Fiona Trust case, 17 October 2007, is of great significance for anyone who may be involved in arbitration as it laid down important principles concerning the construction and effect of an arbitration clause. Those principles are of general application to situations very different from those which gave rise to the Fiona Trust litigation.
Eight charterparties were entered into over a three-year period (2001-2003) between companies forming part of the Sovcomflot Group of companies and three charterers. The charterparties were all on the Shelltime 4 form. They provided that:
“any dispute arising under this charter shall be decided by the English Courts … notwithstanding the foregoing … either party may … elect to have any such dispute referred to arbitration in London.”
In April 2006, the owners purported to rescind the charters, alleging that they had been procured by the bribery of senior officers of the Sovcomflot Group. The question arose whether the issue of whether owners were entitled to rescind should be determined in arbitration or a court.
The owners commenced court proceedings for a declaration that the charters had been validly rescinded. The charterers applied for a stay of the court proceedings under section 9 of the Arbitration Act 1996, arguing that the proceedings related to a matter which was to be referred to arbitration.
The Court of First Instance refused a stay, but the Court of Appeal allowed the appeal and granted a stay of the court proceedings (reported in Sea Venture issue 8 and on the Steamship Mutual website - see report on court of appeal decision). The owners appealed to the House of Lords.
The case raised two questions:
- Whether, as a matter of construction, an arbitration clause in a charterparty was apt to cover the question whether the charterparty was procured by bribery; and
- Whether it was possible for a party to be bound by a submission to arbitration when he alleges that, but for the bribery, he would never have entered into the contract containing the arbitration clause.
1. On the first question, the House of Lords considered various cases on the meaning of such phrases as “arising under” and “arising out of”. The House agreed with the Court of Appeal that the time had come to draw a line under these authorities and to make a fresh start. Lord Hoffman said:
“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. The clause should be construed in accordance with this presumption unless the language made it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction.”
Adopting this approach, the language of the clause contained nothing to exclude disputes about the validity of the contract; whether because it was procured by fraud or for any other reason. Accordingly the arbitration clause applied to the present dispute.
2. Section 7 of the 1996 Act lays down the principle of separability:
“Unless otherwise agreed by the parties an arbitration agreement which forms or was intended to form part of another agreement … 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.”
The House of Lords held that the effect of this was 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; the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement.
In some cases, the main agreement and the arbitration agreement will both be invalid on the same ground. For example, if the signature to a contract containing an arbitration agreement is forged, then the arbitration agreement is invalid. This is not because the main agreement is invalid, but because the signature to the arbitration agreement as a “distinct agreement” was forged.
In other cases, however (including the present case), where it is alleged that an agent exceeded his authority in entering into the main agreement in terms which were not authorised, or for improper reasons, that is not necessarily an attack on the arbitration agreement. An allegation that a party can rescind an agreement because it was induced by bribery does not undermine the validity of the arbitration agreement as a distinct agreement.
The case is important because, as a result of the decision of the House of Lords, the previous authorities regarding interpretation of arbitration clauses have been swept away. Parties entering into contractual agreements should be aware that, unless very specific wording in the contract is used, a party who has signed a contract with an arbitration clause will now be considered to have agreed that all disputes, including disputes as to whether the contract was validly entered into at all, will be referred to arbitration. This is the case even where one party purporting to enter into the agreement may have exceeded his authority. It is now important to bear in mind when negotiating agreements with arbitration clauses, such as charterparties, that parties are bound by the arbitration clause even where the remainder of the agreement is void or voidable.
With thanks to Nick Barber of Stephenson Harwood for preparing this article.
Fiona Trust And Holding Corporation & 20 Others V Yuri Privalov & 17 Others [2007] UKHL 40
