Fiona Trust v Privalov
Note: the decision in this case has been overruled by the Court of Appeal, in a judgment dated 24 January 2007. For a note on the Court of Appeal decision, click here
Julian Flaux QC, Philip Jones QC, Justin Higgo and Jennifer Haywood (instructed by Ince & Co) for the Claimants
Graham Dunning QC and Jern-Fei Ng (instructed by Howes Percival) for the Second Defendant
Gordon Pollock QC, Nicholas Hamblen QC and Vernon Flynn (instructed by Lawrence Graham) for the Third to Seventeenth and Nineteenth Defendants
FRAUD: BRIBERY: CHARTERPARTIES: ARBITRATION CLAUSES: ARBITRATORS’ JURISDICTION: RESCISSION: RESTITUTION: VITIATION OF CONTRACTS AND ARBITRATION AGREEMENTS
Where a contract was rescinded on the grounds that it was procured by bribery, the whole contract had gone, including the arbitration clause. The fraud went to the very existence of the contract, in that the claimants never truly agreed to be bound by the contract at all. Consequently, their claims for damages or restitution could not be said to arise "under" the contract and the arbitrators had in consequence no jurisdiction.
DMC Category Rating: Confirmed
This case note is based on an Article in the December 2006 Edition of the ‘Marine Bulletin’, published by the Marine team at the international firm of lawyers,DLA Piper. DLA Piper is an International Contributor to this website.
The claimants' case was that the chartering of their vessels formed part of a dishonest conspiracy to injure the claimants' business by unlawful means and that this was part of a pattern of corrupt activity in which individual defendants had been engaged from 2001 to
2005. This included diversion of commissions, uncommercial sale and leaseback arrangements, shipbuilding options and the acquisition of shares obtained for no or no proper consideration, backdated documents and a surrender of rights for a substantial undervalue.
Four claims were made:
The issues in this hearing concerned whether the dispute should be heard in the court (as the claimants wished) or whether it was subject to a valid arbitration agreement in the charterparties.
All the charters were on the Shell Time Form, which, at section 41 provided that the charter would be governed by English law and jurisdiction, but "Notwithstanding the foregoing ... either party may, by giving written notice of election to the other party, elect to have any such
dispute referred ... to arbitration in London ...".
On 12 April 2006, the claimants purported to rescind 8 time charters. On 25 April, the defendants instituted arbitration proceedings. On 27 April, the claimants purported to rescind the jurisdiction and arbitration clauses in the charterparties.
Construing the clause
The defendants said the clause was wide enough to encompass the dispute and survived an attempted rescission of the contract as it was a separate and distinct bargain between the parties. Rescission was not an available option in the case of two of the charterparties which had been fully performed, because restitution was no longer possible. The charterers could not give back what they had received as they had entered into sub-charters and bills of lading, none of which were capable of being "unscrambled". Lastly, the claimants had waived their rights by delaying for some six months before serving their rescission notices.
The claimant must show either that the resolution of the contractual issue is necessary for a decision on the tortious claim, or that the contractual and tortious disputes are so closely knitted together on the facts that an agreement to arbitrate on one can properly be construed as covering the other: The "Angelic Grace"  1 Lloyd's Rep 87.
Non est factum
The allegations of bribery and fraud in the making of the contracts made this case akin to cases of "non est factum" (where it is argued that, even though the defendant executed the document, "it is not his deed") or to mistake, both of which go to the very root of the existence of the contract. No true agreement had been expressed by the claimants because the contracts had been procured by fraud. If the claimants were entitled to rescind the contracts for bribery, the whole contract would go - arbitration clause and all.
At this stage, the judge only had to be satisfied that the claimants had shown a fully arguable case that the time charters and their arbitration clauses had been validly rescinded. In his view, they had fulfilled this condition.
Although legal problems might arise when a charterparty had been fully performed or third party rights had become involved, the law was flexible enough to permit rescission even in such cases. The fact that full restitution might not be possible in the literal sense was not a bar to the remedy.
On the facts, the judge was also satisfied that the claimants had not lost their remedy by delay or other acts. They were entitled to await the report of an expert engaged to review the terms of the charterparties before rescinding the contracts.
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