Fiona Trust v. Primalov (HofL)

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Fiona Trust and Holding Corporation and Others v Yuri Privalov and Others
under name of Premium Nafta Products Ltd (20th Defendant) & Others v. Fili Shipping Co Ltd (14th Claimant) & Others
English House of Lords: Lords Hoffmann, Hope, Scott, Walker and Brown: [2007] UKHL 40: 17 October 2007
Christopher Butcher QC and Philip Jones QC (instructed by Ince & Co) for the Appellant shipowners
Nicholas Hamblen QC and Vernon Flynn (instructed by Lawrence Graham LLP) for the Respondent Charterers

Affirming the judgment of the Court of Appeal in this case, the House of Lords unanimously held that, unless the language of an arbitration clause made it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction, it was to be assumed that the parties, as rational businessmen engaged in an international commercial transaction, were likely to have intended any dispute arising out of the relationship into which they had entered, including disputes over the validity of their agreement itself, to be decided by the arbitrator rather than by a court. Such an approach was now part of the law of international commerce and must be accepted as part of English law too (per Lord Hope)

DMC Rating: Developed

This claim concerned the shipowners’ entitlement to rescind certain charterparties on the grounds that they were tainted with fraud due to bribery. All of the shipping companies formed part of the Sovcomflot group of companies (which is owned by the Russian state). The allegation was that a certain Mr Nitikin, who controlled or was associated with the charterer companies, secured the charters - on terms characterised as ‘uncommercial and unbelievably generous’ - by means of bribing senior officers of the Sovcomflot group, in particular, Mr Skarga, the Director-General. For the purposes of the present litigation, it was accepted that the shipowners had an arguable case on these grounds.

All of the charters had been entered into on the Shelltime 4 Form. Clause 41 of the charters provided that:
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 (emphasis added) this charter shall be decided by the English courts to whose jurisdiction the parties hereby agree";
c) "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 …".
A further sub-clause referred to a dispute "arising out of" (emphasis added) the charter1.

On 12 April 2006, the shipowners purported to rescind eight of the charters. On 25 April, the charterers instituted arbitration proceedings and sought to enforce their rights in arbitration. On 27 April, the shipowners purported to rescind the jurisdiction and arbitration clauses in the charterparties. The ground for rescission was that the contracts were obtained by bribery.

The question then was whether the issue of whether they were entitled to do so should be determined by arbitration or by a court. The shipowners commenced court proceedings for a declaration that the charters had been validly rescinded and the charterers applied for a stay under section 9 of the Arbitration Act 1996. Morison J [2007] 1 All ER (Comm) 81 refused a stay but the Court of Appeal (Tuckey, Arden and Longmore LJJ) [2007] Bus LR 686 allowed the appeal and granted it.

In granting the appeal, the Court of Appeal held that the arbitration clauses in the charterparties did apply to disputes about rescission of those contracts on the grounds that they had been induced by bribery. The words "arising out of" in a charterparty jurisdiction clause were effective to cover every dispute under that charter except a dispute as to whether there was ever a contract at all. The Court of Appeal held that this case was different from a dispute as to "whether there was a contract at all". In particular it was not enough to say that bribery impeached the whole contract unless there was some special reason for saying that bribery impeached the arbitration clause in particular. There was no such reason here.

The shipowners appealed to the House of Lords on two grounds:
a) that, as a matter of construction, the arbitration clause, by referring only to disputes ‘arising under’ the charterparty, was not wide enough to cover the question whether the contract was procured by bribery; and
b) that it is not 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 – the ‘separability issue’.

The only two extended opinions in the case were those given by Lord Hoffman and Lord Hope.

Lord Hoffman
As regards the question of construction, Lord Hoffman noted the distinction that had been made in the cases between clauses requiring all disputes "arising under" and those requiring all disputes "arising out of" the agreement to be referred to arbitration. He did not, however, analyse the distinctions further as, in his opinion, "they reflect no credit upon English commercial law" (at p.12). In his view, the time had come to "draw a line under the authorities to date and to make a fresh start" (ibid). This fresh start was "justified by developments which have occurred in this branch of the law in recent years and in particular by the adoption of the principle of separability by Parliament in s.72 of the 1996 [Arbitration] Act" (ibid).

He continued:
"In my opinion 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 makes it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction. As Longmore LJ remarked, at para. 17 [of the judgment of the Court of Appeal]: "if any businessman did want to exclude disputes about the validity of a contract, it would be comparatively easy to say so."

Adopting this approach, he found nothing in the wording of clause 41 of Shelltime 4 to exclude disputes about the validity of the contract, "whether on the grounds that it was procured by fraud, bribery, misrepresentation or anything else" (at p.15). On that basis, it applied to the present dispute.

The second issue was whether, give the allegation of bribery, the arbitration clause was binding upon the owners. The owners’ argument was that, "but for the bribery, the[y]would not have entered into any charter with the charterers and therefore would not have entered into an arbitration agreement" (at p.19). But, in his opinion, that was exactly the kind of argument that s.7 [of the Arbitration Act 1996] was intended to prevent. He continued:

"It amounts to saying that because the main agreement and the arbitration agreement were bound up with each other, the invalidity of the main agreement should result in the invalidity of the arbitration agreement. The one should fall with the other because they would never have been separately concluded. But section 7 in my opinion means that they must be treated as having been separately concluded and the arbitration agreement can be invalidated only on a ground which relates to the arbitration agreement and is not merely a consequence of the invalidity of the main agreement (ibid).

For these reasons, which he acknowledged were substantially the same as those of Longmore LJ in the Court of Appeal, he held that the charterers were entitled to a stay of proceedings and that owners’ appeal would be dismissed.

Lord Hope

Lord Hope, too, found for the charterers on the construction issue. He drew a distinction between the way in which different terms in an international contract should be construed. A high degree of precision was needed in the terms that dealt with the parties’ mutual obligations in relation to price and performance, since they lay at the heart of every business transaction. In other terms, where the overall purpose was clear, "the parties are unlikely to linger over the words which are used to express it" (at p.26).

Clause 41 of the Shelltime 4 charter fell, in his view, into the latter category. It was the kind of clause "to which ordinary businessmen readily give their agreement so long as its general meaning is clear" (at p.26). It was appropriate, therefore, that it be liberally construed. Such an approach promoted legal certainty. It served to underline the golden rule that "if the parties wished to have issues as to the validity of their contract decided by one tribunal and issues as to its meaning or performance decided by another, they had to say so expressly. Otherwise they would be taken to have agreed on a single tribunal for the resolution of all such disputes" (ibid).

The overall purpose of clause 41 was identified, he said, in the two opening paragraphs, namely, the choice of law and jurisdiction clauses. There was no indication here that the parties intended that the disputes which were to be determined in accordance with the laws of England and be decided by the English courts were not to include disputes about the charter’s validity. The arbitration clause which followed had to be reading that context. "It indicates to the reader," he said, "that he need not trouble himself with fussy distinctions as to what the words "arising under" and "arising out of" may mean. Taken overall, the wording indicates that arbitration may be chosen as a one-stop method of adjudication for the determination of all disputes."

He agreed with the Court of Appeal and with Lord Hoffman that a fresh start should be made, "at any rate for cases arising in an international commercial context" and he felt that for many years the trend of recent authority had "risked isolating the approach that English law takes to the wording of such clauses from that which is taken internationally" (at p.29). Foreign jurisprudence, including the Federal Court of Australia, established that "a liberal approach to the words chosen by the parties was underpinned by the sensible commercial assumption that the parties did not intend the inconvenience of having possible disputes in two places, particularly when they were operating in a truly international market". This approach to the issue of construction was, in his view, "now firmly embedded as part of the law of international commerce" (at p.31). He agreed with the Court of Appeal that it must now be accepted as part of English law too" (ibid).

It was in the light of these observations that the issue of severability had to be viewed. In his view, as in Lord Hoffman’s, "the validity, existence or effectiveness of the arbitration agreement is not dependent upon the effectiveness, existence or validity of the underlying substantive contract unless the parties have agreed to this" (at p.32).

In this case, the owners had argued that the bribes impeached not only the charters themselves but also the arbitration clause. The argument was essentially one of causation. It was that the charters would not have been entered into in the absence of these bribes or other benefits and that, but for the agreement to enter into them there would have been no agreement to go to arbitration (see p.23)

But as Lord Hope pointed out, this case was different from a dispute as to whether there was ever a contract at all. The owners’ argument was not that there was no contract at all but that they were entitled to rescind it, including the arbitration clause, because the contract was induced by bribery. Allegations of that kind, he said,
"may affect the validity of the main agreement. But they do not undermine the validity of the arbitration clause as a distinct agreement. The doctrine of separability requires direct impeachment of the arbitration agreement before it can be set aside. This is an exacting test. The argument must be based on facts which are specific to the arbitration agreement. Allegations that are parasitical to a challenge to the validity to the main agreement will not do"(at p.35).

That being the situation in this case, Lord Hope held that the agreement to go to arbitration had to be given effect and dismissed the appeal.

Of the remaining members of the House, Lords Scott and Walker agreed with the opinion of Lord Hoffman; Lord Brown agreed with the opinions of both Lord Hoffman and Lord Hope.

[1] (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) specifies the nature of the dispute; and
(3) refers expressly to this clause 41(c)
(b) it fails to give notice of election to have the dispute referred to arbitration not later

than 30 days from the date of receipt of such notice of dispute."

[2] "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."

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