Fiona Trust v. Privalov (CofA)
Note 2: on 17 October 2007, the House of Lords upheld the decision of the Court of Appeal to the effect that the arbitration clauses in the relevant charterparties did apply to disputes about rescission of those contracts on the grounds that they had been induced by bribery. To access a note on the House of Lords judgment, click here
Note 1: On 29th March 2007 the House of Lords granted permission for the Court of Appeal decision to be appealed. The Court of Appeal then had to decide whether the restraint on the charterers from continuing the arbitration proceedings should be extended until the House of Lords gives judgment, which could be twelve months away. The Court of Appeal held that the restraint should be lifted, but on certain conditions - see Fiona Trust Holding v. Primalov  EWCA Civ 414. (Editor, 27 July 2007)
Nicholas Hamblen QC and Vernon Flynn (instructed by Lawrence Graham LLP) for the Appellants/Defendants
Christopher Butcher QC and Philip Jones QC (instructed by Ince & Co) for the Respondent/Claimants
TIME CHARTERPARTIES: SHELLTIME 4 FORM, CLAUSE 41: EFFECT OF FRAUD AND BRIBERY ON VALIDITY OF JURISDICTION AND ARBITRATION CLAUSES: "ARISING OUT OF" COMPARED TO "ARISING UNDER": ARBITRATION ACT 1996, SECTIONS 91 AND 722
The Court of Appeal, overruling the Commercial Court judgment of October 2006, held that arbitration clauses in certain 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 did 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.
DMC Rating: Confirmed/Developed
This case note is based on an Article in the February 2007 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
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 shipowners made their application on the basis of section 722 of the Arbitration Act 1996 (the "1996 Act"), seeking to restrain the arbitration proceedings on the basis that they (the shipowners) had rescinded both the charterparties and the arbitration agreements contained in them for bribery and that there can be no arbitration. The charterers responded by seeking a stay from the court under section 91 of the 1996 Act of the shipowners’ rescission claims.
At first instance, Morrison J had declined to stay the claims for rescission and had granted interlocutory injunctions to restrain the arbitration proceedings pending the trial of the action. That trial had not yet been concluded.
The submissions of the parties were conveniently grouped under
the following heads:
The court considered the opening words of the clause in which the parties agreed a choice of English jurisdiction. The logic of the shipowners’ argument was that their claim of rescission for bribery could not be brought in England because it was not a claim "under the contract" since it was a claim to have the contract set aside. The court considered that it could not be right that the businessmen negotiating these charterparties intended that any claim suggesting the contract was invalid would have to be brought wherever the defending companies were incorporated while claims for breach of contract were to be brought in England.
The importance of a liberal construction of an arbitration clause in favour of a "one stop" approach to arbitration was emphasised by the court. Although in the past the words "arising under the contract" had sometimes been given a narrower meaning, that should no longer continue to be so. In addition no commercial man would knowingly create a system that required that the court should first decide whether the contract should be rectified or avoided or rescinded before the arbitrators could go on to resolve the dispute that had arisen.
In these circumstances the court concluded that disputes as to whether contracts can be set aside or rescinded for alleged bribery did fall within the arbitration clauses on their true construction.
The court pointed to previous authority for the proposition that it is not enough to say that the contract as a whole is impeachable and that there must be something more than that if the arbitration clause is also to be impeached. Their reasoning was that if the arbitrators could decide whether a contract is void for initial illegality, there is no reason why they should not decide whether a contract had been procured by bribery, just as much as they can decide whether a contract has been procured by misrepresentation or non-disclosure.
Sections 9 and 72 of the Arbitration Act 1996
It was therefore clear that the trial judge did not have the discretion he thought that he had and there was no reason why the charterers should be prevented from arbitrating the claims. To conclude, the arbitration tribunal should be free to decide whether the charters had been procured by bribery and they should then be able to decide what consequence that conclusion had on any claims which the charterers might otherwise legitimately have.
9. -(1) A party to an
arbitration agreement against whom legal proceedings are brought (whether by way
of claim or counterclaim) in respect of a matter which under the agreement is to
be referred to arbitration
2. 72. -(1) A
person alleged to be a party to arbitral proceedings but who takes no part in
the proceedings may question-
and section 70(2)(duty to exhaust arbitral procedures) does not apply in his case.
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