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

DMC Category Rating: Confirmed

Background
This claim concerned the claimants' entitlement to rescind charterparties, which they alleged had been tainted with fraud due to bribery. Many of the claimant companies were one-ship companies ultimately owned by a Russian state-owned entity.

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:
(1) damages for the tort of conspiracy;
(2) damages arising from the payment of bribes;
(3) a claim for dishonest assistance and breach of fiduciary duty by the defendants inprocuring the charterparties by bribes; and
(4) that by reason of the bribes the charterparties had been validly rescinded and for consequential restitution.

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 claimants argued that the arbitration clause was not apt to determine the dispute. The first three claims were not claims in respect of disputes "under" the charterparties. They were disputes in relation to matters which occurred before the charterparties were entered into. It might be argued that the fourth claim (the claim for restitution) was a claim "under" the charterparties, but the argument failed because the claim was predicated on the basis that there was no contract because of bribery. In any event, as a result of the rescission, the arbitration clause had "gone".

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.

Judgment
The judge agreed with the claimants. The word "under" should be read as if equivalent to "arising out of". Where the clause refers to disputes "arising out of this contract", it will cover a tortious claim if there is a sufficiently close connection between the claim and a claim under the contract.

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" [1995] 1 Lloyd's Rep 87.

Non est factum
In the judge's view, this was not a dispute that arose "under" the contract and so the arbitrators had no jurisdiction to decide the issue.

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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