On 17 October 2007, the House of Lords in Fiona Trust1 handed down an important judgment that is strongly supportive of international arbitration. The Lords upheld, unanimously, the Court of Appeal's ruling in a case concerning the scope and effect of arbitration clauses. The decision is significant in two respects:

  • First, the Lords drew a line under previous authorities concerning the construction of arbitration clauses and supported the view that arbitration clauses should be construed liberally, without making fine semantic distinctions between disputes "arising out of", "arising under" or "in connection with" the contract. When construing arbitration clauses, the courts will now start from the assumption that in the absence of a clear wording to the contrary, commercial parties are likely to have intended to use arbitration as the only forum to resolve all their disputes.
  • Secondly, the Lords elaborated on the scope of the doctrine of 'severability' (enshrined in section 7 of the Arbitration Act 1996), endorsing the Court of Appeal's view that arbitration clauses are to be treated as "distinct agreements" from the main agreements and can only be invalidated on grounds that relate to the arbitration clause itself. The Lords confirmed that arbitration tribunals, not courts, have jurisdiction to determine the validity of a contract that is subject to an arbitration agreement, even in cases where that contract has been induced by fraud, misrepresentation or bribery.

Background 

The dispute arose out of eight charter-party contracts entered into between a Russian group of ship owners and eight charter companies. The ship owners wished to rescind the charter-party contracts on the grounds that their entry into the agreements had been procured by bribery. Each of the charters contained a "Law and Litigation' clause that provided for disputes arising "under" or "out of" the charter to be decided by the English courts but which also gave both parties the right to elect to have the matter decided by arbitration in London. The charter-parties elected for arbitration in London and sought to proceed to arbitration. The ship owners sought an injunction preventing the arbitration from proceeding on the basis that the charter-party contracts, and the arbitration clauses contained therein, had been validly rescinded for bribery. They argued that, but for the bribery, they would not have entered into the charters at all and therefore would not have entered into an arbitration agreement.

At first instance, the Court granted the injunction sought by the owners. On appeal, the Court of Appeal reversed this decision on the ground that the question of the validity of the contracts (allegedly procured by bribery), was to be determined by arbitration and not by the English Courts. That decision was fully confirmed by the House of Lords.

Construction of Arbitration Agreements

The first issue before the House of Lords was the construction of the arbitration clause. The ship owners claimed that the charters had been rescinded for bribery and that this was not a claim covered by the arbitration agreement contained in the charters. They argued that the question of whether the charter was procured by bribery was not a matter arising "under" or "out of" the charter and should therefore not be submitted to arbitration.

Lord Hoffmann, delivering the leading judgment, agreed with the Court of Appeal's observations that it was time to make a ‘fresh start' and move away from semantic distinctions such as whether arbitration clauses covered disputes arising "under", "out of", "in relation to" or "in connection with" the relevant agreement. Lord Hoffmann stressed the consensual character of arbitration agreements and the need to give effect, so far as the parties' language permits, to the commercial purpose of the arbitration clause. In most cases, that purpose is to refer all disputes to one tribunal that the parties have chosen rather than to submit certain disputes to one tribunal and other disputes elsewhere. Unless there is clear wording to the contrary, it is assumed that rational businessmen intended to submit all of their disputes to the same tribunal.

Severability of Arbitration Agreements

The second issue before the House of Lords was whether the invalidity or rescission of the main agreement would also rescind the arbitration clause. Lord Hoffmann emphasized the doctrine of severability of arbitration agreements, enacted in section 7 of the Arbitration Act 1996, and held that an arbitration agreement could only be invalidated on grounds that related directly to the arbitration agreement, and not as a consequence of the invalidity of the main agreement.2

Lord Hoffmann noted that there may be situations when an attack on the main agreement includes a challenge to the validity of the arbitration agreement on identical grounds. For example, in situations in which there was never any agreement at all, because the signature of the document containing the main agreement and the arbitration clause was forged, or, where the agent concluding the agreement had no authority to do so.

On the present facts, the Lords held that the alleged bribery was not sufficient to show that the agent had been bribed into concluding the arbitration clause. Lord Hoffmann noted that, "It would have been remarkable for him to enter into any charter without an arbitration agreement, whatever its other terms had been."

Practical Implications

The House of Lords' approach in looking at the true intentions of commercial parties will be welcomed by parties to an arbitration agreement. The decision sent a clear message that English courts remain highly supportive of the arbitral process.

While English courts have adopted a relatively broad approach to construing arbitration clauses in the past, the abandonment of drawing subtle distinctions in the wording of arbitration clauses has further broadened this approach, avoiding costly and time-consuming disputes as to whether a particular issue arises "out of", "under", "in relation to" or in "connection with" a contract. This broad approach will no doubt make the drafting of an arbitration clause under English law more straightforward. However, if parties wish to carve out certain types of disputes from their arbitration agreement (and, for example, submit those disputes to the jurisdiction of the courts or some other alternative dispute resolution mechanism, such as mediation), they will need to take particular care in clearly identifying those disputes when drafting their arbitration clause.

The decision confirms that arbitral tribunals, not the courts, have jurisdiction to resolve disputes as to the validity of an agreement that includes an agreement to arbitrate. It also confirms the limited scope for challenging the validity of an arbitration agreement in court. If parties wish to impeach an arbitration agreement, a direct challenge of the arbitration agreement is required. It will not be sufficient to attack the main agreement, unless the ground for attack is also a direct challenge against the validity of the agreement to arbitrate. This decision may help to discourage parties from challenging the jurisdiction of arbitral tribunals on unmeritorious and technical grounds.