Sally-Ann Underhill, the professional support lawyer in the Shipping Group, reports on the House of Lords judgment in the case of Premium Nafta Products Limited and Others v. Fili Shipping Company Limited and Others.

The decision concerns the scope and effect of arbitration clauses in Shelltime 4 form, but is of much wider application and extends to all arbitration clauses. Clause 41 of Shelltime 4 provides for any dispute arising under the charter to be dealt with by the English Courts unless one of the parties exercises an option to have the matter referred to arbitration. This constitutes an arbitration agreement, and the House of Lords dealt with it as if it was a basic arbitration agreement.

Two issues arose:-

1. Construction – whether, as a matter of construction, the arbitration clause covered the question of whether the contract was procured by bribery (the underlying allegation being that the main agreement was in uncommercial terms which, together with other surrounding circumstances, gave rise to an inference that an agent acting for the Owners was bribed to consent to it).

Clause 41 provides for “any dispute arising under this charter” to be referred to arbitration. There is much legal authority as to the difference between such clauses and those referring to “disputes arising out of this charter”.

In the leading judgment, Lord Hoffmann held that the time has come (i) to stop arguing about the possible differences between such clauses, (ii) to give commercial effect to such clauses, (iii) to draw a line under the authorities to date, and (iv) to take on board the provisions of section 7 of the 1996 Act, which provides that “unless otherwise agreed by the parties, an arbitration agreement which forms or is intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, nonexistent 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”. This means that from now on, all such arbitration clauses should be construed on the assumption that the parties intended that any dispute arising out of their relationship be decided by the same tribunal. This will be the case unless the language of the arbitration clause makes it clear that certain questions were intended to be excluded from the arbitrators’ jurisdiction.

In future, if parties wish to have issues relating to, for example, the validity of the agreement itself, dealt with otherwise than by the agreed arbitration tribunal, they will need to make express reference to this in their arbitration clause.

2. Separability – the issue of whether it is possible for a party to be bound by a submission to arbitration when he alleges that, but for, for example bribery, he would never have entered into the contract containing the arbitration clause. Reference was again made to the section 7 Arbitration Act principle of separability. The Lords held that the arbitration agreement must be treated as a distinct agreement, and can be void or voidable only on grounds which relate directly to the arbitration agreement itself. In this case, notwithstanding the suggestion that the agreement was in uncommercial terms, the agreement would, in any event, have been almost bound to include an arbitration clause, or some other jurisdiction clause. Reference was made to the fact that such clauses are not generally subject to minute scrutiny by the parties, as their purpose is clear. The judgment therefore clarifies that if a party wishes to dispute the validity of an arbitration agreement, it needs to adduce grounds which relate to the arbitration agreement itself, and are not merely of consequence to the validity of the main agreement.

The judgment is clearly a commercial one, and should introduce certainty into this area by reducing the number of challenges to London arbitration clauses and increasing their effectiveness.