So confirmed the House of Lords last week in Fiona Trust & Holding Corporation (and others) v Yuri Privalov (and others) [2007]. It held that commercial reasons and common sense dictate that there is an assumption that any agreement to arbitrate covers all disputes. In our March briefing “Court of Appeal calls time on arbitration aviodance”, we explained how the Court of Appeal had stated that if it was the intention of the parties to a contract at the time the contract was made to refer disputes to arbitration then neither party should be allowed to avoid that consequence through linguistic niceties. The House of Lords agreed. It also referred to the importance of the principle of separability set out at section 7 of the Arbitration Act 1996 which prevents one party from wriggling out of an agreement to arbitrate.

The two issues

The case involved eight charterparties, which were entered into using a standard form made between eight charterers and eight companies forming part of the Sovcomflot group of companies. It was alleged by the owners that the charters were procured by the bribery of senior officers of the Sovcomflot group by a Mr Nikitin who was associated with the charter companies.

The owners had an arguable case that the charters could be rescinded because of the bribery. They issued court proceedings for a declaration that the charters were rescinded. The charterers applied for a stay of the court proceedings because of the existence of an arbitration clause in each charter agreement. The two issues before the Lords were:

  • Whether as a matter of construction the wording of the arbitration clause covered the question of whether the contract was procured by bribery; and
  • Whether the arbitration clause remained valid even if it was proved that the contract could be rescinded because of the bribery.

Assumption that the arbitration clause includes all disputes

The House of Lords confirmed that a proper approach to interpretation requires the court to give effect, so far as the language used by the parties will permit, to the commercial purpose of the arbitration clause. There is no rational basis upon which businessmen would be likely to wish to have certain questions (such as the validity or enforcement of the contract) decided by one tribunal and questions about other issues (such as performance) decided by another. That being so, when construing an arbitration clause the starting assumption is that the parties 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.

Separability of agreement to arbitrate

The House of Lords also confirmed that, on the facts of this case, the agreement to arbitrate remained valid despite the allegations of bribery, which if proved, would entitle the contract to be rescinded. The principle of separability, contained in section 7 of the Arbitration Act 1996, means that the invalidity or rescission of the main contract does not necessarily result in the agreement to arbitrate being invalid or capable of being rescinded. The arbitration agreement must be treated as a distinct agreement and is voidable only on grounds which relate directly to the arbitration agreement itself. In this case, there was no suggestion that bribery affected the agreement to arbitrate. Therefore, the arbitration agreement remained valid for all disputes. Cases in which an allegation would affect the main agreement and the arbitration agreement include instances of alleged forgery of a signature of one party or an agent acting without authority.

Comment

The golden rule is that if you want to have issues as to the validity of the contract decided by one tribunal and issues as to the meaning and performance decided by another (which would be unusual) you must expressly say so. Otherwise, you will be taken to have agreed on a single tribunal for the resolution of all disputes. Only in a very few cases will the allegations being made have an impact on the agreement to arbitrate all disputes. The Lords have marked a fresh start for arbitration agreements with this decision: commerciality, common sense and the original intention of the parties will prevail, fine verbal distinctions will not