On 24 January 2007, the English Court of Appeal delivered an important judgment enforcing an arbitration clause, compelling arbitration where one party to the contract containing that arbitration clause had purported to rescind the contract as a whole following allegations of bribery. The Court of Appeal ruled that if a contract is said to be invalid for reasons such as bribery, unless that bribery relates specifically to the arbitration clause, the clause survives and the validity of the contract as a whole is to be determined by the arbitrators, not the court. It also took the opportunity to set aside a longstanding debate in the English authorities on the distinction between disputes arising "under" a contract and disputes arising "out of" a contract, concluding that arbitration clauses in international commercial contracts should be given a liberal interpretation.

The Facts and First Instance Decision

The case, Fiona Trust & Holding Corporation & ors v. Yuri Privalov & ors, is part of a wider dispute between the Russian Sovcomflot group of companies and Mr Nikitin, who is alleged to have successfully bribed one or more of their directors or employees. The dispute before the English Court of Appeal concerned eight charterparty contracts entered into between Sovcomflot companies (as ship owners) and three separate chartering companies. It is alleged that these (and numerous other contracts) were procured by bribery and contained terms highly favourable to the charterers. Each of the eight contracts at issue contained a clause permitting either party to elect to have disputes referred to arbitration in London.

The charterers commenced arbitration in London, and the owners responded by commencing court action pursuant to Section 72 of the Arbitration Act 1996 ("1996 Act") seeking to restrain the arbitral proceedings on the basis that they had rescinded the contracts, and therefore the arbitration agreements contained within them, on grounds of bribery, and there could be no arbitration. The charterers responded by seeking a stay of the court action in favour of the arbitration pursuant to Section 9 of the 1996 Act. At first instance, Morison J. declined the stay and granted interlocutory injunctions restraining the arbitration proceedings pending trial of the court action. The Court of Appeal reversed this decision. It dealt with the arguments of the parties under three headings:

(i) Construction

The owners argued that the arbitration clause did not in any event cover a claim that the charters had been rescinded for bribery. The lengthy dispute resolution clause referred first to disputes "arising under" the contract, and later to disputes which have "arisen out of" the contract. The Court of Appeal considered argument on whether "out of" should have a wider meaning than "under", and if so, given that the clause contained both formulations, which should prevail. In its judgment, the Court of Appeal discussed previous decisions that had debated this point before concluding:

"Not all these authorities are readily reconcilable … For our part we consider that the time has now come for a line of some sort to be drawn and a fresh start made at any rate for cases arising in an international commercial context. Ordinary business men would be surprised at the nice distinctions drawn in the cases and the time taken up by argument in debating whether a particular case falls within one set of words or another very similar set of words. If business men go to the trouble of agreeing that their disputes be heard in the courts of a particular country or by a tribunal of their choice they do not expect … that time and expense will be taken in lengthy argument about the nature of particular causes of action and whether any particular cause of action comes within the meaning of the particular phrase they have chosen … [I]t seems to us any jurisdiction or arbitration clause in an international commercial contract should be liberally construed."

The Court of Appeal therefore concluded that a dispute about whether a contract could be set aside or rescinded for alleged bribery did fall within the meaning of the arbitration clause.

(ii) Separability

It is a well established principle of English law that an arbitration clause is a separate contract which survives the destruction (or termination) of the main contract, as confirmed by Section 7 of the 1996 Act. English case law has also confirmed that this applies even if the whole contract is alleged to be invalid, the invalidity of the contract being determined by an arbitral tribunal pursuant to the (separate) arbitration agreement.

The owners alleged that they would not have made any contract at all had they been aware of the bribery, and that it was enough for them to say that whatever impeached the main agreement also impeached the arbitration clause. The Court of Appeal disagreed:

"It is not enough to say that the bribery impeaches the whole contract unless there is some special reason for saying that the bribery impeaches the arbitration clause in particular. There is no such reason here."

(iii) Relationship between Sections 9 and 72 of the 1996 Act

This section of the Court of Appeal's judgment considered an apparent clash between two different provisions of the 1996 Act.

Section 9 provides that, on the application of a party to an arbitration agreement against whom court proceedings are brought, the court shall grant a stay of those proceedings unless the arbitration agreement "is null and void, inoperative, or incapable of being performed…". Section 72(1)(a) of the 1996 Act provides that an alleged party to arbitration proceedings who takes no part in those proceedings may question by way of court proceedings whether there is a valid arbitration agreement.

As the Court of Appeal had already concluded that the arbitration clause, being a separable agreement, was not impeached by an alleged bribery relating to the contract as a whole, and that there was therefore no ground to question its validity in this case, it considered that Section 72 had no application. Although it could have stopped here, the Court of Appeal went further and made two further comments of note.

Firstly, from an analysis of these (and other provisions) of the 1996 Act, the Court of Appeal considered that "it is contemplated in the Act that it will, in general, be for the arbitrators to be the first tribunal to consider whether they have jurisdiction to determine the dispute".

Secondly, where the court has conflicting applications before it to stay court proceedings under Section 9 in favour of arbitration and for a declaration under Section 72 that there is no valid arbitration agreement, the application under Section 9 is the primary (i.e. the first) matter which it should decide. The Court of Appeal considered this would be more in keeping with the U.K.'s obligations under the New York Convention on enforcement of arbitral awards, reflected in Section 9 of the 1996 Act.