UK House of Lords Proclaims Fresh Start to the Interpretation of English Law-Governed Arbitration Agreements

October 19, 2007

The House of Lords, England’s highest court, has placed English law firmly on the side of liberal, pro-arbitration construction of arbitration provisions, ending years of technical debate distinguishing English law from that of many commercial centers around the world. The House of Lords was asked to consider two questions (i) whether there is any legal distinction between clauses calling for arbitration of disputes “arising under” versus “arising out of” an agreement; and (ii) whether matters acting to invalidate or void a main agreement (e.g., fraud in the inducement, bribery) operate to void the parties’ agreement to arbitrate as well. The House of Lords responded in the negative to each of these questions.  (Premium Nafta Products Limited and others v Fili Shipping Company Limited and others – (Fiona Trust & Holding Corp v. Privalov [2007] UKHL 40) House of Lords decision dated 17 October 2007.)

Factual Background

Separate charterparties were entered into between a group of owners and eight charterers, each containing an identical “law and litigation clause” providing an option for any party to submit to arbitration “[a]ny dispute arising under this charter …”. The owners commenced court proceedings for rescission of the agreements on the grounds that their agent had been bribed to enter into them. The charterers applied for a stay of proceedings in favor of arbitration. The owners responded by asserting that (i) the bribery-based rescission claim did not “arise under” the agreements and, (ii) in any event, the alleged bribery voided the charterparties in their entirety, including the arbitration agreements contained within them.

The House of Lords upheld the decisions of the lower courts granting the requested stay of court proceedings.

House of Lords’ Judgment

A. “Arising Under” v. “Arising Out Of”

Their Lordships started from the proposition that parties to commercial contracts must be assumed to have entered into their agreements to achieve some rational commercial purpose. With respect to the purpose of arbitration provisions, Lord Hoffman posited that there could be little doubt:

“The parties have entered into a relationship, an agreement … which may give rise to disputes. They want those disputes decided by a tribunal which they have chosen, commonly on the grounds of such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law. Particularly in the case of international contracts, they want a quick and efficient adjudication and do not want to take the risks of delay, and in too many cases, partiality, in proceedings before a national jurisdiction.”

Against this background, Lord Hoffman expressed the view that “there is no rational basis upon which businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another…“. Accordingly, “one would need to find very clear language before deciding that they must have had such an intention.”

Lord Hoffman then turned to the long-standing “arising under” versus “arising out of” debate, declaring that “the distinctions which they make reflect no credit upon English commercial law” and confirming his agreement with the Court of Appeal that “the time has come to draw a line under the authorities to date and make a fresh start.” The principles set forth to guide future judges and arbitrators are the following:

“the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have 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.”

Applying these principles to the case before them, their Lordships held that the owners’ rescission claim was encompassed by the “arising under” language of the charterparties’ dispute resolution clause. As put by Lord Hope of Craighead:

[The clause] indicates to the reader that he need not trouble himself with fussy distinctions as to what the words ‘arising under’ and ‘arising out of’ may mean. Taken overall, the wording indicates that arbitration may be chosen as a one-stop method of adjudication for the determination of all disputes.”

B. The Separability Doctrine

The owners’ remaining argument did not require a “fresh start.” The separability doctrine is enshrined in Section 7 of the English Arbitration Act 1996, which provides:

[u]nless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement … shall not be regarded as invalid, non-existent 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.”

As emphasized by their Lordships, an arbitration agreement, therefore, “can be void or voidable only on grounds which relate directly to the arbitration agreement” and “not merely as a consequence of the invalidity of the main agreement.” This might be the case, for example, if the signature on the agreement was forged, or if the agent purporting to sign the agreement was without authority to conclude an agreement of any kind. Their Lordships distinguished these examples from the case at hand, noting that the owners’ allegation was that the main agreement was in uncommercial terms and procured by bribery. This was found insufficient to affect the validity of the arbitration clause:

[b]ut that does not show that he was bribed to enter into the arbitration agreement. It would have been remarkable for him to enter into any charter without an arbitration agreement, whatever its other terms had been.”

Impact of the Decision

The “fresh start” liberal approach to construction is a welcome development, ending what Lord Hope quite rightly described as “the trend of recent authority [which] risked isolating the approach that English law takes to the wording of such clauses from that which is taken internationally.” It allows for arbitration agreements to be interpreted broadly while, if the parties so intend and express their intention clearly, permitting them to exclude any particular disputes from arbitration.

While business people and counsel need no longer be troubled by the “fussy distinctions” between “arising under” and “arising out of” insofar as English law is concerned, complete international harmony on this point remains to be achieved. The practical significance of this is that, to the extent liberal pro-arbitration law is not applied to an agreement, or potential award enforcement or related proceedings can be envisioned in jurisdictions not clearly sharing this approach, fussy attention to contractual language addressing the scope of the arbitrators’ jurisdiction will continue to be warranted.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, Cy Benson (+44 20 7071 4239, [email protected]) or Nathalie Allen (+44 20 7071 4270, [email protected]) in the firm’s London office.   

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