International arbitration: the new liberal approach of the Court of Appeal

We have in previous years described how, with decisions such as that of the House of Lords in Lesotho Highland Development Authority v Impreglia, the position of London as a prime location for international arbitrations has been reinforced. In January of this year the Court of Appeal issued its own decision which further underlines this trend. In the case of Fiona Trust & Holding Corporation & Ors v Privalov & Ors [2007] EWCA Civ 20, the Court of Appeal indicated that a new approach needs to be taken by the English courts when considering questions relating to the jurisdiction of arbitration clauses in international commercial contracts. The Court of Appeal considered that the time had now come for a line to be drawn, and a fresh start made for cases arising in an international commercial context. In particular, the Court of Appeal commented that ordinary businessmen would be surprised at what it termed “the nice” or fine 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.

The Fiona Trust case arose out of an ongoing dispute between the Russian Sovcomflot group of companies and a Mr Nikitin. Part of the dispute related to an allegation that a number of charterparty contracts had been procured by bribery. Each of the contracts contained a clause enabling disputes to be referred to arbitration in London. The charterers duly commenced arbitration proceedings. In response, the owners sought to restrain the proceedings pursuant to section 72 of the 1996 Arbitration Act, arguing that as they had rescinded the contracts owing to the bribery, the arbitration agreements contained within those contracts fell as well.

It is thought to be the first time that the question as to whether an arbitration agreement can be regarded as being separable in circumstances where the contract as a whole is under the suspicion of bribery has come before the English courts. At first instance, Morison J granted an injunction restraining the arbitration proceedings pending trial of the court action.

The Court of Appeal disagreed, ruling that if a contract is said to be invalid for reasons such as bribery, unless that bribery specifically relates to the arbitration clause, the arbitration clause will survive. This would mean here that the validity of the contract as a whole would be determined by the arbitrators, not the court.

One of the issues related to the lengthy dispute resolution clause, which referred first to disputes “arising under” the contract, and later to disputes which have “arisen out of” the contract. In particular, the Court of Appeal had to consider arguments relating to the distinction, if any, between disputes arising “under” a contract and disputes arising “out of” a contract. Should “out of” have a wider meaning than “under”, and if so, given the wording of this particular clause, which of the two should prevail? And it was the need to rule on the construction of this clause that led the Court of Appeal firstly to review the authorities and then to rule that the time had come to take a fresh approach.

Noting that not all the authorities were readily reconcilable and that hearings and judgments were getting longer as new authorities had to be considered, Longmore LJ concluded that arbitration clauses in international commercial contracts should be given a liberal interpretation:

“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… 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 in their arbitration clause. If any businessman did want to exclude disputes about the validity of the contract it would be comparatively simple to say so.”

Accordingly, Longmore LJ indicated that:

“It seems to us any jurisdiction or arbitration clause in an international commercial contract should be liberally construed.”

In relation to the dispute at hand, this led the judge to the conclusion that:

“The words ‘arising out of’ should cover every dispute except a dispute as to whether there was ever a contract at all.”[1]

One of the reasons given in the authorities which favoured this liberal construction of arbitration clauses was the presumption in favour of one-stop arbitration. Again the judge made reference to the expectations of the typical commercial man who would be most unlikely to deliberately and knowingly create a system which required first that a court should decide whether the contract should be rectified or avoided or rescinded and then secondly, if the contract was held to be valid, required the arbitrator to resolve the issues that had arisen.

The Court of Appeal was also required to consider the relationship between sections 9 and 72 of the 1996 Arbitration Act. Section 9 deals with applications to stay proceedings to arbitration, whilst section 72 deals with applications in relation to the question of whether or not there is a valid arbitration agreement. Although the Court of Appeal considered that section 72 did not apply here, it held that where the court has conflicting applications before it either to stay court proceedings or for a declaration that there is no valid arbitration agreement, then the application under section 9 should be taken first. The Court of Appeal considered that this was not only the logical approach but would also reflect the UK’s obligations under the New York Convention on the enforcement of arbitral awards.

In considering this issue, the Court of Appeal restated the four possible approaches to deciding whether an arbitration agreement exists to which section 9 might apply, as set out by HHJ LLoyd QC in the case of Birse Construction v St David (1999) BLR 194:

1. to determine on the evidence before the court that such an agreement does exist in which case (if the disputes fall within the terms of that agreement) a stay must be granted, in the light of the mandatory “shall” in section 9(4). It is this mandatory provision which is the statutory enactment of the relevant Article of the New York Convention, to which the UK is a party;
2. to stay the proceedings on the basis that it will be left to the arbitrators to determine their own jurisdiction pursuant to section 30 of the 1996 Act, taking into account the subsequent provisions in the 1996 Act for challenge to any decision eventually made by the arbitrators;
3. not to decide the issue but to make directions pursuant to what is now CPR Part 8 for an issue to be tried as to whether an arbitration agreement does indeed exist; and
4. to decide that no arbitration agreement exists and to dismiss the application to stay.

On the facts here, it was clear that the first option was the appropriate one.

Conclusion

This decision, and the clear message of support given to international arbitration by the Court of Appeal, can only serve to confirm the attractiveness of London and England as an arbitration centre.

[1] A sentiment which of course applies just as equally to domestic adjudication.