Bribery and arbitration agreements: new Court of Appeal guidance

Practical Law UK Legal Update 9-214-7053 (Approx. 7 pages)

Bribery and arbitration agreements: new Court of Appeal guidance

by Practical Law Dispute Resolution

Background

There is much authority (not all reconcilable) on the construction of arbitration agreements, and on particular forms of wording used in arbitration agreements. It has hitherto generally been accepted that an arbitration agreement which refers to disputes arising "out of" a contract is of broader scope than an arbitration agreement which refers to disputes arising "under" a contract. (For further discussion, see Practice Note, Interpreting Arbitration Agreements).

English law recognises the "separability" of an arbitration agreement - namely, the theory that the invalidity of a contract will not necessarily entail that an arbitration agreement contained in it is likewise invalid. The theory of separability is given statutory force in section 7 of the Arbitration Act 1996 (the Act). For further discussion, see Practice Note, Separability.

Where court proceedings are brought in breach of an arbitration clause, the court will stay the court proceedings pursuant to section 9 of the Act. If there is a dispute about whether or not the claims in question fall within a valid arbitration clause, then the court must decide how that issue (which affects the jurisdiction of the tribunal) will be determined. In a nutshell, either the court will determine the issue, or it will stay the court proceedings (pursuant to its inherent jurisdiction) to permit the tribunal to rule upon the jurisdictional question. For further discussion, see Practice note, Remedies for breach of the arbitration agreement: stays of English court proceedings: Overlap with jurisdictional issues.

Section 72 of the Act provides that a person "alleged to be a party to arbitral proceedings but who takes no part in the proceedings" is entitled to question the tribunal's jurisdiction (as defined in the Act) "by proceedings in the court for a declaration or injunction or other appropriate relief." For further discussion, see Practice note, Jurisdiction: determination by the court: Decision by court: non-participators.

Facts

These disputes arose out of eight charterparties concluded by shipowning companies in the Russian Sovcomflot fleet (Owners). The Owners alleged that the charterparties were procured by bribes made to Sovcomflot directors and employees.

Each charterparty contained a "law and litigation clause" which provided for any dispute under the charter to be decided in the English court, but which also entitled either party to elect to have any such dispute referred to arbitration in London. The clause was inconsistently drafted, referring at first to disputes arising "under" the charter, but later (in connection with the loss of the right to elect for arbitration) to disputes arising "out of" the charter.

In April 2006, the Owners purported to rescind the eight charterparties on the grounds of fraud.

The charterers then elected to refer the disputes to arbitration, and appointed a tribunal. This prompted the following applications in court:

The Owners applied pursuant to section 72 of the Act for an injunction restraining the arbitration on the basis that the charterparties, and the arbitration agreements contained in them, had been rescinded.
Charterers responded by applying, pursuant to section 9 of the Act, for a stay of the Owners' claims.

First instance decision

The applications were heard by Morison J, who held that the case was indistinguishable from a case of non est factum or mistake which went to the root of the existence of the contract. It followed that:

As a matter of construction, the claims that the charterparties had been rescinded fell outside the scope of the arbitration clause.
The arbitration agreement had itself been rescinded along with the main charters: for these purposes, the arbitration clause was not separable.

Morison J accordingly refused the Charterers' application for a stay, and granted the Owners' application for an injunction restraining the arbitration proceedings. The Charterers appealed.

Decision

The Court of Appeal unanimously reversed the decision of Morison J, setting aside the injunction and granting a stay of the court proceedings.

Construction

The Court of Appeal held that, logically, the first step was to construe the arbitration clause to see whether the rescission claims fell within its scope.

The Court considered the numerous decisions on the meaning of the phrases "arising under" and "arising out of", but held that the time had now come "for a line of some sort to be drawn and a fresh start made" - at least for cases arising in the international commercial context. The Court held that:

In such cases, any jurisdiction or arbitration clause should be liberally construed.
The words "arising out of" should cover every dispute except one as to whether there was ever a contract at all.
Although in the past "arising under" has been given a narrower construction than "arising out of", "that should no longer continue to be so".

The court indicated that this approach to construction was justified by the "presumption in favour of one-stop adjudication" - it being unlikely that commercial parties would intend to exclude from the chosen tribunal's jurisdiction issues relating to the validity of the contract.

Applying this liberal approach, the court held that disputes about whether a contract could be set aside or rescinded for bribery did fall within the scope of the arbitration clause.

Separability

The Court of Appeal held that it was necessary to identify some separate and independent reason for saying that the arbitration clause (as opposed to the main charterparty agreement) was invalid. It was not enough simply to say that the contract as a whole was impeachable. For example, an arbitration agreement might be invalid on the grounds of non est factum, mistake as to the identity of a contracting party, or because the parties had never concluded any agreement. Such factors would directly impeach the arbitration agreement. By contrast, the mere fact that the main agreement was voidable would not, of itself, mean that the arbitration agreement was also impeached.

Here, no such specific factors had been identified: the Owners had simply alleged that the bribery and consequent rescission of the charterparties affected the arbitration agreement in the same way as it affected the main agreement. In those circumstances, there was no reason to hold that the arbitration agreement was invalid.

The relationship between sections 9 and 72

Morison J had indicated that, even if the arbitrator did have jurisdiction to decide the bribery/rescission issues, he would exercise his powers under section 72 to grant an injunction in any event. This was convenient in that it allowed the court to determine all the issues in a single hearing.

The Court of Appeal rejected this approach, noting that to restrain an arbitrator from determining issues within his jurisdiction might well involve breach of the United Kingdom's obligations under the New York Convention. The Court held that, where a judge is faced with applications under sections 9 and 72, the proper course is as follows:

The primary matter to be determined is the stay application under section 9. This should be determined before the section 72 application is considered.
If there is an issue about the validity of the arbitration agreement, that issue can be determined by the court as part of the section 9 process; alternatively, the court may decide to stay its own proceedings (pursuant to its inherent jurisdiction) to permit the arbitrator to rule on these matters.
However, in most cases, the separability of the arbitration agreement will mean that there is no true question about its validity. Unless the claimant in the court proceedings has identified specific factors impeaching the arbitration agreement (as opposed to the main agreement), the court will simply conclude that the arbitration agreement is separable (and therefore unaffected by the alleged invalidity of the main contract), and will grant the stay accordingly.
If the claimant has identified specific factors impeaching the validity of the arbitration agreement, the court then has discretion to decide whether to determine that issue itself, or whether to refer it to the arbitral tribunal.
Generally, the court should be cautious about permitting parties to question (pursuant to section 72 of the Act) whether there is a valid arbitration agreement. If the court determines that there is a valid arbitration agreement and grants a stay of proceedings pursuant to section 9, there is no right to apply under section 72 of the Act for injunctive or other relief: "If there is a valid arbitration agreement, proceedings cannot be launched under section 72(1)(a) at all".

It followed that the Owners' application under section 72 of the Act for injunctive relief would be dismissed.

Comment

As the Court of Appeal noted, this is the first case to consider whether an allegation of rescission for bribery is a dispute which can and should be determined by arbitration in the context of a commonly used arbitration clause. The case is a significant one in a number of respects.

Construction

The Court of Appeal's liberal approach to construction is a welcome development. Parties to arbitration agreements do not intend or expect there to be lengthy and detailed argument on the meaning of particular phrases; and as the Court of Appeal noted, hearings and judgments get longer as new authorities have to be considered.

The Court of Appeal's view that the phrase "arising under" is no narrower than "arising out of" is probably obiter (because the clause in this case contained both phrases). However, the generally robust approach of the Court of Appeal, and the clear desire to "draw a line" under the old authorities and start afresh, means that in practice it would now be difficult - at least in the context of commercial arbitration clauses - to argue for any substantial distinction between the two phrases.

With regard to drafting arbitration agreements, note the Court of Appeal's view that "if any business man did want to exclude disputes about the validity of a contract, it would be comparatively simple to say so" (para 17).

Separability

The Court of Appeal adopted a strict approach to the question of how an arbitration agreement can be impeached. If you wish to argue that an arbitration clause contained in a contract is invalid, you will have to demonstrate that there are specific factors which make the arbitration agreement (as opposed to merely the main contract) invalid or non-existent.

As a matter of presentation, you should ensure that your evidence focuses specifically upon the arbitration agreement (note the criticisms of the owners' evidence at para 25 of the judgment). Any argument that the arbitration agreement was avoided for the same reasons as the main agreement is most unlikely to succeed in the light of the Court of Appeal judgment. The Court of Appeal gave the following examples of factors which may specifically affect the validity of the arbitration agreement: mistake as to identity of the contracting parties, non est factum, or a failure to conclude any agreement at all. Outside these situations, it will often be difficult, if not impossible, to identify any factor which specifically affects the arbitration clause, rather than the main agreement.

The relationship between sections 9 and 72

For the first time, the Court of Appeal addressed the relationship between sections 9 and 72 of the Act. The court firmly rejected the argument that section 72 permits a non-participating party to apply for injunctive or other relief regardless of any pending section 9 stay application. On the contrary - where the court is faced with applications under both sections, the Court of Appeal has now made clear that the section 9 stay application (together with any associated issues relating to the existence or otherwise of the arbitration agreement) should be determined first. Only then can the section 72 application be addressed - and, in most cases, will stand or fall with the result of the section 9 stay application. The two sections are mirror images of each other.

Some of the Court of Appeal's dicta about section 72 (for example, that the court should generally be cautious about "agreeing" that its process should be utilised to permit a party to question the validity of an arbitration agreement - see, generally, paras 34-5 of the judgment) are probably too broad. Section 72 is a mandatory provision, and was described by the DAC as a "vital provision". It is likely that the Court's comments will be read as applying only to a situation where the court has already determined - pursuant to section 9 of the Act- that the arbitration agreement is valid.

The following Practice Notes are being reviewed in the light of this decision, and will be amended shortly:

Case

Fiona Trust & Holding Corporation & ors v Yuri Privalov & ors [2007] EWCA Civ 20

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