Separability Arbitration Clauses

Separability arbitration clauses

InFiona Trust[1],the Court of Appeal drew a clear line under a voluminous body of case law that considered how far to push the envelope in relation to the applicability of arbitration clauses.

Before considering the details of this landmark case, the starting point for any discussion on the applicability of arbitration clauses is the Arbitration Act 1996 (the “Act”). Section 7 of the Act states as follows:

“Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) 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.”

Prior to the Act, this concept had been recognised by the courts by the doctrine of separability that developed in order to make arbitration a more practical and efficient method of dispute resolution. The doctrine of separability is the principle that an arbitration agreement is a separate contract, not necessarily affected by the invalidity, ineffectiveness or non-existence of the main contract. The doctrine is recognised in most jurisdictions and is enshrined in the leading arbitral rules e.g. LCIA, ICC and UNCITRAL.

The question that arises from this background is how far can this notion of separability be extended? The case ofFiona Trustsheds some light on this often complex and uncertain area of law.

Background

The Respondents in the arbitration proceedings were 8 one-ship companies which – as owners – entered into charterparties with the Appellants (Yuri Privalov and others) – as charterers – between February 2001 and September 2003. The charterparties contained a clause stating that:

“Any disputearising underthis charter shall be decided by the English Courts to whose jurisdiction the parties hereby agree…Notwithstanding the foregoing…either party may, by giving written notice of election to the other, elect to have any such dispute referred…to arbitration in London in accordance with the London Maritime association of arbitrators…”

The charterers commenced arbitration proceedings and the owners made an application for an injunction to the English court under Section 72 of the Act seeking to restrain the arbitration proceedings on the grounds that they had rescinded both the charterparties and the arbitration agreements contained therein on the basis that they had been obtained by bribery. The charterers sought a stay of those court proceedings under section 9 of the Act on the basis that the parties had agreed to arbitrate.
Key issues

1. Scope of the arbitration clause

The Court of Appeal set out to consolidate earlier common law on the jurisdiction of arbitral tribunals. The Court stated that for their part they,“…consider that the time has now come for a line of some sort to be drawn and a fresh start made…”. The case law thatFiona Trustpurported to consolidate related to the use of expressions: “under the contract” and “arising out of the contract”. There had previously been much judicial discussion as to whether these expressions covered disputes as to the validity of the agreement itself.

The Court of Appeal, applying a purposive approach to interpretation of the terms, stated as follows:

“As it seems to us any jurisdiction or arbitration clause in an international commercial context should be liberally construed. The words “arising out of” should cover “every dispute except a dispute as to whether there was ever a contract at all”…Although in the past “arising under the contract” have sometimes been given a narrower meaning, that should no longer continue to be so…”

The Court took the common sense view that if business men go to the trouble of agreeing that their disputes be heard in a particular country or by a particular tribunal, they do not expect time and money to be spent on arguing about whether a cause of action comes within the meaning of a particular phrase that they have used. As the Court of Appeal stated,“If any business man did want to exclude disputes about the validity of a contract, it would be comparatively simple to say so.”

2. The doctrine of separability

The Court of Appeal recognised that the common law had evolved to a point where an arbitration clause is a separate contract which survives the destruction or termination of the main contract.HarbourAssurance[2]was – as recognised by the Court of Appeal inFiona Trust –a major evolutionary step. InHarbour Assuranceit was decided that the arbitration clause applied to a dispute regardless of whether the agreement in which it was embedded was void for initial illegality. This principle is now codified in section 7 of Act (as discussed above). As Longmore LJ stated inFiona Trust:

“This statutory principle codifies the principle that an allegation of invalidity of a contract does not prevent the invalidity question being determined by an arbitration tribunal pursuant to the (separate) arbitration agreement. It is only if the arbitration agreement is itself directly impeached for some specific reason that the tribunal will be prevented from deciding the disputes that relate to the contract.”

The Court of Appeal therefore held that if the arbitrators could decide (as they did inHarbour Assurance)whether a contract was void for initial illegality, there was no reason why they could not decide whether a contract had been procured by bribery.

3. Interaction between sections 9 and 72

The Court of Appeal held that it would be for the arbitrators first to consider whether they have jurisdiction to determine the dispute and not the courts. If the court was faced with conflicting applications to stay court proceedings under section 9 of the Act in favour of arbitration and an application for a declaration that there is no arbitration agreement under section 72, the application under section 9 is the first matter that there arbitrators should decide. The Court came to this decision on the basis that this was more in line with the UK’s obligations under the New York Convention to consider section 9 applications first.

An exception

InFiona Trust,the Court of Appeal demonstrated the support of English courts for international commercial arbitration.Fiona Trustconfirms the doctrine of separability of the arbitration clause from the main contract, even in situations where that contract was procured by bribery. Coupled with the Court’s liberal (and commercial) approach to the interpretation of arbitration clauses, it highlights that where parties have agreed to arbitration, the arbitrators should be the first to consider whether there are any jurisdictional issues that need to be resolved.

What happens, however, where the parties dispute that there was ever a contract at all as quoted above in relation to the scope of an arbitration clause? If there was no contract, how can there be an arbitration clause? Academic writers, includingMustill & Boyd,consider that the words “arising out of” should cover“every dispute except a dispute as to whether there was ever a contract at all.”

At first glance, this position (supported by the decision inFiona Trust) appears difficult to square with the wording of section 7 of the Act (see above) which appears to cover contracts which“…did not come into existence…”. However, the crucial distinction with this situation and the facts inFiona Trustis that there was an intention to create legal relations. The contract “did not come into existence” (for the purposes of section 7) because of bribery but there was still an intention, at the outset, to create legal relations between the parties. In contrast, it seems that a party cannot rely on an arbitration clause in a proposed contract where the offer is revoked before it has been accepted by the other party. However,Harbour Assuranceeven clouds this concept:

“It seems to me impossible to accept so sweeping a proposition. There will obviously be cases in which a claim that no contract came into existence necessarily entails a denial that there was any agreement to arbitrate. Cases of non est factum or denial that there was a concluded agreement, or mistake as to the identity of the other contracting party suggest themselves as examples. But there is no reason why every case of initial invalidity should have this consequence…In every case it seems to me that the logical question is not whether the issue goes to the validity of the contract but whether it goes to the validity of the arbitration clause. The one may entail the other but…it may not.”

Whilst the originalMustill & Boydposition may be a starting point – and the doctrine of separability may not apply to a situation where there is a denial that a contract came into existence –Harbour Assuranceappears to confirm that every case must be decided on its own special facts. Whilst it may seem unlikely that a contract that never came into existence according to basic contractual principles could nevertheless still produce a binding agreement to arbitrate, this is an anomaly that has still not been tested by the courts as such.

Recent developments

Another key point to note is that on 29 March 2007 the House of Lords granted permission to appeal against the judgment inFiona Trust. The Court of Appeal has, separately, refused to extend an injunction restraining the Appellants from pursuing the arbitration pending judgment in the House of Lords. The Court of Appeal held that the courts should adopt a cautious approach to injunctive relief in the arbitration context.

The Respondents would have to show a strong case of potential prejudice before the Court would intervene and the Respondents had not shown a strong enough case. The Appellants were, however, required to give three undertakings, namely:

1. the Respondents could participate in the arbitration without prejudice to their rights under section 72 of the Act;

1. the Respondents would be permitted to appoint their own arbitrator; and

1. any additional costs incurred as a result of the arbitration would be borne by the Appellants if the House of Lords held the arbitral tribunal did not have jurisdiction.

Whilst the Court of Appeal decision inFiona Trustappears to shed light on the doctrine of separability and demonstrate support for international arbitration, the Law Lords may yet decide to reverse the decision. Arbitrators everywhere should, therefore, watch this space.

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

[2]Harbour Assurance Co (UK) Ltd v Kansa General International Assurance Co Ltd and others[1993] 3 All ER 897