Originally published in BLG Marine, Energy and Trade notes, January 2008
The House of Lords in Premium Nafta Products and Ors v Fili Shipping Ltd and Ors (2007) ("Premium Nafta") recently upheld the separability of arbitration clauses from the contracts in which they are contained.
In Premium Nafta, a dispute arose out of eight charterparty contracts, governed by English law, between a group of shipowners and charterers. Shipowners alleged that the charters were procured by bribery and then sought to rescind them. The issues to be determined were whether the dispute fell within the arbitration clauses in the various charters and whether the shipowners were bound by the arbitration clause.
On the first issue, the parties sought to distinguish the phrases 'any dispute arising under this charter' and 'any dispute arising out of this charter'. The House of Lords held that the time had arrived to "draw a line under the authorities to date and make a fresh start" for the interpretation of arbitration agreements. They took as their starting point the assumption that commercial parties are likely to have intended that any dispute arising out of the relationship of parties to a transaction, or purported transaction, be decided by a 'one stop' tribunal. It followed that arbitration agreements should be so construed unless there was clear and express wording to the contrary. Here, the dispute was held to fall within the broad construction of the arbitration clause.
On the second issue, the Lords confirmed that the enactment of section 7 of the Arbitration Act 1996 enshrined the principle that an arbitration agreement must be treated as a distinct and separate contract. As such, arbitration agreements can only be regarded as void on grounds which relate directly to the arbitration agreement and not merely as a consequence of the invalidity of the main agreement. This is known as the principle of separability. Thus, there remain very limited circumstances in which an arbitration agreement can be impeached, such as the case of a forgery (where it is argued that a party did not agree to anything in the document as his signature was forged), and not, as in this case, by an allegation of bribery concerning the main contract alone. Another example not mentioned in the judgment would be a case where, following bankruptcy, the arbitration clause is regarded as having been abrogated by the law of the state of incorporation of the company.
Following Premium Nafta, a liberal and purposive approach to the construction of arbitration agreements results in greater legal certainty. Parties to a transaction with an English arbitration clause can take comfort in the 'golden rule' that if parties wish to have different issues decided by different tribunals they can only do so by express wording. There will likely be a reduction in the amount of disputes concerning the scope of English arbitration agreements as a result of the decision; however, parties should be aware that other jurisdictions may take a more restrictive approach to construction.
This decision sends a clear message that England remains an attractive centre to arbitrate in so far as interference with the arbitration process will be kept to a minimum.
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