In the last three months benches of both the Court of Appeal and House of Lords have given decisions that have underlined the extent to which the English court system is prepared to uphold arbitration clauses and require parties to abide by their choice to resolve disputes by arbitration rather than litigation.
In Premium Nafta Products v Fili (also known as Fiona Trust) and C v D, the courts stated quite clearly that, in the absence of clear wording to the contrary, if there is an arbitration clause in a contract, the courts will enforce it in the way it was commercially intended to be enforced.
Premium Nafta Products v Fili
Courts have in the past been extremely sympathetic to arbitration clauses and normally go out of their way to ensure that they are adhered to. The issue in Premium Nafta Products, was, however, a challenge to this approach: the dispute was about the fundamental basis of the contract itself, what happened before the contract even came into existence. The argument was one of “chicken and egg”: if the contract itself was invalid, how could the arbitration clause that forms part of it still be viable? This argument is an old chestnut before the courts, often sought to be argued by parties attempting to shy away from arbitration clauses no matter how many times the court may address those arguments.
In the reinsurance context there has been case authority since 1993 that arbitration clauses do cover pre-contractual issues such as material non-disclosure or misrepresentation. The Court of Appeal in Harbour Assurance v Kansa held that arbitration clauses, reflecting a separate agreement by the parties to arbitrate, are severable from the rest of the contract, and will still stand even if the rest of the contract is in doubt.
This authority was confirmed and developed by the House of Lords in Premium Nafta Products v Fili. In this case, to do with bribery, it was claimed that the arbitration clause should not apply for two reasons. Firstly, the contracts themselves were invalid, having only been entered into because of bribery, and secondly, the wording of the arbitration clause was not wide enough to cover a pre-contractual event - in this case the bribes.
The House of Lords dismissed both arguments. It did not matter that the contracts were liable to be rescinded due to the alleged bribes; the arbitration clause stood on its own and was still enforceable. As for the wording of the arbitration clause, the Law Lords agreed 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 approach to construction needs to be re-examined”. This was a reference to the courts’ practice in the past of finding distinctions between words used in arbitration clauses. It had been held, for example, that “disputes arising under this contract” had a narrower meaning than “disputes arising out of this contract”. The House of Lords accepted that most businessmen would be amazed to find that such distinctions applied, and would certainly not anticipate the consequences of such small differences in wording when entering into contracts. The effect of the Law Lords’ decision and comment means that such subtle differences in arbitration wording will no longer be important: the clear default position is now that arbitration clauses will be enforced unless the parties to a contract clearly state otherwise.
For more information on the House of Lords’ decision click here.
C v D
Another challenge to the law of arbitration clauses was rejected by the Court of Appeal in December 2007. The case of C v D examined the Bermuda form of arbitration clause: a popular hybrid of English arbitral procedure and US substantive law.
The defendants to the action claimed that, just because the seat of the arbitration was London, this did not mean that the arbitration clause was governed by English law. It was argued that the contract was silent as to the law governing the clause and that it ought therefore to be the law of the contract as a whole: New York law.
It was the first time that the Court of Appeal had been called upon to consider Bermuda form clauses but the Court of Appeal rejected this argument entirely and in so doing it upheld an earlier finding of the High Court that, where such clauses are used, English law is the correct law to deal with procedural disputes. They recognised the commercial reality that the purpose of a Bermuda form clause was to achieve a balance between English and US law. The judicial remedies in the appeal “should be those permitted by English law and only those so permitted”. The court was above all concerned to avoid a scenario in which the parties to a dispute could each make separate appeals in separate jurisdictions. To allow this would be to allow an interpretation of the clause that the parties could not possibly have contemplated when entering into the contract.
This decision is more likely to reassure those who use Bermuda form clauses than it is to surprise them. The reason such clauses are used is to take advantage of less burdensome English procedure, particularly in relation to discovery (disclosure requirements are lower and there are no depositions), whilst being able to rely on the perceived greater flexibility of US law in relation to remedies. Other advantages put forward include the fact that English arbitrators normally give a written reasoned award (this is still generally not the case in the US).
Comment
These cases both evidence a strong body of judicial opinion in the English courts in favour of upholding parties’ choice of arbitration clauses, and ensuring commercially-minded clarity in the implementation of such clauses. As the Court of Appeal put it in Premium Nafta, recognising some of the apparent illogical nuances in earlier authorities, “the time has come to draw a line under the authorities to date and make a fresh start”. This fresh start may well mean that the courts going forward will be even more reluctant to intervene in disputes where the parties have entered into an arbitration clause and one party is denying that clause’s applicability or arguing against commercially sensible construction.
