“Arising under” or “arising out of” – it’s all the same in arbitration clauses

In a judgment that takes a refreshingly modern and commercially realistic approach, the House of Lords has drawn a line under years of varied and conflicting case law concerning the effect of an arbitration clause’s particular wording on its scope. Instead, it has ruled that arbitration clauses should be presumed to cover any dispute concerning the relationship between the relevant parties, unless the contrary is clear from the wording.

Background

In Premium Nafta Products Limited & others v. Fili Shipping Company & others (sub-proceedings in the ongoing Fiona Trust & Holding Corporation & others v. Yuri Privalov & others case), the parties entered into eight charterparties. The charters each included an arbitration clause providing, in essence, that any party could elect to refer any disputes “arising under” the charter to arbitration. The owners purported to rescind the charters claiming they were procured by bribery and sought a declaration from the English court to this effect. The charterers sought a stay of those proceedings on the basis that the arbitration clauses in the charterparties required the matter to be determined by arbitration.

Issues

• Whether the claim that the charterparties had been rescinded due to bribery was a dispute covered by the arbitration clause (the construction issue); and
• If so, whether the arbitration clause had also been rescinded because, but for the bribery, the owners would not have entered into the main agreements containing the arbitration clause (the separability issue).

Construction Issue

The House of Lords held that courts should give effect to the commercial purpose of the arbitration clause, so far as permitted by its language. The court considered whether rational businessmen were likely to have intended some disputes to be determined by arbitration, but others by national courts. If there was no rational basis for this, very clear language would be needed before deciding that there was such an intention.

Bearing that approach in mind, Lord Hoffmann briefly considered the case law on the meaning of disputes “arising under”, “out of”, “in relation to” and “in connection with” the agreement. He held that the distinctions that had developed “reflect no credit upon English commercial law” and fully endorsed the approach taken by the Court of Appeal that the time had come to make a fresh start. He concluded:

“… the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction”.

As the arbitration clause here did not exclude disputes on the validity of the main agreement, the current dispute fell within the clause.

Separability Issue

The court held that an arbitration agreement has to be treated separately from the main agreement and can be invalidated only on grounds specifically related to it, not simply as a consequence of the invalidity of the main agreement. Just because there was evidence that the agent acting for the owners may have been bribed to enter into the main agreement on uncommercial terms did not mean he was also bribed to enter into the arbitration agreement. The doctrine of separability, enshrined in section 7 of the Arbitration Act 1996, requires direct impeachment of the arbitration agreement before it can be set aside and this is an exacting test to be met.

The owners’ appeal was dismissed and the court proceedings stayed.

Comment

While the findings in respect of the separability issue may be unsurprising, the decision on the construction issue is a welcome departure from previous authority drawing technical distinctions between wordings in arbitration clauses. The decision provides a simplified and purposive approach for determining the scope of an arbitration clause, which may ultimately also be adopted in interpreting other dispute resolution clauses – indeed, this appears to be Lord Hope’s expectation in his judgment. A word of caution, though – comments made by Lord Hoffmann in his initial analysis, coupled with the “few brief comments” of Lord Hope, leave some uncertainty as to the limits of the application of this decision. Practitioners should not assume they can now be less exacting in drafting dispute resolution and jurisdiction clauses.

Case reference:

Premium Nafta Products Limited (20th Defendant) & others v. Fili Shipping Company (14th Claimant) & others [2007] UKHL 40