COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
Hon Mr Justice Morison
Strand, London, WC2A 2LL
B e f o r e :
LADY JUSTICE ARDEN
LORD JUSTICE LONGMORE
| FIONA TRUST & HOLDING CORPORATION & ors
|YURI PRIVALOV & ors
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A Merrill Communications Company
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(instructed by Lawrence Graham Llp) for the Appellants/Defendants
CHRISTOPHER BUTCHER Esq QC and PHILIP JONES Esq QC
(instructed by Ince & Co) for the Respondent/Claimants
Crown Copyright ©
Lord Justice Longmore:
This appeal raises, apparently for the first time, the question whether, if there is a plausible argument that contracts have been induced by bribery and have been rescinded on discovery of the bribery, that constitutes a dispute which can (and should be) determined by arbitration in the context of a common form of arbitration clause.
"41. (a) This charter shall be construed and the relations between the parties determined in accordance with the laws of England.
(b) Any dispute arising under this charter shall be decided by the English Courts to whose jurisdiction the parties hereby agree.
(c) Notwithstanding the foregoing, but without prejudice to any party's right to arrest or maintain the arrest of any maritime property, either party may, by giving written notice of election to the other party, elect to have any such dispute referred . . . . to arbitration in London, one arbitrator to be nominated by Owners and the other by Charterers, and in case the arbitrators shall not agree to the decision of an umpire, whose decision shall be final and binding upon both parties. Arbitration shall take place in London in accordance with the London Maritime association of arbitrators in accordance with the provisions of the Arbitration Act 1950, or any statutory modification or re-enactment thereof for the time being in force.
(i) A party shall lose its right to make such an election only if:
(a) it receives from the other party a written notice of dispute which
(1) states expressly that a dispute has arisen out of this charter;
(2) specifies the nature of the dispute; and
(3) refers expressly to this clause 41(c)
(b) it fails to give notice of election to have the dispute referred to arbitration not later than 30 days from the date of receipt of such notice of dispute . . . . . ."
(1) Construction of the arbitration clause or (in other words) does a claim that the charters have been rescinded for bribery come within the arbitration clause?
(2) Separability of the arbitration clause
(3) Procedural matters viz the relationship (if any) between sections 9 and 72 of the 1996 Act.
For the charterers Mr Hamblen QC addressed us first on the question of the separability of the arbitration clause from the rest of the agreement. Mr Butcher QC for the shipowners said that logically one must first decide what disputes are governed by the arbitration clause before considering the extent to which the arbitration agreement (whatever it meant) was separable from the main charter agreement. To that extent we agree with Mr Butcher. Counsel agreed that, since the clause referred both to the expression "any dispute arising under this charter" and (in sub-clause c(i)(a)(1) for the purpose of describing the requirements of a notice of dispute which may lead to the consequence that a party has lost his right to arbitrate) to the expression "a dispute has arisen out of this charter", the parties drew no distinction between disputes arising "under" and "out of" the charterparty. That was the limit of their agreement. Mr Hamblen submitted that "out of" was a wider phrase than "under" and that the parties therefore intended a wide meaning to be given to the clause. Mr Butcher submitted that "under" had a narrow meaning, was the primary word in the clause and that "out of", since it appeared only second and in a sub-sub-clause, must take its meaning from the meaning of "under". In any event he said that "out of" itself had a narrow meaning. We were referred to numerous authorities which Mr Butcher said supported his submission that the arbitration clause did not apply to a dispute about rescission for bribery.
". . . I do not doubt that, in some contexts, such as an arbitration clause in a commercial contract, it would be right to treat the first of these two expressions as the equivalent of the second."
He continued that it would not be right to do so in the context of domestic statutes intended to give effect to an international convention "which require . . . . a broad and liberal construction". Mr Butcher laid considerable emphasis on this passage but did not explain why on the facts of this particular case, words in a well-known form of agreement likely to be made between two parties of different nations should be construed less broadly and less liberally than a statute giving effect to international obligations.
"any disputes arising thereunder shall be exclusively subject to Belgian jurisdiction."
The underwriters avoided the contract for non-disclosure of material facts and submitted that the jurisdiction clause could no longer apply because there
"is no contract and there was no contract when the Belgian proceedings were started. So the relations between the parties are no longer governed by the contract at all" per Mr R A MacCrindle QC at page 593.
Lord Denning MR described the argument as being
". . . . owing to the non-disclosure there was no true contract no real consent by the underwriters and that, on this basis, the contract itself falls down, including even the jurisdiction clause."
This court rejected the argument on the grounds that there was a contract until avoidance and that the case was not like a case of "non est factum" when the foreign jurisdiction clause might not apply at all (see page 598C per Lord Denning MR and page 603 per Diplock LJ). It is clear that a claim for innocent misrepresentation would have also been regarded as falling within the words "any dispute arising thereunder" (pages 603-604 per Diplock LJ).
"any dispute or difference . . . as to the construction of this contract or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith . . . ."
Balcombe LJ said (page 503C) that a dispute about a mistake leading to rectification was not a matter "arising" under the contract but also said (503G) that all words should as far as possible be given a meaning. In that case the clause used two different phrases which were intended to have different meanings; their use in the instant clause, however, shows, as is common ground, that the phrases "arising under" and "arising out of" are intended to have the same meaning. Bingham LJ said (508H) disputes "arising under the contract" would not include claims in tort but left undecided the question whether claims for restitution or rectification would be covered because such claims would be covered by the subsequent wording.
"The question whether all the promises contained in the agreement were rendered invalid and void at the time when the parties signed the document by the illegality of the agreement is, in my judgment, a dispute arising out of the agreement."
At page 726C Hoffmann LJ said that the words of the arbitration clause applied without difficulty to a dispute over whether the agreement which was admittedly concluded gave rise to any enforceable obligations.
(1) Ethiopian Oil Fields v Rio del Mar  1 Lloyds Rep 86 in which it was held that a dispute about rectification came within the words "any dispute arising out of or under this contract" Hirst J held that "out of" must add something to "under", even though the words "out of " were in fact the words which appeared first in the clause. He also said that the words "arising out of" were virtually synonymous with the words "arising in connection with". Mr Butcher submitted that that was not right on the authorities but it seems to us that both Antonis P Lemos and Harbour v Kansa support Hirst J in relation to that;
(2) The Ermoupolis  1 Lloyds Rep 16 where it was held, following The Playa Larga, that a claim for the tort of conversion fell within the phrase
"any dispute arising in any way whatsoever out of this bill of lading";
(3) Harbour v Kansa at first instance  1 Lloyds Rep 81 where Steyn J said (page 95) that older (pre Heyman v Darwins Ltd) authorities about the width of arbitration clauses had to be approached with some care and that the words "arising from the contract" have almost invariably been treated as "words of very wide import". He also said (page 91) that the inexorable logic of Mackender v Feldia required him to hold that a question of voidability for fraud is just as much capable of being referred to arbitration as an issue of avoidance for innocent misrepresentation;
(4) Chimimport v D'Alesio  1 Lloyds Rep 366 where Rix J said that "arising under" is narrower than "arising out of" and doubted whether a tortious claim could easily give rise to a dispute "under the contract";
(5) The Delos  1 Lloyds Rep 703 where Langley J held claims for breach of duty and bailment could be brought within the phrase "any disputes under" the relevant contract.
Ever since Heyman v Darwins Ltd the English common law has been evolving towards a recognition that an arbitration clause is a separate contract which survives the destruction (or other termination) of the main contract. Heyman v Darwins Ltd itself was a case of termination by accepted repudiation. A major evolutionary step was taken in Harbour v Kansa in which it was decided that the arbitration clause applied to a dispute whether the agreement in which it was embedded was void for initial illegality. Section 7 of the 1996 Act now provides:-
"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."
"Once it became accepted that the arbitration clause is a separate agreement, ancillary to the contract, the logical impediment to referring an issue of the invalidity of the contract to arbitration disappears. Provided that the arbitration clause itself is not directly impeached (e.g. by a non est factum plea), the arbitration agreement is as a matter of principled legal theory capable of surviving the invalidity of the contract."
The judge had already said (page 91) in relation to fraud and duress that Lord Macmillan's statement in Heyman v Darwins Ltd that a claim to set aside the contract on the ground of fraud or duress was not arbitrable was no longer the law. Likewise in responding to a submission that the separability doctrine cannot apply to any rule which prevents the contract from coming into existence or makes it void ab initio Hoffmann LJ said at page 723F-724C of Harbour v Kansa
"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 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 . . . . . . saying that arbitration clauses, because separable, are never affected by the illegality of the principal contract is as much a case of false logic as saying that they must be. As Ralph Gibson LJ has pointed out the same is true of allegations of fraud."
The reference to Ralph Gibson LJ's remarks on fraud is to page 712D where that learned Lord Justice said of Steyn J's reference to direct impeachment that it was
"to distinguish an attack upon the clause otherwise than by the logical proposition that the clause falls within the containing contract. When it is said that the contract was induced by fraud it may well be clear that, if it was, the making of the arbitration clause was also induced by the fraud."
In similar vein Leggatt LJ (717E) referred to the judgment of Fortas J in Prima Paint Corporation v. Flood & Conklin (1967) 388 U.S. 395 to the effect that the court could adjudicate if the arbitration clause was itself induced by fraud but not if the contract was in general induced by fraud.
"to elect to rescind the transaction ab initio."
For this purpose Mr Butcher relied on Article 23 of Bowstead and Reynolds on Agency 18th edition (2006):-
"Unless otherwise agreed, authority to act as agent includes only authority to act for the benefit of the principal."
This is a new Article in the latest edition of the work and no doubt Professor Reynolds is correct to observe there that a transaction such as a contract procured by bribery is, as regards the principal, void as being unauthorised. But that is no argument for saying that a separable arbitration clause cannot be invoked for the purpose of resolving the issue whether bribery occurred. In this connection an allegation of bribery is (and should be) no different from the allegation of initial illegality in Harbour v Kansa.
"The Supreme Court of the United States has also held that a challenge to the existence of the jurisdiction agreement based on fraud or duress must be based on facts specific to the clause and cannot be sustained on the basis of a challenge on like grounds to the validity of the contract containing it. It is submitted that there are excellent reasons of policy to support such an approach, for the parties when they nominated a court with jurisdiction to settle their disputes may well have expected this court to have and exercise jurisdiction if the dispute were to concern the very validity of the contract."
Mr Butcher said that this statement of the law went beyond any existing authority but it seems to us to be amply supported by both Mackender v Feldia and Harbour v Kansa. Moreover the European Court of Justice has in Benincasa v Dentalkit (1997) Case C-269/75,  ECR 1-3767, come to the same conclusion in relation to a distribution agreement which contained an exclusive jurisdiction clause.
It will be convenient first to set out these sections:-
"9 Stay of legal proceedings
(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.
. . . .
(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed . . . .
72 Saving for rights of person who takes no part in proceedings
(1) A person alleged to be a party to arbitral proceedings but who takes no part in the proceedings may question
(a) whether there is a valid arbitration agreement,
(b) whether the tribunal is properly constituted, or
(c) what matters have been submitted to arbitration in accordance with the arbitration agreement,
by proceedings in the court for a declaration or injunction or other appropriate relief.
(2) He also has the same right as a party to the arbitral proceedings to challenge an award
(a) by an application under section 67 on the ground of lack of substantive jurisdiction in relation to him . . . ."
(1) to determine on the evidence before the court that such an agreement does exist in which case (if the disputes fall within the terms of that agreement) a stay must be granted, in the light of the mandatory "shall" in section 9(4). It is this mandatory provision which is the statutory enactment of the relevant Article of the New York Convention, to which the United Kingdom is a party;
(2) to stay the proceedings on the basis that it will be left to the arbitrators to determine their own jurisdiction pursuant to section 30 of the 1996 Act, taking into account the subsequent provisions in the 1996 Act for challenge to any decision eventually made by the arbitrators;
(3) not to decide the issue but to make directions pursuant to what is now CPR Part 62.8 for an issue to be tried as to whether an arbitration agreement does indeed exist;
(4) to decide that no arbitration agreement exists and to dismiss the application to stay.
No question of the interrelation between section 72 and these approaches arose in that case but His Honour did proceed to give helpful guidance as to the circumstances in which it might be appropriate to adopt options (2) and (3) rather than (1) and (4). In this case it is, in our judgment, clear that option (1) is appropriate and that a stay should be granted.
Mr Hamblen submitted that, even if the owners had been in theory entitled to rescind the relevant charterparties and the agreements to arbitrate contained in them, on account of the alleged bribery by or on behalf of Mr Nikitin, they were not in fact so entitled because three of the charterparties had been wholly performed and the remaining five partly performed so that restitutio in integrum was impossible and rescission therefore unavailable. He also had arguments about delay or acquiescence.
We would therefore allow this appeal, set aside paragraphs 8 10 of the judge's order and substitute an order that the owners claims for rescission of the charterparties be stayed pursuant to section 9(4) of the Act and that the applications made pursuant to section 72 of the Act be dismissed.