Kamraj Nayagam reviews the recent decision of the House of Lords' in Premium Nafta Products Ltd v Fili Shipping Company Ltd  UKHL 40
This recent decision of the House of Lords (England’s highest Court) provides authoritative confirmation of the recent trend towards judicial enforcement of agreements to arbitrate.
Arbitration as a mode of dispute resolution can only survive and thrive by reason of judicial support. Such support takes its most obvious form by way of judicial enforcement of arbitral awards, without which arbitration would amount to no more than a waste of time, money and paper, but judicial support is also crucial during the initial stages of a dispute, when one party often resorts to the Courts, as opposed to arbitration.
As has been explained in the previous issue of LEGAL INSIGHTS (Issue 3/2007) many jurisdictions allow, and indeed encourage, the Courts to stay such proceedings in favour of arbitration upon the application of the parties. However, English law traditionally drew a distinction between the wordings of different types of arbitration clause, necessitating careful drafting of such clauses for fear of attracting consequences not necessarily foreseen by the parties at the time of entering into the contract. By this decision, the House of Lords has expressly indicated that the time has come to consign such decisions to the sphere of legal history.
The House of Lords' decision in the case was concerned with two issues. Firstly, the principles which govern the interpretation of arbitration clauses, and secondly, whether an arbitration clause in a contract allegedly entered into as a result of bribery remains binding on the parties to that contract.
The case arose out of charterparties entered into between 8 companies belonging to the Russian Sovcomflot group (“The Owners”) and 8 charterers. The Owners alleged that the charterers had obtained the charters by bribing officers of the Sovcomflot group and purported to rescind the charterparties on that ground.
The owners commenced proceedings in the English Courts, seeking a declaration that the charterparties had been validly rescinded. The charterers applied for a stay of the Court proceedings under section 9 of the English Arbitration Act 1996 (the "1996 Act"), which is similar to section 10 of Malaysia’s Arbitration Act 2005. This provision allows for court proceedings to be stayed pending arbitration if the parties have previously agreed to arbitrate their differences.
The application for a stay was refused by the High Court but this decision was overturned by the Court of Appeal, which allowed a stay.
THE HOUSE OF LORDS' DECISION
The appeal turned on two issues, namely:
(1) whether, as a matter of interpretation, the words of the arbitration clause was sufficiently wide to include the allegation of bribery; and
(2) whether the arbitration clause contained in the contract could be binding on the parties in light of the alleged rescission of the contract.
The House of Lords upheld the Court of Appeal’s decision, holding that:
(1) the arbitration clause was sufficiently widely drafted to include the issue of bribery; and
(2) the arbitration clause remained operative notwithstanding the alleged rescission of the contract.
The House of Lords’ approach to both issues was largely based on section 7 of the 1996 Act which states that “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”.
In the course of delivering the leading Judgments of the House of Lords both Lord Hoffman and Lord Hope took the opportunity to endorse observations made by Lord Justice Longmore in the Court of Appeal as to the proper approach to the interpretation of arbitration clauses.
In the words of Lord Hope:
“It has indeed been clear for many years that the trend of recent authority has risked isolating the approach that English law takes to the wording of such clauses from that which is taken internationally.”
Lord Hoffman, after reviewing the English authorities cited to the House of Lords, put it thus:
“I do not propose to analyse these and other such cases any further because in my opinion the distinctions which they make reflect no credit upon English commercial law. … So I applaud the opinion expressed by Longmore LJ in the Court of Appeal (at Paragraph 17) that the time has come to draw a line under the authorities to date and make a fresh start. I think that a fresh start is justified by the developments which have occurred in this branch of the law in recent years and in particular by the adoption of the principles of separability by Parliament in section 7 of the 1996 Act”.
Not only did the principle of separability in section 7 of the 1996 Act suffice to dispose of the second issue, but, as the attack on the contract proper was distinct from any attack on the arbitration clause, it also affected the approach to the first issue. Lord Hoffman went on to hold that:
“That section was obviously intended to enable the Courts to give effect to the reasonable commercial expectations of the parties about the questions which they intended to be decided by arbitration. But section 7 will not achieve its purpose if the courts adopt an approach to construction which is likely in many cases to defeat those expectations. The approach to construction therefore needs to be re-examined.
In my opinion 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 decision is notable in that it spells an end to the often esoteric distinctions drawn by English courts in the past between arbitration clauses which speak of disputes arising “out of” as opposed to “under” a contract. The decision also makes it clear that where parties have opted for arbitration, the English Courts will assume that they have opted to refer all disputes to one tribunal, unless the contrary is clearly stated.
In short, the House of Lords has not merely reaffirmed judicial support for arbitration as the preferred method of resolving commercial disputes, but has also taken the opportunity to make a clean break with previous English authority and to bring English jurisprudence in this field back into step with the approach taken by many other jurisdictions. It is to be hoped that this approach will find favour with the courts of Malaysia, especially in light of the provisions of the recently enacted Arbitration Act 2005.
KAMRAJ NAYAGAM (