Premium Nafta Products Limited (20th Defendant) and others (Respondents) v. Fili Shipping Company Limited (14th Claimant) and others (Appellants)

An arbitration clause in a commercial contract should ordinarily be construed on the assumption that rational businesspeople intended every dispute arising from their relationship, including disputes about validity based on bribery, fraud or misrepresentation, to be decided by one tribunal. Clear language is required to exclude a category of dispute.

Under section 7 of the Arbitration Act 1996, the arbitration agreement is distinct from the main contract. Invalidity or rescission of the main contract does not affect it unless the grounds directly impeach the arbitration agreement. Forgery or a total absence of authority may do so; an agent's improper reasons for agreeing the main terms ordinarily will not. Agreement to arbitrate is also a permissible waiver of access to a court under article 6 of the European Convention on Human Rights.

Eight companies in the Sovcomflot group alleged that charterparties in Shelltime 4 form had been procured through bribery of senior group officers. The owners purported to rescind the charterparties and sought declarations from the court that the rescissions were valid. The charterers applied under section 9 of the Arbitration Act 1996 to stay the proceedings in favour of arbitration.

Morison J refused a stay: [2007] 1 All ER (Comm) 81. The Court of Appeal allowed the charterers' appeal and granted a stay: [2007] EWCA Civ 20; [2007] Bus LR 686.

The House considered whether the arbitration clause covered a dispute about rescission for bribery and whether the alleged invalidity of the charterparties also impeached the arbitration agreements contained in them.

Appeal dismissed unanimously. Lord Hoffmann delivered the leading speech. Lord Hope of Craighead entirely agreed and added further reasons; Lord Scott of Foscote and Lord Walker of Gestingthorpe expressly agreed with Lord Hoffmann, while Lord Brown of Eaton-under-Heywood agreed with both Lord Hoffmann and Lord Hope. The stay granted by the Court of Appeal therefore remained in force.

1. Construction of arbitration clauses. Per Lord Hoffmann, an arbitration clause must be interpreted in the light of its commercial purpose. Rational businesspeople ordinarily intend disputes arising from their relationship, including questions about the contract's validity or enforceability, to be determined by the same tribunal. A court should depart from that assumption only where the language clearly excludes particular questions from arbitration.

   Fine distinctions between disputes arising “under” a contract and those arising “out of” it should no longer control the construction of commercial arbitration clauses. The Shelltime 4 wording contained nothing excluding disputes about validity arising from fraud, bribery, misrepresentation or another vitiating factor. Lord Hope added that liberal construction promotes legal certainty and avoids fragmented proceedings.

2. Separability. Per Lord Hoffmann, section 7 of the Arbitration Act 1996 requires an arbitration agreement to be treated as a distinct agreement. Invalidity, non-existence, ineffectiveness or rescission of the main contract therefore does not necessarily invalidate the arbitration agreement. The latter may be avoided only on a ground relating directly to it, rather than one arising merely as a consequence of the challenge to the main contract.

3. Direct impeachment. A forged signature or a complete absence of authority to conclude any agreement may impeach both the main contract and the arbitration agreement. By contrast, an allegation that an agent exceeded authority by agreeing unauthorised terms, or acted for improper reasons, does not by itself attack the arbitration agreement. Even a dispute about whether the main contract was concluded may be arbitrable where the arbitration clause itself was agreed.

4. Application. The alleged bribery explained why the owners said that the charter terms were unauthorised and uncommercial. It did not show that the relevant agent was bribed to agree to arbitration or lacked authority to make any arbitration agreement. Treating the agreements as inseparable merely because neither would have been made but for the bribery was precisely the reasoning section 7 was intended to prevent.

5. Access to a court. Per Lord Hoffmann, article 6 of the European Convention on Human Rights did not prevent the stay. Arbitration rests on agreement, and parties may waive access to a court by agreeing, on a fair construction of their contract, to arbitrate the relevant dispute. The charterers were consequently entitled to a stay under section 9 of the Arbitration Act 1996.

• House of Lords: The House unanimously dismissed the owners' appeal and left the arbitration stay in force: [2007] UKHL 40 .
• Court of Appeal: Tuckey, Arden and Longmore LJJ allowed the charterers' appeal and granted a stay: [2007] EWCA Civ 20 ; [2007] Bus LR 686.
• High Court: Morison J refused the charterers' application for a stay: [2007] 1 All ER (Comm) 81.