Premium Nafta Products Limited and others v. Fili Shipping Company Limited and others

The House of Lords held that an arbitration clause in standard Shelltime 4 charterparties was to be construed purposively and broadly in an international commercial context so as to cover disputes as to the validity of the contract, including allegations that the charterparties were induced by bribery. The court applied the separability principle in section 7 of the Arbitration Act 1996 to treat the arbitration agreement as a distinct agreement which could only be impeached on grounds directly attacking the arbitration agreement itself, not merely on grounds parasitic on an attack on the main contract.

Accordingly, a stay of court proceedings was appropriate under the parties' arbitration/jurisdiction provisions and the owners’ contention that rescission for bribery invalidated the arbitration clause was rejected unless there was a direct challenge to agreement to arbitrate.

The respondents (owners) alleged that eight Shelltime 4 charterparties had been procured by bribery and sought declarations in the English court that the charters had been validly rescinded. The charterers applied for a stay under section 9 of the Arbitration Act 1996 on the basis of the clause in clause 41(b)-(c) of the standard form which provided for English law and either English court jurisdiction or, by election, arbitration in London.

• Nature of the claim: declarations of rescission for bribery and attendant relief; application by charterers for a stay of proceedings to arbitrate.
• Procedural path: Morison J refused a stay; the Court of Appeal allowed the appeal and granted a stay ([2007] EWCA Civ 20); the owners appealed to the House of Lords.
• Issues framed: (i) construction — whether disputes as to procurement of the charters by bribery are disputes "arising under" or "arising out of" the charterparties and thus referable to the agreed tribunal; (ii) separability — whether allegations of bribery that, if proved, would have entitled the owners to rescind the contract also rendered the arbitration agreement void or voidable.

The court reasoned that in international commerce the commercial purpose of an arbitration clause is to provide a one-stop forum for disputes arising out of the relationship and that, absent clear words to the contrary, reasonable parties are presumed to have intended that questions of validity should be decided by the same tribunal. Section 7 of the Arbitration Act 1996 embodies separability: the arbitration agreement is a distinct agreement and is not to be treated as invalid merely because the main contract is alleged to be invalid. An arbitration clause can be impeached only by grounds that relate directly to the arbitration agreement itself. The House of Lords therefore held that the arbitration clause covered the bribery issue and that the owners had not established a direct attack on the arbitration agreement; the appeal was dismissed.

Appeal dismissed. The arbitration clause was construed purposively and broadly to cover disputes about the validity of the charterparties (including alleged procurement by bribery). Applying section 7 of the Arbitration Act 1996, the arbitration agreement is separable from the main contract and could not be set aside merely because the main contract was alleged to be voidable for bribery; only a direct attack on the arbitration agreement would suffice. The charterers were therefore entitled to a stay to arbitrate.

First instance: Morison J refused a stay ([2007] 1 All ER (Comm) 81). Court of Appeal (Tuckey, Arden and Longmore LJJ) allowed the appeal and granted a stay ([2007] EWCA Civ 20). House of Lords dismissed the further appeal ([2007] UKHL 40).