September 2007

From the outset, an allegation that the parties never entered into a contract gives rise to a jurisdictional challenge. It is evident in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (‘New York Convention’) that where an arbitration clause is deemed invalid then any award would be set aside by Article V and by the relevant sections under the Arbitration Act 1996 (‘Act’) in the United Kingdom (‘UK’).

For an arbitration to legitimately proceed it is fundamental that the parties have contracted to deal with their dispute in this manner, otherwise, the proceedings cannot continue. In the absence of such agreement no award could or should be recognised or enforced.

Numerous cases have touched upon this issue as to whether an agreement to arbitrate was reached by the parties. What is essential and made clear by both the New York Convention and the Act is that any such agreement must be in writing. Article II(2) of the New York Convention defines the term “agreement in writing” to include “any arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.”

Section 5 of the Act goes further and gives “agreement in writing” a whole life of its own. Traditionally a signed contract containing an arbitration clause was the only way a dispute could be arbitrated, unless there is a submission or arbitration agreement. Section 5(2) allows agreements that are not signed, or if an exchange of communications in writing, or reference to terms which contain an arbitration clause are now sufficient to have a dispute arbitrated. Whether or not a signature is required has given rise to problems in some states, but in the UK it is accepted that a signature is not necessary provided the arbitration agreement is in writing.

What if there is no contract at all, or a contract that was not signed by one party, or a forgery, or induced by fraud yet signed by both parties? If a dispute arises, is there a valid agreement to arbitrate?

The issue arises most frequently in construction disputes where the parties continue to negotiate a contract despite commencement of the work and end up in disagreement as to whether a contract has been concluded. In the case of Heyman v Darwins [1942] A.C. 356 the Privy Council held that an arbitration clause survived termination of the contract through repudiation. In Ashville v Elmer [1989] Q.B. 488 it was held that an arbitration clause might empower an arbitrator to rectify the contract containing the clause. Both these cases illustrate the arbitration clause being separate from the underlying contract.

Section 7 of the Act has placed the doctrine of severability beyond any doubt. If there is an issue as to whether there exists an arbitration clause then the arbitrator or the court will decide whether the parties have entered into a separate arbitration clause. This is mirrored in Article 16 of the UNCITRAL Model Law on International Commercial Arbitration (‘Model Law’).

Where the existence of the arbitration agreement is put in issue, the Act contains significant powers which support the ability of the arbitrator to continue with the arbitration despite such a challenge, sections 31 and 67(2). The question whether, and to what extent, an arbitrator can make decisions bearing on his or her own jurisdiction is often given the German label kompetenz kompetenz or, in French competence de la competence. Section 31 of the Act adopted a provision from the Model Law requiring a party to raise the question of jurisdiction timeously.

Further, unless otherwise agreed by the parties, the tribunal is given power under section 30 of the Act to rule on its own jurisdiction including the question whether there is a valid arbitration agreement including the matters submitted to arbitration. Once this ruling is made in the form of an award, it may be challenged before the court, section 67(1)(a). Alternatively, the court may be asked to rule on the question of jurisdiction pursuant to section 32. However, where a party does not raise a challenge to jurisdiction timeously, that party may lose the right to raise this objection, section 73.

The Act establishes a means where any challenge to jurisdiction is dealt with at an early stage and usually by the arbitrator. The Act has clearly codified what it never did in the past by giving certainty to an arbitration agreement or some agreement between the parties, whether signed or otherwise.

Are Allegations of Fraud or Bribery Arbitrable?

Arbitrability involves determining which types of dispute may be resolved by arbitration and which must be dealt exclusively by the courts. The New York Convention and the Model Law are limited to disputes that are “concerning a subject matter capable of settlement by arbitration”. Whether or not a dispute is arbitrable is a matter of public policy, which varies from state to state and from time to time. It is now accepted that bribery, fraud and corruption are matters that are arbitrable.

In the UK this issue is at the heart of a case currently on appeal to the House of Lords, Fiona Trust & Holding Corporation & Ors v Yuri Privalov & Ors [2006] EWHC 2583 (Comm). Briefly, the claimant shipowners alleged that charterparties had been procured by bribery and commenced proceedings in the commercial court seeking a declaration that the charterparties had been validly rescinded. The charterparties contained arbitration clauses, and the defendant charterers unsuccessfully applied for a stay of proceedings pursuant to section 9 of the Act. The defendant charterers appealed.

The Court of Appeal, overturning the first instance decision of Morison J, granted a stay. There were three issues before the court surmised as follows:

  1. Construction of the arbitration clause, i.e. does a claim that the charters have been rescinded for bribery come within the arbitration clause.
  2. Severability of the arbitration clause.
  3. Procedural matters, i.e. the relationship (if any) between sections 9 and 72 of the Act.


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. The arbitration clause included “any dispute arising under and out of this contract”. Did the parties intend to give a wide meaning to this clause?

Lord Justice Longmore opined:

“Although in the past the words ‘arising under the contract’ have sometimes been given a narrower meaning, that should no longer continue to do so. Since both phrases are used in the present case, there is, in any event, no need here to differentiate between them but the proposition that the phrases ‘under’ and ‘out of’ should be widely construed.

We would, therefore, conclude that a dispute whether the contract can be set aside or rescinded for alleged bribery does fall within the arbitration clause on its true construction. The case is different from a dispute ‘as to whether there were even a contract at all’”.


The next issue is whether the assertion of invalidity goes to the invalidity of the arbitration clause as opposed to the validity of the charter parties as a whole of which the arbitration agreements are a part? It is not enough to say that the contract as a whole is impeachable. There must be something more than that to impeach the arbitration clause and it is not present in this case.

Lord Justice Longmore held that Section 7 has codified “the principle that an allegation of invalidity of a contract does not prevent the invalidity question being determined by an arbitration tribunal pursuant to the (separate) arbitration agreement. It is only if the arbitration agreement is itself directly impeached for some specific reason that the tribunal will be prevented from deciding the disputes that relate to the main contract”, for example, by a non est factum plea where denial that there was a concluded agreement or a mistake as to the identity of the other contracting party.

Lord Justice Longmore concluded that:

“If arbitrators can decide whether a contract is void for illegality, there is no reason why they should not decide whether a contract has been procured by bribery, just as much as they can decide whether a contract has been procured by misrepresentation or non-disclosure… It is not enough to say that the bribery impeaches the whole contract unless there is some special reason for saying that the bribery impeaches the arbitration clause in particular. There is no such reason here.”

Sections 9 and 72 of the Act

Finally, the relationship (if any) between sections 9 and 72 of the Act. Section 9 provides, inter alia, that should there be a valid arbitration agreement, then any proceedings instituted in court by a party may be stayed upon application to the court.

Section 72 states that a party to an arbitration that takes no part in the proceedings may question whether there is a valid arbitration agreement; whether the tribunal was properly constituted; or whether the matters submitted to arbitration were in accordance with the arbitration agreement.

The reference to section 67 in section 72 reminds the reader that once an award has been made an application to the court can also be made challenging the award on jurisdictional grounds. Sections 30 to 32 of the Act relate to the jurisdiction of the arbitral tribunal, and together with section 9(4) contemplate that it will, in general, be right for an arbitrator to be the first tribunal to consider whether they have jurisdiction to determine the dispute.

The Court of Appeal ruled that the arbitration clause is a separate agreement unimpeached (not rescinded) by the claim to set aside the charterparties and wide enough to determine whether the charterparties can indeed be set aside. The claim to rescission should be stayed and the application under section 72 of the Act should be dismissed. The court saw no reason why the charterers should be prevented from arbitrating these claims (damages for conspiracy, fraud, bribes and for account of profits) if the tribunal decides that the charters were indeed procured by bribery they will be able to decide what consequence that conclusion has on any claims which the charterers might otherwise legitimately have.

Fiona Trust is on appeal to the House of Lords with a decision expected later this year.

Update – November 2007

The House of Lords has unanimously dismissed the shipowners' appeal from the Court of Appeal decision. The judgment is reported as Premium Nafta Products Ltd v Fili Shipping Company Ltd [2007] UKHL 40. Delivering the leading opinion, Lord Hoffman held that, as a matter of construction, the owners' claims fell within the terms of the charterparty arbitration clauses. Furthermore, the allegation of bribery did not directly impeach the arbitration clause (as opposed to the underlying charterparty), which was to be regarded as separate as required by section 7 of the Act.

The Lords' reasoning is substantially the same as that of the Court of Appeal. In particular, the Lords endorsed the Court of Appeal's view that English courts should make a "fresh start" with regard to issues of construction. Older English authorities on the meaning and significance of particular phrases are of limited value: instead, the starting point is a strong presumption that the parties intended all their disputes to be resolved in a single forum.

The contents of this article is intended to provide a general guide to the subject matter and does not constitute legal advice. Ferrer Lawyers always recommend that you obtain legal advice prior to entering into any contract. No matter who you are, if you’re having contract issues or in a dispute call (02) 8823 3588 or email us with your enquiry at This email address is being protected from spambots. You need JavaScript enabled to view it. for further information, guidance or assistance.