What a mess! The “one-stop shop” wheel keeps on turning.

9 March 2019

Commercial background

One of the clauses parties should keep a weather eye on is the humble dispute resolution clause – often tucked away at the back of a typical commercial contract, often just a few lines long. But it is an important provision: if something does go wrong, that is one of the clauses a dispute lawyer will go to first to find out where any claim should be brought.

A defence lawyer will also look at that clause to see whether a claim can be struck out for having been brought in the wrong forum. The problems really start where a series of connected or related agreements contain inconsistent dispute resolution provisions. This might be where the underlying main commercial contract contains an arbitration agreement submitting all disputes to arbitration, but a later variation or settlement agreement contains a clause submitting all disputes to the courts of some named country. When a dispute then arises, should the court or an arbitral tribunal hear the dispute?

Disputes on jurisdiction are wasteful of both time and money – the parties will typically want to know where they stand as soon as possible, not pay lawyers to play games challenging jurisdiction before the courts or arbitral tribunals. These delaying tactics play into the hands of the defendant, causing delay and running up costs, wearing a claimant down.

Legal background – the new approach to construing arbitration agreements

Looking at the problem historically, there is a bewildering mass of cases looking at the problem. The matter came to a head when the House of Lords considered the appeal in Premium Nafta Products v Fili Shipping Company [2007] UKHL 40 (referred to as the Fiona Trust litigation). The basic facts concerned a number of charterparties entered into by Russian state-owned shipowners. They alleged that the charters were entered into following bribes made to their officers and employees. The charters each contained an arbitration clause providing for any disputes to go to litigation before the English Courts, but also providing an option for either party to elect for arbitration in London instead. The drafting was not of the best, variously describing disputes as arising “under” the charter but also referring to disputes arising “out of” the charter. The owners rescinded the charters for the alleged bribery, and the charterers then started arbitration proceedings. The owners responded by applying for an injunction to stop the arbitration as the underlying charters had been rescinded.

The House of Lords agreed with the Court of Appeal, and in effect deprecated the mass of earlier case-law which had come up with barely reconcilable decisions turning on the use of “arising under” or “arising out of” or some other formulation. Instead, the House of Lords preferred a new start and a strong presumption that the parties, as rational businessmen, had chosen to have all their disputes decided in just one forum. Of course, the arbitration agreement itself might provide that some types of dispute should be dealt with differently and the courts would respect that.

That being so, there was nothing in the wording of the arbitration clauses in the charters before the court in Fiona Trust to say that matters to do with rescission were excluded from arbitration and so the charterers were successful in obtaining a stay of the owners’ proceedings.

Application of the law – inconsistent dispute resolution provisions

The modern way of approaching the interpretation and application of arbitration agreements was seen in Monde Petroleum v Westernzagros [2015] EWHC 67 (Comm). In this case, Western entered into a consultancy contract with Monde by which Monde would provide services to Western to explore and produce oil in Iraq. That agreement contained an arbitration agreement providing for disputes to be heard in London under the ICC Rules. A dispute arose between the parties which was compromised in a formal settlement agreement, under which the consultancy agreement was terminated against payment of certain sums by Western to Monde. However, the settlement agreement provided for all disputes to be heard by the English Courts.

Yet another dispute arose between the parties, with Monde alleging that it was induced to enter into the settlement agreement following a misrepresentation made by Western, alternatively, that it was forced to enter into the agreement under duress. Monde commenced proceedings both in the Commercial Court and before an arbitral tribunal: the tribunal issued an award effectively saying that the scope of the arbitration agreement had been cut down by the later settlement agreement, being reduced to dealing with disputes about confidentiality under the original consultancy agreement.

In the High Court, Popplewell J held that the tribunal was right in deciding that it had no jurisdiction to hear Western’s claims for a declaration. The judge referred to Fiona Trust saying that rational businessmen would want all their disputes to be heard before one forum only. That being so, the settlement agreement came later in time and could be said to be the parties’ last word on the subject, meaning that all disputes thereafter should be determined according to the dispute resolution method contained in that settlement agreement. The judge was concerned not to allow different disputes to go to different fora, with the risk that different fora would come up with inconsistent decisions.

Application of the law – no dispute resolution wording at all

More recently, we have the decision in Sonact Group v Premuda (the “Four Island”) [2018] EWHC 3820 (Comm) which concerned the scope of an arbitration agreement in a charterparty. There was a voyage charter for the carriage of fuel oil aboard the “Four Island” between two ports in Russia. The arbitration agreement contained in the charter provided for “any and all differences and disputes of whatsoever nature arising out of this Charter shall be put to arbitration” and went on to provide a detailed procedure for selecting the tribunal.

A dispute arose under which the owner of the vessel was claiming for demurrage ((US$718, 948.08) and heating costs (US$190,200). This claim was subject to correspondence between the parties before being settled by an exchange of emails providing for the charterers to pay the sum of US$600,000. The charterer did not pay by the due date. The owners issued a notice of arbitration, but the charterers challenged this on the grounds that the settlement contained no arbitration clause, meaning that the arbitrators did not have any jurisdiction to hear that particular dispute.

Males J upheld the arbitrators’ decision that they had jurisdiction. It was true that the settlement agreement was to be found in an exchange of emails but he agreed with the arbitrators that it was “obvious” that the parties intended the original arbitration agreement to apply to non-payment of the agreed settlement amount. Indeed, it was “inconceivable” that the parties would intend a dispute about non-payment to be heard by the courts – this would mean either commencing legal proceedings in the charterers’ home jurisdiction or seeking leave before the English Courts to serve proceedings out of the jurisdiction. Males J said that there was no “bright line rule” separating a new legal relationship (here, the settlement agreement) from the arbitration clause in the underlying main contract, such that the arbitration clause would simply fall away. However, the judge in this case had no difficulty in holding that the arbitration clause still applied to the settlement agreement concerning a dispute over outstanding fees.

Conclusion

Since Fiona Trust, the amount of case-law has not diminished on the question of the scope of arbitration clauses, but the overwhelming trend is towards the “one-stop shop”: this much comes across from Males J’s succinct but robust judgment in Sonact where arguments which once might have prevailed were brushed aside in favour of providing for the parties’ chosen form of dispute resolution.

The lesson coming out of this for those drafting variations to commercial agreements or drafting settlement agreements is simply this: don’t just rely on your template and include whatever dispute resolution clause you find there – take a look at the underlying agreement and find out what it provides for. Then either:

  • consciously change it and make sure you say so in express terms, leaving it clear what disputes will or will not follow the new dispute resolution procedure; or
  • use the existing dispute resolution procedure in the underlying agreement, again making it clear that it survives and is the chosen form of dispute resolution for the new agreement

Failure to do so could land your clients with a hefty bill as the lawyers fight a war of attrition in the courts trying to determine the correct forum for hearing the dispute in question. If you are dealing with an international contract, failure to ensure that you have chosen arbitration as your chosen dispute resolution procedure could leave you fighting in the courts – without the protection of the New York Convention which is such a great help in enforcing arbitration awards around the world.

Caveat

This is a general update on recent case-law: as always, seek professional advice before trying to apply any of the law here to a specific situation.