How a quirk became a cause

A dispute between Russia’s state-owned shipping company, Sovcomflot, and some privately owned Russian businesses about the terms of charterparties (contracts for the delivery of goods by sea) may not seem to be of obvious relevance to the UK construction industry. But, as Tony Bingham pointed out (9 November, page 58), “the Fiona”, as it is known, may well have significant consequences for adjudication.

One of the case’s many quirks was the fact that, despite being about Russian ships, it was subject to English law and the jurisdiction of English courts. The relevant contracts (eight in all) also contained arbitration clauses – and arbitration, like adjudication, is a key method of resolving construction disputes.

The problem in all eight cases was the allegation that employees of Sovcomflot had been bribed to sign up to contracts the terms of which were very favourable to the private companies. If the bribery were proved, then all eight contracts would be set aside. The question for the court was whether the correct forum for deciding the allegation of bribery was the court (as Sovcomflot argued) or an arbitrator appointed under the allegedly unenforceable contract (which the private companies accused of bribery wanted).

Sovcomflot’s argument depended on two facts: a) the agreements had been procured by bribery, and b) the arbitration clause was contained in those agreements. If each contract was set aside because the bribery was proved, then so would the apparent agreement to arbitrate.

They raised two arguments:

• The arbitration clause could not cover the question of whether the contract which contained it was procured by bribery.
• It was not reasonable for Sovcomflot to be bound by an agreement to arbitrate where, but for the bribery, it would not have entered into the contract at all.

You may be surprised to hear that Sovcomflot lost. In a decision that robustly upholds arbitration agreements in English law, the unanimous opinion of the highest court in the land relied on two points.

The decision is a very strong indication that the courts will look to enforce arbitration agreements wherever possible

First, section 7 of the Arbitration Act expressly deals with the point where the arbitration clause forms part of an agreement that is held to be ineffective – this states that the arbitration clause shall survive by being treated as a “distinct agreement”. For Sovcomflot to defeat the effect of the section, it had to show that the parties had intended to exclude questions of whether the contracts were procured by fraud or bribery from the ambit of the arbitration clause. They failed to do so.

The House of Lords also felt that the bribery allegation had to, in its words, “attack” the distinct arbitration agreement and not the underlying charterparty. Sovcomflot failed to do this. Although it had a strong argument that the employees who took the alleged bribes did not have the authority to enter into such one-sided contracts, any argument that they did not have authority to enter into arbitration agreements was doomed to fail, not least because charterparties nearly always contain arbitration clauses.

The decision is a very strong indication that the courts will look to enforce arbitration agreements wherever possible and often in the face of quite compelling arguments to do the opposite. Admittedly, parties to a construction contract cannot rely on the argument that construction contracts nearly always contain arbitration clauses because, although still popular, they are not as popular now as they have been.

But if you find the decision odd, you probably cannot take much comfort from this. It has clearly been influenced by a decision to support arbitration under English law as a matter of public policy. One judge emphasises the appeal of English arbitration in robust terms, praising “its neutrality, expertise and privacy … and the unobtrusive efficiency of its supervisory law”.

Two judges actually hinted that any other decision would have resulted in parties choosing to arbitrate in other jurisdictions.