Disputes Under a Contract

© Daniel Atkinson 2007 20 October 2007

Arbitration Clauses and Arbitration Act 1996

In Premium Nafta Products Limited v Fili Shipping Company Limited [2007] UKHL 40 the House of Lords considered the meaning of the term "disputes arising under a contract" in relation to an arbitration clause.

The relevant contracts were eight charterparties made by eight one-ship companies in the Russian Sovcomflot group of companies as owners, with three separate chartering companies between February 2001 and September 2003 on the Shelltime 4 Form. Each of the charterparties contained a “Law and Litigation” clause which provided for any dispute under the charter to be decided in England and confered on either party the right to elect to have any such dispute referred to arbitration in accordance with rules of the London Maritime Arbitrators’ Association.

The matter before the House of Lords was whether the issue whether a charter had been validly rescinded fell within the meaning of "any dispute arising under this charter" and therefore within the ambit of the law and litigation clause. The House of Lords examined the clause as if it was a simple arbitration clause.

Lord Hoffmann giving leading judgment first examined the fundamental question about the attitude of the courts to arbitration. He recognised that arbitration was consensual and depended on the intention of the parties as expressed in their agreement.

Accordingly he considered that in approaching the question of construction, it was necessary to inquire into the purpose of the arbitration clause. In choosing arbitration the parties showed an intention to have their disputes decided by a tribunal which they had chosen, commonly on the grounds of such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law. Particularly in the case of international contracts, the parties wanted a quick and efficient adjudication and do not want to take the risks of delay and, in some cases, partiality, in proceedings before a national jurisdiction.

Lord Hoffmann held that there was no rational basis upon which businessmen would be likely to intend to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another. It would need very clear language to show such an intention. The construction of the arbitration clause required the court to give effect, so far as the language used by the parties permitted, to the commercial purpose of the arbitration clause.

The question whether arbitrators had jurisdiction to decide whether a contract was valid was put beyond doubt by section 7 of the Arbitration Act 1996 which recognised that businessmen frequently wanted the question of whether their contract was valid, or came into existence, or had become ineffective, submitted to arbitration and that the law should not place conceptual obstacles in their way.

Lord Hoffmann referred to the familiar decided cases on the distinction between the terms "dispute arising under", "dispute arising out of", "dispute arising in relation to" and "dispute arising in connection with" the contract. He did not analyse these the cases in any detail but held that the distinctions made in the cases reflected no credit upon English commercial law. Instead he held that a fresh start was justified by the developments which had occurred in this branch of the law in recent years and in particular by the adoption of the principle of separability by Parliament in section 7 of the 1996 Act.

Lord Hoffmann considered that section 7 was obviously intended to enable the courts to give effect to the reasonable commercial expectations of the parties about the questions which they intended to be decided by arbitration. Section 7 would not achieve its purpose if the courts adopt an approach to construction which was likely in many cases to defeat those expectations.

Accordingly Lord Hoffmann held that the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, were likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction.

On the basis of this approach to interpretation, the House of Lords decided that the arbitration clause in issue contained nothing to exclude disputes about the validity of the contract, whether on the grounds that it was procured by fraud, bribery, misrepresentation or anything else and applied to the instant dispute.

Adjudication Clauses in Contracts

The above approach to interpretation of the term "disputes arising under" a contract is unlikely to apply to adjudication clauses. Adjudication is usually provisionally and not finally binding which is one main difference to arbitration under the Arbitration act 1996.  Further there is no provision in the Housing Grants Construction and Regeneration Act 1996 which is similar to Section 7 of the Arbitration Act 1996.  Instead there is a well developed jurisprudence which recognises that the adjudicator's decision on the validity of the contract cannot of itself provide the adjudicator with jurisdiction to decide a dispute referred to him.

The right to refer a dispute to adjudication under Section 108(1) applies only to disputes “arising under” the contract. Ashville Investments v Elmer Contractors Ltd [1987] 37BLR55 was authority for the proposition that an arbitration clause which included the words "in connection with" should be given a wide interpretation and will cover related claims for rectification, negligent mis-statement and the like. When the Court of Appeal applied that decision in the later case of Fillite (Runcorn) Ltd v Aqua-Lift [1989] 45BLR27, they concluded that an arbitration clause which encompassed all disputes “under” the contract (but did not contain the additional words “in connection with”), embraced claims for breach of contact but was not wide enough to include disputes that do not concern obligations created by or incorporated in that contract.

During the passage of the bill, Amendment No. 133 sought to insert the words “or in connection with” to widen the type of dispute which was to be referred. The case of Fillite Runcan Ltd -v- Aqua-Lift (1992) CA was quoted. It was argued for the Government that Amendment No. 133 would widen the scope of adjudication from disputes under the contract to disputes under or in connection with the contract, which was considered a huge step. It was stated that the Adjudicator was appointed under the contract and should be guided by its terms.

Adjudication is to be distinguished from arbitration because the intention of Parliament was not to allow all disputes to be referred but only those arising under the contract. The intention was that the Adjudicator should be part of the administrative machinery of the contract. In this sense the illegality of the contract itself will be a bar to the adjudicator’s jurisdiction for Statutory Adjudication.

It is suggested that the matters which can be referred for resolution by Statutory Adjudication are disputes and differences which arise under a construction contract and comprise:

1. Generally, disputes over obligations created or incorporated in the Contract.
2. Issues of set off.
3. Issues of abatement of price.
4. Issues relating to breach of the contract.

It is suggested that the matters which cannot properly be decided by Statutory Adjudication are:

1. Request for rectification of the contract.
2. Issues relating to misrepresentation.
3. Issues relating to negligent misstatement.
4. Claims under a collateral warranty or contract.
5. Claims under a contract which is void for illegality.
6. Provisionally binding decision on the adjudicator's own jurisdiction.

The parties may always confer a greater jurisdiction on the Adjudicator.