Arbitration is the Preferred Option


The Law Lords have handed down a significant judgment for people who have disputes over contracts which contain an arbitration clause. The case arose because of a dispute between businesses engaged in the chartering of ships. The ship owners brought an action for damages for conspiracy, bribery and breach of fiduciary duty relating to a charter contract that contained a clause which provided that disputes under the contract would be settled by referral to arbitration.

The ship owners argued that the arbitration clause did not apply for two reasons. Firstly, the question of whether the charters obtained by the defendants were procured by bribery was not a dispute arising under the charter contract and, accordingly, the dispute was ‘outside the agreement’. Secondly, the ship owners argued that the arbitration clause was liable to be rescinded and therefore not binding on them, because they had the right to rescind the entire contract if their allegations of bribery could be sustained.
The House of Lords could not accept these arguments. In its view, a contract was agreed by rational businesspeople who could have placed certain types of dispute outside the arbitration clause had they chosen to do so. In the words of Lord Hoffmann, “The language of the relevant clause of each charter contained nothing to exclude disputes about the validity of a contract on the ground that it was procured by fraud.”
The Lords also considered that the owners’ claim, that if they were right about the bribery they were entitled to rescind the whole contract including the arbitration clause, was flawed. An arbitration agreement can only be rendered void or voidable on grounds relating directly to that agreement. There were no grounds of challenge specific to the arbitration agreement so as to invalidate it. The claim that the main contract had been induced by bribery thus fell to be determined under the arbitration agreement.
If you are offered a contract which contains an arbitration clause, you might care to consider whether you wish to limit the application of the arbitration clause so that certain types of dispute are not covered by it. We can advise you on all contractual matters.
Partner Note
Fili Shipping Co Ltd. v Premium Nafta Products Ltd. (on appeal from Fiona Trust and Holding Corpratation v Privalov) [2007] UKHL 40. See

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