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Who can be the judge?

Contracting parties may decide that disputes arising between them under a contract should be dealt with by arbitration. Parties choose arbitration because they want their dispute to be decided in private by a person who has particular knowledge and/or experience of a particular subject matter. In the world of international commerce, where the parties will be from different legal domains, it is even more important that the parties clearly stipulate in their agreements:

  • that disputes are to be decided by arbitration;
  • how the tribunal will be appointed;
  • which country’s substantive laws will apply to the arbitration agreement;
  • which country’s laws will apply to the supervision of the arbitration proceedings;
  • which country’s laws will be used to interpret the underlying contract; and
  • in which language will the proceedings be conducted.

But what happens when the contract is terminated by one of the parties? Does arbitration still apply to resolving a dispute under a contract which is no longer in place? And what if the contract never actually came into existence, for example, because of the fraud on the part of one of the parties?

Some guidance is provided in the English Arbitration Act 1996 which states

“Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.”

This clarifies the view under English law that the agreement to arbitrate is separable from the trading contract and that the arbitration agreement itself will remain intact unless the parties have agreed otherwise.

The Court of Appeal looked at this in Fiona Trust & Holding Corporation & Others v Yuri Privalov & Others [2007] EWCA. The Court confirmed that section 7 of the Act 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 trading contact.

The Court concluded that if arbitrators can decide whether a contract is void for initial illegality, they are also permitted to decide whether it has been procured by bribery or 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 itself.

Summary

The decision of the Court of Appeal in the Fiona Trust v Yuri Privalov case provides confirmation that an arbitration clause is a separate agreement which survives the termination of a trading contract. Even if a contract is found to be invalid for reasons such as bribery, fraud, misrepresentation and so on, unless that bribery, fraud or misrepresentation relates directly to the arbitration agreement itself, the arbitration clause survives and the validity or otherwise of the contract as a whole is to be determined by an arbitrator and not by the Court.