Fiona Trust & Holding Corporation v Privalov

In the case of Premium Nafta Products Limited (20th Defendant) and others (Respondents) v. Fili Shipping Company Limited (14th Claimant) and others (Appellants) [2007] UKHL 40, the House of Lords addressed the scope and effect of arbitration clauses in charterparty agreements between the Sovcomflot group of companies and charterer companies. The respondents alleged that the charters were procured by bribery of senior officers of the Sovcomflot group by Mr Nikitin, who controlled or was associated with the charterer companies. The respondents sought to rescind the charters on this ground, while the charterers applied for a stay of the court proceedings under section 9 of the Arbitration Act 1996.

The legal issues the court had to decide were whether the arbitration clause covered the question of whether the contract was procured by bribery and whether it was possible for a party to be bound by submission to arbitration when they alleged that, but for the bribery, they would never have entered into the contract containing the arbitration clause. The House of Lords held that the arbitration clause should be construed in accordance with the commercial purpose of the parties, which was likely to have intended any dispute arising out of the relationship to be decided by the same tribunal. The court also held that the invalidity or rescission of the main contract did not necessarily entail the invalidity or rescission of the arbitration agreement, as the arbitration agreement must be treated as a "distinct agreement" and can be void or voidable only on grounds which relate directly to the arbitration agreement.

The final orders of the House of Lords were that the charterers were entitled to a stay of the proceedings to rescind the charters and that the appeal was dismissed. The court's decision was based on the principle of separability, which means that the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement. The arbitration agreement must be treated as a distinct agreement and can be invalidated only on a ground which relates to the arbitration agreement and is not merely a consequence of the invalidity of the main agreement.