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LMAA – CIArb Joint meeting INTERPRETING CONTRACTS – WHERE IS THE SUPREME COURT LEADING US?

This joint meeting organized by LMAA and CIArb delves into the interpretation of dispute resolution clauses in contracts and the influence of the Supreme Court's decisions. Topics include historic positions, fine linguistic distinctions, and the impact of fraud on arbitration agreements.

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LMAA – CIArb Joint meeting INTERPRETING CONTRACTS – WHERE IS THE SUPREME COURT LEADING US?

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  1. LMAA – CIArb Joint meetingINTERPRETING CONTRACTS – WHERE IS THE SUPREME COURT LEADING US? David Brynmor Thomas 39 Essex Chambers 20 November 2017

  2. Interpreting Dispute Resolution Clauses Premium Nafta and afterwards

  3. Historic position • Fine distinctions in language • Heyman v Darwins Ltd [1942 ] AC 356, 399 “arising under” narrower than “arising out of” (Lord Porter) • Union of India v E B Aaby's Rederi A/S [1975] AC 797 – no difference (Viscount Dilhorne and Lord Salmon)

  4. Historic position • Overseas Union Insurance Ltd v AA Mutual International Insurance Co Ltd [1988] 2 Lloyd's Rep 63 (Evans J) distinction between clauses which referred • "only those disputes which may arise regarding the rights and obligations which are created by the contract itself” (“under”) • those which "show an intention to refer some wider class or classes of disputes.” (“In relation to”) 

  5. Premium Nafta • Premium Nafta Products Ltd (20th Defendant) & Ors v. Fili Shipping Company Ltd & Ors [2007] UKHL 40 (17 October 2007)

  6. Premium Nafta • Shelltime 4 form: • "41.(a)  This charter shall be construed and the relations between the parties determined in accordance with the laws of England. • (b)  Any dispute arising under this charter shall be decided by the English courts to whose jurisdiction the parties hereby agree. • (c)  Notwithstanding the foregoing, but without prejudice to any party's right to arrest or maintain the arrest of any maritime property, either party may, by giving written notice of election to the other party, elect to have any such dispute referred . . . . to arbitration in London …”

  7. Premium Nafta • Two issues: • Construction of the arbitration agreement • Effect of fraud on the arbitration agreement

  8. Premium Nafta • Lord Hoffmann - §6-8 • It is therefore necessary to inquire into the purpose of the arbitration clause. As to this, I think there can be no doubt. The parties have entered into a relationship, an agreement or what is alleged to be an agreement or what appears on its face to be an agreement, which may give rise to disputes. They want those disputes decided by a tribunal which they have chosen …”

  9. Premium Nafta • Lord Hoffmann - §6-8 • its construction must be influenced by whether the parties … were likely to have intended that only some of the questions arising out of their relationship were to be submitted to arbitration and others were to be decided by national courts. …If, as appears to be generally accepted, there is no rational basis upon which businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another, one would need to find very clear language before deciding that they must have had such an intention.”

  10. Premium Nafta • Lord Hoffmann - §6-8 • “A proper approach to construction therefore requires the court to give effect, so far as the language used by the parties will permit, to the commercial purpose of the arbitration clause.” 

  11. Premium Nafta • Lord Hope §25 – 26 • the various clauses in these forms serve various functions. In some a high degree of precision is necessary. Terms which define the parties' mutual obligations in relation to price and performance lie at the heart of every business transaction. They fall into that category. In others, where the overall purpose is clear, the parties are unlikely to linger over the words which are used to express it.

  12. Premium Nafta • Lord Hope §25 – 26 • Clause 41 falls into the latter category. …It is the kind of clause to which ordinary businessmen readily give their agreement so long as its general meaning is clear. The proposition that any jurisdiction or arbitration clause in an international commercial contract should be liberally construed promotes legal certainty. It serves to underline the golden rule that if the parties wish to have issues as to the validity of their contract decided by one tribunal and issues as to its meaning or performance decided by another, they must say so expressly. Otherwise they will be taken to have agreed on a single tribunal for the resolution of all such disputes.

  13. Premium Nafta • Fraud Issue • Addressed by separability of arbitration agreement • s.7 Arbitration Act 1996 • 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."

  14. Continuing problems • Different contracts • Different claims • Other parties

  15. Different contractsSatyam –v- Upaid Systems • Satyam Computer Services Ltd v Upaid Systems Ltd [2008] EWCA Civ 487 Lawrence Collins LJ • Settlement agreement • "Any and all disputes arising out of or relating to this Agreement shall be brought in a court of competent jurisdiction in London, England.“ • Claims in Texas in relation to Assignment Agreement • Argued for a wide interpretation to allow “one stop litigation”

  16. Different contractsSatyam –v- Upaid Systems • Rejected: • I do not consider that Premium Nafta Products v Fili Shipping Company is of assistance. Plainly it makes commercial sense for a dispute about the validity of the contract to be determined under an arbitration agreement (or a jurisdiction agreement). Whether a dispute under a different contract is within a jurisdiction agreement depends on the intention of the parties as revealed by the agreement. The effect of clause 3.1(b) is that any claims under the Assignment Agreement are governed by that agreement and not by the Settlement Agreement. Claims under an agreement preserved by the Settlement Agreement do not "relate" to the Settlement Agreement.

  17. Different claimsMicrosoft –v- Sony • Microsoft Mobile OY (Ltd) v Sony Europe Ltd & Ors [2017] EWHC 374 (Ch) Marcus Smith J • “It was common ground between the parties that arbitration clauses, as contractual provisions, fall to be construed according to the precepts laid down in Investors Compensations Scheme v. West Bromwich Building Society[1998] 1 WLR 896, Rainy Sky SA v. Kookmin Bank[2011] UKSC 50 and Arnold v. Britton[2015] UKSC 36.

  18. Different claimsMicrosoft –v- Sony • Microsoft Mobile OY (Ltd) v Sony Europe Ltd & Ors [2017] EWHC 374 (Ch) Marcus Smith J • “Additionally, the parties recognised that whilst arbitration clauses had, in the past, been subject to a series of specific and technical rules, the starting point now for the construction of an arbitration clause was Fili Shipping Co Ltd v. Premium Nafta Products Ltd[2007] UKHL 40 …”

  19. Different claimsMicrosoft –v- Sony • Microsoft Mobile OY (Ltd) v Sony Europe Ltd & Ors [2017] EWHC 374 (Ch) Marcus Smith J • “The spectrum of cases falling within and without a “relationship” was considered in the “Angelic Grace” [1995] 1 Lloyd’s 87. This decision was cited to the House of Lords in Fiona Trust, but not mentioned in their Lordships’ opinions.”

  20. Different claimsMicrosoft –v- Sony • Microsoft Mobile OY (Ltd) v Sony Europe Ltd & Ors [2017] EWHC 374 (Ch) Marcus Smith J • “The Playa Larga [1983] 2 Lloyd’s Rep. 171: In order that there should be a sufficiently close connection … the claimant must show either that the resolution of the contractual issue is necessary for a decision on the tortious claim, or, that the contractual and tortious disputes are so closely knitted together on the facts that an agreement to arbitrate on one can properly be construed as covering the other.”

  21. Different claimsMicrosoft –v- Sony • Microsoft Mobile OY (Ltd) v Sony Europe Ltd & Ors [2017] EWHC 374 (Ch) Marcus Smith J • The starting assumption articulated in Fiona Trust is that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to have entered to be decided by the same tribunal. • But it is difficult to see how a tortious claim can arise out of a contractual relationship when the only claim in contract that can be said to be related is unarguable.

  22. Other partiesTeam Y&R –v- Ghossoub • Team Y&R Holdings Hong Kong Ltd & Ors v Ghossoub [2017] EWHC 2401 (Comm) Rabinowitz QC • Asplin J in Black Diamond Offshore Limited and Ors v Fomento De Construcciones y Contratas S.A.: “There is no dispute that the relevant principles which apply to the construction of jurisdiction provisions can be derived from Donohue v. Armco Inc [2001] UKHL 64 and [2002] Ll Rep 45; Fiona Trust and Holding Corporation v. Privalov [2007] EWCA Civ 20, [2007] 2 Lloyd's Rep 267and Satyam Computer Services Limited v. Upaid Systems Limited [2008] EWCA Civ 487 and [2008] 2 AE (Comm) 465 . It is accepted therefore, that jurisdiction clauses must be construed "widely and generously" with a presumption in favour of "one-stop shopping" for dispute resolution."

  23. Other partiesTeam Y&R –v- Ghossoub • Morgan Stanley & Co. International Plc v China Hasihen Juice Holdings Co. Ltd.[2009] EWHC 2409 (Comm) • The claimant bank (MSIP) sought to enforce an exclusive jurisdiction clause contained in a contract between itself and the defendant holding company (CH) to stop proceedings instituted by CH against MSIP and a Hong Kong affiliate of MSIP (MSAL) in the People's Republic of China. The clause, 13(b)(i)), provided among other things that, "With respect to any suit, action or proceedings relating to any dispute arising out of or in connection with this Agreement ("Proceedings"), each party … (1) irrevocably submits to the exclusive jurisdiction of the English courts".

  24. Other partiesTeam Y&R –v- Ghossoub • Morgan Stanley & Co. International Plc v China Hasihen Juice Holdings Co. Ltd.[2009] EWHC 2409 (Comm) • Argued by MSIP that the clause obliged CH to bring the proceedings it had instituted against both MSIP and MSAL in England despite MSAL not being a party to the contract; • MSIP contended that the scope of the clause applied to "any suit, actions or proceedings relating to any dispute arising out of or in connection with" the contract and was not restricted to proceedings against it, MSIP, the other contracting party.

  25. Other partiesTeam Y&R –v- Ghossoub • Morgan Stanley & Co. International Plc v China Hasihen Juice Holdings Co. Ltd.[2009] EWHC 2409 (Comm) • "it is not clear that the parties, as rational businessmen, would be likely to have intended that any dispute with a third party arising out of the relationship into which they had entered with each other should be decided by the same court which decides disputes between the same parties".

  26. Other partiesTeam Y&R –v- Ghossoub • Principles of construction: • (1) Whether an exclusive jurisdiction clause should be understood to oblige a contractual party to bring claims relating to the contract in the chosen forum even if the claim is one against a non-contracting party, requires a consideration of the contract as a whole including not just the language used in the exclusive jurisdiction clause but also all other terms in the contract that may shed light on what the parties are likely to have intended.

  27. Other partiesTeam Y&R –v- Ghossoub • Principles of construction: • (2) The principle that rational businessmen are likely to have intended that all disputes arising out of or connected with the relationship into which they had entered would be decided by the same court cannot apply with the same force when considering claims brought by or against non-contracting third parties. • The starting position in considering whether disputes involving a non-contracting third party might come within the scope of the clause must be that the contracting parties are likely to have intended neither to benefit nor prejudice non-contracting third parties.

  28. Other partiesTeam Y&R –v- Ghossoub • Principles of construction: • (3) Where it is clear the contracting parties have turned their minds to the position of third parties and … whether such third parties are to benefit or bear the burden of rights and obligations agreed between the contracting parties, the absence of any express language in the exclusive jurisdiction clause that provides for the application of that term in relation to claims brought by or against third parties may be an indication that the clause was not intended either to benefit or prejudice such third parties. • (4) Where the exclusive jurisdiction clause is silent … the fact that any provision in the contract dealing with third parties indicates an intention that third parties should not acquire rights as against the contracting parties by virtue of the contract, may be a further indication that the clause was not intended either to benefit or prejudice such third parties.

  29. Other partiesTeam Y&R –v- Ghossoub • Principles of construction: • (5) Where a particular interpretation of the exclusive jurisdiction clause produces a material contractual imbalance because for example it results in one party to a dispute relating to the contract being subjected to an obligation to bring proceedings in the chosen jurisdiction in circumstances where the other party to the dispute is not similarly obliged, or where that interpretation would require a claim against a non-contracting third party to be brought in the agreed jurisdiction even where the chosen forum may not actually have jurisdiction over such a claim against that party, this too may be an indication that the clause was not intended to so apply because such a result is unlikely to be what the contracting parties as rational businessmen would have agreed.

  30. Other partiesTeam Y&R –v- Ghossoub • Principles of construction: • (6) The fact that there is nothing in the contract that might indicate a rational limit in terms of the identity of non-contracting third parties whose rights and interests might be affected by the application of an exclusive jurisdiction clause might provide a further indication that the clause was only intended to affect the rights and interests of the contracting parties.

  31. Other partiesTeam Y&R –v- Ghossoub • Principles of construction: • (7) It follows that where contracting parties intend that any claim relating to the contract be subject to the exclusive jurisdiction clause even where it is one brought by or against a non-contracting party, clear words should be used expressly setting out this intention, the parties to be affected and, if relevant, the manner in which submission of any non-contracting parties to the jurisdiction of the chosen court is to be ensured.

  32. Other partiesTeam Y&R –v- Ghossoub • Principles of construction: • (1) Whether an exclusive jurisdiction clause should be understood to oblige a contractual party to bring claims relating to the contract in the chosen forum even if the claim is one against a non-contracting party, requires a consideration of the contract as a whole including not just the language used in the exclusive jurisdiction clause but also all other terms in the contract that may shed light on what the parties are likely to have intended. • (2) The principle that rational businessmen are likely to have intended that all disputes arising out of or connected with the relationship into which they had entered would be decided by the same court cannot apply with the same force when considering claims brought by or against non-contracting third parties. More particularly, whist it is well established that the language of an exclusive jurisdiction clause is to be interpreted in a wide and generous manner, the starting position in considering whether disputes involving a non-contracting third party might come within the scope of the clause must be that, absent plain language to the contrary, the contracting parties are likely to have intended neither to benefit nor prejudice non-contracting third parties. • (3) Where it is clear from the express terms that the contracting parties have turned their minds to the position of third parties and more particularly whether such third parties are to benefit or bear the burden of rights and obligations agreed between the contracting parties, the absence of any express language in the exclusive jurisdiction clause that provides for the application of that term in relation to claims brought by or against third parties may be an indication that the clause was not intended either to benefit or prejudice such third parties. • (4) Where the exclusive jurisdiction clause is silent on the question, the fact that any provision in the contract dealing with third parties indicates an intention that third parties should not acquire rights as against the contracting parties by virtue of the contract, may be a further indication that the clause was not intended either to benefit or prejudice such third parties. • (5) Where a particular interpretation of the exclusive jurisdiction clause produces a material contractual imbalance because for example it results in one party to a dispute relating to the contract being subjected to an obligation to bring proceedings in the chosen jurisdiction in circumstances where the other party to the dispute is not similarly obliged, or where that interpretation would require a claim against a non-contracting third party to be brought in the agreed jurisdiction even where the chosen forum may not actually have jurisdiction over such a claim against that party, this too may be an indication that the clause was not intended to so apply because such a result is unlikely to be what the contracting parties as rational businessmen would have agreed. • (6) The fact that there is nothing in the contract that might indicate a rational limit in terms of the identity of non-contracting third parties whose rights and interests might be affected by the application of an exclusive jurisdiction clause might provide a further indication that the clause was only intended to affect the rights and interests of the contracting parties. • (7) It follows that where contracting parties intend that any claim relating to the contract be subject to the exclusive jurisdiction clause even where it is one brought by or against a non-contracting party, clear words should be used expressly setting out this intention, the parties to be affected and, if relevant, the manner in which submission of any non-contracting parties to the jurisdiction of the chosen court is to be ensured.

  33. David Brynmor Thomas 39 Essex Chambers LLP is a governance and holding entity and a limited liability partnership registered in England and Wales (registered number 0C360005) with its registered office at 81 Chancery Lane, London WC2A 1DD. 39 Essex Chambers‘ members provide legal and advocacy services as independent, self-employed barristers and no entity connected with 39 Essex Chambers provides any legal services. 39 Essex Chambers (Services) Limited manages the administrative, operational and support functions of Chambers and is a company incorporated in England and Wales (company number 7385894) with its registered office at 81 Chancery Lane, London WC2A 1DD.

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