Harbour Assurance Company (U.K.) Ltd v Kansa General International Insurance Company Ltd

JurisdictionEngland & Wales
Judgment Date28 January 1993
Date28 January 1993
CourtCourt of Appeal (Civil Division)
[COURT OF APPEAL] HARBOUR ASSURANCE CO. (U.K.) LTD. v. KANSA GENERAL INTERNATIONAL INSURANCE CO. LTD. AND OTHERS 1993 Jan. 25, 26; 28 Ralph Gibson, Leggatt and Hoffmann L.JJ.

Arbitration - Arbitrator - Jurisdiction - Dispute under reinsurance contracts - Allegation of illegality - Whether illegality dispute covered by arbitration clause - Whether arbitration clause severable - Whether defendants entitled to stay of action

The plaintiffs agreed to reinsure the defendants in respect of risks for the years 1980, 1981 and 1982. The agreement contained an arbitration clause which provided that all disputes arising thereunder should be submitted to arbitration. The plaintiffs claimed that the defendants were not registered or approved to effect or carry on insurance or reinsurance business in Great Britain under the Insurance Companies Acts 1974 and 1981 and that the agreement was therefore void for illegality and sought a declaration to that effect. The defendants applied for an order that the action should be stayed pursuant to section 1 of the Arbitration Act 1975. The judge held that the issue of initial illegality was not within the jurisdiction of an arbitrator and dismissed the application.

On appeal by the defendants: —

Held, allowing the appeal, that an arbitration clause contained in a written contract was a collateral agreement which fell to be construed according to its terms and the wishes of the parties; that the question of initial illegality of a contract, not directly impeaching the arbitration clause, was capable of being within the jurisdiction of an arbitrator; that whether a particular form of illegality rendered void both the arbitration clause and the contract depended upon the nature of the illegality; that the illegality pleaded had not affected the validity of the arbitration clause which, as a matter of construction, was wide enough to cover the issue, and the question of initial illegality was, therefore, a dispute arising out of the agreement; and that, accordingly, a stay of the action would be granted (post, pp. 47E–F, 49C–D, 50C, 51B–C, 52A–F, 53A–D, 56D–G, 57B, 62E–63C).

Heyman v. Darwins Ltd. [1942] A.C. 356, H.L.(E.) considered.

David Taylor & Son Ltd. v. Barnett Trading Co. [1953] 1 W.L.R. 562, C.A. distinguished.

Decision of Steyn J. [1992] 1 Lloyd's Rep. 81 reversed.

The following cases are referred to in the judgments:

Ashville Investments Ltd. v. Elmer Contractors Ltd. [1989] Q.B. 488; [1988] 3 W.L.R. 867; [1988] 2 All E.R. 577, C.A.

Bremer Vulkan Schiffbau und Maschinenfabrik v. South India Shipping Corporation Ltd. [1981] A.C. 909; [1981] 2 W.L.R. 141; [1981] 1 All E.R. 289, H.L.(E.)

Dalmia Dairy Industries Ltd. v. National Bank of Pakistan [1978] 2 Lloyd's Rep. 223, C.A.

Decision of 27 February 1970 (1990) Arbitration International, vol. 6, No. 1, p. 79

Fillite (Runcorn) Ltd. v. Aqua-Lift (a firm) (1989) 45 B.L.R. 27, C.A.

Heyman v. Darwins Ltd. [1942] A.C. 356; [1942] 1 All E.R. 337, H.L.(E.)

Hirji Mulji v. Cheong Yue Steamship Co. Ltd. [1926] A.C. 497, P.C.

Langton v. Hughes (1813) 1 M. & S. 593

Lee (Joe) Ltd. v. Lord Dalmeny [1927] 1 Ch. 300

Mackender v. Feldia A.G. [1967] 2 Q.B. 590; [1967] 2 W.L.R. 119; [1966] 3 All E.R. 847, C.A.

Mahmoud and Ispahani, In re [1921] 2 K.B. 716, C.A.

Paal Wilson & Co. A/S v. Partenreederei Hannah Blumenthal [1983] 1 A.C. 854; [1982] 3 W.L.R. 1149; [1983] 1 All E.R. 34, H.L.(E.)

Phoenix General Insurance Co. of Greece S.A. v. Halvanon Insurance Co. Ltd. [1988] Q.B. 216; [1987] 2 W.L.R. 512; [1987] 2 All E.R. 152, C.A.

Prenn v. Simmonds [1971] 1 W.L.R. 1381; [1971] 3 All E.R. 237, H.L.(E.)

Prima Paint Corporation v. Flood & Conklin Manufacturing Co. (1967) 388 U.S. 395

Prodexport State Co. for Foreign Trade v. E. D. & F. Man Ltd. [1973] Q.B. 389; [1972] 3 W.L.R. 845; [1973] 1 All E.R. 355

Smith, Coney & Barrett v. Becker, Gray & Co. [1916] 2 Ch. 86

Sojuznefteexport v. Joc Oil Ltd. (unreported), 7 July 1989; (1990) Yearbook of Commercial Arbitration 384

Taylor (David) & Son Ltd. v. Barnett Trading Co. [1953] 1 W.L.R. 562; [1953] 1 All E.R. 843, C.A.

Union of India v. E. B. Aaby's Rederi A/S [1975] A.C. 797; [1974] 3 W.L.R. 269; [1974] 2 All E.R. 874, H.L.(E.)

The following additional cases were cited in argument:

Antonio P. Lemos, The [1985] A.C. 771; [1985] 2 W.L.R. 468; [1985] 1 All E.R. 695, H.L.(E.)

Craig v. National Indemnity Co. (unreported), 25 July 1980, Lloyd J.

Deutsche Schachtbau-und Tiefbohrgesellschaft m.b.H. v. R'As al-Khaimah National Oil Co. [1990] 1 A.C. 295; [1987] 3 W.L.R. 1023; [1987] 2 All E.R. 769, C.A.

Empresa Exportadora de Azucar v. Industria Azucarera Nacional S.A. [1983] 2 Lloyd's Rep. 171, C.A.

Gibraltar (Government of) v. Kenney [1956] 2 Q.B. 410; [1956] 3 W.L.R. 466; [1956] 3 All E.R. 22

Kruse v. Questier & Co. Ltd. [1953] 1 Q.B. 669; [1953] 2 W.L.R. 850; [1953] 1 All E.R. 954

Sykes v. Fine Fare Ltd. [1967] 1 Lloyd's Rep. 53, C.A.

Willcock v. Pickfords Removals Ltd. [1979] 1 Lloyd's Rep. 244, C.A.

INTERLOCUTORY APPEAL from Steyn J.

The plaintiffs, Harbour Assurance Co. (U.K.) Ltd., claimed, inter alia, a declaration that certain insurance policies made by way of obligatory quota share retrocession, taking effect for the years 1980 to 1984, entered into with the six defendants, Kansa General International Insurance Co. Ltd., Tapiola International Insurance Co. Ltd., Keskinainen Vakuutusyhtio Autoilijat (a body corporate), Tyovaen Keskinainen Vakuutusyhtio Turva (a body corporate), Keskinainen Vakuutusyhtio Varma (a body corporate) and Finnish Industrial and General Insurance Co. Ltd., were void for illegality on the grounds, inter alia, that the defendants were not registered or approved to effect or carry on insurance or reinsurance business in Great Britain under the Insurance Companies Act of 1974 and 1981. The agreements contained an arbitration clause and the defendants applied for the action to be stayed under section 1 of the Arbitration Act 1975. On the trial of a preliminary issue Steyn J. [1992] 1 Lloyd's Rep. 81 ruled that he was compelled by authority to hold that the principle of separability of an arbitration clause from the contract in which it was contained, could not extend so as to enable the arbitrator to consider whether the contract itself was void ab initio for illegality, and dismissed the application.

By a notice of appeal dated 18 November 1991 the first, third, fourth and fifth defendants appealed on the grounds, inter alia, that (1) the judge had erred in holding that it was part of the ratio decidendi of Smith, Coney & Barrett v. Becker, Gray & Co. [1916] 2 Ch. 86 and/or David Taylor & Son Ltd. v. Barnett Trading Co. [1953] 1 W.L.R. 562 that an issue of illegality as to the primary contract could not be determined under an arbitration agreement; (2) the judge should have held, consistently with his findings as to the developments in the common law and by legislation, that an arbitration agreement, being a separate contract to the primary contract to which it referred, was capable of applying to a dispute of any nature, including initial invalidity of the primary contract, providing the arbitration agreement was sufficiently widely drafted, and (3) the judge, having correctly found that the arbitration agreement was sufficiently widely drafted as a matter of language to cover disputes as to the initial validity and/or illegality of the contracts of retrocession between the plaintiff and the first, third, fourth and fifth defendants, ought to have held that the disputes which were the subject of the action fell within the scope of the arbitration agreement and should therefore have ordered that the action be stayed pursuant to section 1 of the Arbitration Act 1975.

By a respondents' notice dated 6 December 1991 the plaintiffs contended that the judge's order should be affirmed on the additional grounds, inter alia, that (1) the judge, while correctly holding that arbitrators had no jurisdiction to determine disputes as to the illegality of a contract, had failed further to hold that the non-arbitrability of such disputes accorded with the decision and the reasoning of the majority of the House of Lords in Heyman v. Darwins Ltd. [1942] A.C. 356; (2) the judge had incorrectly held that a principle of the separability of the arbitration contract was inherent in the ratio decidendi of Heyman v. Darwins Ltd.; (3) the judge had erred in law in holding that disputes as to whether a contract was void or voidable for misrepresentation were arbitrable and (4) alternatively, the judge had erred in law in finding that the arbitration clause was drawn in sufficiently wide terms as to cover disputes as to the initial validity of the retrocession agreement or disputes as to illegality, as the clause was drawn in language not apt to cover such disputes.

The facts are stated in the judgment of Ralph Gibson L.J.

Sydney Kentridge Q.C. and Stephen Ruttle for the first, third, fourth and fifth defendants.

Andrew Longmore Q.C. and Timothy Saloman for the plaintiffs.

Cur. adv. vult.

28 January. The following judgments were handed down.

RALPH GIBSON L.J. This is an appeal, brought with the leave of Steyn J., by the first, third, fourth and fifth defendants against his order of 31 July 1991 in an action brought by Harbour Assurance Co. (U.K.) Ltd. By that order Steyn J. [1992] 1 Lloyd's Rep. 81 dismissed the application by the defendants for a stay of the action under section 1 of the Arbitration Act 1975.

This case raises the question whether in English law, under the principle of the separability or autonomy of the agreement expressed in an arbitration clause, which clause is contained in a written contract, the clause can give jurisdiction to the arbitrators under that clause to determine a dispute over the initial validity or invalidity of the written contract, upon the assumptions that upon its true construction the arbitration clause covers such a dispute and that the nature of the...

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