Chapter 3: The sequel in the construction of arbitration clauses

In this chapter the aim is to offer a systematic and critical analysis of the current interpretational trends regarding the construction of arbitration clauses in international commercial contracts when incorporation issues arise. This chapter’s objective is also to track the changes they provoke in the landscape of international commercial arbitration. Does English law seem to be contextualist-ic and purposive in terms of incorporation of arbitration clauses?

It will be shown that not only have English courts discarded traditional interpretational approaches regarding incorporation of arbitration clauses, but, at the same time, they have unjustifiably become too flexible towards the opposite direction.

The problematics are the following: Do courts follow a liberal or a literal approach towards the construction of arbitration clauses? Should the courts give precedence to the specific words used in the bill of lading or read it along with the charterparty. The emergence of new judicial opinions on these issues, occasionally taking a different view from what was so far considered the law, simply suggests that there is no clear law on the matter, as yet. The uncertainty that has resulted from liberally stretched approaches that have occurred recently and have become usual resulting in controversies will be revealed. It is important to know whether the arbitration clause impliedly takes precedence over the jurisdiction clause.

In addition, recently, the courts have seemed to apply English law straight away to a bill of lading, in order to determine whether English law was incorporated into the bill, and this practice has been critically assessed. 1 It will be stressed once again that it is of vital importance to first determine the law governing the bill of lading as the UK judicial approach in respect of incorporation issues differs from the US, China’s and other national approaches. 2 This completes the discussion that started in the first chapter on aspects that could only be understood after the context of construction has been presented. Reference in this chapter will be made to commercial judgments, mostly maritime, to show how the conflict between arbitration and litigation is resolved by the courts.

This chapter will also corroborate the central thesis of this monograph about the “sui generis” status of arbitration clauses, which in cases of conflict should persevere against jurisdiction clauses, if the long-established principles of English common law on incorporation of arbitration clauses are properly applied.

By putting emphasis on how English courts have construed words and phrases such as “may” and “shall”, “arising under this” or “arising out of this” whenever the incorporation of an arbitration clause is at question, it will be proved how certain judgments appear to reinforce the status of an arbitration clause compared to that of a jurisdiction clause, by suggesting certain principles of construction that cannot be rebutted by some mechanistic rules of construction. In other words, whereas in Chapter 2 we dealt with some mechanistic canons of construction, in this chapter we will elaborate on certain principles of construction that should be given precedence as they derive from the specific weight and recognition of arbitration. We shall see therefore that the equivalence (or not) between arbitration and exclusive jurisdiction clauses is not a context different to that of the incorporation cases. Fiona Trust created a liberal pro-arbitration construction that should be applied first before any other method of construction.

In Anzen v Hermes, 3 which involved a shareholders’ agreement, the dispute resolution clause provided that in the case of a dispute “any party may submit the dispute to binding arbitration”.

When such a dispute arose, one of the parties commenced court proceedings whereas the other party applied for a stay of these proceedings. As a consequence, the vital issue that had to be answered by the court was whether the aforementioned dispute resolution clause was just providing for an option to arbitrate or for an obligation to arbitrate, as seen from the effect of the verb “shall”.

In brief, three theories were developed: the first provided that the dispute resolution clause had to be read exclusively as an arbitration clause. The second supported that arbitration was one option and litigation was the other, and that the arbitration would be an exercisable option only if the arbitral proceedings had started. 4 Last but not least, the third analysis stipulated that arbitration was an option that could be elected in litigation’s place, and in case litigation had been first commenced by one party, the latter would be required to refer the dispute to an arbitral tribunal if the other party had applied for a stay. In the end, it was this third analysis that was upheld by the court. 5

In other words, the judicial proceedings were stayed, even though the arbitral proceedings had not actually commenced. More specifically, the court held that the clause “any party may submit the dispute to binding arbitration” was conferring on the parties the right to order a stay of the court proceedings despite the fact that none of them had referred the matter to arbitration. 6 As Lord Mance and Lord Clark correctly stated, 7 this case raises issues regarding the interpretation of an arbitration clause and therefore emphasis will be placed on certain aspects of this judgment that appear to reinforce the status of an arbitration clause compared to that of a jurisdiction clause.

It is well apparent from this case, that a party who wishes its dispute to be arbitrated can start arbitration proceedings or insist on arbitration, irrespective of the fact that court proceedings may have been commenced first by the opponent and the arbitral proceedings may not be on foot. 8 Hence, it seems that, if one of the parties wants to arbitrate its dispute, the word “may” is automatically turned into “shall”, and the arbitration clause acquires a binding effect at once. 9

Attention should be drawn to the twofold situation that arises at this point: on the one hand, the verb “may” is usually deployed to dictate an option and shows that arbitration is the alternative to litigation, if elected; however in this judgment, although one of the parties had commenced court proceedings, the respondent was ultimately required to follow the arbitration proceedings instead because the other party applied for a stay. In other words, in a case where litigation is one option and arbitration is the other, it is rational for someone to wonder: why should the option and election of arbitration proceedings be given priority? It needs to be underlined that in Anzen, whereas court proceedings had been first commenced by a party (thus the option logically had been exercised), this party was asked to go to arbitration. And this was because the defendant applied for a stay. This case as well as Aiteo Eastern 10 are two significant paradigms of the liberal approach followed by courts in favour of the interpretation of arbitration clauses. This is another strong indicator that arbitration takes precedence and is considered as a preferable method for the resolution of commercial disputes compared to litigation. The answer is that this conclusion has strong and noteworthy similarities with the well-known and leading judgment in the Fiona Trust 11 case.

For this it is indispensable to recall some very important points of the House of Lords’ holding in the Fiona Trust. In this case there were eight charterparties with an arbitration clause setting out in clause 41 that:

‘b) any dispute arising under this charter shall be decided by the English courts’ and ‘c) … that either party may … elect to have any such dispute referred … to arbitration in London …’ and that ‘c) i) A party shall lose its right to make such an election only if: (a) it receives from the other party a written notice of dispute which (1) states expressly that a dispute has arisen out of this charter’.

It was apparent that (b) was a jurisdiction clause in respect of “any dispute arising under this charter” which was then referred to-by the words “any such dispute” – in the arbitration clause in clause 41(c). 12 So, the issue at question was whether clause 41(b) referred the question of whether the charterparties were procured by bribery to the jurisdiction of the English court. If it did, then the party had the choice to have that question referred to arbitration, according to clause 41(c).

Lord Hoffmann, after mentioning some cases drawing a distinction between claims “arising under” and “arising out of” the agreement, stated that there is no need to analyse these as according to his view the aforementioned distinction “reflects no credit” upon English commercial law. 13 The judge also added that ‘it may be a great disappointment to the judges who explained so carefully effects of the various linguistic nuances if they could learn that the draftsmen of so widely used a standard form as Shelltime 4 obviously regarded the phrases “arising under this charter” in clause 41(b) and “arisen out of this charter” in clause 41(c)(1)(a)(i) as mutually interchangeable. The judge also continued by applauding the opinion expressed in the Court of Appeal that “the time has come to draw a line under the authorities to date and make a fresh start”. 14

Furthermore, Lord Hope of Craighead stated:

“Ordinary businessmen … are unlikely to trouble themselves too much about its precise language or to wish to explore the way it has been interpreted in the numerous authorities, not all of which speak with one voice. Of course, the court must do what it can to provide charterers and shipowners with legal certainty at the negotiation stage as to what they are agreeing to. But there is no conflict between...