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The arbitration clause, the settlement agreement and the rational businessman

It’s fair to say that the “rational businessman”, as described by Lord Hoffmann in the Fiona Trust case, has been pretty busy over the last few years.

He stands, like a coach on the touch line, ready to rush on to the field to apply first aid in the form of common sense when it comes to the interpretation and application of arbitration clauses.

But why do we need him (or her)?

Arbitration is a consensual process. Its scope and application depends on the intention of the parties as expressed in their agreement to arbitrate, which is why ensuring that an arbitration clause is effectively drafted and reflects the needs of the parties is so important.

However, whilst we may hold these truths to be self-evident, the commercial reality is that poorly drafted arbitration clauses are not uncommon.

The term “pathological clause” (“clause pathologique”) was first coined by Frederic Eisemann, a former Secretary General of the ICC Court of Arbitration back in 1974. It refers to an arbitration clause that has been so badly drafted so as to be potentially invalid and therefore ineffective. The term remains in use today.

The principal defects found in arbitration clauses are those of inconsistency, uncertainty and inoperability. When faced with a potentially defective arbitration clause, the English courts will approach the problem as a matter of construction. This is where the rational businessman comes in.

To quote Lord Hoffman:

“Businessmen in particular are assumed to have entered into agreements to achieve some rational commercial purpose and an understanding of this purpose will influence the way in which one interprets their language.”

This has given rise to what has been characterised as the “one-stop presumption”, where rational businessmen who are parties to a contract intend all questions arising out of their legal relationship to be determined in the same forum. The presumption is a strong one, and requires clear words to the contrary if it is to be displaced.

One area in which the “one-stop presumption” has been applied is where an agreement is entered into for the purpose of settling disputes which have arisen under an earlier agreement between the same parties. One party then seeks to impeach the settlement agreement and to advance a claim based on the earlier contract.

In Monde Petroleum SA v Westernzagros Ltd, a dispute arose under a consultancy agreement and was subsequently settled. The consultancy agreement provided for arbitration; the settlement agreement provided for the exclusive jurisdiction of the English courts. A dispute arose as to whether one of the parties was induced by misrepresentation to enter into the settlement agreement and as to whether the courts or an arbitral tribunal had jurisdiction to determine the matter.

Enter the rational businessman.

The court took the view that a rational businessmen is likely to have intended that all aspects of the dispute would be resolved in a single forum and for the dispute resolution clause in the settlement agreement to supersede the clause in the earlier agreement. There are several reasons for this. The settlement agreement comes later and has been agreed by the parties in the light of the specific circumstances which have given rise to the disputes to be settled. It is the operative clause governing issues concerning the validity or effect of the settlement agreement and therefore the only clause capable of applying to disputes which arise out of or relate to the settlement agreement. In considering any dispute about the scope or efficacy of a settlement agreement, the tribunal is likely to have to consider the circumstances in which the dispute arose and the rights of the parties under the earlier contract. If that court or tribunal cannot also decide disputes arising out of the underlying contract, and those disputes are determined by a different court or tribunal, there would be a risk of inconsistent findings.

The recent decision in Sonact Group Limited v Premuda SPA “Four Island” is an interesting application of the “one-stop” presumption to a case involving the settlement of claims arising out of an underlying agreement.

The case involved a voyage charterparty which included an arbitration clause providing that: “Any and all differences and disputes of whatsoever nature arising out of this Charter shall be put to arbitration.”

The owner had a claim for demurrage and heating costs. The claim was the subject of correspondence between the parties and was settled. The parties did not enter into a formal settlement agreement. Rather, the agreement to compromise the claims was documented in an exchange of emails, in which the charterer agreed to pay the owner US $600,000.

The charterer did not pay and the owners’ solicitors gave notice of arbitration.

The claim advanced by the owner in the arbitration was for the agreed sum of US $600,000. The charterer contended (amongst other things) that the arbitrators had no jurisdiction to determine the claim under the settlement agreement because the settlement agreement did not contain an arbitration clause.

The claim advanced by the owner in the arbitration was for the agreed sum of US $600,000. The charterer contended (amongst other things) that the arbitrators had no jurisdiction to determine the claim under the settlement agreement because the settlement agreement did not contain an arbitration clause.

In their view, the negotiation and agreement of demurrage claims under voyage charterparties was so much part and parcel of operating and chartering ships that people working in the industry would be astonished to be told that the dispute resolution provision in the governing charterparty did not apply.

It was of course open to the parties to agree that the settlement agreement should be governed by different dispute resolution provisions, but such an agreement would have to be expressly recorded and could not just be inferred, unless the parties had expressly raised the issue in their exchanges.

The charterer challenged the award, arguing (amongst other things) that the tribunal did not have jurisdiction to determine the claim under the settlement agreement.

Males J agreed with the arbitrators that it was obvious that the parties intended that the arbitration clause in the charterparty would continue to apply in the event that the agreed sum was not paid.

He held that the wide wording of the arbitration clause in the charterparty was sufficient to encompass the claim, albeit that the agreement to pay US $600,000 represented a new cause of action under a new and binding agreement. He dismissed the argument that the settlement agreement gave rise to a new legal relationship between the parties, replacing the relationship under the charterparty, stating:

“ … there is, in my judgment, no bright line rule that once the parties enter into a new legal relationship, here a settlement agreement, an arbitration clause in the underlying contract necessarily can no longer apply.”

He considered it inconceivable that the parties intended that, if the agreed sum was not paid, the owner would be unable to pursue its claim in arbitration, the parties’ chosen forum. Instead, they would have to commence court proceedings, either in the charterers’ home jurisdiction or by seeking permission to serve English proceedings out of the jurisdiction.

Males J felt that, in the circumstances, it was “hardly necessary to say anything about the “rational businessman” described by Lord Hoffmann in the Fiona Trust case”. Nevertheless, the decision is a clear indication that the English courts will adopt a commercially pragmatic approach both to the construction and the application of arbitration clauses. It seems the rational businessman is very much here to stay.

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