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English courts will extend arbitration clauses to widest possible range of disputes, expert says

Out-Law News | 15 Dec 2015 | 10:29 am | 2 min. read

A contract's arbitration clause should be extended to apply to a claim not directly covered by that contract, the High Court has ruled. The claim was brought by Russian businessmen against their former partners in the redevelopment of a Moscow hotel.

Commercial disputes expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com, said that the decision reflected the "now well-established" 'Fiona Trust' principle, which allows the English courts to construe arbitration clauses widely "on the assumption that rational businessmen intend that all disputes relating to the relationship they have entered be dealt with by the same tribunal, unless they specify otherwise".

"Parties who have agreed to arbitration under English law should not, therefore, be surprised if the arbitral tribunal assumes jurisdiction over disputes which are wider in scope than the contracts themselves, even where they involve claims under foreign law," he said.

The High Court also ruled that the City of Moscow, which was not a signatory to the agreement, could be made part of the case because it was liable for the contractual obligations of the developer company by virtue of article 105 of the Russian Civil Code. This could be done even though the contracts and the arbitration agreement were governed by English law, it said.

"The court made a clear distinction between, on the one hand, identifying the parties to the arbitration agreement – a matter for the substantive law of the arbitration agreement, in this case English law - and identifying whether a party could be liable for the acts of its subsidiary, and therefore liable to be joined into the arbitration - a question for the law of incorporation, in this case, Russian law," he said.

"Article 105 did not make the City of Moscow a party to the arbitration clause. Rather, its effect was to make it liable to be joined in the arbitration - just as, under English law, non-parties might be joined into an arbitration by way of agency, assignment etc. The court concluded that the arbitrators should have looked to Russian law, as the law of incorporation of OEK Finance, to determine whether the City of Moscow should be joined into the arbitration," he said.

Vitaly Gogokhiya and his business partner, Ashot Egiazaryan, were parties to a shareholders' agreement and a share purchase agreement. They alleged that the company, OEK Finance, had in conjunction with the City of Moscow devised and orchestrated a 'corporate raid' to oust them from an apparently "prestigious and lucrative" project to redevelop the Moskva Hotel near Red Square, Moscow.

The shareholders' agreement and share purchase agreement were governed by English law and contained English arbitration clauses. The two men brought a claim in tort against OEK and the City of Moscow. However, the arbitrators concluded that they had no jurisdiction over the claim as the City of Moscow was not a party to the arbitration agreement. They also found that the tort claim was not covered by the arbitration agreement.

The High Court disagreed on both points, now brought only by Gogokhiya. It ruled that there was a distinction between joining the City of Moscow to the arbitration, and making the City party to the arbitration clause itself. It also found that the arbitrators were wrong to conclude that the tort claim was "insufficiently connected" with the contractual agreements, bearing in mind the House of Lords' reasoning in the Fiona Trust case in 2007.

"The real issue here was whether a claim in relation to which none of the allegations were contract-related, as found by the arbitrators, could fall within the arbitration clause," said complex commercial disputes expert Richard Dickman.

"Under the 1996 Arbitration Act, and as emphasised in a leading text book and by the House of Lords in the Fiona Trust case, the arbitrators had to determine whether the claim arose out of the relationship entered between the parties pursuant to the agreements. The arbitrators held that it was insufficiently connected, as the combination of none of the allegations being contract related and the fact that third parties were key conspirators militated against the tort claim being within the arbitration clause. The court disagreed," he said.

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