Court rules on the breadth of arbitration clause

A recent Court of Session decision ([2023] CSOH 6) has clarified the breadth of arbitration clauses and the reach of the Fiona Trust Principle (also known as the 'one-stop shop' approach). This principle is a presumption that where parties have agreed to an arbitration clause, they intend it to apply to all disputes arising from the relationship between them.

Whilst the court accepted that an arbitration clause in an agreement stands separate from the agreement itself, it was going too far to say that the 'one-stop shop' approach has the consequence that every subsequent agreement between the same parties is subject to the same arbitration clause. There must be some connection between the dispute to be litigated and the agreement in which the arbitration clause appears. This involves analysis of the dispute and determination of whether it can properly be said to arise out of, or in connection with, the original agreement, which will be heavily fact dependent.

Case circumstances

The parties entered into a written contract whereby the Pursuer undertook to recover a barge owned by the Defender which had sunk off the coast of Skye.

The Pursuer contended that, after carrying out its initial assessment of the wreck, due to dangerously high levels of hydrogen sulphide, it was too dangerous to recover the barge and, thereby, the contract was frustrated.

The Pursuer argued that considering the dangers posed, the parties came to a further agreement that the Pursuer would recover the contents of the barge, and they entered into an oral contract to that effect.

The Defender took a preliminary plea of no jurisdiction under reference to the arbitration clause in the written contract which provided that:

"any dispute arising out of or in connection with the Written Fixed Contract shall be referred to Arbitration."

The key question for the court was whether the issue in question was one which arises out of or is in connection to the written contract.

The Pursuer argued that although the parties were the same, the written contract and the oral agreement applied to wholly different subject matters. The written contract had provided for the barge to be recovered for a fixed fee on a 'no cure, no fee' basis, whereas the oral agreement was a different agreement which was struck following the discovery of the dangerous substances. It was just by chance that the Pursuer had the skill and experience to carry out the services required under the oral agreement. Furthermore, it was open to the Defender to instruct a third party to carry out these services and the fact that the Defender chose to instruct the Pursuer did not link it in any way to the written contract.

Counsel for the Defender argued for the application of the Fiona Trust principle, a presumption that where parties have agreed to an arbitration clause, they intend it to apply to all disputes arising from the relationship between them. The subject matter of the action was said to plainly arise out of and was connected with the relationship created by the written contract. The arbitration clause represented a separate and separable agreement from the written contract in which it was first recorded. The whole subject matter of the dispute related to only one thing: the salvage operation in relation to the Defender’s barge.

Decision

The Judge accepted the principle laid down in Fiona Trust, that an arbitration clause in an agreement does stand separate from the rest of the agreement, however he clarified the breadth of this principle by noting that it was not intended that every subsequent agreement between the parties is subject to the same arbitration clause - there must be some link between the dispute to be litigated and the contract.

The Judge decided that the matters clearly arose out of (or in connection with) the written contract. There was a clear overlap between the facts underlying both the written contract and the oral agreement, in that the services both included the recovery of contents from the same barge, located in the same position. There was a close causal connection between the written contract and the oral agreement – one arose out of the other; and there was clearly a factual overlap since both involve the removal of the same contents from the same vessel.

Key takeaways

Whilst the courts may interpret the breadth of an arbitration clause liberally, care should be taken in drafting it. Don’t assume it will cover all subsequent agreements as a connection will require to be shown. Likewise, if you do not want an arbitration clause to apply in certain circumstances make that clear or you may be stuck with it.