Viscount Simon LC: Ｍy Lords, by a written contract dated 19 February 1938, the respondents, who are manufacturers of steel in Sheffield, as principals appointed the appellants, whose business is in New York, to be sole selling agents of their tool steels in a wide area of territories, including the western hemisphere (excluding USA and Argentine), Australia, New Zealand and India…The agreement contained an arbitration clause in the following terms:
＂If any dispute shall arise between the parties hereto in respect of this agreement or any of the provisions herein contained or anything arising out of the same shall be referred for arbitration in accordance with the provisions of the Arbitration Act 1889, or any then subsisting statutory modification thereof.＂
The question to be decided in this appeal is whether an action started in the King’s Bench Division by the appellants against the respondents should, on the application of the latter, be stayed pursuant to the Arbitration Act 1889, section 4, in order that the matters in dispute between the parties may be dealt with under the arbitration clause.
The appellants contend that the dispute does not fall within the arbitration clause at all, and alternatively that, if it does, the judge in chambers, Cassels J, rightly exercised his discretion in refusing to stay the action. The Court of Appeal (Scott, MacKinnon and Luxmoore LJJ) took a contrary view and held that the arbitration clause clearly applied, and that the judge made a wrong use of his discretion in refusing the stay. The Court of Appeal refused leave to appeal further, considering that the case was ‘a very simple one’, but the appeal committee of this House, largely, I think, because of the uncertainty said to result from certain pronouncements in previous cases decided in the House of Lords and the Judicial Committee, gave leave.
The answer to the question whether a dispute falls within an arbitration clause in a contract must depend on (a) what is the dispute, and (b) what disputes the arbitration clause covers. To take (b) first, the language of the arbitration clause in this agreement is as broad as can well be imagined. It embraces any dispute between the parties ‘in respect of’ the agreement or in respect of any provision in the agreement or in respect of anything arising out of it…. Ordinarily speaking, there seems no reason at all why a widely drawn arbitration clause should not embrace a dispute as to whether a party is discharged from future performance by frustration, whether the time for performance has already arrived or not.
My lords, it is of much practical importance that the law should be quite plain as to the scope of an arbitration clause in a contract where the clause is framed in wide and general terms such as this, and I trust that the decision of the House in this appeal may be useful for this purpose and will remove any misunderstanding which may have grown up out of certain phrases in some of the previous decisions to which I have referred. At the risk of some repetition, I would summarize what I conceive to be the correct view on the matter as follows.
An arbitration clause is a written submission, agreed to by the parties to the contract, and, like other written submissions to arbitration, must be construed according to its language and in the light of the circumstances in which it is made. If the dispute is as to whether the contract which contains the clause has ever been entered into as all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract is thereby denying that he has ever joined in the submission. Similarly, if one party to the alleged contract is contending that it is void ab initio (because, for example, the making of such a contract is illegal), the arbitration clause cannot operate, for on this view this clause itself is also void.
If, however, the parties are at one in asserting that they entered into a binding contract, but a difference has arisen between them as to whether there has been a breach by one side or the other, or as to whether circumstances have arisen which have discharged one or both parties from further performance, such differences should be regarded as differences which have arisen ‘in respect of’, or ‘with regard to’ or ‘under’ the contract, and an arbitration clause which uses there, or similar, expressions should be construed accordingly. By the law of England (though not, as I understand, by the law of Scotland), such an arbitration clause would also confer authority to assess damages for breach, even though it does not confer upon the arbitral body express power to do so.
I do not agree that an arbitration clause expressed in such terms as above ceases to have any possible application merely because the contract has ‘come to an end’, as, for example, by frustration. In such cases it is the performance of the contract that has come to an end…. There is a previous decision of this House which establishes this precise proposition. I refer to Scott & Sons v. De; Sel (1923), where sellers of jute contended that a contract to export from Calcutta 2,800 bales to Buenos Aires was brought to an end, after a portion has been dispatched, by a government prohibition of further export, notwithstanding that the contract contained an express term exempting the sellers from liability for late delivery due to unforeseen circumstances. The arbitration clause ran: “Any dispute that may arise under this contract to be settled by arbitration”.
The sellers argued that the dispute as to frustration was not a dispute under the contract, but a dispute as to the existence of the contract. This contention was unanimously rejected.
I can see no reason why an arbitration clause framed in the above lines should not equally apply, if the supervening even which is alleged by one side to have effected discharge by frustration occurs after the contract has been entered into, but before the time has come for anything to be done under the contract. It is, in my opinion, fallacious to say that, because the contract has ‘come to an end’ before performance begins, the situation, so far as the arbitration clause is concerned, is the same as though the contract had never been made. In such cases a binding contract was entered into, with a valid submission to arbitration contained in its arbitration clause, and, unless the language of the arbitration clause is such as to exclude its application until performance has begun, there seems no reason why the arbitrator’s jurisdiction should not cover the one case as much as the other.
In this summary it is not necessary to deal with the situation which arises when a contract stipulates that the arbitration must take place before an action can be brought, as in Scott v. Avery (1856) or with the difficult question whether an arbitration clause covers a dispute as to the ambit of the submission: see the observations of Lord Parker in the Produce Brokers’ Co case (1916).
Two further observations must be made in conclusion. The first is that, notwithstanding the general validity of the above observations, the governing consideration in every case must be the precise terms of the language in which the arbitration clause is framed. Its terms may, of course, be such as will either expressly or by implication reduce what would otherwise be the full ambit of the clause, or again, will extend it yet further. Secondly, what I have endeavored to formulate in this summary is concerned solely with the question whether or not an arbitration clause applies. It has nothing to do with the further and quite distant question whether, where an action is started in the English courts about a dispute which is within the scope of an arbitration clause, the action should be stayed at its inception under the Arbitration Act 1889, section 4. the principles which should govern the exercise of judicial discretion on this matter have often been laid down and are well understood, and the extent to which appellate authority may interfere was last stated in this House in Ostenton & Co v. Johnston (1942). I think the Court of Appeal was right in reversing the decision of Cassels J on this head. Even if the judge were right in regarding the issue as one in which nothing but a question of law is involved, that circumstance would not necessarily, and in all cases, make it right to refuse a stay…. Moreover, in the present case questions of fact may well have to be determined and the dispute as a whole is of a class which is constantly dealt with by an arbitrator. There is no sufficient reason why the matter should not be referred, and therefore, by the express language of the Arbitration Act 1889, section 4, there must be a stay.
In my opinion, this appeal fails on all points, and I move that it be dismissed with costs.
Lord Macmillan, Lord Russell of Killowen, Lord Wright and Lord Porter agreed.
Questions and Comments
1. This is a typical case concerning the jurisdiction of the arbitration tribunal. In other words, whether the arbitration clause was wide enough to cover the present dispute and whether the dispute is within the jurisdiction of the arbitral tribunal or the court. The appellants argued that it was not within the scope of the arbitration clause. The appeal dismissed.
2. If the contract was frustrated before its performance, does the termination of the whole contract effect the arbitration clause therein?
3. Why the judges rejected the seller’s argument that the dispute as to frustration was not covered by the arbitration clause?
4. If the contract is invalid according to the applicable law from the very beginning, what is the result of the arbitration clause therein?