Last week, the District Court of Larnaca ruled in favour of a sub-contractor represented by our firm, opposing the main contractor’s application seeking annulment of an arbitration clause in a Construction Contract based on allegations of fraud pursued by the main contractor.

Section 9(2) of the Cyprus Arbitration Law, Cap.4 empowers the Cyprus Courts to order that an arbitration clause ceases to have effect upon the application of a party, where the other party has been guilty of fraud in a dispute which arose between the parties and referred to arbitration. Such provision of the Cyprus Arbitration Law mirrors the s.24(2) of the Arbitration Act 1950 which was in force in the United Kingdom before being repealed by promulgation of the Arbitration Act 1996.

Facts

The case pertained to the eruption of a dispute between the parties during the execution of a construction contract, which included an arbitration clause granting the power to a standing appointing authority to appoint an arbitrator at the request of the referring party.

Upon the referral of disputes to arbitration by the sub-contractor, the main contractor charged the former with fraud perpetrated before in various instances, commencing before the signing of the Construction Contract up until its termination, hence seeking to oppose the resolution of all disputes in the agreed dispute resolution forum.

Such opposition was initially raised with the arbitrator in an application filed by the main contractor for a preliminary ruling seeking termination of the proceedings on the basis that the arbitrator could not hear issues of fraud. The arbitrator dismissed the application, ruling that the tribunal lacked the power to order the annulment of the arbitration clause; such power was vested in the Courts, by law.

In light of the above, the main contractor pursued essentially the same claim in Court through the filing of an originating summons. The sub-contractor opposed the main contractor’s claim and insisted inter alia that no fraud arose, whilst strongly rejecting the main contractor’s accusations.

Decision

The Court considered whether a concrete and specific issue of fraud was proved by the main contractor, hence making reference to relevant case law of the Supreme Court of Cyprus, as well as judgments of the Courts of the United Kingdom which were issued with reference to s.24(2) of the now repealed UK Arbitration Act 1950, including Camilla Cotton Oil Co. v. Granadex S.A. And Tracomin S.A,ⁱ Russell v. Russel,ⁱⁱ and Cunningham-Reid a.o. v. Buchanan-Jardine.ⁱⁱⁱ

The President of the District Court of Larnaca held that the annulment of an arbitration clause is not to be ordered light-heartedly and it should not apply in all cases where fraud is alleged. In this case, no prima facie case of fraud was proved by the main contractor and their claim was dismissed.

Allegations as to misrepresentation before the conclusion of the construction contract did not reveal a concrete and specific issue of fraud, whereas claims for idle time, disagreement as to the interpretation of the Construction Contract and service of a 21-day-notice before the filing of a winding up petition against the main contractor did not cross the necessary threshold.

Comment

The judgment of the District Court of Larnaca properly applied the well-established case law of the UK’s Court of Appeal on the matter, which gradually rendered the application of the Courts’ power to strike down an arbitration clause all the more difficult to invoke or apply; in the last case of that line of authority, i.e. in Cunningham (above), the Court of Appeal refused to annul an arbitration clause despite the finding of the High Court acting as Court of First Instance of a strong and convincing evidence of a blatant fraud by the defendant, deeming such finding as not enough under the circumstances to justify the exercise of the Court’s powers.

Per the UK Courts case law which was adopted by the Supreme Court,ⁱ the issuance of a Court order ceasing the validity of an arbitration clause is within the Court’s discretion, which may be exercised upon being satisfied that a prima facie case of concrete and specific issue of fraud is made out by the applicant.

In other jurisdictions such as New York and India, the modern approach on the matter has become more liberal: there is nothing stopping an arbitrator to decide on issues of fraud, provided that such matter or dispute falls within the scope of the arbitration clause. In the UK,^v the House of Lords expressed the view that issues of fraud may be considered as being included in the scope of issues that the parties, as rational businessmen, are likely to have intended to be decided by the arbitral tribunal on the basis of the arbitration clause so chosen by the parties to govern the resolution of any disputes that could arise. With hindsight, this seems to have been the justification for the repeal of s.24(2) of the Arbitration Act 1950 by the Arbitration Act 1986, too.

The firm, George Coucounis LLC, was represented by its partner Nikolas Koukounis. For further information on this topic please contact Nikolas Koukounis by e-mail at nikolas@coucounis.law.

Endnotes

(i) [1976] 2 Lloyd’s Law Reports 10

(ii) [1880] 14 Ch. D. 471

(iii) [1988] 2 All ER 438

(iv) Christdoulou v. SPE Polemiou (2009) 1A JSC 242 & Psilogeni a.o. v. Nea Sinergatiki Etaireia Platron a.o. (2004) 1A JSC 243

(v) Premium Nafta Products Limited a.o. v. Fili Shipping Company Limited a.o. [2007] UKHL 40