The Introduction
Can an arbitration clause in a letter of undertaking replace arbitration clauses in charterparties earlier agreed?
This is an application to determine the jurisdiction of the arbitration tribunal. It was made due to the arbitrators’ ruling that they lacked jurisdiction over claims for sums less then US$100,000.
The tribunal said that they lacked jurisdiction because they were constituted under the ordinary London Maritime Arbitrators’ Association (‘LMAA’) procedure and not the LMAA Small Claims Procedure.
The long-standing commercial experience of Stephen Males J (formerly Stephen Males QC of 20 Essex Street) is evident throughout this judgment – right from his explanation of the unsaid importance of this particular application up to the commercial reasons in support of his decision. His judgment is a lesson in the importance of elevating specialist practitioners to the Bench if the business common sense approach to contractual interpretation is to be upheld.
The Facts
The Claimant sued the Defendant Shipowner under four bills of lading containing or evidencing contracts of carriage of bagged rice. The Claimant says that the rice was damaged due to the Defendant’s breach of the bill of lading contracts.
Of the four claims, some were for more than US$100,000 and others were for less than that sum.
All bills were standard CONGENBILL 1994 which, in their unamended form, contained no independent arbitration clause. This is because the CONGENBILL 1994 purports to incorporate the arbitration clause in the charterparty. The incorporation clause read :
“All terms and conditions, liberties and exceptions of the Charter Party, dated as overleaf, including the Law and Arbitration Clause, are herewith incorporated.”
However, none of the bills identified a charterparty. This raised difficulties as there were three charterparties involved in the carriage of the rice:
(a) the head charter between the Defendant and Seaboard Overseas Limited (‘Head Charter’);
(b) a sub-charter between Seaboard and Azelie Corp (‘Sub-Charter’);
(c) a voyage sub-charter between Azelie and Valency International Pte Ltd (‘Voyage Charter’).
The charterparties had an arbitration clauses which were on different terms.
The Head Charter and Sub-Charter said that arbitration proceedings should be governed by English law under LMAA terms and that claims up to USD100,000.00 shall be dealt with under the LMAA Small Claims Procedure. The Small Claims Procedure is a different procedure from the ordinary LMAA procedure.
The arbitration clause in the Voyage Charter simply said that any arbitration shall be settled in Singapore by English law.
Presumably, pursuant to the arrest of the Defendant’s ship or the threat of arrest, the Defendant’s P & I Club issued a Letter of Undertaking (‘LOU’) providing security for all of the Claimant’s claims.
The LOU said that the claims are subject to arbitration in London under the auspices of the LMAA and that English law shall apply. The LOU goes on to make express reference to the Hague-Visby Rules and the English Carriage of Goods by Sea Act 1992. It further provides for each party to nominate its own arbitrator and for the two arbitrators to appoint a third.
The Parties’ Submissions
The Claimant says that the arbitration agreement in the LOU replaces the arbitration clause in the charterparty, regardless of which charterparty is referred to in the bill of lading.
The Defendant says that, in keeping with the arbitration clause in the Head Charter, claims for sums less than US$100,000 must be arbitrated under the Small Claims Procedure, and not the ordinary LMAA procedure. The Defendant’s reasoning was on these lines:
(a) the starting point is the construction of the arbitration clause in the Head Charter. This is because it is the arbitration clause in the Head Charter that is incorporated into the bills (the ‘Incorporation Point’);
(b) the purpose of the LOU was to provide security for the claims, not to replace the arbitration clause in the bills of lading (the ‘Purpose of the LOU’);
(c) the clause in the LOU merely varied the clause in the Head Charter but did not replace it and was not fundamentally inconsistent with it. Therefore, when both clauses were read together, claims for sums less than US$100,000 still had to be arbitrated under the Small Claims Procedure (the ‘Variation Point’).
The Holding
Stephen Males J held that the arbitration clause in the LOU replaced the arbitration clause in the charterparties. Therefore, as the arbitration clause in the LOU did not discriminate between claims for less or more than US$100,000, the arbitration tribunal could deal with all claims.
The Incorporation Point
Disagreeing with the Defendant’s submission that the starting point should be the construction of the arbitration clause in the Head Charter, Males J said that in order to determine whether the arbitration clause in the LOU was intended to replace the arbitration clause in the Head Charter, the court must first look at the construction of the arbitration clause in the Letter of Undertaking. If the intention in the arbitration clause of the LOU was to replace the clause in the Head Charter, then the clause in the earlier agreement would indeed be replaced.
Males J also disagreed with the Defendant’s outright assumption that it was the arbitration clause in the Head Charter which was incorporated into the bills. The Defendant seemed to make this assumption based on paragraph 6-016 of Scrutton on Charterparties (22nd Edition):
“Where the incorporating clause refers, but does not identify, a charterparty, the court will assume that the reference is to any charter under which the goods are carried. Difficulties can arise where there are two charters, one between the shipowner and a charterer, and one between the charterer and a sub-charterer. It is submitted that a general reference will normally be construed as relating to the head charter, since this is the contract to which the shipowner, who issues the bill of lading, is a party. But this will not invariably be so, and the court may conclude, on examining the facts, that the intention was to incorporate the sub-charter; or even, in extreme cases, that the bill of lading is so ambiguous as to be void.”
The judgment does not mention the authority relied on by Scrutton for this proposition but a similar passage in the 18th edition of Scrutton had been approved by Lord Denning MR in The San Nicholas [1976] 1 Lloyd’s Rep 8 at page 11. Both the 18th and 22nd editions, however, were careful to refer to this proposition as a general statement of law and not an invariable rule.
Males J said that although that Defendant’s presumption may be right, there was still scope for disagreement as to which charterparty was incorporated into the bill of lading. Perhaps he had in mind the criticism leveled at this presumption at para 3-028 of the 3rd edition of Carver on Bills of Lading :
“One view is that it is the terms of the “head charter” which are incorporated (presumably on the ground that it was by reference to that charter that the shipowner intended to define his obligations). However, this is a somewhat one-sided argument since the shipper may not be a party to the head charter and instead be a party to the sub-charter. In such a case there is no obvious reason why the intention of the shipowner should, on the issue of incorporation, prevail over that of the shipper.”
The Purpose of the LOU
Males J did not think that it was significant to say that the purpose of the LOU was merely to provide security for the claims and not to replace the arbitration clause in the charterparties. He preferred to stick to the established cannons of contractual interpretation and ascertain the purpose of a document from the terms that it contained. Perhaps the primary purpose of the LOU was indeed to provide security for the claim but, he reasoned, it also set out how the disputes were to be resolved.
The Variation Point
Males J gave short shrift to this argument partly because he did not think that the authorities relied on by the Defendant supported its argument. Further, he preferred to look at the matter objectively and in light of the relevant background of the contract.
Here he thought that the arbitration clause in the LOU, with its comprehensive. reference to the seat of the arbitration, the constitution of the tribunal and the substantive law to be applied, contained everything needed in an arbitration clause. Therefore, there appears to be no reason why the parties did not intend the clause in the LOU to replace the clause in the charterparties in their entirety.
Further, there is no apparent reason why the parties would intend their arbitration agreement to be located in two places – in the LOU and the Head Charter. This is especially so as there is nothing in the LOU which suggested that the clause in the Head Charter had to be taken into account. Also, if the parties intended the Small Claims Procedure to apply, they could have easily made such provision in the LOU.
The Commercial Background of the Contracts
Males J also said that, given the relatively modest sum claimed and the likelihood that the claims will give rise to the same issues, it would seem odd that the clause in the LOU did not mention the Small Claims Procedure if it intended the procedure to apply. The reason being that the application of the Small Claims Procedure would require the same issues and evidence to be presented at least twice – once in the ordinary procedure and once more in the Small Claims Procedure – and this would seem to be an uncommercial stand. In fact, because P & I Clubs are keen to keep costs down, this would be a peculiar arrangement.
Also, opting for the clause in the LOU removed any uncertainty over which charterparty was incorporated in the bills.
Conclusion
In light of the comprehensive arbitration clause in the LOU, the Defendant had an uphill task persuading Males J that the clause in the Head Charter remained the arbitration clause to be relied on. None of the Defendant’s argument were convincing and the arguments on the purpose of the LOU, in particular, flew in the face of the established method of contractual interpretation.
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