At a glance: In a recent judgment, the Commercial Court highlighted the difficulties that can arise of out of LoU wording in terms of arbitration agreements and extensions of time.
The M/V Majesty was carrying 25,000 mt of rice under a voyage charterparty on an amended Synacomex 90 form. Five Bs/L were issued. The charterparty contained (a) a BIMCO arbitration clause; and (b) a bespoke arbitration clause ("CP Arbitration Clause"), although it was common ground between the parties that the Bs/L incorporated the bespoke CP Arbitration Clause rather than the BIMCO clause.
The material terms of the CP Arbitration Clause were that (a) any dispute under the charter would be resolved under LMAA terms by two arbitrators and, if the arbitrators did not agree, an umpire; and (b) the LMAA Small Claims Procedure ("SCP") would apply to claims not exceeding US$100,000.
The cargo was allegedly discharged short, damaged, and wet. Neither cargo claimants' nor the Owners' surveyors classified their findings by reference to B/L numbers or cargo quantities.
The Owners' Club issued an LoU which was stated to be in consideration of the "Owners of [the cargo] and other parties entitled to sue in respect of the above mentioned claims" refraining from making claims, and covered claims for loss, shortage and/or damage to cargo up to a total amount of US$280,000 ("LoU"). Some important features of the LoU were that:
- Although it identified the Bs/L by number in its preamble, it defined "cargo" as the total cargo volume;
- It provided for payment against an award "of a properly constituted London Arbitration Tribunal";
- Although in its header it stated "Nature of Claim: Alleged loss, shortage and/or damage to cargo", the body of the LoU made reference to both "claims" and "claim"; and importantly
- It contained a stand-alone reference to arbitration: "We confirm that the Shipowners agree that the above-mentioned claims shall be subject to English law and shall be brought in arbitration proceedings in London." ("LoU Arbitration Clause").
After the LoU had been provided, cargo interests sought, and the Owners agreed to, two extensions of time to bring proceedings in respect of the cargo. Both extensions were stated to be "for commencement of proceedings as per the above Bills of Lading in respect of the claim for alleged loss, shortage and/or damage to cargo".
Cargo interests notified the Owners that they had appointed an arbitrator on the terms of an ad hoc arbitration agreement contained in the LoU, alternatively on the terms the BIMCO arbitration clause, alternatively as sole arbitrator in SCP arbitrations (without prejudice to their position that the SCP provisions did not apply). The Owners appointed their own arbitrator, denied that the LoU provided for an ad hoc arbitration agreement, and argued that the cargo claims fell under the SCP.
The tribunal found by a majority in favour of cargo interests on the following points, namely that:
- By the LoU, the parties had agreed to consolidate the claims under the Bs/L and have these heard in a single ad hoc arbitration; and
- The time extensions allowed cargo interests further time to commence arbitration under the ad hoc arbitration agreement in the LoU.
The Owners appealed.
In dismissing the Owners' appeal, Mr Justice Calver took the middle ground and held that a reasonable person applying business common sense would understand that the parties had agreed to consolidate their claims in respect of the entire cargo and refer these to a tribunal constituted under the CP Arbitration Clause. This was because:
- The surveyors engaged by both sides did not classify their findings with reference to B/L numbers or cargo quantities;
- Despite the word "claims" being sporadically used in the LoU, the definition of the nature of the cargo claim and the use of the singular "claim" in the LoU made it clear that the parties were referring to one combined claim;
- The reference in the LoU to a "properly constituted" tribunal should be read as a reference to the appointment mechanism in the CP Arbitration Clause: i.e. two arbitrators and an umpire where the arbitrators cannot agree;
- The reference to the SCP in the CP Arbitration Clause was not applicable to the facts of this case: commercial sense favoured a construction of the LoU that would lead to one consolidated claim of over US$100,000, as this would avoid the inconvenience of five separate references and the risk of inconsistent awards; and
- The parties made it clear that they intended the LoU to apply to anyone entitled to sue in respect of the cargo, and that the arbitration would bind all interested parties.
The Court also considered whether the very broadly worded arbitration appointment by cargo interests, which sought to keep all bases open, had the effect of submitting all claims in respect of the cargo to the consolidated procedure under the LoU. On the facts it did, but the decision serves as a reminder of the need for real care in the drafting of notices.
Finally, the Court had to determine whether the reference in the time extensions "as per the above Bill of Lading" should be read as extending to claims under the LoU. Again, on the facts, it was found that the parties had agreed to resolve the claims under the Bs/L in consolidated arbitration under the LoU, especially since the LoU predated the extensions, and so the extensions were extensions of time in respect of that single reference.
What can one take home from the judgment?
- Check for overlapping jurisdiction clauses. If you want the law and jurisdiction clause in the LoU to prevail over any such clauses in the charterparty and/or bill(s) of lading, make this clear. Not doing so may lead to challenges to the tribunal's jurisdiction, increasing costs and causing delays.
- Check for consistency. In this case:
- The LoU made reference to both "claim" and "claims";
- The charterparty contained (a) a BIMCO arbitration clause incorporated by reference; and (b) a bespoke arbitration clause which was similar to, but not identical with, the BIMCO arbitration clause. Although the parties agreed that the latter was applicable, solicitors for cargo interests had in fact relied on the former in their notice of appointment (alternatively to relying on the LoU); and
- The LoU Arbitration Clause taken in isolation was contradictory: the standard position under the Arbitration Act 1996 is a sole arbitrator, yet the LoU included an undertaking for accepting notice of appointment of an arbitrator on behalf of cargo interests.
In this case, such inconsistencies led to both arbitration and High court proceedings over a USD 280,000 claim even before getting to the substantive issues
- Refine boilerplate wording: if any of the expressions commonly used (such as "a properly constituted tribunal") may be read in more than one ways, amend it to ensure that it says exactly what you want it to say.
- Beware of wording that could be considered as cross-referencing, unless that is the intention: the court relied on the word "confirm" in the LoU Arbitration Clause to hold that this clause must refer to matters already agreed by the Owners, namely the arbitration mechanism in the CP Arbitration Clause. Arguably, interpretation could have swung the Owners' way, namely that the word "confirm" showed that the parties did not intend to amend in any way the CP Arbitration Clause (which would mean that the tribunal lacked jurisdiction to hear a single consolidated cargo claim).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.