Incorporating a charter party arbitration clause into a bill of lading by reference: a case study of the vessel ‘Duden’

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It has long been established that arbitration is contractual and therefore a party cannot be required to submit any dispute to arbitration without agreement. However, it is common practice in maritime shipping that an arbitration clause is extended to third parties.[1]

Charter parties usually contain a clause that provides for arbitration of disputes arising out of the agreement, including claims concerning the cargo transported on the charter party fixture.[2]

Given the fact that the cargo will be sold to a buyer, a bill of lading (B/L) will almost always be issued. Upon transfer by the charterer to the buyer, the B/L becomes a conclusive piece of evidence of the terms of carriage and an independent and binding contract between the transferee and the carrier.[3]

This was the issue disputed in the case of the arrest of the vessel ‘Duden’[4] at the port of Dakar in Senegal.

Facts and proceedings

On 10 March 2005, the registered owners of the vessel Duden (the ‘Owners’) entered into a bareboat charter with Anchor Navigation Ltd of the Marshall Islands (‘Anchor’), whereby the vessel was chartered to Anchor for one year, plus or minus 30 days at the charterer’s option. Anchor was a fully owned subsidiary of the Owners and the bareboat was concluded largely for fiscal reasons.

On 28 September 2005, Anchor, as disponent owners, entered into a time charter on a New York Produce Exchange form (the ‘time charter’) with Capezzana Shipping and Trading SA, for a voyage from Thailand and/or Vietnam to West Africa. The time charter included a London arbitration clause.

The vessel carried a cargo of bagged rice from Vietnam to Dakar (Senegal) arriving on 1 December 2005. The receivers of the cargo were Amadou Lo and Tiger Denrées Senegal. The cargo was insured with Axa-Assurances Senegal (‘Axa–Senegal’). The B/Ls issued by the master identified the Owners on their face as ‘Owners / carriers’. The face of the B/L stated: ‘Freight payable as per Charter Party dated 28 September 2005’. On the reverse, Clause 1 provided: ‘All conditions, liberties and exceptions of the Charter Party, dated as overleaf, including the Law and Arbitration Clause, are herewith incorporated.’

On 8 December 2005, while the cargo was being discharged, Axa–Senegal, on behalf of the receivers, alleged some loss and damage to the cargo and demanded from the Owners a bank guarantee in the sum of CFA 67m (US$106,000) subject to the jurisdiction of the Senegalese courts. The Owners’ P&I Club refused the demand for a bank guarantee and offered to provide a letter of understanding (‘LoU’) on usual Club terms, subject to arbitration seated in London, or the jurisdiction of the English Courts. In the meantime, Axa–Senegal applied to the Court of Dakar and obtained the arrest of the vessel as a security for a claim provisionally valued at CFA 54m (US$85,000).

After completing cargo discharge, the Owners commenced proceedings in the London Commercial Court against the receivers and Axa–Senegal. On 14 September, a London Commercial Court judge granted the Owners an interim anti-suit injunction on the basis that ‘there was a good arguable case that cargo interests were trying to apply improper pressure on the Owners to concede jurisdiction to Senegal’. On 20 December 2005, a compromise was reached whereby the arrest was lifted in return for the provision of the Club LoU to be replaced within three months with a bank guarantee from a first-class bank.

At the London arbitration proceedings, which commenced on December 2006, the Owners contended that the receivers were in breach of the express obligation to submit all disputes to London arbitration and/or an implied term that no party would conduct itself in such a way as would frustrate the London arbitration clause. They further contended that Axa­Senegal wrongfully induced, or procured, or conspired with the receivers to breach their contract. Thus, the Owners claimed damages against Axa–Senegal, most of which were for loss of hire while the vessel was under arrest after completion of discharge, and for bunkers consumed and port charges incurred during that period.

Axa­­–Senegal denied there was either an implied term, as contended by Owners, or a breach of the express terms of the London arbitration clause. It asserted that it was acting under direct instructions from the receivers. Further, Axa–Senegal disputed that the Owners were the contractual carriers under the B/L and contended that any loss had been sustained not by the Owners but by Anchor. It also disputed the Owner’s claim for a final anti-suit injunction.

In a last-minute effort, the Owners attempted to amend their pleadings to the effect that they were claiming on behalf of Anchor.

Comments

This case is almost similar to that of M/v Kallang,[5] as it raises the same two major issues, namely: the validity of the charter party arbitration clause incorporated into a bill of lading by reference, and the breach of the arbitration clause by cargo interests and their insurer Axa–Senegal.

The validity of the charter party arbitration clause incorporated into a bill of lading by reference

Generally, arbitration clauses are found in charter parties and rarely in B/Ls. However, it is a commonly accepted principle and practice that where a B/L is issued under a charter party and it expressly incorporates the charter party arbitration clause into its terms, the parties to the contract of carriage contained in the B/L may be obliged to refer their disputes to arbitration.[6] The main cause for concern arising from the incorporation clauses is that copies of the charter parties referred to in B/Ls seldom travel with B/Ls, and that the B/L holders hardly ever have the chance and the right to see the relevant charter party terms.[7]

Under English law, a B/L holder can be bound by a number of unseen charter party provisions,[8] so long as the B/L and the relevant charter party overcome a set of hurdles, known as the ‘rules of incorporation’.[9]

But, for a charter party arbitration clause to be successfully incorporated into the B/L, three conditions must be met:

  • the operative words of incorporation must be found in the B/L itself;
  • such words must be suitable to describe the charter party clause that is being incorporated, and
  • the incorporated clause must be consistent with the terms of the B/L and, in the event of conflict, the provisions of the B/L will prevail.[10]

In the M/v Duden case, the B/Ls expressly provided that ‘all terms and conditions, liberties and exceptions of the time charter dated 28 September, including the London arbitration clause, were incorporated’. There was therefore no doubt that the parties intended the terms of the time charter to be incorporated in the B/L contracts. Accordingly, the cargo owners and their insurer should have known that the B/Ls were subject to the London arbitration clause.  As in the M/v Kallang case, the inclusion of a clause referring specifically to an arbitration clause within a standard charter party form induces a considerable amount of certainty and predictability in the relationship between the parties to the contract of carriage contained in the B/L, as regards dispute resolution matters.[11] As pointed out by the Court in The Rena K case,[12] the B/ls contained an express agreement, binding on all holders including the receivers, that all disputes were to be referred to London arbitration. If one party tried to obtain security for proceedings in another jurisdiction, or to force the other party to give up their right to arbitrate disputes, that would be a direct and straightforward breach of the arbitration clause.[13]

The alleged breach of the arbitration clause

The question raised here is whether the sole purpose of the arrest of the M/v Duden in Senegal by Axa–Senegal, on behalf of the cargo interests, was to obtain reasonable security for the claim to be arbitrated, or whether this was an attempt to force the other party to give up their right to arbitrate the dispute. In the M/v Kallang case, the London Court considered that, ‘by seeking to use arrest as a means of achieving Senegalese jurisdiction, Axa­–Senegal, on behalf of the cargo receivers, was in breach of the express terms of the arbitration clause’. Indeed, in the Court‘s opinion the actual arrest of the Duden in Dakar was a conservatory arrest for security and not a substantive claim. However, it was also the Court’s opinion that Axa–Senegal intended to use the arrest as a means of forcing Senegalese jurisdiction. The Court subsequently considered that ‘the conduct of the receivers, through Axa–Senegal, went well beyond seeking security for its claims in London arbitration’. According to the Court, the difference of jurisdiction mattered, as the chances of getting a substantial recovery would be much greater if the Hamburg Rules were applied (as would be the case before the Dakar Court) than if the Hague-Visby Rules were applied (as would be the case in an arbitration under English law in London).

The Court did not deny the receivers the right to seek security for the claim in the London arbitration. What it found improper was the attempt by Axa–Senegal to use the arrest as a means of defeating the arbitration clause.

The Court therefore considered that Axa–Senegal’s conduct, knowledge and intent was such as to make it liable for the tort of procuring receivers, a breach of the London arbitration clause incorporated by reference in the B/Ls.[14]

Further, it is important to note that the Owners created Anchor as a legal structure with a view to saving tax. Since the vessel was bareboat chartered to Anchor, the Court found that the loss of hire was sustained by Anchor whose bunker was consumed. Despite their last-minute effort to amend the claim and plead that they were acting as agent for Anchor, the Owners’ claim for damages was dismissed.

Conclusion

The commercial purpose of the incorporation clause is in essence to enable the ship owner or the charterer, who is also the carrier under the B/L, to turn and face the B/L holder on the same terms as their charter party. However, the incorporation of charter party terms into a B/L remains an uncertain issue.[15]

Ship owners should therefore be advised to ensure that: the applicable charter party is clearly identified on the face of the B/L, and that the incorporation clause is appropriately worded.

In theDuden case, although these conditions were met, Axa–Senegal attempted to force the other party to give up their right to arbitrate the dispute. This breach of contract was considered improper by the Court and Axa–Senegal was therefore held liable in tort.

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