Maritime Law Arbitration

Arbitration in London is a popular choice of dispute resolution in maritime contracts.

Thus, for example, many standard form charterparties, international sale contracts, salvage contracts, reinsurance contracts and P&I Club Rules provide for London arbitration. Many bills of lading incorporate the arbitration clause in the charterparty under which the bill is issued.

Arbitration is perceived to have advantages over court litigation including speed, limited right of appeal, lower cost, the parties may choose their own arbitrators and procedure, ease of enforcement of the arbitration award in view of the fact that the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”) has been widely accepted around the world and confidentiality.

Some of these perceived advantages may prove to be illusory where there is a hearing as if the tribunal consists of three busy arbitrators it may take longer to get a hearing than it would in the English court and may cost more as the arbitrators have to be paid. However, the last criterion of confidentiality may be very important, for example, to large companies who do not wish to have their trade secrets aired in the public proceedings of the court. Furthermore arbitration awards are confidential and cannot be published except with both parties’ consent. If such consent is given they may be published in Lloyd’s Maritime Law Newsletter. Although they are not binding precedent they may provide very useful guidance.

The United Kingdom is a party to the New York Convention and it gives effect to its international obligations under that convention in the Arbitration Act 1996. The key principle is that if the parties have chosen arbitration that is what they should get. Sections 5 and 6 of the Arbitration Act 1996 set out the formalities that have to be complied with for there to be a valid arbitration agreement.

Where a charterparty containingan arbitration clause has been drawn up and signed by both parties it will satisfy those formalities. Often in practice this will not be done. The arbitration agreement may also be evidenced in writing and this would comply with the Act.

Where arbitration proceedings are commenced by one party and the other party does not consider it is bound by an arbitration agreement in the contract, the respondent should object to the jurisdiction of the arbitration tribunal before it contests the merits of the matter.

The arbitration tribunal may rule on its own substantive jurisdiction.

In other words the arbitrators may decide, for example, whether there is a valid arbitration clause or, if there is, whether it is wide enough in scope to cover the dispute which has arisen.

It will be necessary to determine whether a contract which states that it incorporates the terms of another contract, such as a bill of lading incorporating the terms of the charterparty pursuant to which it is issued or a reinsurance contract which incorporates the terms of the primary insurance contract, validly incorporates the arbitration clause in that contract. The English courts have taken a liberal approach to incorporation of such clauses.

Sometimes the bill of lading does not identify the charterparty, the terms of which are to be incorporated into the bill of lading, and there may be more than one if there is a string of charterparties. Where there are two or more potentially relevant charters, the courts are very reluctant to hold that the contract is void for uncertainty, as this does not give effect to the obvious intention of the parties that the terms of a charter are to be incorporated. There are “guidelines for ascertaining the intentions of the parties”.

Although it is a question of construction in each case, the general rule is that the head charter, to which the shipowner is party, is incorporated.

However, the position may well be different where the head charterparty is a time charterparty, on the basis of the presumed unlikelihood of the parties wishing to incorporate the terms of a time charter which are different in kind.

General words of incorporation will not successfully incorporate an arbitration clause.

If, however, specific words of incorporation are used (i.e. the arbitration clause is specifically referred to in the words of incorporation in the bill of lading), that will successfully incorporate that clause into the bill of lading. This will be so even if it is necessary to manipulate the wording of the charterparty clause, because, for example, that clause refers “all disputes arising out of this charterparty” to arbitration.

As the parties have made clear their intention by the specific words that the arbitration clause is to be incorporated into the bill, the court will add the words “and under any bill of lading issued hereunder”.

If the bill of lading incorporates the law and arbitration clause in the charterparty this will also work to incorporate the “law and litigation” clause, clause 41 of the Shelltime form, which provides for disputes to be subject to the jurisdiction of the English court, with a right to elect for London arbitration.

In a recent decision the English court has gone further than this and held that an exclusive court jurisdiction clause in the charterparty will also be incorporated by such wording.

As under English law a third party consignee or indorsee of the bill of lading will also be bound by the arbitration clause in a bill of lading, this decision does make it difficult for a third party bill of lading holder  who has not seen the charterparty, or indeed the carrier who has not seen the voyage sub- charterparty, to know which tribunal has jurisdiction. This will be the case even if the charterparty was not drawn up and signed at the time the bill of lading was issued.

Where a party to an arbitration clause, which provides for arbitration in England or abroad, commences proceedings in the English court, the court is obliged to stay the court proceedings if the other party applies for a stay, unless satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed.

Where, however, a ship has been arrested, the court granting the stay has a discretion to order that the property arrested be retained or that alternative security be provided for the satisfaction of any arbitration award.

The court may also grant a freezing injunction in support of the arbitration proceedings.

Where a party to a London arbitration agreement commences or threatens to commence proceedings elsewhere in breach of the arbitration agreement, the other party to the agreement may apply to the English court for an anti- suit injunction to restrain the first party from commencing or pursuing the proceedings elsewhere, provided the proceedings are in a court of a State which is neither an EU Member State nor Lugano Contracting State.

Where, however, a claimant who is not a party to the arbitration agreement seeks an anti- suit injunction it must show that the conduct of the other party is unconscionable as the proceedings elsewhere are vexatious and oppressive. Star Reefers Pool Inc v JFC Group Co Ltdconcerned the guarantees of two charterparties which provided for London arbitration. The guarantor was not a party to the charterparty arbitration clause which had not been incorporated into the guarantees.

Although the guarantees were governed by English law the Court of Appeal refused to uphold an anti- suit injunction restraining the guarantors from pursuing proceedings in Russia. Similarly in Starlight Shipping Co v Tai Ping Insurance Co Ltdthe managers of a ship and in Navig8Pte Ltd v Al- Riyadh Co for Vegetable Oil Industry (The Lucky Lady) the charterers of a ship, could not obtain an anti- suit injunction to restrain a breach of the arbitration clause in the bill of lading as they were not a party to it.

The effectiveness of arbitration agreements in Europe has been weakened. If a party commences proceedings in an EU Member State court in breach of a London arbitration agreement, the English court cannot grant an anti- suit injunction to restrain the respondent in the English arbitration from pursuing the court proceedings in the EU Member State as a result of the decision of the European Court of Justice in Allianz SpA (formerly Riunione Adriatica di Sicurta SpA) v West Tankers Inc (The Front Comor).

There must be mutual trust between the EU Member States and the court of the EU Member State must be trusted to come to its own correct determination as to whether there is a valid arbitration clause. If there is, all the EU Member States are parties to the New York Convention and therefore each EU Member State would be obliged to stay its court proceedings in favour of arbitration.

In The Front Comor the European Court of Justice rejected the argument that as arbitration proceedings fall outside the scope of Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Jurisdiction Regulation), as they are excluded by Article 1(2)(d), the judgment of another EU Member State in relation to the validity of the arbitration agreement was also not within the Jurisdiction Regulation and therefore for the English court to grant an anti- suit injunction was not inconsistent with the Jurisdiction Regulation.

The court held that as the Italian court in that case was seised of a substantive dispute for damages in a tort claim as a result of the Front Comorhitting the Italian claimants’ jetty in Syracuse, and the Italian court had jurisdiction to decide the substantive claim under Article 5(3) of the Jurisdiction Regulation unless there was a valid arbitration agreement, the issue as to whether there was a valid arbitration clause was a preliminary issue to the substantive claim which fell within the Jurisdiction Regulation. Therefore it was inconsistent with the Regulation for the English court to grant an anti- suit injunction restraining the Italian claimant from pursuing proceedings within the Jurisdiction Regulation in Italy.

The unfortunate result of the decision of the European Court of Justice in The Front Comoris that there may be, and indeed were in The Front Comor, parallel arbitration proceedings in one EU Member State and court proceedings in a different EU Member State. There is no mechanism to prevent parallel proceedings with the consequent duplication of costs and risk of conflicting decisions, both as to whether there is a binding arbitration agreement and on the substance of the dispute.

The resulting problems are all too clearly illustrated by National Navigation Co v Endesa Generacion SA (The Wadi Sudr) where the Spanish court held that the London arbitration clause was not binding, whereas Gloster J held that it was. The Court of Appeal held that the Spanish judgment, a Regulation judgment, can give rise to an issue estoppel as much in arbitration proceedings excluded from the Regulation as in any other proceedings in an English court.

Both Waller and Moore- Bick LJJ went further and indicated obiter, that arbitrators bound to apply English law, would have to consider under ordinary principles of English law whether a judgment gave rise to an issue estoppel.

The current system is unfairly weighted against the party seeking to rely on the arbitration clause, who can never seise the court of the seat of the arbitration first within the Jurisdiction Regulation. Even if the claimant obtains an arbitration award first before the judgment of the other EU Member State if the other party is determined to pursue proceedings in its own court for its own advantage, there remains uncertainty as to whether the foreign court judgment can be refused recognition in the English courts. In

The Front Comor once the arbitration award had been made, but before the decision of the Italian court, the Court of Appeal held that the English court had jurisdiction to grant leave to enforce it and to enter judgment in terms of the award.

The case of The Wadi Sudr may be contrasted with The Front Comoras in that case the Spanish court gave its judgment that no arbitration clause was incorporated into the

bill of lading and that the shipowners had waived their right to rely on the arbitration clause by commencing the English court proceedings, before either the London arbitration tribunal or English court could consider jurisdiction and the Court of Appeal held that the arbitrators were bound by that judgment.

It will be important to obtain the award of the arbitrators and enter judgment in terms of the award or a declaration from the English court, as quickly as possible on the validity of the arbitration clause, and in any event before the judgment of the court of the other EU Member State. This may give a defence to recognition of any subsequent judgment of the other EU Member State court under Article 34(3) of the EC Jurisdiction Regulation. In The Wadi SudrWaller LJ indicated obiter that he thought this would be the position, but the point is controversial.

In the latest twist of The Front Comorlitigation Flaux J held that the arbitration tribunal was not deprived, by reason of European law, of the jurisdiction to award equitable damages for breach of the obligation to arbitrate. The damages claimed were for legal fees and expenses reasonably incurred in connection with the Italian proceedings and for an indemnity against an award made against the shipowners in the Italian proceedings which is greater than the liability of the shipowners as established in the London arbitration.

Commenting on The Wadi SudrFlaux J stated in The Front Comor, The Regulation simply does not apply to arbitration or arbitral tribunals. The reason why the arbitrators were bound to recognise the Spanish judgment was nothing to do with any principle of European law derived from the Regulation but because of the English common law doctrine of res judicata.

After a recent review of the Jurisdiction Regulation the European Commission proposed amendments to the Regulation to “enhance the effectiveness of arbitration agreements in Europe, prevent parallel court and arbitration proceedings, and eliminate the incentive for abusive litigation tactics”.

Article 29(4) of the revised Regulation provided that where the jurisdiction of the courts of an EU Member State is contested because there is an arbitration agreement providing for arbitration in another EU Member State, the court shall stay its proceedings where the courts of the EU Member State where the seat of the arbitration is located or the arbitration tribunal have been seised of proceedings to determine, as their main object or as an incidental question, the existence, validity or effects of that arbitration agreement. The risk is that a party alleges an arbitration agreement and it is found that there is not one.

This proposal was rejected.

Article 1(2)(d) of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (the “Recast Regulation”), which applies from 10 January 2015, simply excludes arbitration from the scope of the Recast

Regulation and Article 73 provides that the Recast Regulation shall not affect the application of the New York Convention. Recital 12 states that a ruling by the court of an EU Member State as to whether or not an arbitration agreement is null and void, inoperative or incapable of being performed should not be subject to the rules of recognition and enforcement laid down in the Regulation, regardless of whether the court decided on this as a principal issue or as an incidental question. The decision of The Front Comorhas, therefore, been reversed.

Neither an English court judgment nor the Italian court judgment as to the validity of the arbitration agreement would be a Regulation judgment. However, if the court of an EU Member State decides that there is not a valid arbitration clause and proceeds to a substantive judgment on the merits, Recital further states that that judgment will not be precluded from being recognised or enforced under the Regulation. This should not prejudice the competence of the courts of the EU Member States to decide on the recognition and enforcement of arbitral awards in accordance with the New York Convention which takes precedence over the Recast Regulation. Therefore a London arbitration award should be able to be enforced in, for example, Italy under the New York Convention.

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