Nippon Yusen Kubishiki Kaisha v Golden Strait Corporation

The parties entered into a contract in 1998 whereby the Owners, Golden Strait Corporation (the Owners) agreed to hire to NYK (the Charterers) a vessel named MT GOLDEN VICTORY (the Vessel). A dispute between the parties arose as to the date when the hire agreement could be brought to an end by the Charterers. The contract provided for arbitration in London and Mr Gaisford was jointly appointed as the sole arbitrator. He made an Interim Declaratory Award on 16 September 2002 in favour of the Owners. Cause 41 of the Charterparty which formed part of the contract, gave the parties a right of appeal to the Court on questions of law.

The appeal was heard on the last Friday of the Michaelmas term and this is my written Judgment. At the outset I would like to pay tribute to the care with which the Award has been prepared. If I might say so, the Award is a model of its kind, well-reasoned and, in my view, obviously right.

I start with the background facts, as found by the arbitrator. In 1998 the Owners were part of a group of companies known as Golden Ocean. The ultimate holding company of the Group was Golden Ocean Limited (GOL) which owned a company called Golden Ocean Group Limited (GOGL) which itself owned four companies, one of which owned a number of single ship owning companies including the Owners in this case. The Group had ordered a number of new buildings of VLCCs (supertankers) from the Hitachi Ariake Yard. The vessel was one such and in May 1998 the parties entered into negotiations for the charter of the Vessel, which culminated in the Contract. The first document in time was a fixture memo between GOGL and the Charterers. This recorded a confirmation of a 7 year fixture for the time charter of the Vessel. At this stage GOGL was described as the Owner and the Charterers were given an option to “charter back” the vessel to COGL at three and five years “on the back to back basis”. The Fixture was stipulated to “be subject to amicable discussion and mutual agreement of details of Charter Party including form of Charter party.” Subsequently the details of the Charter Party were agreed, as was the identity of the owner, namely Golden Strait Corporation. And the written agreements forming the Contract were signed by the parties at the end of September 1998. The arbitrator concluded that the vessel was “delivered into the Charterparty” on 7 January 1999.

The Contract comprised a Charterparty on an amended Shelltime 4 form dated 10 July 1998 with two addenda dated 17 July 1998, and a Memorandum of Agreement (MOA) of the same date. Relevantly, and it was common ground, the Charter was for a seven year period commencing from the time and date of delivery of the vessel. There was a specific daily charter rate together with a profit sharing agreement whereby the Owners and Charterers were to share “any operating profit over and above” the stipulated charter rate. The Charterers were under an obligation to use their best efforts to fix the vessel at market related rates. The MOA recited that it was made “with reference to the captioned Charter Party” and provided

The arbitrator found that

The facts leading up to the termination of the contract are, as found by the arbitrator, these.

The question before the arbitrator was whether the Charterers were entitled to re-deliver the vessel back to the Owners under the “CHARTERERS OPTION FOR PERIOD” in the MOA.

For the Charterers, Mr Young QC submitted that upon its true construction, the MOA gave the Charterers an option to terminate the charter by delivering the vessel “back” after three or five years. The court should not adopt an over-literal approach to the words which the parties used: the words are no longer “the irrebuttable final determinant” of the parties’ true intentions. The factual matrix included the Fixture memorandum which “provides the proper and legitimate basis for construing the Contract” and the arbitrator fell into error in rejecting it as a legitimate basis for construing the Contract. He emphasized the arbitrator’s findings that the intention of the two options was “to relieve the Charterers of their obligations/liabilities under the Charterparty” and that they would be likely to exercise their options where they found performance of the Charterparty to be unprofitable. The option was for a clean break and not for a chance to opt back in should the charter market rise during the remainder of the seven years. He made a number of discrete points in support of his general submission:

For the Owners, Mr Hamblen QC essentially relied upon the reasoning of the arbitrator, which he fully supported. I intend no discourtesy to him if I simply summarise the arbitrator’s reasons, adding, where appropriate, comments of my own. These represent the reasons for dismissing this appeal.

The correct approach to the construction issue is that “one should have regard to the factual matrix so as to consider the contract as expressed by the parties in the same context as the parties did at the time they made it. However, serious surgery on the words and syntax would only be justified if it was apparent from the factual matrix, or the particular construction to which those words and syntax would otherwise lead, that something must have gone wrong with the drafting.” As the arbitrator went on to say, in the light of the correct approach as formulated, the words which the parties choose to express their agreement cannot be said to be the irrebutable final determinant, but that the starting point must be the words chosen by the parties to express their agreement in the first place. The arbitrator’s approach seems to me to be right. But, as is often the case, the problems about construction are usually not eased by general formulations. It is the application of well-known principles rather than their formulation which is the product of much litigation, as here.

The only matter of law with which the arbitrator had to deal on the proper approach to construction, related to the Fixture memorandum. Excluded from admissible factual matrix is the subjective intention of the parties (‘when I wrote the document I intended it to mean’ or ‘when I read the document I thought it meant’) and the negotiations leading to the agreement. The negotiations often represent no more than the parties’ subjective intention. If what is finally agreed is different from a position adopted in negotiation then how should the court interpret the change without embarking on an examination of subjective intent; if the positions do not change, then what is the point of referring to the negotiations. But ‘agreements’ made in the negotiating process may be admissible. But that must depend, I think, on the nature of the agreement and its relationship to the contract in question which is under examination. In this case, the Fixture Memorandum was not a concluded or legally binding agreement; it was simply a step in the negotiations and I agree with the arbitrator’s conclusion that “(for my part therefore I would not be inclined to take it into consideration at all.”) But in view of the Owners’ concession that it could be taken into account but that it should be treated ‘with caution’, he was justified in considering it further than I would have thought proper. His reasoning led him, correctly I think, to the conclusion that the Memorandum did not assist the Charterers. As he said, the “better view would be that in the fixture memo the expression “Owners” was being used loosely to mean the relevant companies making up the Golden Ocean Group of Companies, so that, consistent with its corporate structure, the vessel would be owned by a single - purpose company.” In these circumstances the Charterers’ point that the words ‘charter back’ to a company could well include a charter back to the company which owned the vessel and, thus, comprise a re-delivery, was empty.

The arbitrator concluded that when the MOA was executed it was always the intention of both parties that GOL should be bound, and that finding was entirely compatible with the Charters’ subsequent approach through their lawyers, who had apparently advised that it would not be binding on GOL unless guaranteed and signed by them, which is what happened. It would be absurd, I think, to adopt Mr Young’s submission that the arbitrator should have approached the question of construction without regard to GOL’s subsequent acceptance (by signature) of the obligations on them. As to the language of MOA, the arbitrator said that he found it very difficult to find a plain meaning from the heading to the options clause at all. It is unfair to criticise him for dealing with these detailed points one by one and to suggest that he thereby failed to look at the Contract overall or ‘in the round’. If he had not dealt with the individual points he would have been criticised for not doing so. In a sense he was on a hiding to nothing: damned if he did and damned if he did not. He observed that the MOA was loosely worded, but that a charter back was consistent with the commercial objective which would have been defected had there been a right to de-deliver the vessel at three or five years. The word “back” meant a charter on a back to back basis to a company within the group and was consistent with the commercial background. The words “elect to continue” are inconsistent with a 7 year charter and it was common ground that they were not opposite in any event. The arbitrator concluded that the words were really referring to the charter back option. As he put it,

The arbitrator rejected an argument which attached significance to the word “the” in the phrase ‘the first three years’ and this argument was not repeated to me. As to the words “all other terms and conditions” he said that this was boilerplate language and he attached no significance to them. The Charterers say that the arbitrator did not properly address the use of the word “other” which shows that the parties intended an amendment to the charterparty, namely clauses 4 and 18. I think this criticism is not justified. The arbitrator was considering whether the phrase comprised the word ‘other’. He did not overlook it. He accepted that this was ‘the usual (unthinking) mantra’, as the Owners had submitted. But if one had to strain to find a use for the words, then his explanation was that the arrangement for a charter back on a back to back basis might conflict with the obligation to fix the vessel at the best market rates. In my view there is no need to strain to find a use for words designed as a final catch all, but that the arbitrator’s rationalization seems reasonably convincing.

The arbitrator convincingly dealt with the Charterers’ problem of trying to explain why there needed to be options to charter back on a back to back basis if all that was intended was an option to re-deliver at three or five years. For my part I cannot accept the proposition that the reference to GOL and its description as the Owners’ parent company indicated a “guarantee” or provided “flexibility” as Mr Young submitted. The word guarantee is missing and no kind of guarantee was given by GOL, merely a commitment to take the vessel on as a subcharter from the Charters. I do not see how this provided flexibility additional to the Charterers’ option to continue as Charterer for the whole period or effectively to hive off their obligations after three or five years. The parties must have intended something by the options and I can see no reason why their language should be distorted to produce a result which would involve massive surgery to the words used.

I adopt without repeating the Arbitrator’s analysis of the ‘business sense’ ‘reasonable man’ approach, although it adds nothing to what he has already said, so succinctly. In my view the words mean what they say; there was an option to charter back, on precisely the same terms as the existing charter to GOL at three and five years. That was an option which satisfied the Charterers’ concern that they themselves might have no business use for the vessel after three or five years. A charter back is not a re-delivery, which was an option not acceptable to the Golden Ocean Group, for the reasons set out in the Award.

For these reasons the appeal must be dismissed.