NB Three Shipping Ltd. v Harebell Shipping Ltd.

The principal issue on these applications is whether, on a proper construction of Charterparties on an amended Barecon 89 Form and on a proper interpretation of section 9 Arbitration Act 1996, the Defendant [‘Owners’] are entitled to stay an action commenced against them by the Claimant [‘Charterers’].

By two bareboat charterparties on the Barecon 89 Form dated 17 January 1994, the Owners agreed to charter two vessels, ARCTIC TRADER and ARCTIC VOYAGER, which the Claimants’ predecessors agreed to hire on the terms of the charterparties as amended. The hire payable was calculated on the basis of a ‘principal’ element and an ‘interest’ element. The interest element was at a specified interest rate increased by a specified margin. The interest rate was defined as “the cost of funds to [the Owners] of obtaining the amount in dollars equal to the Principal Balance” [the principal element] prior to the relevant payment date. There was provision for the certification in writing of the rate of interest at which the fund providers were providing funds to the Owners in connection with the financing of each of the two, newly built, vessels.

In early July 2003 there was a dispute between the parties about increases in the interest rate and an explanation was sought by Charterers for them. This led to exchanges in correspondence, and Owners declared that there were events of default. For their part, Charterers served notices to enable them to pay off the indebtedness and acquire the vessels.

Charterers believe, rightly or wrongly, that they have been overcharged and that the Owners have been making a secret profit. On 22 June 2004 Charterers issued a claim form in this jurisdiction claiming against Owners

By letter dated 24 June 2004, Owners’ solicitors indicated that they were entitled to a reasonable time to “consider whether it will exercise its option to refer any dispute under the Charterparties to arbitration in accordance with clause 47.02”. They went on to say: “Given our client’s option we are surprised that you did not consult with our client before you commenced court proceedings.” The response of Charterers’ solicitors was that clause 47.02 “does not apply in circumstances where our clients have exercised their right pursuant to clause 47.09 … to bring proceedings in the High Court. It is not inappropriate for our client to seek the mandatory orders … in the absence of arbitration proceedings and an established tribunal.” On 30 June 2004 Owners purported to exercise their right “to refer the dispute to arbitration” and to indicate that they would be applying to the Court to stay the proceedings. On 6 July 2004 Owners appointed Mr Stewart Boyd QC as their arbitrator under clause 47.10. On 8 July 2004, Owners notified Charterers that there were certain events which they treated as Termination Events and accordingly Charterers’ claims to exercise their purchase options were of no effect. A further dispute arose as to whether an Interest Certificate dated 24 June was issued properly in compliance with the Charterparties.

I am not concerned with the merits of the underlying dispute. Charterers say that the claims relating to Termination Events are concocted and have no merit and have been raised to try and create a dispute which may be referred to arbitration.

The issue between the parties centres on Clause 47 of the Charterparties and Section 9(1) of the Arbitration Act 1996 and I set them out:

Mr Allen made a number of succinct submissions.

When Charterers commenced proceedings they were not acting in breach of any covenant in the contract; indeed, under the terms of Clause 47, Charterers’ only forum of choice was the courts of England.

Therefore, when those proceedings were brought they were not brought “in respect of a matter which under the agreement is to be referred to arbitration”.

The court has no inherent jurisdiction to stay proceedings otherwise than under the 1996 Act.

The “option” in clause 47.02 of the charterparty does not apply to proceedings brought by the Claimant. ‘Brought’ in this context means ‘started’ or ‘commenced’. The word ‘bring’ is used in that context in Clause 47.09 [“the same right to bring proceedings.”]. Thus, Owners have an option either to ‘bring’ any dispute to arbitration or invoke the jurisdiction of the English court. If Charterers bring their claim in that court then Owners have no option to refer the dispute to arbitration. The words used “bringing any dispute hereunder to arbitration” are not apt to describe an option to refer a dispute to arbitration. The word refer is in common usage in connection with disputes being sent off for arbitration. Clause 47.10 shows that the parties used the word refer or ‘referred’ in that context. If clause 47.02 was intended to confer an option on Owners to refer to arbitration a dispute in respect of which Charterers had started proceedings in court, clear words could have been used. If Owners are right, then unusually Owners have been given an option which is not circumscribed by any time constraint or formality.

In any event, even were the matter to be referred to arbitration, the court should make the orders which Charterers were seeking under section 44 of the Act. It is necessary in the interests of justice that the documents sought by Charterers be produced and there can be no good reason for Owners reluctance to produce them.

On behalf of Owners, Mr Hancock QC made these submissions:

A clause which grants one party only a right to refer a dispute to arbitration is not uncommon “and it is well established that this does not prevent such a clause amounting to a binding arbitration agreement”. He referred me to three authorities and a passage from Russell on Arbitration 22^nd edition 2003.

The Messiniaki Bergen [1983] 1 Lloyd’s Law Reports 424. There the English Courts were given jurisdiction over disputes but either party had a right to elect that the dispute be referred to arbitration. It was argued that there was no existing binding agreement to arbitrate but at best an agreement to agree, and that, therefore, the 1950 Act did not apply. Bingham J rejected that submission:

The Stena Pacifica [1990] 2 Lloyd’s Law Reports page 234 Evans J considered a clause which gave both parties an option or election to refer disputes to arbitration. In my view this authority really adds nothing to the earlier case, which it approves.

Lobb Partnership Limited v Aintree Racecourse Company Limited [2000] 1 Building Law Reports 65. There, the clause in question provided that disputes may be dealt with by arbitration but shall otherwise be referred to the English Courts Each party had a right of election for arbitration. In giving judgment Colman J said this:

Page 46/7 of Russell on Arbitration

There are a number of identifiable disputes between the parties, such as the proper interpretation of clause 3.01 and the meaning of the words “from time to time”; whether the effect of a certificate is to disentitle Charterers from going behind it; the form of the certificate is also in issue. If the court is prepared to grant a stay then what the Claimants are effectively seeking is some kind of preliminary disclosure order. Matters of disclosure are for the arbitrators; they have the necessary powers and I should not pre-empt their decision by making what is effectively a mandatory injunction. On normal principles, in any event, a mandatory injunction should not be granted at this stage. The pleadings have not developed, so the issues have not been properly formulated and the disclosure stage has not been reached. There is no urgency and no prejudice will be caused by my refusing an order, whereas if I granted it and it should transpire that the documents were not disclosable, in the eyes of the arbitral tribunal, I would have done an injustice to Owners.

I start with the proper construction of Clause 47 of the Charterparty. It seems to me that under the agreement, Charterers’ right to litigate against the Owner is “limited” to bringing proceedings in the English Court: Clause 47.09. In the normal course of events, where a dispute arose the parties would seek to resolve by agreement whether that dispute was to be arbitrated or litigated, but with a reservation of a right to Owners to decide to [“determines to”] have that dispute referred to arbitration [Clause 47.10]. Thus it would have been in the contemplation of the parties that the issue of arbitration or not would be decided before proceedings were commenced in the courts by Charterers. In this case, Charterers have not initiated the discussion contemplated by Clause 47.10 and, in those circumstances, were bound to start an action in the English court, as they did. If Charterers’ construction of clause 47.02 were correct, the clause would have a very limited effect. The first part of the clause confers jurisdiction on the English court to “settle any dispute” arising out of or in connection with the Charterparty; the second part gives the Owner an option. If Charterers are right, that option only applies when the Owners are deciding whether to start an action in the court; once court proceedings are started, no question of an option could arise. If Charterers started an action then, so the argument goes, the option did not exist; if Owners started an action then their option has been exercised. Effectively, therefore, the second part of Clause 47.02 says nothing. Further, by starting proceedings without a letter before action, Charterers could avoid the consequences of Clause 47.10 and Owners’ right to determine that the disputes should be resolved by arbitration.

I cannot accept that argument because it seems to me to contradict the commercial sense of the clause as a whole. Clause 47 is designed to give ‘better’ rights to Owners than to Charterers. Thus, although Charterers are limited to action in the English Court, Owners are given the right to bring proceedings in any court which has jurisdiction by virtue of a Convention and Charterers waive objections on grounds of forum non conveniens; Charterers are required to provide a place for service within this jurisdiction whereas Owners are not; Charterers are constrained not to challenge enforcement of any judgment “which is given or would be enforced by an English Court” whereas Owners are not. It seems to me that clause 47.02 gives Owners a right to stop or stay a court action brought against them, at their option. This gives the clause some practical effect and was designed to apply in circumstances such as these. If Charterers seek to bypass the Owners’ determination to have disputes resolved by arbitration as contemplated by Clause 47.10, then Owners’ option of bringing the disputes to arbitration remains, continuing Owners’ control over the issue of arbitration or court. Charterers can obtain no advantage from ‘jumping the starting gun’. Whilst I can see the force of the submission as to the words ‘bringing any disputes’ and the absence of the word ‘refer’; it is, in my view putting too much weight on what is a point of semantics. The sense of the whole of Clause 47 is clear, I think. It seems to me that the option granted by clause 47.02 is not open ended. It would cease to be available if Owners took a step in the action or they otherwise led Charterers to believe on reasonable grounds that the option to stay would not be exercised. It would have been better had the precise circumstances in which the option could be exercised or lost were spelt out with greater clarity, but this failure does not, in my judgment render the clause unenforceable. In other cases referred to, the election or option has been properly circumscribed; here, Owners have given themselves in this Charterparty considerable latitude, consistent with what is, largely, a one-sided clause.

What is the interrelationship between section 9(1) of the Act and this interpretation of the contract? Mr Allen says that no case has been decided where the stay is applied for against a party who has, by bringing proceedings, not breached any agreement to arbitrate. It seems to me that that point is not well made. Clause 47, as Mr Hancock QC submitted has two streams running through it: the litigation stream and the arbitration stream. The arbitration stream [Clause 47.10] satisfies the requirements of an arbitration agreement since a one sided choice of arbitration is sufficient. The words of section 9(1) “in respect of a matter which under the agreement is to be referred to arbitration” are to be applied when the application for a stay is applied for. Are these disputes under the agreement to be referred to arbitration? Yes, once the option which Owners have has been exercised. These are disputes which, at Owners’ option they wish to be arbitrated under the arbitration agreement. Neither the fact that the proceedings were properly brought nor that the terms of section 9(1) only applied after the option was exercised affects the conclusion. A party might commence an action in the belief that the other party would not exercise a right to apply for a stay; his action may have been proper. So here, if Owners had decided not to exercise their option. I would be sorry if any other conclusion had to be reached. Apart from anything else, one of the fundamental objectives of the 1996 Act is to give the parties’ autonomy over their choice of forum. On my view of the contract, once Owners exercise their option the parties have agreed that the disputes should be arbitrated. By refusing a stay the court would not be according to them their autonomy.

Accordingly, in my judgment section 9(1) of the Act applies and I should order a stay pending arbitration.

As to the claim for section 44 relief, I am bound to say that I can see no grounds for making the orders sought for the reasons advanced by Mr Hancock QC which I have referred to above. Disclosure of documents is a matter for the Arbitrators; they have the necessary powers; if early disclosure is thought to be desirable then an application can be made to them for that relief. A mandatory order at this time is not appropriate.

Accordingly, I dismiss Charters’ applications and grant Owners’ application for a stay of the proceedings under section 9 of the Arbitration Act 1996.