Stellar Shipping Co Llc v Hudson Shipping Lines

Stellar Shipping Co LLC (“Stellar”) apply under section 67 of the Arbitration Act 1996 challenging the Award and Amended Award of Kenneth Rokison QC, Christopher Moss and Mark Hamsher (“the Tribunal”) dated 14 May 2010 and 12 August 2010 respectively on the grounds that the Tribunal lacked substantive jurisdiction because no arbitration agreement was ever entered into between Stellar and Hudson Shipping Lines (“Hudson”) in respect of an alleged guarantee by Stellar, of the obligations of Phiniqia International Shipping Co (“Phiniqia”) under an alleged Contract of Affreightment between Hudson and Phiniqia.

The essential issue before the Court can be shortly stated:

It is well established that the application under section 67 of the Arbitration Act 1996is a re-hearing and not an appeal or review - See, for example, Electrosteel Casting Ltd v Scan-Trans Shipping & Chartering[2003] 1 Lloyd’s Rep. 190, 197 and the authorities there referred to by Gross J. Accordingly it is for the Court to decide afresh whether or not there was a concluded arbitration agreement between Hudson and Stellar giving jurisdiction to the Tribunal.

This application challenging the Tribunal’s substantive jurisdiction arises out of the arbitration commenced by Hudson against Stellar, which is itself effectively an accessory arbitration to one ongoing between Hudson and Phiniqia. In the Hudson/Phiniqia arbitration Hudson claim some US$3.4 million from Phiniqia alleging that Phiniqia agreed to enter into what was expressed in the contemporary correspondence as a charterparty between owners and charterers (but in terminology terms is more accurately characterised as a Contract of Affreightment ) (“COA”) for four voyages, and failed to proceed after the first voyage. Phiniqia contend that there never was a concluded COA - “subjects” were never lifted, accordingly that tribunal lacks jurisdiction. If there was a COA, Phiniqia say that their failure to proceed with later voyages was not culpable - owing to severe whirlwind damages force majeure prevented further liftings, or the COA was frustrated. In addition they contend that Hudson failed to provide a valid nomination for the second lifting. There are also issues as to the quantum of Hudson’s claim.

Phiniqia are not party to the arbitration out of which the arbitration application before the Court arises, and accordingly are not before the Court. The tribunal in that arbitration (the same constitution as the Tribunal) has yet to rule on Phiniqia’s defences including jurisdiction. In such circumstances it should be made clear that no findings I make affect other parties (and other contracts) which are not before the Court.

The Hudson/Stellar arbitration comes about because Hudson allege that Stellar guaranteed Phiniqia’s obligations under the alleged COA. There are a large number of issues in play in the Hudson/Stellar arbitration including whether either of the people at various times alleged to be Stellar’s agents for the purpose of (i) concluding the guarantee and/or (ii) providing a memorandum of it (Mr Habib of Phiniqia’s chartering arm, Stellar Chartering and Mr Michalopoulos of Velos) had authority.

The arbitration had a complicated procedural history that culminated in a ruling by the Tribunal that the following issues be determined as preliminary issues:

“The “present guarantee” issue” (whether it was merely an agreement to agree).

These issues formed a combination of jurisdictional issues ((2) and (3)) and substantive issues ((1) and (4)) which had the common factors that (i) they could be determined on the basis of the documents attached to the submissions, and (ii) if any of them was found in Stellar’s favour they would be determinative of the arbitration in Stellar’s favour. The Preliminary Issues proceeded on the basis of the assumption (contrary to Stellar's case) that Mr Habib had authority to act on behalf of Stellar (which was left over for future determination). This meant that whatever the findings of the Tribunal on these issues, important matters would remain for future determination (including on questions of authority) and thus as to whether there was in fact a binding COA between Phiniqia and Hudson, and a binding guarantee between Stellar and Hudson (whatever prima facie findings were made).

The issues were heard on 22 March 2010. Hudson and Stellar were represented by counsel. The Award was issued on 14 May 2010, and after submissions in relation to corrections under section 57 of the Arbitration Act 1996 and rule 25 of the LMAA Rules, an amended Award and Reasons were issued on 11 August 2010. The Tribunal held that “the arbitration agreement was incorporated into the COA and encompassed Stellar’s obligation to guarantee performance by Phiniqia” (para 8(A)(3) of the Award). They gave detailed Reasons for their findings on the preliminary issues (extending to some 66 paragraphs).

A threshold matter arises as to the evidence. Stellar argue that the Court should not look at the run of fixture correspondence but should limit itself to the communications that “crossed the line” between the parties. This was not the position taken by them at the arbitration and its appropriateness is disputed by Hudson. However, in principle I consider that Stellar are correct that an objective approach has to be taken in circumstances where the issue is what was agreed and what is the meaning and the effect of what was agreed and I propose to adopt such an approach.

It would appear that the origin of the fixture was an approach in April 2008 by Vassilis Michalopolous of Velos Chartering (“Velos”) to Jeff Czarnota at Maritime Brokers & Consultants, Inc (“MBC”) in relation to a suitable vessel for the carriage of coal in bulk from Vietnam to Egypt.

It is Hudson’s case that Velos (based in Athens) made the approach for Phiniqia, and MBC (based in Chicago) were the brokers for Hudson (also in Chicago). It was Stellar’s case before the arbitrators that Velos were not brokers for Phiniqia/ Stellar but merely intermediate brokers passing messages up and down the line. The Tribunal did not determine this issue, nor is it necessary to do so for the purpose of the present application.

On 17 April 2008, MBC “bid firm” for the fixture, a COA between Phiniqia as Charterers and Hudson as Owners covering four shipments of 30,000mt 15% more or less “FAIRLY EVENLY SPREAD MAY 2008 – MARCH 2009” of coal in bulk from Vietnam to Egypt at a freight rate of USD 63 per mt. MBC asked Velos to “PLS ADVISE FULL STYLE/ BACKGROUND” for Phiniqia. The firm bid was on the basis of a Gencon charterparty and provided inter alia as follows:

Subsequent emails would similarly refer to “PHINIQIA/HUDSON” as the “Subject” and to “CHRTS: PHINIQIA INTL SHIPPING, DUBAI” and Stellar submitted that this made it clear that any reference to charterers in the body of the exchanges was intended to refer to Phiniqia.

On 21 April 2008 Velos responded with an Accept/Except (“A/E”) counter at a rate of US$55. The terms included the following clause on arbitration: “ARB ENGLISH LAW” and attached the requested “BACKGROUND REF”.

The “BACKGROUND REF” was provided as an attachment entitled “Stellar BG”. It stated inter alia:

MBC countered later the same day on an A/E basis at US$63 PMT. It required that Phiniqia’s obligations be guaranteed by Tradeline LLC and called for London arbitration. It stated inter alia as follows:

The following day, 23 April 2008, Velos responded on an A/E basis at US$57 PMT and deleting the reference to the obligations of Phiniqia being fully guaranteed by Tradeline. There was no comment on the London arbitration proposal, which was therefore deemed to have been accepted.

MBC responded on 24 April 2008 on an A/E basis with an US$63 PMT offer and stating:

Velos responded to MBC on 30 April 2008 with a counter at US$61 PMT. As to the guarantee, Velos said:

MBC replied for Hudson on 1 May 2008 on an A/E basis at US$63 PMT but adding the following to the reference to charterers:

The email ended with the following comment:

There was then a month’s break in negotiations which were resumed on 9 June 2008, when Velos countered on an A/E basis at US$62 PMT stating as follows:

Hudson’s suggestion that Stellar would guarantee Phiniqia’s obligations under the COA, which guarantee was to be confirmed by wording from Hudson on a letter from Stellar, was accepted:

MBC responded the same day on an A/E basis at US$68 PMT and adding the following comment:

There was then a further exchange of e-mails between MBC and Velos on 10 June 2008 about the rate which was eventually agreed at US$64 PMT on 11 June 2008.

On 11 June Velos e-mailed MBC as follows:

On 12 June 2008 Velos sent an e-mail to MBC setting out the recap that had been sent to “Chrs” and stating:

The proforma charterparty was a voyage charter of a vessel named “Silver Star” from Vietnam to Egypt in April 2007 on the Gencon form and included as Clause 19 an English law and London arbitration agreement:

On 13 June 2008, Velos forwarded comments on the pro-forma charterparty to MBC.

On the same day MBC responded to the recap and the proforma charterparty. The email stated:

It is the proposal made in this email of 13 June 2008 which (as agreed for the purpose of the preliminary issue) on 18 June 2008 Mr Habib told Mr Michalopoulos was acceptable.

On 14 June 2008 Velos responded on an A/E basis to Hudson’s comments on the charterparty. No reference was made to the proposal from Hudson that, rather than provide a separate letter of guarantee, Stellar (as well as Phiniqia) would endorse the charterparty.

There then followed a series of exchanges on the charterparty terms between Velos and MBC on 17 June 2008 culminating in an email sent by MBC to Velos late on 17 June 2008 stating:

On 18 June 2008 Velos sent the requested recap to MBC:

On 19 June 2008 Velos emailed Mr Habib stating that:

On 22 July 2008, Velos emailed to MBC a COA dated Athens, 18 June 2008 to MBC. In Box 4, it named Charterers as “Phiniqia Intl. Shipping Co. P.O. Box 55409 Dubai – U.A.E. fully guaranteed by Stellar Shipping Co LLC” and described the signatory in the signature box as follows: “For Phiniqia Intl Shipping, LLC – Stellar Shipping Co LLC (as guarantors)”. The COA was never signed.

The “Stellar background” document provided to MBC on 21 April 2008 is important contextual evidence. It indicated that the COA coal cargoes were to be lifted under contracts made by Stellar, and made it clear that the chartering of vessels was done “under the banner” of Phiniqia and that Phiniqia was a wholly owned subsidiary of Stellar. The closeness of the relationship between the two companies and their mutual interest in the COA was thereby made manifest.

Having received that document Hudson immediately countered on terms that Phiniqia’s performance of the COA be “fully guaranteed by Tradeline LLC”.

This was deleted in Velos’ response but Hudson countered on 24 April 2008 introducing “approval of Charterers’ background” as a subject and requesting a guarantee from Tradeline or Stellar.

Velos’ response on 30 April 2008 was that “If insist on gtee, Stellar will do”. It was there being stated that Stellar would provide any guarantee required. Although that statement was made in an email countering on COA terms it would reasonably be understood to be a statement made on behalf of Stellar. The guarantee was to be provided by Stellar not Phiniqia and it was for Stellar to state that this would be done. Given the closeness of the relationship between the two companies and Stellar’s interest in the underlying COA business there is nothing surprising about that being done in an email which otherwise dealt with Phiniqia’s position.

Hudson took up that offer and in MBC’s response of 1 May 2008 inserted the term (“the letter of guarantee term”):

This was accepted in the next A/E counter of 9 June 2008. Again it would reasonably be understood that this had Stellar’s agreement as it was Stellar which was to provide the guarantee.

This remained an agreed term and subject of the COA in the exchanges which followed. On 13 June 2008 Hudson proposed an alternative approach which would enable the subject to be lifted without the need for a letter of guarantee (“the endorsement term”). The proposal made was:

This was not directly responded to until Velos’ recap message of 18 June 2008 in which the endorsement term was set out and immediately below it was stated:

Although it was stated that “Charterers” can agree to the proposal made, in context this was communicating an acceptance of the proposal by Stellar, not merely Phiniqia. The request made was for Phiniqia and Stellar’s agreement. The subject was not to be lifted unless this was provided. Only Stellar could agree to guarantee and endorse the COA in the manner proposed. Stellar’s preparedness to provide a guarantee had already been communicated and been the subject of agreement. I find that, as reflected in this recap, it was agreed between Hudson, Phiniqia and Stellar that Stellar would fully guarantee Phiniqia’s performance under the COA, and that both Phiniqia and Stellar would endorse the terms of the COA.

I accept that, as one would expect, most of the references to “charterers” in the email exchanges are referring to Phiniqia. However, the guarantee was for Stellar not Phiniqia to agree. The endorsement term required an agreement to guarantee and endorse the COA, not the provision of a separate letter. That could only be done by Stellar.

Stellar submitted that the term “without prejudice to this cls in the recap” meant that the original term and subject requiring a letter of guarantee remained. I disagree. The whole point of the proposal of the endorsement term was that it enabled the subject to be lifted without awaiting a letter of guarantee. Once the guarantee and endorsement of the COA was agreed by Stellar the original term was superseded. The expression “without prejudice” to the original clause was used because unless and until the endorsement term was agreed the letter of guarantee term remained a term and subject of the COA.

That this was what was understood to have been agreed is borne out by the recap message sent by Velos to Mr Habib shortly thereafter which provided “Charts: Phiniqia Intl Shipping, Dubai - fully guaranteed by Stellar Shipping Company LLC. The charterparty to be mutually endorsed by Phiniqia and Stellar.” It was no doubt envisaged that the endorsement would be carried out through Stellar’s signature of the COA, as was indeed reflected in the COA which was then drawn up.

My conclusion that Stellar entered into a contract of guarantee mirrors that of the Tribunal. They found as follows:

In common with the Tribunal I accordingly find that (subject to authority issues) Stellar entered into a contract of guarantee with Hudson which involved Stellar’s endorsement of the terms of the COA. I therefore reject Stellar’s case that no contractual relationship of any kind was entered into between Stellar and Hudson.

The next issue which arises, and the central issue on this application, is the effect of that agreement and in particular whether it involved agreement by Stellar to arbitration of disputes arising out of the guarantee in accordance with the COA arbitration clause.

By endorsing the COA Stellar was endorsing and signing up to each of its terms. It was agreeing that if any obligation undertaken thereunder was not performed by Phiniqia then it would be performed by Stellar. However, such an agreement makes little sense in the context of the endorsement of an arbitration clause. If Phiniqia fails to perform its obligations under the arbitration clause Stellar cannot perform those obligations since they are personal to Phiniqia. Stellar’s endorsement of the arbitration clause can only have meaningful effect if it involves Stellar’s own agreement to arbitration in respect of any dispute concerning their own obligations.

I consider that to be both the natural and the commercially sensible construction of Stellar’s endorsement as guarantor of the COA arbitration clause. It is commercially sensible because the parties were entering into a tri-partite relationship enshrined in a single contractual document and would reasonably be expected to intend that all disputes arising out of that relationship be dealt with in a like manner.

In Fiona Trust v Privalov[2008] 1 Lloyd's Rep. 254 at paragraph 13 Lord Hoffmann said:

Similar considerations apply by analogy here. Given the close connection between the COA and the guarantee, and between the parties involved, one would expect them as rational businessmen to agree a common method of dispute resolution. It is correct that since there are separate arbitration agreements there would, absent agreement, be separate arbitrations but one would expect, in the interests of efficiency, expediency and costs, for there to be common tribunals, as indeed there are. It would be surprising to find that the parties actively agreed that the COA was to be subject to English law and arbitration but that they wished to have any dispute under the linked guarantee determined by some unspecified court in some unspecified jurisdiction according to some unspecified governing law.

That this is how the endorsement term would be understood by commercial parties in the position of Hudson and Stellar is borne out by the reasoning and conclusion of the experienced commercial arbitrators. As they found:

They considered that this was “clear” and they arrived at that conclusion “without hesitation”. This reflects their strong view that any other construction of what the parties were agreeing would not be commercially sensible.

The principal contrary argument advanced by Stellar was that to incorporate an agreement to arbitrate requires clear and indeed express words. Reliance was placed on the cases concerning incorporation of arbitration clauses and the fact that a restrictive approach to incorporation is taken in “two contract” cases – see the authorities referred to and summarised in Habas v Sometal [2010] 1 Lloyd's Rep 661. It was submitted that this was a “two contract” case and that there were not in fact any apt words of incorporation.

Like the Tribunal I do not consider that the incorporation cases accurately reflect the position here. This is not a case of incorporation by reference. It is a case which involves construing what, in context, is the meaning and effect of Stellar’s endorsement as guarantor of the COA in general and the arbitration clause in particular. There were no terms being introduced from some external source. On the contrary, all the terms were being specifically endorsed.

Even if the incorporation cases were of relevance I would regard the present case as being more akin to “single contract” than a “two contract” case. Although there were two contractual relationships which were entered into, they were entered into in the context of a single commercial relationship between Hudson on one side and Phiniqia and Stellar on the other as part of a single package agreed in a single document. It did not involve any agreement with a third party. As the Tribunal stated:

Stellar further submitted that the various reasons that the courts have given for a restrictive approach to the incorporation of arbitration clauses equally apply here. In Habas v Sometal Christopher Clarke J. summarised these as follows at para. 34:

”Arbitration clauses are not “germane” or “directly” relevant to, nor part of the subject matter of, the main contract, and general words must generally be taken to cover only those contractual provisions that are germane to the subject matter of the bill of lading contract (e.g. provisions as to carriage and discharge) and are capable of being operated in conjunction with that subject matter because the court cannot confidently infer that the parties intended to incorporate any more than that: Thomas v Portsea (Lord Loreburn, L.C. and Lord Atkinson; The Annefield , Excess Insurance . See also Moore-Bick J inAIG Europe SA v QBE International Insurance[2001] 2 Lloyd's Rep 268 , 273 .

Arbitration clauses are ancillary provisions by way of dispute resolution essentially personal to the parties which agree them so that general words of incorporation are insufficient; see Sir John Megaw in Aughton ltd ; and Excess Insurance Co Ltd p 364 Col 1; an arbitration clause is, thus, not incorporated by language which refers to all terms: The Federal Bulker ; or all conditions: The Varenna ; see also Sea bridge Shipping AB v AC Orssleff’s Eftf’s A/S ( The Delos) [1999] 2 Lloyd's Rep 685 .

Arbitration clauses oust the jurisdiction of the courts and clear words are need for that purpose: Lord Gorrell and Lord Robson in Thomas (T W) & Co Ltd v Portsea Steamship Co Ltd . Section 7 of the Arbitration Act 1979 requires an arbitration agreement to be in writing and shows the need for a conscious and deliberate relinquishment of a right to go to court: Sir John Megaw in Aughton;

Bills of lading may come into the hands of those who will, or may, neither know, nor have the means of knowing, the arbitration clause in the charterparty which they will not have seen and to which they would be unlikely to assent. They will not therefore appreciate that by becoming a party to the bill they became parties to a contact precluding access to the courts: see Lords Atkinson, Robson and, Gorrell in Thomas (TW) & Co Ltd v Portsea Steamship Co Ltd ; Bingham LJ in Federal Bulker ; Colman, J in Excess Insurance at p 364; although the fact that a contract is not contained in a negotiable instrument does not mean that general words of incorporation are in general capable of incorporating arbitration clauses: Excess Insurance p 365 col 1.

The terms of a charterparty arbitration clause may not be applicable to disputes between the bill of lading holder and the shipowner - Lords Loreburn, Gorrell and Robson in Thomas v Portsea - and on that account are not to be regarded as incorporated by a general reference.

The need for certainty in the law: Bingham LJ in The Federal Bulker .”

However, as Christopher Clarke J. made clear, these considerations do not apply in a “single contract” case, which this is most akin to. In any event, I do not consider that any of the considerations have force in the present context. In particular:

As to (a), in circumstances where the arbitration clause is endorsed as part of the agreement to provide the guarantee it may be said that a consensus on it has been sufficiently clearly and precisely demonstrated regardless of whether or not it is germane to the subject matter of the guarantee. Further, this is a case in which most if not of all the terms of the main contract are directly relevant to the guarantee and so there is no general issue of selection.

As to (b), it is correct that arbitration clauses are personal to the parties; that is why Stellar’s endorsement of the clause is only meaningful if it is personally agreeing to it.

As to (c), in the modern pro-arbitration climate I cannot accept that the fact that the court’s jurisdiction is being ousted remains a consideration of weight. It is of course correct that an arbitration agreement has to be in writing, which it was.

As to (d), it was accepted that this was of no relevance here. There is no question of third parties being affected by what was agreed between these parties.

As to (e), it is correct that for the charterparty arbitration clause to apply to disputes in connection with the guarantee one has to add the word “guarantee” to that of charterparty or replace “charterparty” with “agreement”. No other modification is required. However, it is well established that substitution or a degree of verbal manipulation is permissible where the intent of the parties that the arbitration clause should apply is clear. In such a case “to give force to that intention and agreement the words of the clause must be read and construed as applying to those parties” – per Saville LJ in The Nerano “[1996]” 1 Lloyd’s Rep 1 at p5.

As to (f), the present case raises no considerations of certainty. This was a one off agreement. It does not involve generally used words of incorporation which have a meaning established by authority.

Further, I share Christopher Clarke J.’s apparent misgivings about extending the restrictive approach beyond those cases where its application is already established, let alone extending it into supposedly analogous situations. This is particularly so bearing in mind that, as Christopher Clarke J. pointed out at para. 52:

Stellar’s other main submission was that this is a case of an implied rather than an express arbitration agreement and that the test of necessity for the implication of such a contract is not made out – see Gulf Import & Export Co v Bunge SA[2008] 1 Lloyd's Rep 316, 324-325; Baird Textile Holdings Ltd v Marks & Spencer [2002] 1 All ER (Comm) 737; The Aramis [1989] 1 Ll.L.R. 213. However, I do not accept that this is an implied contract case. There is no question of inferring an arbitration agreement from the parties’ conduct. The agreement was made as a result of Stellar’s express agreement to endorse the COA including its arbitration clause as part of its contract of guarantee. Properly construed that involved an express agreement to arbitrate on the terms set out in the COA arbitration clause as appropriately modified.

I accordingly agree with the Tribunal that (subject to authority issues) Stellar did enter into an arbitration agreement with Hudson in respect of their contract of guarantee with Hudson. Although this is a rehearing it turns on the proper construction of the parties’ agreement in its context. As such, the views of the commercial arbitrators should be accorded considerable weight.

For all the reasons outlined above Stellar’s application to challenge the jurisdiction of the Tribunal must be dismissed.