Nanjing Tianshun Shipbuilding Co Ltd v Orchard Tankers PTE Ltd

This is an application by the Claimant sellers by which they challenge the jurisdiction of an arbitral tribunal under section 67 of the Arbitration Act 1996. In the alternative, the sellers seek permission to appeal against awards made by that tribunal under section 69 of the Arbitration Act. The issues in both applications are entwined and it has been agreed that the issue of jurisdiction be determined first.

The proceedings arise out of a shipbuilding contract dated 8 November 2006 between the sellers and the Respondent buyers relating inter alia to a vessel with hull number TS 0608. The contract was in relatively conventional form:

The buyers duly paid the first four instalments under the contract against the background of a refund guarantee issued by a Chinese bank in the form prescribed by the contract. However, the buyers notified the sellers on 2 February 2010 that they were exercising what they asserted was their right to terminate or cancel the contract under Article X of the contract by reason of delay in delivery.

Article X reads in part as follows:

“The Seller shall have the right to dispute the Buyer’s cancellation and/or rescission by instituting arbitration in accordance with Article XIII, if such institution of arbitration is made within thirty (30) days of the Buyer’s cancellation and/or rescission.

If Buyer’s cancellation and/or rescission of this Contract is disputed by the seller as aforesaid, then the Seller may not refund the Buyer until an arbitration award is handed down”

Although the sellers have sought to dispute the buyers’ entitlement to cancel, they failed to institute arbitration proceedings until shortly after the prescribed 30 day period. As a result, the buyers contended that the sellers’ claim was time barred. The response of the sellers was that any failure to institute arbitration proceedings timeously did not bar the right to dispute the cancellation but merely barred the remedy to be obtained by way of an arbitral award.

The present state of play is accordingly somewhat remarkable:

In my judgment, this stance is unsustainable. It is based on a misconception as to the clear meaning and effect of the contractual provisions relating to termination and dispute resolution arising from it.

It is necessary to start by quoting in full the principal provisions at issue:

“ARTICLE II

6.

REFUND GUARANTEE

All payments made by the BUYER prior to the delivery of the VESSEL shall be in the nature of advance to the SELLER, and in the event this Contract is cancelled by the BUYER, all in accordance with the specific terms of this Contract permitting such cancellation, the SELLER shall refund to the BUYER in United States Dollars the full amount of all sums already paid by the BUYER to the SELLER under this contract, if applicable, together with interest (at the rate set out in the respective provisions hereof) from the respective payment date(s) to the date of remittance by telegraphic transfer of such refund to the account specified by the BUYER. All transfer and other bank charges shall be for the SELLER’S account.

A)

As security to the BUYER, the SELLER shall deliver to the BUYER before payment of the Instalments under this Contract a Refund Guarantee to be issued by authenticated SWIFT from a Chinese bank acceptable to the BUYER (or by such other international bank as may be acceptable to the BUYER) substantially in the form as attached in (it being agreed and understood that the format of the Refund Guarantee shall be substantially as attached, and/or as may be mutually agreed between the BUYER and the SELLER and their respective banks together with a swift message from the Head office of the issuing bank confirming the authority of the Issuing bank to issue the Refundment Guarantee).

ARTICLE VII

1.

TIME AND PLACE

a)

Delivery Date and Place

Upon the completion and acceptance of the successful sea trials as outlined in Article VI and the acceptance of such trials by the BUYER, the SELLER shall tender Notice for Delivery of the VESSEL; the VESSEL shall be tendered to be delivered by the SELLER to the BUYER at a safe anchorage at Nanjing or Shanghai, on or before 31^st July 2008. Within fourteen (14) days thereafter from the date on which the SELLER tender Notice for Delivery, the BUYER shall physically take over the VESSEL and accept transfer of title and risk thereto, except that in the event of permissible delays as defined in Paragraph 3 of Article VIII, the aforementioned date of delivery of the VESSEL shall be postponed accordingly (which date, or the date as so postponed, is herein called the “Delivery Date”).

…..

ARTICLE X

1.

NOTICE

The payments made by the BUYER to the SELLER prior to the delivery of the VESSEL shall be in the nature of advances to the SELLER.

In the event the BUYER shall exercise its rights of termination of this CONTRACT under and pursuant to any of the provisions of this CONTRACT specifically permitting the BUYER to do so, then the BUYER shall so notify the SELLER in writing, or by telex or fax, and such termination shall become effective as of the date the notice thereof is received by the SELLER.

2.

REFUND BY SELLER

If the SELLER shall become voluntarily or involuntarily dissolved bankrupt or insolvent by any cause or if any receiver, administrator, liquidator or similar officer whether provisional or otherwise is appointed in respect of the SELLER or all or any of its assets or if the SELLER makes any special arrangement or composition with its creditors or any moratorium is applied for, ordered or declared in respect of the SELLER or the SELLER in any other way seeks protection from its creditors the BUYER may by notice in writing or by fax or telex terminate this CONTRACT in accordance with this Article.

If this CONTRACT is terminated by the BUYER the SELLER shall on the BUYER’S demand refund to the BUYER the full amount of all sums paid by the BUYER to the SELLER on account of the VESSEL together with interest thereon as herein provided and liquidated damages (if applicable) as herein provided and the BUYER shall be entitled to make demand under the Refundment Guarantee referred to in Paragraph 6 of Article II if such refund is not so made.

The SELLER shall have the right to dispute the BUYER’S cancellation and/or rescission by instituting arbitration in accordance with Article XIII, if such institution of arbitration is made within thirty (30) days of the BUYER’S cancellation and/or rescission.

If BUYER’S cancellation and/or rescission of this CONTRACT is disputed by the SELLER as aforesaid, then the SELLER may not refund the BUYER until an arbitration award is handed down between the BUYER and the SELLER or, in case of appeal (if applicable) of the arbitration award, a final court order is made in favour of the BUYER by such arbitrators and/or court, where after the SELLER shall promptly refund the BUYER in accordance with such arbitration award and/or court order.

The transfer of such amounts and any other bank charges in respect of such refund shall be for the SELLER’S account and the interest rate of the refund as above provided shall be five percent (5%) per annum from the day following the date of receipt by the SELLER of the pre-delivery instalments of the date of remittance by telegraphic transfer of such refund provided however that if the termination of this CONTRACT by the BUYER is based on force majeure delays or permissible delays then in such event no interest components as provided in this Paragraph shall apply.

3.

DISCHARGE OF OBLIGATION

Upon the refund of the required amount from the SELLER to the BUYER and the return to the BUYER by the SELLER on CIF terms and at the SELLER’S cost of all BUYER’S Supplies in substantially the good condition as when delivered to the SELLER, fair wear an [sic] tear excepted, all obligations, duties and liabilities of each of the parties hereto to the other under this CONTRACT shall be completely discharged. If it is impractical to return such BUYER’S Supplies to the BUYER, the SELLER shall compensate the BUYER by payment to the BUYER of the BUYER’S net invoice price in respect of such BUYER’S Supplies.

ARTICLE XIII

1.

RULES, REGULATIONS AND REQUIREMENTS OF CLASSIFICATION SOCIETY REQUIREMENT

If any dispute or any difference shall arise between the parties hereto with regard to this CONTRACT or the Specifications such dispute as to conformity of any construction or material with Classification Society requirements shall be submitted to the head office of the Classification Society surveyor or as regards any other dispute or difference by mutual agreement to such other expert as may be agreed between the parties hereto and in either event the decision of such surveyor or expert shall as the case may be final, conclusive and binding on the parties hereto.

2.

DISPUTE UNDER ARBITRATION

In the event that any dispute other than Paragraph 1 above shall arise relating to the construction of the VESSEL, such dispute shall be resolved by arbitration in London, England in accordance with the rules of the 1996 Arbitration Act or any statutory modification or re-enactment thereof for the time being in force subject to the following provisions of this Article. Either party may demand arbitration of such dispute by giving written notice to the other party. Arbitration shall be governed by the rules of the London Maritime Arbitrators Association.

Any demand for arbitration by either of the parties hereof shall state the name of the arbitrator appointed by such party and shall also state specifically the question or questions as to which such party is demanding arbitration. Within twenty (20) days after receipt of notice of such demand for arbitration, the other party shall in turn appoint a second arbitrator. The arbitrators thus appointed shall thereupon select a third arbitrator, and the three arbitrators so named shall constitute the board of arbitration (hereinafter called the “Arbitration Board”) for the settlement of said dispute. In the event however that the other party shall fail to appoint a second arbitrator as aforesaid within twenty (20) days following receipt of Notice of Demand for Arbitration it is agreed that such arbitrator shall be appointed by the President for the time being of the London Maritime Arbitrators Association. In the event that the two arbitrators appointed by the parties hereto or as the case may be by the President of the London Maritime Arbitrators Association should be unable to agree upon the third arbitrator within twenty (20) days from the date upon which the second arbitrator is appointed the third arbitrator shall again be appointed by the President for the time being of the London Maritime Arbitrators Association, it being agreed however that no one shall be appointed to act as an arbitrator who is an employee of either party or is in any way interested financially in this CONTRACT.

The decision of the members of the Arbitration Board or of a majority of them, as the case may be, shall be final and binding upon the parties hereto.

The decision shall include a finding as to the extent to which the Delivery Date is altered, if at all. Notice of the decision shall immediately be given in writing or by telex or fax to the BUYER and the SELLER. The Arbitration Board shall determine which party shall bear the expenses of the arbitration or the portion of such expenses that each party shall bear.

Work on the construction of the VESSEL shall not as far as practicable be suspended or delayed submission [sic] to arbitrator hereunder.

3.

JURISDICTION AND FORUM

In the event that any dispute shall arise out of this CONTRACT between the SELLER and the BUYER, which dispute is not otherwise governed by Paragraph 1 or 2 of this Article, such dispute shall be resolved in and subject to the jurisdiction of England and the courts in London, England. English law to apply.

Service of process in a proceeding instituted in London, England respecting any such disputes may be made on the SELLER and the BUYER by registered mail, return receipt requested, addressed, respectively, as provided in Article XVIII of this CONTRACT. Each party hereto waives and agrees not to assert as a defence in any such proceeding that it is not subject to such jurisdiction.”

The proposed refund guarantee was to read as follows:

“… We, China Construction Bank, Jiangsu branch, do hereby absolutely irrevocably and unconditionally guarantee as primary obligor and not merely as surety for repayment to you by the builder of an amount up to but not exceeding a total amount of USD 10,500,000 (United States Dollars ten million five hundred thousand) plus interest thereon representing the 1^st, 2^nd, 3^rd and 4^th instalments of the contract price of the vessel, as you may have paid to the builder through us under the contract prior to the delivery of the vessel, if and when the same or any part thereof becomes repayable to you from the builder in accordance with the terms of the contract and upon your first demand and without objection on our part, should the builder fail to make such repayment, we shall, and upon your first demand and without objection on our part, pay you the amount the builder is obligated to refund you in accordance with the terms of the contract together with interest at the rate of five (5) percent per annum or with no interest (in the case of the total loss of the vessel) from the date of receipt by the builder of the said 1^st, 2^nd, 3^rd and 4^th instalments up to the date of remittance by electronic wire transfer of such refund within thirty (30) days after our receipt of a written demand from you for repayment.

However, in the event of any dispute between you and the builder in relation to

1)

whether the builder shall be liable to repay the said 1^st, 2^nd, 3^rd and 4^th instalments paid by you and

2)

consequently, whether you shall have the right to demand payment from us, and such dispute is submitted either by the builder or by you for arbitration in accordance with article XIII of the contract.

We shall be entitled to withhold and defer payment until the arbitration award in respect of such dispute is issued, we shall not be obligated to make any payment to you unless the arbitration award orders the builder to make repayment. If the builder fails to honour the award within thirty (30) days after your demand under the arbitration award is issued in London or in case of appeal to the High Court of Justice of England and Wales (if applicable) of the arbitration award, a final court order is made in favour of yourselves, then we shall refund to you to the extent the arbitration award or the final court order (as the case may be) orders but not exceeding the aggregate amount of this guarantee plus interest thereon at the rate as described above.

…

This letter of guarantee shall remain in force until the vessel has been delivered to and accepted by you or receipt by you of the sum guaranteed hereby, or until two hundred and forty (240) days after the delivery date), (as defined in paragraph 1(A) of Article VII of the contract and as postponed as therein provided, whichever comes earlier, and in any case of expiration, this letter of guarantee shall be immediately deemed null and void, however, in the event that

i)

the construction of the vessel is continuing but has not been completed at the expiry of two hundred and forty (240) days from the delivery date (as so defined and postponed) this letter of guarantee shall be automatically further extended without the need of any further notice from out side to expire at the end of two hundred and forty (240) days from any new agreed delivery date thereafter, unless this letter of guarantee shall be further extended, or

ii)

if there exists an arbitration between you and builder before expiration of this letter of guarantee, then the validity of this letter of guarantee shall be automatically further extended without the need of any further notice from our side until the date which is ninety (90) days after the date of issue of a final arbitration award or in case of appeal (if applicable) of the arbitration award, the date which is ninety (90) days after the date of issue of a final court order in favour of yourselves, or on the date on which we pay you the proceeds of such arbitration ward [sic] or final court order which ever is the latter [sic], or

iii)

if, before the expiration of this letter of guarantee as set out above, we receive a formal demand from you under this letter of guarantee or notification that you have initiated legal proceedings against us under this letter of guarantee, the validity of this letter of guarantee shall be automatically extended without the need of any further notice from our side until the date which is ninety (90) date after the date of issuance of a final court order in respect of such proceedings, or on the date on which we pay you the proceeds of such final court order whichever the latter [sic].

…”

The buyers’ contention is that a failure to meet the 30 day deadline means that the right to dispute the termination or cancellation is barred. The sellers say that the “alternative and preferable” construction of these provisions can be summarised in one of the following ways as taken from their skeleton argument:

i)

The Seller is barred from arbitrating its dispute regarding termination unless it does so within 30 days: thus ensuring that the bank can never raise a defence to a claim under the guarantee on the grounds of an extant arbitration if no arbitration has been stated within 30 days. But this does not impinge upon the Bank or the Seller’s right to claim against the Buyer for recovery of monies paid under the guarantee.

ii)

In the alternative the parties did not intend the time bar in Article X.2 to apply to an arbitration which falls under Article XIII.2. Article X.2 gives the Sellers the right to arbitrate a dispute which would otherwise not be arbitrable because it falls within Article XIII.1 or XIII.3. That right is subject to a requirement that the Seller initiates the arbitration within 30 days. If the Seller does not, then he loses that right and the dispute must be resolved as per the default position in Article XIII.

In the result it is submitted by the sellers that there is no clear bar to the claim in the event of a failure to institute an arbitration within 30 days and, given the ambiguity, only the remedy is barred.

I have little hesitation in preferring the buyer’s construction. My primary reasons for doing so are as follows:

This construction giving rise to relatively straightforward and simple machinery is supported by authority:

The sellers sought to outflank this view of the contract in two primary ways. First, it was submitted that their right of suit could only be extinguished by clear language. It was suggested that the matter is commonly put beyond question by the use of such terminology as: “where this provision is not complied with the claim shall be deemed to be waived and absolutely barred”.

It is accepted however that the absence of such express barring words are not conclusive. Indeed, both Metalimex and Metalfer supra are eloquent witness to that in circumstances where it is necessary in order to give some meaning to the contract: see The Pera [1985] 2 Lloyd’s Rep. 103 at 106.

Greater emphasis was placed by the sellers on the proposition that Article X contained a specific right to arbitration separate from Article XIII in respect of an issue falling outside Article XIII 1 and 2. Thus the argument ran that a failure to invoke arbitration under Article X left intact the jurisdictional agreement in Article XIII 3.

In my judgment, this approach fails at every stage of the argument:

It follows that the application under section 67 must fail and by the same token leave to appeal under section 69 must be refused.