Navios International Inc v Sangamon Transportation Group

This case concerns an application made under section 70(4) of the Arbitration Act 1996 (“the Act”) relating to three section 69 arbitration appeals which arise out of a chain of time charters on back to back terms. Permission to appeal has been granted by Cooke J in each case and he has also directed that the three appeals be determined together.

The application is made by Sangamon Transportation Group (“Sangamon”), the charterer at the bottom of the charter chain and a respondent to an appeal by Navios International Inc (“Navios”). The application is resisted by STX Pan Ocean Co Limited (“STX”), the head disponent owner in the charter chain and a respondent in an appeal by Global Maritime Investments Inc (“Global Maritime”).

Navios and Global Maritime were not represented at the hearing. In the interest of limiting costs, STX appeared on the agreed assumed basis that back to back applications have been made in the other two actions by Navios and Global Maritime respectively.

In summary, the basis for the application is:

The proceedings relate to a chain of time charters on an amended NYPE form of m.v. “Dimitris L” in which:

As a result of complying with voyage orders given by Sangamon, the vessel called at US ports on three occasions and Searose Marine incurred liabilities for USGTT in the total sum of US$134,400. STX reimbursed Searose Marine for that amount and then sought to pass this liability to Global Maritime, who sought to pass it to Navios, who sought to pass it to Sangamon.

In each case, the disponent owner relied as against its charterer on clause 112 of their charter (“the US Tax Clause”) which provided:

“US Tax Reform 1986 Clause”

Any U.S. Gross Transportation Tax as enacted by the United States Public Law 99-514 (also referred to as the U.S. Tax Reform Act of 1986), including later changes or amendments, levied on income attributable to transportation under this Charter Party which begins or ends in the United States, and which income under the laws of the United States is treated as U.S. Source Transportation Gross Income, shall be reimbursed by the Charterers.”

In all three references, the same issue of construction arose, namely: does the US Tax Clause make the charterer liable to reimburse the owner only for payments of tax per se — or he is also liable to indemnify the owner against contractual liabilities in respect of tax?

The Tribunal in the STX/Global Maritime reference (Messrs Aikman and Oakley) was not the same as the Tribunals in the other two references (Messrs Aikman, Gault and Buchan) and the STX/Global Maritime reference was conducted separately from the other references – there was no order for concurrency.

The Award in the STX/Global Maritime reference was published on 5 January 2011. The Tribunal found for STX. No appeal was brought within the 28 day time limit. However, on 19 April 2011, Global Maritime issued an Arbitration Claim Form seeking permission to appeal under section 69. It also sought an extension of time for its application on the basis that the Award in the Global Maritime/Navios reference had been published on 22 March 2011 and the Tribunal in that reference (by a majority; the dissenting arbitrator being Mr Aikman) had reached the opposite conclusion from the Tribunal in the STX/Global Maritime reference. David Steel J granted Global Maritime an extension of time. Global Maritime also sought permission to appeal down the line against Navios, who sought the same as against Sangamon. The three Arbitration Claim Forms are all dated 19 April 2011.

The applications for permission to appeal were all considered by Cooke J on paper. By an Order dated 2 August 2011, he granted permission to appeal and also set down a procedural timetable. In doing so he observed that “the sum involved is small”, that “the parties should be aware of the requirement not to incur disproportionate costs and the Court’s power to disallow such costs, when considering issues of representation and duplication of arguments already made by other parties”, and that “there is an issue about the proportionality here, in respect of costs”.

Cooke J laid down a procedure providing for the exchange of written submissions on the basis of a reasonably prompt timetable. Global Maritime complied with paragraph 4 of Cooke J’s Order by serving its submissions on 26 August 2011. Under Cooke J’s timetable, it was then for Navios/ Sangamon to serve their submissions in response within 14 days, namely by 9 September 2011.

Instead, on 7 September 2011 Sangamon’s lawyers, Reed Smith, wrote to the other parties inviting them to agree on a point of general principle as to the incidence of USGTT or, failing agreement, to agree that the court should order the various Tribunals (under section 70(4)) to consider questions relating to the incidence of US GTT.

STX’s lawyers declined that invitation on 14 September 2011 and Sangamon issued its present application on 4 October 2011.

In the STX/Global Maritime award the Tribunal concluded that (para. 25):

“…the wording, purpose and intent of clause 112 is quite clear. The charterers (regardless whether they are the first charterers in the contractual chain or sub-charterers) are required to reimburse the owners (regardless whether or not they are the head owners or disponent owners down the contractual chain) for any U.S. Freight Tax which was levied against the Vessel whilst trading under the Charterparty, subject only to their payment being a reimbursement of the Owners.”

It was pointed out that “nowhere does it require the Owners, as disponent owners, to have paid the United States Treasury directly before the clause applies” (para. 21). The Tribunal accepted STX’s submission that the tax was “attributable to transportation under this Charter Party” as it was caused by compliance with the charterers’ orders under the charter.

In reaching their conclusion as to the “purpose and intent” of the clause the Tribunal had regard to BIMCO Circular no 9. They stated that:

“The BIMCO Circular No 9 of 6^th July 1988 was issued to explain the intention behind the new U.S. Tax Reform 1986 Clause which had been drafted when BIMCO concluded that it was necessary to draft a specific clause in respect of the U.S. Freight Tax Reform Act 1986 coming into force. The U.S. Tax Reform Clause was prepared by BIMCO after consultation and recommended for use with voyage chartering, time chartering and bareboat chartering forms or charterparty. The Circular explains how, by inserting the clause into a charterparty “it...transfers the tax liability from the Owner to the Charterer, be it the bareboat charterer, the time charterer, or the voyage charterer as the case may be”.

In the other awards the Tribunal concluded that (para. 31):

“The words of clause 112 …levied on income attributable to transportation under this Charter Party …” (our emphasis), make it as clear as it is possible to do that it is only USGTT which is levied on income attributable to transportation under the charterparty to which the claimant owner and respondent charterer are a party for which the charterer is liable to the owner. A charterer is not liable for USGTT for which an owner or disponent owner is liable under a charterparty higher up the charterparty chain.”

They too had regard to BIMCO Circular no 9 and found that their construction of the clause reflected the method of implementation envisaged by the BIMCO Documentary Committee.

They found that “the evidence of the relevant background which was adduced in this reference was limited to The BIMCO Special Circular No.9, 6 July, 1988” (para. 27), that it was “admissible factual evidence of the relevant background” and that it reflected (para. 30):

“…the background knowledge about the incidence of USGTT which would reasonably have been available to the parties in the situation in which they were at the time of charterparty and in the context in which they appear in the charterparty. The background knowledge is to be found in The BIMCO Special Circular. After it was published, that circular would be reasonably available to any party to a charterparty which involved trading to the USA.”

In granting permission to appeal Cooke J stated that the “BIMCO Circular no 9 is clearly background material forming part of the matrix and is to be available in all three appeals for whatever arguments the parties wish to base on it”. However, he later clarified that this was without prejudice to the argument advanced in the Global Maritime/Navios appeal and the Navios/Sangamon appeal that the majority was wrong to take into account or gave too much weight to the BIMCO Circular no 9.

The BIMCO Circular no 9 states as follows:

“What seems to have been the general perception among members is that the only potential liable party for tax is the actual owner of a vessel. However, emphasis should be placed on the fact that in a chain of transactions involving, for instance, bareboat charter arrangements and also time charter agreements, the bareboat charterer and the time charterer may also be exposed to tax. Equally, it should be noted that the taxpayer should not be responsible for any other income than the actual income received under his own contract regardless of whether such tax will be applied to the various charterers in chartering line. A simple example may be illustrative of the problem.

A company incorporated in Singapore bareboat charters its vessel to a Filipino company which again time charters out the same vessel to a company based in Hong Kong. The company based in Hong Kong decides to undertake a voyage from Japan to the United States.

The various liable sources involved in this case will include the bareboat charter hire derived by the company incorporated in Singapore, the time charter hire derived by the company based in the Philippines and, finally the freight revenues derived by the company incorporated in Hong Kong trading the vessel to the United States. Irrespective of whether the three companies are owned by residents of Singapore, Philippines or Hong Kong, respectively, they will be subject to U.S. Tax because, as the situation stands at the present, neither of these countries have so far entered into bilateral agreements with the United States.

Therefore, by inserting the above-mentioned Clause in the bareboat charter, the company based in Singapore transfers tax liability for bareboat hire derived to the Filipino company. Again, by inserting the tax clause in the time charter party, the Filipino company transfers tax liability for time charter hire to the company based in Hong Kong and finally by inserting the tax clause in the voyage charter party, the Hong Kong based company transfers tax liability for freight revenues to the actual voyage charterer.

In other words, this clause transfers tax liability from the Owner to the Charterer, be it the bareboat charterer, the time charterer or the voyage charterer, as the case may be.

It should be noted that tax will be transferred on a reimbursed basis according to the wording of the last two lines in the new U.S. Tax Clause, i.e., that “…U.S. source gross transportation income shall be reimbursed by the Charterers”. Tax liability in the first instance rests with the taxpayer, be it the actual owner, bareboat charterer, or the time charterer, because they are the parties which have to file the tax return and thereby pay the tax in the first instance. As soon as the actual tax estimates have been calculated by the tax authorities, the taxpayer can seek reimbursement from the charterer.”

Section 70 of the Arbitration Act 1996 provides:

“(1)

The following provisions apply to an application or appeal under section 67, 68 or 69.

…

(4)

If on an application or appeal it appears to the court that the award –

(a)

does not contain the tribunal’s reasons, or

(b)

does not set out the tribunal’s reasons in sufficient detail to enable the court properly to consider the application or appeal,

the court may order the tribunal to state the reasons for its award in sufficient detail for that purpose.”

Section 70(4) only applies if reasons are required in order “to enable the court properly to consider” the application or appeal. As was common ground, this means showing that the provision of such reasons is necessary. It is not sufficient that it would be helpful for the court to have such reasons. It is only if the court is otherwise unable properly to consider the application/appeal that the power to order further reasons is available.

This is consistent with the wording of section 70(4) and the case law under the precursor to section 70(4), namely section 1(5) (b) of the Arbitration Act 1979. For example, in Cefetra v Toepfer [1994] 1 Lloyd’s Rep 93 at p100 (Colman J) the threshold was put in terms of the court otherwise being “disabled” from considering the application – the fact that further reasons might be of “great assistance” was not sufficient.

Further, as indicated by the words “may order the tribunal”, the power under section 70(4) is discretionary. It is a power that the Court will exercise very sparingly given in particular that applications for reasons are costly, incur delays and run counter to the purpose and policy of the 1996 Act of conferring finality on awards.

As stated by Kerr LJ in Universal Petroleum v Handels-Und [1987] 1 Lloyd’s Rep. at p528:

“The jurisdiction to order further or more detailed reasons under sub-s. (5)(b) should be exercised as sparingly as possible. Such orders involve a process of “to-ing and fro-ing” between the Court and the arbitrator, with consequential costs and delays before it is even known whether leave to appeal against the award will ultimately be granted. The effect of such orders is therefore greatly to postpone the effective finality of what was intended to be a final award. Any excessive or unnecessary resort to such orders runs counter to the purpose and policy of the 1979 Act.”

Although this statement was made in relation to section 1(5) (b) of the 1979 Act, which applied only to applications for permission to appeal (whereas section 70(4) also applies to applications under sections 67 and 68), its reasoning is equally applicable to all such applications and in my judgment the same approach should be followed in relation to section 70(4).

STX submitted that there were three bars to Sangamon’s application which mean that it fails at the outset.

Application made too late

STX submitted that Sangamon had brought its application too late. It referred to and relied upon PT Putrabali Adyamulia v Societe Est Epices [2003] 2 Lloyd’s Rep 700 in which HHJ Havelock-Allan QC (sitting as a Deputy High Court Judge) stated at para [14] that:

“Moreover the awards were published two years ago. It is undesirable to order a remission after such an interval of time, unless it is quite unavoidable. Here it is only the buyers who need the finding. In those circumstances they could and should have issued a precautionary cross-application under s. 68(2) (h) of the 1996 Act to have the award remitted for further reasons as soon as the sellers’ applications for permission to appeal were served. It is incumbent on a party seeking to defend an appeal on grounds which may not be adequately expressed in the award to take that step. That was the view of this Court under the Arbitration Act, 1979…, and I do not see why the practice should be any different under the 1996 Act. Although, tactically, it may be attractive for a respondent to an application for permission to appeal to adopt the stance that the award is good in its present form and therefore permission to appeal should be refused, a respondent is bound to consider whether the award is adequately expressed for his purposes in the event that permission to appeal is given. In the present case the buyers took their stand on the awards, notwithstanding the warning from Mr. Justice Tomlinson as to whether the findings were adequate and notwithstanding that they had failed to persuade the sellers to agree to additional findings about the classification status of Intan 6. They took a risk. If I had thought they needed a remission on the question of breach, I would not have granted it.”

STX further submitted that the need for a respondent to act promptly in such circumstances is now also enshrined in CPR 62 PD para 12.6 which provides:

“A respondent who wishes to oppose an application for permission to appeal must file a respondent’s notice which:

(1)

…

(2)

states whether the respondent wishes to contend that the award should be upheld for reasons not expressed (or not fully expressed) in the award and, if so, states those reasons (but not the argument).”

It was pointed out that this rule is in mandatory terms and submitted that it shows that a respondent must indicate its intention to apply under section 70(4) during the permission to appeal “phase”, which had not been done in this case.

I am not convinced that CPR PD para. 12.6 is addressing applications for further reasons under section 70(4) of the Act. It is concerned with further reasons which the respondent relies upon to uphold the award, as opposed to reasons which it says that the arbitral tribunal need to provide for the award. Moreover, a section 70(4) application would ordinarily require an arbitration claim or an application notice not merely a respondent’s notice.

On the other hand I agree with HHJ Havelock-Allan QC that there are good reasons why any such application should be made at the same time as the application for permission to appeal (where it is made by the applicant) and at the same time as the respondent’s notice (where it is made by the respondent). If it is considered that further reasons are needed then it is important that the court is made aware of that at the time of the application for permission to appeal. Permission to appeal should be considered on the basis of the reasons for the award which will form the basis of the appeal. It would be unsatisfactory, if not unprincipled, for reasons to be provided between the grant of permission and the appeal since the appeal would not then relate to the same reasoned award as that to which permission related. Equally, if it is considered that further reasons are needed to consider an application under section 67 or section 68 it is important that the court is made aware of that before the application in question is heard.

Applications for further reasons should therefore generally be issued no later than the application to which they relate. If this is not done then it is likely to be a strong factor against the grant of the application, especially where it will have consequences in terms of costs and delay.

Failure to request reasons under section 57

In Torch Offshore LLC v Cable Shipping Inc [2004] 2 Lloyd’s Rep 446, 450 Cooke J held that section 57(3)(a) of the 1996 Act can be used to request further reasons from an arbitrator or reasons where none exist. He held that it is accordingly a bar to a challenge under section 68(2)(d) of the 1996 Act (viz. a challenge that the Tribunal has failed to deal with all the issues which were put to it) that the applicant has not first sought reasons from the arbitrator under section 57(3)(a). The bar arises from section 70(2) which provides that applications under section 67, 68 and 69 may not be brought if the applicant has not first exhausted “any available recourse under section 57”.

STX submitted that the same principle should apply by analogy in the context of applications under section 70(4) and that Cooke J’s rationale that the “policy which underlies the Act is one of enabling the arbitral process to correct itself where possible, without the intervention of the Court” applies with equal force in this context.

Section 57(3) (a) gives the arbitral tribunal the power to “clarify or remove any ambiguity in the award”. Whilst there may be some section 70(4) applications where it can be said that the award is ambiguous, I do not consider that will necessarily be the case, as the present case could be said to illustrate. In any event the bar in section 70(2) relates to applications under sections 67, 68 and 69, not applications under section 70(4). If it is a case in which recourse could have been sought from the arbitral tribunal under section 57(3) (a) then a failure to do so may be a factor against the court exercising its section 70(4) power, but in my judgment it does not provide a jurisdictional bar.

No order for the tribunal to state reasons for its award is sought

The court’s power under section 70(4) is to make an “order for the tribunal to state reasons for its award”. In the present case STX submitted that this is not the order being sought. The terms of the order sought in this case are:

As Sangamon acknowledged, what is envisaged is that the Tribunal will receive further evidence on these issues and make findings accordingly. I have serious doubts as to whether section 70(4) can be used to re-open the evidence in the arbitration. It is directed at the provision of further reasons for the award which has been made; not reasons for an award which is going to be made in the light of further evidence. As STX pointed out, serious complications could arise if, for example, the further evidence called into question findings which the tribunal had already made. Even if the court does have the power to order or allow the re-opening of evidence under section 70(4), the need to do so is likely to be a factor against the discretionary exercise of that power.

The findings Sangamon seeks are all aimed at establishing the answer to the question: which parties in the charter chain are potentially liable for US GTT? It was submitted that this question is important because it is an essential part of the factual matrix, without which the clause cannot sensibly be construed.

Sangamon submitted that there are two possibilities. Either only the registered owner of the vessel is potentially liable; or all parties in the chartering chain are potentially liable.

If the former were right, it was submitted that that would be a strong reason for accepting the broad construction that the clause covers contractual liabilities since otherwise the clause would have no effect. Conversely, if every party in the charter chain was potentially liable for US GTT, then that would be a strong reason for rejecting the broad construction since it would make the ultimate charterer liable to pay not only the US GTT incurred by his disponent owner, but all the US GTT that might be incurred by every owner above him in the chain. Moreover, since a charterer ordinarily does not know how many disponent owners there are in the chain, the clause would – on its broad construction – expose him to a potential liability which he has no means of ascertaining in advance. That, it would be said, is an uncommercial construction of the clause.

There were three main reasons advanced as to why the finding as to factual matrix made in the Global Maritime/Navios and the Navios/Sangamon awards were not sufficient for the purposes of the appeal.

I am not persuaded that the further findings sought are necessary for the court properly to consider the appeal. In particular:

Sangamon stressed that permission to appeal was given on the basis that “this is a point of construction on a common form of charterparty” and that it was in the public interest that the court should have before it all findings which may be relevant to the determination of the question of law raised. However, the potential importance of the issue does not alter the fact that this is an arbitration appeal and must be considered on the basis of the award made. If there are consequential limitations on the general applicability of the decision reached by the court that it is the consequence of the way the case was presented at the arbitration. It does not justify any re-opening of the issues or the evidence.

I would not in any event regard this as an appropriate case for the exercise of the court’s powers under section 70(4) for at least the following reasons:

In reality what Sangamon seeks by its application is the opportunity to present further evidence and seek further findings from the Tribunal, which evidence and findings were not considered necessary at the time of the arbitration. I do not consider that to be an appropriate case for the exercise of the section 70(4) power. The parties must live with the case which was put at the time. There is no room for later further and better thoughts and it would be plainly contrary to the policy of finality for this to be allowed or encouraged.

For all the reasons set out above, the application under section 70(4) of the Act must be dismissed.