Wealcan Enterprises Inc v Banque Algerienne Du Commerce Exterieur Sa

This is a trial of the claimant’s claims for some €21,000 against the first defendant under two guarantees and for €25,000 against the second defendant under a letter of undertaking.

The claimant (“Wealcan”) was the owner of the vessel Millennium. Disputes arose with CNAN Group SpA and CNAN Maghreb Lines, to whom I shall refer as CNAN. The disputes were referred to arbitration; there were two references before the same tribunal. The guarantees and the letter of undertaking, upon which Wealcan claim in these proceedings, were provided as security for costs on behalf of CNAN in the references. The first defendant, to which I will refer as BACE, is a bank domiciled in Zurich. The second defendant, to which I will refer as Penlaw, is a firm of French avocats and solicitors practising in Paris.

The dispute in this action is whether the guarantees and the letter of undertaking cover the arbitrators’ fees, which Wealcan paid in the first instance and for which the tribunal ordered that Wealcan be reimbursed by CNAN, who have failed to pay them.

I should say a little about the course of the reference and how the guarantee and the letter of undertaking came to be provided. The first reference was under a charterparty dated 9 January 2004 and involved various claims and counter claims relating to off hire and various other expenses.

The second reference related to an alleged fixture, alleged to have been concluded on 8 May 2007, raising issues of whether or not, as CNAN alleged, a further charterparty was concluded between Wealcan and CNAN.

On 7 March 2008 Wealcan applied to the tribunal for security of costs in the 9 January 2004 charterparty reference. The application was in broad terms and contained an estimate of the costs likely to be incurred in defending the claim, based on a three day hearing with three arbitrators. A breakdown with the application included costs of counsel, solicitors, experts and other costs and one item was an estimate of €47,250 in respect of “arbitrators”.

CNAN responded to the application and sought their own counter-security for costs. CNAN’s response focused primarily on whether or not security should be granted in principle. But as to the quantum of security, CNAN took issue with the amounts for time and lawyers’ fees, which could reasonably be incurred, suggesting that the estimate put forward by Wealcan was excessive and put forward an alternative global figure of €150,000 in total.

Following further submissions the tribunal ordered that both parties should provide security for costs, which was in a form in which security would be provided in tranches by reference to stages of the hearing. What the tribunal ordered on 17 June 2008 was that Wealcan should be entitled to security in an amount of €125,000 and that that security was to cover: “the costs of the parties through until the completion of disclosure and the service of any statements of any witnesses of fact”.

On 24 June 2008 Wealcan applied for further security for costs, but this time in the alleged fixture reference. Wealcan sought security in the amount of €20,000, again to cover a period up to the completion of witness statements. By an order of 18 September 2008, the tribunal ordered CNAN to provide security for costs in the amount of €20,000 in respect of the alleged fixture reference at the same time as they provided security in the 9 January 2004 charterparty reference.

In the light of the tribunal’s orders CNAN procured two guarantees from BACE in Wealcan’s favour. By a guarantee dated 17 February 2009 BACE undertook to pay Wealcan certain sums up to the amount of €20,000 arising out of or in connection with the alleged fixture and, by a guarantee dated 22 May 2009, BACE undertook to pay to Wealcan certain sums up to an amount of €125,000 in respect of the claims by CNAN against Wealcan arising out of or in connection with the 9 January 2004 charterparty.

The two guarantees were on materially identical terms and in their material part provided as follows:

“In consideration of your accepting this guarantee as sufficient compliance with the Orders of the Tribunal dated 17 June 2008 in relation to security for costs of your defending Charterers’ claims in the proceedings before the Tribunal, we [BACE] hereby agree to pay to you or to your solicitors on your behalf, within 14 days of Owners’ first written demand such sums as may be:

(1)

Agreed in writing between Charterers and Owners to be due to Owners from Charterers in respect of their recoverable legal costs of defending the claims before the Tribunal, or

(2)

Awarded in favour of Owners against Charterers by Final Award of the Tribunal in respect of their recoverable legal costs ...”

In due course the tribunal ordered further security to be provided in respect of both references, to cover the period including the oral hearing.

On 8 January 2010 the tribunal ordered CNAN to provide further security for costs in the sum of €25,000, which it clarified on 21 January 2010 as being in respect of the costs of both references.

On 21 January such security was provided in the form of a letter of undertaking from Penlaw. The terms of that letter of undertaking, so far as material, are as follows:

“Pursuant to the Tribunal’s Order of 23 December 2009 that the Charterers do provide further security for your costs of defending Charterer’s claims, we hereby undertake to pay you or your solicitors upon our receipt of your written demand within 30 days, such sums as represent your costs of defending Charterers’ claim as may be finally ordered, agreed, or taxed as being due to you from Charterers ...”

It went on to provide that the maximum amount of €25,000 was only to be called upon once BACE guarantees had been exhausted.

In due course the tribunal made various awards in which CNAN were ordered to pay Wealcan’s costs or a proportion thereof.

In order to collect such awards Wealcan pays to the tribunal the arbitrators’ fees in the amounts fixed by the tribunal. The awards provided for CNAN to reimburse Wealcan for such arbitrators’ fees

There followed demands under the guarantees and the letter of undertaking. The defendants have declined to pay that part of Wealcan’s costs which is represented by the arbitrators’ fees on the grounds that those are not costs which are covered by the terms of the guarantees or the letter of undertaking.

I will take first the guarantees. The critical question is whether arbitrators’ fees fall within the wording of the guarantees as Wealcan’s “recoverable legal costs”. Wealcan submits that recoverable legal costs is simply a shorthand for costs incurred by one party in fighting the arbitration proceedings and includes disbursements, whether to a lawyer, expert, witness, arbitrator or anyone else and, therefore, includes disbursements by way of payment of the arbitrators’ fees, as the arbitrators’ fees of the references. BACE on the other hand submits that legal costs are a distinct concept from arbitrators’ fees and that legal costs do not include arbitrators’ fees.

Ms Tan, who appeared on behalf of Wealcan, made three points in support of Wealcan’s construction. First, she submitted, the ordinary meaning of the words “recoverable legal costs”, in their context, is any costs incurred in fighting the arbitration proceedings. In its natural meaning, legal costs extend to any disbursements made by the client or the lawyer. It would include disbursements to experts, disbursements to other witnesses, disbursements to translators or transcribers, disbursements by way of booking fees for premises at which the hearing took place, and disbursements by way of the appointment fee required by the arbitrator at the outset of the arbitration. She submits that there is no logical or commercial distinction to be drawn between such disbursements and the disbursements of fees charged by the tribunal for conducting the reference and preparing their awards. She submits that there are no words of limitation in the guarantees which would make it necessary to restrict legal costs to exclude such fees.

Secondly, she submits, that construction is reinforced by the introductory words of the guarantees, which provide that they are provided in consideration of Wealcan accepting the guarantee as sufficient compliance with the tribunal’s orders, “in relation to security for costs of your defending charterers’ claims”. Moreover the wording of paragraph 1 of each of the guarantees refers not just to recoverable legal costs but to recoverable legal costs of defending the claims. Ms Tan submits that this gives recoverable legal costs the colour which their natural meaning bears of being all costs incurred in defending the claims.

Thirdly, she submits that the commercial purpose of the guarantees was to provide security of the kind and scope which would protect Wealcan if CNAN did not comply with the tribunal’s orders in relation to the costs of fighting legal proceedings. If BACE were correct it would lead to an unjustified distinction between, for example, booking fees and the arbitrators’ fees of conducting the reference and preparing the award. It ought not to matter whether a party or an arbitrator has made the booking. Appointment fees were, in fact, in this case, treated as part of Wealcan’s costs and BACE accepted liability for such costs. That reflects the commercial purpose, so Ms Tan submits, of these guarantees.

Mr Ferrer on behalf of BACE supported BACE’s construction with the following points. First, he submitted, the guarantees should be strictly construed in favour of the guarantor and no liability should be imposed upon the guarantor which is not clearly and distinctly covered by the contract. He submitted that this is a general principle of construction applicable to guarantees. In addition he suggested that the contra proferentem principle came into play in this case, because the wording had been prepared and proposed by Wealcan. Accordingly, he submitted, any ambiguity or uncertainty fell to be resolved in BACE’s favour.

Secondly, he submitted that legal costs has a defined and separate meaning from arbitrators’ fees and expenses, as defined in the Arbitration Act, which formed the background, known to both parties, against which the guarantees fall to be construed. The tribunal’s power to award security for costs is contained in section 38(3) of the Arbitration Act 1996 which provides that the tribunal has the power to “Order the claimant to provide security for the costs of the arbitration”. The “costs of the arbitration” are defined by section 59 of the Arbitration Act as constituting three categories of costs: (a) are the arbitrators’ fees and expenses; (b) are the fees and expenses of any arbitral institution concerned; and (c) are the legal or other costs of the parties. Mr Ferrer submits that there is here a clear distinction drawn between legal costs on the one hand, and the arbitrators’ fees and expenses on the other.

Thirdly, he submitted that the LMAA rules draw the same distinction. The first schedule of the LMAA Terms in the 2006 edition, which is in materially the same terms as the previous edition, the 2002 edition, states at paragraph (E) that the tribunal may itself demand reasonable security for its estimated costs, including its fees and expenses up to the making of the award. The second schedule of the LMAA Terms deals with orders for a party to provide security for costs to the other party. At paragraph 7, it provides:

“In the light of paragraph (E) of the First Schedule it will not be appropriate for security for [a party’s] costs to include any provision for the fees of a tribunal.”

Fourthly, he submits, the guarantees were provided pursuant to orders for security in respect of a period up to service of witness statements and, in the case of the first guarantee, “to cover the costs of the parties through that period”.

I prefer the submissions of Wealcan, essentially for the reasons advanced by Ms Tan. Mr Ferrer’s first point, in relation to the Arbitration Act, faces the difficulty that Section 59 does not draw the relevant distinction as being between legal costs on the one hand and arbitrators’ fees on the other, which can be carried over into the wording of the guarantees. In section 59 the distinction is between, in sub paragraph (a), fees and expenses of the arbitrators and, in sub paragraph (c), the costs of the parties, both legal and non-legal. Sub paragraph (c) covers legal costs and other costs. The guarantees are, therefore, not using the expression legal costs as narrowly as section 59(c), because it is common ground that the guarantees would extend to costs of a party, which would be treated as falling within 59(c), not as legal costs but as other costs such as various disbursements.

This illustrates that whether or not the parties had in mind the terms of the Arbitration Act as the background against which the wording of the guarantees was prepared and agreed, they were not using the expression legal costs in the same sense as in the Arbitration Act. Therefore, their interpretation in the guarantees gains no assistance from any distinction drawn in the Arbitration Act.

So far as the LMAA Terms are concerned, there is no evidence that they formed the factual matrix which both parties would have had in mind in agreeing the wording of the guarantees. It is true that the wording was put forward by Wealcan and it is reasonable to suppose that Wealcan might have had the LMAA Terms in mind, but there is no basis for believing that the Terms were known to the bank, or that the bank had them in mind.

However that may be, the provisions of the LMAA Terms upon which Mr Ferrer relies, do not, in my view, assist BACE’s argument. The tribunal’s power to order that it be provided directly with security for its own fees and expenses is what will make it inappropriate to grant an order against a party in those circumstances in which it has exercised that power. But it has not exercised that power in this case. The fact that the tribunal has power to order a party to post security in favour of the tribunal, which is not in fact exercised, does not mean that a party cannot be ordered to provide security to its opponent for costs which include the arbitrators’ fees that that party may have to pay in the first instance. Still less does it mean that any guarantee is not intended to cover such costs.

The provisions of paragraph 7 of the second schedule of the LMAA rules are only expressed as being “in the light of paragraph (E) of the First Schedule”. However, paragraphs (A), (B) and (D) of the First Schedule envisage that there will be payments made by a party to the tribunal which are not the subject matter of any order for security made in favour of the tribunal itself under paragraph E. These cover the payment of fees on the appointment of the arbitrators, they cover any interim fees which the arbitrators are entitled to demand be paid as a condition of continuing with the reference, and they cover the costs of booking premises. It is clear, therefore, that the terms of the LMAA rules are not such as to preclude an order for security for costs being made in the normal way, to include the costs which a party has incurred in making payments to the arbitrators.

Mr Ferrer’s reliance on the period in respect of which the security was ordered to be provided, this takes BACE’s case no further. The legal costs which were referred to by the tribunal plainly would cover costs already incurred and they would, therefore, cover the appointment fees, which had already been paid by the parties. Moreover, there would be arbitrators’ fees incurred in respect of activity during the period in respect of which the security was to be provided. During the period up to the completion of the witness statements, it was foreseeable that there would be interlocutory activity which would involve the tribunal incurring fees for which the parties would have to pay in due course.

Moreover, the guarantees are not themselves limited temporally. Therefore, although the security for costs was awarded in respect of a particular period, the guarantees themselves were not limited to the costs incurred during any particular period. They respond, without any temporal limitation, to all legal costs, whenever they were incurred during the course of the arbitration.

So far as the reliance Mr Ferrer places on the rules of construction and the contra proferentem rule is concerned, the extent of any presumption or construction against a guarantor was the subject matter of dispute; and in the text books and the authorities has been the subject matter of considerable exposition. I do not need to go into the differences between the various expressions of view on that question because, in my view, there is no room for ambiguity or uncertainty and there is no need to resort to any principle or rule of construction in order to answer the questions which I need to decide.

So far as the letter of undertaking is concerned, that was in even wider terms than the guarantees in relation to the type of costs which it was expressed to cover. It was not limited to legal costs; it covered “the costs of defending the charterers’ claim”.

Mr Ferrer’s points on the letter of undertaking were largely points which were made on the back of his points in relation to the wording of the guarantees. He submitted that the expression was to be treated as synonymous with recoverable legal costs. In my view that submission is mistaken. The wording is not the same. The wording is wider and, as a matter of ordinary language, covers costs of fighting the claim, including any costs which comprise sums payable to the arbitrators as the arbitrators’ fees for deciding the merits of such a claim.

But even if the words were no wider, that would not assist Penlaw for the reasons which I have identified in construing what was meant by “recoverable legal costs” in the guarantees themselves.

For these reasons the claims advanced by Wealcan in this action succeed.