Viscous Global Investment Ltd v Palladium Navigation Corporation "Quest"

The issue on this application under section 32 of the Arbitration Act 1996 is whether an arbitration clause in a P & I Club Letter of Undertaking was intended to replace the arbitration clauses incorporated into four bills of lading issued by the defendant shipowners for the carriage of a cargo of bagged rice. The claimant says that it was. If that is so, it is common ground that arbitration has been validly commenced before a three man LMAA tribunal which has jurisdiction to determine its claims.

The defendant says that the LOU arbitration clause was intended to amend the existing arbitration clauses in some limited respects, but in all other respects left those existing clauses unchanged, including in particular their provision for claims of less than US $100,000 to be dealt with by the LMAA Small Claims Procedure. If that is so, what the claimant ought to have done (according to the defendant) was to commence four separate arbitrations, some before a tribunal of three arbitrators and others (because inevitably the amount of the claim under some of the bills must have been less than US $100,000 even though the claimant has not so far specified the amount of its claim under each individual bill) before a sole arbitrator under the Small Claims Procedure. Since that is not what the claimant did the consequence, according to the defendant, is that the tribunal which has been appointed has no jurisdiction over some or all of the claims.

It is apparent, therefore, that there is no dispute that the claimant’s claims ought to be arbitrated. It is agreed also that the seat of any arbitration is London and that LMAA procedures should apply. There is, moreover, an existing tribunal of LMAA arbitrators appointed which is eminently qualified to determine liability for any cargo damage which may have occurred. Nobody has suggested otherwise. It may be wondered, therefore, why the parties have not got on with asking the arbitrators to decide the substantive merits of the dispute. If they had done so, and as arbitration was commenced as long ago as November 2012, there would probably have been a final award by now.

Instead, however, the parties have spent what must by now be fairly substantial sums, probably amounting to a high proportion of the modest amount in dispute, arguing about whether these well qualified arbitrators have jurisdiction. Despite the attractive and interesting submissions of Mr Ben Olbourne for the claimant and Mr Yash Kulkarni for the defendant, it is hard to think that this was money well spent. It is also hard to think, however splendid the LMAA Small Claims Procedure may be as a method of resolving small scale maritime claims, that this jurisdictional dispute is really about whether there ought to be one or three arbitrators appointed to deal with the merits of the various claims, or about the finer points of the arbitral procedure which ought to be adopted. Rather, it seems that the shipowners or their club are hoping to knock out the claim on the basis that the claimant has made a somewhat technical mistake in commencing arbitration, and that it is now too late to start again because any new arbitration would be time barred.

That said, of course, if the owners have got a good argument which knocks out some or all of the claim, they are entitled to deploy it.

Section 32 of the 1996 Act provides that the court may, on the application of a party to arbitral proceedings (upon notice to the other parties), determine any question as to the substantive jurisdiction of the tribunal. Such an application can only be considered if it is made with the agreement in writing of all the other parties to the proceedings, or with the permission of the arbitral tribunal and the court. In this case the application is made with the permission of the tribunal and pursuant to an order made by Field J on 13 March 2014.

In fact there has already been full argument before the arbitrators of the question that the court is now being asked to determine, but the arbitrators could not agree. No award was issued (hence this is an application under section 32, not section 67) but the arbitrators did indicate their views. The majority (Bruce Harris and Tim Marshall) concluded that they did have jurisdiction over any bill of lading where the sum claimed was over US $100,000, but not over any bills where the sum claimed was below US $100,000. But as the claimant had not broken down the amount of its claims under each of the bills, they could not say which was which. The minority (David Farrington) concluded that the arbitrators had jurisdiction over all the claims.

The claimant’s claim arises out of the carriage of bagged rice from Thailand to Nigeria in late 2011. The cargo of about 9,930 mt was carried on board the defendant’s vessel “QUEST” pursuant to four bills of lading variously dated 24 August, 1 September, and 2 September 2011. The claimant’s case is that the cargo was discharged in a damaged condition by reason of the defendant’s breach of the contracts of carriage contained in or evidenced by the bills of lading.

The bills were each on the standard CONGENBILL 1994 form with the usual “Conditions of Carriage” on the reverse. In each case, clause 1 of the Conditions stipulated:

“All terms and conditions, liberties and exceptions of the Charterparty, dated as overleaf, including the Law and Arbitration Clause, are herewith incorporated.”

None of the bills identified a charterparty on its face. On each bill, the relevant box was left blank.

There were three charterparties involved in the carriage of the cargo:

Each of the three charterparties contained an arbitration clause. However, they were in different terms.

Clause 48 of the head charter and the sub-charter (both time charters) both provided:

“All disputes arising out of this contract which cannot be amicably resolved shall be referred to arbitration in London. Unless the parties agree upon a sole arbitrator the reference shall be to 2 (two) arbitrators, one to be appointed by each of the parties.

The arbitrators shall be commercial men, and the umpire, if appointed, in the event of disagreement between two arbitrators, shall be a legal man, and shall be Members of the London Maritime Arbitrators’ Association.

The contract is governed by English Law and there shall apply to arbitration proceedings under this clause the terms of the London Maritime Arbitrators’ Association current at the time when the arbitration proceedings are commenced.

It is further agreed that the 7 (seven) days limit for appointment of the arbitrators, either originally or by substitution, shall be changed to 30 (thirty) days.

Claims up to USD 100,000 to be dealt with in accordance with L.M.A.A. Small Claims Procedure.”

In contrast, the voyage charter provided:

“ARBITRATION IF ANY TO BE SETTLED IN SINGAPORE BY ENGLISH LAW.”

The claimant sought security from the defendant for its claims under all four of the bills of lading. In due course the defendant’s P&I Club, the London Club, issued a single Letter of Undertaking dated 13 June 2012 providing security in respect of the claimant’s claims under all of the bills in the sum of US $300,000 inclusive of interest and costs. The LOU, addressed to the claimant, provided so far as relevant:

“Ship: QUEST

Voyage: Kohsichang Thailand to Apapa Port, Lagos.

Cargo: Bagged Rice

Claims: Damage, loss/shortage to bags

Bills of Lading: B/L no. 01, 02, 03, 12 dated 24 August 2011, issued in Bangkok

IN CONSIDERATION of the owners of and other persons entitled to sue in respect of your claims referred to above consenting to the release from arrest and/or refraining from taking action resulting in the arrest or re-arrest of the above-named ship assets or property or any other ship in the same ownership, associated ownership or management for the purpose of (founding jurisdiction and/or) obtaining security in respect of your said claims concerning the cargo mentioned above, we, The London Steamship Owners’ Mutual Insurance Association Limited, hereby undertake to pay to you or your solicitors on demand such sums as may be adjudged payable to you in London Arbitration (under the written auspices of L.M.A.A.) after final appeal, if any, or as may be amicably agreed in writing between the parties and the Association to be recoverable by you from the above-named ship and/or the Ship Owners Palladium Navigation Corp, Monrovia, in respect of your said claims, interest and costs provided always that the total of our liability shall not exceed the sum of US $300,000 (United States Dollars three hundred thousand only) inclusive of interest and costs.

AND FOR THE CONSIDERATION AFORESAID:

1.

We confirm that the Ship Owners agree that the above mentioned claims shall be subject to London Arbitration (under the auspices of the L.M.A.A.) and English Law to apply (Hague-Visby Rules and COGSA 1992), and for each party to nominate its own arbitrator and the two so appointed may appoint a third.

2.

We confirm that upon our receipt from you of a request to proceed with the above claims in London Arbitration in England and Wales, we shall, within 14 days, appoint an arbitrator on behalf of the Ship Owners.

3.

We confirm that we have received irrevocable authority from the Ship Owners to give this letter of undertaking in these terms. …”

The claimant’s case, in summary, is that the LOU contained a binding agreement between the parties to arbitrate specified disputes under the bills of lading in accordance with the terms of clause 1 of the LOU, which replaced the existing charterparty arbitration clause (whichever charterparty may have been the one referred to in the bills) incorporated into the bills of lading.

The defendant, in contrast, says that (1) the starting point must be the existing arbitration agreements, contained in the head charter, that being the clause incorporated into each of the bills of lading; (2) the primary purpose of the LOU was to provide security, not to replace in their entirety the existing arbitration clauses; (3) the LOU varied the existing arbitration clauses in some limited respects, but was not “fundamentally inconsistent” with them and did not “go to the root of” those clauses; (4) a variation which is not fundamentally inconsistent with (or which does not go to the root of) an existing clause will leave the existing clause intact and will only vary it to the extent of any inconsistency; and (5) the consequence is that the provision in the head charter arbitration clause for the Small Claims Procedure to apply to claims under US $100,000 remained unaffected by the terms of the LOU.

Plainly, and as is common ground, clause 1 of the LOU contains a binding agreement between the parties which at the least varied the parties’ pre-existing agreement to arbitrate contained in whichever of the charterparty arbitration clauses was incorporated into the bills of lading. The question whether the parties intended the LOU to replace the existing agreements in their entirety or merely to vary them in limited respects while leaving the existing agreements otherwise in force is one of construction of the LOU in its context, applying ordinary principles of construction in the light of business common sense. The context includes the pre-existing contractual position. There is no reason in principle why the terms of an LOU should not operate as a complete replacement of an existing dispute resolution clause. An example of such a case is The Pia Vesta [1984] 1 Lloyd’s Rep 169, where Sheen J described an agreement in an LOU to submit to English jurisdiction as a variation (by which he meant a complete substitution) of an existing bill of lading clause providing for Danish jurisdiction.

I do not accept that there is any principle of construction that unless a variation is “fundamentally inconsistent” with, or “goes to the root of”, an existing clause, it will be construed as having only limited effect. The cases on which Mr Kulkarni relied for that proposition (principally Morris v Baron & Co [1917] AC 1 and British & Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48) were focussed on a very different problem, namely the rule that an oral agreement was not effective to vary a contract which was required to be in writing – a rule which, it was held, did not apply if the oral agreement was so fundamentally inconsistent with the written contract as to show an intention to rescind or extinguish the existing contract and start again. There is no need in the present context to introduce the kind of intellectual contortions to which that rule could lead and it would be a retrograde step to do so. Rather the principle is simply one of construction – looking at the matter objectively and in the light of the relevant background, what meaning would the contract convey to a reasonable person?

Mr Kulkarni relied also on the more recent case of Ginns v Tabor (CA, 22 November 1995, unreported). The issue there was whether a later agreement (for the sale of a barn) was intended to rescind an earlier agreement (for a payment to be made on the grant of planning permission to convert the barn). Auld LJ said:

“Whether a subsequent agreement amounts to a rescission or a variation of an earlier one depends on the intention of the parties indicated by the terms of subsequent agreement and from all the surrounding circumstances. See United Dominions Trust (Jamaica) Ltd v Shoucair [1969] 1 AC 340, PC. However, rescission will be presumed when the parties enter into a new agreement so inconsistent with the earlier one that it goes to its very root. See British & Benningtons Ltd. v N.W. Cachar Tea Co. Ltd [1923] AC 48, HL , per Lord Atkinson at 62.”

The first sentence of this citation states the principle, that the question is one of construction of the later agreement -- in the present case, the LOU. The final sentence gives an example of when a later agreement may be presumed to be intended to replace the earlier agreement in its entirety, but I do not read this passage as stating a rule that unless the new agreement is fundamentally inconsistent with the earlier agreement it cannot have this effect.

The arbitration agreement in the LOU is perfectly capable of operating as a new and free standing agreement, containing everything that is needed in such a clause. It appears to be comprehensive, dealing as it does with the seat of the arbitration (London), the procedure to be applied (LMAA), the constitution of the tribunal (three arbitrators, appointed in the usual way), the time for the defendant to appoint its arbitrator (14 days) and the substantive law to be applied (English law, with specific reference to the Hague-Visby Rules and the Carriage of Goods by Sea Act 1992).

Given such a comprehensive set of provisions, there would appear to be no reason why the parties should not have intended the LOU to replace the charterparty arbitration clauses in their entirety. That is the natural meaning of the relevant provisions of the LOU. There are also compelling reasons why the parties should have intended this.

First, it is not readily apparent why the parties should have intended their arbitration agreement to be located in two places, partly in the LOU and partly in the head charter arbitration clause, when that charterparty is not even mentioned in the LOU. That would appear to be a recipe for confusion, particularly as there is nothing in the LOU to suggest that the reader needs also to look elsewhere to discover fully what the parties have agreed about arbitration. If the parties had wanted to tinker with some aspects of the existing clause while leaving other aspects (including the reference to the Small Claims Procedure) intact, there were simpler ways of doing so.

Second, the parties knew that the overall sum claimed was modest, with security being given in the sum of US $300,000 inclusive of interest and costs. They knew too that there were claims under four different bills of lading, all likely in practice to raise much the same issues, and that some claims would inevitably be for less than US $100,000 while some might be for more than that sum. It is therefore striking, if they intended it to apply, that there is no mention of the Small Claims Procedure in the LOU.

Third, it would make no sense at all to my mind for the parties to agree in such circumstances for four separate arbitrations, some conducted under the Small Claims Procedure by a sole arbitrator and some under the “ordinary” LMAA procedure by a three man tribunal. But that is the inevitable consequence of the approach for which the owners contend (albeit that in practice this will not now happen, as any new arbitrations will be time barred). I can think of no reason why the parties (let alone the owners’ club, clubs usually being understandably keen to keep costs down as far as possible) should have wished to provide for such a peculiar arrangement.

Fourth, I have so far assumed that the clause incorporated in the bills of lading was the head charter arbitration clause. That may well be right. But there was at least scope for disagreement as to which of the charterparty arbitration clauses would apply, the head charter with its provision for London arbitration or the voyage charter which provided for arbitration in Singapore. As is apparent from the discussion in Scrutton on Charterparties, (22^nd Edition) at paragraph 6-016, this is an issue which can give rise to disagreement:

“Where the incorporating clause refers to, but does not identify, a charterparty, the court will assume that the reference is to any charter under which the goods are being carried. Difficulties can arise where there are two charters, one between the shipowner and a charterer, and one between the charterer and a sub-charterer. It is submitted that a general reference will normally be construed as relating to the head charter, since this is the contract to which the shipowner, who issues the bill of lading, is a party. But this will not invariably be so, and the court may conclude, on examining the facts, that the intention was to incorporate the sub-charter; or even, in extreme cases, that the bill of lading is so ambiguous as to be void.”

Any possibility of disagreement in this case was removed by the terms of the LOU.

These considerations provide, as I have said, compelling reasons why the parties should have intended – and in my judgment they did intend – that the LOU should replace entirely the charterparty arbitration clauses. There is nothing of any weight to put in the scales on the other side. In particular, I do not accept that it is of any significance to say that the primary purpose of the LOU was to provide security. Perhaps it was, but the purpose of a contract is generally to be derived primarily from its terms, and it was at least one purpose of this LOU to make provision for the way in which the parties’ dispute was to be arbitrated.

This conclusion makes it unnecessary to decide one further point, which is whether the LOU provides for a single arbitration or for four separate arbitrations, one under each bill of lading. That is likely to be of no practical significance as on any view the same arbitrators will now decide the claims under all four bills. If it mattered, I would be inclined to the former view as being supported by the language of the LOU and making better business sense. If that is right, it would provide one further reason for saying that the Small Claims Procedure does not apply. I would not regard this construction as being inconsistent with the decision of Hamblen J in The Biz [2010] EWHC 2565 (Comm), [2011] 1 Lloyd’s Rep 688. That case was not concerned with the construction of an arbitration clause in an LOU but with the appointment of arbitrators under arbitration clauses incorporated in various bills of lading. But as it is unnecessary to decide the point, I do not do so.

For these reasons, and in agreement with the minority arbitrator, I conclude that the claimant has validly commenced arbitration and that the arbitral tribunal has jurisdiction to determine all the claims made by the claimant under the bills of lading.

Needless to say, but for the avoidance of doubt, the fact that the Small Claims Procedure does not apply as a matter of contract does not mean that the arbitrators will be powerless to adopt economical procedures to ensure that this modest dispute is resolved in a proportionate manner. Flexibility to adapt the procedure to the needs of the case is one of the advantages of arbitration.