LJ Korbetis v Transgrain Shipping BV

The issues for decision are whether an arbitrator has been validly appointed under a charterparty on an amended Centricon form and, if not, whether an extension of time should be granted for such an appointment.

The charterparty was concluded on 29^th January 2003. Under it, the applicant owners chartered MV Alexia M to the respondent charterers for the carriage of a cargo of maize. The cargo was loaded at St. Lorenzo in Argentina and discharged at Oran in Algeria. Discharge of the cargo was completed on 24^th April 2003. There was a dispute about demurrage.

Clause 39 of the charterparty provided as follows:

“All disputes from time to time arising out of this contract shall, unless the parties forthwith agree on a single Arbitrator, be referred to the final arbitrament of two Arbitrators, carrying on business in London, who shall be Members of the Baltic and engaged in the Shipping and/or Grain Trades, one to be appointed by each of the parties with power to such Arbitrators to appoint an Umpire. The Arbitrators shall be members of the London Maritime Arbitrators’ Association, and the Rules for arbitration processings of that Arbitration shall apply. Any claim must be made in writing and Claimant’s Arbitrator appointed within 12 months of final discharge and where this provision is not complied with the claim shall be deemed to be waived and absolutely barred. No award shall be questioned or invalidated on the ground that any of the Arbitrators is not qualified as above unless objection to his acting be taken before the award is made.”

When the charterers failed to pay in full the owners’ claim for demurrage in the final freight invoice, (the owners’ claim was handed on their behalf by West of England Hellac Limited) whose office was in the Piraeus. The principal claim hander was Ms. Anna Kauntouriotou, but she was away for part of the relevant period due to illness, and in her absence the matter was handled by Mr. John Merrylees.

On 10^th March 2004, Ms. Kauntouriotou faxed a letter setting out in detail the basis of the owners’ claim. On 23^rd March 2004, she sent another fax saying that she had instructions to refer the matter to arbitration and proposing the name of a single arbitrator. On 31^st March 2004, the charterers replied by fax rejecting the proposed name, and counter-proposing that the owners choose one of the three other names. On 5^th April 2004, Mr. Merrylees, who had taken over for the time being from Ms. Kauntouriotou, composed a reply agreeing to the appointment of one of the proposed names, Mr. Timothy Rayment, as sole arbitrator and asking for the charterers’ confirmation. There was no such confirmation, because Mr. Merrylees’ fax was unfortunately sent to the wrong fax number and was never received by the charterers. The charterers’ number was in the Netherlands. Mr. Merrylees’ secretary omitted to enter the appropriate international dialling code, so the fax went instead to a local number in the Piraeus area. There was no response from the mystery recipient, and neither Mr. Merrylees nor his secretary realised at that stage that the fax had been sent to the wrong person. On 25^th August 2004, Mr. Merrylees composed a further fax to the charterers, referring to the earlier fax, and saying that the owners were still awaiting confirmation that the charterers had provided Mr. Rayment with details of his appointment. This fax was sent to the same Piraeus recipient as the previous fax and suffered the same fate.

On 24^th December 2004, Ms. Kauntouriotou telephoned Mr. Rayment to check whether the charterers had given him notice of his appointment. He told her that he knew nothing of the matter. On the same day, she sent a fax to Mr. Rayment which she copied to the charterers. In the fax, she said that disputes had arisen between the parties and described them as follows:

“The disputes include owners’ claim for demurrage and/or final balance of account and/or damages and/or an indemnity in relation to discharge of a cargo carried pursuant to the charter, including delays/detention of the vessel and/or third party claims concerning the condition of the cargo, as well as claims for interest and costs.”

The fax continued:

“On 5^th April 2004, we told charterers that owners accepted their proposal to appoint you as sole arbitrator in respect of all the disputes arising out of the charterparty (please find attached copies of our exchange). When we spoke to you, however, we realised that charterers had not yet provided you with details concerning your appointment, and therefore we have done so as confirmed in writing by this fax.”

On 12^th January 2005, the charterers responded, making the following points: first, they had never received Mr. Merrylees’ fax dated 5^th April 2004, agreeing to Mr. Rayment’s appointment; secondly, the original dispute had been limited to demurrage and it was not open to the owners now to widen it; thirdly, no arbitrator had been appointed within the time prescribed in clause 39 of the charterparty, and the owner’s claim was accordingly waived; fourthly, Mr. Rayment’s confirmation of appointment was therefore void.

On receiving this fax, Ms. Kauntouriotou looked into the history of the matter, and discovered that the critical fax had been sent to the wrong number. Sensibly, the issue of Mr. Rayment’s jurisdiction has been referred to the court with the arbitrator’s permission under section 32 of the Arbitration Act 1996, and there is no dispute about the court’s jurisdiction to decide it.

The owners’ case is that Mr. Rayment has been validly appointed, because he has been appointed by agreement between the parties. They put their case as to the formation of the agreement in alternative ways. The first contention is that the agreement was concluded by an offer in the owner’s fax dated 31^st March 2004, and by the acceptance expressed in Mr. Merrylees’ fax dated 5^th April 2004. They acknowledge that Mr. Merrylees’ fax was not communicated to the charterers until many months later, but they say that an agreement between the owners and the charterers was concluded as a matter of law at the moment when the fax was sent to the mystery recipient in the Piraeus area.

The owners are unable to cite any direct authority in support of that proposition, nor have the charterers referred to any authority which directly decides the point. I am not altogether surprised. The proposition that an offer by A to B can be accepted by a notification from B to C is contrary to basic principle, except where A has in some way agreed to acceptance by that method, for example by appointing C as his agent. As Chitty on Contracts, 29^th Edition, paragraph 2-034, states,

“The general rule is that an acceptance has no legal effect until it is communicated to the offeror.”

Mr. Lewis on behalf of the owners relied on the well established rule dating back to Adams v. Lindsell (1818) 1 B & Ald 681, and confirmed by the Court of Appeal in Entores v. Miles [1955] 2 QB 327, that an acceptance by post is complete as soon as the letter is put into the post-box. But those cases assume that the letter has been properly addressed. If it has been properly addressed, the acceptor commits himself practically as well as legally by posting it. At that moment the die is cast. The likelihood of non-delivery is remote. Mishaps occur, but if such a mishap occurs, it is not the fault of the acceptor. From a pragmatic viewpoint, the rule of law is generally satisfactory, although Chitty accurately comments, in paragraph 2.046, that the rule favours the offeree for reasons which it is unnecessary to elaborate.

If the letter is wrongly addressed, very different considerations apply. Common sense dictates that it is unfair to the intended recipient that he should be bound by something which he is unlikely to receive because of the fault of the sender. Moreover, if he is to be so bound, such a rule would have the potential to give to the careless would-be acceptor an unfair advantage. Suppose that the would-be acceptor realises that the letter or fax has been sent to the wrong address or number. On the owners’ argument, a contract would already have come into existence. In the practical world, the acceptor would then have an option whether to reveal the contract to the offeror, or to keep silent about it. If the market had moved, this could be a valuable option. The would-be acceptor, in that situation, would also have the opportunity to nurse his option by waiting to see how the market moved before deciding whether to reveal the existence of the contract. Even if the law crafted some form of rule of good faith to prohibit a party from acting in such a way, such a rule could in the nature of things be difficult to enforce. It is not hard to envisage circumstances in which only the would-be acceptor would know when he discovered the true position.

Mr. Lewis submitted that in such situations there should be no firm rule of law, as in the ordinary posting rule, but that it should be for the court to decide on a case by case basis what result most fairly suited the facts. I do not accept that submission. Rules about offer and acceptance ought to be clear, so that parties may know where they stand. A situation in which it is unclear whether or not a contract has been formed until a court decides in the exercise of some form of general discretion whether or not a contract has been formed would be unsatisfactory.

Interestingly, the postal rule itself began with a case of a misdirected letter, but in that case it was the offer which was misdirected. I refer to Adams v. Lindsell. There the offeror’s letter to sell goods at a certain price, if the offer were accepted in due course of post, was misaddressed, but it was accepted promptly by letter on its actual receipt. The court considered it fair that the consequences of the delay should lie at the door of the party responsible for the delay, i.e. the offeror. On the facts of that case, the goods had been sold by the offeror to a third party after it would have expected to receive a reply, if it had sent its offer letter to the correct address, but before it in fact received the offeree’s letter of acceptance. Considering that it was only fair that the adverse consequences of delay should rest with the party responsible for the delay, the court held that acceptance was complete on the offeree sending its letter of acceptance, so establishing the postal rule.

If in that case the delay had been occasioned by the offeree misdirecting its letter of acceptance, rather than the offeror misdirecting its letter of offer, it is difficult to see that the court would have arrived at the result which it did.

The topic of misdirected letters of acceptance has been considered by text book writers. Chitty, at paragraph 2-056, has the following passage:

“Misdirected letter of acceptance. A letter of acceptance may be lost or delayed because it bears a wrong or an incomplete address, or because it is not properly stamped. Normally such defects would be due to the carelessness of the offeree, and although there is no English authority precisely on point, it is submitted that the postal rule should not apply to such cases. Although an offeror may have to take the risk of accidents in the post, it would be unreasonable to impose on him the further risk of the acceptor’s carelessness. These arguments do not apply where the misdirection is due to the fault of the offeror, e.g. where his own address is incompletely or illegibly given in the offer itself. In such a case, the offeror shall not be allowed to rely on the fact that the acceptance was misdirected, except perhaps where his error in stating his own address was obvious to the offeree, for in such a case the offeror’s fault would not be the effective cause of the misdirection of the acceptance. It is submitted that a misdirected acceptance should take effect, if at all, at the time which is least favourable to the party responsible for the misdirection.”

I agree with that general approach, because it seems to me to correspond with principle and justice.

The owners’ alternative argument is that an agreement to appoint Mr. Rayment as sole arbitrator was concluded on 24^th December 2004. It is submitted that the charterers’ offer in their fax of 31^st March 2004, had not been withdrawn, and remained open for acceptance. It was accepted when Ms. Kauntouriotou sent to Mr. Rayment and to the charterers her fax confirming Mr. Rayment’s appointment and attaching the owners earlier fax of 5^th April 2004, which had been misdirected.

Mr. Aswani, on behalf of the charterers, put forward a preliminary argument that the charterers’ fax of 31^st March 2004 was not an offer open to acceptance, but was an invitation to a treat. I do not agree with that argument. The critical question is whether the letter of offer to agree to the appointment of Mr. Rayment as sole arbitrator remained open for acceptance on 24^th December 2004.

Mr. Lewis properly accepted that the letter of offer was implicitly open for acceptance only within a reasonable period. The question is whether a reasonable period had expired by 24^th December, approximately eight months after the charterers fax. Mr. Lewis submitted that eight months was not a lengthy period in the context of marine arbitrations. Mr. Aswani submitted that no offer by the charterers to agree to the appointment of a joint arbitrator could remain open for acceptance after 24th April, because on that date the owners’ claim became automatically time barred by reason of clause 39. Put in those terms, I think that the argument goes too far. Clause 39 is not well drafted, but I think that it would be possible for one party to make an offer to agree to the appointment of a sole arbitrator, which would be open for acceptance within a reasonable period, which might extend beyond the date on which the claim would otherwise become barred. But in deciding what was a reasonable period for acceptance of the offer, the contractual context in which the offer was made is certainly very relevant. The reference to ‘forthwith’ in the opening part of clause 39 connotes some urgency, and the offer should not be construed as intended to give a lengthy period beyond the time at which the bar would otherwise apply. In the circumstances, I am satisfied that eight months was far in excess of a reasonable period for acceptance of the charterers’ offer. It follows that there has been no agreement for the appointment of Mr. Rayment, and that he has no jurisdiction under the charterparty. In these circumstances, the owners apply under Section 12 to extend the time for commencement of arbitral proceedings.

Section 12(3) provides as follows:

“The court shall make an order only if satisfied (a) that the circumstances are such as were outside the reasonable contemplation of the parties when they agreed the provision in question, and that it would be just to extend the time, or (b) that the conduct of one party makes it unjust to hold the other party to the strict terms of the provision in question.”

The owners rely on Section 12(3)(a). Mr. Lewis submitted that there were a number of circumstances outside the parties’ reasonable contemplation. In particular, he relied on the illness of the principal case handler, the unfortunate slip made by Mr. Merrylees’ secretary, and the absence of any response from the mystery recipient which would have alerted the owners to what had gone wrong. There was, he submitted, an unfortunate combination of events which the parties could not reasonably have foreseen. He also submitted that it would be just to extend the period, because the charterers have suffered no prejudice. There is no suggestion on the evidence that the charterers could not defend the claim as well now as if the claim had been started in time, subject to the obvious point of their limitation defence.

Section 12 was considered by the Court of Appeal in Harbour and General Works Limited v. Environment Agency [2001] 1 Lloyd’s Rep 65. In that case, the need for an extension arose because the party seeking an extension had failed properly to understand the relevant conditions of contract, it being a contract under ICE conditions which had been amended by supplemental corrigenda. Waller LJ said at p81:

“The actual mistake on further refinement can be said to be a failure to read the provisions which had been agreed. If one were to pose the question whether it would be contemplated by the parties that they would not even read the provision that they had agreed when contemplating operating the provision, the sensible answer would seem to be that one could not even reasonably contemplate that. Does that mean that the clearer it is that the circumstance is one that the parties would not have contemplated as happening, or contemplated as one for which an extension of time would not be allowed if it had been asked for, the more likely it is that the circumstance is not one within the reasonable contemplation of the parties? In my view that cannot be the proper construction of the subsection. The subsection is concerned with party autonomy. Its aim seems to me to be to allow the Court to consider an extension in relation to circumstances where the parties would not reasonably have contemplated them as being ones where the time bar would apply, or to put it the other way round, the section is concerned not to allow the Court to interfere with a contractual bargain, unless the circumstances are such that if they had been drawn to the attention of the parties when they agreed the provision, the parties would at the very least have contemplated that the time bar might not apply: it then being for the Court finally to rule as to whether justice required an extension of time to be given.”

There was some discussion in argument whether this test involves a narrowing or loosening of the literal interpretation of the first part of Section 12(3)(a). Does it involve interpreting the words ‘circumstances such as were outside the reasonable contemplation of the parties’ as meaning circumstances in which the parties might have thought that the time bar might not apply, even though the circumstances themselves might have been reasonably foreseeable; or does it restrict the words to circumstances which were not only beyond the reasonable contemplation of the parties, but were also such that if the parties had contemplated them, they would also have contemplated that the time bar might not apply in such circumstances?

I conclude that it must be the latter. I say that because of the sentences which precede and follow the final sentence of the passage cited. I have already referred to the preceding sentences, in which Waller LJ rejected the idea that the clause might apply where the circumstances were unforeseeable because the other party’s behaviour was too odd realistically to contemplate. The same thought process continues in another sentence after the passage which I have set out, where Waller LJ said:

“In this very case it [the above construction] enables circumstances such as a failure to read provisions which might not be reasonably contemplated to be circumstances which do not trigger consideration of an entitlement to an extension of time. ”

I am not sure how much the additional restriction adds, because Section 12(3)(a) only applies where the court thinks it just that it should. If the circumstances are such that the parties could not reasonably have imagined that the clause might apply, it is hard to see that the court would think it just that they should apply.

There remain questions how stringent a test is to be applied in deciding whether something is outside the parties’ reasonable contemplation, and what is the relevance of the matter under consideration being within the control of the party seeking an extension.

The test has to be applied in the way which is commercial sensible. All sorts of events may occur which parties would not ordinarily expect to occur, but which they know might conceivably occur. I have in mind the sort of extraneous things which in other contexts might be considered force majeure or frustrating events. It is not difficult to see that in such cases the section might apply. I need not say more about that aspect of the matter, because in this case I am not concerned with some external intervening event, but essentially with an internal error. In making that observation, I am not overlooking the fact of Ms. Kauntouriotou’s illness, but I regard that as part of the historical background to the error. It was not the effective cause of it. The essential error was a clerical error in failing to send the fax to the right number, and that error was followed by an omission to chase matters up with any promptitude.

On this aspect of the matte, Waller LJ said in Harbour and General Works Limited v. Environment Agency at page 81:

“I should add that albeit if a circumstance was within the control of a party seeking an extension, that might be a material factor in assessing the significance of the circumstance; I would not think that control alone disqualifies a circumstance from being one to which the subsection applies. I am not sure that this was the Judge’s view, but in case the reference to control is so interpreted, it is right to be clear about the matter. Thus, for example, if a notice to arbitrate was put through the wrong letterbox by the relevant party, that might be said to be within the control of that party at least to some extent, but that might be an example of a case where Section 12(3) could apply.”

There was some discussion during the argument about what the court may have had in mind by the words ‘at least to some extent’ and whether the court was considering circumstances where there might be shared responsibility for an error. Be that as it may, in this case the mistake was the fault of no-one but the owners’ agents. Moreover, after the attempt to send the acceptance fax on 5^th April 2004, they took no steps to follow it up with the other side or with the arbitrator for months. I do not think that this combination of error and omissions was within the reasonable contemplation of the parties at the time when the contract was made as the kind of circumstance which might trigger an extension of time, or that it would be just to extend the time for commencing arbitration proceedings in circumstances where the respondents have the benefit of a contractual time bar. I am not implying that if the owners had acted promptly after their error in sending the fax to the wrong address, the result would necessarily have been different. That is not a situation which I have to consider. I have to look at the matter in the context of the error to which I have referred, followed by the period of omission to which I have referred. In the circumstances, this part of the owners’ application also fails.