CFR Buyers` Obligation To Arbitrate The Claims Under Bills Of Lading
The Charter Party Bills of Lading transferred to CFR/CIF buyers become contracts of carriage. By incorporation in the Charter Party Bills of Lading, the charter party terms and conditions become a part of the contracts of carriage and are binding upon those making claims for breach of such contracts of carriage1.
Despite the fact that the Charter Party Bill of Lading forms published by BIMCO to be used for commodity shipments indicate that are issued pursuant to the charter party terms and conditions, the CFR buyers and/or subrogated cargo underwriters making claims under the contracts of carriage contained in the Charter Party Bills of Lading often try to force the shipowners to litigate the claims in their jurisdiction.
To fail to refer a dispute to arbitration and instead to commence litigation is a breach of contract of carriage2. The shipowner`s remedy depends on the circumstances of the case.
If the arbitration clause of charter party stipulates that the place of arbitration is to be London and the legal action has been brought in an English Court, the shipowner`s remedy is to ask the Court to stay the legal action and to compel arbitration in accordance with the Section 9 of UK Arbitration Act 1996 which provides as follows:
"(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of clam or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.
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(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed."
If the arbitration clause of charter party stipulates that the place of arbitration is to be New York and the legal action has been brought in an US Court, the shipowner`s remedy is to ask the Court to stay the legal action and to order the parties to proceed to arbitration in accordance with the Section 3 and 4 of Federal Arbitration Act which provide as follows:
"Section 3 Stay of proceedings where issue therein referable to arbitration
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement …
Section 4 Failure to arbitrate under agreement; petition to United States court having jurisdiction for order to compel arbitration; notice and service thereof; hearing and determination
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court ... for an order directing that such arbitration proceed in the manner provided for in such agreement. ...
The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed."
If the arbitration clause of charter party stipulates that the place of arbitration is to be London and the legal action has been brought in an US Court or in any other foreign jurisdiction which recognizes the New York Convention3, the shipowner`s remedy is to ask the Court to stay the legal action and to order the parties to proceed to arbitration in accordance with the Article II paragraph 3 of the New York Convention which provides as follows:
"The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed."
If the arbitration clause of charter party stipulates that the place of arbitration is to be London or New York and the legal action has been brought in a foreign jurisdiction that does not recognize the New York Convention4, the shipowner`s remedy is to ask an English or an US Court, depending to what jurisdiction belongs to, to issue an anti-suit injunction order against the claimant to restrain him from continuing or taking further steps in the legal proceedings commenced in the foreign jurisdiction in breach of the charter party arbitration clause incorporated into the Bill of Lading contract of carriage and also from starting other proceedings elsewhere than before the arbitration tribunal constituted according to the arbitration clause.
When asked to stay the legal proceedings or to issue anti-suit injunction and to compel arbitration, the Courts look at the terms and conditions inserted on the face and the back of the Charter Party Bill of Lading to determine whether the arbitration clause of charter party is properly and validly incorporated into the contract of carriage evidenced by the Charter Party Bill of Lading and whether it is binding upon the third party holder of Charter Party Bill of Lading or subrogated underwriter5.
The only International Conventions on the carriage of goods by sea that include provisions on this matter are the 1978`s United Nations Convention on the Carriage of Goods by Sea ("Hamburg Rules") and 2008`s “United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea” ("Rotterdam Rules"). The Article 22 paragraph 2 of the Hamburg Rules stipulates that:
"Where a charter-party contains a provision that disputes arising thereunder shall be referred to arbitration and a bill of lading issued pursuant to the charter-party does not contain special annotation providing that such provision shall be binding upon the holder of the bill of lading, the carrier may not invoke such provision as against a holder having acquired the bill of lading in good faith."
The Article 76 paragraph 2 of the Rotterdam Rules provides that:
"[A]n arbitration agreement in a transport document or electronic transport record to which this Convention applies by reason of the application of article 76 is subject to this chapter unless such a transport document or electronic transport record:
(a) Identifies the parties to and the date of the charter party ....; and
(b) Incorporates by specific reference the clause in the charter party .... that contains the terms of the arbitration agreement."
An example of such clause was provided in the English law case Primetrade AG v. Ythan Limited (The "Ythan")7, where the Charter Party Bills of Lading had the following wording:
"All terms and conditions of Charter Party dated Zug, January 16th, 2004 between Phoenix Bulk Carriers Ltd., Monrovia, Liberia and Primetrade AG, Zug, inclusive of Arbitration Clause are deemed incorporated in this Bill of Lading."
To ensure the compliance with these rules of incorporation when authorising the ship agents to sign the Charter Party Bills of Lading, the Master`s letter of authorisation should include instructions that the Bill of Lading clause incorporating the charter party terms to identify the parties to and date of the charter party and include an express reference to the arbitration or dispute resolution clause.
In United States where the Hague Rules are still in force, there are no statutory provisions concerning the requirements for valid incorporation of a charter party arbitration clause into the Bill of Lading. Similarly, in United Kingdom where the Hague-Visby Rules apply. That`s why when the US and English Courts are asked to decide disputes as to whether a charter party arbitration clause has or has not been properly incorporated into the Bill of Lading, they follow the rules adopted in previous cases8.
For the CFR buyers of commodities, the importance of understanding the effect of incorporation into the Bill of Lading of charter party arbitration clause is that the failure to initiate arbitration proceedings within the time-limit prescribed by the charter party arbitration clause9 or by the applicable law means that the claim would be time-barred and the CFR buyer as third party holder of Charter Party Bill of Lading would not be able to recover from the shipowner. Since most charterparties incorporate either Hague Rules or Hague-Visby Rules, if a claimant does not initiate arbitration proceedings within the one year time-limit10 and instead chooses to commence Court proceedings and the shipowner obtains a stay of Court proceedings after the lapse of one year, this will mean a defeat of the claim which is time-barred11.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Coal Trade Review Edition No. 1.
Endnotes:
1. See US law case Son Shipping Co v. De Fosse & Tanghe, 199 F.2d 687 (2nd Cir. 1952). The case was a claim by the receiver for the short delivery of an oil cargo. The Bill of Lading clause incorporating the charter party terms stipulated that: “This shipment is carried under and pursuant to the terms of the charter dated Antwerp, June 29th, 1948 between Son Shipping Company and De Fosse & Tanghe, charterer and all the terms whatsoever of the said charter except the rate and payment of freight specified therein apply to and govern the rights of the parties concerned in this shipment.” The Court held that the Bills of Lading specifically referred to the charter party and, in language so plain that its meaning is unmistakable, incorporated in the Bills of Lading all the terms "whatsoever" of the charter party "except the rate and payment of freight specified therein". The Court held that "[w]here terms of the charter party are, as here, expressly incorporated into the bills of lading they are a part of the contract of carriage and are binding upon those making claim for damages for the breach of that contract just as they would be if the dispute were between the charterer and the shipowner". For a similar opinion see US law case Ibeto Petrochemical Industries Limited v. M/T Beffen, 475 F.3d 56 (2nd Cir. 2007). The case was a claim for contamination of an oil cargo. The Bill of Lading clause incorporating the charter party terms stipulated that: "This shipment is carried under and pursuant to the terms of the Charter Party dated 31 December 2003 between Chemlube International, Inc. as Charterer and Bryggen Shipping and Trading A/S as Owner and all conditions and exceptions whatsoever thereto." The District Court of New York held that: "Although Ibeto was not a subscriber to the Charter Party, it was bound by the Bill of Lading to abide by the Charter Party terms, which included arbitration in London."
2. See the English law case Schiffahrtsgesellschaft Detlef Von Appen GmbH v. Wiener Allianz Versichrungs AG & Voest Alpine Intertrading GmbH (The "Jay Bola"), [1997] EWCA Civ 1420; [1997] 2 Lloyd`s Rep. 279.
3. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, adopted at New York, June 10, 1958.
4. For an example of such case see Schiffahrtsgesellschaft Detlef Von Appen GmbH v. Wiener Allianz Versichrungs AG & Voest Alpine Intertrading GmbH (The "Jay Bola"), [1997] EWCA Civ 1420; [1997] 2 Lloyd`s Rep. 279.
5. The Courts will also take into consideration whether the court in foreign jurisidiction where the claimant started legal action will allow the anti‐suit injunction or not.
6. The Article 7 of the Rotterdam Rules stipulates that: "this Convention applies as between the carrier and the consignee, controlling party or holder that is not an original party to the charter party."
7. [2005] EWHC 2399 (Comm); [2006] 1 Lloyd`s Rep. 457
8. The US Courts apply the rules adopted in US case law to determine whether a charter party arbitration clause is incorporated into the Bill of Lading contract of carriage, irrespective of the law governing the charter party. See Duferco Steel Incorporated v. M/V Kalisti, 121 F.3d 321 (7th Cir. 1997); Steel Warehouse Company Incorporated v. Abalone Shipping Limited of Nicosai, 141 F.3d 234 (5th Cir. 1998); Barna Conshipping v. M/V Saturnus (S.D. Tex. 2010).
9. See The Clause 33 paragraph (c) of Australian Wheat Charter 1990 which stipulate that: "Any claim must be made in writing and the claimant`s arbitrator appointed within six months of the Vessel`s arrival at the final port of discharge, otherwise all claims shall be deemed to be waived."
10. Hague Rules and Hague-Visby Rules require that the legal action be started within one year from the date when the goods were delivered or the date when they should have been delivered.
11. See the US law cases Thyssen Inc. v. Calypso Shipping Corp S.A., 310 F.3d 102 (2nd Cir. 2002) and Cargill Ferrous International v. M/V Sea Phoenix, 325 F.3d 695 (5th Cir. 2003).