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Commencement of Arbitration for Cargo Claims6 May 2021

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Club letters of undertaking (“LOUs”) issued in respect of cargo claims essentially set out a promise by the P&I Club to pay the sum that is ordered or agreed to be paid to the cargo claimant if its claim succeeds. However, they also contain other provisions, often including a provision stating that the cargo claim will be governed by English law and referred to London arbitration.

"Owners therefore contended that four separate arbitrations should have been commenced, and since some of those claims must inevitably have been for less than US$100,000, they should have been commenced under the SCP."

Disputes can arise over whether a cargo claimant’s arbitration notice was issued validly – and how (and if) the LOU arbitration provision should be read with the bill of lading’s arbitration clause. Recent guidance from the English courts have emphasised the importance of caution in such circumstances.

The Quest (2014)

In The Quest¹, cargo claimants alleged damage to a cargo of bagged rice that was carried under four Congenbill 1994 bills of lading. The Owners’ P&I Club issued a LOU for US$300,000 in respect of all the bill of lading claims which contained an arbitration provision stating: “the Ship Owners agree that the above mentioned claims shall be subject to London Arbitration (under the auspices of the LMAA) and English Law to apply…and for each party to nominate its own arbitrator and the two so appointed may appoint a third”.

The cargo claimants then issued an arbitration notice in respect of the claims. However, the Owners argued that the arbitration had not been validly commenced as each bill of lading (under the Congenbill’s first standard numbered clause) incorporated the charterparty law and arbitration clause that required claims under US$100,000 to be arbitrated before a sole arbitrator under the LMAA Small Claims Procedure (“SCP”). Owners therefore contended that four separate arbitrations should have been commenced, and since some of those claims must inevitably have been for less than US$100,000, they should have been commenced under the SCP.  If the Owners were right, any attempt by the cargo claimants to bring new arbitrations would have been time barred.

The Owners’ argument was rejected in the arbitration and they appealed to the English High Court, which held that:

  1. One had to ask what meaning the LOU would convey to a reasonable person in light of the relevant background²;
  2. With this in mind, the LOU arbitration clause clearly intended to replace the charterparty/bill of lading arbitration clause and its SCP provision. It contained everything an arbitration clause needed, including a provision for each party appointing its own arbitrator, with no mention of the SCP. The parties would not have wanted the arbitration provisions in two places (a recipe for confusion), with some arbitrations for certain claims under the SCP and others under the LMAA Terms;
  3. The judge also suggested the LOU required just one arbitration (distinguishing the 2011 decision in The Biz³, which held the opposite in the context of bills of lading without a separate LOU arbitration clause); however, this part of his decision was not binding;
  4. So, the judge held, the cargo claimants had validly commenced arbitration.

The Majesty (2020)

More recently, in The Majesty⁴, there was a cargo claim also relating to shortage/damage to a cargo of bagged rice carried under five bills of lading which, again, incorporated the charterparty arbitration clause providing for claims under US$100,000 to be arbitrated under the SCP.

The Owners’ P&I Club issued a LOU stating: “We confirm that the Shipowners agree that the above-mentioned claims shall be subject to English law and shall be brought in arbitration proceedings in London”, after which the cargo receivers served an arbitration notice stating:

"We confirm that the Shipowners agree that the above-mentioned claims shall be subject to English law and shall be brought in arbitration proceedings in London."Owners’ P&I Club

  • Their arbitrator was appointed under the LOU arbitration agreement; or
  • He was appointed under the charterparty arbitration clause; or
  • They would agree him as the SCP sole arbitrator if, which they denied, the SCP applied.

The Owners argued the arbitration was not properly commenced (and the cargo claim was shortly afterwards time-barred) because the cargo claimants should have commenced five separate SCP arbitrations (one per bill of lading) as required by the charterparty arbitration clause incorporated into each bill of lading. The Owners said the LOU arbitration provision did not (as the cargo claimants argued) override the SCP provision and consolidate all of the claims into one arbitration.

The Owners’ arguments failed in the arbitration (by a 2-1 majority decision). They appealed to the English High Court, which rejected their appeal:

  1. The judge held that the LOU wording consolidated all of the claims, but, rather than replacing the charterparty arbitration clause entirely (as in The Quest), simply amended it so that it required one arbitration to be commenced under the charterparty arbitration clause (not under the SCP given the consolidated claim value). This was the business common sense meaning that would be conveyed to a reasonable person as a matter of objective construction against the relevant factual background;
  2. This was consistent with the reference in the subject heading to one combined “Claim” and in its main body to the “above cargo claim” and to an “award” or “order” of the “Tribunal”, all in the singular (suggesting one combined claim in one arbitration);
  3. It was also consistent with the separate reference to an award of “a properly constituted London Arbitral Tribunal”, which must be referring to a Tribunal appointed under the charterparty arbitration clause (though in one consolidated arbitration). The LOU’s separate provision allowing the Club to accept service of an arbitration notice on the Owners’ behalf was consistent with this as well, as was the fact the Club only ‘confirmed’ the Owners agreed that English law/London arbitration applied – they had already agreed this in the charterparty clause;
  4. The reference to “legal or arbitration proceedings…before the Court or Tribunal referred to below” was also consistent with this. The reference to “the Court” was merely a reference to English Court proceedings under the LOU itself in the event of a dispute under the LOU (rather than the main cargo claim that would be subject to London arbitration proceedings);
  5. Owners’ reservation of rights was irrelevant to the SCP, because it was made in relation to the cargo claim itself. It made commercial sense for Owners to consolidate five separate arbitrations into one arbitration, avoiding inconvenience and the risk of inconsistent awards; and
  6. Finally, the arbitration notice was valid even though it alternatively sought to commence SCP arbitration because it actually denied the applicability of the SCP. The arbitration notice merely covered all possible bases.

"Attention will always need to be paid to the LOU wording (if it refers to arbitration commencement) and to commencing arbitration in the right way to avoid potential costly arguments further down the line."

The judge also denied the Owners’ separate argument that the previously-agreed time extensions (which only referred to proceedings under the bills of lading) did not relate to the claims the cargo claimants eventually referred to arbitration. In his view, the time extensions, viewed objectively in their commercial context, referred to disputes under the bills of lading which had been agreed under the LOU to be resolved in one arbitration.

Conclusion

These cases demonstrate a tendency on the part of the English courts to construe LOU arbitration provisions quite widely. Both cases reject the narrower reading argued by the Owners and the suggestion that the LOUs envisaged a separate arbitration for each bill of lading, some of which might be determined under the SCP depending on the claim value. The decision in The Quest may be understandable given the clearer wording of the LOU arbitration provision in that case. Although the decision in The Majesty is a significant further step than that, given the less detailed LOU wording in that case.

In contrast, according to The Biz, separate arbitrations (one per bill of lading) could be what is required where the LOU does not contain any overriding or amending arbitration provision at all. The judge in The Quest distinguished this decision in this regard.

And here lies the rub: care is always needed when commencing arbitration, particularly when faced with a looming time bar. Attention will always need to be paid to the LOU wording (if it refers to arbitration commencement) and to commencing arbitration in the right way to avoid potential costly arguments further down the line.

[1] Viscous Global Investment Ltd v Palladium Navigation Corporation [2014] 2 Lloyd’s Rep. 600.
[2] This principle of construction was later applied in Lukoil Asia Pacific Pte Ltd v Ocean Tankers (PTE) Ltd (“The Ocean Neptune”) [2018] 1 Lloyd’s Rep. 654.
[3] Easybiz Investments v Sonograin [2011] 1 Lloyd’s Rep. 688.
[4] Lavender Shipmanagement Inc v Ibrahima Sory Affretement Trading SA & Ors [2020] EWHC 3462 (Comm).

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