Martrade Shipping and Transport v United Entreprises - The Wisdom C
Martrade Shipping & Transport GmbH V United Enterprises Corporation (The “Wisdom C”)
English High Court, Queen’s Bench Division (Commercial Court); Popplewell J;  EWHC 1884 (Comm); 12 June 2014
TIMECHARTER PROVIDING FOR ENGLISH LAW AND LONDON ARBITRATION: ARBITRATORS AWARDING PENAL RATE OF INTEREST: WHETHER “SIGNIFICANT CONNECTION” BETWEEN CHARTERPARTY AND ENGLAND: WHETHER “APPLICABLE LAW” A FOREIGN LAW: LATE PAYMENT OF COMMERCIAL DEBTS (INTEREST) ACT 1998: ARTICLES 3 AND 4 – CONTRACTS (APPLICABLE LAW) ACT 1990
John Bignall, instructed by Winter Scott LLP, for Martrade Shipping & Transport GmbH, Charterers/Appellants
Neil Henderson, instructed by Jackson Parton, for, United Enterprises Corporation, Owners/Respndents
The High Court allowed an appeal, brought pursuant to section 69 of the Arbitration Act 1996, against an Arbitration Award in which the Tribunal had awarded interest at a penal rate of 12.75% on a principal sum (for unpaid hire), under the Late Payment of Commercial Debts (Interest) Act 1998 (the “1998 Act”).
Case Note contributed by Ervin Tan, B.A. (First Class) Oxon., based in Singapore
The M/V "Wisdom C" (the “Vessel”) was chartered on an amended NYPE form by the Appellant, Martrade Shipping & Transport GmbH, (“Charterers”) from the Respondent, United Enterprises Corporation (“Owners”) (collectively, “Parties”). The Charterparty provided for English law and London arbitration. One of the disputes between Parties was a claim by Owners for unpaid hire amounting to US$178,342.73, which the Arbitral Tribunal awarded to Owners.
However, the Tribunal also awarded Owners interest on that sum under the 1998 Act, calculated at the rate of 12.75 per cent per annum from 23 September 2005 until the date of payment. The Appellants appealed against this award of interest on the basis that the 1998 Act did not apply.
The Wording of s.12 of the 1998 Act
The starting point in Popplewell J’s judgment was section 12(1) of the 1998 Act, which provides as follows.
“This Act does not have effect in relation to a contract governed by a law of a part of the United Kingdom by choice of the parties if:
(a) there is no significant connection between the contract and that part of the United Kingdom; and [the “First Limb”]
(b) but for that choice, the applicable law would be a foreign law.” [the “Second Limb”]
In other words, “where parties to a contract with an international dimension have chosen English law to govern the contract, the choice of English law is not of itself sufficient to attract the application of the Act. Section 12 mandates the application of the penal interest provisions only if one or both of two further requirements are fulfilled. There must be a significant connection between the contract and England (section 12(1)(a)); or the contract must be one which would be governed by English law apart from the choice of law (section 12(1)(b))” [FN 1].
The Policy of s.12 of the 1998 Act
Popplewell J then provided a concise summary of the policy which underlies the 1998 Act. He found that “the interest rate is not intended to be compensatory”, but is “intended to act as a deterrent so as to promote the purposes of the Act reflected in section 6” [FN 2]. Two purposes identified in s 6 of the 1998 Act are, first, “the need to protect commercial suppliers whose financial position makes them particularly vulnerable if their debts are paid late”, and second, “the general deterrence of late payment of commercial debts”. The Act gives effect to domestic socio-economic policy and seeks to promote the benefit of prompt payment of debts on the economic life of the United Kingdom.
Next, Popplewell J opined that there were two reasons why s.12 of the 1998 Act provides that where parties to a contract with an international dimension have chosen English law to govern the contract, the choice of English law is not of itself sufficient to attract the application of the Act.
First, the Act “reflects domestic policy considerations which are not necessarily apt or fair to apply to contracts with an international dimension. There must therefore be an additional connection between England and the contracts, either by English law being the applicable law under established conflict of laws principles irrespective of the parties’ choice (s.12(1)(b) of the 1998 Act), or by some other connecting factor or factors which singularly or cumulatively are significant (s.12(1)(a) of the 1998 Act)”. The additional connecting factor or factors (over and above the choice of law clause) should also go toward “justifying the extension of a deterrent penal provision rooted in domestic policy to an international transaction” [FN 3].
Second, it is of “considerable economic value to the UK that international parties choose English law and jurisdiction to govern their contracts” [FN 4]. To avoid deterring international parties from making such a choice, s.12 of the 1998 Act recognises that the choice of English law of itself should not automatically subject parties to a penal rate of interest on debts.
The application of s.12 of the 1998 Act
As to the First Limb, Popplewell J held that factors which are capable of fulfilling the s.12(1)(a) criterion of “significant connection” must provide a “real connection between the contract and the effect of prompt payment of debts on the economic life of the United Kingdom” [FN 5]. Such factors include the following four (non-exhaustive) examples.
First, where the place of performance of obligations under the contract is in England, especially where the relevant debt falls to be paid in England. If some obligations might give rise to debts payable in England, the policy considerations underlying the Act are applicable to those debts; and if some debts under the contract are to carry interest at a penal rate, it might be regarded as fair and equitable that all debts arising in favour of either party under the contract should do so.
Second, where the nationality of the parties or one of them is English, since, if it is contemplated that debts may be payable by an English national under the contract, the policy reasons for imposing penal rates of interest may be engaged; and if only one party is English, fairness may again decree that the other party should be on an equal footing in relation to interest whether he is the payer or the payee.
Third, where the parties are carrying on some relevant part of their business in England, since they would be within the class of persons (whether natural or legal) who should be encouraged to pay their debts on time and not use delayed payment as a business tool even in relation to transactions which fall to be performed elsewhere.
Fourth, where the economic consequences of a delay in payment of debts may be felt in the United Kingdom, since this may engage consideration of related contracts, related parties, insurance arrangements or the tax consequences of transactions.
Conversely, a London arbitration or English jurisdiction clause cannot be a relevant connecting factor for the purposes of s.12(1)(a). This makes sense. Since s.12(1)(a) will only be engaged in the first place where there has been a choice of English law, then all cases under s.12(1) of the 1998 Act would begin with the scales tipped in favour of finding a significant connection under the First Limb.
Accordingly, the Tribunal’s reasoning in this respect was flawed - the Tribunal had reasoned, in its Award, that “the choice of London arbitration would be a very powerful indication in favour of English law”. Furthermore, the Tribunal also took into account the “use of the English language, the fact that the logs to which the charterers were entitled were to be in English, that [general average] was to be adjusted in London (and English law was to apply to it), that the ship was entered in the London P&I Club, and that the Inter-Club Agreement was incorporated which would be subject to English law” which it concluded individually (“and cumulatively”) reinforced the indication that English law was to govern absent the choice of law clause.
Popplewell J dismissed these latter factors raised in support of the Respondent’s case that s.12 of the 1998 Act applied as follows.
First, the fact that the charterparty was in the English language provided no relevant connection, since English is the first language of many countries and a primary language employed in international trade.
Second, the provisioin for the adjustment of general average in London and in accordance with English law was also not a relevant connection. After all, the choice of English law, which in turn governs the adjustment, was a choice of law which fell to be ignored for the purposes of s.12(1)(a). In any event, charterparties not infrequently provide for adjustment of general average at a different place and under a different system of law from that which is chosen to apply to the remainder of the charterparty. Accordingly, a choice of England as the place of adjustment of general average, and of English law as its governing law, provided no relevant connection between England and the charterparty as a whole.
Third, the entry of the vessel in P & I Club with London managers who also have offices in Greece and Singapore was of no real significance.
Fourth, the governing law of the NYPE Inter-Club Agreement was not helpful since its express choice of English law was derived from the choice of law clause in the charterparty, which was to be ignored for the purposes of the inquiry under s.12(1)(a).
Furthermore, the additional factors that the standard for classification purposes was set by Lloyd’s Register and that basic war risk coverage was to be as defined by Lloyd’s of London were not capable of being relevant connecting factors to England.
As to the Second Limb, Popplewell J held that the opening words of the Second Limb (i.e., “but for that choice”) would require the Court to determine what would be the governing law of the contract pursuant to Article 4 of the Contracts (Applicable Law) Act 1990 (the “1990 Act”), assuming no choice of law clause.
The basic rule contained in Article 4(2) of the 1990 Act is that “it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence or, in the case of a body corporate or unincorporate, its central administration…”. However, Article 4(4) of the 1990 Act provides that “A contract for the carriage of goods shall not be subject to the presumption in [Article 4(2)]”.
Popplewell J held that Article 4(4) applies to a charterparty, “other than a single voyage charterparty, only when the main purpose of the owner’s contractual undertaking is to perform the actual carriage of goods, not merely to make available a means of transport: Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV Case C -133/08  QB 24 at para 37”. A time charter is not such a charterparty since “the owner does not agree to carry goods from and to specific or nominated ports, but rather to make the vessel and her crew available to the charterer, in return for hire, as a means for the charterer to transport goods” [FN 6].
Accordingly, the presumption in Article 4(2) applies. Popplewell J held that the “performance which is characteristic of a contract for the supply of services is the performance of the supplier, not that of the person who pays for the services”, citing Dicey, Morris and Collins, 15th Edition, at paras 32-75 to 32-77. In the case of a time charter, the “supplier” is the owner, and the Court would determine the governing law of the charterparty by determining the principal place of business of the owner.
Finally, applying the rule in Article 4(2) to the facts of the case, Popplewell J concluded that “where a one-ship company incorporated in a jurisdiction of convenience has the ship managed by another company with its principal place of business elsewhere, it will be the place of business of the management company which is determinative. In this case that was probably Greece. On any view it was not England”. Accordingly, an application of Article 4(2) meant that the charterparty “would not have been governed by English law in the absence of the choice of English law by the parties” [FN 7].
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