Viscous Global Investment v Palladium Navigation - The Quest

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DMC/Arbn/14/

England

Viscous Global Investment Ltd v Palladium Navigation Corp (The “Quest”)

English Commercial Court: Males J: [2014] EWHC 2654 (Comm): 30 July 2014

Ben Olbourne (instructed by Grier Olubi Solicitors) for Viscous

Yash Kulkarni (instructed by Jackson Parton Solicitors) for Palladium

ARBITRATION: BILLS OF LADING (“BLS”): P&I CLUB LETTER OF UNDERTAKING (“LOU”): WHETHER ARBITRATION AGREEMENT IN LOU REPLACED ARBITRATION AGREEMENTS IN BLS: ARBITRATION ACT 1996 SECTION 32 APPLICATION

Summary

A P&I Club LOU, when considered in the context of the dispute as a whole and applying ordinary principles of contractual construction in the light of business common sense, contained a binding arbitration agreement between the carrier and the holder of the bills of lading to arbitrate cargo claims under the bills of lading in accordance with the terms of the LOU. This agreement replaced the existing charterparty arbitration agreements incorporated into the bills of lading.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, and International Contributor to DMC’s Case Notes

Background

Viscous, as the receiver, sought to pursue cargo claims against Palladium, the carrier, arising out of the carriage of a bagged rice cargo of about 9,930 metric tonnes from Thailand to Nigeria in late 2011 on board the vessel “QUEST” pursuant to four bills of lading variously dated 24 August, 1 September and 2 September 2011.

Viscous’s case was that the cargo was discharged in a damaged condition by reason of Palladium’s breach of the contracts of carriage contained in or evidenced by the four bills of lading. Palladium’s P&I Club put up security, in the sum of USD300,000, including interest and costs, to avoid arrest of the vessel, by way of a letter of undertaking (“LOU”) to Viscous for the cargo claims pursuant to the four bills of lading.

The LOU contained a detailed arbitration agreement, providing for English law and London arbitration pursuant to the LMAA Terms. This was agreed to in circumstances where the four bills of lading themselves incorporated an arbitration agreement from an unidentified charter.

Three charters existed in relation to the vessel for the subject voyage: a head time charter dated 4 July 2011, a sub time charter dated 30 July 2011, and a voyage charter dated 29 July 2011. The time charters provided for English law and London arbitration pursuant to LMAA rules (the LMAA Terms or the LMAA Small Claims Procedure for claims worth no more than USD100,000), and the voyage charter provided for English law and Singapore arbitration.

Viscous commenced arbitration in accordance with the arbitration agreement in the LOU, whereby one panel of three arbitrators was appointed to determine the claims under the four bills of lading. Palladium sought to argue that the arbitral tribunal did not have jurisdiction to hear the cargo claims, following expiry of the time bar to which the four bills of lading were subject. The objective was to defeat some or all of the claims under the four bills of lading for failure to commence the appropriate arbitration in time.

Palladium’s position was based on differences between the requirements in the arbitration agreements in the four bills of lading and that in the LOU. Palladium argued that there should be four separate arbitrations, one for each bill of lading, and the LMAA Small Claims Procedure should apply to any claims worth no more than USD100,000. Palladium’s argument was that the arbitration agreement in the LOU only supplemented the arbitration agreements incorporated by the four bills of lading but did not replace it.

An application to the High Court was made under section 32 of the Arbitration Act 1996 to determine whether the tribunal had jurisdiction to resolve the cargo claims in the arbitration commenced.

Judgment

The judge identified that the question to be resolved was 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. The judge’s view was that answering the question required the construction of the LOU to be determined in its context, applying ordinary principles of contractual construction in the light of business common sense. That context included the pre-existing contractual position. The judge saw no reason in principle why the terms of an LOU should not operate as a complete replacement of an existing dispute resolution clause.

The judge was not prepared to accept Palladium’s position that there is a 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, namely that it must be read alongside the existing clause. The cases on which Palladium sought to rely (fn1), said the judge, were focused on very different problems, namely the rule that an oral agreement is not effective to vary a contract that was required to be in writing. The judge considered that in the present context there was no need, and it would be retrograde, to introduce the kind of intellectual contortion to which that rule could lead. Rather the task at hand was to look at the matter objectively and, in the light of the relevant background, to ask what meaning would the contract convey to a reasonable person.

In turning his focus to the arbitration agreement in the LOU, the judge noted that it was perfectly capable of operating as a new and free-standing agreement, containing everything needed in such a clause. The clause was comprehensive, dealing with the seat of the arbitration (London), the procedure to be applied (LMAA Terms), 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).

The judge concluded that, given the comprehensive set of provisions, there appeared to be no reason why the parties should not have intended the LOU to replace the charter arbitration clauses in their entirety. The judge considered that to be the natural meaning of the relevant provisions in the LOU.

The judge also noted that there were compelling reasons why the parties should have intended this, including the obvious difficulties caused by the charter arbitration clauses providing for different places and rules for arbitration, the modest sum in dispute, the likelihood that the claims under all four bills of lading would raise much the same issues, the fact that the LOU did not even mention a charter, and the LOU removing any possibility of disagreement as to which, if any, charter was incorporated into the bills of lading.

Comment

The judgment confirms that commercial common sense is to be exercised to determine the true intention of the parties to an arbitration agreement by objectively considering the context of the dispute as a whole and applying the normal rules of contractual construction to the terms of the agreement.

Footnote 1: Morris v Baron & Co [1917] AC 1 and British & Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48