View source for Stellar Shipping v Hudson Shipping Lines

DMC/Arbn/10/5

England

'''Stellar Shipping Co LLC v Hudson Shipping Lines'''

'''English Commercial Court: Hamblen J: [2010] EWHC 2985 (Comm): 18 November 2010'''

Available on BAILII @ http://www.bailii.org/ew/cases/EWHC/Comm/2010/2985.html

'''ARBITRATION: CONTRACT OF AFFREIGHTMENT CONTAINING GUARANTEE AND ARBITRATION CLAUSE/AGREEMENT: TRIPARTITE CONTRACT: SUBSTANTIVE JURISDICTION OF ARBITRATORS: SECTION 67 OF THE ARBITRATION ACT 1996: WHETHER THERE WAS A BINDING ARBITRATION AGREEMENT BETWEEN GUARANTORS AND GUARANTEED PARTY'''

Simon Bryan QC (instructed by Mays Brown) for the Claimant guarantors, Stellar

James Drake (instructed by Lax & Co) for the Defendant owners, Hudson

'''Summary'''

'''Where a party had agreed to guarantee a contract of affreightment, which contained an arbitration clause/agreement, and the guarantee and contract of affreightment were contained in the same document, to which the guarantors agreed on their own behalf and that of the charterers, any dispute that arose between owners and guarantors fell within the scope of the arbitration clause/agreement.'''

By Jim Leighton, BSc (Hons), LLB (Hons), LLM (Maritime Law), Solicitor of England & Wales at Kennedys Singapore LLP and International Contributor to DMC’s CaseNotes

'''Background'''

This case concerned the application of Stellar Shipping Co LLC (“Stellar”) under s.67 of the Arbitration Act 1996 (“1996 Act”) challenging the Award and Amended Award of Kenneth Rokison QC, Christopher Moss and Mark Hamsher (“the Tribunal”) on the grounds that the Tribunal lacked substantive jurisdiction because no arbitration agreement was ever entered into between Stellar and Hudson Shipping Lines (“Hudson”) in respect of an alleged guarantee by Stellar of the obligations of Phiniqia International Shipping Co (“Phiniqia”) under a contract of Affreightment (“COA”) between Hudson and Phiniqia.

The dispute arose between Hudson and Stellar because Hudson had not received an adequate background reference on Phiniqia. Hudson accordingly sought a guarantee from an established parent company on which they had received an adequate background reference.

The COA was negotiated through broking channels where, initially, Hudson had sought a separate guarantee on Stellar’s letter-headed paper but this was later converted into a guarantee within the COA, to speed up the process for commercial reasons. The COA described the charterers as “Phiniqia Intl. Shipping Co. P.O. Box 55409 Dubai – U.A.E. fully guaranteed by Stellar Shipping Co LLC” and described the signatory in the signature box as “For Phiniqia Intl Shipping, LLC – Stellar Shipping Co LLC (as guarantors)”. The COA also included an arbitration clause/agreement which provided for London arbitration subject to English law. The COA was never signed.

'''Judgment'''

The question before the judge was: “Did Stellar enter into an arbitration agreement with Hudson in respect of the alleged contract of guarantee between Stellar and Hudson?”

If the answer was “no”, Stellar were entitled to the relief sought; if the answer was “yes”, the application failed.

To determine this required consideration of (1) whether a contract of guarantee was agreed between Stellar and Hudson, and (2), if so, whether this involved agreement by Stellar to arbitration of disputes arising out of the guarantee in accordance with the COA arbitration clause.

The judge noted that an application under s.67 of the 1996 Act was a rehearing and not a review or appeal, so that the court was to “decide afresh whether or not there was a concluded arbitration agreement between Hudson and Stellar giving jurisdiction to the Tribunal.”

Contract of Guarantee

Having reviewed the contemporaneous correspondence and other evidence, the judge came to the conclusion that Stellar had entered into a contract of guarantee with Hudson contained in the COA. This still left for determination the question of whether or not this included the COA arbitration agreement.

Arbitration Agreement

The judge stated: “By endorsing the COA Stellar was endorsing and signing up to each of its terms. It was agreeing that if any obligation undertaken thereunder was not performed by Phiniqia then it would be performed by Stellar. However, such an agreement makes little sense in the context of the endorsement of an arbitration clause. If Phiniqia fails to perform its obligations under the arbitration clause Stellar cannot perform those obligations since they are personal to Phiniqia. Stellar’s endorsement of the arbitration clause can only have meaningful effect if it involves Stellar’s own agreement to arbitration in respect of any dispute concerning their own obligations.”

The judge held that “I consider that to be both the natural and the commercially sensible construction of Stellar’s endorsement as guarantor of the COA arbitration clause. It is commercially sensible because the parties were entering into a tri-partite relationship enshrined in a single contractual document and would reasonably be expected to intend that all disputes arising out of that relationship be dealt with in a like manner.”

The judge considered this to accord with the opinion of Lord Hoffmann in Fiona Trust v Privalov (fn1),  because “similar considerations apply by analogy here”.

Against this position the principal argument of Stellar was that “to incorporate an agreement to arbitrate requires clear and indeed express words”. Stellar relied in particular on Habas v Sometal (which concerned incorporation of arbitration clauses/agreements into contracts and placed a restrictive approach on incorporation in ‘two contract’ cases)(fn2).  Stellar submitted that the present case was a ‘two contract’ case and that there were no apt words of incorporation here to satisfy the relevant test.

The judge, however, distinguished Habas v Sometal, saying“I do not consider that the incorporation cases accurately reflect the position here. This is not a case of incorporation by reference. It is a case which involves construing what, in context, is the meaning and effect of Stellar’s endorsement as guarantor of the COA in general and the arbitration clause in particular. There were no terms being introduced from some external source. On the contrary, all the terms were being specifically endorsed.”

The judge continued:“Although there were two contractual relationships which were entered into, they were entered into in the context of a single commercial relationship between Hudson on one side and Phiniqia and Stellar on the other as part of a single package agreed in a single document. It did not involve any agreement with a third party.”

While Stellar also sought to rely on the general reasons given by the courts for a restrictive approach to incorporation of arbitration clauses, the judge highlighted that these applied to ‘two contract’ cases only and the present case was, by analogy, “most akin” to a ‘single contract’ case.

The judge consequently answered the question before him “yes” and dismissed Stellar’s application.

Footnote 1:
In Fiona Trust v Privalov (sub nom Premium Nafta v Fili Shipping) [2007] UKHL 40, Lord Hoffmann stated: “In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrators’ jurisdiction.”

Footnote 2:
In Habas v Sometal [2010] EWHC 29 (Comm)[[http://www.onlinedmc.co.uk/index.php/Habas_Sinai_v_Sometal]] 
Christopher Clarke J identified four broad categories of the incorporation of arbitration agreements into contracts:
(1) A and B make a contract in which they incorporate standard terms;
(2) A and B make a contract incorporating terms previously agreed between A and B in another contract or contracts to which they were both parties;
(3) A and B make a contract incorporating terms agreed between A (or B) and C; and
(4) A and B make a contract incorporating terms agreed between C and D.
He further categorised (1) and (2) as ‘single contract’ cases and (3) and (4) as ‘two contract’ cases and identified the different tests against which these two categories of cases were to be judged.