Ulusoy Denizilik v COFCO Global Harvest (Zhangjiagang) Trading - The Ulusoy 11
Ulusoy Denizilik A.S. v COFCO Global Harvest (Zhangjiagang) Trading Co. Ltd (The "Ulusoy-11")
Queen’s Bench Division (Commercial Court): Mr Justice Bryan:  EWHC 3645 (Comm): 28 August 2020
Judgment Available on BAILII: https://www.bailii.org/ew/cases/EWHC/Comm/2020/3645.html
Gemma Morgan (instructed by Mills & Co) for the Claimants ("Owners")
Dominic Happé (instructed by Clyde & Co) for COFCO ("Bill of Lading Holders")
ANTI-SUIT INJUNCTION: BILLS OF LADING EXPRESSLY INCORPORATING CHARTERPARTY LAW AND ARBITRATION CLAUSE: APPLICABLE LAW GOVERNING ISSUE OF INCORPORATION: IDENTITY OF GOVERNING CHARTERPARTY: WHETHER LAW AND ARBITRATION CLAUSE INCORPORATED INTO BILLS OF LADING: BILL OF LADING HOLDERS BRING CARGO CLAIM IN PEOPLE’S REPUBLIC OF CHINA (“PRC”): WHETHER THIS A BREACH OF LONDON ARBITRATION CLAUSE: WHETHER OWNERS ENTITLED TO ANTI-SUIT INJUNCTION: ROME I REGULATION (REGULATION (EC) NO 593/2008), ARTICLE 10(1), (2)
In this case, in which the Claimants applied for a permanent anti-suit injunction, the Judge held that:
(i) The law that governed the question whether the law and arbitration clause of the governing charterparty was incorporated into the bills of lading was English law, pursuant to article 10(1) of the Rome I Regulation and English conflict of law rules;
(ii) It did not matter whether "the Governing Charter Party" referred to in the bills of lading was the Head Charter or the Sub-Charter because both charterparties contained an English Law and Arbitration Clause. The presumption was that it was the Head Charter which was incorporated.
(iii) The wording of a Letter of Undertaking (“LOU”) given by a Chinese insurer in respect of a claim for damage to the cargo did not amount to a variation of the agreement to arbitrate.
Accordingly, the Judge granted the injunction in the terms sought.
Case note contributed by Cindy Ko, LLB (Hons), Advocate & Solicitor of Singapore, International Contributor to DMC’s Case Notes
The owners (the "Owners") time-chartered the "ULUSOY-11" (the "Vessel") to Smart Grain Shipping Co Ltd ("Charterers") on an amended NYPE form ("the Head Charter"). The Charterers sub-chartered the vessel to COFCO International Freight SA ("Sub-Charterers/COFCO") for a time charter trip from Brazil to China ("the Sub-Charter").
In early April 2020, the Vessel carried a consignment of Brazilian soya beans in bulk (the "Cargo") from Barcarena, Brazil to Longkou, PRC. The owner issued 5 separate bills of lading on the Congen Form date 3 April 2020 in respect of the Cargo ("the BsL"). COFCO were the notify party on all 5 of the BsL and were also the receivers of the Cargo. ("Defendants").
During discharge at Longkou in late May/early June 2020, COFCO found that parts of the Cargo were allegedly heat damaged.
COFCO applied to the Qingdao Maritime Court (the "Chinese court") to arrest the Vessel during the Cargo discharge as security for its claims under the BsL. In order to obtain the release of the Vessel from arrest in China, the Standard Club, (the Owners' P&I Club), provided the security in the sum of US$5 million to China Re Insurance Group Corporation (China Re) under an LOU governed by Chinese law. China Re then gave an LOU to COFCO in the same terms. After the issuance of the LOU, the Chinese court lifted the arrest on 2 June 2020. COFCO then commenced proceedings against the Owners in the Chinese court, claiming compensation for the damage to the Cargo.
The Owners commenced an inter partes application for a final anti-suit injunction restraining COFCO from commencing and/or continuing proceedings in any Chinese Court or tribunal, or elsewhere, in breach, it was said, of an arbitration agreement in the applicable contract of carriage.
The issues before the Court were as follows:
(1) Whether there was a binding arbitration agreement between the Owners and COFCO under a contract of carriage governed by English law in favour of London arbitration;
(2) If so, whether the contract of carriage had either been varied to the effect that, or the Owners were estopped from denying that, they had agreed to COFCO's cargo claim taking place in the Chinese courts as a result of the terms of the LOU given in favour of COFCO, such that COFCO were not in breach of the terms of the contract of carriage in commencing the proceedings in the PRC.
(3) Whether in all the circumstances it was appropriate to grant an anti-suit injunction and if so whether that should be final or interlocutory.
The LOU provided as follows:
"This letter of undertaking shall not be construed as any admission of liability, amount, expense or any issues by the owners of MV Ulusoy 11, and is given without prejudice to any rights or defences available to the owners of the M V Ulusoy 11 including the right to limit in accordance with applicable laws."
The alleged agreement to arbitrate in London pursuant to English law
The BsL provided:
"Freight payable as per governing charter party."
"For conditions of carriage see overleaf".
Clause 1: "All terms and conditions, liberties and exceptions of the charter party dated as overleaf, including the Law and Arbitration Clause, are herewith incorporated. "
The Head Charter provided that:
"Clause 69 Arbitration: (a) This contract is governed by and construed in accordance with English law. Any dispute arising out of or in connection with this charter party shall be referred to arbitration in London."
The Sub-Charter provided that:
Clause 13: " This contract shall be governed by English law GA/Arbitration to be held in London."
Clause 17: "Should any dispute arise between the owners and the charterers see clause 69."
Clause 69 then followed in identical terms to that in the Head Charter.
The law governing the question of incorporation:
According to article 10 (1) of the Rome I Regulation (Regulation (EC) No 593/2008), the material validity of a contract is to be decided pursuant to the law which would govern it if the contract or the terms therein were valid. The material term here was the incorporated Law/Arbitration Clause, as asserted by the Owners, in either the Head or the Sub-Charter. The law that governed the question of incorporation was, accordingly, English law.
However, COFCO argued that, according to the exception in Article 10 (2) of the Rome I Regulation, a party may rely upon the law of the country in which it has its habitual residence "if it appears from the circumstances that it would not be reasonable to determine the effect of its conduct in accordance with the law specified in para 1".
As such, a party opposing the putative applicable law pursuant to Article 10 (2) has to prove that:
(1) it is unreasonable to apply the putative applicable law to the issue of the contract formation;
(2) it has not consented to be bound by a contract (here the agreement to arbitrate in this regard).
The court would consider the situation from the perspective of ordinary commercial expectation.
The words "if it appears in the circumstances" meant that the court must have regard to all the circumstances of the case - not solely to those in which the party claiming that it has not consented to the contract has acted.
Consideration had also to be given to the practices of the parties, and that practice in this context was the usual practice of international trade and the carriage of goods by sea. In practical reality, it was very common for cargo receivers to become bill of lading holders without being aware of, or seeing the terms of, any charterparty incorporated into the bills, and without being curious about what those terms were.
Here, COFCO had failed to prove the absence of consent and the necessary “unreasonableness”. Therefore, the court held that English law was the law that governed the question of incorporation, and there was no scope for the application of article 10 (2).
In particular, the Court said that provisions in the Congen bill such as the present were the very life blood of international trade, and the approach to incorporation that had been identified was the approach which was regularly applied. COFCO were free to contract otherwise if they did not want to be obliged to arbitrate in a neutral venue or by an arbitration clause incorporated by reference, but they had not done so.
The applicable charterparty:
The BsL expressly incorporated the “Law and Arbitration Clause” of a charterparty. Although there were two charterparties – the Head Charter and the Sub-Charter - both charters contained an identical English Law and LMAA (London Maritime Arbitrators Association) Arbitration Clause.
COFCO tried to argue that it was the Sub-Charter that was incorporated but that its terms were uncertain, with the result that there was no binding arbitration clause.
The court confirmed that the general presumption, in terms of incorporation of charterparties into BsL, is that it is the head charter which will normally be incorporated into the bill of lading, because it is the head charter to which the shipowner was a party and – in its capacity as carrier under the B/L - the terms of which it will be aware.
The general presumption may be displaced where the head charter is a time charter and the sub-charter is a voyage charter where the parties are presumed to wish to incorporate the more apposite terms of a voyage rather than a time charter into their contract of carriage, particularly where the words of incorporation in the bill are "Freight Payable as per Governing Charterparty". Here, the sub-charter was a trip time charter rather than a voyage charter.
The court held that it was the Head Charter which was incorporated, and that the London Arbitration Clause was incorporated into the BsL, whichever charterparty was incorporated by reference.
Since COFCO’s claim in the Chinese proceedings against the Owners was in respect of damage suffered by the Cargo during the course of its carriage under the BsL, then - absent a variation of the contract of carriage and the associated agreement to arbitrate - the commencement of those proceedings would be a breach of the contractual agreement to arbitrate in London.
Prima facie COFCO as lawful holder of the BsL had rights of suit vested in it pursuant to s.2(1) of the Carriage of Goods by Sea Act of 1992, and - by s.3(1) of the same - COFCO became bound by the original contracting party's (the Shippers’) liability under the BsL contracts.
Was the arbitration agreement varied or superseded by the China Re LOU or were the Owners estopped from relying on the same?
COFCO raised three arguments to the effect that the LOU had somehow varied or superseded the BsL and the parties' agreement to arbitrate disputes arising thereunder:
(i) the wording of the LOU varied the agreement to arbitrate between the Owners and COFCO;
(ii) there had been a submission to the Chinese courts by the Owners by reason of the LOU; and
(iii) that the Owners were estopped from asserting an agreement to arbitrate.
The court held that the present case was governed by English law, and that the LOU here did not constitute a variation of the agreement to arbitrate contained in the BsL, because:
(i) the LOU wording did not support any agreement or intention to abandon the existing London arbitration agreement. The LOU was expressly stated to be given "without prejudice to any rights or defences available to the owners", which showed that the LOU was not intended to affect the Owners’ rights, including their right to arbitrate in respect of the underlying dispute;
(ii) The LOU specifically provided that it was the LOU that was subject to Chinese law and jurisdiction, but this did not mean that "all disputes arising under the bills of lading" were subject to Chinese law and jurisdiction;
(iii) The LOU was a distinct agreement between a third party, China Re, and COFCO, rather than between the Owners and COFCO;
(iv) The LOU would not vary the agreement between the Owners and COFCO because:-
a. China Re was an independent third party not acting on behalf of the Owners in providing the LOU;
b. The LOU did not contain or purport to contain any words that could possibly be construed as an agreement to vary the agreement to arbitrate;
c. The LOU was not given in consideration of the Owners and COFCO agreeing to vary its agreement to arbitrate;
d. COFCO knew they were entering into a separate contractual agreement with China Re and not the Owners' P&I Club or the Owners themselves;
e. Even if the LOU was provided by the Owners' P&I Club, it was in discharge of its obligation to the member owners, and
f. The LOU was not provided by China Re "on behalf of" or "as agent for" the Owners, at the insistence of COFCO.
The Court found that there was no credible basis for the alleged understanding by COFCO that the effect of the LOU was that the parties had agreed to vary the agreement to arbitrate.
Hence, LOU was an independent contract and did not vary the agreement to arbitrate.
No submission to the Chinese Court
COFCO also argued that LOU amounted to a submission by the Owners to the Chinese court that would supersede any arbitration agreement.
The court rejected this argument and held that a variation of the agreement to arbitrate, if any, should be made in writing or evidenced in writing, given the importance of the subject matter. However, there was here no offer, no consideration, no intention to vary the agreement to arbitrate. Therefore, there had been no submission to the Chinese court sufficient to found an unequivocal act of waiver by the Owners of their rights.
COFCO were and remained bound by the agreement to arbitrate in London. There was no representation made in the LOU and the Owners had made no clear and unequivocal representation that they would not rely on their rights under the Law and Arbitration clause of the BsL to have the disputes determined in London Arbitration.
Principles in relation to anti-suit injunction
The court confirmed the principles in relation to anti-suit injunctions:
(i) The court has the power to grant interim injunctions pursuant to section 37 of the Senior Courts Act 1981, as its thinks fit;
(ii) The test for granting an anti-suit injunction is what the ends of justice require;
(iii) This power extends to restraining foreign proceedings when brought, or threatened to be brought, in breach of a binding arbitration agreement;
(iv) The court should exercise its discretion with caution since it indirectly affects a foreign court;
(v) The claimant must demonstrate a negative right not to be sued: on an interim injunction the standard of proof has been stated as "a high degree of probability that there is an arbitration agreement which governs the dispute in question"; on a final injunction, the standard is a higher one, namely, the claimant must prove to the civil standard that there is an agreement to arbitrate, that is, on balance of probability;
(vi) If the claimant meets that standard the Court will ordinarily exercise its discretion to grant an injunction, unless the defendant can show strong reasons to refuse the relief;
(vii) The defendant bears the burden of proving that there are strong reasons to refuse the relief.
COFCO had failed to provide a strong reason to refuse the relief. The LOU would respond to a London arbitration award; there was no submission by the Owners to the jurisdiction of the Qingdao court; there was an agreement to arbitrate under English law; the LOU wording itself preserved Owners’ rights and defences, and PRC law recognised existing arbitration agreements between parties.
The Court was satisfied that it was appropriate to grant the injunction to prevent the continuing breach of the agreement to arbitrate in the form of the wrongdoing of COFCO in commencing and continuing the Chinese proceedings.
Therefore, the court granted a final anti-suit injunction.
This case may be contrasted with the case of Lavender Shipmanagement Inc v. Ibrahima Sory Affrètement Trading S.A. & Ors (Majesty)  EWHC 3462 (Comm) where the Court found that a single LOU issued for cargo claims under five different bills of lading was effective to vary the arbitration agreement so that parties agreed to consolidate the disputes into a single arbitration.
A key difference is whether the LOU was given on Owners' behalf or by an independent third party, although it is notable that in Lavender Shipmanagement it was more a question of whether there should be one or five arbitrations and whether there should be arbitration according to the Small Claims Procedure. In this case, the issue was as to the choice between London arbitration and Chinese court proceedings.
Much will depend on the terms of the LOU in each case and the circumstances of the dispute and provision of the LOU. Parties should exercise caution when negotiating LOUs even though these are commonly done under immense pressure.