Incorporation of arbitration clauses in England

The importance of maritime arbitration in the international commercial context is highlighted by Hill. The popularity of arbitration is seen throughout different areas of maritime law: as well as the typical charterparty disputes, arbitration is frequently seen in relation to disputes over maritime assistance, salvage and ship-building contracts. Arbitration is excluded from environmental protection and marine environment cases because the CLC and FUND Conventions contain exclusive forums such as the place where the harmful event takes place or the place of adoption of preventive measures.

London's prominence as a major centre of international maritime arbitration means that the regulations and business practices of English origin have widespread influence and a well-established framework. The 1996 UK Arbitration Act (UKAA) represented a novel take on the traditional determination of the applicable law by the arbitrator in relation to the substance of the dispute at stake, as did the ICC Rules of Ar bitration that have been in force since 1 January 2012.

The UKAA’s inception was influenced by the report from Lord Mustill in 1989. It aims to ‘restate and improve’ the statutory and common law rules of commercial arbitration^[1] by following the structure and contents of the UNCITRAL Model Law. The seat of arbitration is ‘the juridical seat’ designated by the parties to the arbitration agreement or the institution, person or arbitral tribunal chosen by them. The juridical seat of arbitration can also be ‘determined, in the absence of any such designation, having regard to the parties' agreement and all the relevant circumstances’. ‘The seat of arbitration is usually the physical location where the arbitration is located but in fact it may also be the legal place of arbitration’. The parties may designate London as the seat of arbitration and English law as the applicable law. However, all or part of the proceedings can be conducted in another countiy.

According to the ‘procedural party autonomy' principle, Article 19( 1) of the UNCITRAL Model Law 1985 (last amended in 2006), regarding the determination of rules of procedure, states: ‘subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings’.

Similarly, the provisions of Part 1 of the UKAA are founded on principles among which ‘the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest’ (s 1(b) UKAA).

Furthermore, the procedure in s 34(1) UKAA follows Article 19(1) of the UNCITRAL Model Law 1985: ‘it shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter’.

The limitations to procedural party autonomy in arbitration depend on the stage of arbitral proceedings. The arbitral procedural rules agreed before the constitution of the arbitral tribunal cannot normally be modified without the consent of the tribunal itself unless the parties to the contract never agreed on it. If parties agree on institutional arbitration they will be bound by institutional rules.

Under s 31 UKAA (objection to substantive jurisdiction of tribunal), the respondent should object to the jurisdiction before contesting the merits of the matter:

• 1. An objection that the arbitral tribunal lacks substantive jurisdiction at the outset of the proceedings must be raised by a party not later than the time he takes the first step in the proceedings to contest the merits of any matter in relation to which he challenges the tribunal’s jurisdiction. A party is not precluded from raising such an objection by tlie fact that he has appointed or participated in the appointment of an arbitrator.
• 2. Any objection during the course of the arbitral proceedings that the arbitral tribunal is exceeding its substantive jurisdiction must be made as soon as possible after the matter alleged to be beyond its jurisdiction is raised.

Section 6(1) UKAA defines an arbitration agreement as ‘an agreement to submit to arbitration present or future disputes (whether they are contractual or not)’. The UKAA is applicable to arbitration agreements in writing: Andrews clarifies that ‘an arbitration agreement not in writing might be valid at common law, that is, outside the scope’ of the UKAA, and ‘an unwritten arbitration agreement is not lacking in legal effect; but it will not be governed by the Act’.^[2] Section 5 UKAA sets out that there is an arbitration agreement in writing:

• (a) if the agreement is made in writing (whether or not it is signed by the parties),
• (b) if the agreement is made by exchange of communications in writing, or
• (c) if the agreement is evidenced in writing.

... where parties agree otherwise than in writing by reference to terms which are in writing, they make an agreement in writing.

Furthermore, according to s 5(6), ‘references ... to anything being written or in writing include its being recorded by any means’ including electronic means (such as email, electronic B/L, fixture recap). If the agreement is not in writing it will be valid if it ‘is recorded by one of the parties, or by a third party, with the authority of the parties to the agreement’ (s 5(4)). The arbitration clause may be contained in a charterparty or a B/L. The ultimate B/L holder will be obliged to arbitrate in case of any claim arising from the breach of the B/L contract.

Arbitration and jurisdiction agreements are subject to interpretation rules in English law. English and Welsh courts (or arbitral tribunals, under s 30 UKAA) will determine whether an arbitration clause complies with s 5. They will not determine the validity of the arbitration agreement following a foreign test when it is governed by a third country’s law. Judges have the ‘power to recast botched text when the true intention is readily discernible’ under s 5(5):

An exchange of written submissions in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another party and not denied by the other party in his response constitutes as between those parties an agreement in writing to the effect alleged.

Section 6(2) concerns arbitration clauses incorporated by reference: ‘the reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement’.

Arbitration clauses can be incorporated by general words of incorporation. Although, as seen in The Lucky’ Lady, a B/L must specifically refer to the arbitration clause. The following provision could appear in a standard B/L issued under a charterparty:

This shipment is carried under and pursuant to the terms of the Contract of Affreightment/ Charterparty dated AS PER CHARTERPARTY at PER CHARTERPARTY between AS PER CHARTERPARTY and AS PER CHARTERPARTY as Charterer and all the terms whatsoever of the said Contract of Afifeightment/Charterparty including the Arbitration clause, cargo line clause, and the conditions appearing on both sides of this Bill of Lading to apply and to governthe rights of the parties concerned in this shipment. A copy of the Contract of Affreightment/ Charterparty may be obtained from the Shipper or the Charterer upon request.

The arbitration clause provided in the charterparty becomes a provision in the B/L.^[3] Under English law, the general rale is that an arbitration clause in a charterparty binds the B/L holder when it is expressly and specifically incorporated into the B/L. The B/L holder is not an original signatory and has no power to negotiate the charterparty terms. This person has not acquired any responsibilities or rights under the B/L. However, when the charterparty terms have been incorporated in the B/L and endorsed to the holder, this person is bound by the arbitration clause under the lex fori, raising reasonable doubts for B/L endorsees whether it might bind them. The effect of arbitration clauses on B/L holders may be different, depending on whether the arbitration clause is printed on or inserted into a liner B/L or is incorporated by reference into a B/L from a charterparty.

English courts take a strict approach to resolving the issue of effective incorporation. General words of incorporation in a B/L are not construed as effectively incorporating the arbitration clause from a charterparty. While the B/L usually must include express reference to the charterparty's arbitration clause in order to bind a B/L holder to arbitration, English courts will allow some flexibility in situations where the intent of the parties is evident. In addition, although English law does not necessarily require it, some courts have found that the provision being incorporated must be consistent with the B/L, and if it is inconsistent, the provision will be rejected.

English courts may apply ordinary principles of construction to analyse the effect of an arbitration clause on non-contractual parties (i.e., the successors to the original contractual parties) if the circumstances warrant it, but in most cases, they will require explicit words of incorporation to effectively incorporate an arbitration clause from one contract into another. An arbitration clause must be incorporated expressly and precisely to bind a B/L holder because a B/L holder is not an original party to the contract of carriage and the arbitration clause is an ancillary dispute resolution provision that is not germane or directly relevant to the subject matter of the main contract of carriage. English courts intend to protect nonoriginal parties, such as B/L holders, by requiring the original parties to expressly incorporate the arbitration clause into the B/L and thus provide notice of the arbitration clause to B/L holders.^[4]

Li states:

The express incorporation requirement in English law means that, on its face, a B/L must specify that an arbitration clause from a charterparty is incorporated ... in contrast to US law, English courts apply a rule that does not deal with the scope of the arbitration clause. Furthermore, English law does not require identification of the charterparty... There are benefits and detriments to [this] approach.

When the charterparty intended to be incorporated in the B/L was not correctly identified and the claimant relying on the B/L terms was unaware that the Hague-Visby limitation period had already expired, a Singaporean court stayed court proceedings in favour of London arbitration, stating as a condition that the time-bar was waived. As a general rule, words of incorporation in the B/L do not incorporate an arbitration or jurisdiction clause in the charterparty by general reference to a standard form contract or previous contracts between the same parties to incorporate an arbitration or jurisdiction clause.

The differences between third countries and England can lead to a conflict of laws as well as ‘forum shopping’. Any proceedings other than as provided for in the arbitration agreement will be considered a breach of contract entitling the defendant to a stay under s 9(1) UKAA and even to apply for an anti-suit injunction and/or damages. The choice of jurisdiction in the standard B/L terms and conditions has an important role as ‘forum shopping’ is not an option and a jurisdiction is chosen. Larger shippers often negotiate such clauses but seem eager to litigate in more favourable jurisdictions (i.e., forum shopping).

AP Moller Maersk A/Sv. Sonaec Villas Cen SADFadoul and others is another example of ‘forum shopping’. A consignment of tiles was sold by Yekalon Inc to Sonaec SA, to be delivered from China to Benin. Sonaec (the consignee) did not pay the outstanding amount owed under the contract of sale to Yekalon (one of the shippers); Yekalon commenced action in the Chinese courts to obtain a B/L from the other shipper, obtained the original B/L, surrendered it to Maersk and, after obtaining a second set of B/Ls, sold the cargo to another buyer in Honduras with Maersk as the carrier. Sonaec commenced proceedings in Benin against Maersk when the third set of B/Ls was issued, and an interim order obliged Maersk to deliver it to Sonaec and to pay a daily US$4,800 fine until it arrived. Maersk commenced proceedings in the English High Court and, due to the exclusive jurisdiction and choice of law clause contained in clause 26 of Maersk’s standard terms and conditions, the English court considered that the issuance of the first B/L was collateral to the main contract, equating it to an arbitration agreement.

After the first B/L was surrendered to Yekalon following the Chinese court order, the transfer of rights was without prejudice to any right deriving from an original party to the B/L, as s 2(5) of COGSA 92 stipulates. This decision followed Pyrene Co Ltd v. Scindia Steam Navigation,™¹ in which another sale of goods under FOB terms made it possible for the buyer and the seller to be part of the carriage of transport of goods by sea.

Summing up, it is thus preferable to provide for express incorporation of the arbitration clause into the B/L by clearly stating the incorporation of that clause into the B/L.

• [1] William W Park, Arbitration of International Business Disputes. Studies in Law and Practice (2nd edn, OUP 2012)369-381. 2 UKAA, s 3. 3 ABB Lummus Global Ltd v. Keppel Fels Ltd [1999] 2 Lloyd’s Rep 24; Dubai Islamic Bank Pjscv. Paymen-tech Merchant Services Inc [2001] 1 Lloyd’s Rep 65. 4 Michael Pryles, ‘Limits to Party Autonomy in Arbitral Procedure’ (2007) 24 J Int Arb 327, 339.
• [2] Lord Justice Saville, Departmental Advisory Committee on Arbitration Law Report on the Arbitration Bill (1996) (DTI 1997) [32]; UKAA s 81(2)(b); Lord Mustill and Stewart C Boyd QC, Commercial Arbitration: 2001 Companion (Butterworths 2000) 21, 371; Neil Andrews, Arbitration and Contract Law: Common Law Perspectives (Springer 2016) 24-26. 2 Sarah C Derrington and Janies M Turner, The Law and Practice of Admiralty Matters (OUP 2007) 298-313. 3 Andrews (n 83) 24-26. 4 ibid.
• [3] Robert Force and Martin Davies, ‘Forum Selection Clauses in International Maritime Contacts’ m Martin Davies (ed), Jurisdiction and Forum Selection in International Maritime Law (Kluwer Law International 2005) 32. A liner B/L usually directs any dispute arising under the B/L to be heard by the courts of a certain country and sometimes stipulates an arbitration clause. When a liner B/L is issued, the earner and the shipper are the original parties to such B/L, and a charterparty is not used. An arbitration clause will be included on the face of the B/L, so the B/L holder is fully aware of the terms. See Martin Davies, ‘Forum Selection Clauses in Mantime Cases’ (2002) 27(2) Tul Mar LI 367; Martin Davies, ‘Litigation Fights Back: Avoiding the Effect of Arbitration Clauses in Charterparty Bills of Lading’ (2004) 35 J Mar L & Com 617; Ling Li, ‘Binding Effect of Arbitration Clauses on Elolders of Bills of Lading as Non-Onginal Parties and a Potential Unifonn Approach through Comparative Analysis’(2012) 37(1) Tul Mar LJ 107. 2 See Kallang Shipping SA v. Axa Senegal (The Kallang) (No 2) [2008] EWHC 2761 (Comm) [64]. 3 Joshua S Force and Robert J Zapf, Benedict on Admiralty (7th edn, LexisNexis 2011) [104], 1-13. 4 See, e.g., The Duden (n 67) [55]; The Kallang (No 2) (n 88), [15]; Li (n 87). 5 Li(n87). 6 The Federal Bulker (n 11) 105. 7 E.g., The Kallang (No 2) (n 88) [64] (concluding that despite the existence of two charterparties with the same date, the parties ’ intent to incorporate the voyage charter was clear because the B/L specified that freight was ‘payable’, a tern typically found in voyage charters). 8 See, e.g., Hamilton v. Mackie (n 12) [677]; TW Thomas & Co v. Portsea SS Co [1912] AC 3 [10]. 9 As m Habas Sinai ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC (Comm) 29 [46]— [47] and The Athena (n 43). 10 See AIG Europe SA v. QBE International Insurance Ltd [2001] 2 Lloyd’s Rep 268, 271.
• [4] Li (1187). 2 ibid. 3 Force and Davies (n 87) 32. 4 77;e ZWen [2008] 4 SLR 984. 5 The Siboti(n 7). 6 See Thomas v. Portsea (n 3); The Varenna (n 11); The Federal Bulker (n 11); The Lucky Lady (n 32). 7 Habas v. Sometal (n 95); Yvonne Baatz, ‘The Conflict of Laws’ in Yvonne Baatz (ed), Maritime Law (4th edn, Routledge 2018) 6. 8 See Force and Danes (n 87) 37-40. 9 See Aikens, Lord and Bools (n 42) ch 14. 10 n29.