Incorporation of Arbitration Clause in Bill of Lading - An Ideal Approach?

Introduction

Arbitration is the most preferred mode of dispute resolution in shipping industry. The Charterparty and Bill of Lading (“B/L”) are the principal documents which often are the subject matter of dispute. Charterparty is a contract between the shipowner and the charterer stating the conditions for hire of a vessel, while B/L is a negotiable document governing rights and liabilities of carrier and consignees and acts as a receipt of cargo by the carrier, document of title, and evidence of contract of carriage.

The B/L contains some basic Conditions of Carriage (“CoC”) and incorporates terms of other document, primarily a Charterparty. However, incorporating arbitration clause of Charterparty into B/L is a complex issue and requires a careful consideration. This article explores the complexity and attempts to identify the viable approach to validly incorporate the arbitration clause in B/L.

General Words of Incorporation

When incorporating terms from a Charterparty into a B/L using general words like ‘all terms, conditions, clauses of charterparty’ or ‘other conditions as per charterparty,’ only those terms that are directly germane to the subject matter of the B/L will be included, which generally includes the receipt of goods, the carriage of goods, the delivery of cargo, etc. [1] However, the arbitration clause in a Charterparty is considered a collateral clause and not condition germane to CoC, i.e., it is not directly related to the core conditions of carriage outlined in the B/L and accordingly will not be incorporated in the B/L by such general words of incorporation. [2]

Some may argue that like any other clause the arbitration clause should also be valid by mere general words of incorporation, however it will create issues in commercial transactions due to the very nature of the documents involved in such transactions. One may counter argue that an arbitration clause is a stand-alone agreement which survives without the other clauses in the agreement. Therefore, it should be specifically and separately incorporated by express reference.

Specific Words of Incorporation

The specific incorporation clause as in the standard Congenbill form which reads “All terms and conditions, liberties and exception of the Charter Party, dated as overleaf, including the Law and Arbitration Clause, are herewith incorporated” is effective to incorporate arbitration clause even though it is not germane to the CoC. However, such specific words of incorporation can also be invalidated if deemed insensible. [3]

The inconsistency may at time arise between the specific incorporation clause and arbitration clause of Charterparty, wherein the arbitration clause in Charterparty is limited to the disputes arising out of Charterparty. The approach to resolve such inconsistency may vary, the courts may either focus solely on the words of incorporation in B/L as parties might me unaware of the terms of Charterparty [4] or the courts may consider terms of Charterparty along with the words of incorporation. [5] The latter is the more reasonable approach, allowing the courts to indulge in resolving the inconsistencies through rules of interpretation and eliminates the risk of issues in enforcement of arbitration clause.

Need for Specific Incorporation of Arbitration Clause

The below mentioned special characteristics of maritime transaction and B/L gives rise to the need of specific incorporation:

Bill of lading as Document of Title

The B/L being negotiable and as document of title can be transferred to third parties who can then exercise all the rights and liability of the parties to B/L. However, such third parties have minimal bargaining power and are rarely aware of the terms of the Charterparty. The incorporation of arbitration clause excludes the jurisdiction of courts; therefore, it becomes necessary to ensure that even third parties are expressly and specifically made aware of the arbitration clause for dispute
resolution to identify the clear intent of parties to arbitrate.

Clarity of Commercial Documents

It is a common practice for charterer to enter into sub-charter agreement to sub-let the vessel. In such a scenario, it is crucial to clearly identify the Charterparty whose arbitration clause is intended to be incorporated. Often the shipowner and sub-charterer are unaware of each other's arbitration clauses, and the consignee might not even know about the head Charterparty. Consequently, there might be differences in the intentions of the parties with respect to applicable arbitration clause and there would be no meeting of minds while signing the B/L. These issues are avoidable by express incorporation of arbitration clause.

Conclusion

The above analysis highlights the nuanced process of incorporating the arbitration clause into B/L. It can be concluded that, the ideal manner to validly incorporate the arbitration clause into bill of lading is by specific and clear words of incorporation, expressly identifying the arbitration clause to be incorporated and the Charterparty which is being incorporated. The specific incorporation ensures that rights of third parties are protected and the intention of arbitrate of such third parties can also be clearly identified without raising the issue of consent to arbitrate. The involvement of parties from different jurisdiction in continuously growing field of maritime arbitration, is required to streamline the dispute resolution process and ensure that third parties are aware of their rights and liabilities even though they may not be aware of the actual terms of the Charterparty.

References:

[1] Hogarth Shipping Co Ltd v. Blyth, Greene, Jourdain & Co Ltd [1917] 2 KB 534.
[2] Thomas & Co. Ltd. v. Portsea Steamship Co. Ltd. [1912] AC 1.
[3] The Miramar [1984] A.C. 676.
[4] Skips A/S Nordheim v. Syrian Petroleum Co. and Petrofina SA (“The Varenna”) [1983] 2 Lloyd’s Rep 592.
[5] Supra note3.