Arbitration for Liner Contracts

Author: M Jagannath
Date: June 27, 2016

Arbitration is invariably the default dispute resolution method for disputes arising under a Charterparty. However, for Liner contracts, we rarely see use of Arbitration and this may be due to the perceived imbalance between the parties and / or due to the dispute resolution clause not being individually negotiated. This article will argue that it is best for all parties (Cargo interests and Carriers) to agree for Arbitration to resolve their disputes, if any.

  1. In the Liner context, the Bills of Lading (“B/L”) act as the evidence of contract of carriage between the original parties and become the contract when endorsed to third parties (see S. S. Ardennes (Cargo Owners) v S.S. Ardennes (Owners) (The Ardennes) [1951] 1 KB 55 where the English Court ruled that the contract came into existence before the B/L was issued and hence the Shipper could seek rectification if the terms entered in the B/L were not what was agreed). In addition, the B/L would provide for disputes to be resolved in the courts in accordance with the law where the Carrier has the principal place of business (Cl 4 of the Conline B/L 2000/2016 which states “Disputes arising out of or in connection with this Bill of Lading shall be exclusively determined by the courts and in accordance with the law of the place where the Carrier has its principal place of business, as stated in Page 1, except as provided elsewhere herein” & Cl 5 of Multidoc B/L 1995/2016).

  2. Charter Party B/L’s would incorporate charter party Law and Arbitration clauses to resolve disputes arising out of the contract. However, as mentioned in 1 above, Liner B/L’s do not generally provide for an Arbitration Clause but instead for a Law and Jurisdiction clause. This is obviously understandable given that various courts have, till now, been reluctant to allow the enforcement of arbitration clauses on the basis that the cargo interests are in a weaker bargaining position and /or these clauses were not individually negotiated. We, however, do not agree with this assertion for the following reasons:

    1. Although we have no statistics, we have seen that almost all of the recovery actions are invariably pursued by subrogated cargo insurers. Hence, it is submitted that the Cargo interests are of greater, if not of equal, bargaining power.

    2. Cargo interests are now well represented by the various Shipper Associations and who are able to negotiate effectively with both the Carriers and the Governments to further their (Cargo interests) interests.

    3. Some Cargo interests, due to the volumes they command, together with the present unruly state of the liner market, are able to negotiate with Carriers from a position of strength.

  3. Why Arbitrate?

    1. The first question must be as to why should parties Arbitrate instead of Litigate? Given that there are differences in the legal systems (Common/Civil/Sharia Law, etc.), there will be differences in the results /  judgements given by various courts. As businesses prefer certainty, we submit that the first advantage to both Carriers and Cargo interests would be that there would be greater certainty on the outcome.

    2. Availability of commercial arbitrators to hear the dispute: Parties can choose Arbitrator / Arbitrators aware of the commercial practices and which would again lead to awards keeping in line with the prevailing commercial practices.

    3. Enforceability of arbitration awards: There are more than 150 signatories of The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly known as “New York Convention”). The New York convention requires contracting states to recognise and enforce an award which is rendered in another contracting state and also limits the grounds on which the contracting states may refuse recognition and enforcement of foreign arbitral awards. In the case of enforcement of foreign court judgements, this would be available where individual states have reciprocal arrangements for enforcement of foreign judgements (for instance Reciprocal Enforcement of Commonwealth Judgments Acts in Commonwealth countries). The recent Hague Convention on Choice of Court Agreements (commonly known as "Hague Choice of Court Convention") does allow for foreign courts judgements to be enforced in the contracting states provided the contract provides for an exclusive jurisdiction to hear a dispute. While this is certainly helpful, it is submitted that as this is a relatively young convention (European Union, Mexico and Singapore), it will certainly take time for this convention to have the same bite as the New York Convention. Hence, enforcement of foreign arbitral awards would be easier vis-a-vis enforcement of foreign court judgements.
    4. Small Claims Procedure: Some Arbitration Rules allow for small disputes to be dealt by an expedited process (Small Claims Procedure at LMAA / SCMA) together with fixed costs for disputes up to a certain sum (USD 50,000 or any figure which may be agreed between the parties for LMAA, US$ 150,000 under the SCMA Rules). Most of the Liner disputes would not be for substantial sums and therefore the use of the Small Claims Procedure would lead to reduced costs.

    5. Procedural issues: One of the requirements for litigation in most jurisdictions is that the parties must be present within the jurisdiction or submit to the jurisdiction. One of the ways to get around this requirement may be to try and found jurisdiction by way of arresting a vessel. However, founding jurisdiction would require a claim to fall within the strict parameters of the legislation and therefore some claims may not permit for actions to found jurisdiction. Issues may also arise in the service of process (initial step in commencing an action in the courts). If a party is not available within the jurisdiction, then service of process may become complicated and would depend on whether the jurisdiction where a party is located has signed and implemented the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (commonly called the “Hague Service Convention”). Otherwise, service of process may need to be effected through diplomatic channels and which may not only be costly but also cumbersome. Most of the arbitral rules (LMAA/SCMA/SIAC/HKIAC/ICA etc) ensure that the arbitral processes are kept simple and Arbitration can be initiated quickly.

    6. Party representation: In Arbitrations, parties are free to choose their representatives to argue their case. For matters which are not complex, some parties may present their case by themselves to the arbitral tribunal (in house counsel). By contrast, court rules would generally require engagement of lawyers having right of audience to attend at the courts.

    7. Disadvantages: Some Arbitration rules may not provide for “Summary Procedure” for claims which have no defence and / or deal with multiple parties / contracts. It is submitted that these issues could be dealt by relevant Rules / Clauses being “tweaked” so as to provide for a “summary” procedure for claims which have no defence / deal with multiple parties / contracts.

  4. Cargo Conventions / Legislation:

    1. The Hague / The Hague Visby Rules are commonly used, either compulsorily, or by way of incorporation through the Clause Paramount, to govern the liability regimes for International Sea Carriage. These Rules (The Hague & The Hague Visby) do not have any provision for Arbitration. This being the case, provision of an Arbitration Clause could be argued to be falling foul of Art III Rule 8 of the Rules and which states “ Any clause, covenant, or agreement in a contract of carriage relieving the carrier or the ship from liability for loss or damage to, or in connexion with, goods arising from negligence, fault, or failure in the duties and obligations provided in this Article or lessening such liability otherwise than as provided in this Convention, shall be null and void and of no effect… However, as Arbitration does not relieve the carrier from liability but facilitates determination of the liability, it is submitted that incorporation of an Arbitration Clause and use of Arbitration does not fall foul of the Rules. Incidentally, The United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (commonly known as "The Rotterdam Rules" - the latest liability regime and which is yet to kick in) has arbitration provisions available to be incorporated into liner contracts.
    2. COGSA 1992 (UK) / Bill of Lading Act 1992 (Singapore): Where the COGSA 1992 (or similar legislation) applies, a third party consignee or endorsee to the B/L will be bound by the Arbitration Clause in the B/L if the party should choose to sue on the basis of the B/L contract (see Welex AG v Rosa Maritime Ltd (The Epilson Rosa) (No 2) decided by the English Court of Appeal).

    3. Other legislation: Some jurisdictions provide that any clause in a contract which ousts the jurisdiction of the local courts is null and void. Accordingly, provision of an arbitration clause may be construed as ousting the jurisdiction of the local courts such that it may be struck down.

  5. Conclusion:

    1. Given the advantages, mentioned in 3 above, it is submitted that it is in the best interests of both Carrier and Cargo interests to choose arbitration to deal with their disputes.

    2. With the increasing interest and support provided by various jurisdictions to support arbitration and arbitral institutions, Carrier and Cargo interests could work together to frame an appropriate arbitration clause in their Liner Contracts to deal with disputes.

    3. While there may be some loss in tactical advantages in some situations (initiating action to preserve time would be simpler with lower costs, etc.), given the possible reduction in costs and time together with certainty, it is submitted that all parties would benefit in the long run.  


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