UK Case law: Lavender Shipmanagement Inc v Ibrahima Sory Affretement Trading SA and Others (The 'Majesty') – QBD (Comm Ct) (Calver J)  EWHC 3462 (Comm)
News & Insights 23 March 2021
Arbitration – Jurisdiction – Five bills of lading each incorporating charterparty arbitration clause – Cargo interests alleging cargo damage – Shipowners’ P&I Club issuing letter of undertaking – Whether LOU constituted agreement...
Arbitration – Jurisdiction – Five bills of lading each incorporating charterparty arbitration clause – Cargo interests alleging cargo damage – Shipowners’ P&I Club issuing letter of undertaking – Whether LOU constituted agreement to consolidate arbitrations into single ad hoc arbitration – Whether extensions of time valid.
The dispute arose in relation to the carriage of a cargo of bagged rice from Myanmar to Guinea. Five bills of lading were issued for the voyage covering the total quantity, incorporating all terms and conditions of an amended Synacomex 90 voyage charterparty, including the law and arbitration clause.
Clause 69 of the charterparty provided for London arbitration on LMAA terms with a reference to two arbitrators, but that in cases where neither the claim nor any counterclaim exceeded USD100,000 the LMAA Small Claims Procedure would apply.
At the port of discharge, cargo damage was alleged. Owners and cargo receivers appointed local surveyors who noted loss and damage globally in their findings and not by reference to bill of lading numbers.
An anticipatory letter of undertaking was issued initially, which was replaced by a second LOU when the claim amount crystallised. Both LOUs covered the loss for the entire cargo, and it followed that the parties expected that the claims under the bills of lading, when combined, were likely to exceed the small claims limit of USD 100,000.
The receivers commenced arbitration proceedings in London against the owners, claiming damages of USD 165,208.96. The Notice of Arbitration listed each of the bills of lading and then appointed an arbitrator 'pursuant to the terms of an ad hoc arbitration agreement contained in the letter of undertaking issued on behalf of the owners’ P&I Club', alternatively 'pursuant to clause 38 of the charterparty', while the claimants stated they would also be 'agreeable to [X] acting as a sole arbitrator'.
In May 2019, the owners appointed an arbitrator under protest regarding the tribunal’s jurisdiction. They claimed that there was no ad hoc arbitration agreement in the Club LOU, and that the claims fell within the LMAA Small Claims Procedure.
A preliminary issue was held to determine the tribunal’s jurisdiction. By a majority, it held that it did have jurisdiction on the basis that:
(a) by the terms of the LOU, the parties agreed to consolidate five separate arbitrations under the individual bills of lading into a single ad hoc arbitration; and
(b) that the time extensions operated to grant the cargo claimants additional time to commence arbitration pursuant to the ad hoc arbitration agreement in the LOU.
The owners applied to the High Court challenging the finding that the tribunal had jurisdiction to hear the dispute.
The court rejected the appeal , holding that a reasonable person, applying business common sense, would construe the LOU in the way that it was drafted as an agreement to consolidate all of the claims in respect of the entire cargo before one London arbitration tribunal. As such, the claim exceeded the threshold of US$100,000 and the Small Claims Procedure was not applicable.
The owners also argued that the claim was time barred, claiming that the time extensions did not apply to the LOU. However, the court agreed with the tribunal that the time extensions applied to the arbitration proceedings agreed under LOU on the basis that they were granted by the same party who had agreed the terms of the LOU, and that on a 'purposive' construction it must have been intended that they should cover that same arbitration.
When construing the LOU against the relevant factual background the judge placed significant emphasis on business common sense and the consolidation of all claims under five bills of lading, but affecting the entire bulk cargo, into one reference. This would, for example, avoid five separate arbitrations and the potential for inconsistent awards This afforded a sound commercial reason as to why owners would give up an entitlement to utilise the LMAA Small Claims Procedure. The case highlights the importance of accurate drafting and clear meaning, especially when dealing with law and jurisdiction clauses, and that time extensions should make it clear which disputes and contracts are covered.
Link to commentary here.