Is there an arbitration agreement? That, again…
Posted on 9th May 2019 at 11:21
This familiar issue arose in a novel way in Sonact Group Ltd v Premuda SpA (the "FOUR ISLAND") ( EWHC 3820 (Comm)).
A common thing
Most fixtures contain clauses that make disputes subject to, say, English law and High Court jurisdiction, or more often provide for arbitration, also detailing how the Tribunal is formed and citing the governing rules, such as LMAA.
But very few demurrage disputes get that far. Commercial operators document, present, negotiate and settle the great majority. This is mostly in correspondence but occasionally at a meeting, called to wrangle over a number of matters, with each side generally seeking one overall deal.
Sometimes lawyers are involved, but even then the bargain is typically recorded just by email. Formal documents are sometimes drawn up, but not usually.
An awkward problem?
But what if charterers do not pay the agreed sum?
Owners will press them, perhaps then involving lawyers, but in most cases the only way to compel payment is by formal action. But that cannot be under the charterparty. It has to be under the settlement agreement that (for this purpose) has replaced it.
However, while the fixture may have stipulated arbitration in the clearest terms, the concluding deal may not have done, and that might enable charterers to challenge owners’ attempted arbitration, by urging lack of jurisdiction.
This very case
That is exactly what happened in the "FOUR ISLAND".
Owners Premuda SpA claimed almost $719,000 demurrage and about $190,000 heating costs under an amended Asbatankvoy charter that contained the usual arbitration clause.
The claim was settled by an email exchange, under which charterers Sonact Group Ltd agreed to pay US $600,000 for all owners’ claims.
But they did not pay, and later challenged arbitration on the basis that the agreement did not provide for that, so the arbitrators had no jurisdiction over a claim for the agreed sum.
They said that owners’ claim was not under the charterparty. It was under the settlement agreement. That did not have an arbitration provision, and no words had been used that could incorporate the charterparty clause.
The Tribunal ruled that it did have jurisdiction, as there was an agreement to arbitrate anything arising under the settlement, and on appeal the Judge agreed.
The Judge said that:
1. As mostly happens, the parties had traded views, in writing, and eventually reached an agreement;
2. That was likewise in correspondence, and not in a separate, self-contained document;
3. The parties’ unstated intention was that their agreement should have the same dispute resolution wording as the fixture under which the claims arose;
4. Claimshandling like this is standard, and parties would be astonished to be told that the same mechanism did not apply;
5. Anything else would require the payee to establish court jurisdiction, probably where the defaulting party was based;
6. Parties can agree dispute resolution terms that differ from their charterparty; however
7. Especially if there is no separate settlement agreement, but just an exchange of emails, any such would have to be expressly recorded, and could not simply be inferred;
8. It was obvious that the parties intended the arbitration clause to continue to apply if the settlement sum was not paid, and inconceivable that they had contemplated anything else;
9. There was no rule that, once parties enter into the new legal relationship of a settlement agreement, an arbitration clause in the underlying contract no longer applies;
It was equally obvious that the parties intended that English law, as in the charterparty, would likewise still apply.
Charterers also argued that, under owners’ notice commencing arbitration, the arbitrators had been appointed for disputes under the charterparty, not the settlement agreement.
The Judge rejected that, too. Applying the established "broad and flexible approach", the notice here was effective to refer a claim for the agreed sum to arbitration.
Charterers’ arguments were firmly rejected, but the court did not lay down a general rule, and each case is different.
Where, as normal, a demurrage claim is made and settled in correspondence, it might be hard for a defaulter to argue that the charterparty dispute resolution terms no longer apply.
But that will not always be so. It will depend on what the parties have said, and the exchanges might allow one side to argue that some other mechanism applies to the settlement.
This is perhaps especially so where the parties have captured their agreement in a separate document, or maybe under a different string of correspondence.
It may also be so where the parties have met to deal in aggregate with several claims, arising under fixtures with different disputes clauses, so it may be hard to say which was intended to apply.
Parties should take great care, and perhaps seek advice on this. It will generally be sensible to ensure that a settlement agreement, in whatever form, deals expressly with how any dispute under it will be determined.
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