Consistent Dispute Resolute Clauses Needed in Maritime Contracts
July 2008
It is a rarity in today's society for a maritime
contract not to have an arbitration clause for the settlement of disputes between
the parties. That is particularly true in the context of charter agreements
and bills of lading.
by Michael
A. Orlando
Meyer Orlando
LLC
Thus, marine cargo disputes can lead to complex exercises of maneuvering
between multiple parties as to whether particular claims are arbitrated or litigated
in the court system. A recent decision from the Fifth Circuit Court of Appeals
in The Rice Co. (Suisse), S.A., v. Precious Flowers
Ltd., 523 F.3d 528 (5th Cir. 2008), illustrates this. There, the court
found the parties must have contemplated that by putting arbitration clauses
in the various maritime contracts concerning the carriage of cargo by ship,
they necessarily agreed to piecemeal resolution of multiparty disputes.
Facts of the Case
In The Rice Co., Precious Flowers Limited
owned the vessel M/V Nalinee Naree and time-chartered
it to IBN Agrotrading. The time charter agreement included a clause requiring
arbitration of disputes between those parties in London. IBN then voyage-chartered
the vessel to The Rice Company for shipment of a load of rice from Louisiana
to Togo. The voyage charter required arbitration in New York.
The vessel began taking on a load of rice around the time Hurricane Rita
was due to hit the Gulf Coast. The vessel stopped loading and sailed to Houston
to avoid the hurricane. On the voyage, the hatch covers leaked, and the cargo
became damaged. No bill of lading was issued, apparently because the vessel
was in a hurry to set sail due to the impending weather. The bill of lading
that would have been issued was to incorporate the terms of the voyage charter
between IBN and The Rice Company.
The Rice Company brought suit in federal court in Houston against Precious
Flowers, IBN, and the vessel in rem but
immediately filed a motion to compel arbitration in New York and to stay the
pending lawsuit it filed. The district court denied the motion to compel arbitration.
The Rice Company appealed.
Although it is not completely apparent from the case, it appears that the
time charter, the voyage charter, and the bill of lading were typical forms
for such maritime contracts. The time charter between Precious Flowers and IBN
contained a Rider Clause providing a broad arbitration clause which required
all disputes arising out of the charter agreement to be arbitrated in London.
The parties rejected and struck through a part of the clause that would have
required arbitration in New York. Additionally, the time charter allowed the
charterer to act on behalf of Precious Flowers, the vessel owner, with the standard
clause stating that:
The master shall sign the bills of lading for cargo as presented in conformity
with mates receipts. However, the charterers may sign bills of lading on
behalf of the master, with the owner's prior written authority, always in
conformity with mates receipts, without prejudice to this charter party.
In a separate clause, the time charter stated that the charterer was authorized
by the owner to sign bills of lading on the master's and/or owner's behalf,
again without prejudice to the charter party.
The Fifth Circuit Court of Appeals noted that the vessel owner was not a
party to the voyage charter between IBN and The Rice Company. The arbitration
clause in the voyage charter, which required arbitration in New York rather
than London, was a somewhat narrower clause in that it stated: "that should
any dispute arise between owners and charterers, the matter shall be referred
to three persons at New York...." Although The Rice Company argued that the
use of the terms "owners" and "charterers" was ambiguous in the voyage charter,
the Fifth Circuit ruled that it was clear that those terms referred to IBN as
owner and The Rice Company as charterer because the first time those terms were
used in the voyage charter they were defined that way.
The third contract that the court examined was a standard CONGEN form of
bill of lading which provided that all terms and conditions, liberties, and
exceptions of the Charter Party, dated as overleaf, including the law and arbitration
clause, were incorporated. The Rice Company, as the voyage charterer, contended
that the vessel owner, Precious Flowers, permitted IBN, the time charterer,
to execute bills of lading on the owner's behalf, and because IBN would have
executed the bill of lading, except for the rush to beat the storm, the vessel
owner was contractually bound to the bill of lading which incorporated the New
York arbitration clause.
The Fifth Circuit noted, however, that the time charter between IBN and Precious
Flowers only permitted IBN to sign bills of lading on behalf of Precious Flowers
"without prejudice" to Precious Flowers. Furthermore, Precious Flowers was not
a party to the voyage charter agreement which required New York arbitration.
It should be noted at this point that in the lawsuit filed by The Rice Company,
Precious Flowers entered an appearance only in the limited capacity to file
a claim of owner in its in rem capacity
on behalf of the vessel and restricted its in rem
defense under Rule E (8) of the Supplement Rules for Certain Admiralty and Maritime
Claims, reserving all other defenses. In other words, Precious Flowers was not
entering a general in personam appearance
in the lawsuit. This is important because The Rice Company took the position
that to require it to arbitrate against IBN in New York, while allowing litigation
against the vessel in rem in district court,
could lead to inconsistent rulings, duplicative testimony, and, in general,
piecemeal litigation.
The underlying district court ruled that the voyage charter did not bind
the vessel owner and that there was no contract binding the vessel owner to
New York arbitration. The district court had also held that the
in rem fiction of the vessel as defendant
did not bind the vessel owner to the New York arbitration clause contained in
the voyage charter. The Fifth Circuit affirmed those rulings.
The Court's Analysis
Here, the Fifth Circuit undertakes a thorough analysis of the interrelationships
between the time charter, the voyage charter, and the bill of lading. The court
began by noting that even though the time charter allowed IBN to sign bills
of lading on behalf of the master, it did so only without prejudice to Precious
Flowers.
The Arbitration Clauses
The court's analysis centered principally on the precise wording of the two
arbitration clauses at issue. The time charter's arbitration clause was very
broad in nature. The voyage charter's arbitration clause, on the other hand,
was narrow in that it only required arbitration of disputes between IBN and
The Rice Company.
Even though The Rice Company argued that there should be no distinction between
the interpretations of the two arbitration clauses, the Fifth Circuit followed
the lead of the Second Circuit on the distinction between a broad versus a narrow
arbitration clause. That distinction requires that a court should compel arbitration
and permit the arbitrator to decide whether the dispute falls within the clause
if the clause is broad. In contrast, if the clause is narrow, the arbitration
should not be compelled unless the court determines that the dispute falls within
the clause.
Here, the court found that:
The New York arbitration clause in the voyage charter applies only to disputes
"between owners and charterers" and as we have discussed, the term "owners"
in the voyage charter refers to IBN as the disponent owner not to Precious
Flowers as the vessel owner.
523 F.3d at 536.
The court then noted that arbitration agreements apply to nonsignatories
only in rare circumstances, and after outlining those circumstances, concluded
that this was not one of those instances. The court found that outside of the
maritime context, where parties have not signed an arbitration agreement, they
cannot be compelled to arbitrate. Generally, which parties are bound by an arbitration
agreement is a function of the intent of the parties as expressed in the terms
of the agreement.
The Bill of Lading
The court then goes through a lengthy analysis of agency and principal law,
beginning with the principle that where an agent signs a contract requiring
arbitration, the principal is bound by the arbitration requirement:
That said, the distinction between a general grant of authority to sign on
behalf of the master and a grant that is conditioned by a requirement that
the agent sign the bill of lading "without prejudice to the charter party"
is self-evident.
523 F.3d at 538 [internal citation omitted].
Time and again, the Fifth Circuit went back to the language of the time charter,
which provided that the time charterer could sign bills of lading "without prejudice"
to the vessel owner and that "charterers shall indemnify the owners against
all consequences or liabilities which may arise from any inconsistency between
this charter party and any bills of lading signed by the charters or by the
master at their request." The court then held that, "Together, these circumstances
persuade us that the bill of lading did not bind Precious Flowers." 523 F.3d
at 528.
The In Rem Issue
The court next addressed the complexities involved when a vessel owner enters
a restricted claim of owner to protect the interest of the
in rem vessel. The Rice Company alleged
that Precious Flowers as the personal representative of the vessel could be
compelled to arbitrate because the bill of lading incorporated the New York
arbitration clause. The basis for The Rice Company's argument was the principle
that maritime law expressly forbids a party from relitigating issues in an
in rem proceeding against the vessel if
those issues were decided in a previous arbitration and that:
Implicit in this prohibition is the requirement that the vessel claimant arbitrate
a dispute that is in any way subject to arbitration. Without this implicit
requirement, a vessel claimant will be allowed to relitigate arbitrated
issues in subsequent district court litigation.
523 F.3d at 539.
The Fifth Circuit noted that if The Rice Company's reasoning were adopted,
it would compel a nonsignatory vessel owner to arbitrate, violating the principle
that arbitration may only be ordered for a dispute that the parties have agreed
to arbitrate.
Maritime law in relation to an in rem
proceeding against a vessel is not necessarily intuitive. However, the court
very concisely sets forth the maritime principles at stake when it states:
As Precious Flowers argues, the in rem
proceeding exists so "that the vessel itself can be held liable for a debt
that creates a maritime lien." The ship is its own entity in the
in rem proceeding, and "the owner bears
no personal liability." This is so even where an agent has signed on behalf
of the Master of the vessel; "[a]lthough signature as agent of the vessel
may confer in rem jurisdiction over
the vessel once it sets sail with the cargo, it does not confer
in personam jurisdiction over the owner."
The sailing of the vessel ratifies the bill of lading but does not automatically
confer jurisdiction over a vessel owner. Nor does a vessel owner's Claim
of Owner automatically subject the owner to in
personam jurisdiction.
523 F.2d at 539-40 [internal citations omitted].
The Decision
In affirming that The Rice Company could not compel Precious Flowers to arbitrate,
the court specifically found that, "We have anticipated that arbitration of
a portion of a dispute will lead to duplicated efforts and inefficiency if the
dispute, once arbitrated, must then be resolved in court with nonsignatory parties."
523 F.3d at 540.
The court noted that any inconvenience or duplication of effort is a consequence
of having agreed to arbitrate.
Specifically, "duplication of effort, redundant testimony, and possibility
of inconsistent findings ... are the risks that parties to an arbitration
clause must be considered to have contemplated at the time they struck their
bargain." 523 F.3d at 540 [internal citations omitted].
In essence, the court ruled that relevant federal law required piecemeal
resolution when necessary to give effect to an arbitration agreement. The court
well understood that this was so, notwithstanding the presence of other entities
who were parties to the underlying dispute but not to the arbitration agreement,
meaning that parties subject to arbitration would have to relitigate issues
with parties who are not subject to such arbitration clauses.
Conclusion
While some may believe that this case should be narrowly construed because
of the circumstance that the bill of lading was not actually issued, there is
plenty of language in this opinion indicating that that particular circumstance
did not matter. Here, the Fifth Circuit appeared to hang its hat on the typical
language found in time charters, voyage charters, and bills of lading, particularly
in the time-charter clauses allowing charterers to sign bills of lading without
prejudice to the vessel owner. These make the charterer indemnify the owner
against consequence or liabilities arising from any inconsistency between the
time charter and any bills of lading signed by the charterers or by the master
at the charterers' request. Since that is the usual situation, this same result
should hold true regardless of whether the bill of lading is actually issued
or signed by the master or the charterers.
Until the parties to maritime contracts start incorporating consistency in
dispute resolution clauses, they will necessarily have their disputes resolved
in a less than efficient manner.
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