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.
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].
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.
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.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.