The Importance of Getting the Arbitration Clause Right

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Arbitration News Blog by Herbert Smith

Summary

A recent Federal Court of Australia case, Dampskibsselskabet Norden A/S v Beach Building & Civil Group Pty Ltd (2012) 292 ALR 161 (DKN v BBCG), has highlighted the importance of parties carefully tailoring the arbitration and jurisdiction clauses in their agreements to reflect their particular circumstances. A failure to do so may have implications later when enforcement of an arbitral award is sought.

DKN v BBCG

Background

Dampskibsselskabet Norden A/S (DKN), the applicant in the proceedings, was a shipowner and the award creditor in relation to two arbitral awards. The awards determined a claim by DKN for demurrage under a Charterparty dated 6 October 2009 (Charterparty). Clause 32 of the Charterparty provided that all disputes arising out of the Charterparty should be determined by arbitration in London.

Arbitration in accordance with clause 32 took place in London and a declaratory arbitral award and a final arbitral award in favour of DKN against Beach Building & Civil Group Pty Ltd (ACN 081 893 414) (Beach Civil) were made on 22 November 2010 and 14 January 2011 respectively (the Awards).

The award debtor named in both the first Award and in the final Award was the respondent, Beach Civil. Beach Civil was not named as a party in the Charterparty: the entity identified in the Charterparty as the charterer was ‘Beach Building and Construction Group (of which Bowen Basis Coal Group forms a part), Australia’ (Beach Construction).

In the arbitration, DKN contended that the charterer had been misdescribed in the Charterparty. DKN contended that it was the common intention of those who negotiated the terms of the Charterparty that the charterer under the Charterparty would be Beach Civil. By the first Award, the Arbitrator rectified the Charterparty by altering the name of the charterer from ‘Beach Building and Construction Group’ to ‘Beach Building & Civil Group Pty Ltd’, the corporate name of the respondent. Thereafter, the Arbitrator proceeded to hear and to determine DKN’s claim upon the basis that the entity against whom that claim was being made was Beach Civil.

DKN applied to the court for orders recognising and enforcing both the first Award and the final Award pursuant to section 8 of the International Arbitration Act 1974 (Cth) (the Act).

DKN v BBCG concerned two issues relating to the enforcement of the Awards:

(a) Whether or not Beach Civil was in fact a party to the Charterparty and the arbitration; and

(b) Whether the arbitration clause in the Charterparty had no effect because it purported to preclude or limit the jurisdiction of the Carriage of Goods by Sea Act 1991 (Cth) (COGSA).

Issue 1 – Was Beach Civil a party to the Charterparty?

The award debtor named in both of the Awards was Beach Civil. Beach Civil was not a party in the Charterparty. The entity identified in the Charterparty as the charterer was Beach Construction. Before the arbitrator, and before the court, DKN contended that the charterer had been misdescribed in the Charterparty. DKN contended that it was the common intention of those who negotiated the terms of the Charterparty that the charterer under the Charterparty would be Beach Civil.

Beach Civil called no evidence in the enforcement proceedings before Foster J and made no attempt whatsoever to demonstrate by evidence that it was not truly the charterer in the Charterparty. All that Beach Civil did in the enforcement proceedings was point to the description of the charterer in the Charterparty and assert that, on the face of that document, it was not named as charterer. Foster J stated that that assertion, without more, was not enough to overcome the evidentiary effect provided for under section 9(5) of the Act. The production of a certified copy of the Charterparty and each of the Awards was prima facie evidence of the matters to which they relate. Foster J noted that to the extent that the conclusion above was incorrect, that the uncontested evidence presented during the proceedings established that the charterer was misdescribed in the Charterparty and that this error could be remedied by applying appropriate rules of construction, which would again lead to the conclusion that Beach Civil was a party to the Charterparty.

Issue 2 – Preclusion or Limitation of Jurisdiction of COGSA

The second ground of defence raised by Beach Civil was that the arbitration clause in the Charterparty, pursuant to which the arbitration was conducted, was invalid and of no effect by reason of the operation of section 11 of the COGSA.

Australia is a party to the New York Convention 1958, which has been implemented into domestic law by the Act. Pursuant to the Act, a foreign arbitral award may be enforced in Australia as if the award were a judgment or order of an Australian court. Section 2C of the Act however states that nothing in the Act affects the operation of section 11 of the COGSA. Section 11 of the COGSA states that if a document is either a ‘sea carriage document’ or a ‘non-negotiable document’ within the meaning of section 11, then the document will have no effect in so far as it purports to preclude or limit the jurisdiction of Australian courts unless the relevant document or provision of the document provides for the resolution of a dispute by arbitration to be conducted in Australia.

The Charterparty related to the carriage of goods from Australia to China. Clause 32 precluded or limited the jurisdiction of Australian courts because it provided for arbitration in London. Therefore, the critical question to be resolved was whether the Charterparty was either a ‘sea carriage document’ within the meaning of section 11(1)(a) of the COGSA or a ‘non-negotiable document’ of the kind described in section 11(1)(b). If the Charterparty was either one of those documents, then clause 32 would have no effect and the arbitration agreement would not compel Beach Civil to accept arbitration as the agreed contractual method of dispute resolution with the consequence that the Court could not enforce either of the Awards against Beach Civil.

Foster J held that because the Charterparty was a contract of carriage of goods by sea, it ‘contains or evidences’ such a contract and accordingly the voyage Charterparty was a ‘sea carriage document’ within the meaning of section 11. Clause 32 of the Charterparty was, as a result, held to be of no effect.

Implications

The position reached by the Court in DKN v BBCG is inconsistent with the finding reached by Anderson J of the Supreme Court of South Australia in Jebsens International (Australia) Pty Ltd v Interfert Australia Pty Ltd [2012] SASC 50. Anderson J reached the opposite conclusion of Foster J holding that the voyage charterparty in question in that case was not a ‘sea carriage document’ within the meaning of that phrase in section 11 because in Anderson J’s view, COGSA ‘only deals with the rights of persons holding bills of lading or similar instruments, not charterparties’. Anderson J held that a charterparty is a ‘document of a different genus and is therefore not caught by section 11’.

A notice of appeal was lodged by DKN on 20 July 2012 and the matter has been set down provisionally for hearing by the Full Federal Court on 11 February 2013. Until the position is clarified on appeal, parties to charterparties that involve the carriage of goods to and from Australia should carefully consider and review dispute resolution clauses, particularly where enforcement may be sought in Australia. Parties to such charterparties may need to specify that any arbitration is to occur in Australia to ensure that any such award is enforceable in Australia.

For more information, please contact Donald Robertson, Partner; Leon Chung, Senior Associate.