UK: The Commercial Court Considers Various Issues Relating To The Conclusion Of Binding Contracts Of Carriage And The Commencement Of Arbitration Proceedings

Last Updated: 11 June 2012
Article by Elliot Woodruff and Alex Chisholm

Finmoon Limited and OOO Megafruit v. Baltic Reefers Management Ltd and ors [2012] EWHC 920 (Comm)

In this case, the Commercial Court looked at the parties' long-standing chartering arrangements and at the way bills of lading were issued to determine what types of contractual relationship they intended to create between them. In doing so, the court held that a binding contract of affreightment ("COA") came into existence by virtue of the parties' conduct. Mr Justice Eder also recognised the practise of surrender, cancellation and reissue of bills of lading, confirming that the re-issued bills were still effective to transfer rights of suit to the consignee. Finally, the court adopted a broad and flexible approach with regard to whether or not the claimants had effectively commenced arbitration proceedings. It confirmed – in line with the decision in The Voc Gallant in 2009 - that so long as it is objectively clear that a communication is intended to refer a dispute to arbitration and to require the relevant steps to be taken, then it will generally be considered to have complied with the necessary formalities and to have validly commenced arbitration.

The background facts

The claimants chartered weekly reefer tonnage pursuant to a COA to carry shipments of "green bananas" during the winter 2006/2007 season. The original COA was signed by the defendants, Baltic Reefers Management ("BRM"), as "owners". Tonnage continued to be provided into the 2007 summer season "as per present COA until next one is finalised" and on into the winter 2007/2008 season without a formal extension to the 2006/2007 COA or a replacement COA being drawn up.

BRM was the manager of a fleet of vessels pursuant to SHIPMAN agreements with each of the individual owners. They were instructed to nominate vessels from their managed fleet to perform under the COA each week, but were neither the legal nor the beneficial owner of any of the performing vessels.

The bills of lading were issued at the loadport identifying the fruit sellers as shippers. After receiving payment, the sellers returned the loadport bills to the ships' agents marked "NULL AND VOID". BRM's agents would then be instructed to prepare fresh bills at the discharge port and provide these to the claimants as the named consignees.

During the winter 2007/2008 season, 12 cargoes of bananas were damaged. The claimants notified their claims to BRM and the individual owners of the vessels by reference to both the COA (a draft written version of which was attached to the letter) and the bills of lading. The claimants subsequently served arbitration notices on the defendants purporting to commence proceedings by reference to both the names of the vessels that carried the damaged cargoes and the individual voyage charterparties referred to in the bills of lading (which never came into existence), but without reference to the COA.

The issues for the Court

The defendants sought to defend the claims on several grounds including the following:

  1. BRM did not sign the original COA as principals, but as agents on behalf of the individual shipowners pursuant to the SHIPMAN agreements;
  2. the COA did not continue into the winter 2007/2008 season and the tonnage that continued to be provided was done basis spot trading;
  3. the rights of suit under the contract of carriage were incapable of being transferred to the claimants because the loadport bills were "straight bills";
  4. proceedings were not validly commenced because no reference was made to the COA in the arbitration notices.

In arbitration, the claimants succeeded on issues (a) and (b), but the tribunal found for the defendants on issues (c) and (d). The claimants appealed to the Commercial Court.

The Commercial Court decision

In summary, the court found as follows:

Agency

The court considered the internal management arrangements of the vessels to be of little relevance to the legal effect of the COA. BRM had signed the original COA as "owners" without any qualification and were thus deemed to have been contracting as principals. The court noted that if they had wished to avoid personal liability, BRM should have added wording to make that clear.

Concluded COA

The court held that the original 2006/2007 COA was extended on the same terms for the 2007 summer season. Although there was no response to the claimants' email proposing to do the same for the winter 2007/2008 season, both parties were found to have proceeded on the basis that BRM was obliged to make weekly nominations of vessels that the claimants were obliged to accept and that the claimants were obliged to ship and BRM was obliged to carry the quantities stipulated in the claimants' email. The court therefore held that the claimants' offer had been accepted by conduct and that a winter 2007/2008 COA had entered into existence.

The concept of concluding a contract by conduct is nothing new. The test is whether the cumulative effect of both parties' conduct is enough to demonstrate an intention to create legal relations. In this case, the court clarified that a party alleging the existence of such a contract does not need to be able to point to an exact day when the contract was concluded in order to succeed.

It also did not matter, in the court's view, that slight alterations to the parties' business practises emerged after the previous COA had come to end. The bills of lading issued during the winter 2006/2007 and summer 2007 seasons referred expressly to the COA. Those issued during the winter 2007/2008 season did not refer to the COA, but to the voyage charters pursuant to which each individual vessel was performing. On a few occasions, the claimants also shipped cargoes other than "green bananas" as agreed under the previous COAs. The defendants argued that this was because tonnage continued to be provided on a spot trading basis and not under the COA. The court disagreed, noting that "in any long-term arrangement such variations are to be expected or at least not unexpected" and that the proper approach is to look at the overall conduct of the parties.

Status of bills of lading

The court recognised that there are various reasons why parties might adopt a practice of surrendering, cancelling and reissuing bills of lading, and that this is not uncommon. It might be done, for example, because a shipment is to be split between a number of sub-buyers. In this case, it was done to ensure that the bills were available at the discharge port in time to avoid any delay in discharge formalities.

The defendants argued that the loadport bills lacked the necessary features to create a contract between the carriers and the holder of the bills, namely they were not intended to change hands, enter into the banking system, secure delivery or even leave the loadport. The court disagreed, and saw no reason why this commercially convenient practice should negative the intention to create legal relations.

The piece of paper that is the bill is not necessarily the actual contract of carriage, but may merely be evidence of that contract. It was held that the loadport bills evidenced a contract of carriage between the carrier and the shipper until they were surrendered and cancelled. At that point, the discharge port bills took on the features of a valid and binding bill of lading within the definition of the Carriage of Goods by Sea Act 1992. Once this happened, they were capable of transferring rights of suit to the claimants as consignees pursuant to the provisions of that Act.

Commencement of arbitration

Section 14(4) of the Arbitration Act 1996 provides:

"...arbitral proceedings are commenced in respect of a matter when one party serves on the other party or parties a notice in writing requiring him or them to appoint an arbitrator or to agree to the appointment of an arbitrator in respect of that matter."

The modern view of this statutory provision is that it should be interpreted broadly and flexibly. The courts have recognised in the past that arbitration notices are often given by international traders and businessmen in a shorthand manner that is nonetheless objectively clear. In this case, the court held that the substantive nature of the claims in respect of which arbitration was being commenced should have been objectively clear to the defendants, namely charterparty as well as bill of lading claims in respect of the damaged cargo. In particular, the COA had been referred to in previous correspondence and the names of the relevant vessels carrying the damaged cargoes were specified in the notices themselves. The claimants' arbitration notices were therefore held to be effective notwithstanding that they referred to non-existent voyage charterparties instead of the concluded COA.

Comment

This decision is a good example of the court's ability to look in detail at the commercial conduct of parties to conclude that a binding agreement was concluded between them, even where there is no single written document comprising the contract in question. In this case, the commercial relationship was long-standing, although the same principles could be applied equally to one on a more short-term basis. Notwithstanding this decision, those who wish to ensure that any agreement upheld by the court reflects their true intentions should put that contract in writing up front and preferably sign it to avoid any subsequent (and potentially costly) dispute as to what terms, if any, were agreed. In addition, those who intend to enter into contracts as agents only, especially those who do so on a regular basis such as shipmanagers, should sign expressly "as agents only".

Finally, notwithstanding Mr Justice Eder's pragmatic approach to the effectiveness of the arbitration notices in this case, it remains best practice to ensure that a notice purporting to commence arbitration is carefully and accurately drafted and contains all the necessary and available information about the dispute in respect of which the arbitrator is being appointed. If in doubt, it is advisable to take legal advice when drafting such notices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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