UK: Does A LOU Arbitration Agreement For The Underlying Cargo Claim Completely Replace The Bill Of Lading Arbitration Clause?

Last Updated: 7 November 2014
Article by Evangelos Catsambas and Victoria Waite

Viscous Global Investments Ltd. v. Palladium Navigation Corporation (Quest) [2014] EWHC 2654

In the context of cargo claims brought under four bills of lading, the Commercial Court has recently considered whether an arbitration provision in a Club Letter of Undertaking (LOU) had entirely replaced the arbitration agreement in the bills of lading. If it had not, the Cargo Interests may have been faced with a time bar argument in respect of some of their claims. Luckily for them, the Court found in their favour.

The background facts

The dispute arose out of a shipment of a cargo of bagged rice from Thailand to Nigeria pursuant to four Congenbill 1994 bills of lading. 

There was a head time charterparty, a sub-trip time charterparty and a sub-sub voyage charterparty. The first two charterparties provided for LMAA arbitration in London, with the LMAA Small Claims Procedure (SCP) to apply to claims of less than US$100,000. The sub-sub voyage charterparty provided for Singapore arbitration. All three charterparties were governed by English law. Each bill of lading incorporated the "Law and Arbitration Clause" of the "Charterparty, dated as overleaf", but no charterparty was actually identified (by date).

Cargo damage was alleged upon discharge, and the Cargo Interests sought security from the Owners for their claims under the bills of lading. The Owners' P&I Club issued a LOU which, among other things, confirmed the Owners' agreement that the Cargo Interests' claims (to which the LOU would respond if they succeeded) would be referred to LMAA arbitration in London before three arbitrators and that English Law would apply (including the Hague-Visby Rules and the English Carriage of Goods By Sea Act 1992). The Cargo Interests commenced arbitration under the standard LMAA Terms, but no references were made under the SCP.

The Owners argued that the commencement of arbitration was invalid because the Cargo Interests should have commenced four separate arbitrations (not one) of which some should have been under the SCP (before a sole arbitrator) because the claim values under some of the bills of lading were apparently less than US$100,000; and so the arbitrators had no jurisdiction to decide the claims in this arbitration (and the Cargo Interests were time-barred from commencing new arbitration proceedings to correct this). The Owners argued this on the basis that (1) the head time charterparty's law and jurisdiction provisions had been incorporated into the bills of lading; and (2) its SCP provision for claims for less than US$100,000 survived the LOU – which amended the bills of lading's arbitration provision in some limited respects but left the SCP provision intact.

The Cargo Interests argued that the LOU's arbitration provision had replaced the bills of ladings' arbitration provision entirely. 

The Tribunal's decision

The majority arbitrators held that they had jurisdiction to hear a bill of lading claim for more than US$100,000, but (as the Owners were arguing) no jurisdiction to hear a claim for less than this sum. That said, they could not say which claims they could hear because the Cargo Interests had not set out the claim amount under each bill of lading.

The minority arbitrator held that the Tribunal had jurisdiction to decide all of the bill of lading claims (as the Cargo Interests were arguing).

The Commercial Court decision

The Court agreed with the Cargo Interests that the LOU's arbitration provision had replaced the bills of lading's arbitration provision entirely such that the arbitration had been validly commenced. The Court's reasoning was as follows:

  1. There was no reason in principle why this should not be the case, and the authorities relied upon by the Owners to the contrary did not directly apply here.  The LOU's arbitration provision operated comfortably as a new and free-standing agreement which was comprehensive – dealing with the (London) seat of the arbitration; the (LMAA Terms) arbitration procedure; the number of arbitrators (three, appointed in the usual way); the time for appointing the second arbitrator (14 days); and the law governing the dispute (English law, including the Hague-Visby Rules and the Carriage of Goods by Sea Act 1992).
  2. This was also the natural meaning of the LOU's arbitration provision.
  3. With this in mind, there was no apparent reason why the parties should not have intended this. On the contrary, there were good reasons why they should:

    1. the arbitration agreement would in this way be found in one document (the LOU) rather than two (the LOU and the bill of lading/head charterparty clause);
    2. the parties knew that some of the modest claims would be less than US$100,000 and would therefore have mentioned the SCP in the LOU if they intended it to apply;
    3. it made no sense for them to have been agreeing to four arbitrations under different LMAA procedures; and
    4. it was in fact arguable that the voyage charterparty's Singapore arbitration provision actually applied instead of the head charterparty's London/SCP arbitration provision – as to which any dispute was removed if the LOU's arbitration provision replaced it entirely.


The Court would seem to have made a common-sense decision giving effect to the words used in the LOU and, apparently, to what the parties would have intended.

Whilst not relevant to the decision reached, the Court's comment in passing that the Owners "may well be right", subject to some scope for disagreement, that the head time charterparty's arbitration provision would initially have been incorporated into the bills of lading (rather than the voyage charterparty's arbitration provision) might be questioned in future cases; there is both textbook authority and case law to the effect that if there is a sub-voyage charterparty, thearbitration provision in that sub-charterparty (not that of the head time charterparty) is incorporated into the bill of lading, consistent with the bill of lading's phrase "freight payable as per cp dated [ ]".

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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