New York Arbitration Charterparty Clause Overrides Collateral Agreement

June 2003

(Sea Venture Volume 21)

A decision of the United States Second Circuit Court of Appeals¹ has shed light on how the scope of charter party arbitration clauses are viewed and interpreted by the United States courts. In certain circumstances it appears that a charterparty clause requiring submission of disputes to New York arbitration may override a law and jurisdiction clause in a separate, collateral contract, providing for a different forum for resolution of disputes. In the subject case, it was held that claims arising under a letter of indemnity, containing an express provision for English High Court jurisdiction, nevertheless fell within the scope of a related sub-charter arbitration clause which provided for New York arbitration.

The facts were as follows:-

Disponent Owners Blystad Shipping & Trading Inc. ('Blystad') entered into a tanker voyage charter party with charterers, Louis Dreyfus Negoce S.A. ('Dreyfus'). During the voyage and acting on the instructions of the buyer of the cargo, Lief Enterprises ('Lief'), Dreyfus requested Blystad to change the port of discharge in China. Letters of indemnity were issued by Dreyfus to Blystad guaranteeing that both Dreyfus and Lief would indemnify Blystad in respect of any liability, loss or damage of whatsoever nature sustained by reason of delivering the goods at Qin Huang Dao (the revised discharge port) and without presentation of the original bills of lading. The letters contained an English law and jurisdiction clause. The vessel proceeded to discharge at Qin Huang Dao, where the cargo was seized by the Chinese Customs Bureau and the vessel was arrested and detained for three months.

Pursuant to the letters of indemnity, Blystad commenced proceedings in London seeking damages and an indemnity for losses suffered due to the detention of the vessel. Dreyfus initially challenged the submission to London jurisdiction and accordingly, a week after commencing the London proceedings, Blystad demanded that Dreyfus participate in arbitration in New York pursuant to the arbitration clause (clause 31) of the voyage charter which stated, "Any dispute arising from the making, performance or termination of this charter party shall be settled in New York."

The New York District Court held that Blystad's claim was within the scope of the charterparty arbitration clause and that Blystad had not waived its right to New York arbitration by bringing suit in London first. Dreyfus appealed to the Court of Appeal, arguing that clause 31 of the charter was a "narrow" arbitration clause, by which disputes that are collateral to the argreement's explicit provisions are excluded from arbitration.

The Court of Appeal stated that the policy of the Federal Arbitration Act 1994 is to favour arbitration, particularly in resolving international commercial disputes, and held that to determine whether a particular dispute falls within the scope of an agreement's arbitration clause, a court should undertake a three part enquiry:

1. First, recognising that there is some range in the scope of arbitration clauses, a court should classify the particular clause as either broad or narrow.

2. If reviewing a narrow clause, the court must determine whether the dispute is over an issue that "is on its face within the purview of the clause," or over a collateral issue that is somehow connected to the main agreement that contains the arbitration clause. Where the arbitration clause is narrow, a collateral matter will generally be ruled outside its scope.

3. Where the arbitration clause is broad, there arises a "presumption of arbitrability" and arbitration of even a collateral matter will be ordered if the claim alleged "implicates issues of contract construction or the parties' rights and obligations under it."

In undertaking this enquiry a court must determine whether the language of the clause taken as a whole evidences the parties' intention for arbitration to serve as the primary recourse for disputes connected to the agreement containing the clause. In the present case, the Court of Appeal found that Clause 31 of the voyage charter was a broad clause, since its wording did not indicate that the parties intended to limit the scope of arbitration.

The next step was to decide whether Blystad's claim arose directly under the charter party or was collateral to it. The court tested the "presumption of arbitrability" associated with the broad arbitration clause by asking whether claims under letters of indemnity, as claims under a collateral agreement, implicated issues of construction of the principal contract or the parties' rights and obligations under it. The court found that the letters of indemnity clearly implicated at least two clauses of the charter; clause 6c, which provided for a change in discharge ports at the charterer's expense, and clause 24, which specified the charterers' obligation to indemnify the owners for liabilities arising as a result of complying with charterers' orders. Since the letters of indemnity implicated the rights of Blystad and the duties of Dreyfus under the charter party, the court held that claims arising from the letters fell within the scope of the broad charterparty arbitration clause.

Finally, the court held that Blystad did not waive its right to arbitration by first commencing proceedings in London. Three factors were relevant in determining whether a party had waived its right to arbitration: (1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the extent of litigation which had ensued, including motions filed and discovery; and (3) proof of prejudice. The court found that none of these factors supported a conclusion that Blystad had waived its right to arbitrate.

In particular, Dreyfus sought to allege prejudice on the basis that it might be exposed to the possibility of inconsistent verdicts by having to litigate in New York, since any claim Dreyfus might have for an indemnity against Lief would be subject to proceedings in London. The Second Circuit held that this did not amount to prejudice to support a finding of waiver. Prejudice is defined in U.S. caselaw as 'inherent unfairness', in terms of delay, expense or damage to a party's legal position, that occurs when the party's opponent forces it to litigate an issue and later seeks to arbitrate that same issue. Prejudice cannot however relate to the enforcement of a pre-existing bargain, namely the voyage charter arbitration clause, even where such enforcement will obligate a party to litigate in more than one forum. Since Dreyfus agreed to both the charter party and the letters of indemnity, and since there was no evidence of some form of recognised prejudice such as undue delay or expense, Dreyfus could not now seek to avoid the requirements of the arbitration agreement.

Comment

This decision is noteworthy since it highlights the potential for claims arising under collateral agreements to a charterparty to be brought into New York arbitration, even in the face of a contrary jurisdiction clause in the collateral agreement. Prior to giving or receiving a letter of indemnity, members, whether shipowners or charterers, should consider whether any applicable charterparty provides for New York arbitration. If it does, and if a contrary jurisdiction clause is stipulated in the letter of indemnity, then it may be necessary to consider the actual intent of that letter or agreement and whether the underlying charter has a broad or narrow arbitration provision, since the charterparty arbitration provisions may prevail over the law and jurisdiction clause stipulated in the letter of indemnity. The Club's Defence department can assist Members if they have any queries in this regard.

1.Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 2001 U.S. App. LEXIS 11810