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Incorporation of Arbitration Clauses by General Words

SSM Roundel

Steamship Mutual

Published: September 01, 2007

In the case of Sea Trade Maritime Corporation v Hellenic Mutual War Risks Association (Bermuda) Ltd (2006), the Honourable Mr Justice Langley was asked to set aside an Arbitration Award given in favour of the defendants on the following grounds: 

1)                         The Arbitral tribunal had no jurisdiction as Rule 44 of the Association’s Rules was not incorporated. 

2)                         If the Arbitral tribunal had jurisdiction it was wrong in law to conclude that on its proper construction Rule 44 constituted an exclusive jurisdiction clause in favour of English Courts. 

The dispute initially arose when Trans-Ocean Steamship Agency (“Trans-Ocean”), the New York sub-agent appointed by Natalca Shipping Co S.A. (“Natalca”), the Greek company to whom management of the vessel was delegated by owners, Sea Trade, presented a war risks claim to the Association, on behalf of Sea Trade, in respect of damage to the vessel said to have occurred as a result of an explosion caused by Tamil Tigers during the vessel’s voyage to Sri Lanka. 

The claim was expressly rejected on the basis that there was no right to recover under the insurance because Sri Lanka had been declared an “Additional Premium Area” and Sea Trade had failed to give proper notice of the fact that the vessel was going to Sri Lanka, as required by Rule 25.1 of the Rules of the Association. The Association was asked to exercise the discretion provided for by Rule 25.3 to make payment notwithstanding the want of notice. 

In September 1997 the Association decided, in exercise of its discretion, to make a payment of up to US$3.4 million. Following payment, Sea Trade brought proceedings against the Association in Greece, claiming payment in full (a further $3.5 million) and damages. Sea Trade also brought proceedings in New York which were stayed in favour of Arbitration in London after an application from the Association. 

Rule 44 purported to compel both the member and the Association to submit any dispute arising out of the Rules or in connection with any contract between the parties to English jurisdiction. Rule 46 further stated that the rules were subject to English law. 

In front of the Arbitration tribunal, Sea Trade contended that the tribunal had no jurisdiction because Rule 44 was not incorporated into the insurance contract because:  

  • it was “onerous and unusual”
  • Sea Trade was unaware of the Rule
  • because the Rule had not been expressly referred to and
  • because the contract was void for breaches of Greek and/or New York Law.

The tribunal found in favour of the Association on all the issues raised. 

Before Langley J, the incorporation of the clause was no longer questioned for being “onerous and unusual” but was contended on the grounds that it was not specifically referred to and because Sea Trade was unaware of it. 

A brief background of the facts shows that at the 1993 renewal insurance was offered expressly in accordance with the Rules and by-laws of the Association, which was accepted. A further message was sent enclosing rates and terms for the current policy year, which was expressly stated to be read in conjunction with current Rules of Association. This was all done through a broker, Miller IOM. Langley J held that in light of the fact specific reference was made and a copy of the Rule book was not requested, this was sufficient evidence that the broker and hence Sea Trade had sufficient knowledge of the Rules and their relevance. 

Furthermore, in the application for membership of the Association, which Sea Trade’s attorney signed, it expressly stated “…I/We also request you to enter (ATHENA) for insurance in such Association to the extent specified in accordance with the Bye-Laws and the Rules of such Association with which I/We agree to conform”. Langley J also held the attorney was likely to have read a laudatory statement in a brochure explaining “The cover is set out in the Association’s Rule Book. The extent and width of the Club cover is not always fully understood and for ease of understanding the main aspects are given below…” Therefore, the attorney or someone at Trans-Ocean, who sent him the membership form, must have been aware of the incorporation of the Rules by construction of the exchanges of correspondence. 

A&A acted as broker of record and were replaced by J&H in 1994. In May 1996 J&H New York sought from J&H London, a cover note or certificate of entry for “Trans-Ocean Steamship War risk”, who in turn asked Miller IOM to provide 6 copies of their “most recent rule book” which were duly signed and forwarded to J&H New York. A message was also sent stating that the Association did not issue certificates at each renewal and that entry into the Club was continuous. J&H New York commented that they would have thought new certificates would have been issued due to the change in the broker of record. The concern was to verify to mortgagees of the vessel that war risk cover was in place. Langley J found that a signed copy of the certificate was completed by Miller IOM and supplied to J&H in September 1996, despite contentions that the same was never received.  

On 14 January 1997 J&H New York sent Trans-Ocean a “Confirmation of Insurance” in respect of the vessel which had a list of general conditions attached which included a page entitled “Additional Premium Areas” (including Sri Lanka) and specified that the owner should give written notice to the Association before the vessel entered such an area and followed with the consequences if this condition was not complied with. 

In December 1996 J&H New York sent Trans-Ocean two sets of circulars referring to an amendment of the Rules; which referred expressly to Rule 44 and included explanatory notes proposing the amendments. 

Sea Trade’s argument turned on the submission that, absent special circumstances, express reference to an arbitration clause in primary contractual documents could not be incorporated by reference to a secondary document in which the clause was contained. The submission was founded on authorities in which the secondary document is a contract to which at least one party is different from the parties to the contract in question (a “two-contract case”) i.e. “The Federal Bulker”1, in which the two contracts in question were the charterparty and bills of lading and the arbitration clause from the charterparty was deemed not incorporated in to the bills. 

The Association’s counter argument was that whatever the position in a two-contract case, the law permits the use of general words to incorporate by reference standard terms to be found in another document, including incorporation of arbitration clauses in that document; this relies on authorities such as “St Raphael”2. 

Langley J took the position of the Association and held that general words may serve to incorporate an arbitration clause, particularly where the terms were readily available and questions arose in the context of dealings between established players in a well-known market. The principle does not distinguish between arbitration and other clauses. The exception is made in two-contract cases, i.e. reinsurance, construction and charterparty/bill of lading cases, where express reference to arbitration or perhaps provision of the relevant clause would be required. 

When turning to the issue of construction, Langley J held that the Association’s position that the Application for Membership is a contractual document was again correct. The document purported to record an agreement to conform to the Rules; it was consistent with other documents and formed part of a single transaction confirmed thereafter. 

Finally Langley J turned to the issue of knowledge with regards to whether Sea Trade were aware of the arbitration provision in Rule 44 and would be bound by it even if the clause was held to be sufficiently incorporated. Langley J agreed with the Association’s submission that whether or not Sea Trade had actual notice or knowledge of the arbitration clause was not the same as making a contract or agreement to be bound by it. It makes no commercial sense in a single contract case to deny the existence of an agreement for arbitration if a party agrees in one document or written exchange to be bound by terms to be found in another document and, at the time of that agreement, he knows that the second document contains an arbitration clause and/or has a copy of the second document and can see the position for himself. 

Furthermore, as a matter of English Law, it is trite that the brokers were the agents of Sea Trade. If a principal employs an agent to enter into a transaction, the terms to which the agent’s knowledge is material (even though that knowledge was obtained without the agency) the principal is bound by the contract concluded by his agent including, if it be material, terms of the contract to which the agent has or is held to have agreed as a result of his knowledge (El Ajou v Dollar Land Holdings3). Langley J held it would be a mockery of the law if a broker had to acquire fresh knowledge of the Rules on each occasion a new client instructed him to obtain war risks insurance from the Association. 

Thus, on the first ground the appeal is disallowed. On deciding the merits and demerits of the second ground, Langley J referred to Tonicstar Ltd v American Home4 which fully reported the decision of Justice Hobhouse given in July 1989 in Pathe Screen Entertainment v Handmade Films. In which it was stated “…the question is whether on its true construction the clause obliges the parties to resort to the relevant jurisdiction irrespective of whether the word exclusive is used” therefore one must look for words of submission in the relevant clause not words of reference. 

On construction of this clause Langley J decided in favour of Sea Trade, as in his opinion this was not an exclusive jurisdiction clause and leave to appeal this point was granted. However, as there were no breaches of Greek or New York law, and nor were the same applicable as English law was the governing law, and Langley J found Rule 44 did apply to the facts and was incorporated in the insurance contract, the award was not set aside in favour of Sea Trade.

 

1. [1989] 1 Lloyd’s Rep 103

2. [1985] 1 Lloyd’s Rep 403

3. [1994] 2 All ER 685

4. [2004] EWHC 1234 (Comm)

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