No implied term qualifying free standing demurrage provision in sale contract

 In Gunvor SA v CruGas Yemen Ltd [2018] EWHC 2061 (Comm) a term contract of sale was made for the sale of  gasoline by 12 monthly consignments cif Hodeidah. The buyer was named as CruGas Ltd but the claimant argued that the contract was made with CruGas Yemen Ltd, and that it had been unaware that within the relevant group there was a Cayman Islands company named CruGas Ltd. The claimant obtained performing vessels from a separate entity within its group of companies, Clearlake Shipping Pte Ltd (Clearlake), under a long-term contract of affreightment on an amended Asbatankvoy form. It claimed demurrage totalling $18m under the sale contract and claimed against CruGas Yemen Ltd and CruGas Ltd in the alternative. The defendants denied liability for demurrage on three grounds. First, the demurrage claims were time-barred by reason of a demurrage time bar provision in the COA. Second, a term should be implied into the sale contract that the claimant was required to prove the demurrage rates claimed were “in line with the market rate”. Third, the claimant had to prove that it paid the demurrage sums it claimed under the sale contract.

Phillips J first found that the contract had been made with CruGas Yemen Ltd, and then proceeded to reject all three of the buyer’s arguments. First, it was established in OK Petroleum AB v Vitol Energy SA [1995] 2 Lloyd’s Rep 160 that words of general incorporation in a sales contract concerning demurrage provisions in a separate charter did not bring in terms ancillary to the accrual of demurrage, such as time bars relating to the presentation of demurrage claims. Second, there was no justification for the implication of the term contended for, which was neither necessary for the business efficacy of the sale contract, nor would give effect to the obvious but unexpressed intentions of the parties at the time they contracted. In any event, expert evidence from a chartering expert, was that the demurrage rates were all consistent with the market, insofar as such a thing could be said. Third, the demurrage provision under the sale contract was free-standing and not an indemnity.

 

New Year, New Regulations.

 

Two international regulations came into effect today and one EU regulation came into effect yesterday

 

  1. The IMO’s mandatory Data Collection System on fuel consumption under MARPOL Annex VI starts on 1 January 2019 for each ship of 5000 gross tonnage and above. The EU’s Monitoring Reporting and Verification Regulation on carbon dioxide emissions for Companies operating ships of over 5000GT which carry passengers or cargo for commercial purposes to or from European ports has been in force since 1 January 2018.

 

  1. The IMO’s amendments to the International Maritime Solid Bulk Cargoes (IMSBC) Code MSC.426(98) come into effect on 1 January 2019 for new and existing ships carrying IMSBC cargo. New individual schedules with specific carriage requirements have been introduced for the following Group B cargoes:

Sugarcane biomass pellets

Sand, mineral concentrate, radioactive material and low specific activity (LSA-I) UN 2912

Monocalcium phosphate (MCP)

Monoammonium phosphate (MAP) and mineral-enriched coating has been updated with Group B properties.

 

Shippers must shippers now declare whether a solid bulk cargo is classified as:

As HME (harmful to the marine environment), or non- HME. Overboard discharge restrictions will apply to HME solid bulk cargo.

3. Regulation (EU) No 1257/2013 of the European Parliament and of the Council of 20 November 2013 on ship recycling.

From 31 December 2018, large commercial seagoing vessels flying the flag of an eu Member State may be recycled only in safe and sound ship recycling facilities included in the european List of ship recycling facilities. Three UK yards are currently listed on the european list. Ship recycling facilities located in third countries and intending to recycle ships flying a flag of a Member State must submit an application to the Commission for inclusion in the European List. Two facilities in Turkey and one in the USA have been included on the list. As from 29 March 2019 2300 the UK will no longer be a member of the european union and the UK yards currently on the european list will have to reapply to be admitted as a third party state.

Condition Precedents/Warranties in Insurance Contracts

Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited [2018] EWHC 834 (TCC)

Constructing the meaning of words used in insurance contracts is a regular function of courts. In this case, the meaning of various terms, which appeared in the policy that Wheeldon (the assured) had with Millennium Insurance Co Ltd (the insurer), received judicial airing. The assured owned a waste processing plant which was destroyed in a major fire in June 2014. The assured’s claim for indemnity was turned down by the insurer who argued that the assured was in breach of several terms of the policy. The assured brought this action seeking declaratory relief that the insurer is liable under the policy for the loss.

The Deputy Judge, Mr Jonathan Acton Davis QC, first of all sought to identify the cause of fire at the plant. The plant produced solid recovered fuel by removing non-combustible components from inputted waste material transported on conveyor belts. It was discovered that a failed bearing caused a misalignment of one of the conveyor belts which created a gap between it and a trommel (a rotating industrial sieve). Combustible materials which would have been otherwise caught by the sieve, dropped through the gap at the bottom of the conveyor and began to accumulate there. The friction caused by the failed bearing led to hot metal fragments dropping into the accumulated combustible material thus starting a fire.

The insurer, inter alia, argued that the assured was in breach of:

  1. A condition precedent to liability which provided that “combustible waste must be stored at least 6m away from any fixed plant” (storage condition)
  2. A warranty that required “all combustible stocks and/or wastes to be removed from picking station base and/or trommels and/or hopper feeds and balers etc when business is closed.” (combustible materials warranty)
  3. A condition precedent which required the assured “to maintain all machinery in efficient working order in accordance with the manufacturer’s specifications and guidelines and keep records of all such maintenance” (maintenance condition)

At the plant, there were potentially combustible materials, such as a combination of glass, stones and soils which passed through the sieve, and were kept 6 meters of the fixed plants. Also, combustible materials had accumulated in the gap created by the conveyor belt misalignment. The Deputy Judge held that the presence of such materials did not amount to breach of the “storage condition” in the policy. It was stressed that the word “combustible” should be given the meaning, which would be understood by an ordinary person and not its scientific meaning, which is anything which burns when ignited. On that basis, a layman would not regard a combination of “glass, stones and soils” as combustible. The judge also indicated that the word “store” implied a degree of permanence and a conscious decision by the assured to designate an area to keep a particular material. On that basis, materials accumulated in the gap created by malfunctioning cannot said to be “stored” within the meaning of the condition in the policy.

With regard to (ii), the combustible materials warranty, the assured provided evidence that there was a system requiring employees to undertake a visual inspection and carry out the necessary cleaning each day. The judge held that even though the system, without more, was insufficient, the fact that it was in place and had been adhered to were adequate to comply with the warranty.

On third point, the judge found that the failure of the bearing, without more, did not conclusively mean that there was a breach of this condition. In any event, there was no evidence of any breach. As to the requirement to keep formal records, the judge agreed with the assured that their system of daily and weekly checklist was adequate. Furthermore, the judge stressed that if the insurer required records to be kept in a particular format, this should have been prescribed clearly in the maintenance condition.

Although the focus of the case is construction of certain terms in an insurance contract, it is a reminder to insurers that they need to be clear and specify the particulars carefully in the clause if they want to attribute a specific or scientific meaning to a word or requirement on the part of the assured. Otherwise, any word or requirement in a condition precedent or warranty is likely to be construed by courts as an ordinary person would read them.

It should be noted that request for permission to appeal against this judgment has recently been turned down by the Court of Appeal.

€1.57 Billion to Spain and France in Compensation for Prestige Oil Spill

The 1976 tanker Prestige, which broke up and sank after she was refused entry to a harbour of refuge in November 2002, resulted in one of the worst environmental disasters in European history, polluting nearly 2,000 miles of French, Spanish and Portuguese coastline and wildlife, and adversely affecting the fishing industry.

It’s been a long saga, but today the Spanish Supreme Court upheld a decision handed down by the Provincial Court of A Coruña in November 2017 which requires The London P&I Club and the Prestige‘s Captain Apostolos Ioannis Mangouras to pay nearly €1.6 billion in damages to the Spanish government.

France is also set to receive €65 million and Xunta de Galicia €1.8 million.

BIMCO’s 2020 Marine Fuel Sulphur Content Clause for Time Charters and 2020 Fuel Transition Clause.

 

BIMCO have produced two clauses for inclusion in time charterparties to deal with the new Annex VI MARPOL requirements on sulphur content in fuel that come into force on 1 January 2020, and the ban on carriage of non-compliant fuel that comes into force on 1 March 2020.

  1. The Marine Fuel Sulphur Content Clause deals with owners obligation to comply with the sulphur content requirements of MARPOL Annex VI and also the sulphur content requirements of ECAs, and replaces BIMCO’s previous sulphur content clause of 2005.

The clause contains an express requirement for the fuel provided by the time charterers to meet the “specifications and grades” which are commonly set out elsewhere in a time charter party and to ensure compliance by their suppliers with applicable regulation relating to sulphur content. Charterers will also provide an indemnity to owners in relation to non-compliance with MARPOL requirements and the vessel will remain on hire throughout. Owners warrant that the ship will comply with the sulphur content requirements of MARPOL Annex VI which means that the ship is able to consume fuels that meet such requirements. Provided the charterers have supplied compliant fuel, they shall not otherwise be liable for any losses, damages, liabilities, delays, deviations, claims, fines, costs, expenses, actions, proceedings, suits, demands arising out of the owners’ failure to comply with their obligation to comply with the MARPOL requirements.

  1. 2020 Fuel Transition Clause for Time Charter Parties

This deals with the advance planning needed before 1 January 2020. “Compliant Fuel” is defined by reference to the requirements of MARPOL as of 1 January 2020.

“Non-Compliant Fuel” is defined in the context of use or removal of fuel with a sulphur content greater than 0.50%. Such fuel would be MARPOL compliant before 1 January 2020 but the clause is designed to deal with the use or removal of such fuel before that date.

Charterers will need to have supplied the ship with sufficient compliant fuel on board before 1 January 2020 to enable the ship to reach a bunkering port after that date to bunker with compliant fuel. No later than 1 March 2020 there must be no non-compliant fuel carried for use by the vessels. The parties are to cooperate and use reasonable endeavours to ensure no non-compliant fuel is carried by the vessel no later than  1 January 2020. This is to be done preferably by burning, with off-loading of any remaining fuel by 1 March 2020.

Charterers’ obligation is to pay to offload and dispose of any remaining non-compliant fuel they have been unable to burn. Disposal of non-compliant fuel  must be done in accordance with local regulations. Owners’ obligation is to ensure the ship is fit to receive compliant fuel “taking into account the type of Compliant Fuel that will be loaded…”

 

The two clauses are not intended for use by vessel fitted with and operating exhaust gas cleaning systems (i.e. scrubbers).

Force Majeure, Alternative Modes of Performance and “Eggs in one Basket” – Simon Rainey QC and Andrew Leung

Classic Maritime v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm)

Introduction

A contract contains two modes of performance, A or B. Historically, the obligor has used mode A which becomes unavailable due to a natural disaster. If the obligor can show that it is also impossible to use mode B for reasons beyond its control, can it rely on a force majeure provision to excuse non-performance? Does it need to show it would have performed using mode A but for the mode A-disabling event? Classic Maritime v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm) addresses these questions and others in an area of law that is perhaps not as well-settled in all respects as some might think.

Simon Rainey QC, leading Andrew Leung, represented the successful Defendants, instructed by Julian Clark, Winnie Mah and Trudie Protopapas at Hill Dickinson LLP. 

The dam burst and the COA

At 3.45pm on 5 November 2015, the worst environmental disaster in Brazilian history unfolded. A tailings dam operated by Brazilian mining company Samarco Mineracao SA (“Samarco”) collapsed. A tidal wave of 32 to 40 million cubic metres of mining waste swept across green valleys, villages and farmland.

Iron ore production at Samarco’s mine was brought to an abrupt halt. Shipments of Samarco’s iron ore pellets, hitherto shipped through Ponta Ubu in Brazil, were suspended.

Ponta Ubu was one of two ports from which the charterers, Limbungan Makmur SDN BHD (“Limbungan”), had the option to load iron ore pellets on the vessels of Classic Maritime Inc., under a COA for 59 shipments of iron ore pellets from Brazil to Malaysia between 2009 and 2017. The other load port was Tubarao, from which another Brazilian mining company, Vale SA (“Vale”), shipped iron ore pellets.

The parties’ rival positions

In the Samarco aftershock, it was Limbungan’s case that Vale experienced a surge in demand, earmarked its supply to existing customers, and left newcomers such as itself wanting. Limbungan was therefore prevented from shipping from Ponta Ubu and Tubarao due to circumstances beyond its control. This excused its failure to perform post-5 November 2015 under Clause 32 of the COA, a fairly typical force majeure or exceptions clause, which stated inter alia:

“Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be responsible for…failure to supply, load…cargo resulting from: Act of God…floods…landslips…accidents at mine or production facility…or any other causes beyond the Owners’, Charterers’, Shippers’ or Receivers’ control; always provided that such events directly affect the performance of either party under this Charter Party.”

Classic countered that Limbungan had an absolute and non-delegable obligation to provide cargo and had no arrangements to do so. Instead, it hoped to perform with the gratuitous support of two companies within the same broad corporate family, Lion DRI or Antara. Those companies had asked Limbungan to ship their iron ore pellets to their steel-making plants in Malaysia from Ponta Ubu since 2011, but without any contractual nexus existing between them. The bursting of the dam was thus of no legal relevance. The problem was that the now sole supplier, Vale, would not supply Limbungan or its affiliates, although matters would have been different if Limbungan had made proper efforts and pushed for a long-term supply contract.

What is more, Classic argued that Limbungan would not have performed anyway. It had failed to perform two pre-dam burst shipments as Lion DRI and Antara had not required Limbungan to carry iron ore pellets in a weak market, a state of affairs which would have continued irrespective of the dam burst. The dam burst was not a force majeure event and Classic was entitled to US$20.5 million in damages to compensate it for lost freight.

Against this, Limbungan argued that it had put its eggs in the Samarco/Ponta Ubu basket as it had exclusively shipped Samarco pellets since August 2011. Whether it had enforceable agreements with Samarco, Lion DRI or Antara was not determinative; its settled practice was clear. The obligation after the dam burst was to make new arrangements ex Tubarao, provided it was possible to do so. Clause 32 applied because it was not possible. This was an alternative modes of performance case per Warinco v Mauthner [1978] 2 Lloyd’s Rep 151, 154 in that Limbungan had opted for one mode of performance which had become unavailable. As it could not avail itself of the one remaining mode, it was excused.

Further, it was sufficient that Limbungan was prevented from performing by the dam burst. It was contrary to authority to insist that Limbungan had to show it would have performed had the dam not burst and contrary to the compensatory principle to award damages to Classic in respect of shipments which would never have occurred given the dam burst.

The judgment of Teare J.

The Court rejected Classic’s claim, and in the process made findings of wider legal significance.

  1. First, Classic’s reliance on the principle that a charterer who has been let down by a particular supplier cannot plead force majeure per The Mary Nour [2008] 2 Lloyd’s Rep and The Kriti Rex [1996] Lloyd’s Rep 171 was not on point. Those cases were not concerned with alternative modes of performance, where the required performance was from Port A or Port B, but with performance from a single port (albeit one possibly served by many suppliers).
  2. Second, for the alternative modes of performance principle to apply, it was not necessary for Limbungan to show it had legally binding arrangements to perform from Pontu Ubu rather than Tubarao when the dam burst. What the Court had to assess were Limbungan’s “intentions or arrangements” per Moccatta J in European Grain & Shipping v J.H. Rayner [1970] 2 Lloyd’s Rep. 239, which did not need to display the element of fixity posited by Classic.   
  3. Third, Limbungan had to show that it would have performed but for the dam burst. The House of Lords decision in Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 and a string of other cases, which Limbungan said supported the general proposition that a party relying on force majeure need not show it would have performed but for the force majeure event were, in Teare J’s judgment, cases about contractual frustration provisions, which are intended to mimic the effect of common law frustration. They had no bearing on Clause 32.
  4. Fourth, the Court concluded that neither Limbungan nor its affiliates could have sourced cargoes from Vale ex Tubarao – a topic on which the parties’ market experts spilt much ink. That said, Limbungan could not show it would have performed but for the dam burst: Lion DRI’s steel-making business had effectively been mothballed due to weak demand, Antara had a cheaper COA of its own, and the arrangement whereby Antara had used the more expensive COA and been compensated for the freight differential by Lion DRI was moribund. 
  5. Fifth, though Limbungan could not rely on Clause 32 and was therefore liable under Clause 32, Classic was not entitled to recover damages. This was because even if Limbungan had been able and willing to perform, the dam burst would have supervened and prevented performance, and Limbungan would have been excused by Clause 32. It would violate the compensatory principle, to award substantial damages to Classic when it would never have received performance in any event.
  6. Sixth, the Court rejected Classic’s case to the effect that if the dam burst was due to faulty construction or maintenance by Samarco, it was an event within the “Shipper’s [i.e. Samarco’s] control”, and thus not within Clause 32. No part of the charterers’ obligation to supply and load cargo extended to responsibility for the dam, making it unlikely the parties intended  poor dam construction or maintenance (if proved) to debar Limbungan from relying on Clause 32. This is an important decision on the typical ‘beyond the control of’ provision, analysed in the sometimes misunderstood decision in The Crude Sky [2013] EWCA Civ 905.

Conclusions

The case is believed to be the first authority since the Bremer line of authorities from the 1970s and early 1980s to consider whether the party relying on a force majeure or exceptions clause has also to show it would have performed but for the event relied upon to be excused from non-performance. The answer given in those cases was “no”. For the time being, the textbooks may need to be rewritten to reflect the affirmative answer to this question given by Teare J.

This gives pause for thought. Had Ponta Ubu and Tubarao both been wiped out by a meteor, so that any performance was unquestionably prevented, on one view, asking whether Limbungan could or wanted to perform would be academic. It might be said the parties intended Clause 32 to excuse Limbungan from liability in precisely such a case, particularly since Clause 32 is intended to deal with frustrating and force majeure events, and in the context of frustration, but for causation has always been irrelevant. Not only that: asking whether Limbungan would have performed but for the dam burst is conducive to a doubtful and speculative examination of what Limbungan’s intentions and arrangements would have been in a counter-factual setting, which Megaw LJ Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1977] 2 Lloyd’s Rep 329 cautioned against.

This also appears to be the first case where the argument has been made (by Classic) – and rejected – that the arrangements necessary to activate the alternative modes of performance principle need to be legally binding. They do not: the arrangements can have a looser, more informal character.

Finally, this case exemplifies the compensatory principle at work: if Limbungan had performed instead of breaching the COA, it would have performed with Samarco out of Ponta Ubu. The problem from Classic’s perspective is that with the intervention of the dam burst, Limbungan would have been able to claim force majeure under Clause 32 (as on this hypothesis it would have performed but for the dam burst). The outcome in both the breach and non-breach positions is therefore that Classic would not have enjoyed the benefit of contractual performance. Classic cannot be put in a better position than if the breach had not occurred.

Teare J refused permission to appeal on the ground that Classic’s proposed appeal on the application of the compensatory principle (or perhaps more accurately Classic’s case that the principle allowed it to recover substantial damages to represent loss of charter freights which in fact it could never have earned assuming Limbungan performed rather than breached the COA) had no realistic prospect of success.

A copy of the Judgment, can be found here

International insolvency — English law rights confirmed protected

Shortly after New Year 2018, Hildyard J decided that when an Azeri bank went bust and was put into reconstruction in Baku, the Azeri administrator could not use the Cross-Border Insolvency Regulation to freeze out a couple of creditors in England and Russia whose bond debts were governed by English law. They had refused to have anything to do with the reconstruction, smugly sat back and waited for the reconstruction to finish, knowing that the bank still had English assets that could potentially be seized. (See our blogpost here).

The Court of Appeal has now agreed, in Bakhshiyeva (Foreign Representative of the Ojsc International Bank of Azerbaijan) v Sberbank of Russia & Ors [2018] EWCA Civ 2802 (18 December 2018) . It might or might not be a good idea for England to adopt modified universalism in insolvency and accept, in essence, that the law of a corporation’s home jurisdiction should be controlling in all questions of the enforceability of obligations against it, wherever situated and whatever the law governing them. Indeed, it does just this in EU insolvencies, courtesy of the EUInsolvency Regulation 2015. But established common law authority said that an English court would ignore laws cancelling debts that did not emanate from the state whose law governed them. Further, the CBIR was best read as legislation with procedural, not substantive, aims. It would suspend enforcement of obligations while the reconstruction was going ahead, but would not actually destroy them. Any attempt to use a foreign reconstruction for anything more than that would not be countenanced.

Whether this is the last word we will see. There may be an appeal to the Supremes: the two creditors clearly have the money, and quite a lot rides on the result. However, the view of this blog, for what it is worth, is that this is a delicate matter best left to careful legislative reform, if indeed reform is needed at all. And that’s a bigger if than it looks. Money-men aren’t popular these days, but there is something to be said for the position of the two creditors. No-one has to issue English-law bonds, nor to leave assets in England that can be seized to support the obligations contained in them. And, one strongly suspects, the interest rate on the English-law debt was lower than on Azeri-law debt precisely because of the perceived lower solvency risk. The ability to take the benefit of this and then tell foreign creditors to go fish isn’t, perhaps, something we should be promoting.

Clarifying / Correcting an Award …. and the Effect on the 28 days for Challenge: Clarity at last

Daewoo Shipbuilding & Marine Engineering Company Ltd v Songa Offshore Endurance Ltd [2018] EWHC 538 (Comm)

Overview

Where a party seeks correction or clarification of an arbitral award as a precursor to challenging the award either under s.67 or 68 or 69 of the Arbitration Act 1996, when does the Act’s 28 day time period for the challenge start? From the date of the award? Or of the correction or clarification? And does that apply to any correction or clarification or only to certain types? If the latter, what types and why? And what happens if the tribunal declines to correct?

The decision of Bryan J. (handed down on 16th March 2018) in Daewoo Shipbuilding & Marine Engineering Company Ltd v Songa Offshore Endurance Ltd [2018] EWHC 538 (Comm) brings welcome and definitive clarity to the position. It sets out what should now be regarded as the settled practice of the Court to these problems and to the correct construction of the 28 day time limit provisions in s.70(3). It resolves an apparent conflict in other first instance decisions once and for all.

In summary, after a thorough analysis of the authorities, the Court held:

  • The arbitral process of correction and clarification of an award by the tribunal under s.57 of the Act is not “any arbitral process of appeal or review” under s.70(3) for the purposes of the running of the 28 days.
  • Accordingly, simply applying for a correction will not, of itself, push back the start date for the running of time: the decision in Surefire Systems Ltd v Guardian ECL Ltd [2005] EWHC 1860 (TCC) to the contrary effect was wrong.
  • But where a correction or clarification must necessarily be sought in order to be able to bring the challenge to the award itself (pursuant to section 70(2)), then time runs from the date of that type of correction or clarification being made (a ‘material’ correction).
  • To give effect to that, the “date of the award” in section 70(3) is to be read as “the date of the award as corrected” by a correction of this kind, but this kind only.
  • The submission that the decision in K v S [2015] EWHC 1945 (Comm) was wrong would be rejected.

Leave to appeal was refused.

Simon Rainey QC, leading Tom Bird, represented the successful applicant.

The Background

DSME contracted with Songa to build a series of drilling rigs. The hull design (including the front-end engineering design (“FEED”) documentation) was to be provided by a third party design consultancy. Construction proved to be very protracted and DSME claimed in respect of delays and cost over-runs, alleging that the cause was defects in the FEED. It alleged that under the contracts, responsibility for design, including the FEED, was with Songa not DSME and DSME was entitled to recover all costs and expenses and was not responsible for delay. This was contested by Songa.

The question of design responsibility under the contracts was determined as a preliminary issue in two arbitrations. The Tribunal (Sir David Steel, John Marrin QC and Stewart Boyd QC) held that Songa was correct and that DSME bore full responsibility for the design, including for the FEED.

The Awards were published on 18th July 2017.

Under section 70(3) of the Arbitration Act, DSME had 28 days in which to apply for permission to appeal, expiring on 15th August. Section 70(3) provides:

“Any application or appeal must be brought within 28 days of the date of the award or, if there has been any arbitral process of appeal or review, of the date when the applicant or appellant was notified of the result of that process.”

On 4th August, DSME applied to the Tribunal for the correction of what it itself described as four “clerical errors in the Awards arising from accidental slips” such as transposing Songa for DSME, etc. The corrections were unopposed.

The Tribunal issued a Memorandum of Corrections on 14th August (27 days after the Awards).

On 8th September, 24 days late, DSME issued an Arbitration Claim Form seeking permission to appeal the Awards under section 69, on the basis that the Tribunal’s construction of the contract as to design responsibility was obviously wrong in law.

Songa applied to strike the application out as being out of time.

DSME responded that the 28 days ran from the date of the Memorandum of Corrections and so was brought in time; alternatively it sought an extension of time under s. 80(5) because its management structure and intervening holidays meant that a decision to appeal could not reasonably have been taken any sooner. (Given the 24 day delay and this ‘justification’, unsurprisingly this application was dismissed on ordinary principles.)

The Issues Raised by Songa’s Application

Section 70(3) contains only two express start dates for the running of the 28 days for any challenge to the award: (a) “the date of the award” and (b) the date when the parties are notified of the outcome of “any arbitral process of appeal or review”.

How does this work in the context of a request for the correction or clarification of an award? Section 70(3) is silent on the topic and there is prima facie a lacuna in the drafting of the Act.

A connected issue is the so-called ‘Catch 22’ inherent in section 70(2) which requires a party to exhaust all available arbitral routes of recourse (including under s.57) before being entitled to challenge the award. In relation to corrections, if these are ones which have to be sought before a challenge can be made, then how can time run from the date of the original, uncorrected, award if this date is what has to be taken for s.70(3) purposes?

Question (1): Can the correction / clarification process under s.57 be regarded as an “available process of appeal or review” under section 70(3)?

DSME’s primary argument was that the term “any available process of appeal or review” covered a correction or clarification process carried out by a tribunal itself. It argued that the process of correction involved, in one sense, a process of ‘reviewing’ the award and accordingly this was enough. It also relied upon the definition of a different term (“available arbitral process”) in s. 82(1) as one which “includes any process of appeal or review by an arbitral or other institution or person” as showing that “appeal or review” did not just mean appeal or review by some other arbitral body (such as common forms of ‘two-tier’ arbitral procedures in commodity arbitration under GAFTA or FOSFA Rules) but must be wider and therefore had to cover an ‘internal’ corrective review.

DSME relied heavily on an unreported decision of Jackson J. in Surefire Systems Ltd v Guardian ECL Ltd [2005] EWHC 1860 (TCC), noted in the textbooks. In that case, Jackson J. baldly stated; “In my view, the arbitrator’s clarification issued on 2nd May 2005 constitutes “an arbitral process of … review” for the purposes of section 70(3) of the Act”.

Bryan J rejected DSME’s argument for three reasons.

(1) First, on the plain meaning of the statutory language.

The construction was contrary to the plain and ordinary meaning of the term “appeal or review” as used in section 70(3) which had to be viewed in the light of s.70(2). Section 70(2) requires an applicant seeking to challenge any award to have first exhausted, as a pre-requisite to the right of challenge, all routes of recourse to the arbitral process. It distinguishes in this context between “any available arbitral process of appeal or review” (s.70(2)(a)) and “any available recourse under section 57” (s.70(2)(b)). The Judge held that this was “a clear, and indisputable, distinction” [52]. He considered that the “ordinary and natural meaning” of the reference to “appeal or review”, in the context of a statutory provision that draws a delineation between an appeal or review and a correction, “is that it is a reference to a process by which an award is subject to an appeal or review by another arbitral body”.

(2) Secondly, on the better view of previous decisions

The Judge regarded this as being as the settled approach which had been taken in the previous cases (Price v Carter[2010] EWHC 1451 (TCC); K v S [2015] EWHC 1945 (Comm) and Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm) as well as the commentaries. He regarded the view of Jackson J. in Surefire as wrong. [53]

(3) Thirdly, as contrary to the founding principles of the 1996 Act.

The Judge held the questions of construction of the Act before him had to be approached in the light of the guiding principles in s.1(1)(a) of the Arbitration Act. One of these is that “the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense”.

“The principles of speed and finality of arbitration are of great importance. These would be undermined if the effect of making any application for a correction is that time for appealing runs from the date the appellant is notified of the outcome of that request. This is not simply a “concern” (nor is it one that has been over-stated as alleged by DSME) rather it is contrary to the whole ethos of the Act. It would be open to parties who have freely agreed to arbitrate their disputes to frustrate and delay that agreed mechanism of dispute resolution by relying upon completely irrelevant minor clerical errors. This cannot have been the intention of Parliament …” [55].

Question (2): Is the term “the date of the award” in section 70(3) to be read as meaning the date of the award as and when corrected, irrespective of the nature of the correction?

DSME argued next that an award could not be regarded as final for the purposes of time running until and unless any process of correction started in respect of the award had been fully completed; that applied as much to a material correction impinging upon a potential ground of challenge as to an immaterial textual or other clerical correction. The date when the process was completed was the “date of the award” for s.70(3) purposes.

DSME contended that there was no warrant for treating “the date of the award” as running from a corrected award where the correction was ‘material’ (whatever that meant) but not where it was a purely typographical correction. The date was either affected by corrections for all purposes or none. The Court having previously held that it was affected for material ones, then this applied equally to all other corrections.

Songa argued that the key to the resolution of the lacuna was to recognise the inter-relationship between section 70(3) and section 70(2). Under the latter, a party had to seek a correction or clarification of the award where this affected the challenge which it intended to make against the award as a pre-condition to challenging the award. This need to exhaust arbitral recourse to the tribunal under section 57 identified a class of corrections and clarifications which were indeed ‘material’, because if they were not sought, then the challenge would be barred. It was in relation to these and these only that the lacuna arose. Therefore the distinction between ‘material’ and non-material corrections was inherent in the Act itself and the term “date of the award” would be construed accordingly.

The Judge accepted that argument. He stated at [63] (original emphasis):

“The purpose is to ensure that before there is any challenge, any arbitral procedure that is relevant to that challenge has first been exhausted. Thus if there is a material ambiguity that is relevant to the application or appeal you have first to go back to the arbitrators, however if what you are doing is seeking correction to typos then that is not a bar to you pursuing your application. Materiality is inherent within section 70(2). It is only where a matter is material that you first have to exhaust the available remedies specified in section 70(2), so that it is only in those circumstances that it is necessary for time only to run after those available remedies have been exhausted. There is no reason or necessity for time not to run, or be extended, in the context of immaterial corrections – these are not matters that have to be corrected before an appeal can be brought. This illustrates that the test of materiality is inherent in the structure of section 70(2) and 70(3).”

Again deploying the ethos of the Act and section 1(1(a), he held that it was contrary to any sensible construction of “the date of the award” to treat it as accommodating trivial or irrelevant corrections [56]. As the Judge held (and as DSME accepted) “these are classic clerical and typographical errors. They are not connected in any way, shape or form with DSME’s subsequent appeal.” [10]

Conclusions: “Materiality” and Unanswered Questions?

The decision is to be welcomed as laying to rest the ‘Surefire argument’ once and for all.

The Court, in refusing permission to appeal, considered the point to have no realistic prospect of success on appeal and stated in terms that it was “high time to draw a line under the debate” given the “consistent and continuing practice of this Court which has particular expertise in the construction of the act, and its application.”

Materiality? The Judge saw no difficulty with a ‘materiality’ test which is “clear and easy to apply” [65]. With the section 70(2) concept in mind, it is submitted that the Judge is plainly right: a party can usually easily tell the difference between points which it has to investigate under s.57 before it can make a challenge under s. 67, 68 or 69 at all and all other corrections or clarifications.

If in doubt however, as the Judge said “[one] could always issue an application for an extension of time before the 28 day time period expired, and indeed seek permission to appeal to the extent that it was able to do so at that time. No doubt in many cases (based on the content of the application for a correction showing materiality) such an application for an extension of time would not even be opposed, or if opposed, would be resolved in the applicant’s favour should any point be taken.” [65]

Refusal to correct? An unanswered question (which the Judge did not have to address) is as to the position if a material correction is sought under s.57 but the tribunal refuses to make any correction. How is the “date of award as corrected” test then to be applied? In Maclean, the Judge thought it would be the date of the notification of the refusal to correct [19]. The same view was implicitly suggested in K v S where Teare J referred to the grounds of challenge being “dependent on the outcome of the application for clarification” [24]. Given Bryan J’s general endorsement of the reasoning in these cases, the same approach to this question must follow.

This seems right. If a material correction is (and has to be) sought in the exercise by an applicant of all available recourse to satisfy the s.70(2) requirement, then the applicant’s fate cannot sensibly be dependent on the whim of the tribunal and whether it is an expansive one, happy to explain better what it has done or, as is not infrequently the case, one which is resentful of the temerity of a suggestion of the need for clarification and whose approach is the ‘nil return’.

A copy of the judgment can be found here

Commencing LCIA Arbitration: The Perils of Non-Observance of the LCIA Rules

A v B [2017] EWHC 3417 (Comm)

The Requirements for (a) Valid and Effective Commencement of LCIA Arbitration and (b) When a Challenge to Jurisdiction Must be Made under the LCIA Rules

Summary: The LCIA Arbitration Rules (currently the 2014 revision) provide for a simple and well drafted procedure for the commencement of arbitration.

The recent decision of A v B [2017] EWHC 3417 (Comm), handed down on 21st December 2017 (and therefore perhaps escaping attention in the immediate Christmas rush), illustrates that failure to follow this simple procedure will result in a purported commencement of arbitration being wholly ineffective. This may have potentially highly significant consequences where the soi-disant “commencement” takes place hard up against the date of the expiry of a limitation period, statutory or contractual.  The decision demonstrates that appeals to the ‘flexibility’, which may have a place in the very different context of arbitration where there are no rules or requirements as to how the arbitration is to be commenced (as in Easybiz Investments v Sinograin (The Biz)[2011] 1 Lloyd’s Rep. 688), have no traction where the manner of commencement is defined by institutional arbitration rules, which have either been complied with or not.

The decision also sheds valuable light on when (i.e. how early) a challenge to jurisdiction must be made under the LCIA Rules and the correct construction of Article 23.2 of the LCIA Rules.

Simon Rainey QC is counsel in the separate contested LCIA sub-arbitration by A against C, referred to in the judgment, and in applications currently before the Commercial Court related to that purported arbitration.

How the Issues in A v B Arose

B was party as seller to two separate contracts, one concluded in September 2015 and the second in October 2015, for the sale of parcels of crude oil on FOB terms. Each separate contract was subject to an LCIA arbitration clause. A, as buyer, on-sold the parcels by two separate sub-contracts on substantially identical terms save as to price. A failed to pay the price and B sought to commence arbitration to recover the price.

Article 1 of the LCIA Rules provides that “Any party wishing to commence arbitration under the LCIA Rules … shall deliver to the Registrar of the LCIA Court … a written request for arbitration (the “Request”) containing or accompanied by” and then setting out the basic core details relied upon as giving rise to the claim or dispute and as supporting the submission of that claim or dispute to LCIA arbitration.

Inexplicably B filed a single Request on 23rd September 2016 against A under Article 1 by which B purported to commence a single arbitration for the amounts claimed under the two separate contracts as if under a single contract and, in particular, as if under arbitration agreement. A single arbitration registration fee was paid under Article 1.1(vi) of the LCIA Rules.

A in its turn commenced a separate LCIA arbitration against C) on 31st October 2016), adopting an equally single form Request on the same ‘single claim and arbitration agreement’ basis. C challenged the jurisdiction of the Tribunal in the A vs C reference on the basis that A’s purported Request for Arbitration was invalid and ineffective to commence arbitration.

A sought to adopt the same argument against B. However, by this stage, A had already served its Response under Article 2 of the LCIA Rules (on 31st October 2016). That contained a generic reservation of rights (summarised by the Judge as “(i) stating that the Response should not be construed as submission to any arbitral tribunal’s jurisdiction to hear the claim as currently formulated; and (ii) reserving A’s rights to challenge the jurisdiction of the LCIA and any arbitral tribunal appointed” [6]). But no specific challenge to the Tribunal’s jurisdiction on the basis that B’s Request was invalid and ineffective to commence arbitration was made by A in the Response. That specific challenge, passing on the point taken by C against A, was not made by A vis-à-vis B until shortly before A was due to serve its Statement of Defence and therefore well after the Response.

B argued that under Article 23.3 of the LCIA Rules A’s challenge to jurisdiction on the grounds of an ineffective Request for Arbitration came too late.

The LCIA Tribunal (Ian Glick QC; David Mildon QC and William Rowley QC) agreed, holding that A should have raised its challenge in its Response, at the latest, and that it was too late to raise that challenge in its Statement of Defence.

A applied under section 67 of the Arbitration Act 1996 on the basis that the B’s Request was ineffective; that the Tribunal had no jurisdiction and that its determination was invalid.

Issue 1: Was B’s Request for Arbitration Effective to Commence Arbitration?

This, the threshold question as to whether the Tribunal enjoyed jurisdiction over A at all, turned on Article 1.1 of the LCIA Rules. Given the parties’ arbitration agreement was on the basis of arbitration under the LCIA Rules, the Rules governed the manner in which arbitration was to be commenced.

Article 1 provides that a party wishing to commence arbitration is to file a Request for Arbitration which is to be accompanied by (a) “the full terms of the Arbitration Agreement (excepting the LCIA Rules) invoked by the Claimant to support its claim, together with a copy of any contractual or other documentation in which those terms are contained and to which the Claimant’s claim relates” (Article 1.1(ii)) and (b) “a statement briefly summarising the nature and circumstances of the dispute, its estimated monetary amount or value, the transaction(s) at issue and the claim advanced by the Claimant” (Article 1.1(iii)). In addition under Article 1.1(vi) “the registration fee prescribed in the Schedule of Costs” is to be paid the LCIA with the submission of the Request.

B accepted (inevitably) that an arbitration can only encompass a dispute arising under a single arbitration agreement (recorded at [16]).

As there were two separate contracts and two separate arbitration agreements forming part of each contract, albeit in identical form, two separate Requests were therefore necessary, one under each contract and arbitration agreement.

Phillips J. had little difficulty in dismissing B’s case that its single Request was to be read as a Request validly commencing two separate arbitrations, one under the September and the other under the October contract; in other words that while the Request was expressed in the singular, it could be and should be read as a double Request.

The problem for B was that its Request was, as the Judge summarised at [22], specifically drafted on the basis of a single Request referring a single dispute under a single contractual regime and, critically, under single arbitration agreement, to a single arbitration, with B as claimant thereby being entitled to pay a single arbitration fee. 

The Judge summed up the ordinary objective interpretation of the Request and its language (drafted, as he pointed out, by lawyers) in these terms: “In my judgment, and given the analysis of the LCIA Rules and their effect above, a reasonable person in the position of the recipient would have understood the Request as starting one single arbitration. The Request makes no reference to the commencement of more than one arbitration, but refers throughout to “the Arbitration Agreement”. The Request also claims one single amount of damages, refers to “the seat of the arbitration”, “the language of the proceedings”, “the governing law of the arbitration agreement” and payment of “the fee prescribed by the Schedule of Cost”, being a reference to the fee for a single arbitration. It is entirely clear that the intention was to commence a single arbitration and no reasonable reader would conclude otherwise. Indeed, the LCIA itself regarded it as commencing just one arbitration.”

B’s ambitious argument that a Request for Arbitration under Article 1.1 of the LCIA Rules was nevertheless to be read in the light of section 61(c) of the Law of Property Act 1925 which provides that “in all deeds, contracts, wills, and other instruments […] the singular includes the plural and vice versa” was rejected by Phillips J. as having “no merit whatsoever” [19]. 

As the Judge pointed out, this would mean that multiple different arbitrations could be commenced under one registration and one registration fee. Further, the language of Article 1.1 made it clear that a Request was singular and that the arbitration commenced by it was equally singular, not multiple or permitting the commencement in the Claimant’s sole option of as many concurrent or consolidated arbitrations in one Request as it wished.

In seeking to remedy deficiencies in the commencement of arbitration, resort was made by B to the decision of Hamblen J. in The Biz [2011] 1 Lloyd’s Rep. 688.

This was a very different case in which claims under 10 different contracts (10 separate bills of lading), each with its own identical arbitration agreement, were the subject of one notice of appointment of an arbitrator under each agreement in respect of each claim. There were no rules or requirements as to how arbitration was to be commenced and, accordingly, the default regime in section 14 of the Arbitration Act 1996 governed the position. Hamblen J held that the requirements of section 14 had to be construed broadly and flexibly concentrating on the substance and not the form of the notice.

Phillips J. held at [22] that, while that approach was unimpeachable per se, it could not assist B in the different context where detailed arbitration rules defining the way in which arbitration had to be commenced were in place and governed now a claim was to be referred to arbitration.

Issue 2: How Quickly Must a Party Challenge Jurisdiction under the LCIA Rules?

Even if B’s Request was ineffective such that the Tribunal could have no jurisdiction, B contended in any event that A had lost its right to challenge jurisdiction.

Its case rested upon Article 23.2 of the LCIA Rules which provide in so far as material that: “An objection by a respondent that the Arbitral Tribunal does not have jurisdiction shall be raised as soon as possible but not later than the time for its Statement of Defence […].” [Emphasis added.]

B relied on the Tribunal’s view that this required an “as soon as possible” response in all cases, such that if a party receiving a Request for Arbitration considered it to be misconceived in jurisdictional terms, then it had to raise that objection “immediately”. This would require a challenge to jurisdiction to be made under the LCIA Rules potentially earlier even than the filing under Article 2 of the Response to the Request for Arbitration but in any event certainly no later than taking the challenge in and as part of the Response, such that a Respondent could not leave the taking of a challenge to the Tribunal’s jurisdiction to its Statement of Defence.

Even leaving to one side the relevant statutory background, the Court found this to be a difficult argument simply on the wording of Article 23.3 itself which refers expressly to the Statement of Defence in terms as being the final cut-off point.

As the Judge stated at [40]: “the better construction of Article 23.3 is that it excludes “untimely objections”, that phrase relating back to the requirement that an objection shall be not later than the time for its Statement of Defence. Whilst the Article stipulates that objections shall be raised as soon as possible, it does not state a sanction for non- compliance, the sanction for untimely objections being provided by or implicit in the words “not later than” which apply to the time for the Statement of Defence. Had the intention, in 2014, been to introduce a new and much stricter requirement, complete with heavy sanction, it would surely have been done with far clearer words”.

The Judge supported that construction by the approach taken to a similar type of clause (: “as soon as reasonably practicable and in any event within 30 days”) in AIG Europe (Ireland) Ltd v Faraday Capital Ltd [2006] 2 CLC 770.

The Court’s view was further supported by the statutory context in which Article 23.3 was to be construed.

The Court recorded the fact that the Tribunal had cross-checked its construction of Article 23.3 against section 73(1) of the Arbitration Act 1996 which provides that where a party takes part in the arbitral proceedings “without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part” any objection to jurisdiction, the right to object is lost. The Tribunal viewed the requirement of “as soon as possible” as meaning just that with this being consistent with the “forthwith” element in section 73. It was therefore not open to a party to reserve jurisdiction at the response stage and then take it at the defence stage: it had to take it immediately but at the latest in and by the Response.

Phillips J. noted that the Tribunal had however not considered section 31(1) of the 1996 Act which specifically addresses when an objection to jurisdiction must be taken as the default position and which is referred to in section 73(1) (:“without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part”, emphasis added). Section 31(1) provides that an objection to jurisdiction “must be raised … not later than the time he takes the final step in the proceedings to contest the merits of any matter in relation to which he challenges the tribunal’s jurisdiction.” This follows Article 16(2) of the UNCITRAL Model Law save that the reference to it being not later than the statement of defence in the Model Law was replaced by a reference to the final contesting of the merits. As the Departmental Advisory Report on the Arbitration Bill records, the only reason for this change was the avoidance of the impression “that every arbitration requires some form of formal pleading or the like”.

The Judge held that, reading Article 23.3 of the LCIA Rules in its proper context, it was highly unlikely (indeed the Judge put it thus: “it is inconceivable”) that the LCIA had intended some new and stricter regime departing dramatically from section 31 and requiring a challenge even before Response or appointment of an arbitrator, even though both of those steps could not by themselves amount to a waiver of the right to challenge jurisdiction and even though the LCIA Rules provide that the omission to serve any Response does not affect the respondent’s position as to the denial of any claim (Article 2.4).

Conclusions

Permission to appeal was refused by the Judge and so the decision is effectively final on the points it determines.

The Judge’s decision on both issues should therefore be carefully noted.

First, it makes it clear that commencement of arbitration under the LCIA Rules is a straightforward process as defined in Article 1.1 where a claim or set of claims under one contract governed by an LCIA arbitration agreement is referred to arbitration by a Request and that if there are separate contracts and separate arbitration agreements, separate arbitrations must be commenced. Subsequent consolidation of the separate arbitrations is a different matter, with the necessary consents: the LCIA Rules provide for this in terms in Article 22.1(ix).

Secondly, it now clarifies the correct construction of Article 23.3 of the LCIA Rules (newly amended in the 2014 revision). While jurisdictional challenges must be made at an early stage in arbitral proceedings, the long-stop approach of requiring them to be made no later than the contesting of the merits and the time for the Statement of Defence which amounts to a step in the proceedings is consistent with the provisions of the Arbitration Act 1996 and similarly worded provisions.