Arbitration Without An Express Arbitration Clause

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Arbitral tribunal had jurisdiction despite the lack of an express arbitration clause.

In Sonact Group Limited v Premuda Spa [2018] EWHC 3820, the English High Court confirmed that an arbitral tribunal had jurisdiction over a dispute arising from an informal settlement agreement — despite the fact that the agreement did not contain an arbitration clause. The court held that the arbitration clause in the charterparty applied to the settlement agreement. On the facts, the settlement agreement was no more than an informal routine arrangement to settle sums under the charterparty. The parties clearly intended the arbitration clause to apply to claims relating to the settlement agreement and, therefore, the challenge to jurisdiction was rejected.

The case highlights the English court’s pragmatic and pro-arbitration approach, but also serves as a reminder of the importance of always including express dispute settlement provisions in settlement agreements and other ancillary contractual documents.

Background

The claimant charterer and defendant owner entered into a voyage charterparty under which the defendant chartered its motor tanker the “Four Island” to the claimant for a voyage between two Russian Far Eastern ports. The charterparty contained an arbitration clause which provided that:

“Any and all differences and disputes of whatsoever nature arising out of this Charter shall be put to arbitration in the City of New York or in the City of London whichever place is specified in Part I of this charter….before a board of three persons…..Until such time as the arbitrators finally close the hearings either party shall have the right by written notice served on the arbitrators…..to specify further disputes or differences under this Charter for hearing and determination.”

London was chosen as the seat of arbitration.

A dispute arose under the charterparty. The defendant made a claim of US$718,948.08 for demurrage and US$190,200 for heating costs. The claimant agreed to settle the claim for US$600,000, but ultimately failed to make the agreed settlement payment. The defendant therefore issued a notice of arbitration which referenced a “number of claims against charterers, including a demurrage claim, a claim for heating costs, a claim for a penalty, a claim for interest and costs, plus various other matters…” The claimant argued that the tribunal did not have jurisdiction as the settlement agreement did not provide for London arbitration and the charterparty had been novated.

The Award

The tribunal held that it had jurisdiction to determine the claim, noting that while the settlement agreement was not contained in a separate document, the parties had exchanged views and achieved a meeting of the minds.

The tribunal held that the parties’ unexpressed but clear intention was that the settlement agreement should be governed by the same dispute resolution mechanism as the charterparty under which the underlying claims had arisen. Claims for demurrage were “part and parcel of operating and chartering ships” and people in the industry would be “astonished” to be told that the arbitration clause did not govern the settlement agreement. The novation argument was similarly rejected and the claimant did not pursue it further.

The tribunal awarded the defendant the agreed sum. The claimant then renewed its challenge to the tribunal’s jurisdiction under section 67 of the Arbitration Act 1996.

The Court’s Decision

The court rejected the challenge and upheld the tribunal’s reasoning, noting the following points in its judgment:

  1. The parties’ intentions. The settlement agreement was no more than an informal exchange of emails to finalise the sums due under the charterparty. In these circumstances it was “obvious” that the parties intended the arbitration clause in the settlement agreement to apply in the event that the sums were not paid and “inconceivable” that the parties intended the defendant to commence court proceedings.
  2. The language of the arbitration clause. The arbitration clause was broad and encompassed the defendant owner’s claims, even though the agreement to pay US$600,000 constituted a new cause of action and formed part of a new and binding agreement. There was no “bright line rule” that once the parties enter into a new legal relationship, an arbitration clause in the underlying contract could no longer apply. In any event, the arbitration clause in the charterparty allowed the parties to “specify further disputes or differences” after the arbitration commenced provided they were “under this charter”.
  3. The governing law. Even though the settlement agreement did not contain a governing law clause, it would be “very odd” if the settlement agreement would be governed by another other law than that which applied to the charterparty. Accordingly, the same was true of the arbitration clause.
  4. The notice of arbitration. While the notice of arbitration did not refer to the agreed settlement sum rather, inter alia, to demurrage and heating costs, the US$600,000 claim could be properly regarded as representing these costs claimed as part of the underlying dispute, given the context in which the claim was made. The notice was therefore effective.

Finally, the court briefly considered an argument that the tribunal’s jurisdiction was not confined to the terms of the notice of arbitration and that the failure to pay the settlement sum was a dispute “arising under or in connection with the transaction” pursuant to article 10 of the London Maritime Arbitrators Association (LMAA) rules. The arbitration clause in the charterparty did not contain a reference to the LMAA rules, and while the parties’ submissions were headed by reference to the LMAA rules, the claimant always objected to jurisdiction. Further, as the court had already rejected the challenge, it was unnecessary to consider whether the conduct of the parties conferred jurisdiction on the tribunal pursuant to clause 10 of the LMAA rules.

Comment

This decision highlights the court’s pragmatic approach and pro-arbitration stance. On the facts, the court was willing to consider the wider industry context and practice in ascertaining the parties’ intentions and was unpersuaded by the fact that the settlement agreement did not contain an express arbitration clause. However, the case also underlines the potential for disputes to arise in circumstances in which a settlement agreement or other ancillary contract does not provide a dispute resolution mechanism or governing law clause. While the court was persuaded that the parties intended the arbitration clause to apply to the settlement agreement, parties should include express terms on dispute resolution and governing law in settlement agreements in order to avoid costly and time consuming disputes on jurisdiction.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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