A recent judgment from the Commercial Court has emphasised the importance of accurate wording for letters of undertaking (LoUs), especially in relation to arbitration agreements and time extensions.
A cargo damage claim in Lavender Shipmanagement Inc v. Ibrahima Sory Affretement Trading S.A. & Ors (Majesty)  EWHC 3462 (Comm) raised the issue of whether the P&I Club’s LoU amended the arbitration agreement contained in the bills of lading. In upholding the majority tribunal’s award, the Court construed the dispute resolution provisions of the bills of lading and the LoU together. Applying commercial common sense, it concluded that these provided for the consolidation of all claims arising under the various bills of lading in one set of proceedings.
A cargo of bagged rice was carried from Myanmar to Guinea pursuant to a voyage charterparty and under five bills of lading. Each bill of lading incorporated the law and arbitration clause of the voyage charterparty, which provided for LMAA arbitration with each party to appoint their own arbitrator and, in the case of claims not exceeding $100,000, for the LMAA Small Claims Procedure (SCP) to apply.
On arrival in Guinea, the claimant cargo interests alleged that the cargo was short, damaged and wet. Both the claimants and the owners instructed local surveyors who inspected the cargo. The survey reports did not refer to individual bill of lading numbers or cargo quantities carried under each bill, but simply addressed the total amount of loss.
An LoU was issued to the claimants by ETIC SAS (ETIC) on behalf of the owners’ P&I Club. The LoU heading referred to all the bill of lading numbers and to the total quantity of cargo. It also stated: “We confirm that the shipowners agree that the above-mentioned claims shall be subject to English law and shall be brought in arbitration proceedings in London.”
ETIC subsequently granted time extensions to the claimants on behalf of the owners. In due course, the claimants purported to commence arbitration by sending one notice of arbitration that listed all five bills of lading and indicated that one arbitrator was being appointed either: (a) pursuant to the ad hoc arbitration agreement in the LoU or; (b) pursuant to the arbitration provision incorporated into the bills of lading.
In response, the owners appointed their arbitrator without prejudice to the contention that there was no ad hoc arbitration agreement in the LoU and that any claims had to be brought as five separate references under the bills and pursuant to the SCP.
In arbitration, the tribunal decided by a majority that:
Whilst the five bills of lading each contained a separate arbitration clause governed in part by the SCP, by the terms of the LoU the parties had agreed to consolidate those arbitrations and to have them heard in a single ad hoc arbitration; and
The time extensions operated to grant the cargo claimants an extension in respect of commencing arbitration proceedings pursuant to the ad hoc arbitration agreement in the LoU.
The dissenting arbitrator found among other things that:
the LoU did not contain the necessary means for an identifiable or workable arbitration procedure and in fact taken in isolation, the LoU appeared to be contradictory; and the LoU referred to the pre-existing agreement to arbitrate in the bills of lading.
The owners appealed, arguing that the LoU did not provide for an ad hoc agreement to arbitrate, nor did it consolidate five references under the five bills of lading into one. Among other things, the owners contended that there was no provision in the LoU on how a properly constituted tribunal would be appointed so the reference to this was meaningless. Additionally, the owners could not be taken, without more, to have readily given up the benefits afforded to them by the SCP.
The claimants, on the other hand, submitted that the LoU wording made clear the parties’ intention to arbitrate their disputes in a single set of proceedings. They highlighted among other things that: the surveys treated the bills of lading interchangeably; this was one cargo (all the bags of rice carried the same markings and were of the same size and weight); the factual basis of each cargo claim would be the same under each of the bills; and the owners’ defences under all the bills would be the same.
Commercial Court Decision
The Court dismissed the appeal. It construed the LoU in light of the relevant background, namely:
- the charterparty arbitration provision, as incorporated into the bills;
- the fact that the surveyors did not classify their findings by bill of lading numbers or cargo quantities; and
- one LoU issued in respect of the entire cargo.
It concluded that the LoU was an agreement to consolidate all of the claims in respect of the entire cargo before a London arbitration tribunal constituted in accordance with the charterparty provision for the following reasons:
While the LoU was somewhat informally drafted, it was clearly intended to apply to anyone who was entitled to sue in respect of these claims;
There was a clear intention to bind the owners to the LoU since the P&I Club had irrevocable authority from the owners to give the LoU;
The LoU arbitration provision referred back to the charterparty on how the tribunal was to be constituted; and
There was considerable commercial sense to this construction of the LoU, as it meant that the issues with one shipment of rice could be resolved once and for all-in-one arbitration, avoiding the inconvenience of having to commence five separate arbitrations and the risk of inconsistent awards. This afforded a sound commercial reason as to why the Owners would give up an entitlement to use the SCP.
The Court also found that the notice of arbitration was a valid notice, as it purported to appoint one individual as arbitrator in a consolidated procedure under the terms of the LoU and expressly stated that the SCP did not apply to the claims thereunder.
Finally, the Court concluded that the extensions of time applied to the LoU despite reference in them to proceedings “as per the above Bills of Lading” and not as per the LoU. The Court held that the wording of the time extensions should be read to mean that the extensions applied to disputes arising under the bills, which had been agreed to be resolved in a consolidated arbitration under the LoU.
This decision is a reminder that dispute resolution provisions in a LoU are potentially as important as those in the underlying contracts of carriage. To avoid an argument as to which procedure applies when a dispute arises, the parties should ensure that the dispute resolution wording of an LoU is comprehensively and clearly drafted and, where desirable, is consistent with the corresponding provisions in the bills of lading and/or charterparty.
The dispute also highlights that it is important to draft both notices of arbitration and time extensions precisely to make it clear what disputes are covered and under which contracts.
Source: Baltic Exchange