INCORPORATION BY REFERENCE AND THIRD-PARTY RIGHTS

Authored by Amit Chawla and Kartikey Bhalotia

Introdution

Disputes in International Maritime Arbitration can be categorized broadly in two types – Contractual (Sale or use of cargo or ship, carriage of goods etc.) and Non-Contractual (Maritime rescue or collisions etc.).[1]Though the issue of incorporation arises in contractual disputes, arbitration agreement in International Maritime Arbitration plays a very essential role as it is directly linked to party autonomy.[2]It determines the willingness of the parties to submit to arbitration, the jurisdiction they want their disputes to be subjected to, the choice of law etc.[3]International Maritime contracts are usually embodied in “charter parties” or documents attached to the “bills of lading”. Practice has shown that these are not mutually exclusive.[4]

Incorporation of an arbitration clause into a bill of lading by reference to a charter party, has been a common practice in the realm of maritime contracts. This has been the main point of dispute between parties to a maritime contract on numerous occasions. Another concern which this kind of incorporation brings into picture is the third- party rights. A bill of lading being a negotiable instrument can easily be transferred by the original holder to a third party, who may further transfer the same. This breaks the shackles of privity of contract and brings into picture a third party, thus, the interpretation of these incorporated arbitration clauses also affects the rights of third parties, who may not be or rather are not the party to the original contract. 

Non-liner bills of lading (“tramp bills of lading” or “charter  party bills”), which are issued for the ship under charter, contain a general clause of incorporation of specific terms and conditions existing in a particular charter party into the bill of lading.[5]This general clause incorporates either explicitly or implicitly the arbitration clause as well as the Choice of Law Clause of the charter party to which it refers. Complex nature of these clauses necessitates proper assessment of the intention of parties towards this incorporation. Different from formal dimension of arbitration clauses, a tribunal or court in these cases tries and assesses the nexus between the actual bearer of the bill of lading and a set of terms of certain charter party, which is incorporated through an incorporation clause of a bill of lading.[6]There are cases wherein the bearer may not have negotiated the terms of the charter party or he may not even know about the terms thus it becomes an important area, where there are different opinions of different courts and even different conventions for that matter. For example, the United Nations Commission on International Trade Law under Option I Art. 7.2 recognizes this type of incorporation and holds the validity, provided that the contract is in writing and the clause containing such requirement of arbitration is made part of the present contract, which in this case is the bill of lading. 

England

It is also important to look at the approach of different national courts to this particular matter in order to understand this matter in its entirety. Looking at London which is the largest hub of international maritime arbitration, with influx of approximately 70% of all of the maritime disputes of this world,[7]it can be analysed that the courts in the UK have adopted a highly restrictive attitude towards this type of incorporation.[8]However, generally they have had an open attitude towards incorporation of terms of charter  party into a bill of lading, but with the exception particularly towards the “arbitration” and “choice of law” clauses.[9]

The courts therein, through various decisions, have divided the clauses of a charter party into two categories, which are “ancillary” and “germane” to the said charter party.[10]The “arbitration” and “choice of law” clauses being put under the category of ancillary clauses to the charter party, because they have been considered to be independent from carriage of goods, which is the objective of the contract and thus forming a separate contract in themselves. On the other hand, load, transport, disembark and delivery of goods, payment for those goods, all these clauses are considered to be “germane” to the contract.[11]The courts in the UK have displayed an open attitude towards incorporation of “germane” clauses, whereas, restrictive attitude towards the incorporation of “ancillary” clauses. They mandate certain qualification which an incorporation of the said ancillary clauses should possess in order to be given effect[12]– First, it is necessary for the clause to have specific mention to the arbitration clauses of the charter party in the incorporation clause of the bill of lading; Secondly, it is required that those terms to be incorporated into the bill of lading must be compatible with the terms and conditions of the bill of lading itself.

In the case of T.W. Thomas & Co. Ltd. v. Portsea Steamship Co. Ltd.[13]– it was held that the arbitration clause should specifically refer to the arbitration agreement of the charter party so sought to be incorporated, mere general mention of incorporation of all the “terms” and “conditions” of the charter party cannot suffice. The court went on to say that through opting for arbitration, the parties preclude their legal right to approach the court. Thus, it is important for the arbitration clause should be in writing and should specifically be identified to not leave any ambiguity.

In another case of Skips A/S Nordhiem and Others v. Syrian Petroleum Co. Ltd. and Another[14]– where the charter party provided for an arbitration clause and another clause provided “that all bills of lading issued pursuant to this charter party would incorporate all the terms and conditions of this charter party including the arbitration clause”.The bill of lading contained an arbitration clause, which generally incorporated “terms” and “conditions” of the charter party. When a dispute arose, the court did not allow for arbitration, stating that the “conditions” to which the incorporation clause has referred is only such conditions which are to be fulfilled by the consignees on receiving of the goods, and arbitration was not such a condition.[15]Thus, it is required that, it is the Bill of Lading that should specifically refer to the arbitration clause and the charter party as in this case.

United States

Where the courts in the UK show a restrictive attitude towards the incorporation of arbitration and choice of law clauses, the attitude of the courts in the US is a far cry. The courts in the US have generally displayed a flexible attitude towards this type of incorporation[16]and there exists a presumptive attitude towards the validity of the arbitration agreement entered into by the parties.[17]Presumptive attitude has led to as matter of principle the acceptance of the incorporation clauses of this kind drafted in general terms, i.e. not specific mention of arbitration clause, while incorporating the clauses of the charter-party into a bill of lading.[18]The courts herein have focused on the knowledge of the parties about the existence of such incorporation and the consequences arising thereof, to hold an incorporation clause valid.[19]

In case of Amoco Overseas Co, v. S.T. Avenger[20]– the US Court held that as long as the identity of the charter-party is known to the consignee, there can be no ambiguity as which arbitration clause has been referred to in the bill of lading. The courts in the US consider the intention of the parties to arbitrate.

India

In India, the position regarding incorporation by reference in maritime arena is unsettled as of now. The Supreme Court discussed the general validity of these type of arbitration clauses in the case of Inox Wind v Thermocables Ltd.[21]to hold that a general reference to a standard form of contract of one party would be sufficient to incorporate an arbitration clause. The court highlighted the exception in the case of MR Engineers[22]and noted that where the standard form of contracts concerning trade associations and professional bodies, a general reference to standard form of terms and conditions would be sufficient to incorporate the arbitration clause by reference. However, the court, taking into account the development of law based on the reasoning laid down in the Habas judgementexpanded the scope of exception as stated in MR Engineersand opined that general reference to standard terms of one of the parties is sufficient for incorporation of arbitration clause by reference even if it is not a trade association and professional body. The English court, in the case of Sea Trade Maritime Corporation v. Hellenic Mutual Water Risks Association(Bermuda) limitedThe Athena[23]discussed the concept of single contract/two contract reference and  in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal Sal[24]held that if the standard terms were previously agreed between the parties in another contracts or if the standard terms of one of the parties are set out in the back of an offer letter, order or another document, that would suffice to incorporate the arbitration clause by reference.

However, in the recent judgement of Giriraj Garg v Coal India Limited and Ors.[25], the court took a different view and held that if the arbitration clause was contained in the standard terms and conditions of the main contract, incorporation of arbitration clause by reference would not be valid. The court again brought to light the ‘single contract case’ and ‘two contract case’ and held that a single contract case is one in which the arbitration clause would be contained in a standard form of contract and there would be a general reference in the contract. On the other hand, two-contract cases are those in which the arbitration clause is contained in some other contract between the parties and reference is made to incorporate the same in the contract between the parties. As regards to the single contract cases, the incorporation by reference is considered to be valid whereas in two contract cases, the reference to the arbitration clause must be specific in nature.

Since there is no express provision in the Arbitration Act regarding referring third parties to arbitration, it is to be noted that if the contract containing an arbitration clause is between the party to the original contract and a third party and where the entire contract is to be considered as a single commercial relationship, the scope of single contract cases should be expanded. This view has also been supported in the case of Ameet Lalchand Shah v. Rishabh Enterprises[26]in which the contract did not had the arbitration clause but since the clause was integrally connected to the commercial understanding in other agreements that had arbitration clause, such an arbitration was held to be valid.

Conclusion

These conflicting views of courts in different jurisdictions, in dealing with the concerned issue, creates a lot of uncertainty, especially in the context of maritime contracts which often raises the stakes to an international level, not confining within the boundaries of the jurisdiction of the national courts. With a country like India becoming a hub of maritime transactions involving large scale commercial operations and affecting third party rights, there is a need to provide specific provisions for the incorporation of arbitration clause by reference in maritime arbitration. The Act should be amended to incorporate such provisions and bring at par with the international standards. 

About the Authors

Amit Chawla is a 4th-year law student at National Law University Odisha. He has been associated with the Centre for Maritime Law for the past one year. He has a keen interest in exploring the various nuances of maritime law.

Kartikey Bhalotia is a 2nd-year law student at the National Law University Odisha. He is currently associated with the Centre for Maritime Law as a member and has been researching various aspects of International Maritime Arbitration for the past one year.


[1]J L Gabaldón García, J M Ruiz Soroa, Manual De Derecho De La Navegación Marítima (3rdedn, Marcial Pons 2006) 957.

[2]J F Wilson, Carriage of Goods by Sea(4thedn, Longman 2001) 321.

[3]Dr Carlos Esplugues Mota, ‘Validity and Effects of the Incorporation by Reference of Arbitration Agreements in International Maritime Arbitration: Current Situation and Future Trends’ [2012]. 

[4]Supra(n 2).

[5]Supra(n 1).

[6]X Boucobza, ‘La Clause Compromissoire Par Référence En Matière D’arbitrage Commercial International’ [1998] Rev Arb 495.

[7]P N Tassios, ‘Choosing the Appropriate Venue: Maritime Arbitration in London or New York?’ [2004] J.Int’l.Arb 355.

[8]A Tweeddale, K Tweeddale, Arbitration of Commercial Disputes – International and English Law and Practice(Oxford University Press 2005) 34.

[9]Supra(n 3).

[10]OK Petroleum A B v Vitol Energy S.A[1995] 2 Lloyd’s Rep 160.

[11]A A Mocatta, M J Mustill, S C Boyd, Scrutton on Charterparties, London(19thedn, Sweet and Maxwell 1984) 64.

[12]L D’arcy, C Murray, B Cleave, Schmitthoff’s Export Trade – The Law and Practice of International Trade(10thedn, Sweet and Maxwell 2000) 274-275.

[13]T W Thomas & Co Ltd v Portsea Steamship Co Ltd [1912] AC 1 (HL).

[14]Skips A/S NordheimAnd Others v Syrian Petroleum Co. ltd. And Another[1984] QB 604.

[15]Ibid,600.

[16]W Tetley, Marine Cargo Claims(4thedn, Thomson/Carswell 2008) 1417-141.

[17]Vimar Seguros y Reaseguros v M/V Sky Reefer[1995] 515 US 528.

[18]Supra(n 3).

[19]D Di Pietro, ‘Incorporation of Arbitration Clauses by Reference’ [2004] J.Int’l Arb 441.

[20]Amoco Overseas- Co v S T Avenger[1975] 387 F Supp 589 (SDNY).

[21]Civil Appeal No 19 of 2018 (Arising out of SLP (Civil) No 31049 of 2016) decided on 5 Jan 2018.

[22]M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696.

[23][2006] EWHC 2530 (Comm).

[24][2010] EWHC 29 (Comm).

[25]Civil Appeal No. 1695 of 2019 (Arising out of SLP (Civil) No. 28693 of 2018) decided on 15 Feb 2019.

[26]Civil Appeal No. 4690 of 2018 (Arising out of SLP(Civil) No. 16789 of 2017) decided on 3 May 2018.

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