How not to start an arbitration

Two recent London decisions have highlighted problems that can be encountered in starting an arbitration.

The first decision concerned an issue with identifying whether a non-signing counterparty was bound by the agreement containing the arbitration clause. The second decision concerned the question of which persons that are authorised to accept service of arbitration notices.

Whether non-signing counterparty is bound

In the first decision, LMAA award 13/16, a claim was made under a booking note for the shipment of a project cargo. A booking note is designed to be a precursor to a bill of lading, containing both the agreement with charterers/freight forwarders for booking space on the vessel and also an agreement on the terms of the bill of lading to be issued by shipowners for the cargo once loaded. These terms included the standard liner bill definition of the counterparty as the “Merchant”, to include the named merchant but also deemed to include shipper, receiver, consignee, holder of the bill of lading and cargo owners.

Normally the bill of lading once issued supersedes the booking note, hence the need for the definition of “Merchant” to cover whoever might be the lawful holder of the bill of lading. Indeed, normally shipowners’ claim would be made under the bill of lading. However in this case, the bill of lading was issued after the accident to the project cargo loaded under the booking note. Moreover, it was issued with the correct weight for the project cargo, while the booking note had misdescribed the weight and this, said shipowners, caused the accident. Why shipowners issued the bill of lading with the corrected weight is not mentioned, and it was unknown whether the mate’s receipts upon which the bill of lading would have been based recorded the correct weight but this was not picked up until after the accident. In any event, shipowners’ case for misdescription of the cargo rested under the booking note, which due to chance had still not been superseded at the time of the accident.

To accept service of arbitration notices, like court claims, require actual or ostensible authority for such service.

Shipowners’ position was further complicated because they wanted to claim against both the named merchant who signed the booking note and the merchant’s load port representative, who was nominated as merchant’s representative in the booking note and also appeared as shipper on the subsequently issued bill. However, when shipowners served their claim the shipper objected, saying it was not a party to the booking note. Shipowners argued that it was a party, by reason of it being the shipper, named as merchant’s representative, and the intended counterparty to the bill of lading anticipated by the booking note. However, the tribunal rejected all shipowners’ arguments, affirming that nothing in the booking note made the shipper a party to it and that without a contract with the shipper, the tribunal had no jurisdiction to hear the claims, even the potential claims in tort for the misdescription. This is perhaps the key to shipowners’ strained attempt to bring shippers into the arbitration, as the alternative forum for tort claims was in their domicile, Romania.

The case serves as a reminder that for any non-signing counterparty to be bound by the signature of another counterparty, they have to give actual or ostensible authority for that counterparty to sign on their behalf. In this arbitration, simply defining the term merchant to include the shipper, having the shipper named as the merchant’s representative, and agreeing the contract would be superseded with another one with the shipper was not sufficient.

Authorisation to accept service of arbitration notices

The second case is Sino Channel Asia Ltd v Dana Shipping and Trading Pte Singapore [2016] EWHC1118. It is an appeal to the High Court in London from a London arbitration award concerning an assumption about who was to be served with notice of arbitration.

A contract of affreightment (“COA”) had been made between the owners and charterers via their brokers. In the course of the negotiations, a Mr Cai was represented by charterers’ brokers as a representative of the charterers’, and was the brokers’ point of contact with the charterers. What was not known to owners was that Mr Cai did not work for charterers, but another company who was working with charterers on the operational aspects of the COA. As such, when it came to serving a notice of appointment of arbitrator for breach of the COA, it was sent on owners’ behalf to the brokers and to Mr Cai. The notice sent to charterers’ brokers was forwarded by them to Mr Cai as well. The accepted evidence was the Mr Cai did not pass the notices on to charterers, tried to resolve matters without success and left owners to obtain a default award against charterers. The first charterers knew about the arbitration was when they received a copy of the award by post. They asked Mr Cai’s company about it to be told that Mr Cai had acted without authority and that the company would settle the award. However there was no settlement, at which point charterers questioned the legitimacy of an award obtained without their knowledge. The question was whether Mr Cai was authorised to receive the notice of arbitration on behalf of charterers.

For any non-signing counterparty to be bound by the signature of another counterparty, they have to give actual or ostensible authority for that counterparty
to sign on their behalf.

First, as regards actual authority, it was accepted that charterers had not authorised Mr Cai or his company to act in arbitrations for them. Nor could such authority be implied from Mr Cai’s general authority. To accept service of arbitration notices, like court claims, require actual or ostensible authority for such service. As for ostensible authority, charterers had given no representations that Mr Cai or his company could use to show that charterers had acquiesced in their receiving the notice, nor had it acquiesced in any such representation being made by Mr Cai or his company. Admittedly charterers’ brokers had passed the notice to Mr Cai, suggesting he did have authority to receive it, but the judge decided the brokers were probably simply keeping to a line of communication previously established without considering the issue of authority. So the judge agreed with charterers that they had not been properly served with the notice of appointment of the arbitrator and this invalidated the award (after dismissing further arguments that it had been ratified by charterers’ response or non-response once served).

This decision underlines the problems that can follow from assuming persons who are in the chain of communication for a contract are authorised to accept service of arbitration notices. This applies to P&I Clubs and lawyers too, without obtaining confirmation they are authorised to accept service there is a risk that service on them will not be recognised. That said, it is to be expected that an agent or broker will usually pass the notice to its principal and actual receipt of the notice by the principal will then be regarded as effective. However, in this case even the broker sent the notice to the wrong person. This could all have been avoided if the notice had been sent to charterers direct.

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