José María Alcántara González
- The choice of law. Which law?
In the world of Arbitration the law to be applied to the dispute by the Arbitrator is a matter of essence. In the world of Maritime Arbitration is also a matter of some peculiarity.
We shall here refer to the law of the merits on which the dispute must be decided and in no way shall we enter into the field of the enforceability of the Arbitration agreement neither shall we touch upon the rules of procedure that are to govern the Arbitration trial.
As it therefore regards the law of the merits of the case concerned, the first question should be asked: is there any choice over such law?
The parties are, indeed, free to discuss and agree the terms of the Arbitration clause, including the applicable law to the substantive issues to arise in the future of their business relations.
Such a freedom, however, becomes largely undermined in Shipping by the fast and eager way through which the deals are negotiated in the first place; secondly, by the use of model clauses by the brokers during the parties’ negotiations and, thirdly but perhaps the most important, by the overwhelming reference to english law in the forms recommended by the BIMCO and followed in the market generally.
It is therefore hard to say that a “choice” truly exists in the majority of the contracts under fixing while it is no lesser a true fact that the parties have little time for discussing such a relevantly key issue as they normally tend to satisfy themselves as to looking after the matters of costs and feasibility.
Why the latter is that so?, because of the absolute predominance and reliability of english law in the international shipping market.
That is still the position in the XXIst century irrespective of the force of many International Maritime Conventions and regardless of the circumstances under which one party may impose another law to his counterpart.
Yet, a 93% of the arbitrations cases worldwide are awarded according to english law. That is a material fact we cannot ignore.
- Arbitration clauses in shipping Contracts.
Most of the shipping contracts refer the parties to ARBITRATION in the event of a dispute. Such is the case with shipbuilding contracts, sale and purchase MOA forms and particularly, with printed forms (LOF) of salvage agreements. However, the vast majority of arbitration cases arising in shipping relate to CHARTERPARTY disputes, to which central and full consideration shall be given next.
Many Charterparty standard forms include an Arbitration Clause in their printed text and such is, indeed, the general rule.
However, a number of others (e.g., CEMENCO, BRITCONT, SCANCON, HYDROCHARTER, PANSTONE, COASTHIRE, BP. VOY, MARATHON TIME and VOY) do not speak of arbitration at all, thus making the parties to set one arbitration clause out in the additions or riders to the printed form (as such was the case also with GENCON before 1994) and even so, the clause is often forgotten by brokers or the parties themselves who do not tend to negotiate matters such as arbitration covenants.
The wording of these clauses varies remarkably from one form to another. Attention must also be paid to the practice of using too short a provision in the body of the additional typed clauses (e.g., “arbitration and general average, if any, to be settled in London”, which was held to be inadequate; or “London Arbitration/English Law”, which is no longer sufficient as from 1st April 1991 upon entry into effect of the Contracts (Applicable) Law Act 1990).
The wording of the arbitration agreement is essential for the kind of proceedings that are to follow if a dispute arises. The type and frame of the arbitration is set by the clause and a number of issues derive from it. Some of them may go to the root of the formula, e.g., the place where the reference is to be conducted and the award issued.
The clause may also define and limit the matters being referred to the arbitration, and this may be of crucial importance when discovering that some issues may have become time-barred.
The clause will be relevant to ascertain whether, in certain countries like Spain, the parties intended the dispute to be resolved by amiable compositeurs (pursuant to equity) or by law. The parties ought to be careful and aware of the advantages and disadvantages of one and the other at the time of making their choice within the frame of the clause. Arbitration according to equity may be implied by appointing arbitrators to be “commercial men”.
By far and insofar as it may trigger the applicable law, the prime importance lies with the place of arbitration, namely so often London or New York, and then the list goes down to Paris, Hamburg, Moscow, Singapore, Hong-Kong, etc. up to include a number of new international centres, regional chambers and domestic fora, in respect of which information needs be provided beforehand in order for the parties to be familiar with the way arbitration disputes are handled in the particular place offered to them for agreement. Previous experience in such place or otherwise, information relating to matters of time, costs, finality of the award, rules of procedure, etc. and, also very important, enforceability of the award in the country of the Respondent are all, but not limited to, matters to care about before opting for a particular clause.
Thence, it cannot be remarked too strongly that the choice of an arbitration clause is not an easy matter and entails a number of serious implications and consequences to the parties.
The shipping market provides a large number of model forms or patterned clauses. A majority of the options directs the parties to London and English law for arbitration (e.g., FERICON 1942, amended 1974, at Cl. 17; GASVOY 1972, at Cl. 29; GASTIME, at Cl. 42; WORLDFOOD 1986, at Cl. 39; INTERTANK VOY 76, at Cl. 32; BALTIME 39, Layout 1974, at Cl. 23; LINERTIME 1974, at Cl. 32; SHELLTIME 3 1972, at Cl. 40; SHELLVOY, at Cl. 39(b); INTERCONSEC, at lines 164 and 165; CEMENTVOY 1990 at Cl. 41; QAF COCHARTER at Cl. 29, among others).
A second important set of samples provides a choice of arbitration between London and New York (thus, ASBATANK VOY 1977 at Cl. 24; NORGRAIN 89, AMWELSH 93 and SUPPLYTIME 89 at Cl. 31 and, more recently, NYPE 93 at Cl. 45) and New York alone (STB TIME, TEXACO TIME). Latterly, NYPE 2015 added Singapore and the BIMCO ARBITRATION CLAUSE 2020 added Hong-Kong as a fourth option.
As a result, the role of the common law arbitration models stands to be predominant in the basic trades and has become leading to an overwhelming extent in the market of today. Owners and Charterers, who may not be connected with London or New York at all, will find themselves referred there for arbitrating their disputes by effect of the printed clauses.
However, well-outlined examples of minority options seem to have emerged out of the blue and have already caused very interesting and professional awards (namely, SYNACOMEX 90, for ICC, Paris; AUSTWHEAT 90, for Melbourne; GRAIN VOY 1974, for Hamburg; NIPPONORE 1974 and NANYOZAI, for the Japan Shipping Exchange, Tokyo, SOVCOAL 1962, for the MAC, Moscow).
- The place of arbitration and the law to apply.
The place of arbitration is, again, of fundamental importance. The domestic legislation will determine the extent to which the national Courts may become involved in the conduct of the arbitration.
Likewise, the extent and nature of any mandatory procedural rules that will have to be adhered to will turn to the rules applicable in the State in which the arbitrators sit.
Careful consideration should be given to the circumstances under which, for example, points of law may be referred by the arbitrators to the national Courts for decision or, otherwise, a referral to the Courts can be made for taking evidence located out of the arbitrator’s reach.
Domestic limitations come in with the choice of the place since, e.g., the arbitrators must conform with certain personal requirements in some countries. The place alone, without mention of the applicable law, will entail the acceptance of the arbitration rules and procedure in force in the particular country. Thus, where the clause would state the place for arbitration only, then the parties will not always know beforehand what kind of arbitration they have chosen.
Some Charterparties do not state a place of arbitration at all (e.g., MEDCON 1922, at Cl. 17; WELCON 1974, at Cl. 9, though it can be presumed easily that Cardiff is such place) but most of them, and always insofar as printed clauses are concerned, leave the matter up to be agreed by the parties (thus, POLCOALVOY 1976 at Cl. 33; NUVOY-84 at Cl. 50; GENORECON 1963 at Cl. 38; SOVORECON at Cl. 38; BLACKSEAWOOD at Cl. 47) or otherwise, as an alternative, contemplate a particular place in default of agreement (BALTIME 1974; BIMCHEMTIME; BOXTIME; SOVCOAL; NIPPONORE) or, as well, an alternate key to arrive at that place (e.g., SOVIETWOOD 1961, at Cl. 24,b and SOVCONROUND at Cl. 42,b, which refer to the country of the Respondent in the absence of a place agreed). The latest forms tend to provide a tripartite choice between London, New York and another place (thus, GENCON 94, BOXTIME 90, RUSWOOD 95).
Very interesting are the clauses which relate the source of the dispute to one or another place in the vessel’s voyage, so that arbitration takes place in the port of loading or in the port of discharge pursuant to whether the dispute applies to one port or the other (i.e., BALTCON 1950 at Cl. 24; GERMANCON-NORTH 1957; and to the discharging port only also SOVCOAL 1962).
Altogether, London stands as the most commonly stated and actually agreed place of arbitration. Whether the clause will so state or not, it is well known that English Arbitrators always apply English law for resolving the dispute, if the parties have not agreed otherwise.
The English arbitration enactments will also be governing the proceedings where London is chosen as the place, so the parties should be aware that appeal against a London award is only granted by the High Court under somewhat exceptional circumstances.
The parties, who are often foreigners and do not equally often know much about the English arbitration system and laws, should perhaps take more and better assistance from the brokers for ascertaining whether London is the most suitable place for them to choose in the prevailing circumstances of the business they are about to enter into. It is, indeed, generally accepted that London is an arbitration place of the utmost prestige and quality but it should not mean that it is a forum which Owners and Charterers should sign up for blindly or without regard, or indeed prior information, to the circumstances of their commercial venture.
For it is noteworthy remarking that the place of arbitration brings about a careful decision in the part of the contractors and that their choice may literally determine the outcome of the case. In a non-marine arbitration case between a Finnish company and an Australian company, London was selected as the place of arbitration in the arbitration clause. The case involved royalty payments allegedly not made and the purported cancellation of the relevant agreement in 1976.
In 1982 the licenser commenced arbitration proceedings. The arbitrator found that, because the arbitration was taking place in England, the Statute of Limitations in the U.K. had to be applied. Accordingly, notwithstanding the fact that Finnish law was applicable and that Finnish law had no similar legislation, the arbitrator applied the relevant U.K. six-year statute of limitation and barred all claims arising prior to 1976, which in the particular instance meant all claims.
In the case Sudamerica Cia. Nacional de Seguros S.A. v.Enesa Engelharia SA(2013) 1 WLR 102 the tribunal set out a three-stage test, as follows:
- Have the parties made an express choice of the law of the arbitration agreement?
- If not, have they made an implied choice of the law of the arbitration agreement?
- If not, which system of law does the arbitration agreement have its closest and most real connection?
The application of such test is not always straightforward, because it may be the case that the parties have not made an express choice, but the particular circumstances of the case point to a different law such as the law of the main contract either applicable as a matter of implied choice or for being the law with the closest and most real connection to the contract.
- The silence of the clause and the principles for determining the law of the arbitration agreement.
The silence of the clause over the applicable laws where a law is needed for the resolution of the dispute (not in Spain and in other countries providing for amiable composition) will give the arbitrators the first and prior task of determining the conflict of law rule that will lead the way to finding the law to apply to the issue.
Application of the private international law of the place is one possible solution. Others are the application of law rules determined by comparative law methods or the conflict of law principles of the national law which the arbitrators have found to be applicable for the procedure (which does not necessarily be the law of the place of arbitration).
The ICC Court of Arbitration Rules provide (at Art. 13-3) a method, which is shared by other patterns in the world (the European Convention of 1961, the UNCITRAL MODEL LAW), whereby the arbitrator shall deem the rule of conflict to be the most appropriate and then apply to the merits the law designated as proper by such rule of conflict (. e.g., lex fori, law of the flag, lex loci contractus, etc.). The issue would yet remain as to whether “the most appropriate “conflict rule should be found by the tribunal of arbitrators according to their best of knowledge and ability or whether such conflict rule should be determined by a domestic law rule specifically relevant to arbitration. The latter view provides more certainty.
The recommended Charterparty forms do not seem to face this problem, which will undoubtedly arise where the arbitration clauses do not have any mention of the applicable law. A number of forms say nothing: BALTCON 1950, GERMANCON-NORTH 1957, SOVCOAL 1962, AUSTRAL 1974, GRAINVOY 1974, GENORECON 1963. In particular, BALTIME 1974 does not bring into the feature any applicable law in the event that London may not be agreed in Box 20.
Failing, therefore, a reference to the law chosen to be applied to the merits, the Arbitrators will have to resort, as they normally do, to the rule of conflict provided by the place of arbitration.
Nonetheless, in many instances the Arbitrators tend to apply straightforwardly the substantive law of the country seat of the arbitration (which may be sometimes frustrating for the parties as found later).
The forms BOXTIME, BLACKSEAWOOD and POLCOALVOY follow the application of the law of the place agreed to be the seat of the arbitration, although the two latter show some confusion when they refer to “law and procedure” casting a doubt over which law is meant: substantive, procedural or both.
The Fonasba’s MULTIFORM 1982, at Cl. 30, is even specific about the “law applicable to Charter Party disputes” in the place of the arbitration and so is the STB TIME. The SOVIETWOOD form, also, opts for the law in force in the country of the Respondent.
The practical effects of a silence over the question of the applicable law are at times conflictive not only to the extent that the Arbitrators will have to find such a law but also because the parties may eventually see that their contract or the issues under dispute were dressed up by rules of law totally foreign or unrelated to their business and, often, to themselves.
Tormod Ragfard, ex-President of INTERTANKO, once said that the governing law of Charterparties should be the law of the place of arbitration. In that refers to the law on the merits (the substantive law) I am not fully satisfied that such must be the solution, because to the extent that London or New York are the popular places Owners and Charterers, who are not familiar with English or US laws (neither do they need become), might yet take advantage of other arbitration fora at ease (and against odds and surprises) if the practice of arbitration there could be made more amenable to resolving disputes according to laws that may be agreed by the contracting parties.
To such effect, forms that do not segregate the place of arbitration from the applicable law (e.g., NYPE 93, GENCON 94, FERTICON, FERTIVOY, GASVOY, GASTIME, SUPPLYTIME, NUBALTWOOD, INTERTANKVOY, INTERCONSEC and the most used tanker forms) at present should desirably be amended so as to contemplate a choice of law different from the one of the places of arbitration, or at least leave the matter open to express agreement of the parties.
The case of the famous BALTIME (Cl. 23) will soon require some polishing work because if it is there intended that the cases be decided in London pursuant to English law it will need read -as many other forms mentioned here- to the effect that “any disputes arising shall be governed by and construed in accordance with the principles of English law as to substance and procedure” (Contracts (Applicable) Law Act 1990).
The Rome Convention of 1980 over the law applicable to the contractual obligations (EC), which is incorporated in most of the EU countries, sets out a new framework for ascertaining which law should govern the contracts and the basic principle behind the new rules is freedom of choice, and such a choice may be made expressly or implied.
The expressly chosen law needs not have any connection with the contract or with the parties (though in matter of Charterparties it logically will) or with the place of arbitration. The choice of law may be implied from the arbitration clause. In the absence of choice, the applicable law would be the law of the country (national law) which is more closely connected with the contract. Presumed connection would be the country in which the performing party has his place of business at the time of making the contract, though this criterion does not apply to the transport of goods (including the Voyage Charterparty) (art.4.2 and 3).
The system suggested by the Rome Convention may of course have introduced a number of problems, which the shipping community may not find too palatable upfront, but it does certainly enhance the chances to the parties for choosing the law they want and not having one chosen for them (i.e., the law of the place of arbitration whenever it is automatically applied by the arbitrators there).
The NUVOY-84 form contains a short covenant (Cl. 50) which, very briefly and fairly, permits the choice of a place of arbitration, and there of a particular tribunal, and a different substantive law.
The report of the UNCTAD Secretariat relating to a comparative analysis of Charterparties, dated 27th June 1990 (TD/B/C.4/ISL/55) was critical in the matter of the CENTROCON arbitration clause due to the very confusing meaning of the expression of “final discharge” in the context of the time limit for appointment of arbitrators. UNCTAD also, more generally, found that the lack of reference to applicable law noted in many clauses, whether printed or additional, was a prime source of difficulties as the place of arbitration cannot by itself determine the law that must be applied.
This situation, according to UNCTAD, is unsatisfactory because many times the parties themselves and the terms of the contract are hardly or at all related to the place of arbitration and the law prevailing there. Therefore, UNCTAD pointed out that the place of arbitration has no bearing with the applicable law chosen by the parties. A law which must be consistent with the contractual frame and the intention of the parties.
The view to relate the place of arbitration to the applicable law where this is not expressly stated by the parties is, indeed, supportive among english arbitrators and scholars. London stands to be the most often place chosen in maritime disputes, and invariably there the arbitrators apply english law as matter of sense and common practice.
A recent decision of the Supreme Court of England (“Enka Insaat ve Sanayi AS v. OOO Insurance Company Chubb”, 2020 UKSC 38), clarified that the main contract was governed by Russian law due to the close connection of the main contract with Russian law (ie, not because of the parties´ choice).
The curial law (english law) was held to govern the arbitration agreement also on the basis of the close connection, namely, the place of the arbitration. Therefore, the English Courts had jurisdiction to rule on whether the Moscow claim was brought in breach of the arbitration agreement and the Supreme Court affirmed the decision to grant the anti-suit injunction in Enka´s favour.
Interestingly and noticeably enough, the dissenting opinion of Lord Burrows and Sales made the right point by holding that the parties had in fact chosen (albeit impliedly) Russian law as the main contract law. In reaching this conclusion, they cited the fact that the contract was written in Russian, made numerous references to Russian law throughout, was to be performed in Russia by a Russian company and the effects of any breach would be suffered in Russia.
They had agreed with the majority judgment´s principle that the choice of law (implied or express) for the main contract will also apply to the arbitration agreement is silent. However, they held that if the main contract law had not been impliedly chosen (i.e., it had been determined by virtue of the close connection test), Russian law, as opposed to the curial law would have the closest and most real connection with the arbitration agreement.
This was because reasonable businesspersons would expect all clauses of the same contract to be coherently governed by the same system of law.
I would add that the close connection test cannot be applied twice for the main contract law and for the arbitration law, where none of them are express or implied, because the arbitration disputes should all necessarily arise from the very contract in which the arbitration clause is embodied, so the results of having two different laws in place would make little sense.
Above all remarks, I would wish to emphasize that the contracting parties must not remain silent in the Charterparty form about the place of arbitration and the applicable law.
The rules of procedure ought to be those prevailing in the place of arbitration agreed, otherwise the arbitrators will find themselves in need of research or, indeed, of appointing legal experts.
The link between the forum and the substantive law is not necessary and the parties should be free to make their choice of law within the boundaries of the freedom of contract.
The English Arbitration Act of 1996 is most flexible about the issue. Under the Act the intention of the parties in regard to the choice of law receives absolute respect, so the London Arbitrators are expected to apply foreign laws more often than they did before. Furthermore, the act of 1996 gives enforcement to the so-called “equity clauses” whenever the arbitration agreement contains an express reference of the parties for the dispute to be decided according to principles of equity and good conscience. In many respects affecting the fate of the arbitration of shipping disputes, the 1996 Act brought in progress and modernity.
It is desirable that the parties act with consciousness in regard to the choice of law and that they care to the effect that a specific agreement over the applicable law be mentioned in the arbitration clause. Otherwise, that an appropriate “equity” clause be drafted and included in the contract, as an open alternative or, indeed, that they agree on English or New York laws upon satisfying themselves that one or the other is suitable to the dispute they are concerned with. The parties should not leave the matter up to the brokers or to the intermediaries.
The aplicable law to the Arbitration is the one the parties have chosen, save as it may be explicited from the wording of a Maritime Convention (e.g., The Hamburg Rules 1978 or The Rotterdam Rules 2009) in a mandatory fashion in respect of the disputes arising within the frame of the relevant Convention only.
Where the choice is not expressly made in the Arbitration Clause, then it could be implied with reference to the law of the main contract in which the Arbitration clause is embodied.
Problems may arise where neither the Arbitration clause nor the main contract specify a law to apply.
Then, under English Law the test of the closest and most real connection to the contract should be used for finding the aplicable law, and rather than pursuant to the Rome Convention from 2021 onwards because the U.K. has ceased to be a State Member of the UE(Brexit).
In practice, the shipping market goes to London more than often and the practice there is for the Arbitrators to apply english law, not only because it is the law of the place but also because is the most acceptable, recognized, reliable and predictable in the law systems worlwide for maritime claims.
The moral inference might arise to the effect that ENGLISH LAW itself makes the connection to the subject-matter of the dispute to comply with the test.
But such is not a rule of law at all, but of practice only.