Of paramount importance

Of paramount importance

THE English commercial court recently gave some guidance on the construction and interpretation of the 1996 Arbitration Act and the use of the term 'paramount clause' in a modern charter party. It addressed whether the term paramount clause in charter parties should now be interpreted as incorporating the Hague Visby Rules rather than the Hague Rules, clearly an important issue for the interpretation of charter parties generally.

In the case in question, the charterers sought an indemnity from the owners under a voyage charter in respect of a cargo claim. The owners alleged that the cargo claim was time-barred on the basis that arbitration had not been commenced within the one-year time-bar under the Hague Rules (Art III Rule 6). The charter party was expressly governed by English law, provided for London arbitration and incorporated a paramount clause.

One day before the one-year time-bar expired, the charterers' P&I club sent a fax to its proposed arbitrator, copied to owners, requesting the arbitrator to accept his appointment and the owners to appoint their own arbitrator. The owners claimed that the appointment of the arbitrator was invalid as the notice from the charterers' P&I club was merely copied to the owners, and therefore no direct notice had been given in accordance with the 1996 Arbitration Act and within the Hague Rules one-year time-bar.

The parties referred the time-bar issue to the arbitrator who found that the Hague Rules were incorporated into the charter party by reason of the paramount clause, and that the charterers' notice of appointment was invalid as notice of arbitration proceedings should be clear and unequivocal in order to comply with Section 14 of the 1996 Act.

On appeal by the charterers, the court considered two issues. Firstly, whether incorporation of a paramount clause in a charter party, concluded in 1996 and governed by English law, incorporated the Hague Rules, with their one-year time-bar for an indemnity claim, or the Hague-Visby Rules, with their longer period for bringing such claims. Secondly, if the Hague Rules were incorporated, was the charterers' notice a valid notice sufficient to commence arbitration proceedings?

In 1976 the Court of Appeal in London decided in the Agios Lazaros that a charter party which provided for the incorporation of a paramount clause governed by English law incorporated the Hague Rules. At the time of the Agios Lazaros decision, the Hague-Visby Rules had not been brought into force in the UK. The charterers argued that the Hague-Visby Rules could not have been relevant to that decision and that therefore the term paramount clause should be interpreted as incorporating the Hague-Visby Rules.

The commercial court considered that, although circumstances had changed since 1976, the general approach to this issue must remain governed by the approach of the Court of Appeal in the Agios Lazaros, and the Hague Rules were therefore incorporated.

The judge agreed with the Court of Appeal that the correct approach was to ask what shipowners in particular had in mind when referring to a paramount clause? However, the judge did comment that in other circumstances where further evidence was available as to the views of the shipping industry in general, the charterers' argument might have been successful. The mere bringing into force of the Hague-Visby Rules in the UK did not automatically imply that a paramount clause in a charter party governed by English law would incorporate the Hague-Visby Rules.

Validity of the charterers' notice

The 1996 Act broadly provides that arbitration proceedings will be commenced where one party serves on the other a notice in writing requiring it to appoint an arbitrator, or to agree to the appointment of an arbitrator. The judge considered this issue without reference to any decision pre-dating the 1996 Act.

The court decided that Section 14 of the 1996 Act should be interpreted broadly and flexibly, and that a strict and technical approach to Section 14 had no place under the scheme of the 1996 Act. On the facts of the case, the charterers' notice was objectively clear in requesting the owners to appoint an arbitrator or agree to the appointment of the arbitrator, the notice was sent by effective means and was received by the owners.

Despite the decision, it seems that the term paramount clause might now be interpreted as incorporating the Hague-Visby Rules rather than the Hague Rules. In the meantime, if parties wish to incorporate the Hague-Visby Rules into charter parties concerning trades where those rules are compulsorily applicable, this may be achieved by including the specific term 'general clause paramount' or an express clause incorporating the Hague-Visby Rules.

The court's approval of the practice of giving notice of commencement of arbitration to a party by copying the party into the correspondence with the arbitrator will come as a relief to both P&I clubs and maritime lawyers, although the problem should be avoided by a direct request in the first place.

Of more general importance is the court's view that the 1996 Arbitration Act should be regarded as a self-contained code, sweeping away all previous case law.