International contracts and application of the Late Payments of Commercial Debts (Interest) Act 1998: London arbitration clause does not provide a "significant connection" to England

In an appeal on a point of law under s69 of the Arbitration Act 1996 in Martrade Shipping & Transport GmbH v United Enterprises Corporation, the Commercial Court considered the applicability of the Late Payment of Commercial Debts (Interest) Act 1998 (the Late Payments Act) in the context of a charterparty governed by English law and providing for arbitration in London.

The Late Payments Act applies to qualifying debts arising under commercial contracts for the supply of goods and services and implies a term into such contracts that such debts are to carry statutory interest in the same way as interest carried under an express contractual term. Since 1998, the rate of statutory interest has been set at 8% above the Bank of England base rate from time to time.

In certain circumstances, the Late Payments Act will apply to an international contract. Section 12(1) of the Late Payments Act provides that a choice of English law in itself is not sufficient to attract application of the Act in relation to an international contract. However, it will apply if there is a "significant connection" between the contract and England, or the contract would be governed by English law apart from the choice of English law.

In this case, the Court found that there was no significant connection between the charterparty and England. The London arbitration clause was not held to be a relevant connecting factor in this case for the purposes of s12(1). Further, had the parties not agreed that the charterparty would be governed by English law, it would not otherwise have been governed by English law under conflicts of laws rules.   As Section 12(1) of the Late Payments Act had not been satisfied, the appeal of the tribunal's decision to award interest under the Late Payments Act was therefore allowed.

Whilst in this case the Court disagreed that the Late Payments Act should apply, a claimant seeking an award for non-payment under an international contract should consider whether the Late Payments Act applies to their contract. In establishing a significant connection, the Court indicated the following may be relevant factors: England being the place of performance of obligations under the contract; the nationality of the parties or one of them being English; where the parties are carrying out some relevant part of their business in England or where the "economic consequences of a delay in payment of debts may be felt in the UK" (including in relation to related contracts).

Background

A Panamanian vessel owned by the Defendant, a Marshall Islands company, and managed by a Liberian company registered in Greece, was chartered to the German Claimants for a time charter trip via the Mediterranean/Black Sea. The charterparty was on a New York Produce Exchange (NYPE) form, which recorded that it was made and concluded in Antwerp. The charterparty had been amended to contain a clause which provided for English governing law and that disputes shall be referred to arbitration in London (Clause 48). Hire was payable in US dollars to a bank account in Greece.

A number of disputes were referred to arbitration, including a claim by the Defendants for unpaid hire in respect of which the Claimants claimed to be entitled to deduct certain sums. The tribunal held that the Claimants were not entitled to make the deductions and that the Defendants were entitled to an award for the hire sum. The tribunal also held that the Defendants were entitled to interest on the sum calculated at a rate of 12.75% per annum until the date of payment under the Late Payments Act.

The Claimants appealed the award of interest on the basis that the Late Payments Act had no application by reason of s12(1). Section 12(1) provides: "This Act does not have effect in relation to a contract governed by a law of a part of the United Kingdom by choice of the parties if – (a) there is no significant connection between the contract and that part of the United Kingdom; and (b) but for that choice, the applicable law would be a foreign law".

The Claimants argued that the choice of London arbitration was an irrelevant consideration under both limbs of s12(1) and that:

• s12(1)(a) requires important factors connecting England to the commercial transaction itself which cannot include choice of jurisdiction or any other indicia of an implied choice of law; and
• s12(1)(b) required application of Article 4 of the Rome Convention ignoring any indicia of choice of law whether express or implied, which led to the conclusion that the charterparty would be governed by foreign law in the absence of the express choice of English law in Clause 48.

The Defendants argued that:

• the tribunal's finding of a significant connection was a finding of fact which was not subject to review on an appeal;
• the London arbitration clause amounted to a significant connection between the charterparty and England under s12(1)(a) and when considering whether there is a significant connection, there is no need to disregard factors which might be indicia of an implied choice of law such as an arbitration clause;
• other factors relied on by the tribunal were capable singly or cumulatively, of amounting to a significant connection between the charterparty and England; and
• further or alternatively, s12(1)(b) was not fulfilled because the Charterers failed to prove that the charterparty would have been governed by foreign law absent the express choice of English law in Clause 48.

The Commercial Court's conclusions

The Commercial Court analysed the purpose of, and policy considerations underlying, the Late Payments Act, and the explanations for why choice of English law by parties to an international contract is not of itself sufficient to attract application of the Late Payments Act. With this in mind, the Court found that factors capable of fulfilling the s12(1)(a) criterion of "significant connection" must connect the substantive transaction to England and be of a kind and significance which justifies the application of a domestic policy of imposing penal rates of interest on a party to an international contract i.e. "[t]hey must provide a real connection between the contract and the effect of prompt payment of debts on the economic life of the United Kingdom".

The Court concluded that a London arbitration (or English jurisdiction) clause could not be a relevant connecting factor for the purposes of s12(1)(a): " once shorn of its significance as ancillary to the choice of law, [it] has no relevance or significance to the substantive rights and obligations of the parties". Thus it would provide no logical justification for subjecting parties whose international contract has no connection with England other than choice of English law, to the domestic policy of deterrence embodied in the Late Payments Act.

The Court disagreed that the tribunal was entitled to treat others factors which it identified as amounting cumulatively to a sufficiently significant connection absent the London arbitration clause, (or indeed that it had done so). The Court did not consider any of the other factors to be capable, singly or cumulatively, as a matter of law, of constituting such a significant connection for the purposes of s12(1)(a).

In relation to s12(1)(b) of the Late Payments Act, the Court applied Article 4 of the Rome Convention, which deals with applicable law in the absence of choice of law. Whilst choice of London arbitration in accordance with the LMAA Rules is generally treated as a choice of English law, choice of law (whether express or implied) must be ignored for the purposes of s12(1)(b). In applying Article 4 to the time charterparty, the Court concluded the charterparty would not have been governed by English law in the absence of a choice of English law by the parties.

The appeal under s69 of the Arbitration Act 1996 was therefore upheld.

For further information, please contact Nicholas Peacock, Partner, Hannah Ambrose, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.