Win some, lose some: English court considers contractual limit on period to bring a claim in arbitration under section 12 of the Arbitration Act 1996

The English Commercial Court (the Court) has considered[1] the principles governing contractual time-bars and an application under s12 of the English Arbitration Act 1996 (the Act) to extend a contractually agreed limitation period to allow the claimant to bring claims in an arbitration.

As a matter of English law, parties are generally held to the consequences of exceeding a contractual time-bar, especially when the consequences are explicit. Parties should, therefore, be wary of agreeing such a deadline in circumstances where their ability to meet a deadline may potentially be impacted by the conduct or inaction of third parties. When such time-bar relates to the bringing of proceedings by arbitration, a court dealing with an application for extension of that time-bar under s12 will first consider whether there are exceptional circumstances which explain why the time-bar has been exceeded. Assuming that there are "exceptional circumstances", the court will then consider whether the parties would have contemplated that the time-bar "might not" have applied. Finally, in deciding whether to exercise its discretion to grant the extension, the court will consider whether the applicant has "acted expeditiously and in a commercially appropriate fashion to commence proceedings".

Context

Factual background

The parties to the proceedings were parties to back-to-back voyage charters and occupying the middle of the charter chain. The charters included an arbitration clause and the following time-bar at Clause 67:

"Any claim other than the demurrage claim under this contract must be notified in writing to the other party and claimant’s arbitrator appointed within thirteen (13) months of the final discharge of the cargo and where this provision is not complied with, the claim shall be deemed to be waived and absolutely barred."

A dispute arose regarding the condition of the cargo. The holder of the bill of lading covering the cargo issued a Statement of Claim against the head owners at the top of the entire chain. This triggered various notices down the chain, which were alleged not to comply with the contractual time bar.

The claimant applied to the Court for:

1. declarations that their claims against the charterers had been brought in time, notwithstanding the wording of Clause 67;
2. in the alternative, an extension of time under s12 of the Act either to validate the notices of arbitration they had served on the defendant charterers or for such extension of time as the Court saw fit.

The Court's decision

Time-bar wording to be given literal meaning

The Court found that Clause 67 should be given a literal reading, even though the parties' intention was that claims for breach of contract would be passed up or down the chain, and a party may not know about the claim in time. Such clauses operate mutually and make commercial sense: at the end of the relevant period the parties know where they stand regarding any outstanding claims and the difficulties of dealing with a claim only long after the event are largely averted. The parties took the risk that it may not be possible to pass on a claim validly received within the required period.

It was, therefore, necessary to consider whether the Court should exercise its power to extend time under s12.

Section 12 application

Section 12(1) provides that where an arbitration agreement "provides that a claim shall be barred, or the claimant’s right extinguished, unless the claimant takes within a time fixed by the agreement some step (a) to begin arbitral proceedings … the court may by order extend the time for taking that step."

Any party to the arbitration agreement may apply for such an order after exhausting any arbitral process to obtain an extension of time, but the Court "shall make an order only if satisfied –

• that the circumstances are such as were outside the reasonable contemplation of the parties when they agreed the provision in question, and that it would be just to extend the time, or
• that the conduct of one party makes it unjust to hold the other party to the strict terms of the provision in question.

Relevant factors

The Court accepted that where parties agreed a contractual time-bar, they must be taken to have contemplated that non-compliance "in not unusual circumstances arising in the ordinary course of business" would result in a claim being time-barred, unless the other party's conduct would make it unjust. The Court adopted Hamblen J's factors in SOS Corporation Alimentaria SA & Anor v Inerco Trade SA [2010] EWHC 162 (Comm), viz:

1. whether there were circumstances beyond the parties' reasonable contemplation and, if so, had they contemplated them, whether they would also have contemplated that the time-bar might not apply;
2. whether the circumstances significantly contributed to the non-observance of the time limit;
3. if the circumstance was "not unlikely" or "prone to" occur, or "not unusual", the test would probably not be satisfied, but if was "relatively exceptional" it would be outside the reasonable contemplation of the parties;
4. as to whether the parties would also have contemplated that the time-bar might not have applied in the circumstances in question, the test is whether they would contemplate that the time limit "might not" apply rather than it "would not" apply or "must not" apply. In general, time limit clauses are addressed at steps which the party in question can reasonably be expected to take within the prescribed time.

Application: s12 triggered in principle

Following a review of the factual history, the Court found that the "direct, dominant and effective cause" of the relevant notice being served after the expiry of the contractual time-bar was the receipt of the previous claim (that was intended to be passed down the charter chain) on the last day of the stipulated period after the recipient's business hours. These circumstances were outside the parties' reasonable contemplation as the eventuality was "in all probability … relatively exceptional". Further, the parties would have contemplated that the time-bar "might not" apply given the expectation that claims could be passed up or down the charter chain.

Whether just to grant the extension of time sought under s12

However, in the Court's view, it would only be just to extend the time following a s12 application by a party in a charter chain "if the applicant has acted expeditiously and in a commercially appropriate fashion to commence proceedings" after becoming aware that a claim is being made above or below in the chain. Two of the three applicants did not act expeditiously and in a commercially appropriate fashion. Relevant factors included (i) whether a party investigated the time-bar (either through the operational staff checking the contracts, or informing the legal department or the company's P&I club and asking for urgent advice); (ii) how soon a party appointed solicitors and nominated an arbitrator; and (iii) how soon it served a further notice down the chain and sought an extension.

Comment

This judgment serves as a reminder of what factors a court will take into account when considering (i) contractual time-bars in an arbitration context and (ii) s12 applications. The basic position on contractual time-bars in a commercial context, especially when the consequences are explicit, is that those consequences will apply. This is the price the parties pay in exchange for certainty. At the time of contracting when it is often unclear who might sue whom, this represents a mutual acceptance of risk.

An English court considering a s12 application will look for exceptional circumstances as to why the time-bar has been exceeded, but, once those have been found, the threshold is whether the parties would have contemplated that the time-bar "might not" (as opposed to "would not" or "must not") have applied. Finally, the court's residual discretion whether to extend the time limit (at least in a charter chain scenario) will depend on whether the applicant has "acted expeditiously and in a commercially appropriate fashion to commence proceedings".

For more information, please contact Nicholas Peacock, partner, Maximilian Szymanski, associate, or your usual Herbert Smith Freehills contact.

[1] P v Q [2018] EWHC 1399 (Comm)