HONG KONG: COURT REFUSES STAY WHERE ARBITRATION CLAUSE NOT INCORPORATED FROM CHARTERPARTY

In OCBC Wing Hang Bank Ltd v Kai Sen Shipping Co Ltd [2020] HKCFI 375, the Hong Kong Court of First Instance (Court) dismissed a summons for a stay of proceedings in favour of  arbitration due to the impermissibility of incorporating arbitration agreements from a charterparty. The Court declined to stay its proceedings despite the Respondent having filed a Notice of Arbitration in respect of the same dispute, because the Notice included a clear reservation of rights to litigate.

Background

The Applicant, Kai Sen is the owner of the vessel “YUE YOU 903” and carrier of cargoes described in four tanker bills of lading dated 12 April 2018. The cargoes were to be shipped from Dumai, Indonesia to Huangpo, China and the bills of lading were negotiable bills marked “to order”.

The Respondent, OCBC, claimed it granted facilities to Twin Wealth Oils and Fats (Hong Kong) Ltd and indicated Twin Wealth Commercial Offshore de Macau Limitada as the guarantor (Borrowers). OCBC claimed it received the original bills of lading and commercial invoices from the Borrowers in late April 2018 and is therefore the lawful holder of the bills of lading and entitled to immediate possession of the cargoes.

Kai Sen neglected to present the original bills of lading and released the cargoes. OCBC claimed damages against Kai Sen for breaching the contracts of carriage that were contained or evidenced in the bills of lading, and for Kai Sen’s breach of duty as carrier. OCBC issued the writ of summons in January 2019 and filed a statement of claim in March 2019.

In April 2019, Kai Sen applied under Section 20 of the Arbitration Ordinance to stay the proceedings in favour of arbitration. Kai Sen alleged that that OCBC’s claim was subject to an arbitration agreement incorporated by reference from the charterparty into the bills of lading. OCBC denied being party to an arbitration agreement. In support of its claim, Kai Sen pointed out that OCBC had issued of a notice of arbitration on 28 March 2019.

OCBC argued that because the arbitration agreement is governed by English law, specific words of incorporation are required for an arbitration agreement to be validly incorporated into a bill of lading. This is also the position under Hong Kong law. OCBC therefore claimed that the dispute should not be resolved by arbitration because no specific words of incorporation existed in the bills of lading and OCBC had had no knowledge of the terms of the charterparty until this dispute arose. OCBC contended that it merely possessed documents against payment subject to the Uniform Rules for Collection, and that issuing the Notice of Arbitration was not a submission to arbitration but a tactic to beat the limitation period.

The purported arbitration agreement

The relevant provision of the bills of lading provides:

"This shipment is carried under and pursuant to the terms of the Contract of Affreightment/Charter Party dated 2nd March 2018 between [Kai Sen] as owner and TWIN WEALTH MACAO COMMERCIAL OFFSHORE LTD As Charterers, and all conditions, Liberties and exceptions whatsoever of the said Charter apply to and govern the rights of the parties concerned in this shipment…"

Clause 36 of the charterparty dated 2nd March 2018 referred to in the bills of lading provides:

“ARB, IF ANY, IN HONGKONG UNDER ENGLISH LAW.”

What law governs the arbitration agreement?

Queeny Au-Yeung J found that English law was expressly applied as the law of the arbitration agreement, and governed the obligation to submit disputes to arbitration. Under English law, the validity of an arbitration agreement is tested by reference to the law that would apply to the clause assuming it is valid. An express choice of law in the arbitration agreement is conclusive, regardless of the connection to the law governing the contract, due to the doctrine of separability. Following the decisions in Sea Powerful II Special Maritime Enterprises v Oldendorff GMBH & Co KG (the “Zagora”) [2016] EWHC 3212 (Comm) and Klöckner Industrie-Anlagen GmbH and others v. United Republic of Cameroon and Société Camerounaise des Engrais, ICSID Case No. ARB/81/2, the Judge held that although the seat is Hong Kong, English law should govern the incorporation of the arbitration agreement into the bills of lading.

Are specific words of incorporation required under English law ?

Specific words of incorporation must be used to incorporate “collateral” or “ancillary” arbitration or jurisdiction clauses under English law. The judge cited the leading authority, TW Thomas and Co. Limited v The Portsea Steamship Company Limited (The “Portsmouth”) [1910] P.293; [1911] P.55; [1912] A.C. 1, in which general words of incorporation in a bill of lading were held insufficient to incorporate an arbitration agreement in a charterparty.

There are three reasons for this rule.

• bills of lading are negotiable instruments that are frequently traded internationally and incorporating arbitration clauses into them can have jurisdictional consequences
• charterparties often include terms that exceed the legal relationship between the holder of the bill of lading and the carrier; and
• because this is an area of law that greatly relies on clarity and certainty, courts must aim to give effect to settled authority. Consequently, only terms that are directly germane to the matters covered by the bill of lading are incorporated, such as clauses related to shipping or the carriage and delivery of goods, but not dispute resolution clauses.

Are specific words of incorporation required under Hong Kong law?

The judge held that the rule in Thomas v Portsea applies in Hong Kong. In The Pioneer Container [1994] 2 AC 324 and The Mahkutai [1996] 2 HKC 1, the Privy Council confirmed that the rule in Thomas v Portsea applies only to bills of lading or negotiable instruments, and not to other contracts (in respect of which the incorporation of arbitration clauses is permitted by Section 19(1) of the Arbitration Ordinance.

Therefore, the application would be dismissed regardless of whether English or Hong Kong law applied. In fact, the Court surveyed the laws of Singapore, Australia and Canada to demonstrate consistent application of this rule to disputes over bills of lading.

As a result, it was irrelevant whether OCBC had knowledge of the terms of the charterparty because an arbitration agreement could not be incorporated from it into the bills of lading. The Court rejected Kai Sen’s argument that OCBC, with over 30 years of experience, should be aware that an arbitration clause is a normal term in a typical charterparty.

Did OCBC unequivocally submit to arbitration?

Kai Sen claimed that by serving the Notice of Arbitration pursuant to Clause 36 of the charterparty, OCBC had submitted to arbitration. The Court found that parties may impliedly consent to arbitration by commencing or participating in an arbitration without reservation according to Section 19(1) of the Ordinance.

By expressly disclaiming acceptance of Kai Sen’s position and maintaining that Hong Kong courts had jurisdiction in its cover letter, which was delivered on the same date as the Notice of Arbitration, OCBC had manifested its intention to beat the limitation period pursuant to Art III, Rule 6 of the Hague-Visby Rules and had reserved its rights. Therefore, as the arbitration clause was not incorporated from the charterparty into the bills of lading and OCBC had reserved its right to pursue court proceedings, the Court found that it had jurisdiction and dismissed the summons for a stay of proceedings in favour of arbitration.

Comment

This case serves as an important reminder that

1. express wording is required to incorporate an arbitration clause into bills of lading and other negotiable instruments; and
2. commencing or participating in arbitral proceedings will not necessarily constitute consent to submit disputes to arbitration if accompanied by an express reservation to the right to litigate.