Incorporation of Arbitration Agreements by Reference – Special Rules for Bills of Lading

In OCBC Wing Hang Bank Ltd v Kai Sen Shipping Company Ltd [2020] HKCFI 375, the Hong Kong High Court considered an application by the defendant shipowner for a stay of the Hong Kong proceedings to arbitration. In a decision containing an orthodox analysis of the rules for determining the governing law of the arbitration agreement, the incorporation of arbitration agreements into bills of lading by reference, and submission to arbitration, the Court denied the application.

Nick Luxton, Counsel at Gilt Chambers, appeared for the successful plaintiff bank in the application. He has contributed the following review of the case.

Background

The shipowner issued bills of lading for the carriage of cargoes from Indonesia to China. The bank granted facilities relating to the financing of the cargoes. The bank became the lawful holder of the bills of lading and entitled to possession of the cargoes. The shipowner released the cargoes without presentation of the original bills of lading. The bank commenced Hong Kong proceedings against the shipowner for breach of the contracts of carriage and breach of the shipowner’s duties as carrier or bailee. The plaintiff bank denied that it was a party to an arbitration agreement.

The shipowner applied for a stay of the Hong Kong proceedings pursuant to s 20, Arbitration Ordinance. The shipowner alleged that the bank’s claim was subject to an arbitration agreement that was incorporated into the bills of lading by reference. The bills of lading provided that “all conditions, Liberties and exceptions whatsoever of the said Charter apply to and govern the rights of the parties concerned in this shipment…” The relevant charterparty contained an arbitration clause, which stated: “ARB, IF ANY, IN HONG KONG UNDER ENGLISH LAW.”

There were three issues in the stay application:

  • What is the governing law of the arbitration agreement that governs the obligation to arbitrate?
  • Are specific words of incorporation required in order to incorporate an arbitration clause into a negotiable instrument such as a bill of lading?
  • In what circumstances will commencement of arbitration amount to an election to arbitrate?

Governing law of the arbitration agreement

Au-Yeung J held that the validity of an arbitration agreement must be tested by reference to the law which, assuming the validity of the clause, would have applied to it. These principles have been applied in previous Hong Kong decisions. In this case, the chosen law of the arbitration agreement was English law. Therefore, it was English law which governed the question of whether the arbitration agreement was incorporated into the bills of lading.

Specific words of incorporation for arbitration agreements

It is a long established principle of English law that general words of incorporation in a bill of lading are not usually sufficient to incorporate an arbitration agreement into a charterparty – see TW Thomas & Co Ltd v Portsea Steamship Co Ltd [1912] AC 1. Au-Yeung J explained that there are three reasons for this rule:

  • Bills of lading are negotiable instruments which may pass through many hands internationally.
  • Charterparties commonly contain terms that are not relevant to the legal relationship between the carrier and the holder of the bill of lading. Terms of a charterparty are only incorporated by general words to the extent that they are directly germane to the matters covered by the bill of lading.
  • In this area, the law should be clear, certain and well understood and the court should try to give effect to settled authority as best it can.

Applying English law, the arbitration agreement in the charterparty had not been incorporated into the bills of lading. Therefore, the shipowner’s application for stay of the proceedings was dismissed.

Au-Yeung J went on to consider the position under Hong Kong law. She held that the principles outlined in Thomas v Portsea are applicable. Au-Yeung J referred to Astel-Peiniger Joint Venture v Argos Engineering & Heavy Industries Co Ltd [1995] 1 HKLR 300, in which it was held that an arbitration agreement could be incorporated by reference by general words of incorporation. However, this did not apply to bills of lading and other negotiable instruments. As explained in The Pioneer Container [1994] 2 AC 324, the rules concerning incorporation of arbitration agreements into bills of lading are a ‘special corner of the law’.

Finally, Au-Yeung J noted that the rule in Thomas v Portsea has been applied in Australia, Singapore and Canada. A consistent approach should be taken with these common law jurisdictions.

Submission to arbitration

In making its claim for misdelivery of cargo, the bank was subject to a one-year limitation period under the Hague-Visby Rules. The bank contacted the shipowner, asking whether the shipowner would withdraw its jurisdictional challenge, which the shipowner refused to do. The bank also asked whether the shipowner would consent to an extension of time for commencement of arbitration, which was also rejected. Therefore, the bank commenced arbitration as a precaution, in order to protect against the limitation period. At the same time, the bank expressly reserved its rights to continue with the Hong Kong proceedings. The shipowner argued that the bank had submitted to arbitration.

Au-Yeung J rejected the shipowner’s argument. She accepted that if a party wishes to preserve its rights by taking part in arbitration under protest, it must make the objection clear at the start or at an early stage. This is precisely what the bank had done by reserving its rights to continue the Hong Kong proceedings.

Conclusion

The judgment contains an orthodox analysis of the rules for determining the governing law of the arbitration agreement, the incorporation of arbitration agreements into bills of lading by reference, and submission to arbitration. It reflects a consistent approach with the case law in other leading common law jurisdictions, which is to be welcomed.

See also the review of this case by Herbert Smith Freehills.

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Hong Kong Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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