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Australia – The Importance Of Getting The Arbitration Clause Right: Update On The Appeal From DKN v BCGG.

28 October, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

Background


Earlier this year, we released a legal briefing1 regarding the Federal Court decision of Foster J in Dampskibsselskabet Norden A/S v Beach Building & Civil Group Pty Ltd[2012] FCA 696. In summary, Foster J held that an international arbitration agreement in a voyage charterparty was invalid and of no legal effect because, contrary to section 11(2)(b) of the Carriage of Goods by Sea Act 1991 (Cth) (COGSA), it precluded or limited the jurisdiction of Australian courts. His Honour found that section 11(2)(b) was enlivened because a voyage charterparty was a ‘sea carriage document relating to the carriage of goods’ for the purposes of section 11(1)(a) of COGSA.


This decision was of significance, particularly to foreign entities entering into charterparties with Australian entities, or with entities with substantial assets in Australia, because it meant that any international arbitration agreement specifying an arbitral forum outside of Australia in a voyage charterparty in respect of a vessel carrying goods overseas from Australia was invalid and of no legal effect in Australia. This was the case regardless of the governing law of the charterparty, or where it was negotiated. It also meant that any award made pursuant to such an arbitration agreement would be unenforceable in Australia.


The Full Court’s decision


The decision of Foster J was appealed and, in a split decision2 of the Full Court of the Federal Court, the appeal was allowed, and the decision of Foster J reversed.


On appeal, the key issue was whether a voyage charterparty was a ‘sea carriage document relating to the carriage of goods’. This was because, if a voyage charterparty did not fall within this description, section 11(2)(b) of COGSA would not apply, and the international arbitration agreement within that charterparty would remain effective.


Rares J, who delivered the leading judgment of the majority, held that a voyage charterparty is not a sea carriage document relating to the carriage of goods within the meaning of section 11(1)(a) of COGSA. In reaching this decision, his Honour determined that:


  • the legislative history of COGSA, its objectives, and its terms when read as a whole, make it apparent that COGSA provides a regime for regulating the relationship between persons who carry cargo, and persons who desire cargo to be carried. In contrast, the ambit of COGSA does not extend to the regulation of the relationship between persons who contract for the hire of a ship, which is the subject matter of a voyage charterparty; and
  • the ready availability of international arbitration to resolve disputes between owners and charters arising under charterparties has been a fundamental feature of the shipping trade for decades. Accordingly, if Parliament had intended COGSA to make a sweeping change to the ways in which arbitration agreements in charterparties operated, it would have needed to say so in clear terms, which are not contained in section 11 of COGSA.

In a separate judgment, Mansfield J agreed with Rares J, adding that because the term ‘sea carriage document’ was introduced into COGSA and the amended Hague Rules (which form Schedule 1A of COGSA) at the same time, it would be appropriate to construe the undefined term in COGSA consistently with the defined term in the amended Hague Rules. Upon consideration of the defined term ‘sea carriage document’ in the amended Hague Rules, Mansfield J found that it did not encompass charterparties.


In dissent, Buchanan J held that the determination of whether a charterparty is a sea carriage document turns on the particular provisions and character of each individual charterparty. In this case, the fact that the charterparty in question dealt directly with the terms on which freight would be carried led Buchanan J to the decision that the charterparty fell within the definition of a ‘sea carriage document’. Importantly, in contrast to the decision of Foster J at first instance, his Honour’s decision did not mean that all voyage charterparties would be considered ‘sea freight documents’, but rather that this would need to be determined on a case-by-case basis.


Significance of the Full Court’s decision


The decision of the Full Court has been well received internationally because it reinforces the role of international arbitration in resolving disputes arising in connection with charterparties. As Rares J stated in his judgment:


the purpose of s 11 of COGSA is to protect … the interests of Australian shippers and consignees from being forced contractually to litigate or arbitrate outside Australia. That purpose does not extend to protection of charterers or shipowners from the consequences of enforcement of their freely negotiated charterparties subjecting them to the well-recognised and usual mechanism of international arbitration in their chosen venue.


The Full Court’s decision follows a number of other decisions this year which have assisted in promoting Australia as a pro-arbitration seat for parties wishing to resolve their disputes, including the decision of the High Court of Australia in TCL Air Conditioner (Zhongshan) Co Limited v The Judges of the Federal Court of Australia & Anor [2013] HCA 5. An overview of that decision can be found on our Arbitration blog here3.


We note, however, that the possibility exists that the Full Court decision will be appealed to the High Court of Australia, particularly given that it was a split decision. If this occurs, and the position adopted by Buchanan J is favoured by the High Court, this has the potential to undermine the recent trend of decisions which have helped to promote Australia as a venue for international arbitration. In a practical sense, such a decision could also create difficulties for commercial parties considering dispute resolution options because it would mean they would need to assess, on a case by case basis, the nature and terms of their charterparties regarding vessels carrying goods overseas from Australia to determine whether an international arbitration agreement would be appropriate. The consequences of getting this decision wrong could potentially be significant for commercial parties because it could mean that any arbitral award made pursuant to that agreement is unenforceable in Australia.

 

Endnotes


  1. Legal briefingDampskibsselskabet Norden A/S v Beach Building & Civil Group Pty Ltd [2012] FCA 696
  2. Dampskibsselskabet Nordon A/S v Gladstone Civil Pty Ltd [2013] FCAFC 107 (18 September 2013)
  3. Arbitration Notes blog entry regarding TCL Air Conditioner (Zhongshan) Co Limited v The Judges of the Federal Court of Australia & Anor [2013] HCA 5 (13 March 2013)”.

 

herbert smith Freehills

 

 

For further information, please contact:

 

Leon Chung, Partner, Herbert Smith Freehills
leon.chung@hsf.com

 

Herbert Smith Freehills Dispute Resolution Practice Profile in Australia

 

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