Summary

According to section 19(1)(6) of the Arbitration Ordinance (Cap. 609) (the “Ordinance”), the reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract.  However, in the recent Hong Kong Court decision in OCBC Wing Hang Bank Limited v Kai Sen Shipping Company Limited [2020] HKCFI 375, the Court of First Instance held that under both Hong Kong and English law, an arbitration clause in a charterparty cannot be incorporated into the bills of lading by making mere reference to the charterparty as a whole. Under both Hong Kong and English law, an arbitration agreement contained in a charterparty could only be effectively incorporated into bills of lading by specific and express wordings.

Background

The Defendant, Kai Sen Shipping Company Limited (“Kai Sen”), is the owner of “YUE YOU 903” (the “Vessel”) and was the carrier of some cargoes (“the Cargoes”) to be shipped from Indonesia to China on the Vessel. The shipment was carried under the terms of a charterparty entered into between Kai Sen and Twin Wealth Commercial Offshore de Macau Limitida (“Twin Wealth”) dated 2 March 2018 (“Charterparty”). Clause 36 of the Charterparty provided an arbitration clause which reads “ARB, IF ANY, IN HONG KONG UNDER ENGLISH LAW.”

Four tanker bills of lading dated 12 April 2018 (“the Bills of Lading”) were devised for the purposes of shipping and delivery of the Cargoes. The Plaintiff, OCBC Wing Hang Bank Limited (“OCBC”), claimed to have granted facilities of which Twin Wealth was the guarantor. In return, OCBC received the original Bills of Lading from Twin Wealth, and thus claimed entitlement to immediate possession of the Cargoes as the lawful holder of the Bills of Lading.

On 22 January 2019, OCBC commenced this claim against Kai Sen for the misdelivery of the Cargoes carried on the Vessel. OCBC claimed damages for Kai Sen’s breach of the contracts of carriage contained in the Bills of Lading, and breach of its duty as the carrier or bailee of the Cargoes being misdelivered. However, Kai Sen applied for a stay of the proceedings on 16 April 2019 on the grounds that this claim was subject to an arbitration agreement contained in the Charterparty that was incorporated into the Bills of Lading by reference. The relevant provision in the Bills of Lading referencing to the Charterparty reads “This shipment is carried under and pursuant to the terms of the Contract of Affreightment/ Charter Party dated 2^nd March 2018…, and all conditions, Liberties and exceptions whatsoever of the said Charter Party apply to and govern the rights of the parties concerned in this shipment…”

Kai Sen argued that OCBC’s claim should be resolved by way of arbitration instead of court proceedings as OCBC has unequivocally elected to proceed with arbitration by issuing a notice to commence arbitration on 28 March 2019 (the “Arbitration Notice”).

Kai Sen’s case

Kai Sen argued that according to the section 19(1)(6) of the Ordinance, reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract.

Apart from the statutory provision, Kai Sen also relied on the interpretation by the Court in Astel-Peiniger Joint Venture v Argos Engineering & Heavy Industries Co Ltd [1995] 1 HKLR 300 that an explicit reference to the arbitration clause is not essential. Accordingly, referencing to the Charterparty in the Bills of Lading was sufficient to make the arbitration clause part of the Bills of Lading even though OCBC was not a party to the Charterparty. In determining whether the arbitration clause had been incorporated, the Court’s role was to ascertain the intention of Kai Sen and Twin Wealth when they entered into the Bills of Lading.

OCBC’s arguments

OCBC did not dispute the statutory position in section 19 of the Ordinance and also the general principles as laid down in case laws, but objected to Kai Sen’s application of stay by relying on T W Thomas & Co Ltd v Portsea Steamship Co Ltd [1912] AC 1 (“Thomas”) which held that an arbitration clause can only be incorporated into a bill of lading by express reference under English Law. Since the arbitration clause in question clearly elected English law to be the governing law, the position in Thomas should be followed.

The Court’s view

(1)  What should be the governing law for determining
the incorporation of an arbitration clause into the Bills of Lading?

In respect of Kai Sen’s stay summons, the general rule is that the law of the arbitration agreement would govern the obligation to submit to arbitration. Hong Kong courts will regard the chosen law by the parties as the applicable law when determining whether an arbitration clause has been incorporated into a contract. In the present case, although the seat of arbitration was Hong Kong, Clause 36 of the Charterparty specified the application of English law. Therefore, the Court held that English law should govern the incorporation of the arbitration agreement into the Bills of Lading.

(2)  Is the arbitration clause incorporated under English Law?

The Court agreed that Thomas remains as good law under English law. Specific words of incorporation are necessary to incorporate an arbitration clause in the Charterparty into the Bills of Lading for several reasons. Firstly, bills of lading are negotiable instruments that may pass through many different parties internationally. Secondly, charterparties often contain terms that are irrelevant to the legal relationship between the carrier and the holder of the bill of lading. Given that there is no express and specific wording stating that both OCBC and Kai Sen agreed to be subjected to Clause 36 of the Charterparty, the arbitration agreement in the Charterparty would not be incorporated into the Bills of Lading by general reference. The fact that OCBC may have knowledge to the terms of the Charterparty was not relevant.

(3)  Whether the Arbitration Notice amounted to OCBC’s election to arbitration?

According to The Amazonia [1990] 1 Lloyd’s Rep 236, parties may impliedly agree to arbitration by commencing or participating in arbitration without making any reservation. Unless objections or reservations of right to object to the jurisdiction of the arbitrator are made clear at a very early stage, these actions may constitute an arbitration agreement which binds the parties. 

Moreover, Article 7(5) of the UNCITRAL Model Law (also implemented in Hong Kong by virtue of section 19(1)(5) of the Ordinance) provides that if the existence of an arbitration agreement is alleged by one party and not denied by the other in an exchange of statements of claim and defence, it will be regarded as an arbitration agreement in writing.

Kai Sen claimed that OCBC had submitted to arbitration by giving the Arbitration Notice which expressly referred to Clause 36 of the Charterparty. And by not denying it, Kai Sen had accepted the commencement of arbitration.

However, OCBC contended that the Arbitration Notice was only issued in March 2019 in order to beat the one-year limitation period of its claim against Kai Sen’s misdelivery, which could have been expired in April 2019 as OCBC did not know when the Cargoes were delivered whilst the Bills of Lading were issued on 12 April 2018.  More importantly, OCBC expressly included a disclaimer in the cover letter enclosing the Arbitration Notice which is read as follows:

“All our client’s rights (including but not limited to their rights to continue with the Hong Kong court proceedings, action numbered HCAJ 5/2019) and remedies remain expressly reserved.”

Hence, the Court found that OCBC had clearly denied the existence of an arbitration agreement within the meaning of Article 7(5) of the Model Law, and that the commencement of arbitration was plainly an act to preserve its claim pending resolution of the jurisdictional dispute rather than OCBC’s submission to arbitration.

As a result, Kai Sen’s application to stay the proceedings was dismissed. OCBC’s claim will continue to be heard by the Hong Kong Court.

Conclusion

As illustrated by this case, although the general position under the Ordinance is that an arbitration agreement contained in a document may be incorporated into a contract by general reference to that document, it does not apply to situations that concern a bill of lading. Any dispute regarding the incorporation of an arbitration agreement contained in a charterparty into a bill of lading should be governed by the choice of law elected and stated by the parties to the charterparty. Where the governing law is English law and the parties wish to incorporate an arbitration clause into a bill of lading, express and specific wordings should be used to state the parties’ intention clearly.

Further, to avoid unnecessary ambiguities, parties should include an express objection or reservation to the right to object to arbitration if they are not entirely sure about whether they are being bound by an arbitration agreement or not. A simple sentence like “without prejudice to such rights as owners may have” may already be sufficient to protect their rights.