Arbitration Clause Narrowly Construed

Types : Alerts

The case of  Iota Shipholding Ltd. v. Starr Indemnity and Liability Company, 16 cv 4881, 2017 WL 2374359, 2017 A.M.C. 1461 (S.D.N.Y. May 31, 2017), involved alleged damage to a cargo of tubing shipped from Mexico to Costa Rica on the M/V LITA.  The ship was on a time charter between her registered owner Iota and a disponent owner A&B Limited, who in turn voyage chartered the ship to Ternium Mexico.  For the subject shipment, bills of lading were issued and executed by the ship’s port agent on behalf of the Master and incorporating by reference the voyage charter.  The bills of lading named the voyage charterer Ternium Mexico as the shipper, Ternium Costa Rica as the consignee and “the owners of the M/V Lita” as the carrier.  The bills were on the COGENBILL form, which specified that all terms and conditions of the voyage charter identified on its face were incorporated.

Pursuant to the terms of the Voyage Charter, the cargo underwriter Starr Indemnity, as subrogor of the Ternium entities, demanded arbitration in New York against Iota.  In response, Iota petitioned the U.S. District Court to enjoin the arbitration and declare that there was no valid agreement to arbitrate between these parties, invoking the Declaratory Judgment Act, 28 U.S.C. § 2201 and the Federal Arbitration Act, 9 U.S.C §§1-16.

The Voyage Charter’s arbitration clause stated in pertinent part that “should any dispute arise between Owner and Charterer” (emphasis added) the matter should be referred to arbitration.  The issue before the court was whether this language was sufficient to bind Iota, who was not a named party to the Voyage Charter.

At the outset, the court determined that ordinary principles of general maritime law governed the interpretation of this maritime contract.  The court further held that the question of the validity and scope of the arbitration clause in the Voyage Charter was ultimately for the court to decide.

The parties agreed that Iota was not a signatory to the Voyage Charter.  However, Starr Indemnity argued that Iota was still bound by the terms of the Voyage Charter because Iota was identified by the bills of lading, which incorporated the Voyage Charter terms.

In general, whether a dispute is arbitrated is a matter of contact and a party cannot be required to submit to arbitrate a dispute which it has not yet agreed to arbitrate.  However, there are exceptions under which a non-signatory to an arbitration agreement can still be required to arbitrate.  For instance, when a charty party’s arbitration clause is expressly incorporated into a bill of lading, which the non-signatory has executed; or an alter-ego has executed the charter party with the arbitration agreement.

Here, Starr Indemnity argued that the Voyage Charter was incorporated by the bills of lading.  In order for Starr Indemnity to succeed, Starr Indemnity had to prove express incorporation and that the scope of the incorporated arbitration clause was broad enough to include the underlying claim.

In deciding the motion, the court focused on the second prong, i.e. whether the arbitration clause in question was narrow or broad in scope.  It observed that precedent in the Southern District was to construe the clause referring specifically to disputes “between owners and charterers”  as in the clause at issue, as a typical “narrow” arbitration clause, as opposed to the “quintessential” broad arbitration clause that applies “to all disputes under the charter party.”

The court therefore held that the arbitration clause at issue was restrictive in scope and applied only to the owner and charterer identified as such at the beginning of the Voyage Charter. The Owner was named as the disponent owner A&B Limited.  As such, the court ultimately held that even though Iota might be the true owner of the vessel, it declined to “stretch” the scope of the arbitration clause to include non-signatories such as Iota. The “plain text” of the arbitration clause limited the scope of its terms to A&B.

The lesson here is clear.  If the parties wish to bind third parties who are not signatories to the charter to its arbitration clause, they should draft the clause accordingly with wording such as “any and all disputes arising under the charter party” to reflect their intention of a broad scope.