Poorly Written Choice of Law Clause Causes a Dilemma

Types : Alerts

A good example of how cases can be treated differently by a court or an arbitration panel can be glimpsed from the decision by the U.S. District Court for the Western District of Washington in Teras Chartering, LLC v. Hyupjin Shipping Co., Ltd., No. 2:16-cv-0188, 2017 WL 2363632 (W.D. Wash. May 31, 2017).  In  Teras Chartering, the Federal Judge was confronted with a claim for demurrage arising out of delays at two load ports and one discharge port.  The vessel was operating under a “Booking Note” rather than a formal charter agreement.

The Defendant, an international freight forwarder who charted in the vessel, filed a summary judgment motion in respect to the demurrage claims arguing that it was entitled to a “reasonable time under the circumstance” to discharge cargo, and that it was also entitled to a “grace period” to offset any delay under the terms of the Booking Note.  In wading through the various submissions, the Judge acknowledged that “the parties have made it difficult to trace the basic facts of this case.”  This was only further complicated by arguments from Plaintiff that the charterparty cases cited by the Defendant were inapplicable to a Booking Note.

Ultimately, the Judge agreed that the defendant freight forwarder was entitled to a “reasonable period of time” to discharge, but did not have sufficient facts presented to determine whether the cargo was actually discharged within a reasonable amount of time.  As such, “issues of fact” existed that must be brought to trial.

In contrast, an arbitration panel might have better understood the situation based on their commercial maritime experience, and perhaps have confronted the Defendant’s arguments without delaying the matter for a trial on the facts.

Regarding the allowable “grace period,” interpretation is required by the court.  As a further complication, the Booking Note choice of law clause provided for the non-existent “general maritime law of Washington State.” While there is a recognized body of federal US general maritime law, it does not always agree with the laws of Washington State.  In this particular instance, federal maritime law requires a two-step process – determine whether ambiguity exists; if so, then rely on extrinsic evidence to determine the meaning of the clause.  Washington State law allows the use of extrinsic evidence to determine whether the clause is ambiguous.  Recognizing that a choice of law issue should be determined first, the court directed the parties to address this issue in later briefing.

It is submitted by the author that a maritime arbitration panel would probably have used their own understanding of the terms “missed the laycan” and “grace period” without the subtle legal distinction made by the Judge.

The other arguments to strike certain evidence, for continuation of discovery, and for security aside, the outcome of the motion might have been different, if a maritime arbitration panel had been involved instead of a district court judge.