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DMC/SandT/44/01
Sonatrach
Petroleum Co (BVI) v Ferrell International ltd
High Court: Commercial Court: Colman J: October 2001
Mr. R. Thomas, instructed by Messrs. Clyde & Co. for
Sonatrach
Mr. J. Bignall, instructed by Messrs. Ince & Co. for
Ferrell
ARBITRATION: SHIPPING: BACK-TO-BACK TIME CHARTERPARTIES:
ARBITRATION AND JURISDICTION CLAUSES: FLOATING PROPER LAW CLAUSE:
UNCERTAINTY: FORUM SELECTION: SEPARABILITY
Summary
An arbitration clause in a subcharter that
provided for different disputes to be subject to the law of different
countries was unenforceable for uncertainty but forum selection provisions in the
subcharter were valid, as they did not depend on the provisions regarding the
selection of the proper law. It was therefore possible to have a ‘floating
forum’ provision, but not a ‘floating proper law’ provision.
DMC’s Category Rating: Developed
Facts
The Defendants, Ferrell, applied for a stay of proceedings in
respect of certain claims made against them by Sonatrach, on the grounds that
the matters in issue were the subject of a binding arbitration agreement. In 1997 Sonatrach subchartered the
vessel ‘NOTO GLORIA’ from Ferrell, which had in turn time-chartered the
vessel from a Japanese corporation ('Mitsui'). The head charter, which was in
the BP Time Form, provided in clause 46 that Japanese law was to be the proper
law of the contract and that all disputes between Mitsui and Ferrell were to be
determined by arbitration in Japan. The subcharter, which was expressed
to be ‘back-to-back’ with the head charter, repeated clause 46 of the head
charter but added a further clause 78 reading:
‘Notwithstanding the provisions of clause 46 herein, in
cases where the dispute may arise between Disponent Owner (Ferrell) and
Charterer (Sonatrach), rather than with the head owner [Mitsui], then such
dispute shall be governed by [the following clause]
‘This charter shall be construed and the relations between
the parties determined in accordance with the law of England. The High Court in
London shall have exclusive jurisdiction over any dispute which may arise out of
this charter.’
The Issues
Ferrell contended that most of the claims raised by Sonatrach
in the proceedings fell within the scope of the arbitration clause in the
subcharter and had to be referred to arbitration in Japan, since they involved
Mitsui. Sonatrach's case was that:
(i) the disputes fell outside the arbitration clause. Their reasoning was that
all claims between Ferrell and Sonatrach were to be governed by English law and
be subject to the jurisdiction of the English courts; it was only disputes
between Sonatrach and Mitsui, arising under Bills of Lading issued by Mitsui
incorporating the law and jurisdiction clause of the subcharter, that were to be
subject to Japanese law and arbitration in Japan; and in the alternative
(ii) the arbitration clause was unenforceable, in that it
contained a ‘floating proper law’ clause, which under English law was
invalid. The ‘floating proper law’ clause in this case had the effect that
the proper law of the contract could not be determined until after a dispute had
arisen and its nature been defined – in particular, whether or not it
involved, or potentially involved, Mitsui as well as Ferrell and Sonatrach.
Judgment
1. Clause 78 of the subcharter –the English law and
jurisdiction clause - applied to all disputes under the subcharter that did not involve or potentially
involve a dispute between Ferrell and Mitsui or any claim by Ferrell against
Mitsui under the head charter. The clear purpose of the clause was to match the
proper law of the dispute to the venue of the arbitral tribunal.
2. However, the consequence was that the proper law applicable
to a particular right or obligation under the subcharter could not be identified
with complete certainty at the time of performance and might even remain in
limbo for some time after a dispute had arisen. Such a degree of uncertainty
meant that the choice of law regime in the subcharter was impossible to apply
and hence unenforceable. The judge relied on the decision of the Court of Appeal
in Armar Shipping Co v. Caisse Algérienne [1981] 1 WLR 207, to the effect that
there must be proper law – a governing law – at the time of the making of
the contract. A contract cannot have a proper law which is determined only
retrospectively by reference to some uncertain event or selection process after
the contract has already come into force and obligations under it have fallen to
be performed. As was said in the case of Amin Rasheed Shipping Corporation v.
Kuwait Insurance Co. [1983] AC 50, ‘contracts are incapable of existing in a
legal vacuum’.
3. However, the unenforceability of the choice of law regime
did not invalidate the forum selection regime, since there was no reason why the
dispute resolution forum should be identified at the time when the contract was
made or at the time of performance. The Star Texas [1993] 2 Lloyd's Rep 445 applied.
In reaching his conclusion, the judge
attached particular weight to the principle that jurisdiction clauses, as well
as arbitration clauses, are freestanding agreements, separable from the
substantive contract to which they relate. The judge distinguished this case
from that of The Iran Vojdan [1984] 2 Lloyd’s Rep. 380. He said ‘ In the
absence of clear words of the kind to be found in The Iran Vojdan, that
attribute [of the separability of the forum selection agreement from the
substantive contract which includes the choice of law provisions] serves
sufficiently to insulate forum selection from choice of law. Putting it another
way, forum selection is determined under the composite regime of clauses 46 and
78 by the incidence of a dispute of a particular characteristic. The failure of
the parties effectively to match the proper law under the main contract to the
forum determined under the arbitration and jurisdiction clause does not render
the separate forum selection agreement unenforceable. Forum selection did not
depend on proper law selection, but on the nature of the dispute.’
4. The claims in issue all involved Mitsui and so fell within
the Japan arbitration clause. The stay sought by Ferrell was accordingly
granted.
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