Dreyfus v. Blystad

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Louis Dreyfus Negoce SA v. Blystad Shipping & Trading Inc.
US Court of Appeals, Second Circuit: June 2001
Case Note prepared in co-operation with the New York law firm of Healy & Baillie, LLP, which represented Blystad Shipping & Trading


The United States Court of Appeals for the Second Circuit in New York issued a significant decision on June 7, 2001, holding that "collateral" claims under a letter of indemnity calling for jurisdiction before the High Court in London and English law were arbitrable in New York under a "broad" arbitration clause in the underlying charter.
In its opinion the Second Circuit clarified dicta in an earlier decision and set out a three-part test for determining whether a party can compel arbitration of claims arising under a collateral, defined as "secondary or subordinate," agreement.

Background to the Case
In November 1996, Dreyfus, the claimants, contracted to deliver 25,000 tons of soyabean oil to China. to the buyer, Lief Enterprises (Lief). Lief intended to sell the soyabean oil to Kaland Limited, the ultimate purchaser.

Dreyfus accordingly entered into a tanker voyage charter with the defendants, Blystad, who were the disponent owners of the tanker Thorsfreddy. That charterparty provided for the transport of the soyabean oil from Brownsville, Texas and New Orleans, Louisiana, to one, or two, unspecified discharge ports in China. The preamble of the charter party stated that delivery was to be "as ordered on signing bills of lading to the port or ports of discharge," indicating that the tanker bills of lading would designate the discharge ports. The vessel was loaded in December 1996 and, following instructions from Lief, Dreyfus issued bills of lading on behalf of the vessel providing for discharge at Qingdao, China.

On January 13, 1997, in the midst of the voyage, Blystad advised Dreyfus that the vessel was scheduled to arrive in China in five days and that the original bills of lading had not arrived in Qingdao. Two days later, Lief, following the orders of Kaland, the ultimate purchaser, requested that Dreyfus change the discharge port to Qin Huang Dao, China. Dreyfus informed Blystad that it, as the seller, and Lief, as the receiver, would issue letters of indemnity covering both the change of discharge ports and the discharge of cargo without presentation of the original bills of lading. This was duly done on January 20.

The letters guaranteed that Dreyfus, and in turn Lief, would indemnify Blystad "in respect of any liability, loss or damage of whatsoever nature which you may sustain by reason of delivering the goods to China Ocean Shipping Agency, Qin Huang Dao," and requested delivery to that city without presentation of the original bills of lading. The letters also contained a choice of law and choice of forum clause, providing that "[t]his indemnity shall be construed in accordance with English Law and each and every person liable under this indemnity shall, at your request, submit to the jurisdiction of the High Court of Justice of England."

After the issuance of the letters of indemnity the vessel sailed on to Qin Huang Dao. Upon arrival, the soyabean oil was discharged and promptly seized by the Chinese Customs Bureau. The vessel was arrested by order of the Tianjin Maritime Court. The proffered reasons for the arrest were the delivery of cargo without production of the original bills of lading and the change in discharge ports from Qingdao to Qin Huang Dao. The vessel was detained at Qin Huang Dao until Thorsfreddy and Blystad paid security for its release three months later. The detention of the ship gave rise to damages in the amount of US$659,269, which the owners of the Thorsfreddy recovered from Blystad in New York arbitration in July 1999.

Meanwhile, in March 1997, Blystad had commenced proceedings in London against Dreyfus and Lief under the letters of indemnity. A week later, Blystad commenced arbitration proceedings against Dreyfus in New York, claiming a similar indemnity, pursuant to an arbitration clause in the voyage charter reading:
‘any dispute arising from the making, performance or termination of this Charter Party shall be settled in New York’.
Dreyfus appointed its arbitrator under reservation that Blystad’s claim was subject to resolution in London, and not New York. After the conclusion of the arbitration between Blystad and the owners of the Thorsfreddy, Dreyfus petitioned the Federal Court for the Southern District of New York to stay the arbitration and enforce the law and jurisdiction clause of the letters of indemnity. In February 2000, the District Court denied the petition. Dreyfus appealed to the Court of Appeals against that decision.

The Judgment
The underlying issue was whether the indemnity claim brought under letters of indemnity issued by Dreyfus to Blystad, which contained an English law and jurisdiction clause, were nevertheless subject to New York arbitration pursuant to the terms of an arbitration clause in the charter between Dreyfus and Blystad. The Second Circuit affirmed the judgment of the District Court in favour of Blystad.

At the outset, the Second Circuit stated, to "determine whether a particular dispute falls within the scope of an agreement's arbitration clause, the Court should undertake a three-part inquiry." The inquiry was stated to be as follows:

First, recognizing there is some range in the breadth of arbitration clauses, a court should classify the particular clause as either broad or narrow… Next, if reviewing a narrow clause, the court must determine whether the dispute is over an issue that "is on its face within the purview of the clause," or over a collateral issue that is somehow connected to the main agreement that contains the arbitration clause… Where the arbitration clause is narrow, a collateral matter will generally be ruled beyond its purview… Where the arbitration clause is broad, "there arises a presumption of arbitrability" and arbitration of even a collateral matter will be  ordered if the claim alleged "implicates issues of contract construction or the parties' rights and obligations under it…" (emphasis added). 

The Court held that the District Court erred in not deciding whether the charter's arbitration clause was "broad" or "narrow." The Court stated that "making a distinction between broad and narrow arbitration clauses is necessary and sound . . ." It then held the charter's arbitration clause to be broad.

Next, the indemnity claim was held to be "collateral to the arbitration agreement." Nevertheless, because the arbitration clause in the charter was "broad," the Court held it would employ the "expansive" test, stated above, to determine the arbitrability of the dispute. Accordingly, because the letters of indemnity "implicate[d]" the charter, the claim under them was "within the scope of the arbitration clause."

The decision clarifies an important area of law and sets out a clear test for resolving an issue that frequently arises where a subsequent collateral agreement may not expressly incorporate an earlier agreement.

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