Note: the decision in this case has been overruled by the Court of Appeal in May 2006. To access a note of the Court of Appeal's decision, click here

DMC Rating Category: Confirmed

This case note is based on an Article in the October 2005 Edition of the ‘Marine Bulletin’, published by the Marine team at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website.

Background
On 10 July 2004, the "Olympic Galaxy", grounded while under pilotage off Tricomalee, Sri Lanka. The vessel was carrying a cargo of Australian wheat owned by Prima Ceylon. Galaxy issued proceeding in England for declarations that Prima was liable to make a contribution towards general average and/or salvage charges.

In January 2005, Prima issued proceedings against the owners in Sri Lanka, claiming that Galaxy had entered into a salvage agreement in Lloyd's Open Form with salvors without notice, without authority and acting unreasonably. In order to obtain discharge of its cargo, Prima had had to give security by way of a Lloyd's average bond and an average guarantee. Subsequently, Prima added to its pleadings to seek declarations that it had no liability to Galaxy because the grounding had been caused by the owners' negligence.

No defence had as yet been filed in the Sri Lankan proceedings, but Prima applied to the English court to set aside Galaxy's proceedings on the grounds that it had no jurisdiction and England was not the appropriate forum.

The contractual situation
The cargo was shipped under two Austwheat bills of lading, under which Prima was the notify party. The bills provided that all terms and conditions, including the arbitration clause in the charterparty "are herewith incorporated … general average (if any) shall be settled according to the York-Antwerp Rules, 1974 as amended 1990".

Under the voyage charterparty, general average was "settled and payable in London according to the New York-Antwerp Rules, 1974 as amended 1990…" . Under clause 33(a), any dispute under the charterparty arising from events occurring in Australia was to be settled by arbitration in Australia, but 33(b) provided that "any dispute arising out of this charterparty or any bill of lading issued hereunder other than provided for in paragraph (a) hereof shall be referred to arbitration in London …"

The situation was complicated, however, in that, three days before the grounding, ownership of the vessel had been transferred from the original owners to Galaxy. This meant that Galaxy could not invoke this arbitration agreement.

The only contract between Galaxy and Prima was the Lloyd's average bond, under which Prima agreed to pay the proper proportion of any salvage or general average ascertained to be due.

The guarantee and letter of undertaking
The average guarantee was given on 16 July 2004, but shortly afterwards Prima disputed any liability on the grounds of Galaxy's alleged breach of authority. This led to a letter of undertaking dated 2 August 2004 from the West of England, Galaxy's P&I Club, which provided that, in the event a claim was brought in London, "we mutually agree that the claim will be arbitrated in London as per clause 33(b) of the charter party …". If, however, proceedings were issued in Sri Lanka, the letter gave an address for service of proceedings without prejudice to any right Galaxy might have to contest jurisdiction. The undertaking itself was expressly governed by English law and English jurisdiction.

Galaxy had to persuade the judge that there was a good arguable case that the contract was governed by English law (Rule 6.20.5(c) of the Civil Procedure Rules), that there was a serious issue to be tried and that England was clearly the appropriate forum for the trial.

Galaxy argued that the Lloyd's average bond was subject to English law because this was the law governing the average adjustment. Prima, however, argued that the bond was subject to Sri Lankan law. Although the letter of undertaking was not an exclusive jurisdiction agreement, Prima maintained that it was a strong indication that Sri Lanka was the natural forum for the resolution of disputes arising from the grounding.

Judgment
The judge however referred to the bills of lading (to which Prima was party) and the fact that they incorporated clause 29 of the voyage charterparty, which expressly referred to general average being "settled and payable" in London. In the judge's view, this was a clear indication that English law applied to the Lloyd's average bond.

He was also satisfied that there was a serious issue to be tried. The pleadings in England and in Sri Lanka concerned with the same factual issue - the grounding - and consequential liabilities to pay damages for loss arising at law and contribution under the security given. That left the question of appropriate forum.

As far as any factual investigation was concerned, there was not much to choose between the two venues. Witnesses of fact and of opinion could just as easily be heard in Sri Lanka as in London, although there was perhaps an additional advantage for Sri Lanka in that the grounding took place just off its coastline. Arguments over time and costs were also, in the judge's view, fairly evenly balanced.

A significant factor, however, was the application of English law by the Sri Lankan court. Sri Lanka has for many years adopted and applied the principles and precedents of English maritime law but it has not enacted the 1989 International Salvage Convention, whereas England has, under section 224 of the Merchant Shipping Act 1995.

The Convention gives the master or the owner of a vessel the authority to conclude salvage contracts on behalf of the owner of the property on board the vessel (Article 6). Before England enacted the Convention, however, the law was that, where prior consent had neither been sought nor given to entering into a salvage contract, an "agency of necessity" had to be established (The Choko Star [1990] Lloyd's Rep 516).

Galaxy's concern was that the Sri Lankan court would apply English law by reference to The Choko Star and not the more recent legislation. In addition, the bond obliged Prima to pay contributions to general average that would in normal circumstances be due under the bills of lading. But for the transfer of ownership, the dispute would have been referred to arbitration in London and would have been determined under English law.

The judge agreed. It was persuasive that Prima had originally agreed to be bound by arbitration in London. He did not see that the change of ownership, while it may have destroyed the contractual agreement to arbitrate, made Sri Lanka the more appropriate forum. The considerations which had no doubt influenced Prima to agree to London arbitration and general average to be settled and payable in London remained as valid as they were then.

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