DMC Category Rating: Confirmed

Background
Sea Trade was the owner of the Athena. Management of the vessel had been delegated to a Greek company, which appointed Trans-Ocean Steamship Agency Inc of New York as its sub-agents. 

In December 1992, Trans-Ocean applied via brokers on Sea Trade's behalf to enter Athena with the defendant Association to obtain war risk insurance. Athena was insured as from 10 December 1992. Thereafter, the cover was renewed from 1 January of each year.

In May 1997, Trans-Ocean presented a war risk claim in respect of damage to the vessel following an explosion said to have been caused by Tamil Tigers when the vessel was at Trincomalee in Sri Lanka. The claim was expressly presented on the basis that there was no right to recover under the insurance because Sri Lanka had been declared an "additional premium area" and Sea Trade had failed to give proper notice of the fact it was going to Sri Lanka as required by Rule 25.1 of the Association's Rules. The Association, however, was asked to exercise its discretion under Rule 25.3 to make payment notwithstanding.

In September 1997, the Association exercised its discretion and decided to make a payment of up to US$3.4 million. Following payment, however, Sea Trade brought proceedings against the Association in New York claiming a further US$3.5 million in damages. The Association sought a stay of those proceedings in favour of arbitration in London, relying on the arbitration provision in Rule 44. The stay was granted.

Before the arbitrators, Sea Trade argued that the tribunal had no jurisdiction on a number of grounds, including that Rule 44 had not been incorporated into the insurance. The arbitrators found in favour of the Association on all the preliminary issues. Sea Trade appealed under section 67 of the Arbitration Act 1996 (lack of substantive jurisdiction), section 68 (serious irregularity) and section 69 (permission to appeal on a number of questions of law).

Rule 44
The main issue was whether Rule 44 had been incorporated into the insurance: in particular, whether general words of incorporation were sufficient to incorporate the arbitration agreement. A further question concerned whether, on its proper construction, the Rule was a non-exclusive jurisdiction clause.

As from 1 January 1997, Rule 44 provided:

"44.1 The Association and each Owner hereby submits to the jurisdiction of the High Court of Justice of England in respect of any dispute or difference between the Owner and the Association arising out of or in connection with these Rules or out of or in connection with any contract between the Owner and the Association.

44.2 Save for any claim by the Association in respect of the sums which the Association may consider to be due to it from an Owner either the Association or the Owner may, by giving written notice of the election to the other, elect to have such dispute or difference referred to arbitration in London subject to the provisions of [Rules 44.2.1 - 44.2.7 following]".

Judgment
On the evidence, the judge was satisfied that the original contract of insurance arranged in 1992 and the 1993 renewal expressly referred to the cover being in accordance with the Association's Rules and explained how a copy of the Rules could be obtained if required (in fact, the brokers already had copies). The Certificate of Entry also referred to the Rules of the Association for the time being in force.

In 1996 (before the casualty) Sea Trade's brokers specifically asked for copies of the most recent Rule Book and also for a signed copy of the Certificate of Entry dated 27 September 1996. These contained the same reference to the Rules.

The judge unhesitatingly concluded that both the Certificate and the Rules had been supplied by the placing brokers to Sea Trade's New York brokers prior to the renewal for 1997.

Incorporation
But were these general words of incorporation sufficient to incorporate Rule 44 into the insurance contract? Sea Trade argued that, in the absence of special circumstances, an arbitration clause could not be incorporated into a contract by reference to a secondary document in which the clause was contained.

The judge disagreed, distinguishing between so-called "one-contract" and "two-contract" cases. In two-contract cases (where the secondary document is a contract to which at least one party is different from the parties to the contract in question), the rule is that ancillary clauses such as arbitration and jurisdiction clauses will not be incorporated by general words alone, but must be specifically referred to. This applies, for instance, to insurance-reinsurance and charterparty-bill of lading cases: The "Federal Bulker" [1989] 1 Lloyd's Rep 103 (Court of Appeal). One of the reasons for the rule is that the other party may not have any ready means of knowing the relevant terms in the secondary contract.

But this rule is exceptional, and does not apply to one-contract cases. In principle, English law accepts incorporation of standard terms by the use of general words, particularly where the terms are readily available and the question arises in the context of dealing between established players in a well-known market. In addition, section 6(2) of the 1996 Arbitration Act provides:

"The reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration clause if the reference is such as to make that clause part of the agreement."

Knowledge
The fact that Sea Trade was unaware of the terms of the arbitration clause was irrelevant, although the judge found that its agents, the brokers, were aware of the clause.

A question arose whether the knowledge of the insurance brokers was to be attributed to Sea Trade or to Trans-Ocean. In the judge's view, if the brokers were the agents of Sea Trade, then the brokers' knowledge would be attributed to their principal under English law. But Sea Trade argued that New York law applied to its contract with the brokers and relied on expert evidence that under New York law, the broker in receiving the policy or policy terms is the agent of the insurer.

The judge rejected these arguments, holding that English law applied to the relationship on the grounds that English law applied to the resulting insurance contract. In any event, the expert evidence on New York law showed that a broker is generally regarded as the agent of the insured but may, if the facts so establish, be considered the agent of the insurer. On the facts of this case, it was clear that the brokers acted throughout for Sea Trade and not for the Association.

Exclusive jurisdiction?
Was this an exclusive jurisdiction clause? The arbitration panel concluded it was, but the judge disagreed. 

Under Rule 44, the parties agreed to submit to the jurisdiction of the English court. The fact that the parties submitted themselves (rather than any disputes) to the jurisdiction of the court was significant because such wording does not create exclusive jurisdiction: Pathe Screen Entertainment v Handmade Films, reported in Tonicstar Ltd v American Homes [2004] EWHC 1234.

Had the parties wished to provide for exclusive jurisdiction, they could have adopted simple and clear wording to achieve that result.

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