Sonatrach v. Ferrell

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Sonatrach Petroleum Co (BVI) v Ferrell International Ltd.
English 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

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

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.

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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