London Arbitration 18/18 serves to highlight the care that should be taken over the precise wording of clauses used in charterparties to incorporate the Inter Club Agreement (ICA).
This arbitration concerned a charterparty on an NYPE 1946 form with additional clauses, which contained a provision stating that liability for cargo claims was to be apportioned between the parties pursuant to the ICA. The Tribunal held that this clause was insufficient to also incorporate provisions of the ICA relating to security.
The head owners chartered the vessel to the claimant disponent owners, who in turn chartered the vessel to the respondent charterers, on back-to-back terms.
Clause 35 of the charterparty provided that:
"liability for cargo claims, as between Charterers and Owners, shall be apportioned/settled as specified by the Interclub New York Produce Exchange Agreement effective from 1996 and its subsequent amendments".
Following one of the voyages, the cargo receivers and their insurers alleged damage of US$ 900,000 in a claim against the head owners. Under threat of the vessel's arrest, the head owners' P&I Club provided the cargo insurers with security of US$900,000. The disponent owners then provided head owners counter-security in the same amount, on the basis of Clause 9 of the 2011 ICA, which provides as follows:
"If a party to the charterparty provides security to a person making a Cargo Claim, that party shall be entitled upon demand to acceptable security for an equivalent amount in respect of that Cargo Claim from the other party to the charterparty".
The disponent owners, subsequently, requested counter-security from their charterers pursuant to clause 9 of the ICA, which, they argued, was incorporated into the charterparty by virtue of clause 35. However, the respondent charterers refused to provide any counter-security on the basis that the wording of clause 35 was insufficient to incorporate the provisions of the ICA relating to security.
Were the full terms of the ICA incorporated into the charterparty?
Arbitration proceedings were commenced by the disponent owners against the charterers, who applied for an order for specific performance under section 48(5)(b) of the Arbitration Act 1996 requesting charterers provide counter-security.
The charterers argued that the wording of clause 35 did not incorporate the full text of the ICA and that a strict reading of the same revealed that the ICA, as referred to in the charterparty, was only incorporated to the extent that it applied to the issues which were specifically mentioned, i.e. "apportionment" and "settlement".
The disponent owners counter-argued that clause 35 made it clear that the terms of the ICA applied in full in relation to liability for cargo claims. Therefore, disponent owners contended, all relevant provisions of the ICA were incorporated, including those provisions relating to security.
The Tribunal agreed with the charterers that a strict interpretation should be adopted, as the wording of clause 35 was clearly restrictive. It was held that the wording of clause 35 only related to the apportionment and settlement of cargo claims and did not extend to the matter of security.
In finding in charterer's favour, the Tribunal referred to Time Charters, in which it is stated that the ICA "was neither designed nor drafted to be incorporated into charters". Therefore, without express wording to the effect that the full terms of the ICA were to be incorporated into a charterparty, its full incorporation could not be assumed in silence.
This decision may come as a surprise to many, given that such wording is widely used and parties may not realise this does not amount to a full incorporation of the ICA. It is even more surprising in light of the fact that permission to appeal was refused. This decision serves as a powerful reminder that parties need to be clear about which provisions of the ICA they wish to incorporate, as any interpretation of the wording by the Tribunal will be strict and literal.
The consequences of incomplete incorporation could potentially be severe as a party within a chain of charterparties could be left without recourse. Parties would be well advised to review any relevant charterparty clauses to assess the extent of incorporation of the ICA terms, particularly with regard to counter-security.
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