UK: A Guarantor Who Endorses a Contract is Generally Bound by the Arbitration Clause in the Contract

Stellar Shipping Co LLC v Hudson Shipping Lines [2010] EWHC 2985 (Comm)

Mr Justice Hamblen's recent judgment illustrates the pragmatic approach taken by the Commercial Court in relation to the incorporation of arbitration clauses since the House of Lords' decision in the Fiona Trust case.

Background

The hearing proceeded on the assumption that Hudson Shipping (as Owner) entered into a Contract of Affreightment (COA) for four voyages with Phiniqia International Shipping (as Charterer). Under the terms of the COA, Stellar Shipping guaranteed the Charterer's obligations. The Charterer was a fully owned subsidiary of Stellar Shipping.

The Owner alleged that the Charterer failed to proceed after the first voyage. For this reason, the Owner commenced arbitration proceedings against the Charterer, as well as separate arbitration proceedings against Stellar Shipping.

Stellar disputed the jurisdiction of the Tribunal on the basis that it had not entered into any arbitration agreement with the Owner. By way of a preliminary issue, the Tribunal held that the arbitration clause in the COA applied to Stellar's obligations under the guarantee. The matter was referred to the Commercial Court on appeal. The Court was asked to decide whether Stellar had entered into an arbitration agreement with the Owner in respect of the alleged guarantee between Stellar and the Owner.

Decision

Based on the various exchanges between the parties, the Court considered that it was agreed between the Owner, the Charterer and Stellar that Stellar would guarantee the Charterer's performance under the COA, and that both the Charterer and Stellar would endorse the terms of the COA. Accordingly, it found that Stellar had entered into a contract of guarantee with the Owner which involved Stellar's endorsement of the COA.

In view of the above finding, the Court went on to consider whether Stellar's endorsement of the COA included an endorsement of the arbitration clause in relation to its guarantee obligations. Stellar argued that clear express words were required in order to incorporate an agreement to arbitrate. The Court dismissed this argument because the guarantee involved the endorsement of a charterparty, which included the arbitration clause on its face. It did not concern "incorporation by reference", where terms are imported into a contract from another source and where a more restrictive approach was appropriate.

Instead, Hamblen J applied the commercial approach taken to the construction of arbitration clauses by the House of Lords in Fiona Trust v Privalov [2007] UKHL 40. He therefore held that the close connection between the COA and the guarantee, as well as the parties involved, meant that it would be sensible to expect the parties to agree to a common method of dispute resolution under the COA and the guarantee.

Comment

The Court's decision is welcome because it facilitates the enforcement of guarantees that are provided by way of an endorsement. The alternative, as highlighted by the Court, would be that the contract is subject to English law and arbitration, but any dispute under the linked guarantee is "determined by some unspecified court in some unspecified jurisdiction according to some unspecified governing law" – an unpalatable prospect.

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