Australia affirms that international arbitration references in voyage charterparties are enforceable

A recent decision of the Full Court of the Federal Court of Australia has been welcomed internationally because it affirms that contractual references to international arbitration in voyage charterparties are valid and enforceable. In overturning a controversial 2012 judgment, the Court held that a voyage charterparty is not a sea carriage document within the meaning of section 11 of the Carriage of Goods by Sea Act 1991 (Cth).

Introduction

On 18 September 2013, by a 2 – 1 majority, the Full Court of the Federal Court of Australia overturned a June 2012 decision of a single judge of the Federal Court in which it had been held that a voyage charterparty was a sea carriage document pursuant to the Carriage of Goods by Sea Act 1991 (Cth) (COGSA) such that an arbitration agreement in a voyage charterparty that sought to preclude or limit the jurisdiction of the Australian courts would be void and unenforceable.¹

Background

The two cases examined the meaning of section 11 of COGSA which limits the ability of parties to contract out of the application of Australian law for carriage outbound from Australia, and the ability of parties to preclude or limit the jurisdiction of the Australian courts for carriage both inbound and outbound Australia.

The facts were not remarkable by any means. Danish ship-owners Dampskibsselskabet Norden A/S entered into a voyage charterparty with Australian charterers Beach Building & Civil Group Pty Ltd for the carriage of a bulk cargo of coal from Australia to China. The voyage charterparty provided for English law and London arbitration.

The ship-owners commenced arbitration in London against the charterers for demurrage. They succeeded in their claim and were awarded USD 824,663.18. The ship-owners then applied to the Federal Court of Australia under section 8 of the International Arbitration Act 1974 (Cth) (IAA) for orders to recognise and enforce the international Award. In response, the charterers argued that the arbitration clause was invalid under section 11 of COGSA such that the international Award was unenforceable.

At first instance, the Federal Court agreed with the charterers, refusing to enforce the English arbitration award. The court concluded that a voyage charterparty would fall within the definition of "sea carriage document" in Schedule 1A of COGSA, being a "non-negotiable document … that either contains or evidences a contract of carriage of goods by sea."  This appeared to be contrary to the COGSA provision that stated that the Act did "not apply to the carriage of goods by sea under a charterparty unless a sea carriage document is issued for the carriage", and the generally subscribed distinction internationally that a contract for the carriage of goods evidenced by a bill of lading (or similar) was distinct from a carriage evidenced by a voyage charterparty.

The first instance decision caused some consternation internationally and had the effect of distinguishing Australian law on the subject from that of most other major maritime nations.

The ship-owners appealed to the Full Court on the following grounds:

• a voyage charterparty is not a sea carriage document within the meaning of section 11 of COGSA such that section 11 of COGSA does not render the arbitration clause void;
• in the alternative, even if the arbitration clause was void, an English arbitration award would still be valid and enforceable under section 7 of IAA (which provides for the enforcement of foreign arbitration agreements in Australia); and
• section 8(5) and (7) of IAA, which provide for grounds on which an Australian court may refuse to enforce a foreign arbitration award, are not satisfied.

The Full Court's Decision

The Full Court found that a voyage charterparty was not a sea carriage document within the meaning of section 11 of COGSA. The Court recognised the clear and longstanding acceptance in Australia that international commercial disputes, including under charterparties, may be settled by arbitration. This policy was recently reflected by the High Court of Australia in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia (2013) 295 ALR 596. Click here to read more.

The Full Court examined the legislative history of section 11 of COGSA and observed that it was clear that the original intention of the Legislature was that section 11 would not apply to charterparties. The Court pointed to the deliberate differences in the definitions of contract of carriage and sea carriage document as opposed to a voyage charterparty in the modified Hague Rules and COGSA. The Court also examined academic definitions of charterparty and pointed to its clear distinctions from that of a bill of lading or similar document. The Court was also cognizant of the traditional distinction between a charterparty (i.e. usually being a contract for the hire of a vessel) and a sea carriage document (i.e. relating to the contract for the carriage of goods).

Conclusion

The decision has been welcomed internationally because it affirms that a voyage charterparty is not a sea carriage document under Australian law and, therefore, section 11 of COGSA will not apply to void a contractual reference to international arbitration. The findings made by the Full Court affirm that section 11 of COGSA was only intended to afford protection to Australian shippers and consignees from being forced contractually to litigate or arbitrate their shipping disputes outside of Australia and was not intended to extend to protect charterers or ship owners. As for contracts of carriage evidenced by bills of lading, the law in Australia remains that Australian law will not recognise foreign arbitration agreements in respect of the carriage of goods either into or out of Australia.