Beware of foreign arbitration clauses in inter-State contracts of sea carriage

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By Frazer Hunt, Partner and Lorna Anderson, Lawyer

The Full Federal Court of Australia has held there is no overriding Australian jurisdiction to hear disputes in relation to inter-State sea carriages if a shipowner or carrier has chosen a foreign choice of law. To the extent that this decision is correct, then there is a need to amend what has been described as a “lacuna”, an “absurdity”, a “loophole”, an “anomalous”, “paradoxical” and “regrettable” “oversight” in s 11 of the Carriage of Goods by Sea Act 1991 (Cth) (COGSA).[1]

Proceedings

The Full Court decision relates to a consignment of steel rails, owned by Carmichael Rail Network Pty Ltd (CRN) that was damaged on MV “BBC Nile” during an inter-State voyage from Whyalla, South Australia, to Mackay, Queensland. The relevant bill of lading, issued by BBC Chartering Carriers GmbH & Co (BBC), provided that any dispute arising out of the shipment shall be referred to arbitration in London. CRN also entered into contracts with OneSteel Manufacturing for the latter to supply the rails and load them onto BBC’s ship, with any disputes to be determined in Queensland.

Following a claim by CRN to BBC for the damaged rails, BBC provided notice to CRN informing it that it had commenced arbitration in London, seeking a negative declaration that it was not liable for the damage to CRN’s steel rails.

In response, CRN commenced proceedings in the Federal Court of Australia against BBC and OneSteel, seeking an anti-suit injunction restraining BBC from taking any further steps in the arbitration, arguing that:

  1. on a proper construction of s 11(2) of COGSA, CRN had a statutory right to restrain the commencement or maintenance of any proceedings brought in connection with the consignment otherwise than in an Australian court;
  2. the choice of law and arbitration clause in the bill of lading were void as they were contrary to the mandatory law of the forum prescribed by s 10(1)(b)(ii) of COGSA.
  3. there is a real risk BBC’s liability would be lessened or relieved in the London arbitration given an English arbitral tribunal may apply or interpret the Hague Rules differently noting:
  1.  the divergent approaches to the interpretation of Article 3, Rule 2 of the Amended Hague Rules under the two legal systems;
  2.  BBC would be able to rely upon defences not otherwise available in Australia, including an argument the damage was caused by OneSteel’s failure to properly and carefully load the consignment to shift responsibility for the loss on a party that was not a party in the arbitration;
  3. As a result, the jurisdiction clause in the bill of lading is void in accordance with Article 3, Rule 8 of the Amended Hague Rules.

Anti-suit relief was granted on an interim basis by the Federal Court of Australia.

At the same time, BBC filed a stay application in favour of London arbitration pursuant to s 7(2) of the International Arbitration Act 1974 (Cth) and the foreign jurisdiction clause in the bill of lading. BBC’s application was based on a narrow view that s 11(2) of COGSA does not expressly apply to inter-State carriage and it is expressly limited to outbound/international shipments.

The two applications were referred straight to the Full Federal Court of Australia.

Judgment

The Full Court dismissed CRN’s application, discharged the interim anti-suit injunction and stayed the proceedings in favour of arbitration in London on the basis that:

  1. CRN did not prove BBC’s liability would not be lessened in London arbitration. As a result, the choice of law and arbitration clause in the bill of lading is not null and void pursuant to Article 3, Rule 8 of the Amended Hague Rules;
  2. There are no issues regarding the potential English interpretation of the Australian Hague Rules, given the relevant bill of lading is governed by the Australian Hague Rules, as applied under Australian law in s 10(1)(b)(ii) of COGSA and BBC’s undertaking to apply the Amended Hague Rules as applied under Australian law in the London arbitration;
  3. CRN does not have a statutory right to restrain the London arbitration pursuant to s 11(2) of COGSA. There has never been a legislative intent that the parties to a sea carriage document, including a bill of lading, should be unable to contract out of the jurisdiction of Australian courts in respect of inter-State carriage of goods (no matter how “inconsistent” this seems with the provisions of s11(2)(b) and (c) of COGSA); and
  4. Despite the apparent overlooking of inter-State contracts for carriage of goods by sea in s 11(2) of COGSA, it is not appropriate to fill this gap by inserting words to cover inter-State shipments in s 11(2)(a) and s 11(2)(b).

The Full Court’s narrow approach to s 11(2) of COGSA, if correct, exposes a bizarre loophole in Australia’s shipping legislation, namely, that there is an overriding Australian jurisdiction to hear international shipping disputes, but no overriding Australian jurisdiction to hear domestic shipping disputes, where the bill of lading contains a foreign jurisdiction clause.

This regime is entirely inconsistent with the intention of the original 1904 drafters of the legislation, who intended to create a shipping regime to prevent shippers and foreign carriers/shipowners evading Australian jurisdiction or laws on inter-State shipments. It was only in respect of international shipments that the drafters thought some additional provision would be necessary to ensure that circumvention was impossible. If they were right, s 11
should have been construed accordingly i.e. it nullifies foreign choice of law clauses within bills of lading for inter-State shipments. However, if the drafters of the legislation made a mistake or “oversight”, then this is an appropriate case for reading words into s 11(2) to include inter-State shipments.

CRN has applied for special leave in the High Court of Australia to overturn the Full Court’s decision.

A link to the Full Federal Court Judgment can be found here: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/2022/2022fcafc0171

[1] Gregory Nell SC, “An Apparent Lacuna”, Shipping Australia (Autumn/Winter 2021) 32; Carmichael Rail Network Pty Ltd v BBC Chartering Carriers GmbH & Co. KG (The BBC Nile) ], [2022] FCAFC 171 at [100], [103].

For further information, please do not hesitate to contact us.

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