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The M/V "SKY REEFER" sails on
Enforcement of foreign arbitration clauses in bills of lading
By Kim Jefferies of the Oregon law firm Wood, Tatum, Sanders & Murphy

Ocean bills of lading routinely contain clauses requiring any dispute arising from the carriage of cargo to be resolved by binding arbitration in a foreign country. In 1995, the United States Supreme Court decided Vimar Seguros y Reaseguros S.A. v. M/V "SKY REEFER",1 which held a Japanese arbitration clause valid and enforceable against the US cargo claimant’s contention that the inconvenience and cost of a Japanese arbitration "lessened the carrier’s liability" under the US Carriage of Goods by Sea Act (COGSA) and was therefore void. Prior to the "SKY REEFER" decision, the Federal Circuit Courts had split over the enforceability of such clauses under COGSA. This article will briefly review the history leading to the "SKY REEFER" decision, discuss the reach of the decision and outline the proposed legislative challenge to the holding.

The bill of lading issued for a cargo of fruit loaded in Morocco for discharge in Massachusetts, USA, provided for arbitration of disputes in Tokyo.2 As is customary in commercial practice, the bill of lading was exchanged for payment under the terms of a letter of credit while the vessel was in transit. The fruit was found damaged at discharge and the holder in due course and its cargo underwriter sued the vessel in rem in the Massachusetts District Court seeking about USD 1 million in damages. The vessel interests asserted the arbitration clause which was found to be valid and enforceable by the First Circuit Court of Appeals. As a result, the case was stayed in the US court pending arbitration in Japan. The court retained jurisdiction to enforce an arbitration award. The Supreme Court granted certiorari to resolve a split among the federal circuits over the enforceability of foreign arbitration clauses in maritime bills of lading.

The Supreme Court affirmed the First Circuit Court of Appeals. The majority opinion rejected outright the premise that lessening liability under COGSA includes increasing the cost and inconvenience of obtaining redress. Also dismissed as premature was the possibility that the Japanese arbitrators might fail to correctly apply the law. Since the US District Court retained jurisdiction to enforce an arbitration award, the majority reasoned that any substantive error could be remedied by that court at a later time.

"SKY REEFER" invalidates the line of cases beginning with Indussa Corp v. S/S "RANBORG"3 and settles the split in the Circuits in favour of the enforcement of foreign arbitration clauses in ocean bills of lading. Cost and inconvenience to the US consignee are no longer reasons to invalidate a provision that requires arbitration in a foreign country. Also rejected was the notion that a party must negotiate, or have the opportunity to negotiate, a contract provision before it is considered binding. Readers will recall that the bill of lading in "SKY REEFER" was negotiated to the holder in due course after the shipment was loaded and the vessel was en route. Nonetheless the claimant was held subject to the contract terms as long as those terms were consistent with COGSA.

The "SKY REEFER" decision was applied directly to the dispute in Kanematsu Corp. v. M/V "GRETCHEN W".4Kanematsu was the holder in due course of a bill of lading covering a shipment of corn damaged between Louisiana and Japan. It arrested the "GRETCHEN W" in Portland, Oregon. The owners of the "GRETCHEN W" moved for an order enforcing a London arbitration clause incorporated in the bill of lading. Relying on the Indussa line of cases, Kanematsu argued that the arbitration clause was invalid under COGSA.

Rather than specifying the forum directly, the bill of lading provided "[a]ll terms, conditions and provisions of the Strike, Lighterage Clause No. 6 and the Arbitration Clause of the ‘Centrocon’ charterparty apply". The Centrocon charter, a published form of charterparty designed for the grain trade, specifies London arbitration. The matter was first heard by the magistrate, who recommended that the case be stayed pending arbitration in London. The District Court affirmed the decision, and, in a last ditch effort, Kanematsu convinced the Court to stay the matter pending the decision in "SKY REEFER", presumably in the expectation that the Supreme Court would decide the issue in favor of the Indussa reasoning. Once the "SKY REEFER" decision was rendered, the District Court reopened the case and sent the parties to arbitration in London with jurisdiction retained to enforce an award.

The "GRETCHEN W" decision confirms that (1) the bill of lading may incorporate by reference an arbitration clause, and (2) the cargo consignee or holder in due course is bound by the carrier’s arbitration clause in the bill of lading whether or not the consignee had any opportunity to negotiate the term. As the District Court put it, "when a party brings suit for damaged goods under the terms of a bill of lading, that party consents to all of the conditions of the bill of lading." A bill of lading, like any other contract, requires some form of acceptance by the party to be bound. With respect to the consignee or holder in due course, however, that acceptance may be evidenced by the act of bringing suit under COGSA for cargo damage. See, All Pacific Trading v. Vessel M/V "HANJIN YOSU".5

Although the "GRETCHEN W" decision held enforceable a charter arbitration term incorporated by reference, it is only because the incorporation was specific enough to provide notice to the holder in due course that London arbitration had been specified. The recommended practice is to specify the arbitration forum by name in the bill of lading itself rather than simply incorporate the operable charter. Without a specific reference, the holder in due course who is not privy to the specific terms of the operable charterparty, may successfully argue that the carrier failed to provide adequate notice of the term.

The Maritime Law Association, an association of US maritime lawyers, submitted to Congress certain proposed revisions to COGSA, including a provision meant to legislatively overrule "SKY REEFER". The proposed revision would add to 46 U.S.C. § 1303(8) the following subsection:
(b) Any clause, covenant, or agreement made before a claim has arisen that specifies a foreign forum for litigation or arbitration of a dispute governed by this Act shall be null and void and of no effect if:
(i) the port of loading or the port of discharge is or was intended to be in the United States; or
(ii) the place where the goods are received by a carrier or the place where the goods are delivered to a person authorized to receive them is or was intended to be in the United States;
provided, however, that if a clause, covenant or agreement made before a claim has arisen specifies a foreign forum for arbitration of a dispute governed by this Act, then a court, on the timely motion of either party, shall order that arbitration shall proceed in the United States."

In those situations where carriage is to or from the United States or contemplated to be to or from the United States, the proposed revision would nullify clauses requiring litigation abroad and rewrite arbitration clauses to require arbitration at the request of either party, but in the United States only. The proposed revision is not applicable in situations where COGSA applies only by contract, that is, where the carriage is outside the United States. The parties are also free to agree to use foreign arbitration after the claim has arisen.

At the time of writing, the proposal has been submitted by the Maritime Law Association to interested members of Congress but there has been no action as yet to vote the proposal into law.

Whether and when Congress will act on the proposed changes is unknown. In the meantime, the "SKY REEFER" decision strips US cargo interests of their previously successful Indussa arguments against enforcement of a foreign forum selection clause and protects the foreign-based shipowner from being haled into a US court if the clear terms of the bill of lading require arbitration of cargo claims abroad.

(1) Vimar Seguros y Reaseguros S.A. v. M/V "SKY REEFER", 515 U.S. 528, 115 S.Ct.2322, 132L.Ed.2d 462 (1995).
(2) The bill of lading issued by Nichiro Gyogyo Kaisha, a sub-timecharterer, provided:
"Any dispute arising from this bill of lading shall be referred to arbitration in Tokyo by the Tokyo Maritime Arbitration Commission (TOMAC) at the Japan Shipping Exchange, Inc., in accordance with the Rules ofTOMAC and any agreement thereto, and the award given by the arbitrators shall be final and binding on both parties."
(3) Indussa Corp. v. S/S "RANBORG", 377 F.2d 200 (2d Cir. 1967) (holding bill of lading clause requiring disputes to be determined in Norway invalid).Cases following Indussa that are now invalid include: State Establishment for Agric. Prod. Trading v. Wessermunde, 838 F.2d 1576 (llth Cir. 1988);Organes Enterprises, Inc., v. M/J "KHALJI FROST", 1989 A.M.C. 1462 (S.D.N.Y. 1985); Siderius v. M/V "IDA PRIMA", 613 F.Supp. 916 (S.D.N.Y. 1985).
(4) Kanematsu Corp. v. M/V "GRETCHEN W", 897 F.Supp. 1314 (D. Or. 1995). Magistrate Janice Stewart’s decision is reported at 1995 A.M.C. 187 (D.Or. 1994).
(5) All Pacific Trading v. Vessel M/V "HANJIN YOSU", 7 F.3d 1427 (9th Cir. 1993).