Dryships are reeling after having a US$70M arbitration award in their favour overturned by the English High Court. The Chinese defendants on the other hand must be cock-a-hoop after Lady Justice Carr ruled in their favour.
The story began many years ago prior to the shipping collapse of late 2008. In the middle of 2008 the Owners had fixed several vessels on long term charters to Shanghai Shipping Co Ltd (“SSC”). The charter rates were very high by comparison to today’s market rates. Nevertheless, this was good business for SSC as they by and large had profitable sub charters on those vessels. In a sense therefore they were also riding the wave of the shipping boom.
Towards the end of 2008 the parties agreed to replace the charter on one vessel – the Daytona with a new charter for the Pounda. It was common ground that the parent company of SSC, the large steel company Jiangsu Shagang Group (“JSG”), often guaranteed SSC’s charters. SSC was in effect the shipping arm of JSG. It was also accepted that JSG had authorised the guarantee of the Daytona charter.
Now as everyone knows, the shipping market tanked in late 2008. SSC found themselves in great difficulty as their sub charterers reneged and/or asked for renegotiation of rates. At the same time the Greek Owners steadfastly refused to reduce the head charter rate. Surprisingly, SSC continued to limp on for several years, albeit consistently paying hire late and having to deal with numerous arbitrations against them. Eventually however, they ran out of time and money and had no option but to apply to the Hong Kong Courts for protection from their numerous creditors. The charter on the Pounda was eventually repudiated in April 2015.
The new replacement time charter for the Pounda included a London arbitration clause but it was only signed by the Owners. There was no signature from either SSC or JSG. It was conceded that SSC were bound by the recap. It was also conceded that the former charter on Daytona had been signed by SSC and was guaranteed by JSC. However, JSC’s position for the Pounda was that the replacement charter was not guaranteed by them and SSC had no authority to give a guarantee on behalf of JSG via their brokers Howe Robinson.
The judgment makes for interesting reading as it is essentially a re-hearing of the evidence to establish whether JSG were bound by the arbitration clause in the charter. The interactions between SSC and JSC at the time came under the microscope. It did not help matters that the man responsible for the charter at SSC was sacked for embezzlement of company funds. Various adverse inferences were drawn in the arbitration as a result of JSG’s lack of disclosure. In fact their entire case seemed to rest on verbal conversations between the person in charge at SSC and the person in charge at JSG who had authority to give the guarantee. Largely for that reason – and the fact that there was a pattern of those at JSG refusing to sign charters – the Tribunal decided that JSG had guaranteed the charter on the Pounda and, on that basis, the Tribunal decided that they had jurisdiction to make an Award against JSG.
On appeal, Lady Justice Carr was entitled to consider the evidence afresh – including hearing new witness testimony from JSG – and, on the basis of that evidence, her decision was that Owners had not proved, on the balance of probabilities, that JSG had authorised the guarantee. There were various issues with company procedures for issuing guarantees along with language barriers, which included Mr Shen Wen Ming (director of SSC and vice-president of JSG and the person with authority to authorise a JSG guarantee) neither being able to speak nor read English. Crucially, the Owners had to and failed to establish whether the JSG guarantee had been authorised by Mr Shen Wen Ming for the Pounda charter in replacement for the Daytona charter.
So what does this case tell us?
Firstly, it reminds us that a jurisdictional challenge under s. 67 of the Arbitration Act proceeds by way of a re-hearing rather than review of the decision of the Tribunal. Crucially here for JSG, they had a chance to get their act together and produce fresh evidence at the re-hearing. One assumes a US$70M award against you is sufficiently motivating! JSG brought witnesses to the Court to give evidence in person and under cross-examination. They also plugged some of the gaps in the evidence presented to the Tribunal.
Secondly, it emphasises that the practices associated with the giving of guarantees to secure valuable long term charters are often inadequate. This is not the only case where guarantors have sought to escape liability under guarantees. A similar issue came up in Mitsui OSK Line v Salgaocar Mining Industries (“The Unta”)  EWHC 565 (Comm). Best practice dictates that an authorised representative of the guarantor should sign the charter. Failing that, the Owners should ask to see confirmation that the guarantor has authorised the charterer to enter into the guarantee on its behalf and on the terms set out in the charter. Owners and their brokers should avoid relying on oral representations especially in circumstances where there is no written confirmation of what has been agreed. Finally, care should be taken when replacing vessels. In this case, part of the problem was the fact that the Daytona charter (which was guaranteed) was replaced with the Pounda charter (which was not guaranteed). One can see that it is easy to overlook the issue of the guarantee when working on the assumption that there would be a simple substitution of vessels. In fact, there was a cancellation of the old charter with a new charter being concluded. It follows that the necessary steps should have been taken to ensure that JSG authorised SSC to issue a guarantee on their behalf for the new charter.
It is not known yet if Owners will seek to appeal the decision but we will keep our followers updated on any further news.
The full case citation can be found at: http://www.bailii.org/ew/cases/EWHC/Comm/2018/330.html