Charterparty pitfalls and dispute resolution
An arbitrator's perspective on ship contracting
By Carly Fields
In the complex world of international commerce and maritime transactions, the negotiation and execution of charterparty agreements often set the stage for potential disputes. The intricacies of these contracts can be labyrinthine, and disputes can arise over whether a binding contract was indeed formed or over the comprehensibility of the terms agreed upon.
In the 6th Annual Baltic ICS Lecture Series webinar last week, Lawrence Teh and Karina Albers, two seasoned experts in international arbitration and maritime law explored the key legal principles and practical considerations surrounding charterparty agreements and dispute resolution.
Teh kicked off by reminding brokers and traders of the fundamental legal principles that underpin charterparty agreements. When two parties negotiate a business deal, they can either discuss all the terms of the contract at once or agree to certain terms and leave others to be decided later. This flexibility is particularly relevant in the context of chartering vessels, where crucial terms such as charter hire, loading, destination, and laycan are agreed upon first, with other less pressing or less important terms left for subsequent discussion.
One critical issue in maritime disputes is whether the parties have indeed concluded a binding contract. English and Singaporean law, for instance, emphasise objective conduct over subjective beliefs in determining contract formation. The objective conduct takes into account what is both written and said orally, the industry's standards, the parties' familiarity with each other, and their common understanding.
It's important to note that contracts need not always be reduced to a single written document.
“A contract can exist through the words and conduct exchange between the parties,” Teh said.
Teh outlined the key principles governing charterparty agreements and dispute resolution:
1. Comprehensible Terms: The law will not enforce a contract that contains incomprehensible terms or contracts that are incomprehensible as a whole.
2. Unfulfilled Conditions: Contracts subject to unfulfilled conditions, such as the signing of a full written document or the agreement of all terms, will not be enforced.
3. Illegality: Contracts with an illegal principal purpose will not be enforced.
4. Binding Agreements: Subject to these impediments, the law will enforce any agreement that the parties have mutually agreed upon as binding.
5. Reasonable Expectations: Courts aim to give effect to the reasonable expectations of honest business people, underlining the importance of clarity and mutual understanding in negotiations.
“It is therefore important when you're negotiating a contract to be alive to these principles,” Teh said. “It may make the difference between winning or losing a court case or an arbitration.”
Albers highlighted a critical distinction between US and UK law regarding contract formation. Under US law, if parties agree without any conditions or subjects, a contract is considered formed. English law, to a large extent, has followed suit in recent times. When both parties are clear on the terms, have no subjects, and have adequately recapped their discussions, it is likely that the law will view them as having concluded a binding contract.
Role of clarity and familiarity
Teh emphasised the importance of clarity and familiarity with industry-specific terminology. While brokers may use their own language for efficiency, it can lead to disputes. “I recall one arbitration which came down to one email, one acronym, which, if I recall correctly, was AG WWP,” Teh said. “Fortunately, that was immediately recognised by the arbitrator. So that underscores the point, that it’s important to identify someone who's familiar with the terminology.”
Also, the law does not require contracts to be written or signed; it seeks to establish whether the parties intended to be bound by their discussions and agreements. Albers said: “So be mindful even if the charter party is not signed - and it can be an electronic signature or no signature - if the parties have acted upon it, they've conducted the terms of the contract and then you do have a binding contract.”
Additionally, contrary to the popular notion that silence can never constitute acceptance, in the right circumstances, silence can indeed be a form of contractual consent. This is particularly relevant in the context of fixtures and operations.
“In the right circumstances. silence can be as deafening as active contractual consent,” Teh said.
Albers, meanwhile, underscored that negotiations conducted on social media platforms or via electronic communication can form a binding contract.
Both presenters stressed the importance of seeking resolution, whether through settlement or expert evaluation, when disputes arise. Settlement is often the most efficient and cost-effective way to resolve disputes, and legal professionals can play a crucial role in facilitating this process. Albers noted the use of Early Neutral Evaluation as an alternative to full arbitration.
“It's all about getting people inclined towards settlement,” Teh said. “There's no point in ordering people to mediate or forcing people to enter the settlement negotiations if they are not inclined to find a solution. The question is how you're going to make two parties inclined to explore and find a solution. That's the trick.”
The webinar can be replayed for free here: https://app.livestorm.co/the-baltic-exchange-1/6th-annual-baltic-ics-lecture-series-charterparty-pitfalls-and-dispute-resolution-an-arbitrators-perspective/live