Eleventh Circuit overturn lower court ruling requiring arbitration in Florida

 Overview

In Internaves de Mexico s.a. de C.V. v. Andromeda Steamship Corp., the US Court of Appeals for the Eleventh Circuit overturned a District Court decision and compelled arbitration in London of a charter party dispute.  While accepting the charter party agreement was “hardly a model of clarity” the court found that intention to arbitrate in London was discernible from its terms.  The decision reemphasises the need for particular care in the drafting of arbitration forum selection clauses and choice of law and dispute resolution clauses more generally.

Background

Andromeda Steamship Corporation (“Andromeda”) and Internaves de Mexico s.a. de C.V. (“Internaves”) entered into a charter party agreement in June 2016 whereby Andromeda agreed to furnish Internaves with a vessel to transport goods from Brazil to Mexico (“Contract”).  The Contract was divided into Parts I and II. Part I of the Contract contained terms specific to the parties and their transaction and Part II included general boilerplate provisions typical of shipping contracts.  Both Part I and Part II contained sections headed “Law and Arbitration”. Under this heading in Part II, Clause 19 provided a list of alternative arbitral fora from which the parties could choose:

  • Clause 19 (a) provided for a London arbitration under English law;
  • Clause 19 (b) provided for a New York arbitration under US law;
  • Clause 19 (c) provided for any forum of the parties’ choosing; and
  • Clause 19 (d) provided that, in the absence of any selection being made, clause 19(a) would be deemed to apply.

Each sub-clause was accompanied by various supplemental conditions (which, for these purposes, are not relevant) and an asterisk, with the asterisk notation explaining that sub-clauses “(a), (b) and (c) are alternatives; indicate alternative agreed in Box 25”. Under the heading “Law and Arbitration” in Part I of the Contract, Box 25 directed the parties to write their selection from Clause 19’s options in the space provided.

When the parties completed Box 25, they clearly wrote the words “London arbitration, English Law”.  However, in Part II, sub-clauses (a), (c) and (d) of clause 19 were all struck-through, leaving only clause 19(b), which provided for arbitration in New York, under US law.  A further clause provided that “in the event of a conflict of conditions, the provisions of Part I shall prevail over those of Part II to the extent of such conflict” (“Conflict Clause”).

A dispute arose between the parties with Internaves alleging that, despite pre-payment, Andromeda had failed to tender the vessel on the agreed-upon date. Andromeda maintained that Internaves never delivered the goods to the ship for transportation. Internaves sued Andromeda in the Southern District of Florida for breach of contract, conversion and fraud. When sued, Andromeda moved to compel arbitration of the dispute in London under English law, pointing to the selection the parties had made in Part I of the Contract at Box 25.

The District Court decision

The United States District Court for the Southern District of Florida granted the motion compelling arbitration, but concluded that the contrary agreements in Part I and Part II were “hopelessly in conflict” and that this conflict was compounded by ambiguities in the conflict provisions themselves.  While accepting that Part I should, on account of the general conflict provision in the Contract, prevail over Part II, the District Court observed that the parties had struck-through sub-clause 19(c) which instructed the parties to indicate a forum at Box 25.  Because the court considered that this sub-clause also provided for the supremacy of Part I, its strikethrough was seen to increase the ambiguity.  The court held that the parties had, therefore, failed to provide for a specific arbitral forum and that in light of the requirements of the Federal Arbitration Act, the court could only compel arbitration within its own district.

Andromeda appealed to the US Court of Appeal for the Eleventh Circuit, arguing that arbitration should have been compelled in London, in accordance with what the parties had written at Box 25.

The Eleventh Circuit decision

The Court of Appeals held that despite the “apparent conflict” about choice of forum, under the Conflict Clause the parties had provided for arbitration in London, under English law, and the District Court should have upheld this selection.

In reaching this conclusion, the court looked to the general common law of contracts and drew out five applicable principles of contract interpretation:

  1. The actual language used in the contract is the best evidence of the parties’ intent, so the plain meaning of that language controls;
  2. A contract should be read to give effect to all its provisions and to render them consistent with each other;
  3. If the contract itself provides means for reconciling a conflict, the contract’s internal conflict-resolution mechanism is to be applied – indeed an express conflict resolution clause will mean that there is no ambiguity;
  4. Where general propositions in a contract are qualified by specific, it is the specific provisions that control; and
  5. Interpretation should be with sensitivity to the reality that parties occasionally err or misprint in the course of contract drafting.

The court noted that the parties had, in the way they had completed the Contract, created a conflict between the “Law and Arbitration” provisions in Parts I and II. It considered, however, that such a conflict was anticipated and resolved by the inclusion in the Contract of the Conflict Clause.  Applying the general principles of interpretation, the court held that it was bound by the party-chosen mechanism.  The court continued that Box 25 had been designated by the parties as the authoritative space in which to ascertain forum selection, and the parties had clearly expressed their preference in that box.  While they had, strictly speaking, neglected to stipulate which sub-clause under Clause 19 they were electing (as they had not written the words “Clause 19(a)”), the court held that this amounted to no more than a small error, which could not undermine their manifest intent.  That intent was held to clearly be to arbitrate in London, as this is what had been specifically written. By contrast, the indication of a desire to arbitrate in New York appeared only among the boilerplate provisions of Part II, and, even then, only by way of not being struck-through, as the other sub-clauses of clause 19 had been.

The interpretive rule of favouring specific terms was also seen to support Andromeda’s argument that the arbitration should occur in London.  The specific written insertion in Box 25 constituted a “far more powerful expression of intent” than striking 19(a), (c) and (d) from the boilerplate script.  The District Court’s reading of sub-clause 19(c) was rejected, with the court holding that it did not provide for the supremacy of Part I, but rather provided a “write-in” option for the parties who required a location other than the most typically chosen of London or New York.  Crossing it out therefore did not undermine Part I’s predominance over Part II, or Box 25’s status as the authoritative forum selection clause.  Having found that the parties “provided for” a forum, the court was obliged to recognise and uphold that in accordance with Chapter 2 of the Federal Arbitration Act.

As for the terms which will govern the arbitration, because the parties did not specifically write “19(a)” at Box 25, but rather only “London arbitration, English Law”, the Court did not impose any of the supplemental conditions stipulated at sub-clause 19(a).  Rather, it held that any terms governing the arbitration not stipulated in the Contract must be supplied by English arbitration rules.

Comment

Although the case ultimately hinged on a seemingly straightforward exercise of contractual interpretation, the decision of the Court of Appeals remains worth noting.  It provides a reminder that issues arising from agreements to arbitrate remain subject to the general principles of contractual interpretation and, also, reiterates the duty of the courts to “rigorously enforce arbitration agreements according to their terms”.  Thus, while lawyers are, naturally, acutely aware of the importance of clarity when drafting commercial contracts, the Court of Appeals decision emphasises the need for particular care in the context of arbitration forum selection clauses and choice of law and dispute resolution clauses more generally.  Parties must be clear about their intent as to the place of arbitration and choice of law and need to fully appreciate the interplay of any clauses bearing on that question. They must consider the ways in which they express that intent (such as the contrast between expressly writing in terms and striking through of boilerplate clauses in this case), as the failure to consider these issues creates a risk of costly and avoidable litigation over where to arbitrate.

Additionally, the case highlights the importance of a contract’s internal conflict resolution mechanisms.  Not only did the Court of Appeals make it clear that courts will be bound by such mechanisms, it went so far as to point out that “where a contract contains a conflict, but also includes a clause that expressly resolves conflict, there is no ambiguity”.  A boilerplate internal conflict clause may, in this way, end up being determinative when considering an apparent ambiguity over arbitral fora.  It cannot, however, be a substitute for proper consideration of the relevant choice of law clauses, as clear and unambiguous drafting would hopefully avoid altogether the need for recourse to the courts and the need for reference to the conflict mechanism to resolve the dispute.

 

Matthew Gale and Elizabeth Meade are Associates at Cooke, Young & Keidan

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