Alternative Dispute Resolution

M.V. Baltic Confidence v. State Trading Corporation of India Ltd.

(2001) 7 SCC 473

Citation: (2001) 7 SCC 473
Court: Supreme Court of India
Date: 20 August 2001
Bench: D.P. Mohapatra and A.P. Misra, JJ.

Facts

The vessel M.V. Baltic Confidence was chartered under a charter party containing an arbitration clause.
Under the charter arrangement, disputes arising from the charter party were to be resolved through arbitration in London.
The vessel carried a consignment of peas from Vancouver to Calcutta under five bills of lading.
State Trading Corporation of India Ltd. became the holder or endorsee of the bills of lading.
The cargo was allegedly damaged by seawater during transportation.
State Trading Corporation instituted an admiralty suit before the Calcutta High Court against:
the owners of the vessel;
the charterers; and
other concerned parties.
The shipowners sought reference of the dispute to arbitration under Section 45 of the Arbitration and Conciliation Act, 1996.
They relied on wording in the bills of lading stating that the terms and conditions of the charter party, including its law and arbitration clause, were incorporated into the bills.
State Trading Corporation argued that:
it was not an original party to the charter party;
the charter-party arbitration clause was not properly incorporated;
the clause concerned disputes under the charter party rather than cargo claims under the bills of lading; and
the admiralty suit should therefore continue.

Issue

Whether the arbitration clause in the charter party was validly incorporated into the bills of lading.
Whether a holder of the bills of lading became bound by that incorporated arbitration clause.
Whether the cargo-damage dispute had to be referred to foreign arbitration under Section 45.

Rule

Section 7(5) recognises that an arbitration clause contained in another document may become part of a contract through incorporation by reference.
Incorporation is effective where:
the reference clearly shows an intention to make the arbitration clause part of the later contract; and
the clause can operate consistently with the later contract.
A general reference may not always be enough where the arbitration clause is inappropriate or repugnant to the later transaction.
However, an express reference to the “arbitration clause” strongly indicates conscious incorporation.
Under Section 45, a judicial authority must refer parties to arbitration unless the arbitration agreement is:
null and void;
inoperative; or
incapable of being performed.

Application

The Supreme Court examined the actual language printed in the bills of lading.
The bills did not merely state that ordinary commercial terms of the charter party would apply.
They expressly incorporated:
all terms and conditions;
liberties and exceptions;
the applicable law; and
the arbitration clause.
This specific reference was important because it demonstrated that the parties intended the dispute-resolution clause itself to travel into the bills of lading.
The Court rejected the argument that only the original charterer could be bound by the arbitration clause.
A bill of lading is a transferable commercial document.
A lawful holder obtains the contractual rights under the document but also takes those rights subject to its incorporated conditions.
State Trading Corporation could not rely on the bills of lading to claim delivery and damages while disregarding the dispute-resolution mechanism incorporated into the same documents.
The Court next considered whether the charter-party clause could sensibly apply to a cargo dispute.
Although the clause referred to disputes arising under the charter party, its incorporation into the bills meant that it had to be read as covering disputes arising under the bills of lading as well.
The clause was not commercially inconsistent with a claim alleging seawater damage to cargo carried under those bills.
Any narrower question regarding the precise scope of the claim could ordinarily be examined by the arbitral tribunal.
Section 45 adopted a pro-enforcement approach.
Once a prima facie valid foreign arbitration agreement was shown, the court was required to respect it unless one of the limited statutory exceptions was established.
No evidence showed that the incorporated clause was void, inoperative or incapable of performance.
The admiralty character of the suit did not itself defeat the arbitration agreement.
The dispute remained a private commercial claim capable of settlement through arbitration.

Conclusion

The Supreme Court held that the charter-party arbitration clause had been validly and expressly incorporated into the bills of lading.
State Trading Corporation, as holder of those bills, was bound by the arbitration agreement.
The cargo-damage dispute was required to be referred to arbitration under Section 45.
The orders refusing reference were set aside.
Use this case for: an arbitration clause in a charter party binds the holder of a bill of lading when the bill expressly incorporates that arbitration clause.