Substantial litigation has revolved around the issue of whether charter party arbitration clauses can be incorporated into ocean bills of lading by reference.

To appreciate the complexities associated with this issue, it is necessary to understand the basic documents used in ocean carriage (charter parties and bills of lading) and the fundamentals associated with arbitration

Agreements to employ vessels to transport others’ goods are contracts of affreightment. An affreightment contract can be a charter party when the shipowner leases the entire vessel to a single party for private carriage. Affreightment contracts take the form of bills of lading when vessels carry goods as common carriers by using partial capacities for particular shippers.

To complicate matters, bills of lading often are used on chartered vessels because masters must issue bills at the request of charterers. In such cases, bills of lading are contracts of carriage between the vessel and the consignees named in the bills. However, consignees are not bound by charter terms for which they have no notice.

When bills are issued under charter parties, they do not operate as new contracts between shipowners and charterers. They become receipts that do not modify charter provisions. This often occurs when charterers transport their goods and issue bills of lading to comply with sales requirements.

However, when bills are transferred for value to third-parties, they become contracts, independent of the charter party, except for charter provisions expressly incorporated in the bills. Holders of bills of lading, who are strangers to the charter party, should be able to rely on bills and be free from agreements between shipowners and charterers. The necessity of consulting charters makes charter party bills more cumbersome than most negotiable instruments.

Many charter parties contain mandatory arbitration clauses. These clauses are important in international maritime disputes. They permit courts to compel arbitration without the parties being present. Jurisdictional consent is found in the arbitration clause.

A party to the charter may enforce the arbitration provision against another party if the dispute falls within the terms of the arbitration clause. However, only those who have agreed to arbitrate can be forced to do so. Shippers, consignees or holders of bills, not parties to the charter, have no obligation to arbitrate unless the charter arbitration clause is incorporated into the bill of lading. Generally, charter arbitration clauses are incorporated into bills of lading when the bill clearly refers to the charter and the holder of the bill becomes aware of the incorporation by actual or constructive notice. Ideally, the incorporation clause should specify the date and place where the charter was signed and by whom. Some courts find incorporation fails when the name and date of the charter is left blank in the incorporation clause. However, where there is no confusion concerning the identity of the charter or charter party, an incorporation clause my be effective even though it fails to name the signatories or the date and place of execution.

Unfortunately, many incorporation clauses are confusing and courts must resolve the incorporation issue. The recent M/V Arktis Sky case (1991 AMC 1499) in the Southern District Court of New York illustrates this point.

The Arktis Sky case involved a cargo claim on a shipment from Spain to New Jersey. The plaintiff bill of lading holder purchased the cargo shipped under a charter containing a London arbitration clause. The bill failed to name the parties to the charter or its date and place of execution. Moreover, there was no indication in the bill that the charter contained an arbitration clause. The court refused to enforce the arbitration clause against the plaintiff who was a stranger to the charter. The Arktis Sky case should send a warning to parties involved in international shipping. Arbitration incorporation clauses in bills of lading should clearly identify the parties to a particular charter in order to be enforceable. Clauses that are ambiguous are open invitations to litigation.