VOID CHARTER CONTRACTS MAY CONTIAN VALID ARBITRATION CLAUSES

The Belship Case (1995 U.S. Dist. Lexis 10541) recently decided by the Southern District Court of New York raises a point of some importance to those engaged in chartering ships and utilizing arbitration clauses in charter parties. The central issue of the case was whether an arbitration clause contained in a void charter party contract was nevertheless valid and enforceable. The court answered this puzzling question affirmatively.

By way of background, a charter party is a maritime contract by which a ship is leased to a party, other than the shipowner, for the carriage of goods. The majority of written charter parties contain arbitration clauses. These clauses usually state the arbitration sites, applicable law, number of arbitrators and arbitrator appointment procedures.

TArbitration clauses are important in international maritime disputes because they permit courts to compel arbitration without the parties being present. Jurisdictional consent is found in the arbitration clause. Any party to the charter may enforce the arbitration provision if the dispute falls within the scope of the arbitration clause.

In maritime arbitration, parties select arbitrators of their choice and submit controversies to an arbitration panel, rather than to a court for determination. Most maritime arbitrations are conducted in New York or London.

A strong federal policy encourages maritime arbitration in the United States. This policy is set forth in the Federal Arbitration Act (9 U.S.C. 1-16). The act empowers federal courts to order parties to arbitrate if they have agreed to do so in written maritime contracts. If a party refuses to arbitrate, the aggrieved party will petition the court to compel arbitration and to appoint an arbitrator on behalf of the recalcitrant party.

In the Belship case, a time charterer chartered a vessel to a subcharterer. The charter party contained an arbitration clause. the vessel was then tendered to the subcharterer. The same day the subcharterer arranged with its bank to pay the time charterer.

The following day the bank informed the subcharterer that the bank was obligated by the Office of Foreign Assets Control to block the payment because the vessel was owned by Cuban interests. The subcharterer then advised the time charterer that it was prohibited by law from entering into the charter and, consequently, the charter party was null and void.

Charterer filed for arbitration
The time charterer demanded arbitration, seeking damages resulting from the cancellation. It filed a petition to compel arbitration to obtain quasi-contractual restitutionary relief predicated on a partial performance theory.

The time charterer argued to the court that under the Federal Arbitration Act, the arbitration agreement contained within the void charter party was valid and enforceable.

The subcharterer argued that it should not be compelled to arbitrate. The charter party was void. Therefore, the arbitration clause must also be void. The court rejected this argument and ordered the parties to arbitration:

“Although the Second Circuit (Court of Appeals) has not ruled specifically on the separability of arbitration agreements from contracts void in their entirety because of illegality, other circuits favor separability when the contract is void (from inception) . . The parties . . . agreed to submit their disputes to arbitration rather than to the courts. both the parties’ intent to arbitrate disputes as manifested in the arbitration clause and the presumption in favor of arbitration are best satisfied by holding the arbitration clause separable from the void charter, and therefore valid and enforceable.”

It might be prudent for those engaged in ship chartering to familiarize themselves with the Belship case and the separability concept. Arbitration clauses may be treated as independent contracts, even though they are contained in invalid charter parties.

The Belship decision is on appeal.


[Back]