Binding Effect of Arbitration Clauses on Holders of Bills of Lading as Nonoriginal Parties and a Potential Uniform Approach Through Comparative Analysis

Ling Li | Essay

An arbitration clause usually binds parties who have agreed to it absent any dispute regarding the validity of the clause. An arbitration clause, however, may be incorporated from one contract (the first contract) into another contract (the second contract) pursuant to an incorporating provision in the second contract. Through incorporation, the arbitration clause in the first contract becomes a provision in the second contract. A person who is a party to the second contract, but not a party to the first contract, becomes a nonoriginal party to the arbitration clause. In addition, a successor of either the first contract or the second contract also becomes a nonoriginal party to the arbitration clause. These nonoriginal parties neither personally agreed to nor personally signed the arbitration clause, and therefore, they might resist enforcement of the arbitration clause. They might not know the arbitration clause exists, and even if they know it exists, they might not know the content of the clause. In either situation, the nonoriginal parties might dispute the binding effect of the arbitration clause for the following reasons: (1) the arbitration clause is “not ‘germane’ or ‘directly’ relevant to, nor part of the subject matter of, the main contract”; (2) it is an “ancillary provision[] by way of dispute resolution essentially personal to the parties which agree [to it]”; (3) it can “oust the jurisdiction of the courts”; and (4) it “may come into the hands of those who will, or may, neither know, nor have the means of knowing, the arbitration clause in the charterparty which they will not have seen and to which they would be unlikely to assent.”

In the context of a negotiable bill of lading issued under a shipping contract such as a charterparty or a liner contract, the carrier issues the bill of lading to the shipper. In charterparty situations, the bill of lading may incorporate by reference an arbitration clause from the charterparty between the carrier and the shipper. Contrastingly, in liner contracts, the arbitration clause is either inserted into or printed on the bill of lading. In either situation, when the bill of lading is transferred from the shipper to a holder of the bill of lading, the holder becomes a nonoriginal party to the arbitration clause. This holder occupies the same position as the original parties to the first contract. When the arbitration clause is incorporated or inserted into the bill of lading, the question arises whether the holder, absent an express agreement, is bound by the clause. There is a significant amount of litigation regarding this issue because the holder is neither an original party nor a personal signatory to the arbitration clause.

Courts vary in their approaches in determining the effect of a charterparty arbitration clause on holders. Each country applies its own approach to determine the underlying issue. The legal diversity among jurisdictions may create choice-of-law and forum-selection problems. For example, if the language in a bill of lading merely states, “[a]ll terms and conditions as per charter party dated,” the result is significantly different between U.S. law, which accepts the incorporation of the charterparty arbitration clause, and English law, which does not accept incorporation and thus denies the binding effect of the arbitration clause on the holder. Therefore, absent an express choice-of-law provision in the bill of lading, a holder who wishes to avoid such an arbitration clause can choose to litigate in an English court and argue that English law applies. However, if the same dispute is litigated in a U.S. court, the result could be substantially different. Such varied results cause conflicts of interest and uncertainty at the international level.

This Essay will survey the laws regarding the effect of an arbitration clause on a holder of a bill of lading in the United States, England, and China. In doing so, this Essay will examine the approach and theoretical justification applied in each jurisdiction as it relates to both charterparty bills of lading and liner bills of lading. Finally, it will propose a uniform approach for regulating the effect of arbitration clauses on holders of bills of lading.