Background
In 2019, Carmichael Rail Network (Carmichael) made arrangements to have thousands of tonnes of steel rails manufactured and transported from South Australia to Queensland. Part of this involved Carmichael’s subcontractor entering into a contract with BBC Chartering Carriers (BBC Chartering), an international shipping company, for the loading of the goods into the ship. The steel rails would then be carried by sea to their destination.
The contract came with a bill of lading, stipulating the terms and conditions of the transportation service. Of note were clauses 13 and 14, which addressed liability in relation to the agreement and the method in which disputes would be resolved. Under clause 14, arbitration would proceed in London and English law would govern the procedure.
The loading of the rails into the ship went horribly wrong. Other goods were placed poorly aboard the ship resulting in severe damage to the rails. This rendered them useless. Although, some of them found value in the aftermath as scrap metal.
A web of proceedings begins
Carmichael filed an application in the Federal Court of Australia for damages while BBC Chartering commenced arbitral proceedings in London.
The first task was working out which body had jurisdiction to hear the dispute. The outcome of this question would rest on the interpretation of Article 3(8) of the Carriage of Goods by Sea Act 1991 (Cth), a statute incorporating what are known as the Hague Rules.
The potential impact of the Hague Rules on arbitration agreements
The International Convention for the Unification of Certain Rules of Law relating to Bills of Lading, and Protocol of Signature was developed to adjust the superior bargaining position enjoyed by carriers (those who managed the ships) in contrast to the cargo owners at the other end of the commercial arrangement. The Hague Rules impose a minimum standard on ship owners for liability.
In Australia, the Hague Rules were adopted by the Carriage of Goods by Sea Act 1991 (the Australian Hague Rules).[2] Under Article 3(8) of the Australian Hague Rules:
Any clause, covenant, or agreement in a contract of carriage relieving the carrier or the ship from liability for loss or damage to, or in connexion with, goods arising from negligence, fault, or failure in the duties and obligations provided in this article or lessening such liability otherwise than as provided in these Rules, shall be null and void and of no effect.
Article 3(8) of the Act becomes especially relevant under the International Arbitration Act 1974 (Cth). At section 7(5), a court can decline to stay proceedings if the arbitration clause has been found null and void.
The main question for the courts then was whether the arbitral proceedings, in contrast to proceedings in the Australian courts, would result in the liability of BBC Chartering being relieved or lessened.
Full Federal Court of Australia holds arbitration clause to be valid
In Carmichael Rail Network Pty Ltd v BBC Chartering Carriers GmbH & Co. KG (The BBC Nile),[3] BBC Chartering primarily argued that the arbitration clause in the bill of lading necessitated a stay in proceedings in favour of the London arbitration.
Carmichael had argued, amongst other points, that having to prove Australian law in the arbitral proceedings would place a burden on their efforts to be heard. This would indirectly lessen the liability on BBC Chartering.
The Full Federal Court acknowledged that this would likely lead to an increase in costs. However, a larger legal bill was not a scenario contemplated by Article 3(8). The Full Federal Court reiterated the point of Article 3(8) as being concerned solely with whether a clause, covenant or agreement relieves or lessens a carrier’s liability arising from “negligence, fault, or failure in the duties and obligations provided” in Art 3.
The Full Federal Court of Australia agreed with BBC Chartering.
High Court of Australia unable to see any risk of lessened liability on ship carrier
In determining the matter, the High Court explored the limits of the Hague Rules.
The High Court identified the relevant standard for assessing whether arbitral proceedings would lessen the liability of the ship carrier. That is, the cargo owner must prove that the liability would be lessened on the balance of probabilities. As it stood, all Carmichael was displaying was mere speculation that that liability would be lessened.
The High Court also recognised that although it is to be vigilant of creative strategies attempting to circumvent the protections afforded by the Australian Hague Rules, that does not mean a court is to stretch the provisions. The Australian Hague Rules are not to be construed as liberally as possible for the sole purpose of favouring cargo owners.
The High Court of Australia agreed with the Full Federal Court.
Resistance to dealing with foreign arbitration: a legitimate fear or a form of judicial xenophobia?
One of the notable sections of Carmichael v BBC Chartering concerned the position of the United States on foreign arbitration and how it matched leading English authority.
Carmichael made the case that the position in the United States was that the contemplation of foreign law in arbitral decisions may lessen the liability on the ship carrier. Carmichael highlighted the decision Indussa Corp v SS Ranborg[4] in the United States Court of Appeals where in obiter it was said that:
Requiring trial abroad might lessen the carrier’s liability since there could be no assurance that it would apply [the provisions] in the same way as would an American tribunal.
The Court then underscored that Indussa had been disapproved of by the United Stated Supreme Court in Vimar Seguros y Reaseguros, SA v M/V Sky Reefer.[5] There, the United Supreme Court held that:
Mere speculation that the foreign arbitrators might apply Japanese law which, depending on the proper construction of COGSA, might reduce respondents’ legal obligations, does not in and of itself lessen liability.
Carmichael noted that Vimar Seguros had been subject to heavy academic criticism. This was unsurprising to the High Court, recognising the significance of the question on international trade. However, the rationale behind Vimar Seguros was recognised by the High Court as remaining generally consistent with English judgments on the matter, notably The Hollandia.[6]
In fact, Vimar Seguros has been adopted in previous judgments in Australia. In Pan Australia Shipping Pty Ltd v The Ship ‘Comandate’ (No 2), [7] Vimar Seguros was highlighted as authority on the proposition that:
The Court should be astute to uphold and enforce agreements… rather than to display a form of judicial prejudice or xenophobia against the parties’ chosen method or place of dispute resolution.
The Full Federal Court in Pan Australia Shipping then elaborated on the importance of having faith in arbitration clauses:
Refusal to enforce agreements to arbitrate in international transactions is capable of undermining the reasonable but significant expectations of the international commercial community and the confidence which it and, indeed, local business people place in the readiness of courts to hold people to their bargains.
Comment: arbitration the clear winner in this round
The High Court was asked to juggle two different principles in international shipping law. The Australian Hague Rules make it clear that no clause in a contract for shipping is valid where liability on the carrier will be reduced or lessened. On the other hand, arbitration as a method of dispute resolution is recognised as vital in the world of international commerce.
The two principles do not need to clash. The High Court was able to recognise that the Australian Hague Rules were not intended to cover simple possibilities of a ship carrier escaping liability. So, when the case that liability will be lessened is based on nothing more than mere speculation, the arbitral proceedings will go ahead.
Ultimately, Carmichael v BBC Chartering will stand as an example of the highest court in Australia recognising the value of arbitration.
References
[1] Carmichael Rail Network Pty Ltd v BBC Chartering Carriers GmbH & Co KG [2024] HCA 4.
[2] The corresponding legislation in New Zealand is the Maritime Transport Act 1994, Schedule 5.
[3] Carmichael Rail Network Pty Ltd v BBC Chartering Carriers GmbH & Co. KG (The BBC Nile) [2022] FCAFC 171.
[4] Indussa Corp v SS Ranborg (1967) 377 F 2d 200.
[5] Vimar Seguros y Reaseguros, SA v M/V Sky Reefer (1995) 515 US 528.
[6] The Hollandia [1983] 1 AC 565.
[7] Pan Australia Shipping Pty Ltd v The Ship ‘Comandate'(No 2) [2006] FCA 1112.
