Binding Third Parties in Maritime Arbitration: The Lag in Indian Jurisprudence

Introduction

The bill of lading (BoL) and charterparty are foundational elements in maritime trade. A charterparty is a contract of affreightment between the shipowner and the charterer regarding the use of the vessel, while a BoL is a transferable document of title, representing the receipt of the goods. The negotiable nature of the BoL entitles a party to sell the goods on high seas while in transit by transferring the BoL to the other party.

The issue arises when an arbitration clause, originally intended to govern disputes under the charterparty, also binds parties to the BoL who may not have been signatories to the original charterparty agreement, such as consignees or third-party holders of the BoL. This raises an issue of “deemed consent”, creating an absurd situation, where a non-signatory third party is bound by a charterparty arbitration agreement (whose existence it might not even be aware of), simply by holding the BoL. This circumvents the requirement of consent as a core tenet of arbitration law.

Legal framework in India

Section 7(5) of the Arbitration and Conciliation Act, 1996 provides for an arbitration agreement to be incorporated by reference, provided that the arbitration clause is in writing and the reference in the subsequent document is such as to make the arbitration clause part of the contract.¹

(i) Baltic Confidence— Extending charterparty arbitration clause to BoL

The ambiguity in the latter part of Section 7(5) was clarified by the Supreme Court M.V. Baltic Confidence v. State Trading Corpn. of India Ltd.² The question which arose for adjudication before the Court was that whether the arbitration clause in a charterparty agreement extends to disputes arising under the BoL.

The wording of the incorporation clause in the BoL incorporated “all terms and conditions, liberties and exceptions of the charterparty, including the law and the arbitration clause”, the Supreme Court due to a dearth of Indian jurisprudence on the matter, extensively cited English case law and held that the principal factor in deciding whether a charterparty arbitration clause is sufficiently incorporated into a BoL is the intention of the parties to that effect.

Further, to ascertain this intention, the primary document to look at is the language of the incorporation clause in the BoL. The Court further held that while ascertaining this intention, attempts should be made to uphold and give meaning to the incorporation clause, unless it leads to an inconsistent, absurd or unworkable situation.

The Court further went on to hold that a specific reference has to be made to the arbitration clause in the charterparty while incorporating it in the BoL. Their Lordships quoted Lord Robson in T.W. Thomas and Co. Ltd. v. Portsea Steamship Co. Ltd., where he held that the negotiable nature of a BoL has to be kept in mind and if the ordinary obligations of the parties are to be enlarged beyond their ordinary scope or if it is sought to deprive either party of their ordinary legal remedies, the reference to the arbitration clause has to be explicit and precise.³

However, a critical pillar underpinning the judgment in Baltic Confidence4⁴ is the requirement that the parties must possess awareness and knowledge of the existence of the arbitration agreement in question. More importantly, the judgment specifically addresses a scenario involving only two parties, both of whom are privy to both the charterparty and the BoL, while not providing any guidance for situations where a potential non-signatory third party is implicated.

(ii) M.R. Engineers — Binding third-party non-signatories

The issue of whether an incorporated arbitration agreement binds third parties was considered eight years later by the Supreme Court in the celebrated decision of M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd.5⁵ The factual matrix involved Som Datt Builders, a private construction company entering into a contract with Kerala PWD, and then subsequently sub-contracting its obligations to M.R. Engineers Pvt. Ltd. The primary contract therein contained an arbitration clause which was incorporated into the sub-contract by way of the following words— “This sub-contract shall be carried out on the terms and conditions as applicable to main contract unless otherwise mentioned in this order letter.”

The Court held that mere reference as to the arbitration clause was insufficient, and a conscious acceptance of the arbitration clause was needed keeping in mind the statutory requirements enumerated under Section 7(5), therefore a specific reference to an arbitration clause was required.

(iii) Inox Wind— An exception to M.R. Engineers

Nine years later, the Supreme Court in Inox Wind Ltd. v. Thermocables Ltd.6⁶, though agreeing with the judgment in M.R. Engineers7⁷, carved out an exception for standard form contracts and held that a general reference to a standard form of contract of one party will be enough for incorporation of an arbitration clause.

(iv) Giriraj Garg— Introduction of single-double contract cases

Further, in Giriraj Garg v. Coal India Ltd.8⁸, the Supreme Court imported the principles of law laid down by the Queen’s Bench Division in Habas Sinai Ve Tibbi Gazlar Istihsal Endustrisi AS v. VSC Steel Co. Ltd.9⁹, and brought the concept of single-double contract cases to Indian arbitral jurisprudence. The Court explained a “single contract” case is when an arbitration clause of a standard form contract is incorporated through a general reference in a sub-contract between the same parties. The Court has held a general reference to be valid in a single-contract case, however, the Court propounded a stricter rule to be applied in double-contract cases. The Supreme Court explained that in a two-contract case, a contract refers to a secondary document, which involves a third party to the contract. In such cases, a general reference to the earlier contract would not be sufficient to incorporate the arbitration agreement. Further, the Court in para 4 of its judgment explicitly cited a BoL incorporating charterparty terms as an example of two-contract cases.

Further, in Habas Sinai1¹⁰, the Queen’s Bench acknowledged that while a commercial lawyer might be familiar with the doctrine of separability, which treats an arbitration clause as distinct from the main contract, this concept is a legal fiction. It emphasised that separability is more of an academic and jurisprudential notion, rather than a reflection of the practical commercial realities faced by the parties. The Court concluded that the parties’ intentions should be assessed from the perspective of a reasonable businessperson, rather than that of an informed commercial lawyer.

Lastly, the Supreme Court in its recent 2024 decision of NBCC (India) Ltd. v. Zillion Infraprojects (P) Ltd., reiterated the principles laid down in the abovementioned cases and held that a mere reference to a document does not automatically incorporate the arbitration clause from the referenced document unless there is a clear intention to do so.1¹¹

Bridging the gap

However, when we come back to the maritime context, the problem is still not solved yet. In maritime reality, many times the terms of the charterparty are not enclosed in the BoL. Further, even if the shipper possesses information during the negotiations of a BoL, it is highly unlikely that a third-party holder of the BoL would be aware of it. In such cases, the intention of the BoL holder to be bound by the charterparty’s arbitration clause is central to determining the validity of the arbitration agreement formed through the reference to the charterparty. Therefore, for it to be established that the BoL holders intended to be bound by the incorporated arbitration clause, they must be aware of its incorporation in the BoL.

A potential solution

A potential solution for the issue lies in Article 76(2) of the Rotterdam Rules,1¹² which were ambitiously proposed in 2009 to replace the existing conventions governing maritime trade. For the incorporation to be valid under the Rules, the BoL must identify the date of the charterparty, the parties involved, and specifically reference the arbitration clause within the charterparty. However, the Convention has only been adopted by five countries to date, of which four are minor African countries not influential enough in global trade.

Till then, the only solution lies in using the CONGENBILL 2022, intended to be used with the GENCON charter, which provides for an express incorporation of the arbitration clause into the BoL. The CONGENBILL was issued by the Baltic and International Maritime Council (BIMCO), which is the world’s largest direct membership organisation of shipowners, charterers, shipbrokers and agents, aiming to standardise shipping practices across maritime trade.

While emerging forms of BoLs are significantly improving transactional efficiency and streamlining maritime trade processes globally, Indian jurisprudence has lagged behind in addressing these advancements. The legal framework in India has not fully adapted to the complexities introduced by these modern BoLs, leading to gaps in enforcement and interpretation. As global trade increasingly relies on more sophisticated forms of BoLs, there is an urgent need for Indian courts and lawmakers to align with these developments to ensure legal certainty and maintain competitiveness in maritime commerce.