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Contract ambiguity – When Part I and Part II collide

It’s not often that I end up reading US appeal Court judgments, but there was an article in the Law Society Gazette last month which caught my eye and I couldn’t help myself. Glad I did, too, as the judgment raised some interesting points which are worth bringing up as we do come across similar issues every now and again.

The case itself, Internaves de Mexico S.A. de C.V. -v- Andromeda Steamship Corporation (& ors), was heard in the United States Court of Appeals for the Eleventh Circuit on 1st August 2018 and concerned an appeal by a Mexican company against a Monaco-based operator in connection with an alleged failure to supply a transport vessel to ship an electric transformer from Brazil to Mexico. A charter party dispute, in other words. The facts are immaterial, in the grand scheme of things, as the skirmish at hand concerned an argument as to the appropriate dispute resolution forum.

It’s perhaps a familiar story, when parties using standard form / template contracts either forget to tick a box, tick too many boxes, or take it upon themselves to start crossing out or adding wording without cross-checking the impact on any other provisions. So, what happened here? The charter agreement was broken into 2 separate parts, Part I which contained the ‘headline’ provisions specific to the transaction in question and a number of boxes for the parties to complete in order to record those specifics (readers familiar with the BIMCO contract model, for example, will know the drill), and Part II which contained more detailed, boiler plate-type, wording. It made provision for arbitration (no argument about that) but the question arose as to where that arbitration should take place. One of the boxes in Part I (called “Law and Arbitration”) instructed the parties to opt for one of 3 possible venues set out in Clause 19 of Part II, and stated that if they simply leave the box blank the one which designated arbitration in London under English law will apply by default (a similar fall back appears in Clause 19 of Part II itself). So, in the relevant box in Part I the parties wrote “London arbitration, English law” but then, inexplicably, in Clause 19 of Part II they crossed out all options (including the London/English law default position) except for New York arbitration under U.S. law. Oops.

However, the contract also contained the following, fairly common, order of prevalence wording just above the signature page: “In the event of a conflict of conditions, the provisions of Part I shall prevail over those of Part II to the extent of such conflict.” So, it’s an easy one, isn’t it? Part I stipulated London arbitration under English law and that’s all there is to it, right?

Well, not quite, as the Mexican claimant sought to have the matter resolved in… Florida (!) and sued the defendant in the Southern District of Florida for, amongst others, breach of contract. At first instance, the Southern District Court of Florida decided that it could not ascertain what the parties intended (the phrased “hopelessly in conflict” was used) so it “resorted to the statutory default forum, compelling arbitration in its own district – Southern District of Florida”. Amazing, really, considering that there seemed only 2 possible outcomes – London, or New York. The Mexican claimant was rather happy with the outcome as it was keen to have the matter heard in Florida but, unsurprisingly, the Monegasque defendant was not hence the appeal to the Court of Appeals. Personally, I couldn’t believe the outcome either given the fact pattern which is why I just had to read the judgment.

The Court of Appeals reversed the first instance judgment with instructions to compel the parties to arbitrate in London under English law. Circuit Judge Marcus, who delivered the judgment, confirmed that the court would apply a contract’s internal conflict-resolution mechanism where such existed (as it did here) and that “when interpreting an international arbitration agreement, we ascertain the parties’ intent through plain contractual language; we work to interpret the contract harmoniously to avoid conflict and give meaning to all of the provisions; we are obliged to apply any contractual clauses designed to resolve intra-contractual conflicts; we favour the specific terms over the more general language; and we strive to give the contract coherent meaning if we can, rather than capitulate in the face of apparent ambiguity.” A reassuring proposition for anyone faced with a similar dilemma. Here, the parties expressly stipulated London arbitration and English law in the “Law and Jurisdiction” section of Part I, and Part I was said to prevail in the event of any conflict with Part II. As such, the Court of Appeals held that the parties’ intention to select London arbitration under English law was “discernible from the very terms they wrote into” their agreement and that was that.

The moral of the story is that parties must ensure that provisions of this nature, particularly where a modular approach is provided in a template contract (e.g. box ticking or entering a particular variant from a selection of 3-4 proforma possibilities), are carefully completed. Those who find themselves in a dilemma where the proverbial horse has bolted ought to first check for any conflict-resolution clauses in the contract itself or, failing which, take legal advice to ascertain their contractual position.

The content of this article is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content herein.

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