Key takeaways
Courts may overturn arbitration awards for serious flaws
Intervention happens when decisions conflict with contractual obligations.
Sound reasoning is essential for enforceable outcomes
Errors in interpretation or analysis can undermine arbitration decisions.
Draft clauses to reduce challenge risk
Clear language and review options help safeguard awards.
Mare Nova Incorporated -v- Zhangjiagang Jiushin Ship Engineering Co. Ltd [2025] EWHC 223 (Comm)
In one of the extremely rare occasions where an arbitration award has been successfully challenged for serious irregularity leading to substantial injustice under s.68 Arbitration Act 1996, the Commercial Court has reconfirmed the requirements that a tribunal must meet before it can consider potential defences to a claim on its own initiative and how clauses discharging liability should be interpreted.
Commercial parties should be mindful of the potential implications the Court’s reasoning may have in the interpretation of acceptance and discharge wording in ship repair, conversion and newbuild contracts.
The background facts
The claimant owners (Owners) of the INASE (Vessel) agreed with the respondent ship repairer (Yard) to have the Vessel repaired by the Yard. The Owners and the Yard entered into an agreement containing the below key provisions:
"2.1 All tasks herein specified shall be carried out and completed in all detail. All workmanship and materials are to be of the best quality throughout and confirm to those now on the Vessel unless otherwise specified. All work is to be done to the satisfaction of the Owner's Representative and to the rules and requirements of the Classification Society concerned. Any dispute which may arise during the progress of the work as to quality of material or workmanship shall be left to the decision of the Owner's Representative.”
…
"6.3 The Contractor's liability shall begin at the time when the vessel is delivered to Contractor's yard, pier or other location designated by him, ready for repairs, and shall cease only when all of the work herein specified has been completed to the satisfaction of the Owners or their accredited representative, and all of the Contractors equipment and all rubbish have been removed from the vessel.”
About three hours after the Vessel left the Yard’s premises, a burning smell started coming from the Vessel’s intermediate shaft bearing, which the Yard had worked on. The Owners incurred significant costs in consequence of the damage to the Vessel and claimed those against the Yard in arbitration, in which the Yard did not participate.
The Tribunal found that the Owners’ claim for damages against the Yard failed by operation of clauses 2.1 and 6.3 above, because the Yard’s liability was discharged the moment the Vessel sailed from the shipyard.
The Commercial Court decision
The Court found that the Tribunal’s award was tainted by serious irregularity because the Owners were not given an opportunity to address the argument of discharge of liability, on which the Tribunal relied to dismiss the Owners’ claim. This defence was not raised by the Yard (which took no part in the arbitration), and the Tribunal also failed to ask the Owners to address the possible effect of the combination of clauses 2.1 and 6.3 on the Owners’ claim. This caused substantial injustice to the Owners, who were deprived of the opportunity to run an argument that had at least a realistic prospect of success and protect their claim for damages.
The Court went further and, obiter, found that the Tribunal was substantively wrong in its reasoning. The starting point is that, as a matter of established law, it takes very clear words in a contract to rebut the presumption that a party would not abandon the rights and remedies that would otherwise arise by operation of law in respect of a breach of contract by another party.
Such clear words were not present in clause 2.1: the first two sentences had nothing to do with a limitation either on the Yard’s obligations as set out, or on the rights and remedies of the Owners arising from those obligations, and the third sentence simply afforded the Owners an additional right.
The Court went on to consider clause 6.3 and found that, when read in context, this referred to the Yard’s liability as bailee of the Vessel only. It did not discharge the Yard’s liability for breach of contract or in tort (which would have required clearer wording).
The award was remitted to the Tribunal for reconsideration.
Comment
Clauses discharging liability should be drafted with caution. A party seeking fuller protection should make sure that such clauses are as detailed in what they capture as they can be, and that they are set out in the form of a stand-alone over-arching provision. Conversely, a party seeking to preserve claims will want to have the contract drafted in a way that limits the scope of discharge provisions.
Acceptance clauses will not be readily interpreted as absolving the builder of full liability. However, the Court’s conclusion on this point should be approached with some care: the Court’s findings were not binding, the damage the Yard had caused to the intermediate shaft bearing would not have been obvious before the Owners’ representative accepted the Yard’s work, and (as always) the interpretation of any contract depends on the contract’s wording.
Although the Court’s findings seem intuitive in the context of repair or conversion contracts (where the bailment aspect is clear), they raise a series of interesting questions in the context of shipbuilding agreements. Often, the buyer provides equipment to the yard, without transferring ownership over such equipment. In other cases, albeit rarely, ownership in a newbuilding is transferred in stages to the buyer before delivery. In both those cases, the yard would become a bailee of the buyer’s property. Would a buyer’s representative who accepts works involving property bailed to the yard preclude the buyer from advancing a claim in bailment once work is signed off on? Similarly, could a buyer argue that its acceptance does not preclude claims for non-compliance? The answers lie in the contractual wording, but the Court’s reasoning calls for careful consideration of acceptance and discharge wording in a newbuilding context, as well as in a repair or conversion context.
Arbitration proceedings in the absence of a respondent must be approached with caution. One should take advice from lawyers in the jurisdiction where the award will be enforced, even before arbitration is commenced, in order to ensure that the award will not be open to challenge at the enforcement stage (for example, on the basis that the respondent was not given a sufficient opportunity to present its case as a matter of local law).
