Third-Party Consent and the Complexities of Arbitration in Maritime Trade

In maritime arbitration, the concept of third-party obligation raises the issue of whether those who didn’t sign an arbitration agreement can still be bound by it. This potential extension of arbitral jurisdiction significantly impacts the complex, multi-party transactions inherent in maritime trade. Similarly, the complexities surrounding Bills of Lading (BoL) and charterparties present significant third-party arbitration challenges.

The issue arises when an arbitration clause within the charterparty is used to compel parties holding the bill of lading into arbitration. Typically, the bill of lading is held by a third party, separate from those who originally signed the charterparty. This creates a situation where individuals are deemed to have consented to arbitration simply by possessing the bill of lading, potentially without any awareness of the charterparty’s existence. But here’s the crucial question: can an arbitration clause hidden within the charterparty force these unsuspecting BoL holders into arbitration, simply by virtue of possessing the document? 

The answer lies in Section 7(5) of the Arbitration and Conciliation Act. Section 7(5) allows arbitration agreements to be incorporated into contracts by reference, provided the original agreement is written and the subsequent document clearly indicates its inclusion. In the context of maritime trade, this means a bill of lading could potentially bind its holder to an arbitration clause found in a charterparty, if the bill of lading sufficiently references it. However, ambiguity in this reference often leads to disputes, particularly when third-party bill of lading holders, unaware of the charterparty, are compelled to arbitrate.

The question of whether an arbitration clause from a ship rental agreement (charterparty) could force someone holding the shipping receipt (bill of lading) into arbitration was made clearer by the Supreme Court in the M.V. Baltic Confidence case. The Court looked at whether a general statement in the bill of lading, saying it included “all terms” of the charterparty, was enough to include the arbitration clause. 

The Supreme Court held that the key is the intention of the parties. To figure out this intention, the court held that the wording of the bill of lading itself is most important. The court emphasized that the bill of lading must specifically mention the arbitration clause from the charterparty. The court further clarified that simply stating “all terms” is binding, is not enough. 

The court further clarified that the bill of lading is a negotiable document, meaning it can change hands easily, and therefore, any extra obligations must be very clearly stated. 

While the M.V. Baltic Confidence¹ case emphasized the need for specific reference to an arbitration clause when incorporating it from a charterparty into a bill of lading, later Supreme Court decisions have introduced subtle differences or distinctions.

Can a general reference ever be sufficient? In Inox Wind Ltd. v. Thermocables Ltd²., the Court carved out an exception for standard form contracts, allowing a general reference to incorporate an arbitration clause. 

But what about situations involving third parties? In Giriraj Garg v. Coal India Ltd³.,the Court distinguished between ‘single’ and ‘double’ contract cases. For contracts between the same parties, a general reference to a standard form contract is acceptable. However, in ‘double’ contract cases, like a bill of lading referencing a charterparty involving a third party, a specific reference is required. 

The Court stressed that the intention of the parties should be viewed from a practical business perspective, not just legal theory. Essentially, while legal theory might treat arbitration clauses as separate, real-world business expectations matter. 

Finally, in NBCC (India) Ltd. v. Zillion Infraprojects (P) Ltd⁴.,,the Court recently reinforced that mere reference to a document doesn’t automatically incorporate its arbitration clause; clear intention is always necessary.

Conclusion 

In the complex structure of maritime commerce, where contracts intertwine and bills of lading change hands across oceans, the question of who is bound by arbitration remains a source of significant legal uncertainty. While the courts have strived to clarify the rules of incorporation, particularly regarding arbitration clauses within charterparties and their impact on bill of lading holders, still the ambiguities persist. 

What happens, for instance, when a technologically advanced ‘smart contract’ generates a bill of lading, automatically referencing a charterparty with an arbitration clause, without explicit human interaction? In such a scenario, where the lines of traditional consent are blurred, how do we reconcile the need for clear agreement with the realities of automated commerce? 

As global trade evolves, the legal framework must adapt to address these emerging complexities, ensuring that the fundamental principle of consent in arbitration remains a cornerstone of maritime law, even in the face of rapid technological advancement and increasingly complex contractual relationships. Until then, the risk of unexpected arbitration obligations will continue to cast a shadow over the smooth flow of international shipping. However, internationally, efforts are being made to address these challenges. Organizations like BIMCO(Baltic International Maritime Council) is taking into consideration the specific challenges and implications that automated contracts and smart technologies bring to maritime trade. These industry-led initiatives are crucial in bridging the gap between technological innovation and established legal principles, and will play a vital role in shaping the future of maritime arbitration.

¹(2001) 7 SCC 473
²(2018) 2 SCC 519
³(2019) 5 SCC 192
⁴(2024) 7 SCC 174