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The influence of European instruments of harmonisation on the construction of contracts in maritime law Prof. dr. Marc Hendrikse 1 11 September 2014 Amsterdam.

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Presentation on theme: "The influence of European instruments of harmonisation on the construction of contracts in maritime law Prof. dr. Marc Hendrikse 1 11 September 2014 Amsterdam."— Presentation transcript:

1 The influence of European instruments of harmonisation on the construction of contracts in maritime law Prof. dr. Marc Hendrikse 1 11 September 2014 Amsterdam Centre for Insurance Studies (ACIS)

2 Construction of a contract in maritime practice (1) Words in contracts are often not as clear as they seem at first sight. In commercial practice interpretation/construction disputes regularly lead to juridical procedures. In this lecture I will try to answer the question what the influence is of European instruments of harmonisation - like the Principles of European Contract Law (PECL) and the Draft Common Frame of Reference (DCFR) - on the interpretation/construction of contracts in maritme practice. However both instruments have an (somewhat) academic character - they have interesting, practical provisions relating to the subject of the interpretation/construction of contracts.

3 Construction of a contract in maritime practice (2) First of all two more general aspects of interpretation/construction of contracts will be dealt with because this knowledge is very useful for understanding the argumentation in the second part of this lecture. In that part of the lecture the focus is on the influence of European instruments of harmonisation on the interpretation/construction of contracts in maritime practice. A comparative law approach will be used to make the possibilities of these instruments visible. Attention will be paid to English contract law and also – but on a very limited scale – to Dutch and German contract law.

4 Construction of a contract in maritime practice (3) ‘’Interpretation’’ or ‘’construction’’? Both the PECL and the DCFR use the word ‘interpretation’. See art. 5:102 PECL: ‘’ ''In interpreting the contract, regard shall be had, in particular, to: (..)’’ and art. 8:101 para 1 DCFR: ‘’A contract is to be interpreted(..).’’

5 Construction of a contract in maritime practice (4) In literature one defends that ‘’ ‘Construction’ is a term of a wider scope than ‘interpretation’. While the latter is concerned only with ascertaining the sense and meaning of the subject- matter, the former may also be directed to explaining the legal effects and consequences of the instrument in question. Hence interpretation precedes construction, but stops at the written text.’’ See Margetson (Ph.D thesis2008, p.24. See also Guest 2012 (Chitty on contracts), nr. 12-041 and McKendrick 2010 (Goode on Commercial Law), p. 98. However, E. Peel, Treitel on The Law of Contract, London: Sweet & Maxwell 2011, p. 207 on which page the word ‘construction’ and interpretation’ seems to be used at random.

6 Construction of a contract in maritime practice (5) However I realise that that there is no communis opinio about the reach of both terms, I shall use both words in the meaning given by Margetson – who refers to Black’s Law Dictionary - to prevent discussions about the exact meaning of the terms ‘interpretation’ and construction’.

7 Construction of a contract in maritime practice (6) In case of a construction dispute about a provision in a contract in maritime practice the arbitrator may use the 2-phases construction-model to solve the construction dispute. In 2010 I presented this model to solve construction disputes in insurance contract law. See NTHR 2010-3, p. 95. However, I see no restrictions to use this model to solve construction disputes in maritime contract law because the basis of this model lies in general contract law.

8 Construction of a contract in maritime practice (7) In the first stage one shall have to examine if the provision in the contract is clear, unclear, or incomprehensible. ‘Clear’ means in this case that there is only one construction of the provision in question possible. ‘Unclear’ signifies in this framework that there are two or more constructions of the provison in question possible. ‘Incomprehensible’ means in this case that it is impossible to reduce any construction.

9 Construction of a contract in maritime practice (8) The grammatical construction of the provision is important but not decisive. The arbitrator also has to pay attention to possible other relevant circumstances. See for instance art. 5:102 PECL (relevant circumstances) in which is provided that ''In interpreting the contract, regard shall be had, in particular, to: (a) the circumstances in which it was concluded, including the preliminary negotiations; (b) the conduct of the parties, even subsequent to the conclusion of the contract; (c) the nature and purpose of the contract; (d) the interpretation which has already been given to similar clauses by the parties and the practices they have established between themselves; (e) the meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation similar clauses may already have received; (f) usages; and (g) good faith and fair dealing’’.

10 Construction of a contract in maritime practice (9) It is possible that a grammatically totally clear provision in a contract may lead to more constructions in the light of some relevant circumstances as for instance usages and the meaning commonly given to the provision in question in the branch of activity - in our case maritime practice – concerned.

11 Construction of a contract in maritime practice (10) The continuation in the second stage of the 2-phases construction-model depends on the result of the assessment in the first stage. In case the first phase assessment has produced one construction the case is simple: the construction in question will be followed. In case the first stage examination has resulted in two or more constructions – so the provision is unclear – the matter is more difficult. The arbitrator has to choose one of the possible constructions of the provision. An important question is if the arbitrator has the possibility to apply the contra proferentem rule, especially when it concerns a contract which has been closed between two non-consumers which is for instance the case in maritime practice. The possibility of applying the contra proferentem-rule in case of a contract in maritime practice is the subject of the end of this lecture In case the first phase assessment has not produced any result the arbitrator has an even greater problem. While this situation does not happen very often in practice I will pay no attention to this problem.

12 Construction of a contract in maritime practice (11) The speech of Lord Hoffmann in the case Investors Compensation Scheme Ltd vs. West Bromwich Building Society, [1997] UKHL 28 makes clear that in English contract law the ‘’literal’’ approach is not (any more) the leading approach to the construction of contracts. The arbitator shall not only have to pay attention to the meaning of the words but to the – in the words of Lord Hoffmann – ‘’meaning which a document would convey to a reasonable man having all the background knowledge which would reasonably have been available at the time of the contract.’’ The conclusion is: (..) a judge must always look to the extraneous circumstances (..) no matter how clear the words may seem at first glance.’’ See J. Turner, EJCCL 2013-1, p. 29. The conclusion is further that according to English case law an arbitrator has to pay attention to relevant circumstances in het first stage of the 2-phases construction- model but there is no statutory provision on this topic. The situation in Germany and The Netherlands is more or less the same as the situation in England.

13 Construction of a contract in maritime practice (12) According to § 133 BGB the grammatical meaning of a word in the provision which has to be construed is not decisive in Germany. § 157 BGB provides that contracts have to be construed in a way as the principle of good faith – with respect to relevant usages - requires. Both provisions involve a combination objective and subjective construction of contracts. Interesting is the explicit reference in § 157 BGB to usages as a relevant circumstance in in the first stage of the 2-phases construction-model. In case of a commercial contract § 346 HGB provides in addition that commercial usages are a relevant circumstance when construing a commercial contract.

14 Construction of a contract in maritime practice (13) The present Dutch Civil Code does not contain any provisions on the construction of contracts. In the Dutch Supreme Court–case Haviltex, HR 13 March 1981, ECLI:NL:HR:1981:AG4158, it was held that an arbitrator has not only pay attention to the grammatical meaning of the words in the provision which has to be construed, but also to relevant circumstances as for instance the social position of the parties and the legal knowledge which might be expected from the parties.

15 Construction of a contract in maritime practice (14) The PECL and the DCFR both have – in contradistinction to Dutch, English and German Law – an extensive relevant circumstances scheme. Art. 5:102 PECL (relevant circumstances) provides that ''In interpreting the contract, regard shall be had, in particular, to: (..) (c) the nature and purpose of the contract; (..) e) the meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation similar clauses may already have received; (f) usages and (g) good faith and fair dealing’’. Art. II-8:102 para 1 DCFR provides: ‘’ In interpreting the contract, regard may be had, in particular, to: (..) (c) the interpretation which has already been given by the parties to terms or expressions which are the same as, or similar to, those used in the contract and the practices they have established between themselves; (d) the meaning commonly given to such terms or expressions in the branch of activity concerned and the interpretation such terms or expressions may already have received; (e) the nature and purpose of the contract; (f) usages; (g) good faith and fair dealing.’’

16 Construction of a contract in maritime practice (15) The cited relevant circumstances are very important for maritime law practice. First of all - see the circumstance mentioned under c (PECL) and e (DCFR) - maritime law is a part of commercial law in which area of law the emphasis lies - in contradistinction to civil law in which area of law the emphasis lies on the individual interests of the parties involved - on the general interest of an efficient and effective commercial traffic which starting-point combines well with an more objective (abstract) construction of contractual provisions. In maritime practice one uses frequently expressions and terms with a specific meaning. It is important to take account of this special meaning when construing provisions of a maritime contract - see under e (PECL) and d (DCFR). The same might be said about - see f (both PECL and DCFR) - 'usages'.

17 Construction of a contract in maritime practice (16) Do the relevant circumstances schems of the PECL and DCFR have surplus value in comparison with Dutch, English and German law on the topic of relevant circumstances in the first stage of the 2-phases construction-model? The first advantage of the relevant circumstances schemes of the PECL and DCFR is that there will be less uncertainy about the question which circumstances are of importance when construing contractual provisions than it is the case under Dutch, English and German law because are very precise and extensive. Dutch and English law do not have a statutory scheme on this topic at all and the German statutory scheme is limited and not very precise. The second advantage of both schemes is that because in maritime practice one uses frequently expressions and terms with a specific meaning it is in my opinion a practical approach to start with looking if there is such a meaning instead of – what is the case in English law - giving the words in the charterparty their ordinary meaning but that evidence may be admitted to show that the parties intended to construe the word(s) in a special or technical sense.

18 Construction of a contract in maritime practice (17) § 305c of the German BGB provides - in my own words - that in case the first stage examination has resulted in two or more constructions – so the provision in the contract is unclear – the provision has to be construed against the user of this provision. This legal provision applies to all contracts. Art. 6:238 para 2 of the Dutch Civil Code – which is an implementation of art. 5 of the EEC Regulation on unfair terms in consumer contracts 1993/13 of 5 April 2013 - is comparable with the German legal provision but the reach of this provision is limited to consumer contracts. There are some cases in which it is held that a construction against the user of the provision is also possible in case of a non-consumer contract but that is no rule but at most a point of view.

19 Construction of a contract in maritime practice (18) Is it possible to apply the contra proferentem-rule in case of a non-consumer contract under English Law? Guest says in Chitty on Contracts on this point: ‘’(..) If a carrier gives two notices, limiting his responsibility in cases of loss of goods, he is bound by that which is least beneficial to himself. (..) And if an instrument is made in terms so ambiguous as make it doubtful whether it is a bill or note, the holder may, as against the maker of the instrument, treat it as either at this election.’’ Guest 2012, nr. 12-085.

20 Construction of a contract in maritime practice (19) The ratio of the contra proferentem-rule is for example explained by Evershed M.R. in the case John Lee & Son Grantham Ltd vs. Railway Executive, [1949] 2 All E.R. 581, 583: ‘’We are presented with two alternative readings of this documents and the reading which one should adopt is to be determined, among other things, by a consideration of the fact that the defendants put forward the document. (italics, MLH). They have put forward (italics, MLH) a clause which is by no means free from obscurity and have contended (…) that it has a remarkably, if not an extravagantly, wide scope, and I think that the rule contra proferentem should be applied.’’ It is important to ascertain that Evershed M.R. speaks of ‘put forward’ instead of ‘make/made’. Therefore it does not matter if the party which has put forward the provisions has made the provisions itself. When for instance a party put forward standard terms which contain an unclear provision this provision will be construed against that party although this party has not made the provision itself

21 Construction of a contract in maritime practice (20) The PECL contain a contra proferentem-point of view which applies to all contracts. Art. 5:103 PECL provides: ‘’Where there is doubt about the meaning of a contract term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred’’ It is important to ascertain that the PECL contain not a contra proferentem-rule but a contra proferentem-recommendation which is a consequence of the words ‘’ an interpretation of the term against the party who supplied it is to be preferred (italics, MLH)’’. Art. II-8:103 para. 1 provides the same as the PECL-provision on this topic: ‘’ Where there is doubt about the meaning of a term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred.’’

22 Construction of a contract in maritime practice (21) How to apply the contra proferentem-rule when a broker is in the case? This question is very important for mercantile practice because brokers play an significant role in the process of commercial contracting by for instance preparing contract documents.

23 Construction of a contract in maritime practice (22) In marine insurance practice the matter is clear: “While it is the case that the contra proferentem principle normally works in in the assured’s favour, in many situations, particularly contracts placed at Lloyd’s the wording may have been prepared by the broker. Evidence is admissible to show who in fact was responsible. As the broker is the agent of the assured, the contra proferentem principle is not applicable in the usual way and any ambiguity will in those circumstances be construed against the assured and in favour of the insurer’’. See R. Merkin, Colinvaux’s Law of Insurance, London: Sweet & Maxwell 2010, p. 124. Hence decisive is the following criterion: on behalf of whom acts the broker?

24 Construction of a contract in maritime practice (23) In maritime law literature there is – in so far as I can overlook – no attention for this matter. Applying the above mentioned criterion from marine insurance law to shipping law involves that one has to examine on behalf of whom the broker acts when preparing the wording of the documents of the shipping contract. In the bare boat charter practice for example one sees often that that an agent/broker on behalf of the owner concludes a contract between the owner and the charterer, the contract document has been provided with a vignette of the company of the broker and the broker has prepared the wording of the contract. In such case every ambiguity in the contract will be construed against the owner because the broker acts on behalf of the owner.

25 Construction of a contract in maritime practice (24) Applying art. 5:103 PECL and Art. II-8:103 para. 1 involves more or less the same solution. Because the broker has put forward the provisions of the contract (“supplies”) en negotiations about the contract provisions seldom take place (“not individually negotiated”) every ambiguity in the contract will be construed by preference against the owner because the broker acts on behalf of the owner.

26 Construction of a contract in maritime practice (25) Do the PECL and DCFR have surplus value in comparison with Dutch, English and German law on the topic of contra proferentem? In my opinion the surplus value is present but not at all aspects of construction contra proferentem. First of all one can ascertain that although a construction contra proferentem can be applied to all contracts under both the regime of the PECL and the DCFR it is not a rule but only a recommendation. Surplus value can be found in the schemes when applying the contra proferentem recommendation in cases in which a broker prepares the contract provisions.

27 Construction of a contract in maritime practice (26) Conclusion The topics dealt with in this lecture have made clear that the PECL and DCFR have some surplus value in comparison with Dutch, English and German law on the topic of construction of contracts in maritime practice. Although I recognise the advantages of both schemes on this topic I prefer provisions on construction of maritime contracts in international conventions for the following two reasons. First of all one can ascertain that both schemes are academic experiments which are not applied in international practice. Secondly, a international convention dedicated to (an aspect of) maritime contract law is more appropriate to take account of the special circumstances of maritime practice. This is important for instance on the topic of relevant circumstances in the first stage of the 2- phases construction-model.


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