Author:Bullock, Lance C.

TABLE OF CONTENTS I. Introduction 268 II. Background of Topics 270 A. Charterparties 270 B. Rule B Attachment 271 C. Arbitration Clauses 272 D. Choice-of-Law 274 E. Piercing the Corporate Veil 277 III. Blue Whale Case 279 A. Terms of the Charterparty 280 B. HNA's Property is Attached in New York 281 C. Attachment vacated by Southern District of New York 282 D. Second Circuit Court of Appeals' Decision 282 E. Application of Rule Made by Blue Whale 284 IV. Discussion 285 A. Choice of Law Clause Cannot Govern Corporate Identity 285 B. What Law Should Govern? Choice of Law Analysis 286 1. Jurisdiction 286 2. Substantive Law 287 C. Limited Inquiry--Prima Facie Pleading 290 D. Suggested Remedy 290 V. Conclusion 293 I. INTRODUCTION

A hypothetical vessel owner with multiple vessels makes his living by chartering his vessels to other parties. One day, the vessel owner contracts with a foreign business for the charter of one of the vessels for a single voyage. The vessel will be loaded with 250,000 tons of iron ore in Brazil bound for a port in mainland China. The charterer is required to pay 98% of the freight, (1) roughly $4.5 million, seven days after loading the ore. The seven days pass without the freight being paid. Nervous that the charterer may not pay, the vessel owner asserts a maritime lien over the cargo and instructs the captain to wait in a safe port for further instructions. Almost two weeks later, the charterer pays the 98% balance, and the vessel owner instructs the vessel to set sail for the next port. The cargo having been discharged, the vessel owner invoices the charterer for the remaining 2%, the costs he incurred from the delay (demurrage), (2) and the costs of the exercise of the lien. The charterer fails to pay the remainder. Thus, per the agreement in the charterparty, the vessel owner commences arbitration in London whereby English law will apply to the dispute. Anticipating that the company may become insolvent, the vessel owner files an ancillary proceeding in the United States to obtain security for a possible arbitration award. Because the defendant company appears to be low in capital, the vessel owner decides to pursue a claim against its parent company's assets in New York and files a Rule B (3) attachment action in the Southern District of New York. The assets, however, belong to a different wholly owned subsidiary of the parent corporation. To pursue a claim against the parent or the sibling corporation's assets, the vessel owner must assert an alter ego claim to pierce the corporate veil. There is no dispute that the charterparty between the vessel owner and the charterer is a maritime contract within admiralty jurisdiction which is a requirement for the vessel owner to avail himself of a Rule B proceeding. (4) What is not clear, however, is what law will govern the inquiry of corporate identity and whether corporate form should be disregarded to pierce the corporate veil to hold shareholders liable for the corporation's obligations.

There are many risks in the international shipping industry. The vessel could get caught in a storm and sink. Pirates could hijack the vessel and take the crew and cargo hostage. The vessel could collide with another vessel or allide with an object, causing damage to property and persons, potentially giving rise to liability. Even with these dangers considered, perhaps the biggest concern of the shipper is collecting the freight from the consignee. (5) The shipper may refuse to deliver the cargo until a certain portion of the freight is paid, delaying the vessel's schedule. Shippers that enter into voyage charters attempt to perfectly time one charterparty to end as the next begins, from port to port. (6) In order to generate income for their owner, vessels must keep moving because idle vessels bleed money.

In a business fraught with so many risks, it is not surprising that each contracting party would seek to protect itself contractually. Known variables in a contract are one way a party can protect itself when contracting with an unknown party. This can be done by inserting choice clauses (that is, choice-of-law, choice-of-forum, and arbitration clauses) which are actually "specialized forum selection clause[s]," (7) and are typically part of every charterparty contract.

The first part of this comment will give a brief historical background of the topics at issue. The second part will discuss the case in which these issues arose, Blue Whale Corp. v. Grand China Shipping Development Co., Ltd., (8) including the application of the rule developed by Blue Whale. The third part will discuss the problems with the Blue Whale decision and possible alternatives.


    1. Charterparties

      A charterparty is a contract whereby a vessel, or a part thereof, is leased for a '"specified term, or for a specified voyage, in consideration of a certain sum of money per month or per ton, or both, or for the whole period or adventure described.' These contracts are considered maritime contracts, and are, therefore, cognizable in admiralty." (9) Like many terms, concepts, and rules in admiralty, charterparties have a rich history. The origin of the term "charterparty" can be traced to the method in which the contract was formulated. (10) Identical terms of a contract were written on opposite sides of a sheet of paper which was then separated and each party received a copy. (11) In the event of a dispute, the pieces of paper were put back together to prove the existence of a contract. (12) "Charter" refers to the lease of the vessel, while "party" originated from the separation or "parting" of the contract. (13) A charterparty is subject to the general rules governing contract, as it is a contract. (14) Though most charterparties are reduced to a writing, verbal agreements are binding. (15) There are no statutory provisions that govern charterparties, but rather the law is comprised of judicial and arbitral decisions. (16)

    2. Rule B Attachment

      Actions in rem can be traced to Roman law. (17) The action to recover or obtain the actual thing through possession of it is founded in Civil law. (18) The action further developed in medieval Europe around the fifteenth century. (19) In rem actions largely developed because of the refusal of defendants to appear before the court. (20) The United States allows remedies to creditors through arrest in rem and maritime attachment. (21) These remedies have a long history and have been codified in the Supplemental Rules for Certain Admiralty and Maritime Claims of the Federal Rules of Civil Procedure. (22) This article will focus primarily on the United States' attachment procedure known as Rule B. (23) Though Rule B attachment is considered an in personam action, it is oftentimes referred to as a quasi in rem action. (24) Because Rule B jurisdiction is in personam, if the defendant appears in the action and the plaintiff's claim is allowed, the judgment is enforceable against all of the defendant's property, and not only against the property seized as in the action in rem. If the defendant fails to appear in court, the maximum amount the plaintiff could hope to recover is limited to the value of the property attached. (25) Attachment allows a court to obtain jurisdiction over a defendant though their property and allows a plaintiff to obtain security in the event a defendant cannot be located. (26)

    3. Arbitration Clauses

      One method of alternate dispute resolution available in maritime practice is arbitration. (27) Arbitration also seeks to reduce the costs of resolving legal disputes and to avoid procedural complexity. (28) Previously, litigation was favored over arbitration to resolve disputes. (29) Arbitration clauses were routinely deemed as invalid attempts to usurp the jurisdiction of the courts. (30) The passage of the Federal Arbitration Act (F.A.A.) (31) in 1925, turned the tide the other way, irrevocably. (32) Arbitration is now favored over litigation, particularly in disputes involving international commerce. (33) Maritime contracts--charterparties in particular--commonly contain arbitration clauses. (34) Arbitration clauses found in charterparties are presumed to be valid. (35) If a lawsuit is filed and an arbitration clause is deemed valid, the arbitration clause will likely be enforced by an order compelling arbitration or staying court proceedings. (36) For this reason, charterparty disputes are the number one source of maritime arbitrations. (37) New York and London have become popular hubs of arbitration. (38) Both cities are major ports and have a large connection to the international shipping industry. (39) London is the epicenter of the marine insurance industry with Lloyd's of London being the most dominant. (40) New York is one of the United States' leading ports and is the headquarters for a large amount of international finance and banking. (41) Both cities have numerous firms specializing in maritime arbitration. (42) In London, there are associations or societies which specialize in particular types of disputes: London Maritime Arbitrators Association (charterparties) and Council of Lloyd's (salvage), while the Society of Maritime Arbitrators, Inc. dominates the field in New York. (43)

    4. Choice-of-Law

      Choice-of-law provisions have been traced back as far as Hellenistic Egypt. (44) During that time period, the language of the contract--such as Egyptian or Greek--would determine what law would govern the contract. (45) Parties could choose their forum and law by simply writing their contract in the controlling contractual language. (46) The law has adapted over time, and no longer are parties required to write the provisions of contracts in the language of the state to have the laws of that state govern the contract. In the United States, the Restatement (Second) of Conflicts of Laws is now the preferred approach and states:

      (1) The law of the state chosen by the parties to govern their...

To continue reading