Methanex New Zealand Ltd and Tokyo Marine Co Ltd entered into a contract of affreightment (COA) dated 24 February 1994. The COA covered up to 400,000 mt of product over two years, with a minimum of 24 sailings out of Kitimat, Canada, and four sailings out of New Plymouth, New Zealand, to Asian ports in 1994. The COA provided for arbitration in London (cl 18), incorporated cl 24 of the ASBATANKVOY voyage charterparty on arbitration procedure (also cl 18), was governed by English Law (cl 19), and was said to contain the entire agreement between the parties (cll 25 and M33).

The COA provided for the issuance of bills of lading in the form annexed to the contract (cl 17). However, no bill of lading had ever been annexed. An unsigned bill of lading dated 7 August 1995 was subsequently issued. This bill of lading incorporated a charterparty dated 24 February 1994 between Methanex New Zealand Ltd and Tokyo Marine Co Ltd on the ASBATANKVOY voyage charterparty form.

The bill of lading contained an identity of carrier clause to the effect that if Tokyo Marine Co Ltd was not the owner or demise charterer of the carrying vessel, the contract of carriage would be between Methanex New Zealand Ltd and the owner of the carrying vessel, Fontaine Navigation SA, with Tokyo Marine Co Ltd merely being an agent.

The bill of lading also required disputes to be subject to the jurisdiction of the Tokyo District Court. There were other stipulations:

1. If Methanex New Zealand Ltd commenced legal proceedings against the carrier in any other jurisdiction, it would have to pay the carrier the full amount of any eventual judgment plus 15% interest even if successful before the Tokyo District Court;
2. A penalty of JPY 5,000,000 would be imposed for commencing a proceeding in any jurisdiction other than the Tokyo District Court; and
3. The identity of the carrier and jurisdiction clauses in the bill of lading would prevail in the event of a conflict between the bill of lading and the charterparty.

A cargo of 5,215 mt of methanol was shipped on board the Panamanian tanker Kinugawa from Kitimat to Japan in August 1995. A portion of the cargo was contaminated by ethylene dichloride which was attributable to cracks in two tanks. The contaminated cargo was eventually sold to the Korean market at Ulsan.

Methanex New Zealand Ltd commenced litigation in Canada to claim for the damage. A day later, the United Kingdom Mutual Steam Ship Assurance Associate (Bermuda) Ltd (the P&I club) issued a letter of undertaking (LOU) dated 15 December 1995. The LOU confirmed the claim and made three undertakings in consideration of Methanex New Zealand Ltd undertaking to refrain from arresting the Kinugawa:

1. To accept service;
2. To file a defence on behalf of Fontaine Navigation SA and Tokyo Marine Co Ltd; and
3. To pay any judgment of the Federal Court including costs and interest up to USD 450,000.

The LOU also reserved any rights or defences to 'vessel or owners'.

Tokyo Marine Co Ltd and Fontaine Navigation SA applied for two separate motions to stay the action. Tokyo Marine Co Ltd sought to arbitrate in London pursuant to the COA; it submitted that the wording 'differences and disputes' in cl 24 of the ASBATANKVOY form was wider than the wording 'disputes', which only captured jurisdiction. Fontaine Navigation SA sought to litigate in Japan under the jurisdiction clause in the bill of lading. Methanex New Zealand Ltd resisted the motions and submitted that the LOU contained an agreement to litigate in the present Federal Court proceedings and so neither forum was applicable.

Held: Motions denied.

Tokyo Marine Co Ltd was not entitled to a stay in order to arbitrate in London. There was no evidence of the existence of any 'dispute' to send to arbitration. The reference in the arbitration provision was to 'disputes' as set out by cl 18 of the COA. The role of cl 24 of the ASBATANKVOY form was merely to set out the procedure for arbitration. There was also no more reason to send a sham difference or an undisputed difference to arbitration than to send a sham dispute to arbitration. Separately, litigation in the Tokyo District Court was also not an option for Tokyo Marine Co Ltd because there was no evidence that the Kinugawa was demise chartered.

The court also refused Fontaine Navigation SA a stay to litigate in Tokyo. There were substantial factors that made up strong reasons to deny the Tokyo District Court as a venue for litigation. Litigation in Tokyo would take longer than litigation in Canada, would require the costly translation of documents into Japanese, and would not involve compulsory pre-trial discovery; altogether, this would result in delays and give Fontaine Navigation SA a procedural advantage.

Significantly, the forum selection clause and its penal provision would probably be void in Canada because they contravened art 3.8 of the Hague Rules and the Hague-Visby Rules. The Hague-Visby Rules are enacted in sch 1 to the Carriage of Goods by Water Act, SCC 1993, c 21. Japan had also enacted the Hague-Visby Rules in its Carriage of Goods by Sea Act of 1992.

The forum selection clause and its penalty provision operated to reduce the remedies of Methanex New Zealand Ltd and lessen the liability of Fontaine Navigation SA before the Tokyo District Court. Fontaine Navigation SA would not only be relieved of liability by the reimbursement of the judgment award but earn a profit when measured with the 15% interest rate. The penalty provision would not be considered in Canada but would be considered by the Tokyo District Court. Additionally, the contracting carrier under Japanese law would be Fontaine Navigation SA but could be either Fontaine Navigation SA or Tokyo Marine Co Ltd or both under Canadian law.

Moreover, the LOU was, in effect, a current agreement between Methanex New Zealand Ltd and Tokyo Marine Co Ltd to litigate the cargo damage in Canada, superseding the arbitration provision. It therefore estopped Tokyo Marine Co Ltd from applying for a stay of proceedings in order to arbitrate in London. Fontaine Navigation SA could not renege on that bargain and insist on litigation in the Tokyo District Court because it had agreed to file a defence in this Federal Court action in return for good and valuable consideration to avert the arrest. Methanex New Zealand Ltd had kept its part of the bargain and did not arrest the Kinugawa despite having a warrant.

Furthermore, a majority of the evidence of the cargo condition on shipment, its contaminated condition, and the supporting reasons would come from witnesses in Canada and in Texas and through documents prepared in English. There would, therefore, be additional expenditure of substantial time and money if this evidence were given in a Japanese court. The argument that the witnesses involved in testing the contaminated cargo in Korea 'would be' residents of Japan and 'presumably, would prefer to give evidence in the Japanese language' was tenuous.

Finally, a stay to Fontaine Navigation SA would result in a duplicate set of proceedings in Japan which would run the risk of conflicting judgments and waste time and money.

Separately, London arbitration was not an option available to Fontaine Navigation SA. Although the COA was incorporated into the bill of lading in the guise of a charterparty, the Tokyo jurisdiction clause in the bill of lading had overridden the arbitration provision in the COA.

Accordingly, the Federal Court was the appropriate venue for this litigation.