This arbitration arose out of the purported assignment of a Contract of Affreightment ( "the COA" ), the parties seeking a declaratory award as to its validity. It was heard in Montreal by a panel of three arbitrators, under the Rules of Procedure of the Association of Maritime Arbitrators of Canada.

The Charterer was a Canadian company active in the refining and marketing of oil products. The COA was to cover its domestic transportation needs, and involved the full-time employment of three modern ice class tankers ("the Vessels") which had been transferred under Canadian flag for the purpose.

During 1996, the Charterer realised that it had excess shipping capacity. When another oil company, [S], entered the market to invite tenders for its own marine requirements, the Charterer encouraged another domestic ship-owner / operator, [P], to name the Vessels in its bid to [S].

In February 1997, [P] was informed by [S] that its bid was successful, resulting in a contract for three years and possibly longer; and shortly afterwards, the Charterer and [P] entered into an agreement whereby the Charterer undertook to sub-charter all of the Vessels to [P], and [P] undertook to enter into a requirements contract covering all of the Charterer’s domestic marine movements.

The mechanism eventually chosen to put this agreement into effect was to be an assignment of the COA by the Charterer to [N], a specially incorporated subsidiary of [P], with [P] granting to the Charterer the option to acquire one Class D share in [N] for $1,000. This Class D share could be exchanged at any time for Class C shares equivalent to 11% of the voting stock; and this was protected by an anti-dilution undertaking.

The explanation for this arrangement was to be found in the assignment clause of the COA:

" ... Neither Party hereto may assign any benefit or obligation under this Agreement without the written consent of the other Party, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, and without in any way reducing its obligations to [the Owner] hereunder, [the Charterer] may assign any of its rights or obligations to any associate or affiliate or to any parent or subsidiary corporation of [the Charterer]."

As submitted by the Charterer, the term "associate" should here carry the specific meaning ascribed to it in Section 2 of the Canada Business Corporations Act ("CBCA"):

"‘associate’ when used to indicate a relationship with any person [defined elsewhere in the CBCA to include a body corporate] means

(a) a body corporate of which that person beneficially owns or controls, directly or indirectly, shares or securities currently convertible into shares carrying more than ten per cent of the voting rights ... or a currently exercisable option or right to purchase such shares or such convertible securities. ... "

In the Charterer’s submission, the assignment of the COA to [N] was self-evidently valid because the Charterer had the unfettered right to assign to any associate, and [N] was clearly an associate of the Charterer within the definition of the CBCA. In the alternative, either the assignment was such as the Owner would certainly have refused to consent to, and such refusal must have been unreasonable; or else the Owner had already constructively refused its consent (again unreasonably).

In addressing these issues, the panel elected to follow the sequence of the assignment clause itself, dealing first with the alternative arguments.

Was it certain that the Owner would have objected if its consent had been sought in advance? Because the Owner had received no warning - its first hint was the formal notice of assignment itself - the panel found that the Charterer could not logically prove that the Owner was bound to object. It was likely, even probable, that this would have been the outcome; but that was not enough. In any case, the evidence of the discussions between the parties must leave a lingering doubt that a plain and unambiguous warning of the impending assignment might just have been sufficient to impel the Owner to reach some accommodation with the Charterer.

Had the Owner already signified its refusal? The COA permitted sub-letting of the Vessels, but only with the Owner’s consent, not to be unreasonably withheld. Since the Owner had always refused to give its approval where the proposed sub-charterer was a company which it considered to be a competitor, it had (so the Charterer argued) already demonstrated how it would respond to the assignment. On this point, the panel found that, since those earlier objections were all in the context of the sub-chartering provision, they could not be construed as depriving the Owner of its right to prior notification of the assignment. And, since the Charterer was in breach of its obligation in this regard, it could not now tenably argue that the Owner had given a wrongful anticipatory response to a notice which the Charterer should have given, but never did.

Would it have been unreasonable for the Owner to withhold its consent? In this context, the panel found that the Charterer must be fixed with the terms of the assignment as actually made: it could not now argue that it would have been willing to accommodate any reasonable objection which the Owner might have raised if proper notice of intent had been given.

The COA contained a clause which required the Owner to deliver the cargo without presentation of original bills of lading against a Letter of Indemnity signed by the Charterer without any bank guarantee. The panel found that it would be reasonable for the Owner to object to the assignment because [N] was by no means a company of equivalent financial standing to the Charterer. A parallel objection must apply to another provision of the COA which made the Charterer responsible for the payment of certain contested import duties which might be levied on the Vessels.

It was argued for the Charterer that, as a matter of law, the assignor must still remain liable to the continuing party unless the continuing party granted an express release. This argument did not advance the matter because the panel found that, even so, it would still be reasonable for the Owner to require the Charterer to express its continuing liability in writing; but this was missing from the assignment as actually made.

The panel further found that the Owner was correct in its assessment that the arrangement between the Charterer and [P] represented a serious challenge to its legitimate commercial interests in the foreseeable future, given the Charterer’s open contention that it was free to terminate the COA in 1999, whereas the contract between [S] and [P] would run at least until 2001; and this would have afforded good reason to object to the transfer of the Vessels into the hands of [P].

Having found that it would have been reasonable for the Owner to withhold its consent to the assignment, the panel turned to consider the second limb of the clause, which provided that no consent was required for the Charterer to assign the COA to an associate. Here, it found that [N] could not be considered an associate of the Charterer within the plain meaning of the word: this implied concepts such as sharing, partnership, confederacy, alliance, collegiality - none of which could be said to obtain in this case. The whole relationship between the Charterer and [N] was encapsulated in three interlocking elements: the assignment itself, the requirements contract and the share purchase option.

The Charterer’s main submission was based on Section 2 of the CBCA. Both the Charterer and [N] were federally incorporated companies, and so governed by the CBCA. The CBCA provided a specific definition of the term "associate," with which [N] complied. Accordingly, [N] must legally be the associate of the Charterer.

The panel rejected this argument, finding against the general applicability to a private contract of the CBCA, an Act expressly stating as its purpose "to revise and reform the law applicable to business corporations, to advance the cause of uniformity of business corporation law in Canada and to provide a means of allowing an orderly transference of certain federal companies incorporated under various Acts of Parliament to this Act." They also drew attention to other Canadian statutes containing different definitions of "associate", including the Income Tax Act, under which [N] would not qualify as the associate of the Charterer.

But did the CBCA apply contractually? According to its terms, the COA was to be "governed by and construed according to the laws of Canada (including, without limitation, the Carriage of Goods by Water Act, R.S.C. 1970, CH C-15), as amended from time to time, applicable [in the Province of Quebec] ..." The panel found that this was not sufficient to import the CBCA definition into the COA: it was to be read simply as standard "governing law" provision.

Nor was the CBCA definition to be implied. It was one which was by no means obvious, and it was not necessary for a sensible and rational construction of the COA. In terms of its plain meaning, "associate" was not the same as "affiliate": it could quite conceivably be applied, for example, to a bona fide joint venture partner, even where no cross shareholding existed.

The key to the construction of the assignment clause of the COA was to read it as a whole, and not in two separate parts as implied by the Charterer’s argument. The first sentence presented a general rule, banning any assignment without the consent of the other party. The second sentence introduced an exception to this general rule, which could operate only in favour of the Charterer.

If the Charterer’s contention was correct, it would entail that it was open to the Charterer at any time effectively to assign the COA to any third party, however objectionable to the Owner, and however reasonable that objection, through the simple device of taking an option to buy not less than ten per cent of the voting stock of a shell subsidiary of that third party. This would lead to the absurd conclusion that the general rule was effectively binding only on the Owner, and not on the Charterer - despite what it actually said.

In the view of the panel, the true construction of the assignment clause of the COA must be based on an implied term, to the effect that the assignee must stand in a bona fide relationship with the assignor which was independent of and distinct from the assignment itself and the immediate purpose for which it was made. This did not mean that such association must pre-date the COA; but it did mean that the assignment could not be the sole or predominant end of the transaction. The purpose and scope of the association would have to be considerably wider than was freely admitted by the Charterer in this case.

In reaching its conclusion, the panel had concentrated on the COA itself, as distinct from the evidence concerning the circumstances of its negotiation; but, having construed the document, it then proceeded to test its reading against the testimony of those who had participated in this process.

All of the testimony confirmed that the detailed wording of the assignment clause had received very little attention; and the only point of substance had been the Owner’s concern that, under the second sentence, the Charterer should remain "on the hook" for the performance of its obligations The Charterer’s avowed aim had been to preserve as much flexibility as it could to meet future changes in its corporate and fiscal structure: it wanted to be sure it would not "trip over some technical wording." There was nothing in the evidence which was inconsistent with the implied term.

In its argument, the Owner had referred to the establishment of [N] and the ensuing assignment as a "sham". The panel rejected this description, preferring the characterisation of [N] as the puppet of [P], which was the true beneficiary of the assignment. The assignment was neither illegal nor under-hand: it simply failed to satisfy the conditions imposed by the wording of the COA.