Arbitrator as Advocate

The recent Commercial Court decision in ED&F Man Sugar Limited v Belmont Shipping Limited EQHC 7992 (Comm) has provided some clarity on the scope of Section 33 of the Arbitration Act 1996 (“the Act”) confirming that a tribunal is not obliged to alert a party to potential arguments different to those which it has advanced.

Factual Background.

The underlying dispute concerned a demurrage claim and the commencement of laytime.

ED&F Man Sugar Limited, the claimant charterers, chartered MV Amplify from Belmont Shipping Limited, the defendant owners, on an amended Sugar charterparty 1999 form dated 30 July 2009 for a voyage from Santos, Brazil (the load port) to Paradip and Haldia, India. Clause 19 of the charterparty governed the load port laytime and Clause 23 governed the calculation of demurrage and despatch.

The vessel arrived at the load port on 16 September 2009. Notice of Readiness (NOR) was tendered immediately (and was re-tendered on 19 September 2009). Charterers denied that the NOR was valid because the vessel’s holds were not fit for cargo. On 18 September 2009 a surveyor inspected the vessel and noted certain defects. The defects were corrected and the vessel was approved ready to load at 11:40 on 20 September 2009. The vessel did not berth until 23:40 on 5 October 2009. Following completion of loading at 05:45 on 7 October 2009, owners claimed demurrage. It was agreed that the load port laytime was 5 days and 3 hours but there was a dispute as to the commencement of laytime at the load port.

Demurrage Claim.

Owners argued, in their written submissions, that laytime commenced at 14:00 on 16 September 2009 when NOR was first tendered, but conceded that time did not count during the period when the vessel’s holds were unfit.

Charterers denied that laytime commenced on 16 September 2009 but accepted that “an NOR was good on 21st September 2009 (normal office hours) and laytime commenced at 14:00 as per Charterers’ calculation”. Charterers reasoning was that had Owners, following the completion of the surveyor’s inspection, re-tendered NOR, it would pursuant to Clause 19 of the charterparty, have been effective at 08:00 21 September 2009 and laytime would have commenced at 14:00 21 September 2009.

Award.

The tribunal made and published their award, which was based on documents alone, on 25 October 2010. The award stated that neither the NOR dated 16 September 2009 nor that dated 19 September 2009 was valid due to the fact that the vessel was not ready to load. Accordingly, the tribunal held, as was charterer’s case, that laytime ran from 14:00 on 21 September 2009 meaning the vessel was on demurrage for 1 day 7 hours 50 minutes at a cost of US$13,263.89.

At paragraph 13 of their award, the tribunal stated:

“The Charterers did not rely upon the decision in the Happy Day 2 Lloyd’s Rep 487 so the potential consequences of that decision have not affected our conclusion.”

The decision in the Happy Day would have afforded charterers the argument that laytime should have commenced on 5 October 2009, when loading began. On that basis, no demurrage would have been due at the load port.

The Appeal.

Despite the fact that the tribunal had found for charterers on the commencement of laytime, charterers sought to challenge the award under Section 69, and in the alternative Section 68 of the Act, seeking for the first time, to contend that laytime commenced at the time loading began relying upon the decision in the Happy Day

Section 69

Charterers primary application for permission to appeal was made under Section 69 of the Act which provides:

“69. Appeal on point of law

(1) Unless otherwise agreed by the parties, a party to arbitral proceedings may (upon notice to the other parties and to the tribunal) appeal to the court on a question of law arising out of an award made in the proceedings.

Charterers sought to appeal the following question under Section 69:

“In a situation where no valid notice of readiness has been tendered and the vessel proceeds to load, should laytime commence at the beginning of loading as opposed to some other notional date and if so what date?”

Steel J refused the application for permission to appeal under Section 69 on the basis that the question posed was not one which the tribunal was asked to determine.

Section 68

Having failed under Section 69 of the Act, Charterers sought permission to appeal under Section 68, the notoriously more demanding ground. Section 68 provides:

“68. Challenging the award: serious irregularity

(1) A party to arbitral proceedings may…apply to the court challenging an award in the proceedings on the ground of serious irregularity…

(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant-

Failure by the tribunal to comply with section 33 (general duty of tribunal)”

Charterers sought to argue that the tribunal had breached their duty under Section 33 of the Act to “act fairly and impartially as between the parties, giving each party a reason opportunity of putting his case”.

Charterers argued that this duty required arbitrators, who were aware that a party had failed to advance an argument based on a particular case-law precedent, to enquire of the party whether it wished to do so. Charterers sought to rely on a comment made by Waller LJ in the Magdalena Oldendorff that “if an arbitrator appreciates that a party has missed a point then fairness requires the arbitrator to raise it so that the party can deal with it”. Their failure to do so in this case, it was argued, was a serious irregularity which had caused the claimant substantial injustice.

Owners argued that charterers’ application was without academic, judicial or legislative support and should be dismissed. Owners submitted that the facts of this case did not amount to a serious irregularity nor did it cause a substantial injustice on the ordinary meaning of the words. Moreover, the February 1996 report of the Departmental Advisory Committee (DAC) on Arbitration Law specifically excludes the current situation as a basis for an application under Section 68 of the Act. Lastly, owners highlighted that charterers’ application was inconsistent with the policy of the Act and the authorities on the proper scope of Section 68(2)(a) of the Act.

Judgment.

The Commercial Court dismissed the challenge to the award under Section 68 of the Act.

Teare J reiterated that the arbitrators had a duty to give charterers a reasonable opportunity to put their case. The arbitration was conducted on documents alone. The parties put their respective cases by way of written submissions and asked the tribunal to proceed to a reasoned award. In light of these facts, Teare J held “it would appear impossible to suggest that the arbitrators failed to give the charterers a reasonable opportunity of putting their case”.

Teare J went on to state that he did not consider that Section 33 of the Act required arbitrators to alert the charterers to the possible argument. Teare J stated “arbitrators are not barred from asking a party whether it has considered raising a different case from that which it has advanced but section 33 of the…Act does not oblige them to do so.” In other words, the duty to allow a party a reasonable opportunity to put its case does not require arbitrators to give a party an opportunity to put a case different from that which it has chosen to put.

In his judgment, Teare J held that the statement of Waller LJ in the Magdalena Oldendorff on which charterers’ sought to rely, should be read in context. In the Magdalena Oldendorff, the point that was missed was one which was already in issue and needed to be dealt with. In the present case, due to the concessions made by the claimants as to the effect of the relevant demurrage clause, there was no live issue to which the Happy Day point could have gone. For these reasons, Teare J held that there was no breach by the tribunal of its duty pursuant to section 33 of the Act and as such, there was no serious irregularity.

The Court briefly considered whether, assuming there was a serious irregularity, there was a substantial injustice. Teare J quoted from the DAC Report, which explains that Section 68 was “designed as a long stop, available only in extreme circumstances where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected” (DAC Report). Giving effect to a concession would not be an example of this.

Consequences.

The decision in ED&F Man Sugar Limited v Belmont Shipping Limited emphasises to parties to arbitration and their advisers that, irrespective of the nature of the arbitral proceedings, a party must take responsibility for putting its own case and advancing all potentially necessary arguments at the earliest opportunity. A party cannot assume that a tribunal will make its arguments for it. If the Court had agreed with charterers’ interpretation of Section 33 of the Act, this would undoubtedly have opened a can of worms and resulted in further issues of procedural unfairness. The tribunal would effectively become the advocates, inventing further possible arguments and claims which could tip the balance in favour of one party or another.

It is relevant to repeat that the arbitration in question was conducted on the basis of a documents-only procedure. It was common ground that had there been an oral hearing, the Happy Day [2002] argument may have been raised by the Tribunal. Nevertheless, the court’s view was that a party must be alive to the fact that electing to adopt a less expensive and truncated procedure necessarily affords it a more limited opportunity to put its case.

This case is a timely warning that the drive to limit time and costs in arbitration must be balanced with a procedure that will do justice and not overly restrict the exposition of important arguments. Nonetheless it also reminds advocates of the need to prepare comprehensively, particularly for documents-only arbitrations, so that important authorities are not overlooked.

It is not the arbitrators’ responsibility to be the advocate.

Case № 20

U.S. - Enforcement of Arbitration Clauses in Crew Contracts

There has been a good deal of activity in the United States concerning the enforceability of arbitration clauses in crew contracts. This has culminated in a ruling from the Eleventh Circuit Court of Appeals in the case of Pineda Lindo v Norwegian Cruise Lines (No. 09-cv-22926-DLG (Graham, 1.) (S.D. Fla. Dec. 18,2009)) which affirmed the district court’s order that compelled the case to arbitration.

By way of some background, Lindo alleged that whilst acting in the scope of his employment he injured his back after he was ordered to transport heavy trash bags to the ship. He later underwent surgery to correct the injury. NCL, his employers, had their base of operations in the United States and this is where Lindo wanted to pursue his claim.

Lindo’s employment was governed by (1) a collective bargaining agreement (CBA) negotiated by NCL and the Norwegian Seafarers’ Union and (2) an employment contract. The contract specified that all Jones Act claims would be resolved by binding arbitration pursuant to the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards (the Convention). The place of arbitration was specified as the seaman’s country of citizenship and the choice of law would be the law of the vessel’s flag state. The effect of that clause in this case was that Lindo’s claim would be arbitrated in Nicaragua under Bahamian law.

The district court had upheld the arbitration provision in the employment contract. Lindo appealed.

Lindo did not challenge the place of arbitration but rather he challenged having to arbitrate at all because Bahamian negligence law, rather than U.S. statutory negligence law under the Jones Act, would have applied to the arbitration. He opposed NCL’s motion to dismiss the claim from U.S. state court arguing that the arbitration provision in his contract was void as it was contrary to public policy; it operated as a prospective waiver of his Jones Act claim. (In Thomas v Carnival Corporation 573 F.3d 1113 (11th Cir. 2009), a decision of the U.S. Court of Appeals for the Eleventh Circuit, a claimant had successfully used a similar public policy argument to avoid the application of an arbitration provision.)

After reviewing the Convention and Supreme Court and Circuit precedents, such as the case of Bautista v. Star Cruises 396 F.3d 1289 (11th Cir. 2005), the Appeal Court concluded that the District Court had properly enforced the arbitration agreement in Lindo’s contract. The rationale was as follows:

Under the Convention and Supreme Court and Circuit precedent there is a strong presumption in favour of freely-negotiated contractual choice of law and forum selection provisions and this presumption applies with special force in the field of international commerce.

U.S. statutory claims are capable of being heard under arbitration. The precedents have clearly held that contracts providing for arbitration of U.S. statutory claims are enforceable. The fact that Lindo asserted a statutory Jones Act claim does not affect the strong presumption in favour of enforcement of the choice clauses in his contract. In essence, the Court held that even where a crewmember has a valid Jones Act claim this will not act as a bar to arbitration.

U.S. courts must recognise arbitration agreements as long as:

(a) the four jurisdictional prerequisites are met. These are:

1.There must be an agreement in writing within the meaning of the Convention

2.The agreement must provide for arbitration in the territory of a Convention signatory state

3.The agreement arises out of a commercial legal relationship; and

4.There must be a party to the agreement that is not an American citizen, or the commercial relationship must have some reasonable connection with one or more foreign states

and

(b) no available defence under the Convention applies: Lindo had argued that the arbitration provision was unconscionable, maintaining that he signed the contract on a “take it or leave the ship” basis, but the Court rejected this argument.

The Court further cited the case of Lipcon v Underwriters at Lloyd’s London 148 F.3d 1285 (11th Cir. 1998) where it was ruled that they would declare choice clauses unenforceable only when the remedies available in the chosen forum are so inadequate that enforcement would be fundamentally unfair; NCL provided evidence from a Bahamian attorney who stated that under Bahamian law a plaintiff seaman may sue in negligence and recover damages for pain and suffering, loss of wages, future earnings and medical expenses.

Lindo maintained that his arbitration agreement was void as being contrary to public policy because he could not assert his U.S. statutory rights under Bahamian law. By this logic, courts in other nations could likewise refuse to recognise valid, mutually agreed arbitration provisions if they contemplated the application of American law, in derogation of home based statutory remedies. If every country refused to recognise arbitration agreements that contemplate the application of foreign law, the multilateral commitment of the Convention would be defeated.

The Court also ruled that you cannot render void an arbitration clause based on a public policy defence prior to an arbitration taking place (in contrast to the decision in Thomas). Instead, the Court is to look at the end result of the arbitration to see if the minimum requirements for the injured party have been met. That is the point at which a public policy defence can be made and the arbitration award set aside, if appropriate.

In reality a Court is highly unlikely to want to overrule an award because their inclination is to respect the foreign arbitration award unless there is good reason not to do so. Even if it is the case that a tribunal has awarded a claimant compensation which is clearly inadequate and the award is appealed, a negotiated settlement is likely to follow so that the award may never ultimately be reviewed by a Court on appeal.

The Eleventh Circuit Court of Appeals recently reaffirmed its holding in Lindo v NCL in Maxwell v NCL (Bahamas), Ltd., d.b.a. NCL in reversing the district court’s order remanding and denying NCL’s motion to compel arbitration. The Court followed the ruling in Lindo and held that Bautista takes precedence over Thomas.

This ruling is a very favourable one for the cruise industry and provides much needed uniformity in this keenly disputed and litigated area.