Arbitration or court?

Some comments from a practical point of view

1.  Introductionmagne_andersen
Every year, we initiate a substantial number of arbitration and court proceedings, particularly in London and New York. A considerable number of these proceedings are closed shortly after they are initiated (particularly in the case of arbitration), simply because the initiation of legal proceedings, in itself, is enough to make the debtor pay. In a number of cases, we see that the ability to initiate proceedings in an efficient and cost-effective manner contributes significantly to the achievement of a swift and favourable result for our member. This is particularly so when it comes to straightforward claims, such as claims for unpaid demurrage, hire, freight, damages for detention etc.

By the time a claim is referred to us, the parties have typically been corresponding about it for quite some time. In most cases, the claimant will have threatened to take the matter to arbitration before we become involved. The instructions given to us are often to put the debtor on notice that unless the claim is paid within a certain number of days, the member will initiate legal proceedings. Regrettably, we are from time to time prevented from doing so, simply because the law and jurisdiction clause of the contract in question is legally insufficient, impractical and/or not cost-effective.

The question of where one can initiate proceedings if there is no agreement as to jurisdiction is a difficult one, and will often depend upon local law, typically the law at the place of the registered address of the parties. Issues like these come under the heading “private international law”, and the answers will to a large extent depend upon the rules applicable at the domicile of the claimant. Since it is not possible to give a full overview, or to provide general answers, in respect of such issues, they are not discussed in this article.

In the following, we comment on some of the typical situations we encounter from time to time. These comments should not be taken as a “complete guide” to dispute resolution in the various forums dealt with below, but simply as notes about some practical points that are well worth bearing in mind.

2.  Forum vs law
A law and jurisdiction clause should, at the very least, include two provisions:

  • Choice of law
  • Choice of jurisdiction (the venue where the proceedings shall be held)

As will be seen in the following, as far as arbitration clauses are concerned, the clause should ideally also include provisions about the procedure to be followed if one of the parties wants to litigate a dispute.

3.  Enforcement of arbitration awards vs enforcement of court judgments
When deciding whether to opt for arbitration or court proceedings, it is worth considering possible obstacles to the enforcement of a potential award or judgment against the opponent.

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (often known as the “New York Convention”) has been ratified by some 149 countries around the world http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html. The aim of the convention is to prevent discrimination against foreign arbitration awards (with regard to conflicting jurisdiction provisions and enforcement) and it obliges the convention states to ensure that such awards are recognised and generally capable of enforcement in their jurisdictions in the same way as domestic awards. An ancillary aim of the convention is to require courts of the convention states to give full effect to arbitration agreements by requiring local courts to deny the parties access to court proceedings in contravention of an arbitration agreement. The convention should make it possible to enforce an arbitration award handed down in any one of these 149 convention states within any other convention state. Unfortunately, not all convention states observe the convention in the manner intended. As a result, it can be very difficult, if not impossible, to enforce awards in practice in some of these states. For example, some states make it unduly onerous to comply with the requirement under the convention for the arbitration agreement to be in writing.

As far as judgments handed down by courts are concerned, there is no similar worldwide regime in place. The Lugano Convention and EU law may be relevant in some cases, but do not apply as widely as the New York Convention. One therefore often has to resort to applying a bilateral agreement between the states in question, if such an agreement exists.

4.  English High Court
The English High Court is world famous for its efficiency and quality when it comes to dispute resolution, and has been so for centuries. It is worth mentioning, however, that in order to pursue a claim before the High Court, one will have to involve English solicitors based in England. This is because the English courts require the solicitors who are “on record” as acting for a party to be based within the jurisdiction. Solicitors (subject to a few exceptions) do not have rights of audience in the higher English courts. This means that it will also be necessary to instruct a barrister to present the case to the court. Even if the claim is straightforward, our in-house lawyers (even those qualified in England) are simply not allowed to run High Court proceedings.

This will inevitably have the consequence that the costs of pursuing even a small and straightforward claim before the High Court will be considerable. Hence, we recommend that any dispute resolution clause that provides for disputes to be referred to the High Court should also specify an alternative procedure for smaller claims. The Small Claims Procedure of the London Maritime Arbitrators’ Association (“the LMAA”) will be a safe choice.

5.  Arbitration in London
At the outset, it is worth emphasising that a matter will not be subject to arbitration unless the parties have actually agreed that this will be the case. Such agreement can be made either when the contract is entered into or at a later stage. However, an opponent that is unwilling to pay its debt is unlikely to agree to refer a matter to arbitration in order to ensure the cost-effective handling of the dispute. Accordingly an arbitration clause should be agreed at the time the contract is concluded.

An arbitration clause can be very simple. While there are a number of other issues that it is advisable to address in an arbitration clause, the following will in fact suffice: “Arbitration in London. English law to apply.”  There are, however, practical problems in relation to this formulation as discussed below. In the following, we will also discuss which provisions will apply where the clause in question is silent in respect of the constitution of the tribunal, the number of arbitrators etc.

5.1  No agreement made in respect of the number of arbitrators/the parties are to agree on a sole arbitrator
Where there is no agreement as to the number of arbitrators to be appointed, the tribunal shall consist of a sole arbitrator, ref. the Arbitration Act 1996 Section 15(3).

If there is no agreement in respect of the appointment procedure for the sole arbitrator, it follows from the Arbitration Act 1996 Section 16(3) that “the parties shall jointly appoint the arbitrator not later than 28 days after service of a request in writing by either party to do so”. In practical terms, this means that the debtor can postpone the appointment of the arbitrator and thereby the constitution of the tribunal simply by not responding.

The parties are free to agree what is to happen in the event of a failure by one party to agree to the appointment of a sole arbitrator. However, when there is no such agreement in place, the claimant has to apply to the High Court to have the sole arbitrator appointed, ref. the Arbitration Act 1996 Section 18. This is a quite costly exercise. The application to the High Court may only be made by English solicitors based in England, and the application must be served on the defendant in its home jurisdiction in accordance with the laws of that jurisdiction. In our experience, the cost of an application is typically in the region of GBP 8,000 – 10,000, but can be considerably higher where the defendant’s home jurisdiction specifies complex procedures for service of proceedings. Depending on where the defendant company is domiciled, the process of properly serving documents can take months.

In order to avoid the involvement of the High Court, the arbitration clause should provide that the party who requested the appointment of an arbitrator in the first place may unilaterally appoint a sole arbitrator in cases where the opponent has not replied within a specified number of days. If so, the appointing party can simply appoint an arbitrator with binding effect on the other party without having to pay anything other than the arbitrator’s appointment fee. However, in order to forego accusations of partiality, vigilantism etc., which may create problems when the award is to be enforced, it will be advisable to let a third party do the actual appointment.

The clause could read as follows:

“The reference shall be to a sole arbitrator. If a dispute has arisen, either party may give notice to the other party requiring him to join in appointing a sole arbitrator. If the parties have not within 14 days of the said notice agreed on a sole arbitrator, either party may apply in writing to the Honorary Secretary of the London Maritime Arbitrators’ Association (“LMAA”) for the appointment of a sole arbitrator by the President of LMAA.”

5.2  Parties are to agree on the number of arbitrators (i.e., there is no agreement in that respect in the arbitration clause)
Very occasionally we come across clauses that cater for the parties to agree on the number of arbitrators to be in the tribunal or even to agree on the identity of two or three arbitrators. Such an “agreement to agree” is not enforceable, unless the parties actually agree on the number of arbitrators.

5.3  The tribunal is to consist of two arbitrators
If the clause provides for the tribunal to consist of two arbitrators, but does not specify the procedure for appointment, the Arbitration Act 1996 Section 16(4) will govern the appointment procedure. This sub-section provides that “each party shall appoint one arbitrator not later than 14 days after service of a request in writing by either party to do so”.

If the other party fails to appoint an arbitrator within 14 days, Section 17 of the Arbitration Act will come into play. This provision reads as follows:

“Power in case of default to appoint sole arbitrator.

(1) Unless the parties otherwise agree, where each of two parties to an arbitration agreement is to appoint an arbitrator and one party (“the party in default”) refuses to do so, or fails to do so within the time specified, the other party, having duly appointed his arbitrator, may give notice in writing to the party in default that he proposes to appoint his arbitrator to act as sole arbitrator.

(2) If the party in default does not within 7 clear days of that notice being given—

(a) make the required appointment, and

(b) notify the other party that he has done so,

the other party may appoint his arbitrator as sole arbitrator whose award shall be binding on both parties as if he had been so appointed by agreement.

(3) Where a sole arbitrator has been appointed under subsection (2), the party in default may (upon notice to the appointing party) apply to the court which may set aside the appointment.”

5.4  The tribunal is to consist of three arbitrators
If the clause has no provisions in respect of the appointment procedure and the parties have agreed that the tribunal shall consist of three arbitrators, default provisions are set forth in Section 16(5). This provides that “each party shall appoint one arbitrator not later than 14 days after service of a request in writing by either party to do so”, and further that “the two so appointed shall forthwith appoint a third arbitrator as chairman of the tribunal.” If the second party does not appoint his arbitrator as required, the first moving party will be entitled to appoint his arbitrator as catered for in Section 17 of the Arbitration Act quoted above.

5.5  The tribunal is to consist of two arbitrators and an umpire
If the tribunal is to consist of two arbitrators and an umpire, the fall-back provision of the Arbitration Act is also that “each party shall appoint one arbitrator within not later than 14 days after service of a request in writing by either party to do so”, ref. Section (6). Once again, if the second party does not appoint his arbitrator as required, the first moving party will be entitled to appoint his arbitrator as catered for in Section 17 of the Arbitration Act.

5.6  Application of the LMAA terms
he LMAA terms are a detailed set of procedural rules. Although compliance with the rules is recommended, unlike the Arbitration Act, they will only apply if there is agreement to this effect. In practice this means that they are not applicable unless (a) the parties agree to their application, or (b) the arbitrator(s) accept the appointments subject to the LMAA terms (which is invariably the case).

5.7  LMAA Small Claims Procedure
The LMAA Small Claims Procedure (“SCP”) is specifically designed for dealing with smaller claims. Its aim is to ensure that claims are processed rapidly and costs kept to a minimum. No one can refer a dispute to be dealt with under the LMAA Small Claims Procedure unless this has been agreed between the parties. The SCP can be agreed to take effect by inserting a clause as follows:

“In cases where neither the claim nor any counterclaim exceeds the sum of USD 100,000 the arbitration shall be conducted in accordance with the LMAA Small Claims Procedure current at the time when the arbitration proceedings are commenced.”

All Small Claims arbitrations are decided (usually without a hearing) by a sole arbitrator and there is no right of appeal from the arbitrator’s decision. The arbitrator’s fee is capped (currently at GBP 3,000) and, in the event that a party is successful, they are only entitled to recover their costs from the other side up to a capped amount (currently GBP 4,000).

6.  US courts
Contracts that do not have an arbitration clause may nevertheless state that the contract is subject either to “US Law” or, more specifically, “US Federal Maritime Law” or the law of a particular US state. The majority of Nordisk’s US cases are subject to New York jurisdiction.

While several Nordisk attorneys have current bar licenses from the state of New York, Nordisk as a general policy recommends that local counsel be involved in any US Court proceedings. US procedural law (choosing which court to appear before and making assorted motions once a case has commenced) can be a veritable minefield to navigate and, given that Nordisk’s specialty is the underlying substantive maritime law rather than local law, our members’ interests are best protected when we employ local litigators to assist. Consequently, the costs of pursuing a claim in court in the US can be equivalent to the UK.

7.   US arbitrations

7.1 Arbitration in the US
We see a fair number of cases each year involving contracts that are subject to New York law and arbitration, often designating the Society of Maritime Arbitrators (“SMA”) Rules. Nordisk has had positive experiences with several of the prominent SMA arbitrators in recent years and, as opposed to other prominent forums (notably the UK), New York arbitrators often do not charge their appointment fee until pleadings are submitted. Thus, where commencement of arbitration (appointing an arbitrator) is used successfully as a mechanism to apply pressure on a party to pay an outstanding debt, in New York we find that there will often be no charge by the arbitrators for this service.

Unlike the Arbitration Act 1996 in the UK, the Federal Arbitration Act does not provide a default mechanism for the constitution of a Tribunal if such details are not included in an arbitration clause, i.e., a clause that simply reads, “Law and Arbitration US/NY”. If the arbitration clause does not designate either the number of arbitrators or a process for appointing them, the claimants can end up in the US courts for months simply trying to establish a tribunal. Consequently, when a US arbitration clause is going to be included in a contract it is prudent to ensure that the number of arbitrators is designated as well as a process for appointing them, or in the alternative, include the number of arbitrators and incorporate the Rules of the SMA.

7.2  SMA Shortened Arbitration Procedure
The utilisation of the SMA Shortened Arbitration Procedure, which is similar to the LMAA Small Claims Procedure in the UK, can reduce costs and streamline the handling of small disputes. The SMA recommends the following language to be included in US arbitration clauses:

Notwithstanding anything contained herein to the contrary, should the sum claimed by each party not exceed US $___________ (insert amount, exclusive of interest on the sum claimed, costs of the arbitration, and legal expenses), the dispute is to be governed by the ‘’Shortened Arbitration Procedure’’ of the Society of Maritime Arbitrators, Inc. (SMA) of New York, as defined in the Society’s current Rules for such procedure, copy of which is attached hereto.”

The benefits of an SMA Shortened Arbitration are an expedited process, a sole arbitrator and a USD 3,500 cap on arbitration fees (unless there is a counterclaim, in which case the cap is USD 4,500). Another advantage of the SMA Shortened Arbitration over the LMAA Small Claims Procedure is that under the LMAA Small Claims Procedure the cost of the arbitration (GBP 3,000) is paid upon appointment of the arbitrator, as opposed to the SMA Shortened Procedure where the fee is paid at the end of the arbitration – once the fees have been earned. Thus, if a matter settles, the cost of the Shortened Arbitration in New York will not have been paid up front and there may be some savings to the claimant.

When choosing to employ a Shortened Arbitration under the SMA Rules, one should note that shortened arbitrations proceed on documents alone and discovery can only be conducted at the discretion of the arbitrator. Thus, it is only recommended for small, straightforward claims.

7.3  UNCITRAL & American Arbitration Association (“AAA”) Arbitrations
In larger contracts we very occasionally see arbitration clauses invoking the UNCITRAL Arbitration Rules and designating the AAA as an administering body. There is little need to go into extensive detail regarding such clauses but, as a word of warning, the AAA charges a “filing fee” for commencing arbitrations that can be as high as several thousand dollars, depending on the amount that a claimant is seeking to recover. While the more formal AAA processes can be advantageous for the handling of large disputes, the SMA is a simpler and cheaper mechanism for the resolution of smaller disputes.

8.  Contradicting law and litigation clauses
Quite often, we come across fixture recaps and charterparties incorporating more than one law and litigation clause. Insofar as these clauses are not “rivalling” clauses, there is no problem, but if they provide for a different choice of law or jurisdiction, or different procedures for the constitution of an arbitration tribunal, it may not be possible to reconcile the clauses, and the conclusion may be that there is actually no agreement in respect of law and/or jurisdiction. The parties will then be back to square one, and the claimant may have to initiate proceedings at the place of business of the defendant.