Maximising Claim Recovery – Getting The Contract Dispute Procedure Right

By Stephen Mann, London Office

At the Charterers’ Club we deal with a lot of small and medium-sized claims under our FDD cover, commonly of the nature of final hire statement balances under time charters, and freight or demurrage claims under voyage charters. Basically – what cash balance is payable by one party to the other at the conclusion of a fixture?

These reach the Club when the parties’ commercial staff have failed to reach agreement on who is to pay what to whom.  The Club will then provide assistance to its Assured in putting forward its arguments to the counterparty, and if this is insufficient, the Club may write directly on the matter, either to the counterparty or the counterparty’s own FDD insurers. Commonly, this kind of correspondence is done on a “carrot and stick” basis in the factors in play are the costs of arbitration/ litigation, the management time required of the Assured in directing a case and the issue of commercial goodwill. The factors will be presented as carrot or stick as fits the occasion.

Most of these kind of disputes are settled due to the considerations above. The amount of cash recovery (or payout) under such settlements depends on lots of factors. One of these is “procedure” in the sense that generally if there is a clear route to an enforceable arbitration award in respect of a claim that tends to make it easier to get settlement more quickly and at a better level. If there are doubts in the procedure this may be seized upon by opponents as something that they can potentially use to persuade our Assured to reduce their settlement expectations (or even drop a claim) in the face of the added expense and problems consequent upon those doubts. I’ll call them “settlement disincentives”. Because of this problem what the Club tries to do, as well as resolving existing problems under existing fixtures on the best terms possible, is to give our Assureds guidance as to how to avoid settlement disincentives in future fixtures since – as above – they can lead to a loss of hard cash when fixture accounts come to be settled.

The way to avoid settlement disincentives and their negative effect on the bottom line is to impose a crystal-clear dispute resolution process in your contracts. The following remarks provide some general guidance on this.

Firstly, always make clear which law will decide the meaning of the words of the contract by using such words as “English law to apply”.   Without this the “applicable law” has to be decided by a court or arbitration tribunal, based on a detailed consideration of the facts underlying the dispute, so as to decide which country’s legal system is most closely-connected with the contract.  It may be decided that the effects of the contract are to be determined by a foreign law in a way that is less favourable to the Assured than English law would be.  A dispute of this kind will often involve complex and costly legal arguments. Consequently, settlement disincentives come into play

Secondly, there is the question of jurisdiction. This means – in which place should any claim be decided? This is a different question to the first one above. Most of the disputes seen by the Club arise under contracts which provide for arbitration.  However if there is no specific contract clause subjecting the parties to a duty to arbitrate their disputes, they must take them to a suitable national court. They must then persuade that court that it should – under its own rules and any applicable conventions – accept the case as one it can and should exercise its jurisdiction in. There is then the further question of whether any other court in another country can allow the same claim to be litigated there, at the same time as the claim proceeds in the first court.  These kind of questions can lead to very expensive legal suits, in relation to whether a first court should hear the case, then whether it should transfer it to a different country’s court, or, for instance, whether it should issue a personal order against a party banning it from bringing proceedings in another country’s court. This cost and trouble means more settlement disincentives.  To avoid this, the intended jurisdiction for resolving any disputes (whether arbitration or court proceedings) should be spelt out in the charter, in the clearest words possible, such as – if it intended that disputes should go only to the English High Court- “all and any disputes under this charterparty are to be referred to the exclusive jurisdiction of the High Court of England and Wales.”  The same point goes to clearly establishing jurisdiction for arbitration, and this is considered next.

Where arbitration is to be the agreed means of resolving disputes settlement disincentives can arise by failing to spell out carefully in the charter or other contract the procedure which is to apply in the arbitration. It is important to note that under English law there is no one standard arbitration procedure. Arbitration generally is governed by the Arbitration Act 1996 which provides a basic back-up procedure but this is far from an optimal procedure and the basic idea of the statute is that the parties should agree their own detailed arbitration procedure with the Act filling any “holes”. Without such agreed detailed arbitration procedure the back-stop procedure provided by the Act does not provide a quick easy route to an enforceable Award. So – failing to make detailed provision for an arbitration procedure in your contract creates another settlement disincentive.

It is not difficult to insert such a detailed arbitration procedure in your contracts. The sort of procedure envisaged for this would be (eg) one providing that there should be arbitration under English law, in London, under current LMAA Terms, with each party to appoint an arbitrator, with a procedure whereby the claimant’s arbitrator can make an enforceable Award alone if the respondent fails to appoint a second arbitrator within a short period of being called to do so, and which provides for smaller claims (eg no more than USD100,000) to be determined in a cheaper, quicker “Small Claims Procedure” or similar. Such a clause will mean the claimant has a clear path to an Award that cannot be frustrated by mere inactivity by his opponent. A clause that can be used to cover all these issues is the LMAA Arbitration Clause. This is an enhanced version of the BIMCO Standard Dispute Resolution Clause 2017. It is most important to keep in mind that a mere choice of English law arbitration does not impose such clauses automatically and that the common standard charterparty printed wordings may not do so either. For time charters only the 2015 form of the NYPE time charter goes into anything like such detail (the 1976 and 1993 forms covering only some of the ground) and for voyage charters, the Gencon 1976 charter contains no arbitration wording at all and the Gencon 1994 requires additional box-filling if the Small Claims Procedure is to be engaged. Even for those standard-form charters that do contain printed detailed arbitration wording, it is common to see that struck from the standard form by the draftsman of a particular contract and it is always important to check that something doing an equivalent job has been inserted as bespoke wording elsewhere in the contract.  Just as an illustration of the settlement disincentives that may follow where the subject contract is no more precise than stating “Arbitration – England” (or similar) the 1996 Act will then have the effect that a sole arbitrator will decide claims but to get him appointed, in the face of an uncooperative respondent, the claimant must go to the time, trouble and cost of making an application to the High Court under s. 18(2) of the Act. Likewise, where no specific contract terms on this apply, any appointment of a sole arbitrator (where an opponent refuses/ fails to cooperate in appointing) will carry the disadvantage that the intransigent opponent could ask to court to set that sole arbitrator appointment and allow him to make a late appointment. This is to be contrasted with the position under the special Clauses above or similar contract wording which have the effect that a sole arbitrator, once appointed, can go full steam ahead to making an Award. The incorporation of the LMAA Terms generally by the wording in (eg) the LMAA Arbitration Clause also assists since these contain clear wording answering certain questions about arbitration appointment issues.

Another area where inadequate drafting can slow the route to an Award generate settlement disincentives, is in relation to service of the necessary notice required to commence arbitration. As shown by the Glencore Agriculture B.V. v Conqueror Holdings Limited [2017] EWHC 2893 (Comm) case English law is restrictive in relation to the address to which any notice commencing arbitration must be sent. It cannot be assumed that arbitration can properly be commenced by serving the notice on any person who has corresponded about a dispute from the respondent’s side, such as operational staff. If service is made that way and the person did not have authority to receive the notice, any Award obtained in consequence, may be of no effect. Where there is a lack of clarity about whether any particular person or address has been authorised for the purposes of receiving a notice commencing arbitration, best practice is to rely on the provisions of the Act which say the notice is validly served if sent by post to the registered or principal office of the respondent. This will involve the cost and delay of enquiring into these matters (perhaps with the assistance of foreign lawyers) and the posting process. Again – settlement disincentives. All this can be avoided by including in your charter or other contract express wording which provides that notices commencing arbitration can be served validly by sending them by email to a nominated email address. In this respect the LMAA again provides clause wording for this in the LMAA Arbitration Notice Clause. Use of this or similar wording will again assist in achieving settlements by ensuring a quick, challenge-free procedure.

Even once the arbitral “tribunal” is constituted as above, the claimant may not be in a position to move quickly and inexpensively to an Award if his contract has not stipulated the exact procedure to be followed by the tribunal in actually running the dispute. Where eg the LMAA Arbitration Clause or similar wording has been used, further procedural questions are generally answered by the application of the LMAA Terms. However, without this procedural questions are decided by the Act, which only says that the tribunal will decide the procedure, subject to any agreement between the parties on it. The tribunal will commonly allow the parties consideration time and an opportunity to make submissions before imposing a procedure and a difficult respondent gets another chance here to “string things out”. Again, a settlement disincentive.

Further again, a claimant may expect to obtain an enforceable Award more quickly and at a lower cost if he is able to proceed under the LMAA’s Intermediate or Small Claims Procedure. This is a settlement incentive. However, he will not be able to do so unless the parties have agreed to the application of such a Procedure in their contract. As above, some standard form contracts provide such agreement but require the insertion of further detail, such as maximum claim amounts. Where the relevant boxes are not filled in properly (which we see from time to time), this may have the effect that there is no binding agreement as to the application of the smaller procedures at all and hence meaning any claims have to be brought via the slower and more expensive full procedure: again, a settlement disincentive.

Having said the above. it might well be asked whether the presence of the kind of uncertainties mentioned above might actually lead to a claimant achieving a higher settlement than otherwise since the paying party might wish to avoid exposure to the risk of facing an increased costs liability – on both sides – in respect of the procedures required to decide those uncertainties and also wish to save the associated management time. This may be so in some cases but for the smaller claims we would generally say the uncertainties operate against the claimant. This is because the claimant will seldom manage to recover all his own legal spend on these issues, firstly because courts and tribunals only generally order the losing party to pay 70-80% of the winning party’s legal costs, not least because the respondents will know that he will be unlikely to compensate a winning claimant for 100% of the legal and other costs he might incur resolving the uncertainties before a court or tribunal. This may be because the court or tribunal  the losing party will normally only be ordered to pay a percentage of the winning party’s costs (say 70-80%) and there may also be reduced recovery through rules about proportionality and/or the application of a cap on costs recovery such as under the LMAA Small Claims Procedure.

Accordingly, we would conclude by again stressing the importance, in a market where quick recovery of debts is vital to the cash-flow of chartering businesses, of seeking to ensure contractual arbitration clauses are carefully drafted to avoid settlement disincentives and achieve as quick and direct path to a respondent’s bank account as possible.

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