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Care needed with arbitration clauses

The London Maritime Arbitrators Association has warned brokers of the pitfalls of using hybrid arbitration clauses and listed the three key ingredients that must be included in any arbitration clause.

Speaking as part of the joint Baltic Exchange and Institute of Chartered Shipbrokers’ Webinar Series, Daniella Horton, LMAA honorary secretary, and Bruce Harris, president of LMAA, shared their insights of today’s arbitration sector.

Mr Harris introduced the webinar by outlining the continuing dominance of London in the arbitration field, which he attributes to the UK capital’s large maritime cluster. “I don’t think any country matches the UK when it comes to shipping disputes,” he said. “Without such a huge cluster it is not really possible to have a viable system.”

The majority of current London arbitration cases centre on demurrage, off-hire and unsafe port cases. Bunker quality is increasingly being seen in arbitration cases as well. Reflecting on the awards that he has been involved with in 2020, Mr Harris commented that some 36% of awards were concerned with hire, 21% were on speed and consumption in timecharters, while 21% dealt with freight and demurrage. A further 7% covered brokers’ fraud and misrepresentation. There was also a trend for more offshore related work, albeit from a low base.

The LMAA gathers statistics annually by sending questionnaires to its arbitrators. While this is an under capture of the total number of arbitrations that are conducted on LMAA Terms and Procedures, it gives a valuable snapshot. For 2020, 3,010 appointments were received by arbitrators and there were 1,775 new arbitration cases, both within expected ranges. Of those, 70%-75% of cases settled during the course of the arbitration. Last year, some 523 did not settle and continued through to an award. “Over the 40 years where we have been capturing data there has been a consistent use of arbitration,” noted Ms Horton.

To put this in a global context, the 1,775 new arbitration cases for London compared with 246 for New York, 82 for Singapore, 59 for Hong Kong, and less than 20 for Paris in 2020.

Key ingredients

A takeaway from the webinar for brokers is the importance of including three key ingredients in an arbitration clause, said Ms Horton. “You need a seat/place, governing law and procedural rules. If you are going to take a traditional arbitration clause you will be looking at English law, London arbitration and LMAA Terms & Procedures.” She said that clauses that do not reference procedural rules make “life difficult from the outset”. If brevity is called for in a charterparty, at the very least Ms Horton recommends that brokers state the place of arbitration, governing law and LMAA Terms and Procedures.

She added that there is sometimes confusion between the seat of arbitration and the venue, which can muddy the water for brokers. “When we talk about the seat of arbitration, that is the legal place. It has nothing to do with venue,” she explained. “Venue in the context of LMAA arbitration isn’t necessarily a hugely relevant factor, the point is that an arbitration hearing can take place anywhere that is convenient to the parties. When you are thinking about place of arbitration do not confuse that with your venue of hearing.”

The LMAA publishes its own arbitration clause on its website which “addresses all the important points,” said Mr Harris. However, he added a stern warning to brokers: “Please if you are going to use the clause use it intact, don’t tinker with it because so many alterations we see create difficulties rather than solve problems.”

Hybrid developments

One important development in arbitration clauses was highlighted by Ms Horton. Currently, there are six named options that exist in the BIMCO Law and Arbitration Clause 2020, four of which are traditional combinations of seat/place, governing law and procedural rules and two of which are hybrid clauses that mix and match components. The appearance of these hybrid clauses is increasing, but Ms Horton warns that if a client wants to use them it is even more important that you include some procedural rules.

Also, while there is nothing wrong with agreeing a hybrid arbitration clause, it can have unintended consequences, she added. “One of the most important from an English law perspective is if you have a client who is used to a combination of London arbitration, English law and then ideally some procedural rules, they will be used to part of the London arbitration furniture: the right of a limited right of appeal on a point of law.

“It has come to the surprise of many that where they have mixed and matched a place of arbitration other than London, but they have retained English law, they have expected to retain the limited right of appeal that English law provides. But it will be the seat that ultimately governs those sorts of questions and so by agreeing a hybrid you lose your right of appeal.”

Ms Horton conceded that in many cases that quirk may be of no consequence, but for those clients that are familiar with London arbitration they will have an expectation of what is available. “Make sure you know what hybrid arbitration clauses bring you,” she advised.

Mr Harris offered another concern related to hybrid arbitration clauses. In some jurisdictions, there is the possibility that an arbitrator could be appointed by an institutional body. This means that there is no guarantee that the arbitrator will know about shipping and may well be a generalist arbitrator. “This is a serious risk because of the lack of maritime experience,” said Mr Harris. “You do not want to end up with a generalist arbitrator if they do not know anything about shipping.”

The need for specialist experience does not end there. Mr Harris also stressed the importance of expert witnesses that really know the broking business and that do not just claim to know it. “Very often we need market evidence as to, for example, what the shipowner’s loss has been,” he said. “This is where we get a great deal of help from broker experts who will bring in data related to market conditions. It’s fair to say that some of those experts are not as experienced as they might be. They profess to be able to look at lists of fixtures and reach various conclusions, but what they don’t all have is the market experience to know whether fixtures are actually comparable.

“It’s very important to have real market experts who know the business.”

The Baltic Expert Witness Association (BEWA) offers independent expert opinion for maritime disputes. To become a BEWA member, the expert should have proven appropriate and specialist experience in a specific sector or sectors of the maritime business. Brokers that believe they have the relevant expertise to join BEWA can contact [email protected] for more information on how to join.
Source: Baltic Exchange

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