MV Majesty: Section 68 Arbitration Act 1996 – Arbitrator Refuses to Admit Accounting / Arithmetical Error

In Ducat Maritime Ltd v Lavender Shipmanagement Incorporated [2022] EWHC 766 (Comm), Butcher J set aside part of an award in an LMAA SCP arbitration under s. 68 of the Arbitration Act 1996, on the grounds that the arbitrator breached his general duty of fairness. The judgment provides clarification of what is to happen in the situation where the arbitrator makes an obvious accounting / arithmetical mistake but refuses a s. 57 application to correct that error. 

The initial Award arose from a dispute under a time charterparty of the MV Majesty. Owners (Lavender Shipmanagement) commenced arbitration under the LMAA Small Claims Procedure, claiming USD 37,831 in unpaid hire. Charterers (Ducat Maritime Ltd) denied this by way of set off and counterclaim, including seeking to deduct USD 15,070 for underperformance. The Arbitrator found largely in favour of Owners, but in seeking to reconcile the figures presented by the parties in his Award, he wrongly added the Charterers’ unsuccessful counterclaim (USD 15,070) to the amount claimed by Owners before deducting the amounts on which Charterers succeeded. This resulted in the arbitrator awarding Owners USD 9,553.92 more than he should, having recognized that he could not award Owners more than they had claimed in the reference. Charterers made two unsuccessful applications to the arbitrator under s.57 of the 1996 Act to correct the Award, before issuing an application under s. 68 to have part of the Award set aside. 

Charterers argued that there was an irregularity according to s.68(2)(a) – failure of the tribunal to comply with its s.33 duties - on two alternative grounds: Firstly, that the arbitrator reached a conclusion that was contrary to the common position of the parties, without providing an opportunity for the parties to address him on the issue; Secondly, that he had made an obvious accounting mistake.

Butcher J ruled in Charterers’ favour on the first ground, reasoning that the parties had been in agreement that the Charterers’ counterclaim did not form part of the Owners’ claim and that the parties had not been given the opportunity to address the point as it was not in “the arena”. The judge referenced the fact that the arbitrator realised there “seemed to be a problem” by limiting the amount awarded to the amount claimed when his calculations would have resulted in a greater sum being due to the Owners. He said “I consider that, when he realised that the amount he thought was due to Owners was more than the amount they had claimed, and that this was unexplained, he should not have proceeded to resolve the problem as he did, without giving the parties the opportunity of commenting on it.” 

The judge’s findings on the second argument were obiter but worthy of note. Whilst accepting that illogicality or inadequacy of a tribunal’s reasoning does not bring the matter within s.68, which is focused on due process, he held that a gross and obvious accounting mistake or arithmetical error may constitute a failure to conduct proceedings fairly “because it constitutes a departure from the cases of both sides, without the parties having had an opportunity of addressing it”.  He continued “…neither party’s case is likely to have included the mistake as a basis for the result arrived at, and, in making the error, the tribunal is likely to have departed from common ground between the parties as to how arithmetical processes work, or whether items in an account are credits or debits, and to have done so without giving the parties an opportunity of addressing the justifiability of the departure.” The judge concluded that “If a “glaringly obvious error” in the award, to use Merkin and Flannery’s phrase, can be said to arise in this way, section 68 can probably be regarded as applicable, without subverting its focus on process”.

As to the requirement of “substantial injustice” under s.68, Butcher J found this to be satisfied stating:

 “I recognise that the sum involved is, by the standards of many commercial disputes, small.  Nevertheless, it must be viewed in the context of the total amount of the Owners’ claim, over which the parties considered it appropriate to arbitrate, which was US$37,831.83.  I regard it as substantially unjust that a party should, by reason of an error such as that made by the Arbitrator here, be ordered to pay about 33% more than was due by way of principal, and be ordered to pay interest on its own unsuccessful counterclaim.

I regard that as going well beyond what could reasonably be expected as an ordinary incident of arbitration, even SCP arbitration.”. 

It therefore seems that in assessing substantial injustice the court may look to the financial consequence in comparison to the amount claimed, even if both are extremely small in comparison to the total amounts payable under the relevant contract.  

Article Authors: 

Andrew Patrinos (Partner) and Tomos Holmes Davies (Paralegal)

War Risk Clauses and the Conflict in Ukraine

The invasion of Ukraine by the Russian Federation has triggered the largest conventional war in Europe since 1945, disrupting the lives of millions (BBC (2022) ‘Why is Russia Invading Ukraine and What Does Putin Want?’). It goes without saying that there have been wide-reaching effects on international trade. Since the start of Russia’s so-called ‘special operations’ in the country, the Ukrainian government has closed its ports to commercial shipping. It is understandable that ship owners in the Sea of Azov and the Black Seas will be questioning whether the Charterparty they have entered into can be cancelled due to War Risks. In light of this, we examine the relevance of the War Risk Clause for Voyage Chartering (VOYWAR) 2013 and the War Risk Clause for Time Chartering (CONWARTIME) 2013, as parties attempt to protect their interests and ensure the safety of their Vessels, cargoes, and crew. 

Background

For merchant vessels in the 17th and 18th centuries, war risks were generally categorized as ‘perils of the seas’ on a standard policy, or S.G. Form (Michael Miller (1990), Marine War Risks (Lloyd’s of London Press Ltd, London) at p.3.). In the following two centuries, they were recognized as a threat that had to be distinctly accounted for. On the eve of the Second World War, the Baltic Conference War Risks Clause for Voyage Charters 1938 stipulated that parties could declare the contract of carriage terminated if the navigation of the vessel was endangered by ‘war, hostilities, warlike operations, civil war or revolution’ (Baltic Conference War Risks Clause for Voyage Charterers 1938 (Code Name: “Baltwar”) at s.1(a)). In the post-war period, the Baltic Conference Aggravation of Hostilities Clause 1946 offered provisions for parties to cancel the charter in the event of war or warlike operations ‘being substantially aggravated’ (Baltic Conference Aggravation of Hostilities Clause 1946). In 1993 the Baltic and International Maritime Council (BIMCO) produced the first configurations of VOYWAR and CONWARTIME. The most recent manifestations of these Clauses appeared in 2013, and these are examined below in the context of the conflict in Ukraine. 

Ukraine is a major contributor to global trade and international shipping. Formerly known as the breadbasket of the Soviet Union, it was ranked the world’s second largest exporter of grain in 2021, and there are typically high levels of marine traffic around its ports. On 15th February the Joint War Committee designated the Sea of Azov and the Black Sea as ‘listed areas’, as tensions with Russia mounted. With the Russian invasion now fully underway, there is a far greater possibility of the BIMCO War Risk clauses being invoked by Shipowners operating in these areas, with a view to preserving the safety of their Vessel, cargo and crew. This may create the potential for disputes to arise. 

VOYWAR 2013 

The VOYWAR 2013 Clause provides that if loading has not yet commenced, and the Master or Owners reasonably believe that the performance of the Contract of Carriage will expose the Vessel, cargo or crew to war risks, they may give notice of cancellation of the Charterparty, or refuse to perform such part of it that they reasonably believe will expose the Vessel, cargo or crew to War Risks. If the Contract of Carriage stipulates that loading and discharging of cargo is to take place at a range of ports, and the port nominated by the Charterers exposes the Vessel, cargo or crew to War Risks, then the Owners shall require the Charterers to nominate a safe alternative port, which lies within that range for loading and discharging. They may cancel the Contract of Carriage if the charterers do not nominate an alternative safe port within forty-eight hours of receipt of the notice of this requirement. It is also important to understand how War Risks are defined within the Clause. It states: 

(ii) ‘“War Risks” shall include any actual, threatened or reported: 

War, act of war, civil war or hostilities; revolution; rebellion; civil commotion; warlike operations; laying of mines; acts of piracy and/or violent robbery and/or capture or seizure (hereinafter “Piracy”); acts of terrorists; acts of hostility or malicious damage; blockades (whether imposed against all vessels or imposed selectively against vessels or certain flags or ownership, or against certain cargoes or crews or otherwise howsoever)…’ (BIMCO, Standard War Risks Clauses for Voyage Chartering, 2013).

The Clause also stipulates that the Owners will ‘not be required to continue to load cargo for any voyage, or to sign bills of lading, waybills or other documents evidencing contracts of carriage for any port or place’, if, in the reasonable judgment of the Master and/or Owners, the Vessel, cargo and crew may be exposed to War Risks. Once again, if it should appear that this is the case, the Owners may by notice request that the Charterers nominate a safe port for the discharge of the cargo. If within forty-eight hours the Charterers have not done this, the Owners may elect to discharge the cargo at a safe port of their choosing. They will be entitled to recover extra expenses of this discharge and receive the full freight as if the cargo had been taken to the discharging port, and if this additional distance exceeds one hundred miles, to additional freight ‘which shall be the same percentage of the freight contracted for as the percentage which the extra distance represents to the distance of the normal and customary route’.

CONWARTIME 2013

According to CONWARTIME 2013, War Risks are defined in the same way as by VOYWAR 2013. In section (b), the Clause stipulates: 

‘The Vessel shall not be obliged to proceed or required to continue to or through any port, place, area or zone, or any waterway or canal (hereinafter “Area”) where it appears that the Vessel, cargo, crew, or other persons aboard the Vessel, in the reasonable judgment of the Master and/or the Owners, may be exposed to War Risks whether such risk existed at the time of entering into this Charter Party or occurred thereafter’ (BIMCO War Risk Clause for Time Chartering 2013).

It then provides: 

‘Should the Vessel be within any such place as aforesaid, which only becomes dangerous, or may become dangerous, after entry into it, the Vessel shall be at liberty to leave it.’

Furthermore, section (c) states that a Vessel will not be required to ‘load contraband cargo’, or ‘pass through any blockade as set out in Sub-Clause (a), or proceed to an Area where it may be subject to search and/or confiscation by a belligerent.’

Considerations If Clauses Are Invoked

There are various issues to consider if these Clauses are invoked and disputes arise. Of course, it is understandable that Owners may elect not to call at certain ports if there is a high probability that, in their reasonable judgment, they will be exposed to War Risks. However, the threshold for invoking the clauses is high. They cannot be relied upon simply because of the existence of a state of war, where the Vessel is not affected. It is likely the Owners would only be able to invoke the clause if there was danger present in the specific area the Vessel was scheduled to call at or to pass through. The Triton Lark [2012] established that Owners and Masters must account for quantitative (the degree of likelihood that a peril will occur) and qualitative factors (the seriousness of the potential consequences for a Vessel and the crew) when assessing the level of risk (Pacific Basin IHX Limited v Bulkhandling Handymax AS (the “Triton Lark”) (2012)). For example, Russian land operations in Ukraine, taking place far away from a Vessel sailing in the Black Sea, would be unlikely to establish sufficient qualitative danger for an Owner to invoke the clause, but an intensification of naval operations and the possibility of cargo ships being adversely affected, as a recent case demonstrated, would be far more likely to do so. It may then be safely said that the Charterers would not be entirely at the mercy of the Owners’ refusal.  

Charterers will likely have to be on their guard that the Owners do not invoke the clauses hastily or incorrectly, disrupting the course of business. There are a number of measures that Charterers might consider, in order to protect voyages to Ukrainian ports. These may include proposing specific wording in the Charterparty that might exempt the named port from the War Risk Clause or simply providing for the Charterers agreement to the Owners’ refusal to call at the port after the formation of the contract. Additional amendments might also be considered by the Charterers, such as the forty-eight-hour limit within which to nominate an alternative, safe port.

As for CONWARTIME 2013, Owners may be prepared to invoke this Clause with a heavy reliance on section (c), which stipulates that Owners will not be required to proceed to an area where they may be ‘subjected to search and/or confiscation by the belligerent.’ Following the recent seizure by the French navy of a Russian cargo ship bound by US sanctions, it has yet to be seen whether Russia will retaliate by seizing Vessels of NATO member states and subjecting them to lengthy searches. 

As the crisis in Ukraine develops, parties will have to consider these issues so that they are equipped to allow business to proceed as smoothly as possible in the circumstances and the safety of the Vessel, cargo and crew is assured. As a brief analytical overview, this article does not intend to serve as legal advice. If any assistance is required on an individual matter, please contact the office for further information. 

Article Authors:
Monty Birley (Assistant Solicitor) and Tomos Holmes Davies (Paralegal)

Premature Termination For Failure To Deliver Puts Buyers In Breach

Jackson Parton (Andrew Patrinos and Alex Askew) and Mr Timothy Hill QC (20 Essex Street) acted for the successful Sellers, Alegrow SA, in  Alegrow SA v Yayla Argo Gida San ve Nak A.S [2020] EWHC 1845 (Comm).

This was a rare example of a successful appeal of an arbitral award on a point of law under s69 Arbitration Act 1996 (the “Act”), before Mr Justice Henshaw in the Commercial Court (the “Court”).  The judge varied and remitted a GAFTA Appeal Board (the “Board”) Award finding that the Board had made an error in law in deciding that the Seller had repudiated its contract with the Buyer, with the Buyer being entitled to treat the contract as having come to an end and so entitled to substantial damages.

Background

The dispute involved a contract for the sale of 24,000 mts of Russian paddy rice Rapan type Crop 2016 CIF FO Mersin. The shipment period was between 1 September 2016 and 15 December 2016 and there were detailed contractual specifications. The rice was to be shipped on various vessels. Two shipments were made. However, the shipment on the mv KIOWA, despite the rice having been inspected and cleared by the GAFTA approved surveyor at the load port, was initially rejected by the Turkish authorities who alleged that there was a presence of nematode (roundworm).  As the rice had been produced by the same supplier, harvested from the same fields etc this caused consternation and concern. On 27 February 2017, the Turkish authorities allowed the mv KIOWA to berth and discharge.

In the meantime, the balance of 11,385.58 mts had not been shipped.

On 29 March 2017, the Buyer, Yayla Agro Gida San ve Nek AS, sent an email to the Seller informing them that they had until the evening of 30 March 2017 to provide a shipment schedule and to 15 April to ship the remaining rice. There was no response to this email, nor to an email on 1 April which indicated the Buyer’s intention to bring arbitral proceedings if the Seller failed to respond by 4 April. On 7 April the Buyer confirmed to the Seller that they had referred the matter to arbitration and attached the notice of arbitration.

The Awards

The first tier GAFTA tribunal (“FTT”), having considered the matter on paper, found for the Buyer. The FTT concluded that

“The Buyer having indulged the Seller for a reasonable period of time, finally made time of the essence by their email of 29 March 2017 when they required the Seller to declare by 30 March 2017 the tonnage that would/would not be loaded by the latest shipment date of 15 April 2017 AND WE SO FIND. The Seller failed to respond and on 1 April 2017 the Buyer once again gave notice that they would apply for Arbitration, thereby ending their indulgence if they did not receive a decision by 4 April 2017. With time of the essence once again preserved and the Seller failing to react, the Buyer finally brought the Contract to an end and held the Seller in default on 7 April 2017 and claimed arbitration. WE THEREFORE FIND that the date of default is 7 April 2017.”

The Sellers appealed the decision to the GAFTA Appeal Board and an oral hearing took place. The Board concluded that

“Buyers gave a final deadline to Sellers of 30th March 2017 for them to receive a schedule for the shipment of the outstanding balance. Sellers failed to respond to or meet this deadline and provide a schedule. Buyers notified Sellers of their intention to go to arbitration on 1st April 2017 and declared Sellers in default on 7th April 2017. We therefore uphold the first tier Tribunal’s Award to the extent that Sellers are in default by their failure to provide the balance of rice outstanding of 11,385.580mt rice. It is important to note that Buyers were not, on 29th March 2017, insisting on shipment before the end of March, but were requesting a shipment schedule AND WE FIND THAT the notice gave adequate time for Sellers to provide a schedule.

With regard to the date of default by their failure to respond to the deadline of 30th March 2017, Sellers were in breach of the Contract on the next business day after the deadline for receipt of a schedule for the outstanding shipment and the default date was 31st March 2017.”

The Seller appealed to the English High Court under s69 of the Act, on the following questions of law

“i) “Was the Buyer contractually entitled to demand a ‘shipment schedule’ on 29 March 2017?”; and

ii) “Was the Seller in repudiatory breach of the Contract in failing to provide such a shipment schedule by the Buyer’s deadline of 30 March 2017?”.

The Court’s decision

Despite the fact that “Trade tribunal decisions are generally to be accorded deference where the arbitrators’ experience assists it in determining a question of law, such as the interpretation of contractual documents or correspondence passing between members of an arbitrator’s own trade or industry” Mr Justice Henshaw allowed the Seller’s appeal.

The judge (relying on the judgment in Bunge SA v. Nibulon Trading BV [2013] EWHC 3936 (Comm); [2014] 1 Lloyd’s Rep 393, §§ 35-36 per Walker J, referring to statements of the Court of Appeal in MRI Trading AG v Erdenet Mining Corporation LLC [2013] 1 Lloyd’s Rep. 638) made clear that “the English court strives to uphold arbitration awards”, and accordingly the court should read an award in a “reasonable and commercial way, expecting as is usually the case, that there will be no substantial fault that can be found with it”. Awards should not be read with a “meticulous legal eye endeavouring to pick holes, inconsistencies and faults … and with the object of upsetting or frustrating the process of arbitration”.  Moreover, in cases of uncertainty, “the court will, so far as possible, construe the award in such a way as to make it valid rather than invalid”.

In deciding whether a tribunal had dealt with a question of law, English courts should “read  [the relevant] paragraphs [in the award] in a fair and reasonable way in the context of the award as a whole. They must not be taken in isolation and subjected to minute textual analysis” (Kershaw Mechanical Services [2006] EWHC 727 (TCC) at [77]-[78] per Jackson J). However, as Popplewell J explained in Novasen v Alimenta [2013] EWHC 345 (Comm), the appropriate degree of deference may sometimes be tempered:

“26. I would naturally be reluctant to differ from a trade tribunal such as the FOSFA Board of Appeal on a question of the interpretation of one of its standard clauses unless I were satisfied that despite the collective experience of the Board it were wrong. Nevertheless in this case the deference due to their views is somewhat tempered by the fact that the tribunal did not articulate any reasoning for their conclusion, either as to the wording of the clause, or as to the commercial considerations which might have influenced the effect which they found the clause to have. …” .

With these considerations in mind, the judge nevertheless came to the view that the FTT reasoning that “ time ceased to be of the essence, but that  [the Buyer’s] 29 March 2017 email made it of the essence again, and that on 4 April 2017 [the Buyer] then withdrew its ‘indulgence’ due to [the Seller’s] failure to provide a shipping schedule by 30 March 2017... [which] was in substance a finding of breach by failure to deliver, time having once more become of the essence” was unsupportable. “In order to find time thereby to have been made of the essence again, the FTT would have had to conclude that the period from 29 March to 15 April 2017 was a reasonable time to ship the remaining goods. No such finding is evident from its award. Further, if [the Buyer] had made time of the essence by requiring shipment by 15 April, it could not then in law have treated [the Seller] as in breach for failing in the intervening period to provide a shipment schedule that was not contractually required…”

In analysing the Award, after highlighting a lack of clarity in certain respects, and identifying various inconsistencies in the Board’s reasoning, Mr Justice Henshaw concluded that “it was the failure to respond to the request for a shipment schedule that led the Appeal Board to find [the Seller] to have been in default by 31 March”, and that the Seller’s breach of this obligation to provide a shipment schedule was repudiatory given that, as the judge pointed out,  “the Appeal Board made no finding as to where any obligation to provide a shipment schedule is to be found in the Contract, or why one should be implied”. 

The Court therefore found that

“i) the Buyer was not contractually entitled to demand a shipment schedule on 29 March 2017; and

ii) the Seller was not in repudiatory breach of the Contract in failing to provide such a schedule by the Buyer’s deadline of 30 March 2017.”

The appeal was allowed and the judge ordered that the Award “must be varied so as to conclude that [the Seller] was not in repudiatory (or renunciatory) breach of the Contract, but that [the Buyer] renounced the Contract by its notice of arbitration”. The Seller’s counterclaim was ordered to be remitted to the Board for determination of liability and quantum.

The Buyer also sought to run an argument based on renunciation. The judge observed that the Board did not explicitly address any case of renunciation, nor record the Buyer’s case as having been advanced on this basis at any time. In those circumstances the Seller had not been “given the opportunity to meet any case based (expressly or in substance) on renunciation”. To decide the case on the basis of renunciation it would have been necessary for the Board to have found that the Seller “had indicated, clearly and unequivocally, that it refused to perform or could not perform.” There was no such finding. Finally, the judge rejected an argument of renunciation by silence.

Points to note 

1.     In situations where, under a contract, time is of the essence for delivery and such delivery is late the buyer may expressly waive the breach or treat it as a breach of warranty only.

2.     However, the parties may also, by a process of mutual affirmation, agree to keep the contract on foot, in which case the seller bound to deliver in a reasonable time when so instructed by the buyer. The question of what amounts to a reasonable time is a matter to be decided based on all the relevant facts that apply at the time.

3.     If the buyer has by his words or actions agreed to keep the contract on foot and then made time of the essence again by instructing the seller to deliver within a reasonable time, if he seeks to treat a failure to deliver as a repudiation of the contract before the reasonable time has expired the buyer will be in repudiatory breach of contract which the seller can accept as bringing the contract to an end, entitling the seller to claim any damages that may result.

4.     The judgment reiterates the court’s approach and general reluctance to interfere with arbitration awards when parties seek to appeal an award on a question of law under s69 of the Act. Successful challenges are therefore rare under English law but, in appropriate circumstances, where there has been a clear and manifest error of law, this case demonstrates that the court will intervene as the requirements of justice trumps the desire for finality in such circumstances.

5.     However, it is important to note that, as s69 is not a mandatory provision, some major arbitral institutions’ rules expressly exclude any right of appeal on a point of law under s69 of the Act and that parties are always free to exclude the right of appeal by appropriate wording in their contracts.

 Article Author: Andrew Patrinos