(Sea Venture Volume 20)
Parties frequently settle disputes despite the fact that arbitration has already been initiated. Often this results in terms favourable to both sides and settlement should be encouraged. However, as charterers discovered in a recent English case1, it is vitally important not to assume that settlement negotiations supersede arbitration. This was so even though charterers believed that owners had supported the suspension of arbitration proceedings pending the outcome of negotiations.
Background
The chain of events in the case was similar to many negotiations: a charterparty off-hire dispute was referred by owners to arbitration. Charters only responded after the security arrest of an associated vessel and initiated settlement negotiations with owners. At this time, the charterers had not yet served their defence, despite having been requested to do so by the arbitrator.
While owners and charterers were arranging a venue for negotiations, the arbitrator, at the request of the owners’ lawyers, made a peremptory order for the service of charterers’ defence within seven days, failing which a determination would be made on the owners’ submissions only. Charterers immediately advised the arbitrator of the anticipated settlement and managed to obtain a five-day extension of the order, but were warned that any subsequent extension would require written support from owners. Charterers complained to owners that it was unfair that they had pressed ahead with the arbitration while they were preparing to pursue negotiations and asked them to send a fax to the arbitrator (copied to charterers) agreeing an extension of time for service of the charterers’ defence to allow ample time for settlement.
Owners, despite prompting by charterers, never sent the fax, even though the charterers had travelled from Cuba to Greece to commence negotiations. While negotiations continued, the owners’ lawyers advised the arbitrator (on the day of expiry of the extension) that they had not received any communication from charterers and requested a determination on the documents before him. Three days later, an award of US$2million was made in favour of owners.
The Challenge
Charterers challenged the determination and brought an application to court to set aside the decision so that they might make their defence. As charterers could not allege fraud - there had been no express undertaking by owners that they had sent the fax requesting an extension of the extension already granted - they argued that owners had procured the award in a manner against public policy.
The difficulty facing charterers was that in order to set aside an award on this basis they had to prove that the owners had engaged in "serious impropriety" and support their allegation by "cogent evidence"2. It was not enough for the charterers to show that the owners’ involvement in settlement negotiations had misled them into thinking that the arbitration had been suspended. Unfortunately, there was no evidence that owners had agreed to suspend the proceedings and the fax to the arbitrator by the owners’ lawyers requesting an award in the absence of communication from charterers, had, apparently, been sent in ignorance of the settlement discussions. The court found that the owners had not engaged in "unconscionable conduct" and dismissed the application.
At first blush, the decision may seem hard on the charterers. However, it should be borne in mind that the charterers had not responded to the arbitration until the security arrest (suggesting a cavalier attitude to the proceedings) and, on the evidence before court, did not have a strong case against owners. The latter point, although not relevant to the conduct of the owners, addresses the issue of any "substantial injustice" against charterers, a further possible ground on which to challenge a determination.
Conclusion
There are a few lessons to be learned from this case: First, never ignore an arbitration process. Second, do not assume that settlement negotiations suspend an arbitration, no matter how amicable the relationship between the parties. Third, ensure that any consent for an extension of time (or other variation of usual requirements) is recorded in writing and submitted to the arbitrator; confirmation of an agreement by the other side to an extension of time should be sent to all parties and copied to the arbitrator. Fourth, be aware that courts are very reluctant to interfere with an arbitrator's determination - a deliberate and unconscionable act which thwarted a case that enjoyed a strong likelihood of success must be proved. This represents a formidable hurdle.
The charterers in this case failed to appoint lawyers (or any third party, such as a Club) to protect their interests in arbitration. Despite the appeal of settlement negotiations from a commercial point of view, it is nonetheless essential to continue to comply with the requirements of an ongoing arbitration until such time as final settlement has been achieved and reported to the arbitrator and all parties involved.
1 [2001] 1 LLR 707 [QB (Com. Ct)]
2 based upon the relevant provisions of S68 Arbitration Act, 1996
