Lorand Shipping v Davof Trading (Africa) B.V. (MV "Ocean Glory"): when a "creative solution" on the part of the tribunal becomes a serious irregularity leading to substantial injustice

In a rare example of a successful application under section 68 of the English Arbitration Act 1996 (the "Act"), the English Commercial Court has granted an order setting aside part of a final award and remitted the matter to the tribunal.

The circumstances which led to the application concerned a dispute under a charterparty between the Owners (Lorand Shipping) and the Charterers (Davof Trading (Africa) B.V.). The Owners referred a claim for demurrage to arbitration and, in a rather unclear Claim Submission, asked the tribunal to reserve its jurisdiction in relation to other claims which were as yet unparticularised and unquantified. The Charterers asked the tribunal to dismiss all such claims on their merits. The tribunal issued a final award which did neither. Instead, the tribunal refused to reserve its jurisdiction and, without regard to a contractual time bar, envisaged that any other claims would be brought in a new arbitration.

The English Commercial Court found that the tribunal's approach, which had been without proper notice and without having given the parties opportunity to address the course of action which neither of them had advocated, constituted a serious irregularity. The fact that the Owner's claims were now shut out constituted a substantial injustice and the offending paragraphs of the award were remitted back to the tribunal.

The case serves as a reminder to arbitrators that parties must be given opportunity to consider and address a course of action not advocated by either of them, even if the course of action may objectively be considered a practical solution to their collective benefit.

The Charterparty and the reference to arbitration

Problems with the vessel and delays lead to a dispute between the Owners and the Charterers under a Charterparty. The Charterparty provided for disputes to be referred to arbitration seated in London and for a contractual timebar requiring "claims to be lodged … within six months of the last day of discharge of the chartered vessel, or, in the case of non-performance of the charterparty, within twelve months of charterparty cancellation date", failing which such claims would be waived and barred (Clause 27).

After discharge of the vessel, the Owners gave notice of their appointment of an arbitrator under Clause 27, which did not specify any particular dispute or claim that was being referred. The Charterers appointed their arbitrator. The Owners then served "Claim Submissions for an Interim Award on Demurrage" (the "Claim Submissions").

The Claim Submissions also stated that "The Tribunal's jurisdiction is to be reserved for any and all claims against the Respondents, relating to any claim for damage to cargo, that may be brought against the Owners by the cargo receivers under the Bill of Lading and/or in respect of any damage suffered by the Vessel…and/or the extended services of the Salvors …(due to the Charterers' breach of the Charterparty) and in respect of which the Claimants will seek an indemnity from the Respondents at the appropriate time".

The Final Award

The Tribunal made a "Final Arbitration Award" which, in addition to dealing with the Owner's claim for demurrage, dealt briefly with all other disputes arising under the Charterparty, in paragraphs 30-31:

"30. Given the length of time since the cargo was discharged and that the Owners’ provided no evidence that the cargo receivers / interests had or indeed intended to bring a claim against them under the Bill of Lading, we refuse their application.

31. In the event that the cargo receivers / interests do make a claim, doubtless the Owners will consider whether it is possible to start new arbitration proceedings against the Charterers. It follows that this award is not made on an interim basis, but is final in respect of the issues decided herein."

It was agreed that the effect of the award was to exhaust the tribunal's jurisdiction over any claims arising under the Charterparty and to render them functus officio.

The challenge to the Final Award

The Owners challenged paragraphs 30 and 31 of the final award on the basis that, whilst the tribunal did not intend to shut out further claims against the Charterers as it had not considered the merits of such claims, the unwitting effect of the offending paragraphs was to shut out such claims altogether (by virtue of the timebar in Clause 27).

The Owners argued that the tribunal had failed to comply with its general duty under section 33 of the Act by:

1. adopting a course of action that was not advocated by either party – namely, refusing to exercise jurisdiction over other claims against the Charterers on the assumption that these claims might be brought in a separate arbitration. (The Owners had asked the tribunal to reserve jurisdiction over any other claims arising under the Charterparty and the Charterers had asked for those claims to be dismissed on their merits);
2. not giving the parties opportunity to comment on the proposal; and
3. relying on considerations which had not been raised by the parties and which the parties had no opportunity to address before the award was made.

This course of action, argued the Owners, constituted a serious irregularity which led to substantial injustice for the purposes of section 68 of the Act.

The Charterers argued that the high threshold of serious irregularity leading to substantial injustice under s68 had not been met. They argued that it was clear that the Charterers had sought a final award and opposed the application for a partial award, and that both parties had adequate opportunity to address the tribunal on all of the issues. The Charterers also disputed the evidence that there were any more claims against the Charterers: therefore, even if the Owners could demonstrate a serious irregularity, they could not show any substantial injustice.

The Commercial Court's judgment

Whilst accepting that the threshold of s68 is very high, the Commercial Court issued a declaration that paragraphs 30 and 31 were of no effect and remitted that part of the award back to the tribunal.

Notwithstanding the reference to an "Interim Award", the Court characterised the Claim Submissions as an application for a partial award pursuant to section 47 of the Act.   It concluded that, despite the uncertainty in the Claim Submissions, it was the case (or at least the parties proceeded on the basis that) the other claims under the Charterparty had been referred to the tribunal.

The Court held that where a tribunal wished to adopt a course not advocated by either party, it is generally incumbent upon the tribunal to give the parties an opportunity to address it on that possible course. A failure to give the parties such an opportunity may amount to a serious irregularity. The tribunal in this case adopted a "half-way house" approach, which was not advocated by either of the parties: it neither determined the Owner's claims should be rejected on the merits (as submitted by the Charterers), nor did it reserve them for further consideration. The Court therefore found that the parties should have been given opportunity to address the tribunal's proposed course of action. In determining whether this failure caused substantial injustice to the Owners, it was sufficient that the tribunal might realistically have reached a different conclusion.

Whilst it was not necessary to decide the case, the Court offered the observation that, as a matter of arbitral process, where a claim is submitted to a tribunal for determination, the tribunal is obliged to determine it one way or the other and has no power to decline to act.

Comment

The case comes as a sharp reminder to arbitrating parties to be clear in terms of the claims they are pursuing in the reference. The position appears to have been made unclear in this case by the Owner's request for an "Interim Award" on its demurrage claim – which the Court rightly pointed out was an application for a partial award – and the uncertainty that created in its Claim Submissions (and later pleadings) as to whether the other claims against the Charterers under the Charterparty were before the tribunal. Whilst the Owners were ultimately successful before the Court, it is undesirable for a party to end up in a position where it becomes necessary to convince a Court that it should intervene under s68 of the Act.

The judgment also reminds arbitrators to ensure that any solution which they propose to adopt is one which the parties have had the opportunity to address.

For further information, please contact Craig Tevendale, Partner, Hannah Ambrose, Professional Support Lawyer or your usual Herbert Smith Freehills contact.