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Arbitration – Low Value Claims

Jagan - October 14, 2022 - 1 comment

  1. Shipping is an international business and with participants often from different nationalities, locations, and different systems of law. Accordingly, parties would have different expectations such that disputes would invariably arise. While parties often resolve issues by themselves (by negotiation), some issues may remain unresolved and would therefore need to be dealt by other forms of Dispute Resolution including Mediation and Arbitration. Traditionally, Charterpartiesi have provided for disputes to be resolved by Arbitration and which is now also making inroads to other contracts such as Liner Bills of Ladingii and Average Bonds/Guaranteesiii.
  2. If the sums in dispute are substantial, parties would generally pursue the matter vigorously to recover what they believe they are entitled to. On the other hand, if the sums are not substantial, pursuit would depend on the costs together with the potential for recovery of these costs. In so far as charterparty disputes are concerned, they would generally provide for arbitration either under London Maritime Arbitrators Associationiv (“LMAA”), the Society of Maritime Arbitrators of New York (“SMA”) or the Singapore Chamber of Maritime Arbitrationv (“SCMA”) Rules or similar other institutions. All of them have procedures in place for low value disputesvi which are coupled with abridged processes, capped fees of Arbitrators together with recovery of costs.
  3. We have compared the costs which would be incurred to pursue low value claims using either the LMAA, SMA or SCMA and which can be viewed by clicking on this hyperlink. While parties can self-represent themselves in arbitrations, they prefer to be represented by solicitors such that they would also incur costs for their engagement (Solicitor and Client costs).
    1. Accordingly, it does appear that it may not be commercially prudent to pursue a claim by arbitration when the sums in dispute are say below USD 50,000.00.
    2. We say this with one caveat that in the Charterparty context, Owners and Charterers are generally entered with FD&D Clubs/Insurers and who provide a discretionary cover to their Insureds/Member for the legal costs to defend/pursue claims related to owning and operating of entered vessels. The disputed sum itself is not covered – however, the costs for pursuit/defence are borne by the FD&D Clubs/Insurers and therefore parties would only focus on the disputed sums and not the associated costs.
    3. While similar FD&D cover is available in the Transport Liability sector (NVOCC/Freight Forwarders), we have not seen any significant interest / take up of this cover.
    4. With respect to cargo interests, while cover is indeed available to cargo interests acting as charterers, we are not aware of any such cover for the others. Hence,  costs would be a factor to cargo interests who do not have any FD&D cover.
  4. Although we have no statistics, we believe that most claims should be around USD 50,000 to USD 100,000vii. As mentioned in 3 above, if parties are entered with a FDD Club/Insurers, the costs would not be a significant factor to consider. However, if parties do not have the benefit of this cover, they would be forced to a make commercial call as to whether they should pursue or defend such low value claims. Different organizations would have different thresholds beyond which they would persist and pursue such claims. We submit that smaller entities would generally have a lower threshold and therefore would be inclined to pursue low value claims provided the costs are reined. However, given the costs involved, it appears to us that pursuit by arbitration may not be the best fit for such low value claims. One of the alternatives to Arbitration may be Expert Determination.
    1. The reason why international Arbitration is preferred to other forms of dispute resolution is the potential for enforcement as most of the jurisdictions are a signatory of the New York Conventionviii. Unfortunately, there is no similar convention available for Expert Determination and therefore there would always be enforcement related risks (and which would result in additional risks and costs).
    2. The other possibility would be to provide for Expert Determination as a sub-process  /coupled with Arbitration as is currently being done for Mediation (Arb/Med/Arb Protocol). Parties would then have the advantages of both Arbitration and Expert Determination to deal with low value claims.
  5. If we wish to democratize Arbitration, we must necessarily have process available to deal with low value claims or new claims such as General Average (“GA”).
    1. With respect to the GA declared on The Ever Givenix, the Average Guarantee’s provide for LMAA arbitration. Although we have not sighted the Average Bonds sought, we believe that the wordings would be similar such that uninsured cargo interests (who would have provided cash deposits in lieu of Average Guarantee) would have to consider arbitration if they wished to deny the Owners entitlement to seek GA contribution. Our concerns on the use of arbitration for GA is as follows:
      1. Under the LMAA rules, arbitrators cannot order consolidationx but this could be done with the agreement of all parties as provided under S35 of the English Arbitration Act 1996. We understand that this is rarely agreed.
      2. Uninsured cargo interests may not have the requisite knowledge or resources to understand the implications of agreeing to the dispute resolution process provided in the Average Bond wordings.
      3. Based on our experience, the average value of cargo in a container should range around USD 50,000.00 to USD 75,000.00. A cargo interest having say only one container would be providing a cash deposit of say amounts  USD 12,500 – USD 18,750. For these cargo interests, the  costs involved to challenge the GA by Arbitration may well exceed the cash deposits provided and therefore they may be deterred from considering this further.
    2. The advantage of international arbitration is that processes can be tailor made to deal with the disputes together with the potential for enforcement (as mentioned in 4i above). While other forms of dispute resolutionxi are also clamoring for the same respectability, we believe that they would still require time given that arbitration has a first mover advantage.
  6. Way forward:
    1. Arbitration Associations / Institutions should consider amending their rules to cater  for such low value claims and which may include provisions for Expert determination.
    2. It would be preferrable to have separate arbitration process for GA. While GA Arbitration clauses can be easily provided in Charterparties, this may not be easily replicated in Liners Bills of Lading. Instead, as and when the York Antwerp Rulesxii are revised, the drafting committee should consider including a Rule providing for arbitration as the dispute resolution process together with a convienent seat.

i. Charterparty – Wikipedia
ii. See our earlier article, Arbitration Clause – Liner Bills of Lading, where we commented on the same.
iii. The wordings of the Average Guarantee required for The Ever Given provide for the Arbitration to be conducted based on LMAA terms. We have not sighted the Average Bond sought but are assuming that it would have a similar provision.
iv. LMAA has an Intermediate Claims Procedure for Claim values ranging between USD 100,000 to USD 400,000 and with the recoverability of costs capped at 30% of the Claimants claim and with the arbitrators fees capped at 10% of the Claimants Claim (for Single Arbitrator) and 20% (for Three Arbitrators) and the Small Claims Procedure for Claim values below USD 100,000.00 and with the fees of the single arbitrator fixed at GBP 4000 (which may increase to GBP 6500 if there is a counter claim which exceeds the amount of the claim) and the costs being capped at GBP 5000 (which may increase to GBP 6000 if there is a counterclaim which exceeds the claim).
v. SCMA has an expedited procedure for claims and counterclaims which fall below USD 300,000 with the fee’s of the Arbitrator capped at USD 10,000 (for claims and counterclaims up to USD 200,000) with a formula set at 5% for claims and counterclaims above USD 200,000 and with recovery of costs capped at USD 15,000 (for claims and counterclaims up to USD 200,000) together with a formula set at 5% for claims above USD 200,000 to USD 300,000.
vi. We had earlier written on Arbitration for Small Claims earlier but since then rules of both LMAA and SCMA have been revised.
vii. We did try to find out if any statistics were available but were advise that none was available detailing on the quantum of claims.
viii. See write up on The New York Convention
ix. See our earlier article, The Ever-Given Mela – IV para 3c, where we did mention one of our concerns on the use of Arbitration as dispute resolution process for the GA.
x. Consolidation process is available under the SMA Rules (Section 2 of the Maritime Arbitration Rules. While Consolidation is not available under both LMAA and SCMA, powers are indeed available to the Tribunal under the LMAA Terms 2021 (Para 17b) and under the SCMA Rules IV edition (Rule 29.2)  to hold proceedings concurrently
xi. Mediation by way of the Singapore Mediation Convention.
xii. General Average is available as of right. However,  the contracts of affreightments invariably incorporate the York Antwerp Rules (“YAR”) to deal with the adjustment of GA. The latest edition of the YAR is 2016 but the most commonly used Rules still remain of 1994.

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1 comment

  1. Adv.(Dr.) Sasikumar P.V

    Dear Jagan sab,

    This is really a good suggestion.

    With best regards,

    Dr. Sasikumar P.V

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