The Midnight Clause

1. The focus on any business negotiation is to try and reach an agreement at the earliest opportunity. This being the case, attention would be mainly on the provision of the product/service and the price to clinch the deal. Once parties have agreed to these, other issues related to the provision of the product/services would necessarily be considered and negotiated to close the transaction. Given that these other clauses are considered only after the “main” terms have been agreed, these clauses are known as the midnight clauses. Typical clauses which fall under the midnight clause category would be the Law and Jurisdiction and Dispute Resolution Clause (“DRC”).
2. The intention of any contract would be to perform the contract without any issues. However, disputes do arise and if the DRC is not properly thought off, this may certainly impact the effective resolution. Our articles are focused on shipping and related matters and therefore this article will also focus on the common DRC one may find in shipping contracts.
3. Shipping forms such as charterparties commonly provide for the use of pre-worded DRC’s. The most common clauses incorporated are those published by BIMCO and includes both the BIMCO DRC 2017ⁱ or DRC 2020 (which has separate wordings for Londonⁱⁱ, New Yorkⁱⁱⁱ, Singapore^iv and Hong Kong^v). The advantage of using these clauses is that they have been drafted considering the issues together with the interplay of the law of the seat and the procedural rules adopted ( LMAA, SMA, SCMA or the HKMAG).
4. Some of the differences between the arbitration acts of UK, Singapore, and Hong Kong (we have not considered the US arbitration act as we rarely come across this given the location where we are based) are as follows:
   1. English Arbitration Act 1996:
      1. Tribunal:
         • The act allows parties to choose the number of arbitrators to form the Tribunal. In the absence of any agreement on the number of arbitrators, the Tribunal would consist of a sole arbitrator^vi. If the arbitration clause provides for LMAA Terms 2021, then in the absence of express choice, Clause 8(a) provides for a 3 member panel.
         • In a three-member panel, the general process is for each party to appoint an arbitrator and with the third arbitrator being jointly appointed by the first two arbitrators^vii. Some parties may tactically wish to derail the arbitration process by not appointing an arbitrator when called on to do so and in which case, this may force the initiating party to also bear the expenses for the 2^nd and 3^rd arbitrator.The English Arbitration Act has a provision to deal with this issue in that a party who have appointed their arbitrator may give notice to the other party that the initial arbitrator appointed will act as the sole arbitrator^viii. The LMAA 2021 Rules^ix also have a similar provision and therefore if these are the procedural rules to apply even with another seat, the effect would be similar.
      2. Right to appeal: S 69 of the English Arbitration Act entitles a party to appeal to the English High Court on a point of law. This right can be varied if expressly agreed by the parties or in the arbitral rules^x such as provided in the LMAA Small Claims Procedure 2021.
   2. Singapore Arbitration Act: While Singapore has two separate acts, one for Domestic Arbitration (“AA”) and another for International Arbitration  (“IAA”), given that shipping disputes are invariably between parties of different jurisdictions and that the DRV invariably provide for the application of the IAA we are not commenting on the AA.
      1. Tribunal:
         • The IAA incorporates the Model Law^xi (in the absence of any agreement, the model law provides for a 3-member tribunal) but with some amendments and which provide for similar provisions as the English Arbitration Act i.e. in the absence of any agreement, the Tribunal would consist of a sole arbitrator^xii. If the arbitration clause provides for the incorporation of the SCMA Rules (Fourth edition), Clause 8 expressly provides for a three member panel and therefore it will override the provisions of the IAA.
         • Under the Model Law, failure of a party to appoint their arbitrator does not result in any variation in the size of the arbitration panel. Instead, the other party may request the Court or the appointment authority^xiii to appoint the other arbitrator/s. If the SCMA Rules (fourth edition) are incorporated as the procedural rules, the rules provide for the Chairperson of the SCMA to act as the appointment authority for the other arbitrator/s.
         • The practical effect of this is that a party may put financial pressure on the other party in the conduct of the arbitration by not participating in the appointment process. While this behaviour may be condonable, we submit that this is more of a counterparty risk and which may be avoided if parties carefully vet their counterparty prior to entering into any agreement.
      2. Right to appeal: There is no similar provision in either the IAA or the Model law with respect to the right to appeal. In fact, the Model law expressly states that the only recourse against the award is one of setting aside^xiv.
   3. Hong Kong Arbitration Ordinance (“HKAO”): This ordinance provides for the incorporation of Model Law with some amends.
      1. Tribunal: In the absence of express choice either in the DRC or the Rules which may be incorporated, the HKAO provides that the parties may agree on the number of arbitrators^xv failing which HKIAC^xvi may decide on the number of arbitrators either being 1 or 3. Incidentally, the HKAO provides for the HKIAC as the appointing authority. If the HKMAG Terms 2021 are incorporated as the arbitral rules to govern the arbitration, then clause 9 provide for the arbitral tribunal to consist of 3 arbitrators. If the HKMAG Small Claim Procedure 2021 is incorporated, then similar to the LMAA Small Claims Procedure, the Tribunal would consist of a sole arbitrator.  
      2. Right to appeal: Similar to IAA, there is no provision in the HKAO on any right to appeal on a point of law. Instead, the only recourse against the award is one of setting aside^xvii.
5. We have come across DRC’s which read as “ARB IN LONDON/SINGAPORE AND ENGLISH LAW TO APPLY”.
   1. The words “ARB IN LONDON/SINGAPORE” deal with the seat of the Arbitration. The selection of the seat is the legal place of arbitration and which determines the framework of the arbitration. This will have an important bearing as the laws of various seats may differ (e.g. English Law allows a party to appeal on a point of law whereas the Singapore IAA  or the HKAO do not have a similar provision).
   2. The words “ENGLISH LAW TO APPLY” deal with the law of the contract and which applies to the merits of the dispute.
      These DRCs appear to us to be more of an afterthought instead of being crafted specifically to deal with disputes which may arise. The practical effect of these clauses is that the Tribunal would consist of a sole arbitrator with the major difference being that if the Arbitration is conducted in London, then parties would have a right to appeal on a point of law whereas this is not available in Singapore. Additionally, if the size of the claim is modest, the expenses incurred to pursue such claims may dwarf the claimed amounts. Instead, if the arbitration clause provided for any of the Rules (LMAA Terms 2021/SCM Rules (Fourth Edition)/HKMAG Terms 2021) there is availability of an abridged procedure^xviii to ensure that the costs and time are commensurate to the claimed amounts. Additionally, if parties are unable to jointly agree on the appointment of the arbitrator, then the appointment would be based on the Arbitration Act of the seat, and which would be either the court or the relevant appointment authority. This could be avoided if the arbitration clause provides for the incorporation of any of the rules of the various arbitral association/institutions.
6. To conclude,
   1. parties should be aware of the importance of DRC’s and should, as far as possible, incorporate industry standard clauses such as suggested by LMAA, SMA, SCMA or HKMAG.
   2. alternatively, parties should have a choice of DRC’s available as rider clauses^xix and be aware of their effect in dealing with disputes. The advantage of this is that parties  would be signing the contract with “open” eyes and therefore would avoid suprises at a later date.

^i. See https://www.bimco.org/contracts-and-clauses/bimcoclauses/earlier/dispute_resolution_clause_2017
^ii. https://www.bimco.org/contracts-and-clauses/bimco-clauses/current/law-and-arbitration-clause-2020-london
^iii. https://www.bimco.org/contracts-and-clauses/bimco-clauses/current/law-and-arbitration-clause-2020-new-york
^iv. https://www.bimco.org/contracts-and-clauses/bimco-clauses/current/law-and-arbitration-clause-2020-singapore
^v. https://www.bimco.org/contracts-and-clauses/bimco-clauses/current/law-and-arbitration-clause-2020-hong-kong
^vi. See S15(3) of the English Arbitration Act 1996.
^vii. See S16(5) of the English Arbitration Act 1996.
^viii. See S17 of the English Arbitration Act 1996.
^ix. See Clause 10 of the LMAA Terms 2021.
^x. As provided in clause 4 of the LMAA Small Claims Procedure 2021.
^xi. The UNCITRAL Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21st June 1985
^xii. See S9 of the Singapore International Arbitration Act.
^xiii. The Chairman of the Singapore International Arbitration Centre is listed as the appointment authority in the IAA (see S 8(2) of the IAA).
^xiv. See Art 34 of the Model Law.
^xv. See S23(3)(a) of the HKAO.
^xvi. See S23(3) of the HKAO.
^xvii. See S81 of the HKAO.
^xviii. See the LMAA Small Claims Procedure 2021 which is meant to deal with claims upto a sum of USD 100,000, the Intermediate Claims Procedure 2021 which is meant to deal with claims upto a sum of USD 400,000, the SCMA Expedited Procedure provided in Rule 44 of the SCMA Rules Edition 4 for disputes upto a sum of USD 400,000.
^xix. Rider Clauses are a set of additional clauses which substitute or supplement clauses in the original document.