Why arbitration for container liner disputes may not be the best fit?

1. This article is a joint article in the form of a debate with Ashwin Shankerⁱ (“Ashwin”) who argues that Arbitration may not be the best fit for container liner disputes and with Jagan arguing that at the present moment, arbitration appears to be the best way to deal with such disputes. By way of background, Jagan had written an earlier article, Bills of Lading – Arbitration Clause, and to which Ashwin commented on various issues. Jagan subsequently reached out to Ashwin to see whether we both can present a joint article to debate on the various issues arising from an arbitration clause with respect to container liner disputes.
2. Ashwin’s arguments against arbitrating container liner disputes
   1. Complexity for subrogee underwriters to sue carriers. There is controversy as to whether a subrogee underwriter gets the rights under the arbitration agreement as well
   2. On several occasions, you have more than two parties involved in the arbitration. For example, you can have dispute involving a shipper, carrier and receiver, or carrier, his servant and a cargo interest. Arbitrations are not designed for disputes with more than two parties. Most institutional clauses envisage each party appointing one Arbitrator.
   3. Cargo interests often wish to arrest vessels belonging to the carrier, to secure their claims in arbitration. There is ambiguity in some jurisdictions as to whether such an action is permitted at all.
   4. Some Bills of Lading contain a demise clause, which defines the carrier as the head owner, rather than the issuer of the Bill of This occasionally binds an innocent unconnected third party head owner to the Bill of Lading and the arbitration clause.
   5. Arbitration procedures are occasionally differently designed depending upon the nationality of the parties involved in it. For example, if two Indians were arbitrating in India, they must necessarily apply Indian law. In the cases of Bills of Lading, it is unknown as to who the ultimate receiver will be, and thus what its nationality will be. This can result in pre-designed arbitration clauses becoming unenforceable.
3. Jagan’s arguments favouring arbitrating container liner disputes
   1. The prevailing dispute resolution choice in Liner Bills of Lading is litigation in a specific Court’s jurisdiction based on the choice of the Carrier. The effect of this is that parties (both the cargo interests and the Carrier) may sometimes not pursue their legitimate claims due to the following reasons:
      1. Costs of pursuing or defending matters.
      2. Difficulty in enforcing judgements in other jurisdictions.
      3. Delays in the legal system in some jurisdictions relating to enforcements.
      4. Potential unfamiliarity with International shipping practices (perhaps this is one of the advantages of arbitration given that parties can choose a tribunal who are well versed with shipping practices).
   2. There is no best system but given the overwhelming complexity due to the differing legal systemsⁱⁱ in place, it may be best to choose Arbitration due to the following reasons:
      1. Arbitration has an advantage that the processes can be structured with time lines and capped costs i.e. the costs to be proportional to the amounts at stake. Our understanding is that the majority of disputes in Liner Shipper are for small sums and therefore it is not cost effective to consider litigation.
      2. An efficient arbitration process may actually spur parties to reconsider and pursue all of their disputes. While one may say that Jagan is advocating for more disputes instead of less, we believe that this would lead to a fairer balance instead of one party bearing the costs/loss for say no fault of theirs except that the costs of pursuit or defence exceed their costs/loss. A new balance would then be found and parties would deal with the disputes instead of allowing it to be say arbitrated.
      3. The advantage of arbitration is that it can be seatedⁱⁱⁱ in a specific jurisdiction to take advantage of the procedural law available in that jurisdiction. Obviously, the seat chosen should be arbitration friendly and have efficient processes for disputants to deal with their disputes.
      4. If the dispute is international in nature, say that the Carrier and Cargo interests are from two different jurisdictions, then it is easily possible to enforce international arbitration awards given that the overwhelming majority of nations are signatories to the New York Convention^iv and due to which they will enforce arbitration awards subject to public policy defences as provided in Article V of the Convention.
   3. National Courts have tried to ensure that there is a fair balance and therefore if there are arbitration clauses which can be caught in the “public policy” defence available under the New York Convention^v, they may not allow for the enforcement of the arbitration awards. This therefore makes it important for parties to ensure that the arbitration process is fair to all.
   4. With reference to Ashwin’s objections stated in 2, they are all valid. Jagan submits that there are always ways to deal with it and would respond as follows:
      1. Subrogee underwriter: The issue would be whether the subrogee underwriter is pursuing based on common law or based on a specific statue available in the jurisdiction where they are based and in which case, they may have an independent right of pursuit against the carrier. We take each in turn:
         1. Common Law: Under common law^vi, the subrogated underwriters take no better rights than the original parties. Hence, in almost all of the common law jurisdictions, the subrogated underwriter would be bound by the arbitration clause.
         2. Independent right based on statue: In some jurisdictions, the Underwriters may have an independent right as provided in the statue. This being the case, they may not be bound by the contractual provisions of the Bill of Lading. However, in almost all the Liner Bills of Lading, there would be a provision entitling the Carrier to an indemnity from the Merchant should they be pursued by a 3rd party for liability exceeding what is provided under the Bill of Lading contract^vii. In such circumstances, the Carrier could then seek recovery from the Shipper (as original parties to the contract or the Consignee and may arbitrate their dispute with them).
      2. Multiple parties:
         1. With respect to cargo interests, only holders of the Bill of Lading are entitled to pursue the Carrier. This being the case, parties involved would invariably be restricted to two.
         2. We are aware that the Carriers may pursue the original Shipper irrespective if they have divested ownership of the Bill of Lading on the basis that they are the original parties to the contract. We believe that this option would rarely be exercised except when the holders of the Bill of Lading are unresponsive or are seated^viii in difficult jurisdictions. In such cases, there may be multiple cargo interests involved in the same arbitration and which may create issues on the number of arbitrators and whether each have the entitlement to engage an arbitrator. We would suggest that the arbitrator be jointly appointed by the cargo interests instead of each cargo interests. Alternatively,
            1. the rules chosen for the arbitration process provide for the Institution or the appointment authority to choose the arbitrator
            2. the courts in the seat step in to appoint the arbitrators to hear the matter.
      3. Arrest of vessels:
         1. It is now a days rare for Container Carriers to own vessels in their own names. Instead, they prefer to own it through their associate companies so as to ring fence their assets. This being the case, most of the claims arising under a Bill of Lading will not result in the arrest of a vessel unless the loss was due to the fault of the vessel and in which case, cargo interests have an independent right to pursue the Owners. Given that is outside the Bill of Lading contract, an arbitration clause provided in the Bill of Lading would not apply.
         2. In the unlikely event the Container Carriers also own and operate vessels, the question to be asked is whether the cargo interests are entitled to arrest the vessel given that the Bill of Lading has an arbitration clause. This will obviously depend on the jurisdiction where the arrest of the vessel is planned given that in some jurisdictions^ix, it is possible to arrest vessels in aid of arbitration. Subsequently, after security has been provided, parties can proceed with the arbitration as provided in the Bill of Lading.
      4. Demise clause: We believe that it would be rare for at least common law courts to give effect to the Demise Clause after the English HOL judgement in The Starsin. However, if the loss was due to the fault of the Owners, we submit that cargo interests have an independent right to pursue them and which would not be barred by arbitration clause with another party.
      5. Nationality issues: We agree that various jurisdictions have various laws and which need to be respected. In the case of Indian entities who trade in India as a Carrier, they may wish to provide for Indian Law as the law of the contract for at least shipments emanating from India so as to ensure that their clauses provided in the Bills of Lading are held valid.
4. There is no perfect dispute process, and each process would have some advantage or dis-advantage. Our view tempered by our limited experience is that the other processes may not be the best fit for Bill of Lading disputes. Hence, we have been proselytizing Arbitration as we believe that Arbitration can facilitate the early disposal of disputes with costs being incurred proportionate to the claim at hand. If other processes either separately or jointly with Arbitration^x are more efficient, then we are happy to be converted but till such time, let us give arbitration a proper chance.
   

^i. Ashwin Shanker is a Partner at Chambers of George Rebello
^ii. Civil Law, Common Law, Customary Law & Religious Law – see List of national legal systems – Wikipedia
^iii. What is the “seat” of an arbitration and why does it matter?: MoloLamken LLP (ML) Law Firm / Attorneys
^iv. The New York Convention | New York Convention
^v.For instance, Asymmetric arbitration clauses may be held invalid if dealt by a PRC Court.
^vi.See article by Kennedy’s – Insurance subrogation: Common Law vs Roman Law perspective.
^vii. For example see Clause 1, 7 , 14 and 15 of the Maersk Bills of Lading Terms and Conditions.
^viii.For instance, in the case of MSC v Cottonex, which was litigated in the English Courts,MSC pursued Cottonex instead of the receiver.
^ix. See article on “Arrest of ships in India where there is a foreign-seated arbitration agreement.”
^x. For instance the SCMA AMA Protocol.