Awarding attorneys fees at arbitration

AWARDS by the Society of Maritime Arbitrators (SMA) in New York have undergone some important changes in recent years, especially in the area of attorneys' fees. With changes in the SMA arbitration rules, there appears to be a seminal change in climate favouring the award of such fees to successful parties.

"The award of attorneys' fees makes arbitration much more attractive to those who believe they have a strong case and are more likely to be made completely whole by the award."

While the English courts have granted attorneys' fees to the prevailing party for almost four centuries, historically arbitrators in the US have followed American precedent and have tended to direct that each party should bear its own legal fees and costs unless there was bad faith by one party, or the charter party provided for the award. However, there appears to be a pronounced trend in New York arbitration in recent years to award some amount to cover legal costs and fees, particularly where the arguments advanced by the losing party are viewed as having little merit and, on occasion, even if there is no provision for attorneys' fees in the charter party.

This important change could have a significant impact on arbitration in New York. The award of attorneys' fees makes arbitration much more attractive to those who believe they have a strong case and are more likely to be made completely whole by the award.

Prior trends and the rules change

Previously, unless the arbitration clause of the charter party so provided, arbitrators did not have the authority to award attorneys' fees. Basing their decisions primarily upon the Federal Arbitration Act, 9 USC Secs 1-14, 201-208, New York federal courts held that arbitrators could bind the parties only on issues they have submitted to arbitration, and that the award of attorneys' fees therefore exceeded the arbitrator's authority. (Transvenezualian Shipping Co, SA, M/V Caribbean Memories v Czarnikow-Rionda Co Inc, 1982 AMC 1458 (SDNY 1982). In Federal Commerce & Navigation Co Ltd v Associated Metals & Minerals Corp (1979 AMC 1733, SDNY 1978), the court held that the arbitration act "contains no authorisation for attorneys' fees."

Not surprisingly, the most noted case against the award of attorneys' fees in arbitration came from the US Supreme Court. The court concluded in Alyeska Pipeline Service Co v Wilderness Society (421 US 240, 257, 1975), that, unlike England - where counsel's fees are regularly awarded to the prevailing party -"Recent cases have also reaffirmed the general rule [known as the 'American Rule'] that, absent statute or enforceable contract, litigants pay their own attorneys' fees."

The American Rule, the court argued in Alyeska, was an historic precedent deeply rooted in American jurisprudence as far back as 1796 in Arcambel v Wiseman ( (3 US (3 Dall) 306). As a result, the court concluded that parties would bear their own legal fees in arbitration absent a clause in the contract to the contrary.

Prior to this decision, however, the court held that attorneys' fees are available in admiralty cases when a party acts in bad faith or in cases involving "vexatious conduct." (See Vaughan v Atkinson, 369 US 527, 1962, AMC 1131).

The SMA awards during this period reflected the attitude that attorneys' fees are borne by the parties and can only be awarded when specifically agreed to by the parties, or when there is extreme conduct. In M/V Cernik (SMA 2888, 1992), the panel concluded that, while it would like to award attorneys' fees associated with the prosecution of the arbitration ($3,825), prior court decisions as well as the absence of specific language in the arbitration clause of the charter party prevented it from making an award "of that deserved expense."

Similarly, in M/V Vasilios (SMA 2374, 1987), the panel did not award attorneys' fees, fearing that if it were to do so, "it might provide grounds for possible vacation of this award......" as there was no specific authorisation for it in the charter party.

On occasion, panels appeared to search for a way around the limitation. In Cradle of Liberty (SMA 2219, 1986), the panel believed that the charterer was trying to recover an obviously exaggerated claim while the owner was even more outrageous for stonewalling the claim and refusing to appoint an arbitrator. However, while the panel said that it wanted both sides to bear their own legal costs - based upon language in the contract "not usually found in other charter parties," calling for attorneys' fees as damages for a breach - it concluded that the parties intended to "apply something akin the British rule, i.e., that the winning party may recover its attorneys' fees from the losing party." Since the charterer was only partially successful, the panel awarded 75 per cent of its legal costs ($15,459). Along those lines, some panels awarded attorneys' fees without specific contractual authority, arguing that the request from both parties for attorneys' fees represented an agreement between them extending the authority of the panel to make such an award. (The Manila Enterprise, SMA2060, 1983; The Liberian Statesman, SMA 2092, 1985.

Looking at these cases closely, it is easy to conclude that, while arbitration panels in New York were hesitant to make awards of counsel's fees due to the lack of statutory and contractual support, most felt that the resulting award was incomplete. Indeed, the frustration of the panel in Pacific Coast Transport Co v Pakistan Vanaspati Manufacturers Assoc (SMA 509, 1979) was apparent when it stated that it "felt constrained to apply US law requiring the parties to bear their own attorneys' fees" despite the obvious inequities.

SMA rules

The SMA rules codified this historic attitude towards the awarding of attorneys' fees. The 1991 rules provided that "the panel has the power to order the parties to bear attorneys' fees, where permitted" and the costs of the proceeding in whatever apportionment considered fair under the circumstances. However, by 1994, Section 30 of the SMA rules was amended to provide that the arbitration panel, in its award, "shall address the issue of attorneys' fees and costs" incurred by the parties. The rule empowers the panel to award "reasonable attorneys' fees" and expenses incurred by a party in prosecuting or defending its case.

New trends in the award of legal fees

By the mid-1990s, the panels used this new authority to change the landscape of arbitration in New York to more fairly provide the prevailing party with equitable compensation without necessarily making a finding of bad faith. A clear shift in attitude can be seen in the number of attorney fee awards - from 1974 to 1979, compensation for legal fees was granted only 25 times, but between 1991 and 1995, that figure had more than doubled to 58. That trend continues to the present.

Pursuant to this new authority, SMA arbitration panels have made many large awards of both attorneys' fees as well as arbitration fees. In Eastwind Transport/Sutra BV, SMA 3452, 1997), involving arbitration of improper cancellation and demurrage claims by the owner, the panel awarded $20,000 to the owners to cover legal costs. The panel found that the charterer had failed to meet its obligations under the contracts of affreightment and letter of agreement, and had also ignored its prior agreement to proceed to arbitration as a means to resolve disputes. As a result, the arbitrator's fees - $9,940 - were also assessed in full against the charterer.

Likewise, in M/T Aniara, SMA 3319, 1996), involving another wrongful cancellation claim by the owner under an Asbatankvoy charter (where both parties requested attorneys' fees), the panel concluded that the cancellation of the charter by the charterer was valid. The owner was found to have known that the vessel's tanks were not clean and therefore not ready to take on the methanol cargo by the charter party's cancelling date. While there was no finding of bad faith on the part of the owner, the charterer was awarded $20,000 towards legal expenses, with an additional $3,000 to cover the expenses of the marine surveyor whom the panel requested give testimony at the hearing. The panel also awarded the charterer 85 per cent of the balance of the arbitration costs.

The award was made over the dissent of one panelist, who commented that he disagreed with the award of attorneys' fees and costs due to the fact that "not only were the owners to provide their own rope to hang themselves, but now the arbitrators also make the owners pay for the rope itself."

While colourful, this conclusion clearly does not appear to represent the current trend in New York arbitration - in fact, the opposite is true. Fairness and equity, as well as an effort to streamline the process by reducing the number of meritless claims and counterclaims, is doubtless the reason behind the large awards of counsel's fees and disproportionate assignments of arbitration costs.

Indeed, since the revision of the SMA rules, panels are much less timid in awarding legal fees even where the charter party arbitration clause does not specifically provide for it in the arbitration clause or elsewhere. While it was a small award of only $1,000 in M/V Aquario, SMA 3258, 1996, the panel awarded attorneys' fees even though there was no contractual provision giving the panel discretion to make the award. The agreement "presumed the parties will abide by it in good faith," and when the charterer delayed appointing an arbitrator for five months, the panel awarded the owner legal costs based on the empowering language of Section 30 of the SMA rules without making a clear statement that the charterer had indeed acted in bad faith.

Even more surprising, since the revision of the rules, panels have been willing to make a fee award even where they have not received a statement of fees and expenses from either counsel. In M/V Lepanto Glory, SMA 3492, 1998, the panel stated that it is "the usual practice in New York arbitration to award attorneys' fees to the prevailing party." Without citing any arbitration clause language, only the request by the owner for fees, the panel awarded $10,000 to the charterer to defray the attorneys' costs, despite the fact that the charterer did not submit expense receipts or statements.

The single greatest result of the change in attitude by arbitration panels is to make arbitration an increasingly attractive option for owners and charterers alike. The streamlining of the process to include the awarding of attorneys' fees and arbitration costs means that the opportunity now exists for the winner to be made whole.