Fairness is the key

OVER the years, arbitrators have been told that their powers are awesome, particularly when the attorney, who is espousing the theory, wants the panel to exercise its powers. Is it hype or do the facts support it?

The agreement to arbitrate vests arbitrators with powers as broad as the agreement explicitly or implicitly provides. The key phrase is "implicitly", as it indicates that arbitrators have powers greater than those specifically enumerated. Defacto submission of a dispute to arbitration ratifies the power of the arbitrators to deal with those matters submitted.

This point was also reconfirmed in Continental Materials Corp v Gaddis Min Co, where the court stated that the jurisdiction of the arbitrators to make awards is derived from the agreement of submission. It is to be interpreted in accordance with the general principles of contract law. In the absence of any express reservation, it is presumed that the parties indeed agreed that everything, both as to law and fact, and necessary to the ultimate decision, is included in the authority of the arbitrators.

Prior court decisions, when dealing with arbitrators' powers, have usually dealt with the extreme û an award by an arbitration panel may be vacated where the arbitrators exceeded their powers. But then, the courts have also held, that as long as arbitrators remain within their jurisdiction and do not reach an irrational result, they may fashion the law to fit the facts before them, and their awards will not be set aside because they erred in the determination or application of the law.

The most supportive statement by the courts, however, is that, since the parties elected to proceed to arbitration - seeking certain advantages, such as speed, costs, etc - they would also have to assume the shortcomings of the process. In American Almond Prod Co v Consolidated Pecan S Co, Judge Learned Hand made the following statement: "Arbitration may or may not be a desirable substitute for trials in courts; as to that the parties must decide in each instance. But when they have adopted it, they must be content with its informalities. They must content themselves with looser approximations to the enforcement of their rights than those that the law accords them, when they resort to its machinery."

Over the years, many other judges have echoed this sentiment and, almost inevitably, the decisions have been supportive of the arbitral system.

I am not aware of specific court decisions which address the arbitrators' powers on procedural matters. Because of this void, should it not follow that, since an arbitrator is permitted and has the power to construe any provision of the contract (which is ambiguous or unclear,) the arbitrator should also have the power to interpret the arbitration clause in such a manner that the criteria, always praised as the advantages for arbitration, are met; i.e., speed and a minimum in costs. It is therefore reasonable to adduce that the absence of restrictive language permits the arbitrators to take such steps or make such rulings which do not affect the fairness of the proceeding as a whole.

The key word is 'fairness', which will be the yardstick against which any allegation of the arbitrators' misconduct will be measured - fairness in the arbitrators' conduct of not being unreasonable or capricious in their actions and also the fairness of dealing with the relationship between the parties and their commercial intents and expectations.

Neither the arbitrators' power to dismiss cases or the authority to order security is based upon specific directives in the Federal Arbitration Act, but they developed throughout the years of arbitration practice, and subsequently were confirmed by the courts.

With respect to the dismissal of cases, three decisions were made in 1988. In the Irene's Extasy, the panel dismissed charterers' claim with prejudice for failure to prosecute the case. After two hearings had been held, a hiatus occurred, and charterers then advised that they had ceased doing business, but nevertheless wanted to pursue their claim, calling for additional hearings. A hearing was set and subsequently cancelled at charterers' request. Counsel then resigned from the case, entrusting the task to charterers' inhouse counsel, who then also quit. A deadline was set for charterers which, however, was ignored.

In its decision, the panel stated: "The panel unanimously concludes it has offered charterer every opportunity to come forward and present its claim. . . . Lacking any response whatsoever from charterer within a reasonable deadline established by the panel and communicated by certified mail, receipt of which was acknowledged . . . the panel declares this arbitration terminated for lack of prosecution. Charterers' claim is dismissed with prejudice."

The arbitrators dismissed the matter because in fact no one was around or interested from the charterers' side in bringing this arbitration to a conclusion.

Subsequently, two arbitrations addressed similar issues. The Agios Nikolaos II and Archangelos III involved the same owning interest (claimants), the same issues (stevedore damages) and the same third arbitrator. The difference from the Irene's Extasy was that, in these two cases, the owners had assigned their claims to the mortgagee, a viable entity.

The claims amounted to $569,727 and $365,716, respectively, and were pursued against solvent charterers. Nevertheless, after several hearings, owners' counsel in both matters failed to advance the cases, and the arbitrators, therefore, ultimately issued awards dismissing the arbitration proceedings with prejudice. Both cases were argued before the same judge for confirmation/vacatur and also decided in favour of the respondents.

The judge ruled: ". . . This arbitration arising in 1983 was in effect dismissed for failure of the petitioner to prosecute the arbitration. That decision was eminently fair..."

In Meezan Shipping and Trading v Rafael Shipping, the arbitrators were initially faced with a ruling on security. Their partial final award addressed the matter, and the Indian court adopted the panel's reduction of security from $2.2m to $800,000. Six months after this order, the owner petitioned the panel for an order to release the excess funds. Shortly thereafter, Meezan announced that it did not plan to take further action in the arbitration.

Rafael argued that, although Meezan, as the initial claimant, opted not to prosecute the claims, the charterer could not simply walk away from this matter. The panel dismissed the arbitration with prejudice, stating: "All Meezan's claims are subject to New York arbitration; Meezan has refused to prosecute its claims and in order to preclude Meezan from circumventing arbitration by a voluntary withdrawal in order to prosecute these claims in some other form in contravention of its obligation to arbitrate...". The arbitrators ordered the security to be returned, and awarded $344,957.56 to the owner to cover costs and fees for the security and the legal process.

The most recent case in this category involved Paul Buytendyke (as Trustee of the Central American Container Line) and Sea-Land Service, Inc. In response to various motions, the bankruptcy court ruled on March 9, 1998 that the trustee's breach of contract and unfair competition claims were subject to arbitration.

The parties agreed to the rules of the SMA and a sole arbitrator. This was confirmed on June 18, 1998. On June 25, 1998, the arbitrator accepted the appointment, rendered his disclosure statement and made certain recommendations with respect to the arbitration procedure. On September 29, 1998, he inquired about the status and whether an intervention was necessary.

As no one had responded, on March 29, 2000, the arbitrator wrote to the parties, inviting their confirmation that the matter was no longer active. On April 4, 2000, Sea-Land responded and requested a dismissal of Buytendyke's claim. Since claimants did not respond to this crucial message, and also based upon the inactivity of nearly two years since the commencement of the proceedings, on April 10, the arbitrator issued his award.

The decision, dismissing the claims with prejudice, contained the following language: "In Harvey Aluminum v United Steelworkers of America AFL-CIO, it was held that arbitration proceedings should be brought to a conclusion as soon as reasonably possible. In keeping with this expectation, three arbitrations were decided in New York in 1988 dismissing them with prejudice for failure to prosecute. . . . Since the courts have confirmed that an arbitrator is permitted and has the power to construe any provision of a contract, would it not follow that the arbitrator should also have the power to interpret the arbitration clause in such a manner that the criteria, always praised as the advantages to arbitration, are met; i.e., speed and a minimum in costs? It is, therefore, reasonable to adduce that the absence of restrictive language permits the arbitrator to take such steps or make such rulings that do not affect the fairness of the proceedings as a whole."

From the few cases cited, it is apparent that this is not a common issue that happens with the frequency of demurrage claims. Moreover, although the actions to dismiss may appear to be draconian, they are nevertheless commercially and equitably compelling, and would support such an application.

When a cargo claim is filed, the owner, in the normal course of business, notifies his underwriters, who either have to provide security or make a reserve for the potential - but, as yet, unproven - claim. Once the claim has been officially made, the statute of limitations no longer applies and cannot act as a shield for the owner. How long does a matter have to remain in suspense before it is considered a dead issue?

Considering the volatile aspects of the markets, the cost of money and the question as to the viability of companies, time becomes essential. Parties agree to time?bar clauses to control their accounting and to have finality. If that is a commercially realistic expectation, why then should claimants be allowed to be dilatory in their pursuits of claims?