It ain't necessarily so

Manfred Arnold illustrates how time really does cost money

I REMEMBER a German saying, 'Was lange währt, wird endlich gut,' which translates to 'things that take a while will turn out well in the end.' As sayings go, this probably could be applied to a great number of things, but certainly not to the arbitration case I have in mind. Time did not make it better, just more expensive.

Once upon a time, there was a shipowner who fixed his vessel for a time charter with a New York arbitration clause. The time charterer fixed the vessel for a sub-charterer with a London arbitration clause. Although this may have been a commercial necessity, it turned out to be a procedural and economical nightmare.

Under the chartering arrangement, the vessel loaded a cargo of 89,505 m/t of iron ore at Tubarao, Brazil, in March 1989 and proceeded to Gijon, Spain, for discharge. While at the Gijon anchorage, the weather deteriorated, the vessel dragged its anchor and eventually grounded. It sustained substantial bottom damage, causing the flooding of the engine room and hold No. 9. The vessel was abandoned by the crew. Salvage and lightering operations began in April and were concluded on June 2, 1989. The wreck of the vessel was sold.

On July 7, 1989, the owners' P&I Club, in order to prevent arrest of the vessel or other property, issued a letter of undertaking in the amount of $900,000 to cover such sums awarded for claims, interest and costs by the New York arbitrators. It was odd that the New York arbitrators were appointed before the London arbitration was even initiated, particularly since a London award would have been needed before the matter for indemnity could commence in New York.

The London Proceeding

In August 1990, the voyage charterers and time charterers appointed their respective arbitrators. On October 14, 1992, the time charterers served the owners with a vouching-in notice, demanding that the owners assume their defense, failing which they would seek indemnification for any liability which they may incur as the result of the London arbitration. The owners refused to join or otherwise participate in the London proceeding, but they did agree to produce certain documents to assist in the time charterers' defense.

In January and April 1997, the arbitrators appointed by the parties resigned. Promptly thereafter, each side appointed another arbitrator, and chose a third arbitrator rather than rely on the customary umpire. The panel was to address the voyage charterers' claims for contribution to the costs of salvage as damages or as restitution; damages resulting from the loss and damage to cargo; additional discharging costs; reimbursement of survey fees and disbursements; interest, the costs of the referee and the award. The time charterers rejected all claims and denied liability of each item.

The award states that the claim items 'were dealt with at a hearing which took place between September 19, 1997, and October 16, 1997.' I am not certain what transpired as the award simply states that a hearing took place within a distinct time frame. If it was just one hearing which took place, why could the date not be narrowed to a single date, rather than the range of nearly 30 days? On the other hand, if more than one hearing took place within that time frame, why then not call it hearings? This question is not an inquiry into English versus American grammar, but the number of hearing dates which would have a direct impact on the quantum of arbitrators' and counsel's fees.

'At the conclusion of the hearing, the parties requested a reasoned award . . . ,' with which the panel complied. The award stated that the time charterers 'called no witnesses and produced no Civil Evidence Act statements.' The panel relied 'upon statements given by the witnesses of fact before the Court of Instruction No. 3 . . ., and the Examining Magistrates of the Harbour Master's office.' At p15, in point 48 of the reasons, the panel stated that 'the Master was not called and his evidence not tested under cross-examination. We do not accept the Master's evidence . . .'

The arbitrators' award of March 27, 1998, found the vessel to be unseaworthy, the Master incompetent and voyage charterers were awarded direct damages of $632,372.49. The legal fees, interest and costs for the proceedings amounted to more than $2.1 million. As part of the award, 17.5 per cent VAT was charged on the arbitrators' fees which added an expense of £8,872.50, as well as room hire and catering of £2,835.49. The arbitrators' fees and disbursements, including those of the two who elected to step down, amounted to £62,407.99.

In case anyone is wondering about the details of the expenses, it is simply to show that the costs, including interest, had reached approximately $2.1 million, far exceeding the damages sought in this arbitration. It also points to certain extraneous cost items which are not common in other jurisdictions.

With the London award delivered, the matter then moved to New York.

The New York Proceedings

On June 13, 1989, the time charterers demanded arbitration and appointed an arbitrator. On June 30, 1989, the owners responded with their appointment. Nothing of substance occurred until June 1992 when the time charterers demanded discovery from the owners, who refused to comply. The panel was completed in February 1993 with the selection of the chairman.

The time charterers continued to seek discovery in New York for the London proceedings. However, the arbitrators concluded that they had no authority to do so, and pointed to the fact that the time charterers had created their own dilemma by agreeing to different venues. The panel stated that 'they could not provide the bridge between the two jurisdictions.'

Following the issuance of the London award in March 1998, in the following October the time charterers requested the panel to rule on the indemnity issue, seeking an award against the owners for the amounts awarded in London, while at the same time seeking additional security of $1.9 million to secure the panel's final award. The record of the London arbitration, together with further, additional documentation and briefs, was presented to the panel.

After a number of interlocutory rulings, on October 20, 1999, the arbitrators, rendered their decision rejecting the time charterers' request for additional security, acknowledging the time charterers' right to vouch-in owners, but also holding that they were not satisfied that the issues of the Master's competence and latent defects had been fairly and fully presented in the London arbitration. An organisational hearing was held on March 28, 2000, for the purpose of bringing this matter to a conclusion. The owners were then given the opportunity to present the testimony of the Master and the superintendent engineer but elected not to do so. The arbitrators were advised on January 11, 2001, that the parties had settled the matter with the limited funds made available by the owners' P&I Club in 1989.

In one of their briefs, the time charterers had pointed out that they had 'spent nearly ten years and $2.8 million' because the owners refused to defendthe sub-charterers' claim in London. The New York legal fees claimed were $100,000 and the arbitrators charged $42,780.

In hindsight, had the various parties cooperated and had the Club's security been applied to the voyage charterers' claim in 1989, the claim would have been covered. However, the way this case went, ancillary costs and interest well exceeded the primary claim numbers. There certainly was no happy ending for this story.

If anyone would like more information about this case, please contact Manfred Arnold at arno...@worldnet.att.net