In a recent charterparty dispute between Lavender Shipmanagement Inc. and Ducat Maritime Ltd., Ducat successfully challenged part of a London Maritime Arbitrators Association (LMAA) Small Claims Procedure (SCP) decision in court, when the arbitrator was found to have breached his duty of fairness.

This successful challenge is noticeable for a number of reasons, primarily due to the fact that SCP excludes the right to appeal against arbitration awards. In this article, senior partner Stella Petritsi explains what this judgment will mean for future arbitrations where obvious errors have been found.

The facts of the case

The owners of the vessel “Majesty”, Lavender Shipmanagement Inc., claimed in a reference under the LMAA SCP, unpaid charter in the amount of US$37,831.83 against the vessel’s charterers, Ducat Maritime Ltd. Ducat agreed with the owners’ claim calculations, except for (a) a minor non-hire period, (b) an owners’ claim for damages for improper hull cleaning, and (c) amounts claimed by owners in lieu of hull cleaning and dunnage removal. Ducat separately sought to deduct $15,070, as compensation and counterclaim, for alleged underperformance.

The arbitrator found that all disputed items on the owners’ lease calculations were due and payable to the owners, except for the claim for damages for improper hull cleaning at US$9,553.92. The arbitrator also dismissed Ducat’s counterclaim for underperformance and ruled that Ducat had no right to make hiring deductions on this basis.

Based on its findings, the arbitrator should therefore have awarded the owners a total of US$28,277.91 under their main claim, i.e. US$37,831.83 less US$9,553.92 for the cleaning of shell.

Instead, the arbitrator added Ducat’s unsuccessful counterclaim of US$15,070 for underperformance to the owners’ claim and found that the owners’ total claim was in fact worth more than the owners had, in fact, claimed.

Ducat twice asked the arbitrator for a correction of the award under section 57(3) of the Arbitration Act 1996, on the grounds that there had been a clerical error or error resulting from a slip or accidental omission. The arbitrator denied both claims stating that there was no error in the calculations. In these circumstances, Ducat challenged the award in court under section 68 of the Arbitration Act 1996.

Disputing Charterers Under Section 68

To succeed in their appeal under Article 68, Ducat had to show that there was a serious irregularity among those listed in Article 68, affecting the tribunal, the procedure or the sentence, and that this irregularity caused a substantial injustice to Ducat.

Ducat argued that:

  1. The arbitrator failed to comply with section 33 of the Arbitration Act 1996, by reaching a conclusion contrary to the common position of the parties, without giving the parties an opportunity to address him on the question.
  2. The arbitrator had made an obvious accounting error which he refused to correct, rendering his award unfair and questionable under Rule 68(2)(a).
  3. The arbitrator’s error inflated the owners’ claim by nearly 50% and meant Ducat was ordered to pay $9,553.92 more than they should have been, or more than 25% of the total compensation. Had Ducat had the opportunity to comment on the matter, the arbitrator might have come to a different view, and a materially different result might have been produced.

The jugement

The court agreed with Ducat that there was an irregularity which fell under Article 68(2) and that it had caused substantial injustice to Ducat. Consequently, the court annulled part of the compensation and corrected the accounting error.

Irregularity within the meaning of Article 68(2): breach of the obligation of Article 33

The court found that the arbitrator had breached his duty under Article 33, by failing to respect the common ground between the parties when determining the amount due, on a basis that had not pleaded by any of the parties, without giving the parties the opportunity to comment on it.

Irregularity within Article 68(2): serious accounting error

The tribunal considered that a gross and obvious accounting error made in the award may well represent a failure to conduct the proceedings fairly, not because it represents an extreme illogicality, but because it constitutes a departure from the arguments put forward by both parties, without the parties having had the opportunity to discuss them.

Substantial injustice

The court held that it was substantially unfair that a party should be ordered, due to an error such as that made by the arbitrator, to pay approximately 33% more than what was owed in principal and to pay it -even interests unsuccessful counterclaim. Although, as the owners argued, the parties could have accepted the possibility of certain injustices in proceedings such as the LMAA SCP, the judge considered that the arbitrator’s error went far beyond what could reasonably be expected from an ordinary incident of arbitration, even SCP arbitration.

What this means for future errors in arbitral awards

It is remarkable how Ducat obtained permission from the court to challenge, under Section 68, an award made under the LMAA SCP, where appeal is expressly excluded.

It’s also worth noting that Ducat passed the lofty threshold required to successfully appeal under Section 68. As the judge noted, Section 68 was “really intended as a long judgment, available only in extreme cases, where the tribunal has been so wrong in its conduct of the arbitration that justice demands that it be corrected”.

By this judgment, the court clarified what a party can do, under the Arbitration Act 1996, if it is confronted with a flagrant error in the award which the court refuses to recognize and correct. This was unclear, as the relevant case law had previously been decided on the basis of an older version of the arbitration law. An award can be successfully challenged, based on the court’s failure to respect a common ground agreed between the parties.

For referees, two lessons emerge. First, it is imperative that any substantive position of the tribunal that has not been advanced by the parties be submitted to the parties for comment, before being decided in an award. A tribunal may very well have its own opinions, and this is particularly the case in maritime arbitration where the parties expect a certain level of expertise from the tribunal, but these opinions must always be submitted to the parties.

Secondly, there is no excuse for not taking a party’s requests under section 57 of the Arbitration Act 1996 for correction of an award, with the utmost seriousness. This is a mechanism designed to correct mathematical errors and the like and can avoid costly legal action.

For the parties and their lawyers, the lesson is equally striking. Had the attorneys for the winning side of the arbitration accepted the obvious error, the legal proceedings would have been avoided.