Is Arbitration Suffocating Common Law?

Recent comments by the Lord Chief Justice of England and Wales have revived a debate on the balance between the finality of arbitration and the consideration of important points of law by the courts.

In England and other common law jurisdictions, the law develops as much (if not more) through decided cases as through new or amended laws enacted by Parliament. In general terms, this contrasts with “civil law” jurisdictions where the law is more or less codified and cases already decided do not have the same status.

It therefore seems logical that the more judgments there are in a particular area of ​​law (for example, shipping or commodities), the faster that area of ​​law will develop, and the reverse will also be true. The development of the law is important for many reasons, but particularly in relation to commerce where new ways of doing business (in fact, whole new industries) may not be what was envisioned by laws or cases dating back barely 20 or 30 years.

Passing new legislation can be a long process, subject to the changing interests of politicians, for whom updating trade laws is unlikely to win votes. Compare the 109-year gap between the Marine Insurance Act of 1906 and the Insurance Act of 2015 with the constant stream of new laws relating to crime, human rights, constitutional issues, taxation, etc. While some issues require legislative action, the void is largely filled by judges crafting the law one case at a time.

The argument advanced by the Lord Chief Justice and others is that the changes introduced by the Arbitration Acts of 1979 and 1996 have pushed the pendulum too far in favor of finality of awards and away from supervision by the Court of legal outcome. This was done primarily by limiting the number of appeals to be heard by the courts.

As the debate continues, statistics will no doubt be produced showing the number of applications for leave to appeal, how they were decided and how far they went through the courts. Indeed, I recall a speech given by Sir Bernard Eder last year in which such data was presented in relation to shipping cases, and it was surprising how few substantive appeals are heard each year . This reflects the high threshold that must be met before leave to appeal is granted under section 69 of the 1996 Act, namely that:

  • the court’s decision on the matter is manifestly wrong, or
  • it is a matter of general public importance and the decision of the court is at least subject to serious doubts.

This will be a rare case where the court’s decision is obviously wrong. This means that in most cases an aggrieved party will need to identify a matter of general public importance. In the shipping industry, this will often rule out build point appeals as most charter parties are an amalgamation of some or all of the following:

  • a summary of the match setting out the main negotiated terms of the match,
  • an often obsolete print with more or less common modifications,
  • a set of endorsements modifying and supplementing the printed conditions,
  • the terms and conditions of one of the parties (perhaps a large trader), which may themselves be modified for the particular arrangement, and
  • a series of BIMCO clauses dealing with current or past hot issues such as piracy, low sulfur fuel, ISM/ISPS, etc.

Although many sets of endorsement clauses and terms and conditions cover the same issues, they are rarely, if ever, identical. Therefore, persuading a judge that the construction of a particular clause in a particular charterparty raises a question of general importance can be a daunting task.

More important, however, than mere numbers is the effect of such judgments on the development of the law, which is the concern of the Lord Chief Justice. Seen in this light, I would say that (in the areas of law covered by this blog) the quality and breadth of judgments rendered on appeals of arbitral awards has had an effect in recent years that goes well beyond the number limited number of cases reaching the Courts.

There are landmark cases that have an effect on the whole of contract law, not just their origins as shipping or goods cases. Just look at the long series of recent cases on various aspects of contractual damages: The GOLDEN VICTORY and Bunge v Nidera on post-termination events, The ACHILLEAS (as explained in The SYLVIA) on removal, The NEW FLAMENCO on mitigation, and The MTM HONG KONG and two arbitration appeals between Glorywealth and Flame on the compensatory principle.

And of course, the market is eagerly awaiting the Supreme Court’s decision in The RES COGITANS.

In addition to this, the courts have produced a steady stream of judgments on the more day-to-day aspects (in particular) of charterparty law, including:

  • The LIVANITA, the ARCHIMIDIS and the REBORN on dangerous ports,
  • The PEARL C and L’OCEAN VIRGO on speed and consumption,
  • The GLOBAL SANTOSH, the SALDANHA and the ATHENA for rent,
  • The SILVER CONSTELLATION on RightShip approval,
  • ZENOVIA and GRANDE CREATION on re-delivery notices, and
  • ASTRA if rental payment is a condition.

On the other hand, Mr. John Schofield laments in the preface to the seventh edition of his book, Laytime and Demurrage, that:

“In the preface to the fifth edition in 2005, I identified three areas of law in which I thought further judicial scrutiny would be useful. Unfortunately, more than 10 years later, there has been no intervention meaningful judicial process in any of the areas I have identified.”

The current system therefore leaves gaps in certain areas. Whether because these cases are inherently less likely to meet the requirements of Section 69, or because they tend to be of lower value (especially in an era of low freight rates), or for another reason, is unclear.

The gaps are very often filled (as the table of cases in Mr. Schofield’s book shows) by the anonymised summaries of London arbitral awards published in Lloyd’s Maritime Law Newsletter. It is an invaluable resource for practitioners and their clients. However, it has its limits. Summaries can be very brief, often (and perhaps inevitably) resulting in a loss of detail in the factual/contractual matrix, as well as in the observations made and the court’s reasoning. This can make it difficult to identify similarities and differences between the reported case and the issue at hand.

The published awards also represent only a fraction of the awards given out each year. According to the LMAA’s website, its members have averaged about 550 awards a year over the past decade. However, over the same period, the number of attributions declared in the LMLN did not exceed 27 per year and is often much lower (only one in 2009). Of course, not all prices are good enough to merit publication, but this statistic should also reflect the frequent exercise of the right of veto by one or other of the parties to a proposal to publish the price (even in an anonymized form). I suggest that consideration be given to amending the terms of the LMAA to remove this veto and leave it up to the arbitrator(s) to decide whether an award should be issued, or at least require both parties to reject the publication.

Where there is a lack of English authority, it is always possible to turn to the rest of the common law world. However, US law is on the whole too “different” to be of much help, and in many other jurisdictions a strict “model law” approach is taken. This is the case in Hong Kong and Singapore, where there is no equivalent to Section 69 of the 1996 Act [FN1] and therefore no possibility of appeal in cassation. This leaves little to no local case law regarding charter parties in particular.

In these jurisdictions, the pendulum has clearly swung almost as far as it could against court intervention, except in very narrow circumstances such as incompetence or the inability of a party to present its case. The remedies available in England under section 69 (and section 68) of the 1996 Act seem generous by comparison.

Making it easier to appeal sentences could well contribute to the development of the common law, but at what cost? Arbitration can already be as expensive as litigation, sometimes even more given the need to pay arbitrators’ fees. The prospect of more frequent trips to court (and additional time and expense) in cases that do not meet the current section 69 criteria may well encourage parties to consider Model Law jurisdictions. While London remains preeminent in shipping and commodity arbitrations, other hubs (particularly Hong Kong and Singapore) are becoming busier and actively presenting themselves as alternatives.

While I understand the concerns that have been expressed and agree that this is something that should be monitored, I would say that the balance struck in England remains about right at the moment.

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