Arbitration results in a final resolution, without appeal, of a dispute between parties. There is a strong federal policy that encourages arbitration as a method of resolving maritime contract controversies. This policy is set forth in the U.S. Arbitration Act (Title 9, U.S.C.). The Act empowers federal courts to order parties to arbitrate if they have agreed to arbitration in their maritime contracts. These contracts often include charter parties, bills of lading, wharfage agreements and vessel supply or repair contracts.

The object of arbitration is to expedite final determination of disputes in an inexpensive and informal manner. This is accomplished without the restrictive formalities associated with court proceedings.

However, unlike court proceedings, arbitration cannot be utilized unless contracting parties agree to use it. A party cannot be compelled to arbitrate a dispute it has not agreed to arbitrate. Parties may arbitrate most controversies that could be tried in court proceedings.

An agreement to arbitrate takes the form of a clause in a charter contract, or party. The clause sets for the the types of controversies that can be arbitrated. If someone breaches a charter party, damages usually result. The non-breaching party may invoke arbitration by appointing its arbitrator and demanding that the breaching party likewise appoint one.

Should the breaching party fail, neglect or refuse to honor its agreement to arbitrate, the non-breaching party may petition the federal court to appoint an arbitrator on behalf of the defaulting party. Judicial inquiry will be confined to the question of whether the reluctant party agreed to arbitrate the grievance.

What happens if the alleged breaching party claims it never entered into a charter party? Normally, the agrieved party will move in federal court to compel arbitration or to seek a declaratory judgment that there is a valid charter party.

Whether a valid charter party exists is ordinarily a question for the court to decide, because an arbitrator’s authority must be established by the charter party arbitration agreement. Unless there is an agreement to arbitrate, there is no basis for arbitration. Arbitrators should not be called upon to decide their own authority by first determining if there is a valid charter party.

The recent Northern Tankers Cyprus Ltd. case (1992 A.M.C. 1021) in the Southern District of New York illustrates a novel and narrow exception to the general rule that only courts should decide the issue of whether parties have entered into a binding charter party.

In Northern Tankers, a shipowner and a charterer could not agree on whether the parties had entered into an agreement. The shipowner demanded arbitration and presented the charterer with its damage claim for non-performance of the charter. The charterer accepted the demand, but reserved its right to contest the existence of the charter in the arbitration proceeding. The shipowner, asserting that arbitrators could not resolve the issue, instituted a court action seeking judicial resolution of the dispute.

The court held that the charterer’s acceptance of the shipowner’s arbitration demand for damages resulted in a new agreement to arbitrate. This was so because the shipowner’s burden of proof for establishing damages is based upon the existence of a valid charter party. Therefore, the aribtrators were empowered to decide the charter party validity issue.

Since the majority of disputes are arbitrated in New York, it remains to be seen if parties wil follow the Northern Tankers novel approach when the validity of a charter party is at issue. It now appears that in certain cases the issue may be resolved either by courts or arbitrators.