Parties Wise to Include Provisions for Arbitrator Vacancies in Contracts

Arbitration is commonly used in international shipping as a method of resolving maritime contract disputes.

This is especially true in the United States where a strong federal policy encourages maritime arbitration. The policy is set forth in the U.S. Arbitration Act (Title 9, U.S.C.).

The object of maritime arbitration is to expedite the final resolution of disputes in an inexpensive manner without the restrictive formalities of court proceedings. However, unlike court proceedings, arbitration cannot be used unless contracting parties expressly agree to it.

In most maritime arbitrations, each party will appoint an arbtrator based upon the arbitrator’s particular expertise. The two chosen arbitrators then will select a third arbitrator to act as panel chairman.

Hearings will be held where evidence is presented by parties in support of their positions. Briefs and reply briefs will be submitted at the conclusion of the hearings.

The arbitrators then will deliberate and decide the case by issuing a final written award. Occasionally the panel renders a partial final award on a particular issue while it continues to hear evidence on other aspecs of the case.

As previously mentioned, the object of arbitration is to resolve disputes in an expeditious and inexpensive manner. Can this be accomplished if an arbitrator is unable to serve as a member of the arbitration panel at some point during the proceedings? The answer is “yes” if the parties ahd the foresight to specifically provide for this occurrence in their contract.

However, this seldom happens. Fortunately some arbitration clauses incorporate procedural rules that resolve the problem.

For example, the Rules of the Society of Maritime Arbitrators provide:

“(a)If the vacancy is created by an arbitrator appointed by a party, that party will promptly name a replacement. Such replacement shall not have the right to change the chairman previously appointed, except prior to the commencement of the first hearing.

“(b)If the vacancy is created by the chairman, the two arbitrators shall appoint a new chairman.

“(c)If the vacancy occurs after hearings have been held, the panel will proceed based upon the prior record.”

If the contract does not have a vacancy replacement provision, the parties can agree to one or reslve the matter in court. The former alternative seldom succeeds because parties rarely agree upon anything after a dispute arises. The latter alternative will resolve the problem. However, the fast and inexpensive objectives of arbitration will be lost.

The recent Trade & Transport Case (1990 AMC 2938) in the Southern District Court of New York illustrates the point. In that case a charterer entered with a vessel owner in March 1981. Shortly thereafter a dispute arose. Each party chose one arbitrator, and these two selected a third as chairman. The panel, at the request of the parties, decided the liability issue in a partial award during December 1981 and reserved their assessment of damages for the final award. The charterer’s arbitrator died before damages were assessed. The charterer then nominated a replacement arbitrator and demanded that a new chairman be appointed. The charterer also demanded that the arbitration start anew.

The vessel owner refused the demands, and the stalemate was presented to the court for resolution. The court ruled that the arbitrator’s death did not invalidate the partial award on liability and the charterer could not replace the existing panel’s chairman.

During 1990 the new panel rendered its final award on damages in favor of the owner. When the owner moved in court to confirm the award, the charterer objected on the grounds of irregularity in respect to the composition of the panel and again sought to have the arbitration start anew.

The court acknowledged that where an arbitrator dies before any award is issued, the panel’s authority terminates. However, this principle was not applicable because the death occured after the liability award was issued. The court also held that the charterer was entitled to one choice of a chairman, not two.

The charterer now is appealing the decision. However, presently, the case should serve as a warning to parties entering maritime contracts that contain arbitration clauses. The fast and inexpensive objectives of arbitration may be lost if contracts fail to provide for arbitration vacancies.