Arbitrating Maritime Disputes

Thomas H. Belknap, Jr. and Douglas J. Shoemaker

When parties negotiate and draft maritime contracts, they inevitably consider whether, and if so, how, to define the process for dispute resolution. While arbitration is practically universal in “blue-water” charterparties, it is also common in other maritime agreements, such as vessel sale, construction and repair, supplies, commodity sale, towing, stevedoring, and terminal agreements, among many others. Even though some parties and lawyers generally oppose arbitration, the “pros” often outweigh the “cons,” and most specific concerns can be resolved by careful drafting of the arbitration provision. As stated by the U.S. Supreme Court, arbitration “is a matter of consent, not coercion.” Stolt–Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 681 (2010). Parties may structure their arbitration agreements as they see fit.

Efficiency and Flexibility

Perhaps the most important consideration for any commercial party is that an arbitration is (or should be) more efficient than litigation. Arbitrations tend to be quicker and less costly. While it is true that the parties must pay for the arbitrators’ time, this is offset by the streamlined and more flexible process. Unlike some of the broader international arbitration organizations (such as the International Chamber of Commerce and American Arbitration Association), the established maritime arbitration organizations (e.g., the Society of Maritime Arbitrators (“SMA”) of New York and the Houston Maritime Arbitration Association (“HMAA”)) do not impose administrative fees.

Subject to the circumstances of the case, discovery—especially the right to prehearing depositions—is more restricted in an arbitration compared to litigation, and there is usually less need for expert witnesses, since the arbitrators generally possess expertise in the industry. The briefing and hearing schedule is flexible, will account for particular circumstances confronting the parties, and, if unforeseen issues arise, it is typically easier to schedule a hearing with arbitrators than conforming to a court’s often full docket.

Arbitration procedures can be specifically tailored to the circumstances. Arbitration hearings can often be set to fit the schedules and convenience of the parties and counsel, and minor matters can often be dealt with via telephone. And, because the parties are more directly involved in the process and the arbitrators have expertise in the industry, the results of an arbitration are more likely to be tailored to the commercial and practical requirements of the specific dispute.

Further, most arbitration rules provide for shortened procedures. Under the SMA Rules for Shortened Arbitration Proceedings, the matter is heard by a sole arbitrator on documents only, the award must be issued within 30 days after the proceedings close, and the arbitrator’s fee will not exceed $3,500 (or $4,500 if there is a counterclaim). HMAA rules similarly provide for “Fast Track Arbitration” for claims below $100,000.

Industry Expertise

While federal judges in most maritime centers (e.g., Houston, New Orleans, and New York) have experience with complex maritime legal issues, it is rare to find judges with specific industry knowledge. With maritime, commodity, and energy transactions, we believe an understanding of the industry is extremely helpful for the fact-finder. For this reason, when maritime and energy cases do go to trial, extensive expert testimony is almost always required. In arbitration, on the other hand, this may not be necessary where the arbitrators have specific industry knowledge relevant to the issues in dispute and are thus better equipped to digest and understand both fact and expert evidence.

Enforceability

Because maritime transactions span the globe, arbitration is clearly favorable to litigation with respect to international enforceability. Because nearly all developed countries, including the United States, have ratified the Convention on the Recognition and Enforcement of Arbitral Awards (the New York Convention), enforcement of an arbitration award is far more reliable in an international setting. The United States is not a party to any similar international treaty relating to the enforcement of judgments; consequently, parties must rely on arguments of judicial comity in seeking to enforce United States’ judgments abroad.

The Federal Arbitration Act and the New York Convention significantly limit the available grounds for challenging or refusing to enforce awards, and an appeal “on the merits” is rarely possible. Depending on the outcome, this may feel like a pro or a con, though, in the broader sense, an arbitration award’s finality contributes to overall commercial efficiency.

Legal Fees and Costs

A common misconception is that a party cannot recover its attorneys’ fees and costs (including its share of arbitrators’ fees) in arbitration. In fact, under SMA Rules, the panel is specifically empowered to award attorneys’ fees and costs to the prevailing party, and, under the HMAA Rules, the panel will recognize an agreement between the parties by which the prevailing party is entitled to recover attorneys’ fees and costs. Indeed, several New York courts have recognized arbitrators’ inherent power to award fees and costs even where no arbitration rules are incorporated and the agreement does not specifically so provide. (And, since arbitration is a product of contract, parties may retain the “American Rule,” where each party bears its own legal costs, and the arbitrators will recognize that agreement.)

While arbitration is not appropriate for all disputes, with maritime transactions, the “pros” outweigh the “cons.” Arbitration, unlike litigation, affords the parties considerable autonomy and flexibility. If the parties are careful in drafting the arbitration provision and in selecting the applicable rules, and they select qualified arbitrators, arbitration can be an efficient and effective process for dispute resolution.

This article was first published in Texas Lawyer on April 29, 2019. Reprinted with permission.