The current high volume of activity in the shipbuilding market has drawn attention to the ways in which disputes under shipbuilding contracts can be resolved in the most satisfactory manner. The focus of this article is upon disputes which arise during the construction phase, when there is often considerable pressure for a speedy resolution in order to keep to a minimum any delays in the construction and delivery of the vessel.
For those contracts governed by English law and jurisdiction there is a choice between referring disputes to court or arbitration, and quite often arbitration is chosen as there is potential for greater procedural flexibility. Arbitration also has the advantage of conferring confidentiality, which is important where both the vessel’s and yard’s reputations may be at stake.
However, the standard arbitration provisions are often too slow for dealing with disputes which arise during construction and which can have the effect of slowing and even halting construction until they are resolved. For instance, once the first party has appointed its arbitrator, in the absence of a specific provision stipulating a shorter period, the second party will have 21 days simply to appoint its arbitrator. Thereafter, even if the arbitrators agree to expedite the procedure, it will usually take weeks rather than days to obtain an award. In an extreme case, where construction work has stopped, this may obviously have very serious consequences. Whilst the parties can agree a shorter procedure at any stage, this may not happen if one of the parties is less prejudiced by the delay, or even stands to benefit in some way from it.
One way around this which is often adopted in shipbuilding contracts is for certain disputes to be referred to a technical man. It is often agreed that this procedure is available for what are described as “technical disputes”. This procedure will often work perfectly satisfactorily, but there are some potential pitfalls which it may helpful to highlight. These include:
a) From a conceptual point of view, it is often the case that a technical dispute has legal consequences. For instance, a dispute about whether the welding material used in the tanks of a parcel tanker was the correct specification led to consideration of whether the contract could be rescinded if the welding was not replaced. It may not be appropriate for legally complex issues of rescission to be dealt with by a technical man.
b) From a practical point of view, who will be the technical man and how will he be chosen? For a sobering demonstration of difficulties which can arise when a technical man is to be appointed by a classification society within a limited timeframe see, Bernard Schulte v Nile Holdings Limited 1. In that case the classification society did not make the appointment in time and certain of the buyer’s claims were time barred.
c) It is also worth bearing in mind that a technical man may decide the matter in more or less whatever way he wishes. He is not constrained by the usual rules of natural justice, he does not have to listen to each side’s case, and he can reach a decision on whatever basis he likes without explaining this to the parties, see Ali Shipping Corporation v Shipyard Tragir 2. In one case the result was that although the technical man was asked to decide between the builder’s and buyer’s solutions to a problem the technical man produced his own solution which neither party wanted, and which meant that the reference to the technical man was a complete waste of time.
In view of the above there is much to be said for agreeing a short form arbitration procedure in the shipbuilding contract, and which is applicable to pre-delivery disputes (the procedure may be used for all disputes if preferred). Some points to bear in mind when drafting a short form arbitration provision include the following:
1. A timetable should be agreed stipulating the number of days permitted for the appointment of arbitrators, the service of submissions, witness evidence and experts reports, the maximum number of days any hearing may last, and the number of days within which the arbitrators are to publish their award. This should be coupled with an express acknowledgment that time is of the essence. The parties should aim to complete these procedures within around 30 days, and perhaps less.
2. Since the arbitrators themselves are not a party to the contract, the parties should undertake only to appoint an arbitrator who has confirmed before he is appointed that he is available and able to comply with the time table. There should also be a provision that the parties will require the resignation of any arbitrator who does not comply with the timetable, and that the arbitration continues without him.
3. There should be a limit on the number of witnesses and experts each party can rely on.
4. There should be an express provision that the arbitrators have power to decide whether the delivery date is extended by the award.
5. There should be an express provision that during the arbitration proceedings work on the vessel is to continue unless it is directly affected by the issues in the arbitration.
6. There must also be agreement that there shall be no appeal from the arbitrators’ award, otherwise if an appeal to the court was allowed all the good work put into obtaining a speedy award would be undone by the time the appeal would take.
Speedy arbitrations on pre-delivery matters can be achieved, and a provision for speedy arbitration may actually result in fewer disputes, because when the parties know the contract includes a mechanism for speedy arbitration they may be more inclined to agree to a solution in the first place.
With thanks to Peter Jago, MFB Solicitors, for preparing this article.
1. [2004] 2 Lloyd's Law Rep. 352
2. [1998] 1 Lloyd's Law Rep. 643
