What happened between the parties?
A dispute arose out of a charterparty agreement between the owner of the vessel (the claimant in the arbitration, and defendant in the application to set aside the second award (Owner)) and the charterer (the respondent in the arbitration, and plaintiff in the set aside application (Charterer)). Owner had sought an immediate interim award against Charterer for unpaid hire for a sum which it said was indisputably due based on Charterer’s final accounting of the charter. The sole arbitrator granted Owner’s application and issued a first partial final award.
Ten months later, Owner served further submissions to recover the balance of the charter hire and requested Charterer to serve its defence submissions within 28 days. In exchanges between Owner and Charterer, Charterer requested an extension of time, which was agreed. The arbitrator then passed a final and peremptory order ordering Charterer to serve its defence by 5pm on this extended date. It stipulated that, should Charterer fail to comply with the order, Charterer would be barred from advancing any positive case by way of defence or counterclaim, or any positive evidence, and it would simply be for Owner to prove its case. Charterer served its defence on the agreed day, but after the time stipulated in the order, citing internet connection issues.
What did the arbitrator decide and why?
Since Charterer did not serve its defence submissions by the specified time, the arbitrator excluded the defence from his consideration. Charterer objected, noting that Owner had not identified any prejudice arising from the delay, and asked the arbitrator to exercise his discretion to admit the defence; however the arbitrator abided by his order. He also allowed further evidence and submissions by Owner, but denied Charterer the opportunity to respond. The arbitrator then passed his second final award without hearing witnesses and on a document-only basis.
What did the court decide and why?
Charterer submitted that the arbitrator had acted in violation of the fair hearing and equal treatment rules under article 18 of the UNCITRAL Model Law. Charterer contended that the extension of time agreed by the parties had not included any stipulated time, and the arbitrator had not considered Charterer’s explanation for the delay, nor had it inquired as to whether Owner had suffered any prejudice due to the delay. Owner defended the arbitrator’s power to make such an order, noting an arbitrator’s wide discretion to determine what the duty to act fairly and reasonably demands in the circumstances.
The court considered three key issues:
1. What are the powers of an ad hoc arbitrator to make and enforce peremptory orders, and how should such powers be exercised?
The court found that while the phrase ‘peremptory order’ is not found in the Model Law, a reading of articles 23 and 25 together provides that a respondent has a period of time to communicate its defence, which depends on what the parties agreed. In the absence of agreement, the arbitrator is to determine what the period of time should be after consulting the parties. If the arbitrator does not consult the parties, they must be open to reconsider the time fixed upon request of either party, particularly the party bound by the timeline.
Further, should the respondent fail to submit its defence, the arbitrator must consult both parties when considering whether the respondent has shown sufficient cause for the failure. The arbitrator must then continue the proceedings without treating such failure as an admission of the claimant’s allegations.
The court also noted that the Model Law does not mandate general peremptory orders, describing the consequences of non-compliance as “draconian”.
2. Did the arbitrator act within his powers and exercise them in accordance with the principles of natural justice?
The court held that the parties had agreed in exchanges to extend the deadline beyond the ordered date, and that Charterer had served its defence within this extended agreed date. Therefore, Charterer had not defaulted under the original order, and there was no basis for any peremptory order to be made predicated on such default.
Even if Charterer had defaulted, the court found that the arbitrator had not considered whether there was sufficient cause for Charterer’s failure to serve its defence as he did not consider (i) the inter-party exchanges, which demonstrated that Charterer believed a further extension had been agreed, and (ii) the fact that Charterer had only recently instructed counsel. Therefore, again, there was no basis for any peremptory order to be made.
The court determined that, in any event, the arbitrator acted in breach of natural justice by failing to give Charterer the opportunity to address him on the time needed to serve its defence, before making the peremptory order. The arbitrator’s view that he had no discretion in the matter and had to exclude Charterer’s defence unless Owner agreed to its admission was wrong and did not accord with his powers under the Model Law. The court also held that the sanction imposed on Charterer, barring it from raising any positive case or adducing any positive evidence, exceeded the arbitrator’s powers under article 25 of the Model Law. The court concluded that the peremptory order had been made and enforced in breach of the fair hearing rule, and the arbitrator’s failure to demonstrate even-handedness in the handling of each party’s timelines had breached the equal treatment rule.
3. Was any breach of natural justice connected to the making of the second award and did it cause prejudice to Charterer?
The court found that the arbitrator may not have made the peremptory order had he given Charterer the opportunity to address him on whether there had been any default, or whether any default was with sufficient cause. As the order then led to the making of the second award without further evidence or submissions from Charterer to its prejudice, the court refused to remit the award to the arbitrator for reconsideration, and set aside the second award under section 24(b) of the IAA and article 34(2)(a)(ii) of the Model Law.
What does this decision mean for you?
At the beginning and end of its judgment, the court stressed that “justice hurried risks justice buried, while justice delayed may be justice denied”. Unfortunately in this case, the hurry demanded of Charterer but not of Owner proved to be a breach of natural justice. This judgment highlights the careful balance that a tribunal must gauge between promoting and enforcing procedural economy on the one hand, whilst giving parties a reasonable opportunity to present their case on the other. In this case, denying a party the opportunity to address a tribunal prior to making a peremptory order proved to constitute a breach of natural justice.
This judgment also demonstrates that a party seeking a peremptory order must be live to the obligations of an arbitrator and ensure that each party is given sufficient opportunity to respond and present its side. Otherwise, they run the risk of wasting time and costs in having to deal with the set aside of any award.
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Client Alert 2022-025
