June 28, 2018

Mediation - A Legitimate Reason for Court Avoidance

Not every shipping dispute needs to end up in costly litigation, explains Clyde & Co’s Martyn Haines. (First published in Shipping Network, the official magazine of the Institute of Chartered Shipbrokers, June 2018).

The shipping industry is synonymous with the service industry; from ship builders, equipment suppliers and ship managers to freight forwarders, ship brokers and agents, all linked together to provide a service to carry a commodity or passengers, from A to B.

The success of the industry is determined by the success of the individual service companies, so if one fails, it jeopardises the overall financial award but also the ability of that company to be successful. Unfortunately errors occur, some inevitable but others by mistake or oversight and these are the ones that affect reputation and future business potential. Below are five actual incidents that illustrate the point:

Incident 1: A ship manager was responsible for the technical management of a bulk carrier which loaded regularly at the same iron ore port. The master notified the manager of a problem with a mooring winch which rendered it partly operational but usable. The manager took no action to arrange the repairs. The master always informed the pilot of the issue upon arrival, on each occasion, but after many months, the pilot refused to berth the vessel until the winch was repaired. There was a four day delay, and the charterers placed the vessel off-hire. The ship owner brought a claim for US$150,000 against the manager.

Incident 2: A ship’s agent was asked by the master, prior to arrival, whether the vessel had to burn low-sulphur fuel while in port limits and alongside the berth. The master determined, while waiting at anchorage, there was insufficient low-sulphur fuel on board and the port was unable to supply any. The owners decided to divert to another port to bunker and then return to the loading port. The owners later found out the local regulations only required vessels to burn low-sulphur fuel while alongside the berth, and not at the anchorage. The owners brought a claim for US$150,000 against the agent.

Incident 3: A tanker broker operations staff received a telephone and email message over the weekend, from a colleague, asking for cargo loading details to be passed to a tanker owner. The message from the charterer required a change of discharge port rotation which impacted on the cargo loading quantity. The operations staff took no action, assuming the message had been sent to a general operations email address. Due to the failure to pass on the message, the vessel loaded the incorrect amount of cargo, and the original port rotation had to remain in place. The ship owner submitted a significant demurrage claim to the charterer which was passed to the broker for payment.

Incident 4: A marine surveyor provided a ‘fit to tow’ certificate to enable a ferry to be towed to a shipyard. During the tow, the ferry took on water damaging the machinery space.

The ship owners brought a claim against the shipyard, the tug company, and the marine surveyor for the US$750,000 repair costs. Owners alleged the surveyor did not confirm all watertight openings were closed, in fact, the water entered via air vents which were outside the scope of the survey.

Incident 5: A port agent was asked by the owner to provide a cost quote for discharging a shipment of project cargo. The answer was passed to the charterer and the vessel was fixed. Upon completion of discharge, the stevedores submitted an invoice for an amount greater than the quote. An investigation revealed the agent had misread the tariff and a claim was brought by the owner against the agent.

Taking action

Some of the above incidents led to the appointment of lawyers and to damages having to be paid either after losing a court judgment or by reaching a settlement agreement with the aggrieved party. What is not mentioned, and is of crucial importance in a competitive and highly commercial business, is the potential loss of reputation and the risk of losing future business. Would the ship owner find an alternative ship manager, or port agent? Would the owner refuse to use the same brokering service, and would the ship yard use the same surveyor again?

Mistakes, errors, and omissions are foreseeable even with professional competency, so are we prepared for them, and what procedures are in place to protect our reputation and future business?

One procedural option is to stick your head in the sand hoping the problem will go away; it has been tried, but not recommended!

Seeking assistance from a professional indemnity insurer as early as possible is always an appropriate strategy. They will provide an opinion on the merits of the arguments, and possibly cover legal fees if instructing a law firm is considered necessary.

Inevitably, however, a decision has to be made on whether to commence litigation to repudiate liability or negotiate a settlement. But it is not always clear if going to court will be successful, and litigation could expose the losing party to both sides’ legal costs, as well as to any financial award.

Alternative dispute resolution (ADR) methods are now well established – such as arbitration – but one method which is becoming increasingly popular and successful for commercial disputes is mediation.

It is the least adversarial form of ADR and ideal for companies that need to maintain an ongoing relationship, and potentially avoid a loss of market reputation.

Mediation benefits

The features of mediation that make it attractive are: speed of process; comparative lower cost; strictly private and confidential; flexible procedures; preservation of relationship and ultimately settlement success rate.

The process of mediation commences when two or more companies, or individuals, in dispute agree to instruct an independent and neutral mediator to facilitate discussions with the aim of reaching an agreement. Importantly, mediation is voluntary unless the claim proceedings have commenced in court, and then mediation is a compulsory stage in order to try and avoid time and expense in court.

The choice of mediator is decided by all the parties in the dispute. There are no prerequisites for the mediator, but for some disputes it is advantageous to have some understanding of the technical issues.

It is recommended that the mediator is accredited by a mediation council, to show they are trained and meet required standards. The key requirement for a mediator is to empathise with each individual party, to gain trust and understanding, and thus facilitate the parties reaching a settlement agreement. Therein lies the skill, because crucially the mediator is not a judge, nor there to offer a legal opinion on the merits of the dispute.

Flexible approach

Mediation can take many forms and a meeting is not always necessary. Multiple parties in different jurisdictions cannot always agree a time or place to meet, and there are also the travel costs to consider.

The mediator can work from documents alone, and communicate between the parties on the telephone or video conferences. Using email is also possible but does not always promote empathy and trust. If a meeting is required, that too can be flexible for speedy mediations, for example, from up to three hours and fixed cost, to a full day and extended hours if a settlement is close.

Prior to the mediation, all parties are required to sign a mediation agreement. The agreement has important terms and conditions which are imposed on each party in the dispute, for example, confirming the mediation is private and without prejudice, and nothing that is said can be used as evidence in court.

What this means, in practice, is that all parties are able to share their opinions openly without the risk of records being kept and used in court – that avenue of communication is not available in court proceedings.

The mediator will endeavour to facilitate a settlement with all the parties but until a settlement agreement is signed by all parties, no agreement is in place. The flexible nature of mediation may result in any party leaving the process at any time without an agreement being reached; however, once the settlement agreement is signed, it is a legal document and can be enforced, if necessary, in court.

Many disputes occur between parties who wish to continue doing business in the future, and mediated settlement can provide a commercial incentive for the overall resolution of a dispute, in a way not open to a court.