UNDERSTANDING ARBITRATION IN LONDON - THE ROLE OF THE LMAA

(14 November 2012)

Good afternoon Ladies and Gentlemen.

May I start by saying how very pleased and deeply honoured I am to be asked to address you here
today, at this 2012 Autumn Risk Forum.

Taiwan has come a long way in modern times to become today one of the leaders in many areas
of international maritime activity. It certainly deserves the respect it has earned in doing so.

Such success does not come about by chance, nor does it evolve by some magical process. It is
the product of a well defined strategy, entrepreneurial skills, professionalism and sheer hard work
on the part of a strong shipping community, supported by a determined and committed
government.

Rather surprisingly, the general public remains unaware (and therefore unappreciative) of the fact
that in this era of globalisation, more than 90% of the entire world trade by volume travels by sea
in an international fleet of more than 50,000-odd ocean going vessels!

My aim today is to add however modestly to your already wide-ranging knowledge of

shipping matters by offering you an insight into a subject that I hope never becomes a regular
feature of your professional lives.

I hope we will have time, at the end of this presentation, for you to put to me any general
questions you may have about arbitration in London and English law. I will do what I can to
address them. My wish is for you to come away from this forum with at least some of your
queries answered and with a better understanding of the arbitral process in London.

I expect that you are all aware of the fact that English law and London arbitration are more often
than not the mechanisms of choice by owners, charterers, operators, ship managers, shipyards and
other stakeholders in the industry, for the resolution of disputes that may arise in the performance
of their contracts.

The London Maritime Arbitrators Association or LMAA - is privileged by this preference and
its members are conscious of their responsibility and duty to do all that they can to increase and
preserve the industrys confidence and trust.

Most of the cases with which LMAA arbitrators deal, concern commercial disputes arising under
charterparties, bills of lading, ship sale agreements, shipbuilding contracts, contracts relating to
offshore oil and gas exploration, commodity contracts and ship management contracts. We do not
normally become involved what the industry regards as wet disputes, namely collision, salvage
general average and the like.

No two parties begin a relationship with a view that things will go wrong. Sadly though, perhaps
inevitably, they sometimes do.

Professor Roebuck, of the University of London and past editor of the journal published by the
Chartered Institute of Arbitrators in London, who incidentally, has also served as a guest
professor at the Peoples University of China in Beijing, has written a very interesting book
called Ancient Greek Arbitration, in which he describes the processes involved in the resolution
of disputes. I have found his model to be a useful one. (I should mention here that while the use
of arbitration as a means for resolving disputes is recorded in ancient Greece and Rome, its
application can actually be traced even further back to Ancient Egypt.)

At the lowest level of what Professor Roebuck describes as a spectrum, an aggrieved party may
choose to do nothing. That usually occurs either when one of the two contracting parties occupies
a position of such strength, that objection is pointless or when a wronged party perceives that
greater commercial advantage may be derived in terms of business relationships or future strategy
by not taking any action.

The alternatives in the sequence are to seek a concession; to help oneself to a remedy (if that is
feasible, for instance by withholding payment); to try to negotiate a settlement by securing a
dispensation not previously available; to seek mediation; to resort to arbitration or alternatively,
to turn to the courts.

Clearly, the best solution is for the parties to settle their differences amicably or, at least, in a
commercial manner! This has nothing whatsoever to do with the quality of either the judicial or
the arbitral process. It has just to do with business and the avoidance of the inevitable and often
destructive, bitter aftertaste that remains with one or the other side following the forced resolution
of their disputes by a third party. We all know that it takes years to develop a lasting relationship,
yet only minutes for a minor incident or misunderstanding to destroy it.

Mediation is a mechanism whereby the parties are assisted by a independent individual to reach a
mutually acceptable settlement agreement. There is no finding of right or wrong in the conflict
that has arisen. The sole objective of the exercise is to resolve the dispute and defuse a hostile
state of affairs that has arisen between two trading partners. I do not, on this occasion, propose
to deal with mediation.

Arbitration also entails the involvement of a neutral third person or persons forming a tribunal,
who may be lawyers or other experts in the field, who will similarly consider the disputes but the
difference with mediation is that they must then make a decision in accordance with the law
applicable to the particular contract.

English law requires arbitrators to follow and apply the law. The tribunals finding is called an
Award; it binds the parties legally and is enforceable through the courts.

The decision by contracting parties to resolve their differences by arbitration may be unplanned
or it will arise through the existence of an arbitration agreement incorporated into a contract. The
source of Law governing Maritime Arbitration in England is the 1996 Arbitration Act according
to which: The object of Arbitration is to obtain the fair resolution of disputes by an impartial
tribunal without unnecessary delay or expense.

That sounds simple enough.

You have an argument and you choose to refer the disputes to your peers, rather than to a court
for a fair and equitable resolution. Why? Wellbecause, your peers are likely to recognise and
understand your problems far better than a judge who may have no knowledge whatsoever of the
issues at hand. Inevitably, he will view them from an altogether different - and probably far more
legally orientated perspective instead of from a practical, maritime one.
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The question which must linger in your minds is why would the parties wish to refer their
disputes for determination to a tribunal of one or more arbitrators rather than to a court? Put more
directly, why choose arbitration instead of litigation?

I have already touched upon one reason, and that is party autonomy. The parties elect to be
judged by their peers; namely by a respected individual of their choice, rather than by a judge
appointed by chance by the Commercial Court.

So if, for example, your disagreement turns on a fine point of law, you may wish to appoint a
retired barrister, solicitor or judge to deal with the reference. I say retired (as far as the LMAA
full membership body is concerned) because a practising lawyer might easily find himself in a
situation of conflict. If, on the other hand, the problem is a technical one, a more appropriate
arbitrator might be a Marine Engineer or Naval Architect. A commercial matter may be better
dealt with by a shipbroker, a navigational issue by a Master Mariner and so on and so forth.

Secondly, it is much simpler and quicker to commence arbitration proceedings in England at

least - since all you need to do, is to appoint your arbitrator, advise the other party that you have
done so and invite them to appoint theirs. In court proceedings, involving parties outside
England, you need to issue a claim form, go to court, apply for permission to serve proceedings
outside the jurisdiction, argue your case and, assuming permission is finally granted, service will
have to be either through diplomatic channels or by instructing a local lawyer. All this takes time
and money. This is an important consideration when a claimant needs to protect against a time
bar provision in a contract.

Thirdly, as the process is less formal than that in court, one should, as a rule, derive substantial
benefit in terms of cost and time. However, it must be said that this may not always be the case.
The costs of conducting an arbitration, depend entirely on the choices made by the parties.

If a decision is taken to run the arbitration as if it were in court, instead of taking advantage of the
informal procedures available, it is possible that the costs may exceed those likely to be incurred
in court. The simple reason for this is that, at present at least, judges are available to litigants free
of charge, whereas a tribunal has to be paid. The parties legal and other incidental costs would
probably be the same.

The main component comprising the parties costs are the legal fees as distinct from the fees of
the court or those of the tribunal. As the fees are inextricably linked to the time spent on the case,
a tribunal needs to be both vigilant and robust to prevent matters from expanding and dragging
on. This is not as easy as it sounds because most lawyers consider it their duty to their client to
take up each and every point of argument good or bad that they can think of.

Fourthly, the process even its very existence - is private and those involved are under a duty of
confidentiality. The parties require a ruling on their dispute and they then want to get on with
their relationship and commercial life. The last thing they wish is to draw attention to themselves
by the press, or other parties, with whom they may plan to do business in the future. Certainly,
they do not wish to wash their dirty linen in public. Moreover, in the context of business
relationships, referring ones differences to arbitration, instead of seeking a remedy by recourse
to the courts, is usually seen to be less of an escalation of the dispute that may have arisen.

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Fifthly, the tribunals decision is final (subject to certain considerations which I am happy to
discuss in greater detail if time permits)1. In fact, pursuant to the 1996 Arbitration Act, an
arbitration award is more difficult to challenge than a court judgement, because obtaining
permission to appeal is more problematical than that in the case of court decisions (which are
normally appealable as a matter of right).

Lastly, but possibly most importantly is the winning partys ability to enforce an arbitral award
virtually anywhere in the world. This is of vital indeed decisive importance in international
trade. The New York Convention (1958) provides that the Contracting States (virtually all the
important trading nations 148 of them) shall recognise arbitration awards published in another
Contracting State as well as the terms upon which they shall be enforced. Judgements are more
difficult, often politically sensitive and usually far more expensive to enforce.

It is, in my view, important to understand the role the law of England has played in the
development of arbitration in London and how that, in turn, has led to the expansion of the
situation that the LMAA currently enjoys.

Aside from the fact that English is the language of international business, in my view, the reasons
are essentially historical. England occupied a principal position in maritime trades for many
centuries, giving rise to the development of an extensive and weighty mass of mercantile law.

English jurisprudence is based upon the principle of freedom of contract, giving the law which
flows from it much more flexibility and adaptability to modern circumstances compared to other
codified/written civil law systems. It developed from a combination of statute and case law, in
which cases that are decided in public and thereafter bind future decisions of the courts - form
what is known as common law. Over the years, a vast number of cases have been argued before,
and repeatedly tested in the English courts, making it possible for them to acquire the reputation
of expertise, impartiality and fairness which they currently enjoy. Those cases were and
continue to be - conducted by highly skilled and experienced judges, who are completely
independent of governmental or other influence and lawyers who trained at Universities that
developed in order to meet the demands of ever expanding commerce. As a result, contracts
today are endowed with a wealth of settled meanings; definitions of the parties rights and
obligations; and rules of interpretation.

This, in turn, gives todays lawyers the confidence to predict the outcome of a dispute and
thereby advise their clients (or their counterparts elsewhere in the world) where they stand with
some degree of certainty.

Englands leading role in international ship borne trade, as well as in the industrial revolution and
the dominant position it occupied for many decades as a shipbuilder for its own and overseas
nationals, further contributed to its already rich jurisprudence.

In addition, a substantial body of respected expert maritime practitioners evolved, who, as

witnesses, are in a position to assist courts and arbitral tribunals in their deliberations when
dealing with highly technical or specialised matters.

1S.68 = serious irregularity; s.69 Question of Law alone 1. Obviously wrong 2. Public Importance
and at least open to serious doubt.
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The strong presence in London of Lloyds as well as other maritime insurers and P&I/ Defence
Clubs also played a significant part both in the development of English law and of London
arbitration.

London probably rose to prominence as an arbitral centre as a consequence of the existence there
of the Baltic Exchange, effectively since 1744.

The time zone was a major influence in the development of London as a maritime centre. Both
Asian and American markets are accessible during business hours, a factor not missed by the
shipowners, charterers, merchants, traders, Lloyds Register, banks and insurers that established
themselves there.

Moreover, as the cluster expanded over 250-odd years, shipbrokers, technical and marine
experts set up businesses and consultancies there making themselves readily available to assist
the court and tribunals alike.

Foreign shipowners and merchants furthermore recognised it as a neutral location.

Representatives of all shipping disciplines congregated there and disputes arising between
members or their clients were often resolved by senior brokers informally probably over what
the English call a wet lunch. Gradually that unofficial process evolved into what is the
LMAA today.

Over time, matters generally became more complicated, lawyers became more involved and, as
you might expect, more formal procedures were introduced. My own view is that as the nature of
the Baltic Exchange changed and daily face-to-face contacts gave way to trading on screens,
informality gave way to more regulated, explicit terms.

THE LMAA
But what exactly is the LMAA?
It is an association of arbitrators practising in London in the field of maritime law.

Its main objective is: "to advance and encourage the professional knowledge of London maritime
arbitrators and, by recommendation and advice, to assist the expeditious procedure and disposal
of disputes"

The LMAA was founded in 1960, but as youve heard, its roots and traditions go back 300-odd
years, arguably to 1673, when an Act for the Regulation of brokers was passed.

Although the LMAA is extremely conscious of the fact that its reputation is based upon the
ability of its members to provide a service which merits the confidence of users who bring their
disputes to London and accordingly seeks to maintain high standards, it nevertheless does not
administer the arbitrations conducted by its members or under its rules.

An exception to the above, is where the President of the LMAA appoints an arbitrator (because
an arbitration agreement so provides) in circumstances where the parties cannot agree upon his
(or her) appointment. In those arbitrations the role of the LMAA is concluded with the
Presidents appointment. In other arbitrations, the association does not get involved at all. This

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contrasts with the approach of other arbitral institutions which administer arbitrations and charge
for the service. This is an important distinction and one which is often not understood.

The administration of LMAA arbitrations is conducted by the arbitrators themselves. The LMAA
Terms make detailed provision for the procedures to be followed by the parties. Normally, the
tribunal only needs to get involved if one or the other party fails to follow the prescribed
procedure, or where a decision is required because the parties fail to agree on the appropriate
procedural course to be followed.

LMAA arbitration today is professional and well disciplined. LMAA arbitrations range from
being almost as formal as a Court hearing, to a complete absence of formality, where, for
example, a sole arbitrator decides a case on documents alone and there is no oral hearing.

The membership of the association falls into essentially two categories: Full members and
Supporting members.

The full members of the LMAA, who form the nucleus of the Association and who are all
experienced professional arbitrators, currently include 20 arbitrators with a legal, 12 with a
commercial, 5 with a marine and 2 with a technical background. I should explain that several
members fall into more than one category. For instance many of the members who are legally
qualified also built up a strong commercial presence in shipping over the years; a number of
mariners studied law when they came ashore. All full LMAA members are based in England,
although most are prepared to conduct arbitrations overseas. A broad choice is therefore available
to the parties.

A good idea of the breadth of expertise available can be obtained by users from studying the full
members CVs, which are set out in the LMAA handbook and website (www.lmaa.org.uk).

In addition, there are currently over 650 supporting members boasting a diverse and wide
spectrum of maritime knowledge and skills who, whilst not primarily arbitrators, are also
available for appointment, provided the particular arbitration agreement permits it.

Supporting members are involved or interested in maritime arbitration as well as in the LMAA.
They are in sympathy with and wish to lend their support to the association.

The supporting members are also a very international group. The list of countries from which
they come, reads a bit like a roll call at the United Nations. This support network gives the
LMAA a global reach.

Administratively, the LMAA is a small organization consisting primarily of unpaid volunteers.

It comprises a President (elected by the Committee) who normally serves for a term of 2 years.

A Committee (elected by the full members) consisting of 7 full members and 2 past presidents.
The Committee is responsible for managing the affairs of the LMAA.

An Honorary Secretary and an Assistant Secretary.

The office of the Association is in the City of London.

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The LMAAs funds are derived from its membership subscriptions and the other sundry fees
which are charged for services such as appointing arbitrators (or mediators) in circumstances
where the parties cannot agree upon an appointment. The LMAA receives no funding whatsoever
from the state or from any other organisation. It is therefore completely independent of
government and of any other interest group.

The LMAA also has a committee chaired by a Queens Counsel, drawn from its supporting
members, which is representative of the international shipping industry. Known as the Supporting
Members Liaison Committee it comprises individuals from P&I/Defence Club managers in the
UK, from Europe (outside the UK), Asia and the United States, shipping lawyers from within and
outside England, a shipbroker, charterers/ cargo transportation companies, shipowners/ ship
mangers, a person from a shipping or shipbroking association, the president, past president and
Hon. Secretary of the LMAA. The Committee has a consultative function, but no executive role.
It meets twice a year in London and discusses matters of current interest to the association. It is
designed to identify problems which users encounter when arbitrating under LMAA Terms and
finds solutions for them. It is a very helpful sounding board for the association.

The LMAA acknowledging the very significant role in maritime affairs played by commercial
shipping entities in Asia has decided to establish a broadly similar consultative body in the Far
East, so as to benefit from the input by users domiciled there. The first, inaugural meeting will
take place next week in Hong Kong.

One of the most important functions of the LMAA is to publish terms under which its members
(and other arbitrators) conduct maritime arbitrations or mediations. The LMAA recognises that
there is a range of disputes of differing importance to the parties. The range is usually (but not
always) determined by the amount of money at stake. To respond to this reality, the LMAA
publishes different sets of terms and the parties are free to choose the terms which are
proportionate to their disputes. They can choose anything from a thorough but more expensive
service, to a quick but cheaper service.

The thorough but more expensive service comes in the form of the LMAA Terms (2012). These
can be found in the LMAAs handbook and are published on the website. They are designed to be
used in substantial cases, and make detailed procedural provisions for the conduct of arbitration.
There are three features of these terms which are perhaps worth mentioning:-

They provide procedural rules which lay down a process for the conduct of arbitrations. This
enables the parties to agree procedural matters without involving the tribunal. The tribunal will
often only get involved, as a fall back, when the parties fail to reach agreement about some such
procedural matter.

Although many arbitrations conducted under these terms will involve one or more oral hearings
(with counsel, solicitors, witnesses, and experts) before a tribunal of three arbitrators, they can
also be (and often are) used when the expense of an oral hearing need not be incurred and the
arbitration can be conducted more cheaply on documents alone. There was no oral hearing in
about 96% of the cases referred to full members in 2011and only about 24% of the total awards
made followed an oral hearing. In many cases, the award is agreed between 2 arbitrators without
the need for the appointment of a third person. This reflects well on the impartiality of LMAA
arbitrators. It also results in significant saving of cost.

The quick and cheaper service comes in the form of the LMAA Small Claims Procedure 2012.
These terms are designed to be used in cases where the sums at stake are US$100,000 or less,
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although it is left to the parties to agree the financial limit. In some cases, the parties will agree to
a higher or no limit. However, a higher or no limit at all is not always a good idea because the
terms are not really suitable for a complicated or difficult case. The following features are worth
mentioning:-

(a) Arbitrations conducted under these rules are almost invariably conducted on
documents alone by a single arbitrator. Although the arbitrator has power to require an oral
hearing, it is rarely used.

(b) There is no right to appeal from an award in an arbitration conducted under these
terms either on the law or on the facts.

(c) The arbitrators currently charge a flat fee of 3,000 (plus 2,000 if there is a
counterclaim which exceeds the amount of the claim) and the parties recoverable costs are
limited to 4,000 (or 4,500 if there is a counterclaim that exceeds the amount of the claim).

The LMAA further identified a need to increase the range of its terms in order to give the parties
a wider degree of choice in the method of arbitration (particularly its cost) which they consider to
be appropriate for the determination of their disputes. A new set of terms, setting out a procedure
(which falls between the LMAA Terms and the Small Claims Procedure) known as the
Intermediate Procedure, was introduced in 2009 and revised in 2012. These terms are intended to
deal with disputes where the claim falls between US $100,000 and about US $400,000. The terms
adopt features of both the other sets of procedure, and enable disputes within this range to be
determined at a cost which is proportionate to the amount of money at stake. Broadly speaking,
recoverable costs are capped at a level up to 30% of the claimants monetary claim and the
tribunals costs are limited to 1/3rd of the partys recoverable costs where the tribunal consists of
one arbitrator or to 2/3rds where it comprises two or three arbitrators.

The LMAA also provides a mediation service with a panel of experienced mediators and
publishes its own mediation terms. Details of both the panel and the terms can also be found on
the LMAA website. The terms are also in the handbook.

As previously mentioned, the President of the LMAA will appoint an arbitrator or mediator if the
parties cannot agree upon whom to appoint. The LMAA charges a modest fee for this service.
The President made 108 appointments last year; almost all were full members of the association.
In making these appointments, the President will appoint the arbitrator who, in his view, is best
qualified to determine a particular dispute by reason of his experience and qualifications.

LMAA arbitrators boast a very high reputation as arbitrators. The LMAA has an important role in
maintaining that reputation by ensuring that its full members meet its exacting standards and have
proved themselves by acquiring a substantial arbitration practice before being elected. The
criteria for full membership are published both in our handbook and on the website. The most
important of these criteria are as follows:-

(a) prospective full members must have either a legal qualification or other appropriate
qualification as an arbitrator.

(b) prospective full members are required to have been engaged for at least 15 years in a
responsible position in the shipping industry in either a commercial, technical or legal capacity,
and must be familiar with the English law of arbitration, evidence, contract and tort.

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(c) aspiring members must demonstrate to their peers a substantial and recent degree of
involvement on a regular basis working with other LMAA members as a member of a London
maritime arbitration tribunal. They must also demonstrate an ability to draft reasoned awards.

The LMAA collegiate system provides a self disciplining mechanism, because LMAA arbitrators
will not want to let themselves or their colleagues down. It permits the President to deal
informally with the very rare occasion when a party may fairly or unfairly complain about an
LMAA arbitrator.

The LMAA committee will, from time to time, issue guidelines which may be required to ensure
the use of good practices, uniformity of approach and compliance with the law by LMAA
arbitrators.

The LMAA also has an educational function. In particular:-

(a) It holds a seminar for its members and their guests each May, at which
distinguished speakers give talks on topics of current interest. These talks may range from the
legal, to the commercial, to the technical. This seminar qualifies for the continuing educational
requirements of many of the professions to which its members belong.

(b) The LMAA publishes twice yearly a newsletter which contains not only news, but
also articles and papers on a wide range of subjects, notes on relevant cases decided by the
English courts, and summaries of LMAA awards (where the parties have agreed to publication).

(c) From time to time, the LMAA also publishes a law review which contains a variety
of legal articles of current interest to the shipping industry.

(d) The LMAA has a website and publishes a handbook which provides a large amount
of information about its current activities, membership, and terms.

(e) The LMAA also provides a service to the public by answering questions about
LMAA arbitration (usually by e-mail) which are raised by users of its services or by academics
researching maritime arbitration.

The LMAA finally runs 2 social functions every year for its members and their guests namely:

(a) A prestigious dinner in March which is attended by about 210 people engaged in the
shipping industry, including members of the higher judiciary.

(b) A less formal lunch in November each year which is attended by about 120 people
engaged in the shipping industry, at which a prominent person will give an educational talk on
matters of current interest.

I hope that I have given you a clear idea of the role of the LMAA and the value of arbitrating
maritime disputes under LMAA Terms.

Out of about 3,555 appointments in 2011, full LMAA members published 592 awards, down
slightly from the figure of 611 for 2010. Of those awards 143 followed an oral hearing.

Purely for the purposes of comparison, in 2009 which is the last year for which we have
reliable statistics - approximately 1225 claims were brought in the Commercial Court in London
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and around 200 in the Admiralty Court. Usually between 7-10% of the claims brought in the
Commercial Court and only a small fraction of those brought in the Admiralty Court end up in a
trial.

The number of Awards published by the Society of Maritime Arbitrators in New York (which is
the next most active maritime arbitral centre internationally) between June 2004 and August
2008, varied on a year to year basis but was - on average - 40 per annum.

I hope that I have succeeded, in the limited time available to us, in giving you some practical
insight not only into the subject of arbitration as a mechanism for resolving disputes, but also of
the role that the LMAA and London arbitration plays in the business of resolving international
disagreements.

I trust also, that you can readily appreciate the overwhelming degree of reliance that international
shipping and maritime activities generally have upon London arbitration as a forum and
mechanism for resolving disputes.

No system dealing with human relationships can claim to be perfect. There are always grounds
for improvement. As I said at the beginning of this presentation, the LMAA is conscious of the
heavy burden of responsibility it has to the international shipping community. In that respect,
allow me to reassure you that the LMAA remains committed to its users to constantly refine and
seek to improve its service. LMAA arbitrators will continue to provide a responsible and safe
means of resolving maritime disputes, delivered by conscientious and expert practitioners with
integrity, honesty and impartiality.

Thank you all very much.

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