DMC Category Rating: Confirmed

Case note contributed by Patrick V. Martin, counsel to the Society of Maritime Arbitrators.

Background
The law in the United States clearly states that there is no right to consolidate disputes involving common issues of fact or law arising under separate but related contracts containing arbitration clauses such as charter parties. However, the various parties in their contracts can agree to consolidate such common disputes before a single arbitration panel.

The arbitration at hand involved a chain or string of three separate time charters in which the head owner asserted damages for loss when there was a late redelivery of the vessel under the head charter and presumably the two sub-charters. Not content with pressing the claim against the head charterer, the owner petitioned the arbitration panel for an order consolidating that dispute with an allegedly similar dispute under the two sub-charters. The purpose of the motion was to allow the owner to have discovery and claim damages against all three charterers whom, the owner alleged, ordered the vessel on a final voyage knowing that there would be an overlap in a rising market. At the end of this final voyage the vessel was redelivered under all three time charters.

Each of the three charters was on the NYPE form and provided in printed clause 17 for arbitration in New York. A separate clause in each charter incorporated the Rules of the Society of Maritime Arbitrators (the "SMA").

Part I, Section 2, of the SMA Rules states:

The parties agree to consolidate proceedings relating to contract disputes with other parties which involve common questions of fact or law and/or arise in substantial part from the same maritime transaction or series of related transactions, provided all contracts incorporate SMA Rules.

Unless all parties agree to a sole Arbitrator, consolidated disputes are to be heard by a maximum of three Arbitrators, to be appointed as agreed by all parties or, failing such agreement, as ordered by the Court.

Pursuant to clause 17, the owner demanded arbitration from its time charterer and appointed an arbitrator. The charterer appointed its arbitrator and the two appointed a third thus completing the panel under the head charter. At this stage, the owner then made a motion to the panel for an order bringing in the other two sub-charterers. As stated above, the owner sought consolidation so that it could obtain discovery from the sub- charterers and also obtain a judgment against them.

The head time charterer strongly objected to the panel ordering consolidation. It argued that there was no dispute between it and its sub-charterer and consequently it had made no demand for arbitration. Therefore, consolidation, which was meant to facilitate dispute resolution, was in this instance being used to create disputes where none existed. The two sub-charterers were even more vehement in their opposition.

The first sub-charterer confirmed that there were no disputes between it and its owner (head charterer) and likewise none between it and its charterer. It asserted that it was not a party to the head charter and under the law there was no contractual privity with the head owner. The second sub-charterer argued that granting the owner’s motion would be unnecessarily disruptive of commercial practices and the owner had all the remedies it needed under the head charter. It further stated that it had no participation in the composition of the panel and therefore any order the panel may make ordering consolidation would necessarily be unenforceable.

Award
The panel majority denied the motion to consolidate pointing out that section 2 of the SMA Rules does not automatically generate a consolidation status amongst all the parties in the chain. Moreover, consolidation is to be invoked not by the head owner but by the head charterer and proceed down the chain. "Consolidation does not equate to the right of combining parties in sub-charters to create the effect of a class action." In this instance, consolidation could "… achieve a punitive result…" by allowing the head owner to collect damages from those sub-charterers not in contractual privity with the head owner. They concluded that the evidence established that there was a late redelivery under the head charter "… entitling the owner to damages [from its charterer] at a quantum to be determined by this panel."

The dissenting arbitrator stated that by agreeing to incorporating the SMA Rules in each charter, all the parties in the chain were obligated by contract to consolidate disputes involving common issues of law and fact. The charterers refusal to nominate arbitrators was a breach of contract and the panel should simply have entered a default judgment compelling the unwilling parties to arbitrate.

Comment
The award is reported in the Awards Service of the SMA number 3983, dated October 12, 2007.

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