Mediation to resolve disputes in the shipping industry

07 Jun 2016

The shipping market is currently experiencing a serious recession with the Baltic Dry Index and Baltic Capesize Index both at record low levels in early 2016. In addition, capesize rates fell to under USD 2000 a day in January 2016. Coupled with the operating expenses for a standard capesize vessel, which are estimated to be around USD 6 000 a day, this suggests that the majority of vessels are operating at a loss. Industry experts do not expect any major improvement on these numbers over the next year. As a result, fewer ships are also being built and sold

In January, TradeWinds reported that Asia-to-Europe trade experienced negative growth, as well as those routes linked to China, West Africa and South America. Moreover, lower demand growth is forecast for container shipping, in the region of a meagre 1% to 3%. The forecast is grim and market conditions are challenging for all service providers, especially shipping lines seeking to retain their key clients, bring in sufficient income and ensure that agreements are honoured.

In these conditions, disputes are widespread. It is therefore essential for parties to maintain relationships with key customers and retain business. When service providers are faced with the need to retain key clients, however, they often make a commercial decision to write-off the loss rather than to enforce a contract and engage in costly litigation or arbitration.

The advantages of mediation as a means to resolving disputes in the shipping industry are its speed, cost and flexibility. Its outcome is aimed at obtaining a value-added, future orientated, commercial solution for all parties involved. Mediation is not restricted to a ‘winner-loser’ outcome, but rather envisages a ‘mutual gains outcome’. Furthermore, mediation is without prejudice to any further remedies or future and/ or ongoing litigation.

Jonathan Lux, a London based barrister and mediation expert with 30 years’ experience as a solicitor at Ince & Co in the field of shipping, is of the opinion that mediation is the future of dispute resolution. Although the shipping industry is a difficult sector to convince, he believes that the benefits of this approach are numerous.

London Maritime Arbitrators Association (LMAA) arbitration, is so well entrenched as the primary method of dispute resolution within the shipping industry, that although parties complain about the inefficiency, expense and inflexibility of the system, they are loathe to take an alternative approach.

This is not surprising as arbitration is such a well-established form of dispute resolution in the shipping industry. In an international context, mediation is not as well established as arbitration. The 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) is the key instrument in facilitating cross-border arbitral awards. The New York Convention has more than 145 signatory countries and imposes an international obligation on state courts of signatory countries to refer parties to arbitration in lieu of state court proceedings and to grant recognition of awards arising out of such agreements. However, there is no comparable cross-border instrument governing mediation proceedings or their outcomes.

In the future, however, mediation is bound to feature more frequently because of the regulatory requirements in the United Kingdom and European Union. The English Civil procedure rules of 1999 introduced the concept of ‘active case management’ which is defined as encouraging parties to use an alternative dispute resolution procedure. The power of the court goes as far as to order adverse costs despite a litigant being successful at trial, because they had unreasonably refused to follow the court’s suggestion to mediate the dispute. This approach was demonstrated in the case of Dunnet v Railtrack.

Court mandated mediation is also a part of other common law jurisdictions including Australia and Singapore. The European Union has also issued directives in terms of cross-border mediation and consumer mediation, which compels each member state to deal with mediation in national legislation. Germany has recently done so with the introduction of the Act to Promote Mediation and Other Methods of Out-of-Court Dispute Resolution in 2012.

The concept of court sanctioned alternative dispute resolution is not novel to the South African legal system. In fact, the Uniform Rules of Court dictate that in preparation for trial, parties hold a pre-trial conference and complete a minute, to be filed in the court file in preparation for a pre-trial hearing. In the minute, parties must confirm that they have considered alternative dispute resolution including mediation and arbitration. The usual practice is for parties to simply state that alternative dispute resolution is not an option. At present, there is no costs sanction for parties in doing so.

As procedural aspects of the South African legal system tend to develop along similar lines to those of the English legal system, an evolution to court directed mediation or to stricter cost penalties for parties who fail to refer appropriate cases to mediation, seems a likely possibility especially in light of the backlog of civil disputes awaiting trial. At the very least and given the context, it may be prudent for the judiciary and legislature to undertake a serious consideration of court directed alternative dispute resolution.

Most recently, South Africa has tabled the International Arbitration Bill, 2016. The Bill aims to incorporate the model law designed by the UN Commission on International Trade Law as the cornerstone of South Africa’s international arbitration regime. The bill defines the concept of ‘conciliation’ to include mediation and importantly codifies the right to conciliation within the context of an arbitration, providing that parties to an arbitration agreement may refer to dispute subject to such agreement to conciliation provided that the agreement provides for such mechanism. The Bill further incorporates the UNICITRAL conciliation rules should parties wish to engage in the conciliation process.

 It is clear that there is a move towards mediation as the preferred form of alternative dispute resolution. The key question is how this can be managed in the shipping industry and how mediation can be incorporated into commercial shipping agreements.

See also: Maritime arbitration to resolve cross-border shipping disputes in Sub-Saharan Africa

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

Dispute Resolution articles on GoLegal